As the nascent cryptocurrency industry gains in popularity and size, will more investment bankers be willing to work in this risky space? Perhaps, if the current regulatory picture becomes less murky.
Typically, investment bankers, long the pillars of Wall Street, advise companies on mergers, acquisitions or going public in an initial public offering, or IPO, all of which have clear rules and regulations.
But then there are initial coin offerings (ICOs), which could provide bankers with another, riskier, revenue stream. That’s why most are watching from the sidelines.
Regulatory uncertainty is the biggest hurdle to bankers jumping in and crypto investing going mainstream, said , head of corporate development with , which says it is the only investment bank solely dedicated to cryptocurrency and token-based capital markets.
Right now there’s little overlap between traditional and crypto investment banking because traditional institutional investors tend to shy away from riskier crypto investing.
She says the central uncertainty is whether there can be utility tokens that aren’t considered securities by the regulators.
Bankers have reason to be concerned. Consider what one important regulator has said.
Claims that proposed tokens or coins are for utility instead of being securities “appear to elevate form over substance,” Securities and Exchange Commission Chairman Jay Clayton said in in December. “Merely calling a token a ‘utility’ token or structuring it to provide some utility does not prevent the token from being a security. Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law.”
Meanwhile, in April, another SEC official, William Hinman, director of the SEC’s Division of Corporation Finance, that regulators can “imagine a token where the holder is buying it for its utility and not as an investment.”
What’s an investment banker to do?
Until the utility vs. security debate gets settled, Deal Capital Partners assumes all coins will be securities when advising clients, said , an associate with the advisory firm, which provides traditional and crypto investment banking services. “We just go straight security,” he said.
Some Big Differences
There are similarities between crypto and traditional investment banking such as due diligence, coming up with a valuation for a company and marketing.
But a key difference, according to Demina, is the size. The last year, much smaller than . That means the size of the offerings may not be that attractive to traditional investment banks. However, ICOs are getting bigger as time goes on, Demina said. One noteworthy large ICO concluded last week, for a Cayman Islands startup called Block.one. The deal was reportedly larger than the world’s biggest IPOs this year.
There’s currently almost zero overlap between traditional and crypto investment banking because traditional institutional investors tend to shy away from crypto investing as it is considered very risky, Demina said.
That leaves retail investors as the main players in the crypto space. To be sure, some “crypto whales” have more money than smaller investors, but the crypto space remains dominated by investors plunking down relatively small amounts of money.
Beyond advising crypto companies, investment banks may begin adopting blockchain technology themselves for use in smart contracts, validating accredited investors and automating processing involving the various parties that are part of capital raises or company mergers, Bridge said.
The “blockchaining” of the investment banking industry itself combined with regulatory clarification could pave the way for crypto banking to become more mainstream, Demina said.