CV Summit Recap – Out of Hibernation
Crypto winter may be over, but does that mean spring is coming?
For blockchain enthusiasts, the past year has been a sobering affair. After peaking in December 2017, the Bitcoin bubble burst, triggering a sell-off of cryptocurrencies that by September 2018 had wiped out 80% or more of their collective value – a collapse notable for surpassing even the 78% free fall of NASDAQ’s value during the dot-com crash at the start of the millennium. Similarly, the Initial Coin Offering (ICO) has been doing its best go down in history as a phenomenon whose sudden emergence was matched only by its equally abrupt disappearance. Numerous other news – from fake trading volumes on crypto exchanges to the shutdown of prominent projects amid regulatory uncertainty to outright fraud cases – did not help either. Critics and doomsayers see such developments as long-overdue proof that distributed ledger technology (DLT) is, at best, overhyped and fundamentally useless; an esoteric experiment that provides a remarkably sophisticated answer to a question nobody asked.
For proponents of decentralization and disintermediation, however, such setbacks mean little. Where there is great potential, there is great hype. Overshooting, course corrections, and the occasional hiccup are all necessary by-products of high-speed progress. And continued progress there shall be. Or so seemed to be the overall sentiment when the DLT community congregated for the 4th CV Summit (formerly known as Blockchain Summit) in the heart of the Crypto Valley in Zug in late March 2019, with the common goal of “building towards crypto spring”.
The program, consisting of lectures, panel discussions, pitches, and more, covered a broad range of topics – from corporate use cases of DLT to crypto as an asset class for institutional investors to the impact of blockchain on the United Nations’ Sustainable Development Goals. Two subjects that received particular attention were the future of so-called stablecoins as well as the domain of real estate. Finally, the event was further proof that the Swiss government is dead set on continuing to facilitate blockchain technology and reaffirm its reputation as the world’s “Crypto Nation”.
The three commonly cited functions of money are (1) store of value, (2) medium of exchange, and (3) unit of accounting. Since virtually all prominent cryptocurrencies so far have been subject to immense volatility, their usefulness regarding (1) and (3) has been limited. As a result, the idea of stablecoins – cryptocurrencies with minimized volatility relative to some reference asset(s) – has gained in popularity. The classic way to achieve stability is to back the currency with other assets, say, dollars or gold stored in a vault. Such a pegging mechanism must, however, be centrally managed, which requires trust in a third party and thus defeats the idea of decentralization held so dear by the DLT community. An alternative approach attempted by some stablecoin startups has been to aim for stability through algorithmic governance. In this case, the currency is uncollateralized and volatility is minimized through programmatic expansion or contraction of the money supply. Expansion would simply mean flushing more currency into the system through coin generation, whereas contraction would be achieved by offering a separate asset that can be bought with the stablecoin – thus contracting the base – and then redeemed again against the stablecoin once monetary expansion is needed (i.e. once the stablecoin trades above par). The most prominent project evangelizing this approach, a stablecoin called Basis, managed to raise USD 133 million with the idea, only to shut down and return the funds to investors in December 2018 amidst insurmountable regulatory hurdles. Whether or not algorithmic stabilization works in practice is still up for debate, as also illustrated by diverging opinions on the matter amongst CV Summit participants.
Blockchain and Real Estate
Real estate is the world’s biggest asset class. With literally hundreds of trillions of dollars at stake, the top-down argument as to why it deserves focus comes easily, and so numerous crypto startups are committed to the fusion of DLT and real estate – whether it be facilitating the interactions between landlords and prospective renters, storing public land records on a blockchain that interfaces with governments’ legacy systems, or tokenizing real estate investment opportunities.
The recently completed minority sale of the St. Regis Aspen luxury resort by means of a Security Token Offering (STO) served as a first high-profile case study of what the latter may look like in practice. The “Aspen Digital Token” represents an indirect (i.e. via REIT) fragmented equity ownership in the property. According to Elevated Returns, the asset manager behind the STO, the offering serves as a blueprint for future blockchain-based real estate trading that will boost liquidity and lower transaction costs – in a market that has been notoriously plagued by illiquidity and cumbersome title transfer processes. In addition, the use of DLT-based smart contracts will allow for the implementation of transparent bespoke distribution waterfalls, thus facilitating the real estate sector’s propensity for more complex, hybrid financing instruments without sacrificing transferability.
Made in Switzerland
The final words of the conference belonged to Ueli Maurer, President of the Swiss Federation, who reiterated Switzerland’s commitment to being the most attractive jurisdiction for DLT companies. The Swiss government is continuously pushing forward so that their regulatory facilitation may keep up with the breakneck speed of the private sector. In December 2018 the Federal Council adopted a comprehensive report on the legal framework for DLT, concluding that while the country’s regulatory landscape is well suited for dealing with new technologies such as blockchain, there is still a need for selective adjustments.
Three specific areas that have been highlighted were (1) adapting the Swiss Code of Obligations to increase legal certainty in the transfer of DLT-based assets; (2) improving insolvency law to ensure that crypto assets can be separated in the event of insolvency; and (3) updating financial market infrastructure law by creating a new authorization category for DLT infrastructure providers.
Of more than 300 Fintech startups in Switzerland, around 100 are active in the blockchain space. The regulatory modernization outlined by the government is sure to play a vital role in their future development. However, as Mr. Maurer made sure to emphasize, the potential benefits go far beyond tech startups. Switzerland is envisioning a future where DLT will also be used, for example, as an instrument for financing the nation’s economic backbone, i.e. small and medium-sized enterprises (KMUs).
Regardless of company size or stage of development, having expert know-how at your disposal is critical for the execution of (growth) financing or M&A initiatives. With its dedicated technology practice group, ZETRA is the go-to financial advisor for companies with blockchain-enabled business models in Switzerland.