Source: TradingView, CNBC, Bloomberg, Messari
Crypto Enters the Political Sphere
After a strong start in May, digital asset prices fell again last week and have declined for 5 of the past 6 weeks. There were a few exceptions, notably Telegram (TON), which rose over 15% following news that Pantera took a large position in the token, and select AI tokens performed well, with Render (RNDR) +34%, Akash (AKT) +27%, and Arweave (AR) +20% among the big winners. But select winners were few and far between as digital assets once again seek a fresh catalyst to stop the bleeding.
Perhaps the Presidential election will become that catalyst, as crypto has become a topic in political conversations. Mark Cuban has been outspoken about crypto's use cases and the
unfriendly regulatory environment in the U.S. and last week stated that Biden could lose the election because of his anti-crypto politics. Former President Trump said, “If you’re in favor of crypto, you
better vote Trump” at a recent Mar-a-Lago event.
The election is still a way out, and markets are not positioning for the event yet, but this may prove to be a positive catalyst in the near future.
While we talk a lot about U.S. regulation, the reality is that the U.S. is being left behind. The progress that crypto founders, investors and developers are making abroad is a much bigger and more important story.
Feedback From 100+ Meetings Across The Globe
Insights provided by Omar Itum, Arca Head of International Business Development
As our Head of International Business Development, Omar Itum, traveled the world all year. We met with asset management firms, venture capital firms, single and multi-family offices, funds of funds, pension funds and sovereign wealth funds from Mexico, Hong Kong, Australia, Singapore, the United Arab Emirates, the Kingdom Bahrain, and the Hashemite Kingdom of Jordan.
As the digital asset world focuses more on developments outside of North America, here are some observations that shed light on where we see opportunities to invest in blockchain globally:
- Capital formation has never been more confusing. Family offices, traditionally charged with managing a single family's wealth from traditional and legacy industries and businesses, are now raising capital from friends and family - and other family offices - to manage more than just one family's wealth. In many instances, these family offices are now asset managers themselves, often becoming fund-of-funds. A digital assets fund manager who once approached families for allocations now might find themselves on the other side of the traditional capital formation conversation - meaning, the family office might now ask the fund manager for capital to manage themselves. It's a wildly different world than we might have been used to over the past few decades with the focus on equity and credit funds, largely based in New York, Miami and London.
- Family offices are pooling resources together and are increasingly investing alongside one another. Asset managers who identify the leaders in the family office space will find it far easier to scale capital raises than those who do not.
- Asset managers, once charged with managing outside capital, are now allocators. In some instances, they are allocating capital to other fund managers to access deal flow across oceans. In other instances, they’re allocating to better understand how to build the digital assets infrastructure to trade, operate, and manage operations so they can one day build their own internal teams to do these functions themselves.
- Once known to be the biggest allocators in any space, sovereign wealth funds are raising capital from other sovereign wealth funds and strategic investors across geographies. A sovereign entity in Asia is one such example. While this entity is not allocating to fund managers, depending on the geography, it is looking for seats at the table in direct deals and wants to exercise outsized influence with founders in various sub-sectors they deem strategic for other – and their own – purposes.
- Contributions at the local level are the go-to strategy for many government entities, economic development banks, pension funds, and sovereign wealth funds. The Middle East, in particular, stands out in this respect. We have all heard about Abu Dhabi Global Markets and the Dubai International Finance Corporation free trade zone, which has attracted hundreds of companies to their soil over the past several years. Bahrain is another such example. To win allocations from sovereign wealth funds, pension funds, and their countries’ close and closed community of family offices, a fund manager needs to think creatively in terms of giving back by setting up an office, having a local bank account, introducing portfolio companies to government entities and working populations, hiring locally, among other such endeavors.
- Deal flow and co-investments are at the top of everyone's minds. Fund managers that offer strategic players in various geographies a seat at the table in the hardest-to-come-by deals will likely win the race of capital formation over the next 2-3 years.
- Venture funds have traditionally operated with long horizon lock-up periods. Those lock-ups can sometimes be as long as 8-10 years. The appetite for long-duration lock-ups is waning, and more "liquid venture" strategies will win the capital formation race in the short-to-medium term. Shorter lockups of 3-4 years will likely become the norm in the blockchain space, and allocators would like to see more distributions taking place sooner, if only to grow more comfortable with investing in the blockchain and digital asset space, and to avoid the games that VCs have historically played (i.e. liquid token funds have to mark their books regularly and consistently, meaning that swings in asset prices are reflected in their monthly performance metrics). VCs have had the luxury historically of marking their investments based on the valuation at the last round. And, if the market takes a tailspin, their investments are not marked to reflect those downward market slides. Allocators are seemingly growing tired of this tactic.
- Hong Kong is pursuing one of the most aggressive digital assets policies to date. Post-COVID, many family offices left Hong Kong for Singapore and other less politically explosive jurisdictions. A great deal of capital left with them. China's government - and Hong Kong's regulators - view crypto as a way to bring it all back. Two anecdotes:
- One major asset allocator/asset management firm in Hong Kong recently received nearly half a billion dollars from a Chinese sovereign entity to disperse into the blockchain space. The firm has only allocated a small portion of it so far and is figuring out how to manage and deploy the rest. The firm is now setting up its own liquid and venture funds, a funds-of-funds, and other such vehicles to broaden its exposure to founders and best-in-breed companies in the blockchain space.
