November 27, 2019

The future of tokenisation – why tokenise?

OKEx

Tokenisation is the second most important application for cryptocurrencies. Both utility tokens and security tokens offer a variety of benefits for issuers and investors. With security tokens, however, compliance is of importance. Find out the benefits and nuances of issuing blockchain-based financial instruments.

So why tokenise? That’s a very broad subject I’m going to cover.

I have a question for you: Do you actually know what tokenisation is? How would you define it? This is how I define it – it’s the second most important application for cryptocurrencies. 

The first one being, obviously, currency. It was created as an alternative monetary system. Once people start exchanging, once people start buying coffees, pizzas, what have you – at the end of the day they start accumulating wealth… They start thinking “Okay, how do I use that wealth? Where do I invest?” And this is where, in 2013, the Mastercoin started it all.

The ICO started as a movement. And, obviously, there was a lot of money thrown at it. There were also quite a bit of bad players.

So, the big question is – why did the party stop? And why we are looking today at more of security token offering space,rather than utility token offering space?

The thing is – the utility offering space hasn’t actually died down. So called “Initial exchange offerings” still occur and largely there’s a utility token, because  to issue a security token on an exchange you need to be a regulated market participant.

So this space is still alive, but it’s not as lively, as it used to be.      

And the reason why it’s not, is because, obviously, some of these players just played the wrong card. And offered, perhaps, a security, rather than utility to the market. So the regulator had to come in. 

Problem is – once you offer something like a security it cannot be freely exchanged and can’t be offered to the market without regulatory approval. And in many cases for these utility tokens, it was. 

Who has ever invested in an ICO? How easy was that? It’s super easy! Have any of you invested in an STO?  Well, I did. And I can tell you – it was a pain in the neck! 

So, there’s a huge difference in throwing your crypto towards a good idea quickly done, two seconds, basta! Or, when you need to go through a lengthy AML/KYC process, prove your funds, prove your existence, prove whatever you’re asked to prove. And then, you get something, you don’t even understand how it works. Which jurisdiction, what kind of animal it is… Well, I’ll tell you what – for a security token to be a compliant security token, it cannot be free and anonymous, it cannot be freely transferable, it cannot be accepting unverified investors. You’ll need to do a very thorough KYC/AML process.

It cannot be accepting unverified funds. You’ll need to run it through a crypto police, basically. It cannot be freely traded on secondary market. 

And it cannot be anonymously issued. And, finally, it cannot lack oversight.  A centralised oversight which guarantees investor protection.

So, that’s why we realised that there’s probably a future in doing it right. And we have developed our own Fintelum security token implementation. It’s basically an Ethereum Solidity codebase, a standard protocol with modular features, which are quite extensively described in our white paper.

It tackles the need for a blockchain-based tool to represent a transferable security instrument for capital markets.

Something that many proposed that they do have, but as we looked into it with our developers into what’s out there, [..] it just didn’t offer what we, from our legal experience, believe they have to include.

If tokenisation means all of the  centralised oversight – what’s the point? Thing is – the ICO space must be radically different than the STO space because of these reasons: You need to exert certain control. You need to guarantee ownership rights. You need to guarantee voting rights. And enable the issuer the obligation to fulfil them, if you want to sell something in actual law abiding society. 

We are actually very privileged here in Europe. For instance, somewhere in Asia or in Latin America people don’t actually have these rights. All of a sudden, they have the ability to invest in countries, where they have these rights.

Has [tokenisation] actually happened much? It hasn’t. This is the current state of tokenisation. These are the numbers. There’s been only 25 million raised, it’s a puny number. In total, there have been 38 projects announced and 7 have been successful. The rest are either upcoming, unsuccessful or ongoing. And, ongoing, as we know very much from the ICO space, could be going on for years and years on.

… Effectively, we’ll all be using a wallet type of setup. Be it our own managed or custodian managed, but this is the future, it’s inevitable. We are already on our smartphones all day long. Obviously, we have portfolios on our smartphones in crypto, maybe machine

managed, maybe our managed, maybe centralised exchange managed… It’s future, nonetheless. It’s not going to be  “Call my broker, buy me this or that stuff.” It’s myself, press the button – done. Nice building, let’s see if it’s listed, I want to buy 1/100th of the building – done.

All of a sudden real estate becomes as liquid as foreign exchange. When has that liquidity option been possible? Never! 

And this is the beginning. This is the early stage. This is the beginning for all of us!

Thanks to OKEx for organising this event, as well as Bankera and MyWish Platform for new insights and productive discussions.