Mon. Jun 17th, 2024

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First published on April 18th 2018, the original post imported from my old blog can be seen below:

The Crypto Bear Market of Q1 2018 and Regulatory Developments for Tokens

Since my last post (six months ago) at the end of Q3 2017, there’s been a massive acceleration of wealth transferred into digital assets, and valuations peaked near $800 billion at the start of 2018, with altcoins diluting bitcoin’s dominance to its lowest in 2017 at the year-end. For more on Q4, see Coindesk’s State of Blockchain report.


While significant amounts of money were invested and created in terms of trading/volume and valuation multiples, Q1 become a mostly bear market as the market capitalization of crypto assets retraced to $200 billion. To date, bitcoin’s dominance is back above 40%, and the value of crypto assets stand near $350 billion, yet these figures only tell part of the bigger developing story, more on that below.

Over $5 billion poured into ICOs during Q1 2018

Despite a proliferation of scams and unsuccessful startups – many of the underlying blockchain-related projects still remain, and their development is ongoing. For example, the retracement of market prices that deepened at the end of Q1 has not been a deterrent to the some $5 billion invested into ICOs so far in 2018 according to figures from Token Report. Note: around the time this article was published, Coindesk reported the figure was closer to $6.3b for Q1, after accounting for Telegram’s massive $1.7b raise.


On the other hand, exuberant valuations as measured by typical market cap metrics has been a partly misleading indicator – if not taking into consideration a crypto asset’s daily trading volumes (and other key metrics such as NVT ratios), as without sufficient liquidity a user cannot exit their position at a fair price – due to causing market impact – or not being exit at all in the worst case.

The growth of #ICO funding visualized over 4 year’s worth data through November 30th 2017, compiled by @elementus_io #blockchain #tokensales #InitialCoinOffering #Cryptoassets #cryptocurrency #bitcoin

— Steven Hatzakis, Fintech Researcher & Consultant (@shatzakis) March 12, 2018

Crypto development is thriving

Importantly, aside from valuations and multiples, and potential liquidity constraints, the factors that continue to inspire a massive global movement are the underlying potential technologies being developed (and that’s yet to be developed) including experimental approaches and new use-cases that collectively help to push the frontier of decentralized networks and blockchain research.

Modeling social networks

The need for decentralized networks extends beyond just censorship-resistance, to gains in efficiency and an improvement in governance models, game theory, and social economic constructs. Metcalfe’s law and Reed’s Law are manifesting in social constructs in blockchain networks, carried over from telecom and other user-connected network schemas.


Source: An Equilibrium Valuation of Bitcoin and Decentralized Network Assets

Extreme Crypto Prices and Bubbles

Metcalfe’s law is also helping researchers model the predictability of bitcoin price bubbles, as outlined in a March 2018 paper published in Cornell University library in the econometrics category. An excerpt from one of the Author’s medium post about the paper included the following chart:


Diversification challenges

While returns may have appeared to stabilize or moderate, I expect the cyclicality of price bubbles to be an ongoing phenomenon due to the nature of digital assets with limited supply and the current penetration of adoption globally which I estimate to be barely 1 percent. It is still a very early [perhaps golden!?] time to be involved in crypto assets.

Nonetheless, diversification is not an easy task with crypto assets, and knowing that industry as a whole will survive is not enough to protect oneself from a highly dynamic landscape that could require active rebalancing and very broad diversification to capture long-term winners.

Source: Brave New Coin

The diversification challenges are made harder by the fact that not all tokens are compatible across wallets, requiring for an example that a user maintain numerous native wallets that may vary in complexity in order to custody a large variety of different tokens.

Key-custody dilemmas

With regard to key custody, here’s a nice talk by Peter Kroll at Devcon 3 that goes into a good deal of details for beginners, intermediate and even advanced users.


Kroll makes mention of Ian Coleman’s standalone BIP39 web tool that could be used on or offline for key generation, which I was glad to see updated recently to its latest version 0.3.5 as some of the feedback I contributed made its way into the software which remains open-source.

I do expect this process of custody to become easier over time, and already crypto wallet hardware companies like Ledger are implementing more support for new and existing cryptos such as Monero). More on custody and related challenges below.

Chasing returns

Whether bitcoin prices – and the market for crypto assets at large – will continue to ascend or retreat deeper is not the focus of this article, although it is clear to many in the crypto community – that bitcoin has bubbled numerous times over already, as can be seen in the following YouTube video (which can be seen as a very convenient inconvenient truth):


When Harry Markowitz – considered to be the Father of Modern Portfolio Theory (MPT) – wrote his ground-breaking paper titled “Portfolio Selection” in 1952, it was on the premise that the return of an asset should be measured against and fine-tuned for the amount of risk taken. Awesome chart below from unchanged showing HODL waves in bitcoin, as seen in their recent medium post.


Markowitz calculated variance as a measure of volatility to measure potential reward from risk and vice versa. Accordingly, extreme crypto returns seem to be congruent with the extreme level of risk involved, as evidenced by historical price variance.

Screen Shot 2017-11-27 at 10.18.50 AM

Report on top policy trends for 2018

A report just released from Pricewaterhouse Coopers (PWC) highlighted the growing interest in virtual cash yet that security concerns would prevail.


The PWC report cited another research paper from Llyods of London that outlined the potential risk – in billions of dollars – that could materialize from massive cyber hacks at organizations such as a massive cloud service provider, and the importance of cybersecurity. An excerpt with various modeled scenarios can be seen below with the upper range near $8b for a single event.


