As news about blockchain and cryptocurrencies is increasingly reported by mainstream media, a new question is emerging in the minds of traditional investors: is the token economy a fad that will soon die, or are we seeing the start of a new trend?
A little more than one year ago, there were few successful implementations of blockchain technology. Bitcoin, the first decentralized cryptocurrency, was released in 2009. For many people, Bitcoin is still synonymous with the blockchain technology that underpins it, at least in part due to sensational media coverage about wild swings in the price of the cryptocurrency. The other major cryptocurrency platform is Ethereum, released in 2015. Ethereum has its own coin, Ether, but its real innovation is that it eliminates the need for third-party verification of complex transactions by using smart contracts. Smart contracts are essentially code that allows contracts to be executed once specific, mutually agreeable conditions are met.
What are cryptocurrencies? Why haven’t they been widely adopted?
Cryptocurrencies are digital or virtual currencies that are encrypted. Early arguments against cryptocurrencies pointed to its use in purchasing illicit products, or in money laundering, and there is no doubt that Bitcoin, along with other cryptocurrencies, has been used for these purposes. However, it’s important to remember that people bought drugs, and laundered money, long before bitcoin existed, and they did so with cash. In fact, most people still use cash for these transactions.¹
The suspension of trading on the popular Mt. Gox² Bitcoin exchange in February 2014, after reports surfaced that 744,000 Bitcoins had been stolen years earlier in a theft that had gone unnoticed for years, is also frequently referenced as evidence that cryptocurrencies are not trustworthy. Yet, here too, we’re seeing an overly sensationalized response. Consider this: there have been Bitcoin thefts, but no Bitcoin losses have ever resulted from falsifying blockchain records. The former are equivalent to bank robberies, the latter is equivalent to counterfeiting.³ On that basis, there’s a reasonable argument to be made that Bitcoin, at least, is more trustworthy than traditional fiat currencies.
Are they currency?
Despite their name, cryptocurrencies should probably be viewed as assets, not currencies.⁴ A currency is a unit of account, a stable store of value, and a medium of exchange. In comparison with fiat currencies, cryptocurrencies are not stable, and they cannot be simply and easily exchanged for goods and services. This is in large part because transactions can be slow: in January 2018, for example, Bitcoin transactions could take nearly a week to be processed.⁵
What’s the difference between a coin and a token?
All coins and tokens are cryptocurrencies, even if most don’t function as a currency or a medium of exchange. Coins possess their own native blockchain, where transactions that relate to their native coins reside. Tokens are a digital representation of an asset or utility, and they usually operate on top of another blockchain. Tokens can “represent … any assets that are fungible and tradeable, from commodities to loyalty points to … other cryptocurrencies.”⁶
What about security tokens?
In July 2017, the SEC released a report stating that an ICO had issued a token that was, in fact, a security, and as such, would be subject to federal securities regulations. This caused an upheaval in the ICO world, as many ICOs faced challenging questions about the nature of their tokens and whether their offerings could stand up to regulatory challenges.
Two significant developments may be traced back to this event. First, there is growing interest on the part of ICOs in issuing security tokens, which may only be issued by an ICO that meets regulatory obligations. Security tokens may then represent shares of company stock.⁷ Second, there is the recent emergence of innovative — and regulated — token exchange platforms, such as Filecoin, Polymath, Sharevest, and Desico. The Gibraltar Blockchain Exchange has also recently emerged as a publicly available token exchange, offering fiat onboarding and a governed environment.
Tokens are here to stay.
As smart contracts and distributed ledger technology (DLT) gain ever more practical and mainstream use-cases, some of which will involve tokens, investors will become more comfortable with the idea of investing in this new economy. The existence of security tokens and regulated token exchange platforms indicate that the token economy is rapidly maturing, and it is only a matter of time before a stock market 2.0, based on the token economy, is created. The “wild west” image of cryptocurrencies is being replaced by a more mature understanding of their true nature and utility as an asset class. There can be little doubt: tokens are not a fad, but are here to stay.
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