The challenges facing venture capital in digital asset markets

Abstract

This chapter explores how decentralized digital asset markets, including decentralized autonomous organizations (DAOs), are reshaping the landscape of venture capital (VC) investment. Traditional VC tools – such as governance rights, exit strategies, and downside protections – often clash with the decentralized, token-based models of crypto markets. The authors analyze the legal, financial, and structural obstacles facing VC firms, including regulatory uncertainty, limited enforceability of term sheets, and reduced applicability of conventional exit paths like initial public offerings. Despite these challenges, the chapter argues that crypto's transparency, community-driven governance and smart-contract flexibility may offer new models of investor engagement. Venture capital may be particularly well-positioned to adapt to and shape these markets, but only with significant rethinking of risk pricing, control rights and legal frameworks. The chapter concludes by identifying pathways – such as tokenization and overseas regulatory regimes – that may support more stable VC involvement in digital assets.