Learning from Nature

Some extra love never hurts 💗

— Life on Earth 🌴 (@planetepics) March 15, 2018

Moving back to a different subject about networks, another interesting finding from a research report titled “Knowledgeable Lemurs Become More Central in Social Networks” lends observations from biology and the primate world that could be applicable to crowd-related metrics in human social networks including blockchain-powered networks.

The gray nodes (circle in chart below) indicate Lemurs who did not learn the task presented by the researchers, and had fewer direct affiliations with other nodes, compared to the white nodes who were highly social and had learned the task, and who may have benefitted from access to novel information gained from their many connections and access to information.


Kulahci et al., Knowledgeable Lemurs Become More Central in Social Networks, Current Biology (2018),

“Look deep into nature and you will understand everything better” Albert Einstein

Winning or Losing in crypto

Blockchain-focused companies are competing not only to produce products and services that will be widely adopted but must also initially win users respect, trust, and eventual loyalty so that the product or service they plan to develop is supported by enough users to help sustain the underlying network and its native crypto asset. The loyalty can’t be solely for any expectation of profit but must reflect the users need and intended and actual use of the product/service (i.e. app).

Hybrid approaches

While some companies may go the centralized (permissioned) blockchain route, and others the decentralized (permissionless) one, there are some projects that are combing both in a hybrid approach – albeit separately – blending the pros of both sides while offsetting the cons of each.

Q1 2018 culminated in crypto markets moderating following the 2017 year-end peak, and the Chairs of the SEC and CFTC provided testimony to Congress on the applicability of securities and commodities laws in the regulation and enforcement of crypto markets including ICO issuers who could be deemed to be offering private securities.

A matrix table from a Brave New Coin report titled A general taxonomy for cryptographic assets, shows the potential for tokens to have concurrent classifications.


Security vs Commodity?

The aforementioned congressional hearing was followed by two additional hearings from a panel of blockchain and crypto experts who provided testimony the Committee on Science, Space, and Technology, and then to the Committee on Financial Services.

Such industry feedback helped not only provide spoken testimony on matters at hand – but also included written reports that became memorialized in the records for future potential citations by policymakers and lobbyists.

For example, at one of the hearings, written comments from one of the invited speakers associate clinical professor Aaron Wright – from the Cardazo School of Law were made part of the public record (note: his new book “Blockchain and the Law” was just released on April 9th on Amazon).

Pro-blockchain Politicians and Policymakers

In addition, several pro-crypto politicians are taking leadership with blockchain initiatives such as Brian Forde of California, who is running for Congress and who is active in the crypto community, as well as Assemblyman Clyde Vanel of New York who has multiple blockchain bills proposed in Albany, along with representative Ron Kim from the New York Assembly and others.

Source: NY Assemblyman Clyde Vanel’s YouTube Channel

Crypto Lobbying

The Wyoming Blockchain Coalition that helped support the recent legislation that was enacted during Q1 in Wyoming – where utility tokens are exempted from being classified as securities at the state level (despite the ability for Federal laws to supersede or preempt such state-by–state distinctions).

California Bill Would Legally Recognize Blockchain Data: via @coindesk #cryptocurrency #crypto

— Steven Hatzakis, Fintech Researcher & Consultant (@shatzakis) February 20, 2018

On a similar note, there have been various state proposals for new rules that recognize blockchain contracts and related crypto signatures as legally binding, meanwhile industry associations such as the Digital Chamber of Commerce have responded with comments that there needs to be uniformity across states with regards to interpretations and related rules and how existing contract laws are sufficient for recognizing blockchain-related contracts (i.e. to avoid conflicting interpretations of any new laws applied in that context).

International Developments

During the quarter, Switzerland’s financial markets regulator FINMA, issued guidance for ICO issuers, distinguishing that the phase of a token can also impact its classification status.


Just after the end of Q1, Sixteen regulated bitcoin exchanges in Japan joined to form a self-regulatory group called the Japan Virtual Currency Association. Shortly after Japan, fourteen exchanges in Korea that are part of the Korea Blockchain Association announced their initial member rules, and following report of embezzlement that lead to a cleanup:

Also During Q1, CFTC Chairman Chris Giancarlo earned the alias of #cryptodad and gained wide recognition for being pro-crypto, following his above-mentioned testimony during the hearing and as can be seen in one of the Chairman’s Tweets:

Is #crypto #FOMO your #FridayFeeling? #DYOR at #CryptoDad

— Chris Giancarlo (@giancarloCFTC) March 2, 2018

In early April, the US SEC Chairman was quoted acknowledging that tokens can ‘change into securities or away from securities’, helping to reinforce the same collective belief that many in the crypto industry hold.

There were numerous other positive regulatory developments, including from the UK, and Gibraltar, to name a few and as mentioned further below in this post.

Regulated Crypto Brokers

Right after the conclusion of Q1 2017, the author of this post published the 2018 Annual Review of Forex Brokers on April 4th, which included over 83,000 words of research on, spanning 43 broker reviews and 7 guides, and which included cryptocurrency trading through regulated brokerages and exchanges, in addition to other financial markets. In full disclosure, the author of this post runs and the site may be compensated through third party advertisers, (which is separate from the high journalistic standards maintained to provide non-bias reviews, as companies cannot pay for ratings nor buy rankings. To learn more click here.)

As far as crypto trading, about a third of all the brokers reviewed on offer crypto in one form or another (i.e. as a CFD or derivative, exchange-traded commodity or security, or as the actual underlying psychical asset). Compared to its prior year annual review that I highlighted in my last blog post on medium, last year proved how fast crypto has started to become increasingly adopted by brokers to cater to the growing demand from speculators and investor to diversify their portfolios with this new asset class.

