I’ve finally developed a mental picture of how tokenization/ICO should work for projects which are service-providers and build decentralized platforms. The approach is called Equity-Based Token Distribution (EBTD), and can be thought of as an alternative SAFT. The explanation of this is rather extensive, so I’ll break it down into sections.
Part 1. Utility Tokens don’t exist!
Utility Tokens were created by analogy with Bitcoin, and their aim was to attract funding into projects. The idea was that tokens fulfilled a number of functions, including access to the services the project offered; providing an accounting currency, and a way of accumulating the value which the project creates. This all meant that Utility Tokens began to resemble Securities more and more – and it can be confirmed with 99% certainty that this will now be established as their legal definition at U.S. legislation level. However, the problem doesn’t lie there – but in the fact that the economic model of projects which only have a single token won’t work. For example, using their network would be over-expensive (which is what we’re seeing in the example of Ethereum). Bitcoin stands apart in this case, as it’s already become an independent currency. Using the definitions of the EBTD model, we can imagine several different kinds of token, that could represent different sorts of assets:
- a commodity (the right to acquire a certain level of the service, or a certain amount of the product – regardless of its current price at the moment),
- a currency (internal or external currencies, stable),
- equity – (a token that gives the right to receive dividends).
These are three obvious examples, but there may well be others – such as a token which represents debt obligations. All such tokens are managed independently, offering ways of controlling economic processes with very fine levels of precision. (A further indication of how their simplistic recognition as Utility Tokens fails to solve the fundamental problem).
Part 2. Equity-Based Token Distribution
What actually is EBTD? EBTD is a model of how the interests of start-up founders, users and investors could be safeguarded during the post-hype period. The idea behind the EBTD model is that a business wanting to tokenize its processes, and thereby attract capital, is selling not only tokens, but stakes in the company – alongside which comes an option (warrant, allocation, etc) on all tokens that the business may issue. This means that if a start-up issues 1000 Security Tokens, and has 10 equal-right shareholders, then each of the ten shareholders would get the right to 100 tokens. Why is it needed? Let’s suppose that a start-up simply sells shares, after which it achieves its aim of building a decentralized autonomous network. The influence of the company’s team of founders on future development of the project – as well as the chance for monetization – is reduced to nil, just like the value of a stake in the company. This principle is why Bitcoin has no team of founders, and its shares aren’t traded on a stock exchange. Thus, in order to factor-in the interests of the investors, they need Security Tokens – which will pay out dividends, when the project eventually becomes decentralized. On the other hand, if the investors are only given tokens and no shares are sold, a situation might arise in which the company is later unable to adapt to the realities of the market. For example, it’s my personal feeling that Ripple is destabilizing its own internal currency (XRP) by its work in the inter-bank payments market. Yet even if they themselves reach the same conclusion as I have, simply taking hold of XRP and getting rid of it would prove very difficult – since it’s been sold to thousands of investors, including numerous banks. It seems they’ll have to drag this burden along with them. In cases where both shares and tokens are sold in one package, the position would become transparent – if the future development of the company needs to get rid of the tokens (or to alter its economic model), the investors won’t have a conflict of interest. This means that at the start of a project’s development – at the moment when the chances of rate-changes is very high – and the company hasn’t yet established its niche position, you need to keep reliable investors on board. When the moment of decentralization then comes, the role of the tokens – as a way of automizing the distribution of the profits – will come forward into the spotlight. Incidentally, recently in San Francisco I was chatting with one investment company which is planning to do something very similar – to sell stakes in a company (through RegA), and then accrue crypto-currency (and in this case it’s actual currency, and not Utility Tokens) as dividends for all shareholders.