Current Crypto Market Trends: ICOs Are Out, STOs Are In

In this guest post, Daria Generalova, Managing Partner at ICOBox, takes a look at how 2018 saw the decline of ICOs, and how STOs might be set to replace them.

Shifting gears

Late 2017 was a time of explosive growth in blockchain, when many projects made money virtually out of thin air. In the recent months, the cryptomarket went through an expected cooling-off period and is now entering a new stage in its development. Many countries informally leading the crypto industry are getting closer and closer to regulating the sphere, and market players are revising their approaches accordingly. It is entirely natural therefore that this dance revealed the need for newer, more versatile solutions which will help companies achieve even greater success.

The decline of utility tokens

Until recently, Initial Coin Offerings (ICO) ruled the day. Projects issued utility tokens as a sort of internal money that offered their holders certain advantages. They may have granted access to the use of the platform's services, or offered discounts, or were just used as an internal means of payment.

Through all of 2017 and the first half of 2018 ICOs were the most popular way to gain financial backing in the crypto market, and the vast majority of companies issued utility tokens. Largely this was because from the legal standpoint this approach was mostly in the grey zone, so projects and their token holders were not subject to laws governing investments and financial instruments. But the market situation has changed, and the lack of clear, specialized regulation became a serious drawback rather than an advantage.

STOs instead of ICOs

For the past year tokens issued by ICO startups failed to rapidly grow in exchange value – in fact, their rates have dropped, and token holders had no leverage over projects. As a result, new ICOs were unsuccessful in their efforts to collect money, and the market started to grind to a halt. Compared to late 2017-early 2018, the market capitalization and the value of all main cryptocurrencies plunged by two thirds, with new ICOs now collecting just 25% of what was possible just a year before. In fact, the numbers demonstrate that over half of all ICOs conducted in Q2 2018 failed.

All this inspired market players to look for new solutions to develop their businesses. What they found was a Security Token Offering (STO) model. The interest in this new paradigm is growing by the day.

Advantages of Security Tokens

Security tokens and STOs allow projects to raise funds rather than sell their services, thereby clearly dividing their buyers into their future users and those who would just like to invest capital. For serious market players, securities underlying these tokens are a familiar and well understood tool, an investment asset purchased in order to make a future profit. This asset may be issued in the form of bonds, equity shares, or any other instruments bringing passive income.

Issues surrounding security token regulation

Security tokens may well become a new but familiar financial tool for the market, but that would require the projects seeking investors to change their business logic pretty much overnight. The process would encompass a serious shift in business and financial planning, a new approach to transaction structuring, and learning to work with professional securities market players, among other things.

Another obstacle to overcome is the inconsistencies in securities regulation in different jurisdictions. This means that projects have to be extremely careful about their choice of countries where they sell their security tokens. However, the presence of clear and definitive legal framework gives project founders a much greater space for creativity in terms of what exactly they can or cannot do. They would also be able to obtain funding from institutional investors and hedge funds, which are now getting ready to enter the crypto market.

Institutional investors and the crypto market

Institutional investors and hedge funds are truly interested in the crypto market. It is not inconceivable that in the days to come they will gradually replace larger individual buyers as main holders of digital assets. This speaks to the increasing maturity and professionalism of the market and demonstrates its decreased volatility, which makes it much more attractive for long-term investments.

Many in the industry expect serious competition between crypto projects for the attention of institutional investors – because their support will be on an entirely different level than even that of major individual token holders.

Shuttling between IPOs and the crypto market

A couple of other trends need to be noted. First, it appears entirely plausible that many major companies with recent IPOs under their belt but with no previous crypto experience will soon start showing up in the marketplace. These are full-fledged projects with real offices, competent teams, financial reporting, etc. They will now be turning their sights to STOs as another way to attract funding for their innovations.

The second trend is the opposite: many companies that successfully conducted ICOs, collected serious funds, created money-making businesses and did not turn out to be a scam, will be contemplating their IPOs. It is reasonable to expect that quite a few crypto companies which did their ICOs in 2017-2018 would be gearing up for IPOs in 2021-2022.

Conclusions

The shift from utility to security tokens, the enthusiasm regarding STOs, the imminent participation of institutional investors and major companies which have never before worked in the crypto space but are now finding it potentially promising – these will be the defining trends for the development of the crypto market. Transition to more sophisticated, legally-regulated products will make it even more attractive to future investors. And this, despite the current slump, gives one plenty of cause for optimism.

Brazil Is for Blockchain but Against Crypto

Brazil, or the Federative Republic of Brazil, is a Portuguese-speaking state in South America with more than 200 million inhabitants. It is in fifth place among all countries of the world in terms of area and sixth in terms of population.