More on the expected capital inflows to crypto from Institutional investors below.

OTC crypto desks and mega-block P2P swaps

On a related note, the market for over-the-counter (OTC) trading in crypto, which has a bit of a different meaning than the term when compared to the word “OTC ” as it applies in foreign exchange, has attracted much attention recently.

However, there is still a need to educate market participants including the large traders (and often numerous intermediates involved) who look to swap significant cash for crypto (i.e. 100,000 bitcoin or >1bln worth, at $10k per btc).

Buyers with fiat looking to acquire such large blocks shop for a discount to the spot price, while the sellers of the crypto who are in need of fiat are willing to provide the discount to avoid directly impacting the market as such amounts are not available even if splitting up such a large trade and sending it to multiple venues, crypto liquidity is scarce by design.

However, these large trades do impact the market in other ways, even if not directly, and moreover there are many touch points and ways things can go wrong during a P2P swap. Nonetheless, these block trading venues are popping up, and the numerous parties who help broker such deals aim to share potentially hefty commissions on such mega-size trades.

Aiding crypto market efficiency w/ Best Execution

Another option, however, that large block buyers (or sellers) should consider, is using an algo-driven approach that minimizes market impact and that can achieve best-execution in the process to help deliver the spot rate, which is the “fair” price, and in doing so can at least fill a portion of their position while shopping the remaining amount around.

I’ve had the chance to work with parties from both the P2P trading world, as well as a group of Harvard quants using an algo-driven approach since last December, and it is an interesting side of crypto markets (especially as regulation kicks in, and the need for dealing with FinCen-reporting entities or Money Service Businesses (MSBs).

And for those looking for more about Decentralized Exchanges (DEXs), here is a list of them that have been compiled on Github.

Self-Regulation and Best Practices

During Q1, I moderated an eight-person panel (not an easy task for any moderator) in Hong Kong about ICOs in Asia, and self-regulation was a recurring theme and focal point for much of the discussion. Full video coverage here below thanks to the iFX Expo organizers including Finance Magnates:

Numerous self-regulatory initiatives had been brewing for months already in other parts of the world including in the US with several announced by industry players, including the Brooklyn Project (which the author of this post supports) for utility token projects that would enable financial inclusion for consumers and the greater public.

The Brooklyn Project

Launched in part by Consensys, The Brooklyn Project (BKP) is working on disclosures, education, and guidelines for token issuers, that would affect the pre-ICO phase (and potentially post-ICO). Just after the end of Q1, BKP issued its initial list of token classifications outlining what a consumer token is, when it comes to non-security tokens that are expecting to help power the emerging blockchain economy.

BKP also prepared comments to the UK parliament’s inquiry on crypto, as their remains a need for global regulatory harmony with the treatment and classification of crypto assets.


For the post-ICO phase, token curated registries (TCRs) such as the one that Messari is working on, could also play a role in self-regulation vis-à-vis research and reporting tools, similar to EDGAR which aggregates regulatory forms and notices filed by SEC-reporting companies (for compliance) and that the public reacts to by deciphering the meaning of the reports.

Other examples for TCRs that are gaining in popularity include the Ocean protocol where users follow a proof of stake model to keep the community in check where actors are rewarded for accurate curations and penalized when wrong.

This is in some contrast to other consensus algorithms such as Delegated Proof of Stake (DPoS) where there may be no direct penalization for bad actors, where instead master nodes or super nodes (who receive votes from users) act as delegates and are expected to keep each other in check, although could still potentially collude to bribe or buy voters, as argued by Vitalik Buterin in a recent post about Plutocracy.

Self-Sovereignty and Decentralized Identities


At the start of Q2, IBM announced a partnership with the Sovrin Foundation, as the importance of self-sovereign identity, along with Digital Identifiers (DIDs) are becoming recognized as a critical future component across blockchain networks to represent user’s identities.


Source: Evernym

Next-generation stablecoins

MakerDAO had its DAI stablecoin listed on a major venue at the start of Q2 2018, which is being seen as an alternative to the Tether (USDT) crypto stablecoin that aims to track the US Dollar, and with other projects such as SweetBridge leveraging the use of stablecoin technology to balance aspects of their token economics (tokenomics) between their Sweet coin and Bridge coin tokens.

Source: Sweetbridge technical whitepaper

Regulatory Reform Feedback

Following a roundtable standing public hearing at the NY State Senate in Manhattan during Q1, industry executives and members of the public (including the author of this post) provided feedback to state senators on cryptocurrency and the need to reform the BitLicense in New York and help support innovative for small businesses including ICO issuers.

Think-tanks and SROs

The Digital Chamber of Commerce, a Washington D.C. based member-driven organization for blockchain was also in attendance and the NY roundtable and provided feedback about the Token Alliance and its plans to provide a set of guidelines on best practices, a term that has been echoed by many SROs as the industry self-regulates.

The Crypto Working Group (CWG), (the author of this post is a founding member) is another membership-based think-tank consisting of a diverse set of industry professionals who are working on developing best practices for institutional market participants preparing to enter blockchain. CWG also provides feedback and proposals to regulators as well as community education and events. The Security Token Association (STA) was also launched in Q1, and uses a membership-based structure for companies issuing security tokens (i.e. tokens that are private or public securities).