- That same allocator was lobbying Hong Kong regulators for some time in an effort to have spot Bitcoin and ETH Exchange Traded Funds approved. Last month, those regulators approved these ETFs, at a far quicker pace than was anticipated by most in that geographic region. This is perhaps the first time we have ever seen government entities and regulators moving at a quicker pace than asset management firms and private institutions anywhere in the world. Keep in mind that this is not just a local battle that is being waged. Hong Kong is competing against other crypto capitals, including Dubai and Abu Dhabi, to attract capital, founders and developers in the blockchain space to its shores.
- Eastern European founders are moving fast to the Middle East. The winners thus far are seemingly Dubai, Abu Dhabi, and the Kingdom of Bahrain. That has been the case for some time, but we are seeing it happen faster than in the past.
- The Kingdom of Bahrain is taking one of the most forward-looking approaches in the Middle East. A small island/country composed of ~1.5 million inhabitants, it is on the march to attract the best-in-breed Fintech companies to its soil. For example, Binance currently has an office there, and Bahrain Fintech Bay and the Bahrain Economic Development Board are striving to attract companies to Manama. Both entities are seemingly keen on bringing in blockchain companies to enhance their financial services sector, attract foreign direct investment, and increase liquidity in the banking sector. Various government and private sector bodies are already involved in collaborations with local and global players in the blockchain/crypto industry and are continuing to develop a regulatory framework to facilitate the growth of blockchain and crypto businesses in the country.
- There is a growing frustration amongst venture funds, sovereign entities and others regarding the types of projects and companies being birthed in the blockchain space. Blockchain was intended to solve real-world problems and, in turn, be a conduit for solving real human grievances. Two gentlemen in 2010, not to be named at this time but who have grown to be incredibly successful builders and investors in this space, were discussing how Bitcoin and blockchain could one day be used to alleviate the pains of refugees around the world, in particular for those who reside in refugee camps, where fiat currencies are not often used, identities are not kept, access to bank accounts are a figment of any one person's imagination, and where economies are non-existent. These two men discussed how many of these issues could be solved using crypto and blockchain technology, but the general feeling is that this is not the case today. Rather, teams of 'crypto bros' are issuing tokens with little to no utility. Few projects are solving real-world problems that include: carbon credit trading, tokenization of fossil fuels and other natural resources, incentivizing moves to green energy by creating what one person called "home-to-home economies," refugee crises, simplifying and codifying real estate transactions that would ultimately remove the middleman, among other such things. Perhaps that is the case because founders and investors haven’t found ways to make it financially lucrative to tackle such issues via blockchain technology.
- Real-world asset tokenization is top of mind.... for everyone. Fund managers that want to raise capital from overseas capital will be best equipped to do so if they can offer those sovereigns real ideas on how to solve problems at home using blockchain technology and leverage portfolio companies' expertise to assist in those efforts. Real-world asset tokenization will quickly become crowded, and partnering with geographical leaders will be key.
- Different geographies are interested in different blockchain subsectors. Asian and Australian investors seem to be particularly interested in leveraging blockchain technology for their own uses and legacy businesses and in gaming. Asia has always had a hold on the gaming industry, but it appears as though they are making a play for Web3 gaming at a more aggressive clip than in other jurisdictions. The Middle East is more interested in banking and settlement solutions.
- The Middle East, particularly countries like Qatar and the UAE, is leveraging blockchain technology to address various challenges and opportunities. For instance, Qatar uses blockchain to enhance its national security and economic diversification. The technology is being used to improve the efficiency of humanitarian aid logistics, secure communication networks against cyber threats, and bolster the resilience of Qatar's economy across sectors like energy, finance, and trade. It is also being used to address complex geopolitical dynamics, such as the need for more self-reliant security measures. Blockchain technology provides innovative solutions for supply chain security, secure communication, digital identity, border security, smart contracts, and decentralized authentication systems for military and national security data. On the other hand, the UAE is leveraging its strategic location, strong political climate, business-friendly regulations, world-class infrastructure, and culture of innovation to attract blockchain companies to its shores.
- Saudi Arabia is making a big play for gaming. We have heard that a Ministry of Gaming was being set up, and many resources were allocated to its infrastructure. Some $40 billion has been allocated to the space, with only a small fraction deployed thus far. That sum was and is being distributed across a few players in the country, including PIF, NEOM Ventures, the Ministry of Gaming, Savvy Games Group, among others. As an example, NEOM Ventures recently made a $50 million commitment to Animoca with the intention of having them set up shop in Saudi Arabia’s new city.
- Indonesia and Malaysia were often cited as examples of under-covered jurisdictions adopting crypto en masse. One major investor suggested that Indonesians, on aggregate, own more crypto in wallets than they do fiat currencies in local bank accounts. According to Coindesk, the country's crypto regulator reported 19 million registered crypto investors, an increase of 170,000 from January, and crypto transactions hit $1.92 billion that same month. In July 2023, Indonesia launched the world's first state-backed cryptocurrency bourse.
Countries and populations in Latin America, the Middle East, Africa, and Asia are pushing forward, and populations and governments in North America and Western Europe are regressing. We have heard from so many voices, from so many backgrounds, and from so many different vantage points. To sum up their thoughts:
“The United States of America, France, Britain, and Germany are yesterday. Asia is today. The Arab Middle East and Latin America are tomorrow. Africa is the day after tomorrow.”
The West has to wake up. This technology, this adoption, and digital assets will enhance democracy, revolutionize social mobility, and create economies more powerful and inclusive than anything we have experienced since the dawn of fiat currency and the advent of democracy itself.
The U.S. has always been the source of entrepreneurial hope and constitutes the greatest portion of global GDP. The U.S. is defined by upward social mobility when few other countries anywhere can claim the same. But if the U.S. doesn’t completely embrace blockchain and digital assets, broadly speaking, it will fall behind. And it will be tough to catch up.
