This past week in the U.S., there was a significant development with the introduction of exchange-traded funds for Ethereum, the second-largest cryptocurrency by market cap. This means that investors can now access Ethereum through a more traditional offering. Have you ever wondered how to assess crypto projects and what factors to consider? In today’s edition, Matthew Burgoyne, a partner at the law firm Osler Hoskin & Harcourt LLP, offers a comprehensive guide for investment advisors on evaluating crypto projects.
As the crypto and blockchain industry continues to gain momentum, securities advisors are facing an increasing number of inquiries from clients about specific crypto assets and the projects behind them. Evaluating these projects requires a deep understanding of several key factors to make well-informed investment decisions. Here are some areas for advisors to focus on when evaluating the nature and legitimacy of a crypto project and its corresponding crypto asset:
1. Conduct due diligence on project founders: Look into the backgrounds of project founders, their professional history, previous projects, and industry reputation. Be on the lookout for signs of potential fraud, such as newly created social media profiles or anonymous teams.
2. Review and analyze tokenomics: Tokenomics refers to the economic model of the token, including its supply, distribution, and utility within the project. Pay attention to aspects like supply and distribution, utility of the token, and inflation/deflation mechanisms.
3. Evaluate the business plan: A solid business plan is crucial for the success of any token project. Check the necessity of the token, market demand, competition, and revenue model outlined in the white paper.
4. Identify potential risks: Consider technical risks, liquidity risks, and competition risks associated with the project. Look for mechanisms to control token supply and ensure long-term value stability.
5. Consider regulatory compliance: Assess whether the issuance of the token complies with anti-money laundering (AML) laws and securities regulations. Verify if the project founders have obtained legal advice and if sales are restricted in major markets.
By thoroughly examining these factors, investment advisors can offer informed guidance to their clients and help them navigate the ever-changing landscape of crypto assets.
In the “Ask an Expert” section, David Ben Kay, president at Function X, provides insights on legal considerations when evaluating crypto projects. He emphasizes the importance of compliance, governance, and security in assessing the risks and potential returns of a project.
Overall, when evaluating crypto projects from a legal perspective, it is essential to look for projects that have established compliance and governance practices. Projects beyond the startup stage with a track record of good practices are generally easier subjects for due diligence.
In conclusion, legal compliance and governance are crucial factors in assessing the risks and potential returns of a crypto project. Advisors play a key role in helping clients make informed investment decisions based on these factors. In the rapidly evolving crypto industry, it is important to gather objective information and conduct thorough due diligence to ensure informed decision-making.