The Digital Asset Token Association (DATA) launched in Q1 and helped lobby and push legislation in Wyoming and other states, and also launched during the quarter was the Virtual Commodity Association (VCA) proposed by the Gemini Exchange owners’ the Winklevoss twin brothers – who would cater to cryptocurrency exchanges with the proposed SRO.  Shortly before this article was published, the New York Attorney General announced an inquiry into 11 crypto exchanges, requiring the companies complete an extensive questionnaire before May 1st 2018.

Another announcement during the quarter related to SRO developments came from CryptoUK, launched by a consortium of members including prominent names such as Coinbase and eToro, among other notable members. The UK Parliament opened an inquiry into cryptocurrencies due by April 30th 2018, in which CryptoUK is preparing feedback, in addition to comments from the Brooklyn Project being prepared as noted earlier.

It’s worth also noting that in Q1 2018 Consensys AG was selected by the European Commission’s Blockchain observatory, in conjunction with the European Parliament, in addition to having been one of the few companies selected for Dubai’s blockchain accelerator program in 2016.

Note: The author of this post supports the Brooklyn Project, and is also a member of the ICO Certification Committee of Financial Commission, an independent member-driven self-regulatory organization that caters to international and offshore companies.

Social Networks and Crypto Marketing

This culmination of industry noise about the need for best practices coincided with Facebook banning crypto and ICO ads, followed by Google issuing new marketing standards that will affect online brokers offering forex and cryptocurrencies, as well as ICO issuers and those with Token Generation Events (TGEs).

At the end of Q1, Twitter followed with a similar ban on ICO ads as it takes measures to combat the visible thefts occurring as imposters who cleverly impersonate crypto personalities on Twitter and then attempt to solicit donations or funds sent by unsuspecting victims to the phony imposters.

Almost Ironically and direly, Facebook suffered an alleged data breach of user information via its partner Cambridge Analytica, coinciding with the growing importance of sovereign identity and user-controlled information in public networks. The incident drew global attention from regulators and resulted in numerous hearings.

While the industry pivots on best practices for crypto marketing, many industry leaders provided feedback in The Decentralized Marketing Handbook, talking about the power of community empowerment as well as common crypto challenges with marketing. An excerpt from the report can be seen below:


It’s worth noting that project teams need to be careful to balance messaging and be cautious with any forward-looking statements, as well as not to omit any facts (i.e. not disclosing some of the biggest risks that the team is aware of that could cause the project to fail, for example) when it comes to marketing and communications with the public, for the sake of potential regulatory compliance and keeping token holders truly informed of what they are in for. For tips on what NOT to do, see Savedroid’s recent PR stunt gone wrong.

Regulatory Actions and Scams

The SEC and CFTC continue to take action prioritizing outright scams and frauds as the highest priority items as can be seen by a sample of the cases made public over the last quarter, including celebrity-backed ICO projects, as sportsman and actors apparently lacked the technical acumen to distinguish the impending frauds that they got caught up in promoting.

In addition to outright frauds, the potential for thefts by hackers remains one of the most pronounced risks due to the nature of digital assets, although it is important to note that best practices are also evolving with regard to how companies safeguard digital assets.

It is worth saying that those new to crypto should understand that the modern encryption algorithms and cryptography that – help run bitcoin and other popular altcoins – have never been hacked or broken (i.e. 256 bit security) and is widely used on the internet. Of course, researchers and academics (and hackers) continue to try to develop novel ways to find potential attack vectors causing the industry to developing newer classes of encryption algorithms.

Below is an example of how cryptography is used to secure each step in the creation of a bitcoin wallet that supports hierarchical deterministic (HD) wallets using Bip32, and backed up by mnemonic codewords using Bip39.


The National Institute of Standards (NIST) is one of the agencies tasked with ensuring that these standards are safe to use even at the Federal level, and NIST came out with a crypto report about blockchain during Q1, in addition to participating in one of the aforementioned senate hearings.

Accordingly, nearly a dozen new encryption algorithms are being considered by NIST for the next-generation of quantum-resistant encryption algos, where key sizes could potentially double in length and the use of zero-knowledge proofs could help obfuscate trails that hackers (and Quantum computers) could try to compute to break/guess the codes. An example below from a research report by cryptographers shows various collisions for a portion of key strings.

Screen Shot 2017-12-24 at 8.20.53 PM

Distinguishing Crypto Thefts from Crypto Encryption Cracking

As discussed, there is a tremendous difference between a hacker brute force cracking a crypto private key password, versus stealing one because it wasn’t safeguarded properly by its custodian/owner (i.e. was stored in plaintext online, which is neither safe nor encrypted)

Although we have highlighted the difference between two type of hacks, namely crypto thefts (which are a recurring problem and unlikely to go away as masses enter the space) and crypto cracks (which have yet to ever happen to modern encryption algorithms), these two risk seem very similar but they are profoundly different risks that are often mistakenly by lumped together by the media (especially in headlines).

All crypto “thefts” or “accidental losses” are due either to human intention or error (whether manually or automated in code, as in the Bitgrail incident in the above Tweet), and not a fault of the math and underlying security afforded by cryptography (and at least so far, and for the foreseeable medium-term future, according to institutions such as NIST, in terms of risks of Quantum computers breaking modern encryption algorithms).

Bottom line, education about safeguarding oneself against cybersecurity risks are critically important when dealing with crypto assets and something the crypto community is in dire need of, as many crypto assets are some of the most complex financial products and applications ever created – challenging even savvy tech users.

