Lex Sokolin sees 2018 as more challenging than last year, when the initial coin offering (ICO) market levitated with activity. In written responses to questions from ThirtyK, the London-based entrepreneur and partner at Autonomous, a research firm focused on the financial services industry, said that “regulators are looking closely at the space, and investors have become more mature in their requirements from projects.” He added, “2018 will need to prove that tokens and ICOs are still interesting to investors even after the sentiment-based speculation is gone, and it is time to do the work of software development.”
Sokolin is a highly respected commentator on fintech trends, including the rise of the blockchain and cryptocurrency industry. InvestmentNews selected him for its 2016 “40 under 40” list, which recognizes talented young professionals in the financial advice space. ThinkAdvisor named him one of the 25 most influential people in the financial advisory industry in a 2017 story. He previously served as COO of the wealth management services company Vanare. Earlier in his career, he was an investment banker, first with Barclays Wealth and then Deutsche Bank.
Sokolin noted the failure of a number of startups that raised money in 2017, but said that “fundraising activity (in) 2018 appears to be healthy and is on track to exceed the prior year.”
ThirtyK: In an interview last year, you referred to 2018 as a test year for ICOs. Has 2018 been evolving as you expected?
Sokolin: 2017 was the actual test year, where an entirely new phenomenon of token generation events, or initial coin offerings, entered the mainstream. There were experiments with different pricing models, legal documents, jurisdictions. You could see wildly fluctuating prices as all crypto assets grew in value. But in some ways, 2017 was easy. After generating $200 billion in capital gains, investing $5 billion in ICOs as a diversification strategy is not a big stretch.
2018 is much more challenging because regulators are looking closely at the space, and investors have become more mature in their requirements from projects. People expect lockups and vesting, various governance controls and code audits, and a more granular description of a business model from the projects. However, this is still at the level of seed stage tech firms, not scaled public company disclosure. So the projects are raising very large amounts, but for risky ventures. 2018 will need to prove that tokens and ICOs are still interesting to investors even after the sentiment-based speculation is gone, and it is time to do the work of software development. Certainly, many projects that have raised money in 2017 have failed by now, and there’s an open question about how many will be able to deliver. That said, fundraising activity in 2018 appears to be healthy and is on track to exceed the prior year.
ThirtyK: Has the $1.4 billion in ICO flows surprised you? Do you expect this sort of monthly pace for the remainder of the year?
Sokolin: The strong pace of ICO fundraising is driven by several factors: (1) decentralizing of the private investment asset class, (2) the development of blockchain technology, (3) the capital appreciation of crypto assets, and (4) the traditional institutional sentiment around the space from the media, finance and government sectors. In 2018, the last two factors have not been helpful. Hacks and regulatory shutdowns are constantly in the news, regulators are tightening their approaches, and market capitalizations of the coins have been volatile but flat. But the other two factors matter. Global private crowdfunding as a challenger to venture capital investing is an interesting secular trend. And the underlying specialization of blockchain technology into various crypto ecosystems is also a positive symptom. It is likely that for any one ICO project, it is harder to raise assets, but as a whole the trend is positive.
ThirtyK: Would you revise your outlook on blockchain’s direction for the remainder of 2018?
Sokolin: I wouldn’t change much. It may take longer than expected to build ETF and mutual funds from crypto assets, which continues to be a real disservice to American investors. The longer it takes for such an instrument to exist, the more retail investors will chase blockchain-related public companies, or various online projects. A vanilla instrument would be the perfect antidote to speculation in the crypto markets. But in underlying developments, nothing has meaningfully changed.
ThirtyK: What blockchain companies and projects are particularly intriguing to you and why? In which industries do you see blockchain as potentially most disruptive?
Sokolin: There are a few themes that make sense to me. The first investment theme in crypto has been “fat protocols,” meaning trying to own a part of the future highway where crypto transactions will take place. A lot of capital has been put into this, and more interesting opportunities are available. One example is the marriage of traditional finance with the crypto economy, and enabling various bridges between the two sectors. Second would be the machine economy and the internet of things — at some point, our robotic agents will need to perform automated transactions between themselves, and they may not need to do it in human currency (fiat). And last, I am interested in traditional fintech venture-type companies, solving a human financial services need with software, that are now able to use crypto as an additional piece in their development.
ThirtyK: What is the potential long-term impact of blockchain on the financial services industry?
Sokolin: In the long run, all securities of all kinds should be tokenized and accounted for on a distributed ledger. This can happen from the side of the financial incumbents through projects like Hyperledger or Digital Asset Holdings. Or it can happen from the public crypto side, with projects like Polymath or others. This will remove the distinctions we have created between asset classes. For example, there will be no difference from an ownership or software perspective of a public or private equity. The difference sits with the regulator. Second, the role of the financial industry will need to shift. If much of the accounting and safekeeping work simply vanishes, then financial institutions will need to find either more human ways to add value to people’s lives, or become yet another set of crypto miners keeping our machine economy humming along.
A Global Marketplace
ThirtyK: You’ve mentioned that the West is failing to have “any coherent vision of the future” with regard to blockchain and financial services. What do Western industrialized countries need to do to catch up?
Sokolin: We have entered a global marketplace where participants are jurisdiction shopping for the best regulatory environment. Think of this as finding the global version of Delaware for blockchain companies. This means that innovation bounces out of jurisdictions like the U.S. and toward those like Singapore or Switzerland. Further, the American grip on venture capital in Silicon Valley is also meaningless here because crypto funding is decentralized across the world. To fix this requires work of monumental proportion. Regulation between the federal agencies, like the SEC, CFTC, OCC and others, needs to be aligned to make sense in a modern world. And second, the federal and state level regulations have to also be aligned. New York’s money-transmitter license pushed out several high-profile crypto companies that have now created, literally, billions of value. Are consumers better protected as a result, or are they missing out on something important?
ThirtyK: Would you summarize here the best practices for ICOs?
Sokolin: Everything will fail, but there will be at least one crypto Amazon. I won’t know which one, until it’s too late!