What To Watch in 2024 - Blockchain Edition
KEY EVENTS TO WATCH IN 2024
(and their impact on the blockchain industry)
At Blockchain Coinvestors our mission is to provide broad coverage of emerging unicorns and the fastest growing blockchain companies in the sector. Central to this mission is the need to understand the major trends that have potential to shift the direction of technological innovation.
The year 2024 stands out as a potential watershed moment in the blockchain landscape, with pivotal developments on the horizon that could significantly influence the future of digital assets and technology.
As preparation to participate in what could be the largest value creation event in decades, register now for our event on April 3, 2024. BlockTalk 24 will bring together some of the brightest minds and most experienced investors in the blockchain space to share actionable tips on how to strategically position your resources in 2024 for maximum potential returns using blockchain investing.
Matthew and I gave our predictions for 2024 on Castle Island’s “On the Brink” podcast, where we predicted that after many long years of trying, the digital asset industry would finally see the approval of a Bitcoin Spot ETF.
That proved very timely, as just two weeks into the year, our prediction has already come true. Last week we saw the approval of 11 Bitcoin Spot ETFs and historic inflows to the product, marking a new era in digital assets. Now, Bitcoin will be available to nearly all traditional investors in the most liquid and active capital markets environment in the world.
In this newsletter, we turn our analytical lens towards four further key events in 2024 that we believe are instrumental to the future of the industry:
The UK Will Call an Election
Implementation of MiCA in the EU
The US election
Interest Rate Cuts
Our exploration into these events is not just about keeping you informed; it’s about providing a nuanced perspective on how these developments might shape the blockchain world. Let’s dig in.
The UK Will Call an Election
We approach a pivotal moment in British politics: the upcoming UK election. British elections are mandated by law to occur within five years of the last and this deadline now fast approaches. The Conservative Party, currently under the leadership of Prime Minister Rishi Sunak, must hold an election by January 28, 2025. With the Labour Party leading the polls by over 20 points, the Conservatives find themselves in a challenging position. Rumors are that the election will be held next fall, as the Brits don’t enjoy heading to the polls during the Christmas season.
Implications for Blockchain:
The outcome of this election is poised to have far-reaching implications for the blockchain industry in the UK. Prime Minister Sunak has been vocal about his vision for the UK, aspiring to establish it as a global hub for crypto assets. This ambition led to the inclusion of digital assets in the comprehensive Financial Services and Markets Act of 2023 (FSM). The FSM tasked UK regulators, chiefly the Financial Conduct Authority (FCA), with formulating a regulatory framework for the industry. Following its royal assent in July, the rule-making process has been set in motion. The Conservative government has shown a proactive stance towards nurturing digital asset innovation. However, the Labour Party's position on this matter remains less defined. As the election draws near, anticipation is growing around how the potential shift in government could shape the final regulations. The direction taken by British policymakers in the aftermath of the election will undoubtedly be a defining factor in the ultimate trajectory of blockchain technology in the UK.
Implementation of MiCA
2024 marks a significant milestone in the regulatory landscape of the blockchain industry as the European Union gears up to implement MiCA (Markets in Crypto-Assets Regulation), the world's first major, comprehensive crypto law. This groundbreaking regulation hopes to bring legal clarity to an industry that hitherto has struggled to find its place in the preexisting regulatory landscape. Now, companies aiming to provide crypto services within the EU—including custody, trading, portfolio management, or advisory services—must secure authorization from one of the 27 national financial regulators of the EU member states. Furthermore, any firm offering crypto assets to the public is mandated to release a white paper that transparently outlines risks and avoids misleading potential investors.
Importantly, MiCA modifies current rules to accommodate the innovative elements of blockchain technology. For example, unlike securities prospectuses, crypto white papers under MiCA can be published prior to regulatory approval.
While MiCA was passed in 2023, its actual effect comes into play in 2024, and its implementation is eagerly anticipated.
Implications for Blockchain:
MiCA's introduction by the world's largest economic bloc places us in a new era for blockchain companies, and its implications are profound. Firstly, it's likely that these regulations will be mirrored in other jurisdictions, as global blockchain firms will find it more efficient to adopt these standards universally.
Secondly, MiCA will legitimize the blockchain industry significantly, and may well pave the way for institutional engagement. Major corporations and institutions, now assured of dealing with a legally compliant blockchain industry, will be able to engage with the industry in ways they previously could not. At Blockchain Coinvestors, we see this development as a major catalyst, dramatically accelerating the growth of the industry, and we eagerly await to see how it impacts the digital asset ecosystem in Europe.
But most importantly, MiCa brings much needed clarity to an industry that has been operating in the grey for far too long. While we can debate the logic of each individual rule, in general, MiCA provides a road map for companies wishing to offer services in a compliant way. Now custodians, exchanges, stablecoins, and even token listings may be done in a compliant way with rules that are clearly laid out.
The US Election
2024 of course brings the US elections. With the Primaries kicking-off in January, the nation's attention will firmly fixate on the presidential race, especially the anticipated contest between incumbent President Joe Biden and former President Donald Trump. Set for Tuesday, November 5, 2024, this year's election promises nearly 11 months of relentless political discourse. How exciting! But besides the presidency, every seat in the House of Representatives and a third of the Senate seats are also up for election. Current polls lean towards Mr. Trump, but historical precedents (such as the elections of George W. Bush and Barack Obama) have shown the resilience of incumbent Presidents.