The Brazilian economy ranks ninth in the world in terms of nominal GDP and seventh in purchasing power parity. The country is a member of the UN, G20, WTO, Mercosur and the Union of South American Nations, and is also one of the BRICS countries.

Despite the active development of IT in the country and massive investments in this industry, large investors and financial institutions have preferred to stay out of cryptocurrencies. Brazil has tightened crypto control: investment funds are now banned from buying cryptocurrencies, and banks have demonstrated unfriendly attitudes by blocking the accounts of cryptocurrency companies and crypto owners.

Nevertheless, Brazil is actively integrating blockchain technology into its infrastructure and economy and even launching its own instant payment system. More on that in the article written by Solomon Brown, Head of PR for Freewallet, a cryptocurrency wallet developer.

Cryptocurrency Regulation in Brazil

Interest in the crypto industry is growing in Brazil, and regulation is slowly catching up. The main managerial authority that currently deals with crypto companies is CADE - Council for Economic Protection of Brazil. Regulators have still not taken decisive action. They first showed their willingness to do so in November 2018, submitting for consideration a bill on the taxation of crypto assets.

On May 31, 2019, the chairman of the Brazilian Chamber of Deputies ordered the creation of a commission to consider cryptocurrency regulation in the country. The commission is tasked with overseeing the digital asset industry. Also, the Brazilian Federal Revenue Office (RFB) has issued new rules requiring cryptocurrency exchanges to inform the regulator of user transactions in order to detect tax fraud, local news outlet Livecoins reported.

The guideline states that cryptocurrency trading platforms in Brazil have to inform the agency about the movement of user funds in cryptocurrencies and comply with the requirements of standard 1.888 / 2019, published last May, “whenever the monthly volume of operations exceeds 30,000.00 Brazilian reals ($5.140).” In addition to the transaction volume, operators must also provide additional data including the citizenship of the owner of the digital currency, his place of residence, registration number and a description of the crypto assets used in the transaction.

At the moment, there are no other specific laws regarding holders: those who store crypto without transferring their assets to fiat don’t have to pay income tax. Some investors have to report to the tax service — there is a provision requiring you to pay a 15% income tax on earnings of more than 35,000 reals per month, which is approximately $6,000.

Meanwhile, the four largest financial agencies in Brazil have teamed up to create a regulatory sandbox and develop regulation for new technologies, including blockchain. The Ministry of Finance, the Central Bank, the Securities Commission and the Superintendent for Private Insurance of Brazil announced their intention to put together a set of rules for fintech and cryptocurrency businesses.

Regulators said the new rules will affect Brazil's securities, finance and capital markets. In addition, institutions will create a normative sandbox to facilitate new developments in technology.

A new regulatory initiative came soon after the announcement of plans to establish a Cryptocurrency Regulatory Commission in Brazil. Although new regulatory efforts are defining the boundaries of using cryptocurrency and blockchain technologies in business, many cryptocurrency sellers are still not classified in the financial market.

The Minister of Finance has hailed the benefits that DLT technology has brought to Brazil's financial markets, also mentioning cryptocurrencies and ICOs in the field of finance. Brazil currently has the largest number of cryptocurrency users in Latin America and ranks fifth in the world in this respect. According to experts, at the end of 2019, 8% of the Brazilian population owned some form of crypto asset. But with all that red tape, a basic question arises: How do locals buy cryptocurrencies?

Cryptocurrencies in Brazil: Where to Buy and How to Spend

Local Bitcoin Exchanges

Despite the government’s bearishness, Brazilian cryptocurrency exchanges and exchangers still exist and are operating, but not actively enough, compared to the countries that are more friendly to the crypto industry. Here is a summary of the volume data of Bitcoin buy and sell transactions collected from 40 local exchanges, such as BitBlue and Braziliex.

According to Cointrader Monitor, a local website monitoring cryptocurrency quotations in Brazilian brokerages, exchanges reported having handled 395,209.48 Bitcoins from January 1, 2019 to March 31, 2020. The highest volume exchange was demonstrated by MercadoBitcoin with 120.889.34 Bitcoins traded, corresponding to 30.58% of the national market.

The day that registered the biggest Bitcoin movement in the period was June 26, 2019, with 5,070.38 BTC. And the day with the least movement was January 1, 2020 with 64.90 BTC. Analysts suggested that the downtrend might be a consequence of cryptocurrency companies having lost credibility due to litigation with their clients.

Talking about the BTC trading volume, it is interesting to note that the 2020 numbers are encouraging, compared to the figures from the first quarter of 2019.

img 1.png

Source: CointraderMonitor

From January to March 2019-2020, the national Bitcoin market saw a 32.64% increase. Thus, if the trend continues, we can expect a volume of more than 480,000 Bitcoins traded in Brazil in 2020.

