Tokenomics
New evolutionary stage in securities trading (3)
1. Certificate: physical transmission 2. Book effects: transmission via CSD (Central Securities Depository) 3. Security token: transmission peer-to-peer
Ethereum as a place for tokens to live
- "De-facto" standard for the development of crypto tokens - Different standards: > ERC-20 (most used) > ERC-721 (non-fungible tokens) > ERC-1400/10 (security tokens)
General Key Takeaways of Tokenization
- Access to "alternative investments" for retail investors - Improved access to capital for SMEs/crowdfunding - Creation of liquidity in "illiquid asset classes" - Lack of market infrastructure (still) inhibits activities - Shift in influence (IB to fintech) - Margin pressure on traditional suppliers - Strengthening investor rights (electronic vote) - Correct categorization is essential (i.e., regulation)
Liechtenstein's Advantages for STOs
- EEA membership (passporting) - Legal certainty and clear understanding of roles through TVTG - Proximity to CH - Expeditious establishment and authorization processes - High degree of political continuity and stability - AAA-rated - Long tradition in finance - Attractive tax legislation (income tax, no VAT)
CoreLedger as a place for tokens to live
- Implementation of (almost) every business process as a token transaction - DocumentDB: global digital asset and document director (e.g., prospectus) - WARP: Multi-party asset search and matching tool
Factors to Popularity of ICOs
- Open access - Investing in crypto - Ease of trade
Advantages of STOs
- Reduction of settlement risks - Reduction of transaction and custody costs - Automation of payment flows - Reduction of administrative efforts - Simple and fast transferability (independence from central securities depository) - Automation of regulatory processes (white lists, etc.) - Transparent transaction history - Unambiguous traceability of ownership (real-time register)
Specific Areas to Improve in STOs
- Regulated secondary market - Regulated custody solutions - Stable/settlement coins - Due diligence requirements - Insurance - Market data services/ratings - Token standards - Protocol standards
Types of Tokens
-Cryptocurrency **Serves as a payment method between participants** > Used as a store-of-value or means-of-payment; unit of account > Not issued by a central authority > Can be mineable or pre-mined -Tokenized Asset **Asset-backed: entitlement to fungible and tradable goods -> Security Token** > Gives access to assets like gold, even in a micro-transaction scale > The underlying asset needs to be held by the issuing party > Thus introduces counterparty risk, contrary to cryptocurrency -Tokenized Platform **"Grease the Wheels"; Token as fuel: for nodes provide incentives and keep consensus going** > Platform-like network, not owned and operated by a single entity > Before users had limited roles in a platform, now roles are distributed and available to every network participant > Value (financial/utility) flows freely through the network -Token-as-a-share **Equity: holding a share in a company; ICO instead of IPO; security token** > Tokenized instrument to invest in companies (though currently on no regulated basis) that has characteristics of stock and currency (e.g., ICO replacing IPO) > Shares on steroids: flexible, programmable via smart contract > Currently a highly uncertain token class as regulatory frameworks are only beginning to emerge
Application examples away from the capital market
-Direct ownership claims to assets that do not qualify as securities (e.g., gold bars, other mobile or immobile assets (e.g., division of an estate)) **Note: ownership passes but possession does not necessarily (enter reason for physical validator) -Commodities, plantations, jungles, ESG projects -Direct financing -Tamper-proof databases (supply chain management) -Tokenization of identities, land records, etc. -Tokenization of voting rights in elections/ballots -Discount tokens/action tokens -"Tokenize" likes -References for a book/article -Intellectual property rights/licenses/patents -CO2 rights -Right of use/vouchers that do not generate fixed income and do not participate in the success of a company
Functionalities, underlying value, examples of Basic Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology -Underlying value: none -Examples: > Bitcoin > Bitcoin Cash > Litecoin > Monero > ZCash
Functionalities, underlying value, examples of Application Access Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Access to decentralized application or platform without legal claim against a counter-party -Underlying value: none -Examples: Wings
Counterparty tokens
-Natural/legal person as a counterparty (relative right) -Subclasses (FINMA equivalent) > IOU Tokens (Payment, Utility, and/or Asset Token) > Derivative Tokens (Asset Tokens) > Fund Tokens (Asset Tokens) > Equity Tokens (Asset Tokens) > Membership Tokens (n/a)
Native utility tokens
