Token Issuance Programs – the new structured finance?

We’ve known for some time now that Blockchain and Bitcoin were designed to disrupt the financial services sector. But I suspect that not even the earliest proponents of distributed ledger technology nor the most avid supporters of crypto-currencies anticipated how far and how quickly that disruption would spread. In addition to P2P payments and lending, alternative stock exchanges, and self-executing smart contracts, recent events suggest that digital assets issued on Blockchain infrastructure are themselves the new source of venture capital, that they may even come to be seen as the new form of structured finance (albeit with less complexity and more transparency).

Image: Maria’s Cakes founder issues her own record…. (Source: Maria Lee website)

In the past few weeks, we have seen Token Issuance Programs (sometimes referred to as ICOs – “initial coin offerings” – or token sales) raise extraordinary amounts of capital – $53m for MobileGo, $150m for Bancor. Even allowing for the fact that VC funding rounds have been increasing in recent years, these results are quite staggering – given that the sellers of these tokens have not had to relinquish any equity, or incur any debt either. Because tokens do not represent shares in a company or units in a corporate bond. Nor are they securities in the usual sense, as they do not create any interest or obligation other than an entitlement to be granted a given number of tokens at a predetermined price.

Of course, these tokens may carry the right to use proprietary software or access marketplace platforms, and even acquire future products. In this way, they also resemble crowdfunding projects. But because of the potential returns generated by the increased value tokens may accrue (a combination of network effects, scarcity and market appreciation), there is buyer demand for new tokens backed by the right project.

These token sale results have also benefited from the increased price of Bitcoin, Ethereum and other leading digital currencies – or perhaps the other way round? – as investors get more comfortable with this new asset class. That’s not to say there isn’t talk of a market correction, or even a bubble. But despite the apparent risks, and the occasional exchange outage, new token issuance and crypto-currency trading are generating growing interest – not just from currency speculators, but also asset managers and traditional investors. No doubt helped by developments in markets like Japan, where crypto-currencies are now a legally recognized form of payment.

As for structured finance, some projects are looking to issue tokens that are linked to or represent an underlying asset, such as a pool of loans. In the case of securitization, for example, Blockchain technology can not only help to structure the token issuance (via smart contracts, for example), it can also provide better transparency on the underlying loan performance (using real-time repayment data from bank feeds, for example).

Of course, there have been some speed bumps along the way for Blockchain-derived assets, most notably the infamous DAO “hack” of last year.  Plus, the price of Bitcoin continues to display considerable volatility, which makes it harder for some investors to embrace. And if anyone is wondering why this week’s blog features an image of a Hong Kong cake shop owner, it relates to the Asian Currency Crisis of 1997-98. Maria’s Bakery was a famous chain of shops that sold coupons at a discount, that could be redeemed for cakes at any time in the future. It was a practice that spread to other retail sectors. But during the market jitters caused by failing currencies and a tightening of credit, there was a run on Maria’s coupons, which coincided with a 2% fall on the Hong Kong stock exchange. This may have been coincidental, but it also demonstrates that financial markets can be sidelined by the most unexpected events. Like, who would have made the connection between over-extended home owners in parts of the USA with the worst global financial crisis for 80 years…?

NOTE: The comments above are made in a purely personal capacity, and do not purport to represent the views of Brave New Coin or any other organisations I work with. These comments are intended as opinion only and should not construed be as financial advice.

Next week: Expert vs Generalist

#Blockchain heralds a new railway age?

Last week, I suggested that digital currencies might be the new portals. Reflecting further on my work with Brave New Coin*, it also occurs to me that the growth of Blockchain resembles the railway mania of 19th century Britain. Hopefully it won’t end in the same over-investment and asset bubble – but there are some interesting similarities.

“Railway Mania” – Image sourced from Business Pundit

First, the railways displaced the canal system, just as canals overtook roads as the key means of transportation. For these purposes, if we compare roads to the Internet, and canals to the World Wide Web, then Blockchain is the next generation of the “information superhighway”. Blockchain and distributed ledger technology, along with crypto-currencies, digital assets and smart contracts are powering the “new” internet – the Internet of Things, the Internet of Money, the Internet of Value Exchange.

Second, and in a similar vein, the Internet was designed primarily as a means of communication. Then, the web enabled e-commerce, content distribution and on-line interaction. Now, Blockchain technology is supporting a range of new activities – such as tokenizing tangible and intangible assets; securing personal data and financial accounts; decentralizing networks, exchanges and registries; and validating immutable transaction data.

Third, the proliferation of public, private and permissioned Blockchains is prompting the development of technical standards for the design, architecture, security and taxonomy associated with this technology – as railway systems have implemented common safety and operating standards. There is also the need for interoperability between Blockchains, just as railway networks have had to address different track gauges among competing operators.

Of course, on the downside, railway mania led to heightened speculation, failed or over-optimistic prospectuses, and duplication of competing networks as developers sought to secure the most lucrative routes.

And let’s not overlook the issue of forking, which Blockchains are having to address in order to meet the demand for increased processing capacity and/or to iron out potential design weaknesses. In some ways this resembles the creation of railway branch lines – in some cases, these subsidiary routes would become more important than their parent main lines; and may even have outlived them, following the Beeching restructures in the 1960s.

Finally, for all the benefits that Blockchain undoubtedly holds, challenges remain with “on-ramp / off-ramp” access – a bit like disconnected transport interchanges or uncoordinated train timetables.

*Note: the opinions expressed here are my own, and do not represent the views of Brave New Coin or their clients.

Next week: Long live experts….

 

 

 

Digital currencies are the new portals

Once described as “The Internet of Money”, Bitcoin is much, much more: it’s software, it’s a store of value, and increasingly it’s being recognised as a legal form of payment. In its wake have come a multitude of other crypto-currencies, alt. coins, digital tokens and programmable assets. Each of them built on one or other blockchain protocol or using distributed ledger technology (DLT), and each of them seeking to serve a specific use case or to drive disruption in traditional markets and business models.

Based on my work with Brave New Coin (a market data vendor for these new asset classes)*, I was recently asked my opinion on all these “Initial Coin Offerings” (ICOs – although I prefer to call them Token Issuance Programs). My response was that digital currencies are becoming the new portals.

How?

First, they are building dedicated communities of interest. Many of them are designed for a specific audience or for a particular purpose. They are leveraging network effects to drive engagement and participation, such as MobileGo, for the online games community.

Second, they are becoming “destinations” in their own right, such as Steem for publishing, or CalcFlow, a market place for mathematical models. They are acting as repositories and resources for specialist content. They are also curating this content, and enabling users to contribute to the community, and get rewarded for doing so.

Third, they are building platforms that support e-commerce and other online transactions, such as SPHRE’s Air solution, and its XID token. In Air’s case, they are creating a paradigm shift in digital ID management: in contrast to most social media and old-school portals that monetize our personal data, our content and our search behaviour through the sale of advertising, Air is giving individuals more power over the use of their own data.

Finally, token issuance programs are creating new registries and alternative distribution networks for a range of tangible and intangible assets, such as MyBit for energy, and bitNatura, for natural capital.

So, as well as supporting P2P payments, facilitating cross-border remittances and enabling the purchase of electrical goods in Japan, Bitcoin and the like are becoming key tools in the new digital economy, just as AOL, CompuServe, Lycos, Yahoo!, Google and MSN were once the main public gateways to the internet.

*Note: the opinions expressed here are my own, and do not represent the views of Brave New Coin or their clients.

Next week: #Blockchain heralds a new railway age?