Implications for Blockchain:
The stakes for the future of blockchain technology in the United States couldn't be higher. The year 2023 witnessed a surge of bipartisan legislative proposals concerning blockchain in Congress. However, the onset of the election season casts doubts on the likelihood of significant legislative progress before November.
Here's a brief overview of the key blockchain-related legislative activities underway as we enter 2024:
Market Structure: Clarifying SEC and CFTC Roles
A vigorous debate remains ongoing as to whether the SEC or CFTC should regulate crypto spot markets. It principally hinges on the classification of tokens as securities or commodities. The SEC generally views most assets, barring Bitcoin, as securities while the CFTC and some legislators argue for distinct criteria. Several bills have been proposed to resolve this issue, but no clear resolution is imminent.
Stablecoins: Safety and Oversight
The growth of stablecoins, now a $120+ billion industry, has raised concerns about their potential impact on U.S. monetary policy and the reliability of major issuers like Tether and Circle. Legislative efforts have focused on criteria for issuing stablecoins, along with rules for redeemability and collateral.
Anti-Money Laundering Measures
Amid skepticism from figures like Elizabeth Warren (D-Mass.), some legislators seek greater assurance that the industry will comply with the Bank Secrecy Act. The key question here is what entities are defined as money-services businesses.
Self-Custody and Regulatory Certainty
Several bills have been introduced to safeguard the rights of individuals to self-custody their cryptocurrencies and to use them for transactions on public blockchains.
The 2024 election results will determine who controls the White House, Senate, and House, and consequently, the future direction of blockchain technology in the US. The unresolved questions above - the need for clarity in market structure and stablecoin regulation - could very well determine whether the US remains the center of digital asset innovation during the next decade. As we noted above, the EU has already passed a comprehensive bill, and innovation is not slowing down for a US election.
Interest Rate Cuts
The Federal Reserve's aggressive interest rate policy since March 2022 has resulted in the fastest tightening cycle since the early 1980s. The policy, which has implemented 11 rate hikes, has significantly elevated consumer borrowing costs, threatening a recession, in an effort to tamp down stubborn inflation. The Fed has persistently sought to balance inflation fighting and growth, seeking what it called a ‘soft landing’. In the recent December Fed meeting, the Fed did not raise rates, and many economists now view this as the culmination of the Fed's cycle of tightening. Projections from the Fed itself indicate an anticipated reduction in their benchmark rate to 4.6 percent by the end of 2024, implying three quarter-point cuts from its current level next year. Private market participants go even further, with BofA Global Research forecasting four 25-basis point rate cuts by the Fed starting in March next year.
Implications for Blockchain:
This shift in interest rate policy could have a substantial impact on the blockchain sector.
From an investment standpoint, if rates fall, the digital asset ecosystem will be more attractive on a relative basis and see capital inflows and a rise in valuations. This is because where digital assets and early-stage investing sit on the risk curve relative to other assets.
Private equity, or investment in private assets, is considered riskier than publicly listed equities due to its illiquidity (e.g., it’s more difficult to sell). Venture capital, which involves funding early-stage private startups, often unprofitable ones, sits even further along the risk spectrum.
When interest rates are low, investors move further out on the risk curve, seeking to generate higher return. Yet the reverse is true: higher interest rates elevate the risk-free rate of return, exemplified by instruments like US treasuries. For instance, with 1-year US treasuries now yielding about 5%, venture capital investments must offer relatively higher returns to compensate investors for the increased risk.
If the Fed substantially lowers rates in 2024, this decrease in interest rates is likely to invigorate "risk-on" assets, such as technology stocks and digital assets. As rates fall, these sectors become more attractive, potentially leading to an influx of capital seeking higher returns. For the blockchain industry, this environment could mean heightened investment activity and growth.
The View from London
As we reflect on the unfolding events of 2024, it's clear that some years are more momentous than others. This year stands out as particularly significant, with two major elections and the implementation of landmark crypto legislation in the world’s largest economic bloc.
Elections, by their nature, introduce a degree of unpredictability that can significantly influence the trajectory of technological progress, given the regulatory questions that remain unanswered. The UK and the USA are at pivotal junctures, with major regulatory legislation poised to shape the future of blockchain for years to come. The outcomes of these political events are more than just a change in administration; they represent potential shifts in policy and regulatory approaches that could fundamentally alter the landscape of digital assets and blockchain technology.
In London, we are observing these developments with a keen eye and a sense of cautious optimism. The complexity and unpredictability of political processes, especially in the context of rapidly advancing technology, make for an intriguing and potentially transformative period. Our focus remains on understanding these shifts, interpreting their implications, and positioning ourselves and our partners to capture returns from the ultimate structure the industry takes.
Thanks for reading,
Mitch Mechigian
Partner, London
About Blockchain Coinvestors
Blockchain Coinvestors is the best way to invest in blockchain businesses. Our vision is that digital monies, commodities, and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of early stage blockchain investments and access to emerging blockchain unicorns. Blockchain Coinvestors’ investment strategies are now in their 10th year and are backed by 400+ investors globally. To date we have invested in 40+ pure play blockchain venture capital funds in the Americas, Asia, and Europe and in a combined portfolio of 1000+ blockchain companies and projects including 80+ blockchain unicorns. Blockchain Coinvestors’ first fund of funds ranks in the top decile amongst all funds in its category on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in London, New York, Grand Cayman, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.
“The best way to invest in blockchain businesses”