South China Morning Post: Tokenized VC Funds Aim to ‘Turn the Current VC Model on its Head’

South China Morning Post: Tokenized VC Funds Aim to ‘Turn the Current VC Model on its Head’

According to a recent article in the South China Morning Post, Venture Capital (VC) funds are becoming increasingly interested in the benefits offered through blockchain technology. Even in Hong Kong— where the regulatory situation is clouded with ambiguity— tokenized VC funds are being developed to reshape the current capital markets industry.

How Cryptocurrency Platforms Remain Unregulated in Hong Kong

The larger blockchain community is well aware of the increased regulatory enforcement seen throughout 2018. In the United States for example, SEC Chairman Jay Clayton noted that the majority of ICOs he saw, did constitute securities.

As a result, the SEC penalized both ICOs and exchanges. In 2018, more than $36 million was returned to harmed investors.

The situation is a bit different in Hong Kong, however. The Hong Kong-based Securities and Futures Commission (SFC) has said cryptocurrencies such as bitcoin, bitcoin cash, and ethereum do not fall under its definition of “securities” or “futures contracts”. This has resulted in Hong Kong-based cryptocurrency platforms operating in an entirely unregulated fashion.

In November 2018, the SFC launched a regulatory sandbox to explore whether or not regulating and licensing digital asset trading platforms and exchanges is the right answer.

Nonetheless, proponents of security tokens continue to launch tokenized VC funds, which do target Asian investors.

How Tokenized VC Funds will Lead to an Era of Programmable Assets

Ciarán Hynes is managing partner of Boston-based VC firm Cosimo Ventures. They are launching a security token fund, Cosimo X, where each token will represent $1 par value in the fund. Cosimo Ventures is aiming to raise $20 million, with some of that coming from Asian investors.

As Hynes told the South China Morning Post,

“Blockchain is disrupting and turning [the] venture capital model on its head. The liquidity options from a security token venture fund is more attractive than what has been available under the traditional venture capital fund.”

Cosimo Ventures will use the funds they raise to invest in four or five tech-based startups seeking pre-Series A round financing.

In Hong Kong itself, enterprises are doing similar things.

Kenetic Capital is partnering with Venture Smart Asia to launch a security token fund in early 2020. Jehan Chu, managing partner of Kenetic Capital, believes the tokenized fund will untangle the “barnacles that have been weighing down the ship of capital market progress”.

He believes capital markets will move past “programmable money”, like we see with Bitcoin, and right into an era of “programmable assets”.

The flourishing of such an industry, at least in Hong Kong anyway, will likely require the approval of the SFC. And they have claimed that prior to any licensing or approval, an operator must first demonstrate that it offers the trading of “at least one or more virtual assets which fall under the definition of ‘securities’ on its platform”. Only then could the SFC’s approval for regulated activities be granted.

In the US, requirements for regulated status are a bit clearer. “I’m not going to change rules just to fit a technology” said SEC Chairman Jay Clayton. Security tokens, he has implied, must abide by the commission’s existing securities laws.

Under such guidance, tokenized investment funds have seen some success. Realecoin, for example, is a functioning, SEC-compliant real estate investment fund on Ethereum. Additionally, the SPiCE VC fund was the first security token to experience a compliant transfer on a P2P platform.

2018 witnessed a lot of progress in the realm of security tokens. The industry now looks to see how the landscape will develop in the highly anticipated year of 2019.

What do you think about the future of tokenized VC funds? Will the integration of blockchain technology go on to ‘turn the current VC model on its head’? We want to know what you think in the comments below.

Image courtesy of Medium.

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