Tokens have properties or dimensions related to currency, equity and products. Let’s look at these distinct aspects in order.
1. As currency
Of course, Bitcoin is the very paradigm here and has always called itself a coin. And even though Ethereum describes itself as a ‘world computer’ with much more sophistication and utilities in relation to Bitcoin, it is also widely held, widely traded and has enjoyed a continuously escalating value in relation to fiat money. In the past several years there has been a profusion of alternative tokens asserting that they are in fact currencies: Monero, Zcash, Dash, Litecoin. And there would be many more in future.
What’s worth noting here is that whether new tokens assert their intent to behave like currencies or not, the fact that they are widely held, widely exchanged and easily valuated renders them cash-like. There can, therefore, be no formal distinction between cryptocurrencies and some other class of tokens which do not behave in this way.
But in what way are crypto-tokens not like fiat currencies that we have already known? There is one odd matter: despite the widespread adoption of Bitcoin and Ethereum, neither is yet a preferred unit of account. That remains in fiat, specifically in the US dollar. This is one sense in which so-called cryptocurrencies may rather be behaving like a financial instrument whose value may vary over time or a secondary national currency valued against the dollar. We should note that while Bitcoin and Ethereum have both done very well over the past year, from an Ether-centric perspective Bitcoin has become very much cheaper than before. Once we begin seeing things this way we will be better placed to believe that at least some tokens are indeed currencies.
2. As the promise of a new product-business
If Bitcoin and its early peers offered themselves primarily as a form of digital currency, new decentralized apps and the organizations that built them began creating so-called utility tokens and selling them in advance of their product and system being built. The ERC 20 protocols on Ethereum templatized this process and made it quick cheap and easy for anyone to go out and mint a new token set and then raise money against it.
Once a utility token issues its ICO, moreover, the token can come to be widely held and exchanged for other tokens. In this way, a token is similar to a Kickstarter campaign, which may raise money from early adopters before the unique new wallet, electric cycle or multitool has actually been manufactured.
Or you might even compare it with the thousand dollar deposit that so many enthusiasts put down on the Tesla Model 3 several quarters ago: Elon took your money early and is now using it to build your new car. As discussed above, however, you have the right to go out and sell that deposit receipt to someone else quickly and easily on account of the token’s greater fungibility.
Adam Ludwin has recently argued that tokens should be seen as a new asset class that enables decentralized applications and in turn that decentralized apps have their central utility in censorship resistance. While Ludwin is essentially correct to point out that tokens have so far served to fund decentralized applications and that this might be classic and original use, they can also now be used in many more innovative and derived applications. We must, therefore, soften Ludwin’s views on two fronts -- decentralization as an absolute and the kind of value unlocked by decentralization. A cursory view of the existing token horizon reveals to us highly centralized tokens like Ripple, which are run by private corporations. Centralization and decentralization are therefore not absolute binary states but rather ideal-types at polar extremes while most existing applications on Blockchain fall somewhere in the middle. Secondly, there are many reasons for decentralized apps to come into existence which may not have to do with censorship resistance but with the redistribution of trust within existing networks. For example of energy, content and agricultural supply chains, all of which stand to be readily tokenized.
Richard Kastelein recently mentioned to me the successful ICO of EMovieVenture a movie futures club. This is a semi-decentralized crowd-feedback oriented movie ticket futures project without a real decentralized app or many software developers to incentivize. Whatever one may think of this particular case, its success suggests that there isn’t a business model or sector vertical immune to tokenization. Tokenization has now jumped the shark -- it is a form of social and financial behavior that is enabled by Blockchain originally applied to crypto-technological applications, but it is now abroad as a means of futures trading for new enterprises.
Even if, from the point of view of investing rationally in viable, credible token ecosystems such as StorJ and Filecoin should be the most attractive to investors. There are of course going to be many more and diverse types of product business ideas including those attached to celebrity, entertainment and lifestyle. If a Beyoncé token comes about in the near future, I would not suggest you hold back from her ICO just because she is not building a truly decentralized app.
