Funding dollars devoted to crypto and blockchain projects plunged by 30% last year, according to CBInsights.
The research company estimates that $2.8 billion was raised in 2019—considerably less than the $4.3 billion generated the year before. It’s worth noting that 2018 may have been something of an outlier, given how the industry was still basking in the glow of a record-breaking bull run.
CBInsights’ Blockchain Report 2020 reveals that, despite the substantial decline in funding dollars, the number of deals backed by venture capital firms was relatively steady—falling just 2% year on year. To cut a long story short, projects haven’t dried up entirely… it’s just that each of them is receiving less financing on average.
That said, the news is not nearly as bad as CBInsights predicted in July 2019, when its 2019 Blockchain Trends in Review report estimated that VC investments in blockchain companies would top out at $1.6 billion that year.
Winners and losers
According to the report, there are distinctive winners and losers in crypto and blockchain.
Funding for enterprise blockchains that enhance business processes and slash back-office costs is one of the bigger casualties—but you would necessarily see that looking at the figures. At a glance, investment rose 62% year on year to hit $434m. The problem is that an eye-watering $200m of this came from one deal: Ripple’s Series C funding round. When the payment protocol’s fundraising drive is taken out of the equation, the figure for 2019 stands at $234m—down 12%.
This isn’t to say that applications for enterprise blockchains aren’t being explored. According to CBInsights, it’s just that progress is at a very early stage. The report illustrates the reason for this with a pertinent, succinct quote from Bloomberg’s Matt Levine, who said: “The problem is a social, coordination problem: you gotta get everyone to agree to use one system, blockchain or otherwise.”
The problem is that this is the same problem industry experts were talking about last May at MIT Media Labs’ “Business of Blockchain” conference. During a panel, Dan Robinson, a research partner at cryptocurrency-focused hedge fund Paradigm, said corporate blockchain consortium’s “social problems are almost intractable… [p]eople really want to form this consortia, write a press release about it, but they don’t really want to put their business critical methods on there until it’s been proven.”
The 2020 report also suggests that enthusiasm for this technology in the corporate world may be on the wane. CBInsights logged mentions of “blockchain” in earnings calls—and found that it was discussed 50% less in the fourth quarter of 2019 than it was in the first quarter of 2018.
Funding for cryptocurrency companies fell by 41% to $2.4 billion in 2019. Although this is quite a drop from 2018 levels, it’s still streets ahead of the enterprise blockchain sector. Big winners included businesses focused on facilitating digital payments, improving the interoperability of crypto networks, and operating mining facilities. CBInsights concluded that this shows there is an appetite for infrastructure that enhances the experience of users—potentially aiding that elusive goal of mainstream adoption.
A final interesting statistic lies in which investment arms were the most prolific in 2019. Venture capital spin-offs of established crypto firms dominated the top two positions—with NEO Global Capital and Coinbase Ventures coming out top. One particularly surprising shift in the rankings saw Digital Currency Group, which was the biggest investor for three consecutive years, fall to fifth place behind Galaxy Digital and Fenbushi Capital.
Looking ahead to 2020, CBInsights plucked out three key themes. First, initiatives that promote ease of use for crypto products will likely dominate investments for the rest of this year. The report warns: “Low DApp usage, poor network interoperability, and sustained volatility are still obstacles to mass adoption of crypto tools.”
Second, it’s predicted that blockchain service providers will look to diversify—with exchanges and custodians foraying into “high-margin, value-added services” such as insurance and lending. (That said, crypto businesses may be thinking twice about certain areas following last week’s Ether calamity at MakerDAO.)
Last but not least, the report warns that government interest in central bank digital currencies could be at the detriment of non-fiat crypto networks, which are likely to face higher levels of monitoring and regulation. A December EU report, for example, came up with the idea of rationing privacy on an EU-wide CBDC with “anonymity vouchers.”
The CBInsights report added: “Confidentiality will become a harder feature to guarantee on blockchain platforms. And, if CBDCs do launch, expect regulation to discourage consumers from embracing non-fiat stablecoins.”
A return for ICOs?
Casual followers of the cryptocurrency sector will know that initial coin offerings were a mainstay until very recently—hitting total funding levels of $7.8 billion in 2018. The report shows it subsequently tumbled by 95% to a measly $371 million.
CBInsights suggests that there’s a chance—a small chance—that they could make a comeback. Reports in the media have covered how an ICO was recently approved under a newly developed French law, with the US Securities and Exchange Commission unveiling a legal framework for digital coin offerings.
This openness could be linked to the development of monitoring platforms such as Chainalysis, CipherTrace, and Elliptic, which enable government agencies and law enforcement to investigate suspicious activity.