I’ve finally developed a mental picture of how tokenization/ICO should work for projects that are involved in building decentralized platforms and, upon that, provide certain services. The approach is called Equity-Based Token Distribution (EBTD) and can be thought of as an alternative to SAFT. The explanation of it is rather extensive, so I’ll break it down into sections.
Part 1. Utility Tokens do not exist!
The Utility Tokens were created by the analogy with Bitcoin, and their aim was to attract funding into projects. The main idea is that a Utility Token fulfills a number of functions:
- gives the right to using the service of the project;
- is an accounting currency as well;
- provides a way of accumulating the value that the project creates.
The more you think of it the more you realize that Utility Tokens are resembling Securities. It’s what they basically are. And I would say that there’s a 99% certainty that that’s the way they will be defined on the U.S. legislation level.
However, the problem doesn’t only lie here but also in the fact that the economic model of projects that have just one (kind of universal) token won’t work. The usage of their networks would be too expensive (which is what we’re observing in the Ethereum, currently). That’s where Bitcoin stands apart, as it has already become an independent currency.
Using the definitions of the EBTD model, we can imagine several different kinds of tokens that could represent different sorts of assets:
- a commodity (gives the right to acquire a service (on a certain level), or a certain amount of the product, regardless of its current price at the moment);
- a currency (internal or external currencies, stable);
- equity (gives the right to receive dividends).
These were just three of the most obvious examples, but there may well be others, such as the token that represents debt obligations. All such tokens are to be managed independently, offering various ways of controlling the economic processes with a quite good level of precision. Having them all recognized as Utility Tokens won’t let one solve the fundamental problems.
Part 2. Equity-Based Token Distribution
What EBTD actually is? 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 EBTD model is the following… A business that wants to tokenize some (or all) of its processes for the purpose of attracting the capital doesn’t sell only tokens, but also — stakes of the company. That’s where you basically get a warrant on all the tokens that the business may issue.
This means that if a start-up issues 1000 Security Tokens, that said, it has ten equal-right shareholders, then, obviously, each of the shareholders would get 100 tokens. Why is it needed?
Let’s suppose that, at one point, the start-up decides to sell its shares in order to build a decentralized autonomous network. From this point, the influence of company’s founders on the future development of the project as well as any monetization opportunity is reduced to zero just like the value of a stake in a company. That’s the specific reason Bitcoin has no founders and BTC shares are not (and can never be) traded on stock exchanges. That’s why you need Security tokens — to factor-in the interests of investors by paying out dividends once the project eventually becomes decentralized.
Another situation that might happen (in the case when investors are only given tokens and no shares are sold) is that the company will later find itself unable to adapt to the realities of the market. Here’s an example (what goes next is my personal opinion). Ripple is destabilizing its own internal currency (XRP) by its involvement in the inter-bank payments market. And, if due to certain reason they will come up with the same idea I’ve just described, well… , it would be exceptionally difficult for them to take hold of XRPs and get rid of them, since they are already been sold to thousands of investors, including numerous major banks. Rather, they would have to bear this burden along with them.
In cases when both shares and tokens are sold ‘in one package’, things are much more clear and transparent — if the future development of the company needs to get rid of the tokens (or alter its economic model), the investors won’t have a conflict of interests.
This means that at the start of project’s development — the moment when the chances of rate-changes are 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’ eventually comes, the role of tokens as a way of automation of the profits distribution will come into the spotlight.
Incidentally, in San Francisco, I was chatting with one investment company which is planning to do something very similar. The plan is to sell the stakes of a company (through RegA), and then accrue cryptocurrency (and in this case, it can basically be classified as an actual currency but not Utility Token) as dividends for all shareholders.