One helpful infographic I revert to from Q4 of last year, in order to highlight crypto asset custody complexity and tips – can be seen below, courtesy of Twitter user @Jennicide:


Crowdfunding Pathways for ICO issuers

For bona fide crypto projects attempting to operate in good faith, some are either setting up in the US (or abroad) as foundations and soliciting donations for the benefit of their protocol development, or in the extreme are banning US investors from participating and using an offshore structure. In other examples, projects are limiting their pre-sale to private parties (and avoiding a public open ICO-style sale) or in the case of a security token – registering their offering under one of the many JOBS Act pathways for capital raising which are considered private placements (pre-ICO securities).

Excerpt from a sample ICO project survey offered on


Other examples exist for ICO structuring depending on the classification of the token, and which also affects its potential tax treatment.

Below is an excerpt of tax structuring complexities, which can be made worse when crypto involved.

Deloitte IFRS 15 Revenue from contracts with customers

The JOBS Act

Capital raising pathways in the US was expanded thanks to the Jumpstart Our Business Startups (JOBS) Act enacted by Congress and signed into law in 2012, and its various titles including for crowdfunding have kicked-in in recent years.

Examples of private placements done under JOBS Act pathways include Regulation A (Reg A and Reg A+), Regulation Crowdfunding (Reg CR) and Regulation D (Reg D 506b and 506c) and some of which are administered through regulated broker-dealers (BDs) and filed with the SEC (as well as Regulation S for companies offering private securities to non-US investors under these pathways). Most recently, a Senate hearing about Reg A explored increasing the limit for the tier-two part from $50m to $75m.

Pathways for Token Sales

Finding a way to fit crypto into these existing legal pathways in cases where the token is not intended to be a security, as well as finding a way for tokens to transition to non-security (utility tokens) even if they start as securities, is one of the main challenges that regulators and the industry collectively face.

For example, creating a new pathway for non-security tokens that would be exempted from federal securities law (and perhaps fall more squarely under commodity laws) could be a viable option but would require support from the SEC and CFTC – along with support from industry groups, lobbyists and policymakers – for Congress to pass such new laws.

Related Safe harbors are said to be discussed as per coverage by Nathaniel Popper of the NY Times, and the good news is it is already happening at the state level, more on that below.

With regulators in the US recognizing, even more, the importance of innovation and the need to support it, following a wave of subpoenas issued by the SEC to force dialogue with companies who may have been shy to engage the SEC out of fear of retaliation, there has been positive feedback circulated including comments from the SEC’s Chairman that acknowledge how a token could transfer away from a security (becoming a utility token) or towards a security token.

The SEC (and CFTC) has done a good job policing bad actors, yet the need for clearer guidance would help many good actors continue on their paths to innovation while reducing the risks for inadequate disclosures. Concurrently, the SEC is relying on the many gatekeepers in the industry to help self-regulate or face the risk of more blanketed and draconian measures that would be bad for everyone and not an ideal outcome to help keep the US markets innovative.

Securities Tokens

In addition, many projects are launching as security tokens from the start to be safer on the compliance side, while simultaneously putting themselves into a higher standard of compliance requirements that could be deterrent to their project flexibility and innovation requirements.

Accordingly, some SAFT agreements hoping to circumvent securities laws are now facing major challenges, showing that the variation of the SAFE agreement works only on a case-by-case basis and is not a panacea for all token issuers.

For issuers that do however need to stay as security tokens due to potential rights or dividends that they wish to extend to tokens holders, securities laws and pathways are viable and Alternative Trading Systems (ATSs) such as Tzero, and other companies including Consensys who are pursuing or have recently acquired an ATS license, could be ideal listing venues.

Companies such as PolyMath that help companies create securities tokens have partnered with Tzero, anticipating that it will be an oasis of liquidity for security tokens as institutional investors enter the market on a regulated platform for trading security tokens. Early in April 2018, tZero announced that a prototype of its security token trading platform was launched.

Commodities and Utility tokens

Securities aside, all cryptographic tokens have inherent commodity-like qualities so we can expect that at a minimum, all tokens will have at least one set of laws apply, aside from Bank Secrecy Act and Anti-Money Laundering that are already in place for Money Transmitters and Money Service Businesses (MSBs).

For example, lawyers I’ve interacted with agree that the CFTC has enforcement jurisdiction on all cryptos – in cases of suspected fraud or market manipulation – in physical spot markets (due to their inherent commodity-like features), even if a crypto asset does not have an underlying futures contract or derivatives market that is regulated such as bitcoin futures.

Non-security tokens

On the other hand, some projects – such as – are launching as a utility token and taking a firm stance that they are not a security token. Another is the Sheltercoin project, for example, where contributions are deemed donations to a non-profit to be used in the future once its network is operational to help fund disaster relief efforts with greater transparency and by developing advanced shelter systems for real-world use.

The point at which a network becomes operational for its native token to be used – in terms of its utility – is an important distinction from a regulatory context when it comes to secondary market trading, as much of the speculation that happened at the end of Q4 2017 occurred in tokens where the underlying networks had yet to be developed or were non-existent (while their valuations ran wild).

In addition, the manner in which token sales are structured can materially change their status from token into security, based on the SEC’s interpretation of the Howey test when scrutinizing offerings to determine if they are in violation of federal securities laws. Those attempting to sell non-security tokens need to be even more careful not to implicate securities laws in the context of the Howey test (as in the Munchee case from last December, where a utility token caused itself to be deemed a security and its sale was halted by the SEC).

While the Howey test is not law, it does in fact reference case law dating back to a 1946 supreme court case, and as it stands appears to be the de facto litmus test used by the SEC in assessing whether a token is a security or not.