These figures prove a considerable number of Brazilians are sticking to local crypto services, exchanges and wallets. Nevertheless, the country is in Freewallet’s top 20 list by number of users, which makes us extremely proud.

What to Buy for BTC

In the Brazilian city of Fortaleza, citizens will be allowed to pay for public transport with cryptocurrency, according to Cryptoglobe, which cited local media. The Ceart State Autonomous Carrier Cooperative (COOTRAPS) announced that a new function for buying tickets via QR codes will appear as part of a special application. Currently, debit and credit cards are the supported means of payment.

COOTRAPS is also considering adding cryptocurrencies other than Bitcoin. City authorities want to increase the efficiency of the payment system, reduce its cost and attract more people who will use this service. This is a way to reduce bureaucracy and make the system easier for users with the help of crypto.

In December 2018, Oásis Supermercados began accepting cryptocurrencies as a payment method. Now, shoppers in Rio de Janeiro can pay for purchases with Bitcoins, Bitcoin Cash and Litecoin. For this, the supermarket chain is working with CoinWISE. In this arrangement, the withdrawal of cryptocurrencies to fiat occurs every three days.

In Brazil, more and more local companies are beginning to support crypto. Clients of the Technisa construction company can get a 5% discount when paying with Bitcoins. Bitcoin Cash and Litecoin are accepted by transport companies Brasil Sul and Viação Garcia and metro operator Metrô Brasília.

In 2017, Dash announced a partnership with the Brazilian platform CoinBR. After that, the altcoin began to be accepted in 13,000 stores. Earlier Dash announced a collaboration with the Uphold platform.

According to a statement by Dash CEO Ryan Taylor, this will allow 94 percent of the population to use tokens in everyday life. Simultaneously with these events, the digital currency rate has more than doubled, since November 2017, when the coin was worth $300.

Analysts even believed at one point that, due to its widespread distribution in Brazil, the price of the altcoin would rise to $1,000, which wasn’t that far-fetched back when the price was around $840.

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Source: newsbtc

But, as we all know, nothing lasts forever, and Dash is currently trading around $74, according to CryptoCompare.

Brazil: Blockchain for Good

Unlike crypto, which hasn’t been warmly welcomed, blockchain is employed in many Brazilian social institutions.

In early September 2019, the first birth certificates were issued exclusively through blockchain technology without having to go through registration in the registry office. A new type of registration project was developed by technology company Growth Tech in partnership with IBM. Registration is done through Growth Tech’s Notary Ledgers platform, which provides virtual notarial services.

The Brazilian Ministry of Education has proposed the creation of a blockchain platform for the issuance of digital certificates of education among non-state universities in order to combat the falsification of diplomas. Brazil Education Minister Abraham Weintraub said the government is considering this opportunity. The resources for financing the development of the platform will come from private educational institutions themselves, as they will be solely responsible for issuing diplomas.

In addition, to implement this measure, the ministry will require universities to create independent departments responsible for managing the blockchain-based platform. Local media have also reported that at least 14 private universities have already shown interest in the government’s proposal. Gilberto Garcia, the former president of the National Board of Education, said the initiative also includes all educational institutions in the system, which will support the concept of transparency that the blockchain can offer.

PIX: The Prospects of Cryptocurrency in Brazil

Brazilian cryptosphere has had a bumpy road due to the slow development of crypto regulation in the country. For instance, recently the XDEX Brazilian cryptocurrency exchange, owned by the largest brokerage company in Latin America, XP Investimentos, announced its closure. And it’s not the only company that has had to make this difficult decision due to disappointing market forecasts. A lot of cryptocurrency companies have had  to continue fighting banks in order to be provided with financial services. Just recently the Mercado Bitcoin exchange won its court case over a bank closing its bank account this March.

Nevertheless, the government is eager to implement blockchain decisions to improve the lives of its citizens. For instance, this February, the Central Bank of Brazil launched the PIX instant payment system which uses QR-codes and doesn’t require personal data. This initiative is a tool to fight against alternative digital payment means, including cryptocurrencies.

The system, which involves all state banks, will allow for almost instant payments using mobile applications, Internet banking and ATMs 24/7. Hopefully, this measure will add to the blockchain adoption that’s happening right now in Brazil. And, who knows, maybe after PIX proves the benefits of anonymity and cashless transfers, cryptocurrencies will also get regulated and be welcomed by the state.

Featured image by sergio souza on Unsplash


Solomon Brown, Head of PR at Freewallet. Drawn to the blockchain space by a belief in its ability to restructure global finance and passionate about telling stories, Solomon cut his teeth in blockchain startup promotion before joining Freewallet's Team in 2018. LinkedIn