One of the more common complaints about Bitcoin and cryptocurrencies in general is that they’re not a real thing. They’re based on air. There’s nothing backing it. How could it possibly have value? But there’s a simple counter to that—so is debt, and it still manages to kick our asses everyday. We wrote a story yesterday about First Blockchain Capital (BITC.OTC)getting involved with real estate tokenization. In that story, we described tokenization as:
“Tokenization creates fractional ownership interest on an asset (utility or security) with a blockchain-based token. Think of casino chips as a stand-in for currency, which can be exchanged at the end of the night.”
Which is fine for the context of the story, but only hints at the true reach of this technology. Ostensibly, these tokens are also based on air, with no real backing, but that doesn’t necessarily mean they don’t have value.
Here’s Joseph Lubin, co-founder of Ethereum and founder of blockchain venture studio ConsenSys, on the subject:
“A token is something representing something else, and can be rendered in any sort of form. It can be a piece of paper. It can be an idea. It’s a symbol representing something. Your driver’s license, for instance, is a token that’s indexed into a ledger that the state maintains of who’s legal to drive.”
A token can represent property, a painting, or a service. It can be divided as many times as there entities involved. It can provide liquidity to an otherwise illiquid product, again with real estate being the obvious example. This way, ten people can go in on ten stakes of a house, splitting it up ten ways in any denomination or percentage allocation desired.
If those tokens are logged on an auditable blockchain, then those tokens will retain their value. In this case, it’s the blockchain that confers and recognizes ownership, including the origins of the contract by which the tokens were disseminated. There will be an immutable paper-trail leading back to the block in which the information was uploaded. The agreement is ultimately what confers value, but the blockchain provides a record of it.
In general, there are two types of tokens: Utility tokens and security tokens.
Utility tokens are meant to be used for something, and that’s more than often to give their owners access to products and services. Security tokens represent an investment, like maybe a share in a company or a voting right in how the company operates, or maybe a unit of value or some combination of the three. These tokens can also represent real-world assets, like gold or real estate. Security tokens must comply with the existing regulations governing traditional securities, such as stocks.
This is the kind of token that First Blockchain Capital is using to represent their real estate dealings.
And there also seems to be some confusion in the crypto-space about the difference between initial coin offerings or ICO’s and tokenization, which is something that deserves some clarification.
ICOs are mostly scams
ICOs are a less legitimate version of public fundraising—mostly through crowdsourcing but private ICOs are becoming more common. Some companies have used them as work-arounds for the more heavily legislated initial public offering (IPO) process to raise funds, and then made viable products that provide returns to their initial investors.
The coins given out at ICO’s are technically tokens in that they store the value-potential of a company in exchange for raising funds. But unlike an IPO, there’s no guarantee that the cash raised is going to go towards developing the company. Instead, it often finds its way into the wallets of the owners, who then make appearances on social media driving their new lambo.
There’s also the time-honoured tradition of the pump and dump, in which scammers using ICOs drive up the value of an ICO to generate interest and drive up the value of the coins, then dump the coins for a profit.
The difference is in the lack of a binding contract, which is then reinforced by being put on a public blockchain. This would bind the company raising funds towards a given trajectory, instead of pocketing the money raised. If a transaction for a token weren’t placed on the blockchain, there would be no record showing ownership. The same with ICO’s. No record and no contract means no ownership. End of story.
Granted, that hasn’t stopped various regulatory bodies from pounding offending companies into the dirt.
There isn’t a general regulatory consensus among countries
Using Canada as the middle ground—we’re not entirely sure what to do with them and we’re still devising regulations. The United States has stated that not all ICOs should be considered securities, but has come down hard in recent months on companies they think definitely should, and China has outright banned ICOs until they devise regulations of their own.
As with all of these investments, do your due diligence and make sure you get the receipts.
—Joseph Morton