3. As securities or securitized assets
According to a recent ruling by the US Securities and Exchanges Commission, the purchase of crypto-tokens may be deemed to be securities if they conform to the Howey test:
1. As currency
Of course, Bitcoin is the very paradigm here and has always called itself a coin. And even though Ethereum describes itself as a ‘world computer’ with much more sophistication and utilities in relation to Bitcoin, it is also widely held, widely traded and has enjoyed a continuously escalating value in relation to fiat money. In the past several years there has been a profusion of alternative tokens asserting that they are in fact currencies: Monero, Zcash, Dash, Litecoin. And there would be many more in future.
What’s worth noting here is that whether new tokens assert their intent to behave like currencies or not, the fact that they are widely held, widely exchanged and easily valuated renders them cash-like. There can, therefore, be no formal distinction between cryptocurrencies and some other class of tokens which do not behave in this way.
But in what way are crypto-tokens not like fiat currencies that we have already known? There is one odd matter: despite the widespread adoption of Bitcoin and Ethereum, neither is yet a preferred unit of account. That remains in fiat, specifically in the US dollar. This is one sense in which so-called cryptocurrencies may rather be behaving like a financial instrument whose value may vary over time or a secondary national currency valued against the dollar. We should note that while Bitcoin and Ethereum have both done very well over the past year, from an Ether-centric perspective Bitcoin has become very much cheaper than before. Once we begin seeing things this way we will be better placed to believe that at least some tokens are indeed currencies.
2. As the promise of a new product-business
If Bitcoin and its early peers offered themselves primarily as a form of digital currency, new decentralized apps and the organizations that built them began creating so-called utility tokens and selling them in advance of their product and system being built. The ERC 20 protocols on Ethereum templatized this process and made it quick cheap and easy for anyone to go out and mint a new token set and then raise money against it.
Once a utility token issues its ICO, moreover, the token can come to be widely held and exchanged for other tokens. In this way, a token is similar to a Kickstarter campaign, which may raise money from early adopters before the unique new wallet, electric cycle or multitool has actually been manufactured.
Or you might even compare it with the thousand dollar deposit that so many enthusiasts put down on the Tesla Model 3 several quarters ago: Elon took your money early and is now using it to build your new car. As discussed above, however, you have the right to go out and sell that deposit receipt to someone else quickly and easily on account of the token’s greater fungibility.
Adam Ludwin has recently argued that tokens should be seen as a new asset class that enables decentralized applications and in turn that decentralized apps have their central utility in censorship resistance. While Ludwin is essentially correct to point out that tokens have so far served to fund decentralized applications and that this might be classic and original use, they can also now be used in many more innovative and derived applications. We must, therefore, soften Ludwin’s views on two fronts -- decentralization as an absolute and the kind of value unlocked by decentralization. A cursory view of the existing token horizon reveals to us highly centralized tokens like Ripple, which are run by private corporations. Centralization and decentralization are therefore not absolute binary states but rather ideal-types at polar extremes while most existing applications on Blockchain fall somewhere in the middle. Secondly, there are many reasons for decentralized apps to come into existence which may not have to do with censorship resistance but with the redistribution of trust within existing networks. For example of energy, content and agricultural supply chains, all of which stand to be readily tokenized.
Richard Kastelein recently mentioned to me the successful ICO of EMovieVenture a movie futures club. This is a semi-decentralized crowd-feedback oriented movie ticket futures project without a real decentralized app or many software developers to incentivize. Whatever one may think of this particular case, its success suggests that there isn’t a business model or sector vertical immune to tokenization. Tokenization has now jumped the shark -- it is a form of social and financial behavior that is enabled by Blockchain originally applied to crypto-technological applications, but it is now abroad as a means of futures trading for new enterprises.
Even if, from the point of view of investing rationally in viable, credible token ecosystems such as StorJ and Filecoin should be the most attractive to investors. There are of course going to be many more and diverse types of product business ideas including those attached to celebrity, entertainment and lifestyle. If a Beyoncé token comes about in the near future, I would not suggest you hold back from her ICO just because she is not building a truly decentralized app.
3. As securities or securitized assets
According to a recent ruling by the US Securities and Exchanges Commission, the purchase of crypto-tokens may be deemed to be securities if they conform to the Howey test:
- There is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
