3 Important Topics Trending In the Tokenization/Crypto World
In Part I: TokenFest and the Blockchain/Crypto Culture, I took a look at the blockchain and crypto show I went to in Boston called TokenFest. As I mentioned in my previous piece, I really liked the show. When I looked at my notes from the show, there were a few things that clearly stood out as interesting challenges for tokenization. This doesn’t mean it isn’t still on a path to world disruption, but some topics seemed to continually come up in conversations both on stage and on the show and exhibit floor.
The first two are more commercial issues, whereas the last is a broader economic issue. The issues are:
- Asset Value Dislocation After Token Sales
- Blockchain “Native” as Table Stakes
- Wealth Inequality…Now Available in Crypto
I thought it would make sense to try and explain them briefly as it is a helpful way to describe the kinds of issues, challenges and growing pains that come up day today as we get closer to the fundamental and more permanent establishment of tokenization as a mainstream practice.
Asset Value Dislocation Post-Sale
The first theme I will describe is in the realm of where founders and investors come together — the tokens themselves, and the prevalent notion of value sustainability. Today, there seems to be a significant potential dislocation between a token's value, and the underlying asset it is based on or meant to represent. Let’s use an example. Let say a company, we will call it UtiliCo, does an ICO or STO (Initial or Security Coin Offering) that goes well and meets its capitalization goals. Let’s assume in this scenario that UtiliCo already has a product that works on a basic level, also known as an MVP or “Minimum Viable Product”. UtiliCo then demonstrates a positive series of subsequent actions (most likely tied to uses of the raised capital from the sale) and meets some real performance benchmarks. Despite this, a pattern of selling from token owners becomes obvious. In other words, in this scenario, even though UtiliCo did what it was “supposed to do”, acted responsibly and executed, a portion of the crypto owner/trader community “dumped” the tokens anyway, leaving the company and probably many other investors with the short end of the stick. This is a cautionary tale for anyone considering a token sale.
The crypto world is a complex one, and if you are getting in as a business you better be prepared for some serious planning and almost independent of that, and regardless of what you do, a possibly bumpy ride. Herein lies the issue. There is often no specific connection between sustainability and how long tokens are held. Speculation in the market is rampant if not inherent, and if you or someone else does not design in a reason to hold them, then the token owners may sell or trade into something else as soon as it is possible. In fact, they may do it anyway, simply for the thrill of timing an exit. The good news is that this concept is becoming much better understood and is creating lots of innovation in products, processes and ecosystem models designed around getting owners to hold the tokens. More importantly, a lot of smart people are working on better linking the economics and trading of tokens to the actual underlying assets and business models, whatever they might be.
Blockchain “Native” as Table Stakes
A concept that gets bandied about regularly, and also did at TokenFest, was the premise that to be successful, there is a need for the company’s IP and hence the token itself, to be predicated on a blockchain component. To unpack this a bit, this is basically a mindset that if the products or services aren’t built on or require blockchain to work properly or be successful from day one, that your company is disadvantaged, or in some cases, marked for death. Another way to express this is essentially saying that being blockchain “native” is a pedigree of sorts. My opinion is that this is bullocks (a.k.a. gobshite, hogwash, or malarkey). For example, what if you only recently realized how much your model could benefit from blockchain, or how much blockchain could add value after you developed a SaaS product? This is an interesting conflict, that such a seemingly diverse, alt-loving and anti-big brother and establishment crowd would come to develop such a provincial attitude about something. In my view blockchain should be for everyone and has the potential to improve so much, so there should be no restriction or in this case — severe valuation impact around retro-adding it to your model if it offers clear benefits. The origin of this bias seems to come from the perception that there are many companies that do this as window dressing for a token sale. Obviously, those without a real application for blockchain, or those using it as a last minute bolt on to try and make their offerings more successful for a pump and dump type sale should get what they deserve. But, I think the pendulum has swung a little too far on this, and hopefully, it will come back a bit.
Wealth Inequality…Now Available in Crypto
Regulation and sustainability are great, but they weren’t the only topics at the show. I heard a good number of very intelligent people discussing larger crypto issues like fairness and equality as well. Cryptocurrency is sometimes viewed as being a subversive monetary vehicle, unregulated and undiscoverable by governments, and available to everyone (including some very bad guys) and some of that may be true. Unfortunately, not really the “everyone” part. In fact, accessibility issues and wealth inequality are hugely prevalent in cryptos. While at the World Economic Forum, Meltem Demirors, Chief Strategy Officer at CoinShares said, “Twenty percent Bitcoin is owned by the top 100 wallets. With Ethereum it’s even worse. In Ripple it’s something like seventy percent.” You can see a video of it here. The point here is that despite the great potential that cryptos bring to positive economic factors, the same or worse risks remain related to things like the opacity of investors’ and owners’ identity.
The irony is obvious; one reason cryptos are popular in the first place is that the obscurity is attractive, and not just to criminals. Ultimately, this has the potential to continue to hurt the sustainability elements of the industry in fundamental ways, which is probably why, in addition to concerns about the socioeconomic impacts, that many in the space are screaming for better self-policing, transparency and structure. Ms. Demirors goes on to describe it as a need for “…reducing the amount of moral hazard and information asymmetry”. Basically, she seems to be saying that coins and money are too tightly intertwined, or as she said: “So long as money and the acquisition of coins are coupled…this is going to be very difficult to overcome…and build globally usable networks and applications.” Another way to describe this is likely what the SEC puts forth as frequently as possible, and that is that without less opacity around ownership and identity, the temptation looms for fraud and predatory behavior.
Nowhere is this more evident than in the thwarted attempts of Wall Street to begin to capitalize on the advances of cryptocurrency. As Paul Vigna wrote in the Wall Street Journal article Bitcoin Has Unhappy 10th Birthday as Price Skids, “In August the Securities and Exchange Commission rejected nine separate proposals for bitcoin exchange-traded funds.” He goes on to say that “…the SEC has consistently concluded there isn’t enough transparency in the cryptocurrency markets to be sure prices aren’t being manipulated.” I think many of us are hoping this is based on an effort to protect average future crypto buyers and not interventional behavior as an effort to assert control for the sake of control. Like most things where a government is involved, it’s probably a mix of both. Unfortunately, we have gotten accustomed to settling for allowing one for the sake of the other. My hope is that we can strike a balance here because while there will always be risk, the benefits and possibilities that tokenization promises really deserves a solution that might actually succeed, rather than a prevention heavy mindset.