What is money? The rise of crypto credit and non-bank lending

Some argue whether money was first a medium-of-exchange or store-of-value, yet money may have originated first as “credit“ and then a unit of account, where something becomes “owed” in return for some services provided (or that were loaned) or that needed to be paid for, and that value (amount) later became tradeable as a medium of exchange (and accumulated as a store of value).

An excerpt from a research report about Bitcoin by Villarreal published by the University of Florida highlights the credit-theory of money as social capital (among other useful diagrams):


Source: Villarreal Robledo, Omar Eliud, “The Ontological Sociology of Cryptocurrency: A Theoretical Exploration of Bitcoin” (2016). Electronic Theses and Dissertations. 5119.

Rewinding back to ancient times, commodity trading in Mesopotamia accelerated thanks to the use of clay pots which not only helped facilitate the physical medium of exchange (literally) but also standardized the units of account in terms of measuring the commodities that each pot held. In those times, the clay pot technology helped to facilitate trade and commerce, including credit, and as assets became fungible and tradable like hard cash, it enabled bartering and commerce supporting socioeconomic activity and growth.

Money is social capital

When commodities are used to either extend credit and create debts and then trade, even in the absence of fractional reserve banking, money has a social aspect connecting people to their local and broader economies.

Blockchain can help provide fully collateralized loans and transparency and self-enforcing smart contracts to help remove systemic risk such as the type used with leveraged derivatives that caused the Great Financial Crisis (GFC).

Post-Financial Crisis & the Rise Alternative Technology/Investments

Ironically, from the ashes of the financial crisis, alternative assets and namely Bitcoin emerged as a next-generation evolution of technology for commerce and social currencies, beyond just securities and commodities, but nearly all potential branches of commerce, thanks to blockchain – which is simply the use of existing hashing and encryption technologies that are rolled into one solution.

It may sound easy on the surface and as the use of the word, #blockchain went from buzzword to becoming sort of a misnomer as the word becomes arbitrarily attached to nearly everything as a proposed panacea to solve all world problems, which is somewhat far from the truth. Rather, it is the fine details of each crypto project where companies are trying to differentiate themselves with potential applications and their proposed usefulness now and in the future.

Post-bitcoin challenges

The rise of decentralized crypto networks with Bitcoin being the first example, proves the importance of a permissionless public networks where anyone can claim access using math, even though some degrees of trust is still required (such as in the use of any client-side software, or the potential for forks, or miners colluding to mount a 51% attack).

Nonetheless, substantial progress has been made, yet it is clear that many projects are inherently centralized – even if launching via the open-source permissionless network route – from their initial starting phases and may take years to reach the level of distribution that bitcoin has achieved to become “more” decentralized (and thus hardened against attacks).

On a different note, there were a number of prominent acquisitions made recently including Circle buying Poloniex, and Coinbase buying (I’ve been using for months already and think it’s great for lists and anti-spam, sign up here and I earn $1 in BTC for every registered user:

Latest #Crypto acquisitions:

@circlepay buys @poloniex for $400m

@coinbase buys @CipherBrowser

@coinbase buys @earndotcom for $100m

@BitGo buys kingdom trust

The times are changing.

— Adam Draper (@AdamDraper) April 16, 2018

Staking & Loans

As non-bank lending becomes the more commonplace in crypto, especially with proof-of-stake consensus algorithms where users are incentivized to “stake” or lockup their tokens in a network or smart-contract in return for some benefit, the use of tokens by consumers within applications should accelerate.

In full disclosure, the author of this post is currently advising a payments-related project called Digits, as part of its plans to build its Hedge Lending Network to support payments technology that it has created (note: the payments side of the project is already in Beta and contains blockchain components under development) that aims to enable users to turn any debit card into a crypto-spendable card.

Digits aims to let users spend fiat without having to sell their crypto, by staking their crypto as collateral in the Hedge Lending Network in return for a real-time fiat micro-loan to pay for their card swipe transaction.

Crypto Payments

Solutions like Digits could help solve one of the biggest challenges for consumers in crypto which includes using (spending) crypto and network transaction times (confirmations) which thus far are not fast enough to permit the quick point of sale transactions that consumers are accustomed to when buying a cup of coffee, for example.

In the meantime, I look forward to the launch of Digits and enabling it with my solid gold Aurae Lifestyle MasterCard!

Photo Source: Steven Hatzakis

Side note, I believe every holder of significant crypto (i.e. founder, whale, crypto millionaires, and billionaires etc..) should have an Aurae Lifestyle solid gold card.

Why? Because it’s a debit card made out of solid gold with substantially high limits such as $150k per swipe, $20k ATM, and can convert seven figure fiat amounts from crypto into fiat using institutional rates, and comes with perks such as additional concierge and butler services depending on membership tier, including access to exclusive sporting and other events such as the White House correspondents dinner.

In addition, the card grants access to 950 airport lounges worldwide, another vital convenience for busy executives and those that need to recover when en route on busy world-travel tours.

Yes, this is a solid gold debit card (roughly 2oz/50 grams of 14k)

But even without all the perks and limits, the gold card is still really cool and I am grateful to own one. The card is by member-invite only, so contact me if you want one, its base membership starts at about $25k per year (and goes up to $100k for the full package) and the card is insured by Lloyds Bank.

Photo Source: Steven Hatzakis

Another cool point about the Aurae gold card that I am proud to share is that each one is custom made based on the personality of the cardholder, so for mine we used my astronomical art for the card design inspiration, and the resulting lines and stars (which consist of over 70 stars that make up a half a carat of real diamonds, by the way) look like blocks on a blockchain!