-No legal counterparty (decentralized ecosystem) -Subclasses (FINMA equivalent) > Basic Tokens (Payment tokens) > Infrastructure access tokens (Payment and/or utility tokens) > Application access tokens (Payment and/or utility tokens) > Application Settlement Tokens (Payment and/or utility tokens)
Ownership tokens
-Right in rem (absolute right) -Subclasses (FINMA equivalent) > Joint-Ownership Tokens (n/a) > Co-Ownership Tokens (n/a) > Sole-Ownership Tokens (n/a)
Possible classifications of tokens (BCP)
1. Native utility tokens 2. Counterparty tokens 3. Ownership tokens
Functionalities, underlying value, examples of Application Settlement Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Access to decentralized application or platform without legal claim against a counter-party > Used as P2P settlement instrument on an application/platform -Underlying value: none -Examples: > Siacoins > Mysterium > Filecoin
Functionalities, underlying value, examples of Infrastructure Access Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Access to enhanced functionality infrastructure (i.e., SCS or burning mechanism, without legal claim against counter-party) -Underlying value: none -Examples: > Ether > Ether Classic > Cardano > Risk > ICON > EOS
Functionalities, underlying value, examples of Co-Ownership Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Co-ownership of an asset (i.e., IP) -Underlying value: Ownership of an asset -Examples: tba
Functionalities, underlying value, examples of Joint-Ownership Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Joint-ownership of an asset (i.e, IP) -Underlying value: Ownership of an asset -Examples: tba
Functionalities, underlying value, examples of Sole-Ownership Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Sole-ownership of an asset (i.e., IP) -Underlying value: Ownership of an asset -Examples: tba
Functionalities, underlying value, examples of Derivative Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Tokenization of a claim > Value derives from an underlying on- or off-chain base value -Underlying value: Derivative (debt) -Examples: Modum
Functionalities, underlying value, examples of IOU Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Tokenization of a claim against a legal counterparty (e.g., right to receive funds, services, or use infrastructure) -Underlying value: Debt/claim -Examples: > Lykke Colored Coins > "Utility Tokens" with counterparty
Functionalities, underlying value, examples of Equity Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Tokenization of a corporate membership > Equity related shareholder's and financial rights -Underlying value: Equity share -Examples: > Daura > C-Shares
Functionalities, underlying value, examples of Fund Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Tokenization of a fund share -Underlying value: Fund share -Examples: Blockchain Capital
Functionalities, underlying value, examples of Membership Tokens
-Functionalities: > Medium of exchange > Unit of account and store of value > Providing access to an underlying technology > Tokenization of a personal membership -Underlying value: Personal membership right -Examples: tba
Tokenomics in the context of other disciplines
-Monetary economics: a token represents currency in an ecosystem -Corporate finance: an ICO represents a means of procurement for companies -Capital market: Tokens are easily tradable on exchanges -Game theory: incentive creation is at the heart of token model design **Possible characteristics of a token: -Means of exchange (goods and services) -Unit of account (within the token ecosystem) -Store of value (savings and investments)
Advantages and Disadvantages of ICOs (Generally)
Advantages - New way of money creation (created coins directly benefit the community) - "Wisdom of the Crowd" (indicator for demand) - No regulation - Immediate liquidity (possibility of an exit as soon as listed) Disadvantages - Too much capital raised (as market demand and macro factors not modeled) - Unqualified teams (without operational skills) are provided with funds (given unregulated nature of ICOs) - Legal (unclear regulation and definition of token rights) - Lost or stolen tokens
BCP in this context
Blockchain Crypto Property
Coin vs. token
Coin - native to underlying blockchain; necessary to make underlying blockchain work (e.g., Bitcoin, Ether) Token - newly built on existing blockchain not necessary to make underlying blockchain work; could still be "native" within the app built on the underlying blockchain, but unless it is the primary native, it is a token (e.g. other things on Ethereum blockchain other than Ether)
Howey Test
Created by the U.S. Supreme Court to define a security as an investment in a common enterprise that earns profits from the efforts of others. - Is it an investment of money? - Is it profit expectation? - Does it come from a joint venture? - Does it depend solely on the efforts of a promotor or 3rd party?
