Blockchain is one of the fastest growing ideas in recent history, and its revolutionary decentralized model is being appropriated by industries far and wide. Part of its popularity is derived from cryptocurrency, which is now almost a decade old. Bitcoin was the seminal cryptocurrency back when it was just that: a currency. However, the term ‘cryptocurrency’ is now somewhat dated. It used to describe digital fiat money alternatives like bitcoin, Litecoin, and Ripple, but is now a catch-all phrase that covers literally any ‘coin’ that is transferrable via blockchain.
Part of this shift is due to the waning novelty of coins that mimic fiat money. The market now has so many other choices delivering bitcoin’s capabilities and more, that it has come up with new terms to help illustrate the differences between them all. The rise of ICOs means that there are now thousands of different cryptocurrencies out there, with ICO-generated coins commonly referred to as ‘tokens’. This year will likely signal the rise of one special kind of token, called a security token, which provides one of the most encouraging cases for blockchain technology yet.
Considering that companies like SWIFT—the global payment transfer provider—are busily creating their own proprietary blockchain-based services, the death of the ‘digital money’ concept is nigh. Even before SWIFT made its announcement, platforms like Ripple had already chipped away at bitcoin’s value proposition. The ground-breaking cryptocurrency once had the ambition to give people the ability to be their own bank, but has since relinquished its goal and is now a purely speculative tool, with some utility to purchase other blockchain assets.
Moving in a New Direction
Utility is where the market headed after bitcoin became old news. The aptly named ‘utility tokens’ are the result of an ICO whereby users of a blockchain platform pay with the tokens sold during the ICO, or that they earn for providing some other relevant input. Golem is a pertinent example, allowing users to lend their own PC’s power to the network which collectively employs it to run a remote supercomputer. Users earn GNT for connecting to the network, but they can also buy them via an exchange. Basic Attention Token is similar, with users rewarded in BAT for using the BRAVE browser and viewing ads.
However, these tokens amount to little more than the loyalty rewards points given by credit cards, in some cases, and barely need to be denominated in token form for the platform in question to work. Attaching value to them is an exercise in ambiguity as the market pretends that the underlying business’s value proposition and market (potential or real) make its tokens more valuable. This often isn’t the case. Projects like the ones mentioned above are gaining new partners and users constantly, and yet their tokens still move in relation to bitcoin and the market at large. Participants with utility tokens are therefore purchasers of a service, and not investors in it. The result of their contribution to an unregulated crowdsale is simply the ability to use the service itself, and nothing more.
A better balance is found in security tokens, which are essentially digital, liquid contracts for fractions of any asset that already has value, like a house, a car, a painting, or equity in a company. Denominating fractional ownership of a real asset in tokens is an idea that is naturally more structured and means investors can expect that their ownership stake is preserved on the blockchain ledger.
Benefits of Security Tokens
Security tokens are a natural bridge between the traditional finance sector and blockchain and benefit both equally. This is because the assets divvied up via tokens already exist in the traditional market—even the biggest markets like public or private equity and real estate. Many blockchain projects now have platforms that directly undercut the old ICO model by tokenizing equity rights for pre-IPO companies.
A lack of regulation for utility tokens has meant that companies raising capital can circumvent institutional finance alongside the costs and accountability involved. However, with the cryptocurrency market slipping this year and perpetually volatile, it has become riskier to launch an ICO and expect conditions stable enough to run a company. Many projects have taken to cashing out immediately to remain solvent. This sinks the already weak argument that ICO participants are “investors” in young companies and opens the door to new ideas like that of The Elephant.
The Elephant is the first secondary market for pre-IPO equity built on blockchain. By tokenizing the rights to future shares in startups after their public offering, The Elephant’s marketplace brings an immense source of liquidity to the existing market for such assets, which is notoriously difficult to navigate. With companies taking longer to go public than they used to, many can’t avail of their equity rights for as long as ten years. Blockchain infrastructure finally provides a market where these rights can be bought and sold transparently, to the benefit of rights holders and cryptocurrency enthusiasts alike.
The end game here is to merge the traditional financial market and the cryptocurrency market together, for the betterment of both. Other projects are working on similar ideas, such as Funderbeam, which has already helped over 100 pre-IPO startups (blockchain and otherwise) raise over $5.8 million. Causam Exchange is using a parallel concept to sell its own stock via the blockchain, through what it calls BITE, or a Blockchain Instrument for Transferable Equity. Even Nasdaq is taken with the idea of incorporating blockchain into the listing of public companies, with its recently announced Linq platform able to issue private securities via the blockchain.
The Cryptocurrency Storm Clears
The enormous rise and subsequent crash of the cryptocurrency market at the beginning of 2018 created waves that washed the entire blockchain landscape clean. What remained after the storm cleared were a few projects of repute and real value, using the blockchain out of necessity rather than just seeking a quick fundraising route. Increasingly, trends this year demonstrate that companies looking to raise capital will no longer try to skirt institutional models, but instead flock to ones that are already accommodating of regulations. Considering its real use cases and ability to denominate value, the security token could roil traditional financial markets in favor of the more hybrid model available from blockchain and its accompanying benefits.