QR-code scanning and the future

Personal bling aside, another company helping to solve challenges in the payments space by saving people money is called Craypay, also advised by this author. Craypay has a consumer-facing fintech app that helps users save money when making purchases and other payment-related transactions, and is already integrated with national brands and retailers. The app will pay up to 30% of your bill, no joke, and the app is available for iOS and Android devices and can be used currently at over 50,000 retail locations nationwide in the US.


Using blockchain in a network like Craypay to help build a community-driven economy around its token could help reward users in a number of ways including with discounts and other token-driven economics that incentivize usage and adoption.

Bye bye pen signatures, hello key signatures

In a recent report by, mobile scan-and-go solutions were said to reduce – or even remove – the need for physical checkout lanes, as consumers can pay in-aisle via a mobile app. Likewise, VISA, AMEX, Discover and most recently Mastercard, announced they are eliminating the need for a signature at the register. The convergence of themes coinciding with the rise of crypto is no coincidence and is accelerating. In just a few years, checkout lanes may be obsolete as each item is scanned with your mobile app and you become the checkout.

#AI replacing #retail store checkout, #payments and re-stocking. @MikeQuindazzi hashtags #ai #computervision #machinelearning #deeplearning #fintech

— Mike Quindazzi ✨ (@MikeQuindazzi) April 17, 2018

Converging trends across payments and fintech

These trends within the payments and lending space are also converging with the gaming sector, as the user-experience and user-interface of apps have natural cross-over into the gaming arena as companies aim to make their products fun and easy to use.

For example, I read recently that nearly a third of all apps purchases on Google Play and iOS devices in 2017 were game-related, and even financial markets trading apps are increasingly becoming gamified in terms of streamlining the signup process and creating incentives and rewards when users solve problems such as passing initial training or completing steps to register in order to receive some benefit.

Games, gaming, gamification, gamified, got game?

As it stands, the number of transactions on the Ethereum network (shortly before the time of publication of this article) had a significant contribution from games, with over a third attributed to gaming.


source: Twitter

Gamification and Rewards points in the real world

One company leading the charge in the area of rewards and gaming is Priatek (short for Private Advertising Network, also advised by this author), which has developed and successfully distributed physical hardware (kiosks) and developed dedicated software which supports its ecosystem of providers such as In2win, which also comes available as an app. The In2Win network provides games where users are rewarded for playing and are given special discounts and offers from the retailers of their choice within the In2Win network.

Priatek has a patent on its rewards-based advertised gaming applications and already provides non-cryptographic tokens as rewards points that are redeemable for special offers and events, in addition to the discounts and perks that users can receive at national retailers.

Transitioning its existing reward tokens to a cryptographic-based solution will help Priatek grow its ecosystem in a number of ways as blockchain can help unify its network with dedicated fungible and non-fungible crypto assets.

Near-term versus longer-term applications

Projects like those discussed above could have potential immediate real-world use and demand once launched, (due to existing users and a product-market fit) compared to more complex projects that are trying to solve the deeper problems of developing competing infrastructure protocols. The Kin token launched by Kik – that will be dedicated to the gaming industry, is another one I am eyeing.

While there are many different projects each may be important in its own way, and thus every project should be evaluated on its own merits, even in cases where there is no other viable comparison whether due to experimental technology or unique approaches.

As game theory converges with crypto economics, and political governance in the search to build sustainable token economies, driven by distributed app users and token holders, much work remains including experiments with on-chain and off-chain governance.

Idiosyncratic governance models: Plutocracy, Isocracy and beyond


Source: Twitter

Research from other related fields in computer science and math, aim to tackle decade-old challenges such at the Asymmetric Traveling Salesman Problem (ATSP), where novel approaches could help make computer algorithms more efficient in the next generation of apps.


source:  arXiv:1708.04215v2 [cs.DS]

The Chop Algorithm

In Quanta magazine, I came across what looked like a another novel approach for dealing with large datasets when it comes to algorithms and their growing importance in applications that will be increasingly relied upon in industries such as the Internet of Things (IoT) and Artificial Intelligence (A.I.) which deal with vast data sets.


For more on A.I, machine learning and IoT, checkout this Podcast from Q1 from Amazon’s Alexa division:

Beyond the household, Alexa for business has also made it’s way to wall street (and there are a few apps for crypto that fetch related headlines) as can be seen in the Tweet below from Dave Isbitski:

JPMorgan Brings Amazon’s Alexa to Wall Street Trading Floors #AmazonEcho #IoT #VoiceFirst #DigitalBanking #Finance

— Dave Isbitski (@thedavedev) April 15, 2018

Moving back to crypto, as ambitious projects aim to tackle the longer-term challenges of discovering infrastructure protocols that will enable companies to build upon, such as Dfinity, there is also non-blockchain financial technology (Fintech) companies with existing businesses that are ripe to implement blockchain at the application layer.

This trend has led to the rise of hybrid projects, blending aspects of private and public blockchains, although the most value appears to be longer-term in the public blockchain projects which often require years to mature and become more fully decentralized (i.e. Bitcoin, Ethereum).

Challenges ahead despite development progress

Even mature projects like Bitcoin and Ethereum face scaling bottlenecks, yet the launch of the Lightning Network which enables off-chain payments do be conducted in channels was launched in Q1 although is still in its early phase of use – in an attempt to help Bitcoin scale.

For example, in one instance with a lightning app called Éclair, a user closed the channel prematurely not realizing that the seed phrase does not backup the channel funds, as per a comment on Github, showing that users still face UI/UX challenges and a steep learning curve. Nonetheless, beta products are often better than no product at all, as real user feedback is crucial.