Advantages of ICOs for Founders and Investors
Founders - Efficient, fast, inexpensive, simple form of financing - Relevant investors (often from same area of finance) - Branding and marketing easy because of manageable communities - High financial "commitment" of all parties involved - Risk and return well distributed between investors and founders Investors - Low barriers to entry (geographically and financially) - Relatively high liquidity - Transparency - Early access - Lottery properties - Low correlation to existing assets
ICO vs STO vs Traditional Fundraising: Investor Participation
ICO - Global - Low entry barriers (e.g., fractional ownership of tokens) STO - Large (not necessarily global) - Low entry barriers (e.g., fractional ownership of tokens) Traditional Fundraising - Access only for qualified investors
ICO vs STO vs Traditional Fundraising: Capital Formation Process
ICO - High cost efficiency (due to automated processes) STO - Better cost efficiency than traditional securities issuance Traditional Fundraising - Complex securities regulation with high associated regulatory compliance costs
ICO vs STO vs Traditional Fundraising: Investor Rights
ICO - No associated investor rights STO and Traditional Fundraising - Legally binding investor rights (e.g., ownership rights, voting rights, dividend rights)
ICO vs STO vs Traditional Fundraising: Regulation
ICO - Still unclear in many jurisdictions STO - Based on local security laws (including KYC/AML) Traditional Fundraising - Based on local/international security laws (including KYC/AML)
ICO vs STO vs Traditional Fundraising: Token Application
ICO - Various services and spending opportunities STO - Proof of ownership and application of corresponding features and rights Traditional Fundraising - Proof of ownership via established custodians (including associated rights)
ICO vs STO vs Traditional Fundraising: Overview
ICO - with utility tokens or cryptocurrencies - utility token; cryptocurrency (publicly tradable) STO - with security tokens - security tokens (publicly tradable) Traditional Fundraising - with shares (e.g., VC/PE financing) - private company shares (not publicly tradable)
Lawyers meet economists
Legal & Compliance - What kind of token is used and what are its properties and functions? - Which legal bases and regulations come into play? - How will the project be set up in terms of governance and legal structures? - What special regulations exist in the targeted industry? Token Economics - What are the underlying economic mechanisms of tokens? - How do the generation and distribution of respective tokens work? - How are tokens "destroyed" or made worthless? - Who are the counterparties? - What rights and obligations does the token represent? **Both as a project team and an investor, it is imperative to perform comprehensive "due diligence" on the token and its features
Synchronization Expanded
Off-chain - Issuer registers and then issues - Law intervenes to mandate transfer of rights On-chain - Token Generating Event (TGE) - Law should ideally intervene to mandate transfer of rights to wallet with transfer of rights done via Blockchain-TX
Many terms for one thing
One thing: a coin or token is created and then sold - Initial Coin Offering (ICO) - Initial Token Offering (ITO) - Initial Coin Sale (ICS) - Token Generating Event (TGE) - Security Token Offering (STO) - Initial Exchange Offering (IEO)
Challenges in the tokenization of tangible assets
Physical - digital connection - How do I gain access to the physical object? - How do I enforce my usage rights? "Synchronization" issue - Information synchronization: legally relevant information - Transfer synchronization: actual transfer of rights - Owner synchronization: rights holder Tax aspects - Different taxes apply depending on the jurisdiction (e.g., withholding tax in CH, VAT, capital gains tax, etc.) Suitability - How do I make sure that my token only goes to "good" hands - Risk tolerance - Restrictions: geographical, sanctions, etc. **The design of the token must be such as to ensure direct transfer of rights and other regulatory/governance aspects **The emerging token standards are beginning to take these circumstances into account
Private vs. Public Platforms for Tokens
Private ("permissioned") - Access "by invitation" only - Between companies or consortia - Known (i.e., identified) participants - Typically without cryptocurrency - Similar to an "Intranet" - Examples: > Ethereum Enterprise > Ripple > R3 Corda > Digital Asset Holdings > Monax > Hyperledger Public ("unpermissioned") - Open for all - Peer-to-peer - "Anonymous" (pseudonym) - Based on cryptocurrency (mostly) - Similar to the "Internet" - Examples: > Ethereum > IPFS > Cardano > Bitcoin > Civic > Zcash
Token Strategies
Strategy 1 - Single Utility Token - dApp - simple ERC-20 tokens (ETH) - issue as many as possible for use in the dApp (i.e., utility tokens) - perform ICO - cash out Strategy 2 - Two Tokens: Utility and Security - dApp - Security Token: Share Offer > Must comply with the requirements of the securities law of the relevant jurisdiction - Utility Token: Use within the App > Tokenomics are becoming increasingly important > Loyalty program structures via rewards, cash backs, and purchases within the app