Ethereum is also working on more scalable solutions, such as Plasma, which is being led in part by its founder Vitalik Buterin and could potentially bring block sizes down dramatically with potential speed and other efficiency gains, in addition to the plan to switch Ethereum to a Proof-of-Stake model as proposed in Casper.



The challenges that investors faced last year appear to have transposed in a positive way as the industry has evolved and self-regulates, yet research and education remain important tools especially as the speed of information and development in crypto appears to move faster than in any other industry.

Fake news and privacy

On the heels of massive data breaches of recent times which have escalated concerns over privacy and how sensitive information is safeguarded (beyond just crypto assets), cryptography technologies related to blockchain are expected to help achieve perfect privacy.

For example, the application of Zk-SNARKs, used in cryptos such as zCash, were noted by MIT Technology Review as one of the top ten technologies of 2018.

In addition, the integrity of news and other information sectors (i.e. voting) are ripe for disruption in a positive way, and as the ability to even decipher what is real is becoming harder as new technologies let users easily manipulate things like a video, as can be seen in the clip below:


GIFs and short video clips are also being manipulated with text to change the context of the original content (i.e. fabricated news) and shared amongst users, often comically, yet could also be misconstrued as real.

[wpvideo aQVww24D]

One company bringing blockchain to the newsroom is a project called Civil, which uses a TCR-style method of keeping content in check by the community so that readers receive curated and vetted news.

On the topic of infrastructure protocols both existing and future potential ones from crypto, major hosting provide Cloudfare announced on the first day of Q2 it’s launch of a speedier and more robust DNS service called (the literal server address for the news service:, noting that it was not an April fools joke. Bottomline, the next generation of the internet is being developed and blockchain will be (is) a big part of it.

Social-Impact Potential

One of the most exciting potential uses cases for blockchain beyond commercial business and enterprise, is the area of social impact, as it pertains to non-profit initiatives, and disrupting a massive sector where legacy infrastructure can cause vast amounts donations to be eaten up by operational costs resulting in very little benefits going to the intended causes.

In addition to banking the unbanked and the theme of financial inclusion, which technology aims to help solve, I think social-impact blockchain projects are right up there on the importance scale.

ixo Foundation

Blockchain technologies are expected to streamline that process bringing transparency and efficiency gains, while incentivizing actors within related networks and communities.  Similar to the carbon-credits that are issued to energy companies who can prove that they have offset carbon emissions by producing equivalent amounts of energy from solar, blockchain technology is helping companies create a market for social-impact credits.

[vimeo 264055837 w=640 h=360]

ixo: the Blockchain for Impact from ixo foundation on Vimeo.

Blockchain technology is expected to help support such initiatives through social-impact projects, such as the ixo.Foundation (and its IXO token) which this author supports as an ambassador. Here’s a great blog that cover’s ixo, written by a fellow ambassador, called Startcryptosmartly, which I recommend reading for those interesting in learning more about ixo and the potential for social-impact projects on blockchain. Stanford just came out a report about social impact that featured ixo.

On a related note, here is a copy of the book cover of the “Animal Internet” that I picked up a few weeks ago, which highlights how technology will help us connect with the animal kingdom in ways previously unthinkable and which could help serve positive social-impact.


And shortly after buying that book, I watched a documentary about an app called Topher that is helping monitor illegal logging in rainforests, using upcycled mobile phones running the Topher app and with the use of mini solar panels. Such projects could be one of many potential use-cases for IXO, for example, as the company has helped sequester over 6 million metric tons of CO2, using a data-driven approach that is measurable.

Women in Blockchain

Last but not least, the above-mentioned trends have also coincided with a rise in global awareness for the need of gender equality and its importance in the modern global economy where more women enter the workforce, since historically they have been often excluded or under-appreciated with respect to many financial and other growth opportunities whether due to direct conscious (or subconscious) bias or social conditioning from male counterparts – which must be eradicated to help bring more fairness to society and the workplace.

The “Women on the Block” conference dedicated to diversity in blockchain, and supported by the CKR Charitable foundation, is set to take place on May 13th 2018 in Brooklyn, NY, and with a diverse array of sponsor and supporters (Twitter hash tag #womenontheblock).

There have been numerous local campaigns to help increase awareness of the many women who have helped make a difference in both society and business, for example, this was an ad shown on a panel at JFK airport that I saw last week, featuring some prominent female scientists that have helped make a difference in the world.


Diversity and beyond

As the Blockchain industry had started to become a male-dominated space as can be often seen from the selection of speakers at events, it appears the industry is beginning to self-regulate in this crucial area too.

For example, the need for more thought to be given to gender diversity in the organization of such public forums, in addition to the gender ratios at the founder and executive level of startups and existing companies, is rising and also resulting in Women-Owned Business Enterprises (WBE). Or, on a more subtle level such as the application layer when a programmer designs a video game to include female characters and not just male ones.

Bottomline, we have to look out for each other, regardless of gender, and even outside of crypto. I happened to have stumbled across an article about celebrity Ben Affleck who appeared to have been bullied in a very subtle yet powerful manner in a blog post, and I called out the publication on it and Twitter seemed to agree:

Beyond gender and race, humans come in all shapes and forms, and it is my hope that blockchain will help further connect us and the otherwise fragmented global communities, foster diversity and inclusion, and create a supercluster of interconnected communities for both the global economy, social interaction and our future.

Best regards,

Steven Hatzakis


In full disclosure, the author of this post holds financial interests in the following companies or tokens as of the date of publication (board advisory roles denoted by an asterisk *). The below names and symbols are not an endorsement nor recommendation of any kind:

IXO Foundation

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