Utility Tokens Will Fade and Security Tokens Will Rise
Last December I published an article about tokenized securities and how they would lead to a world where the divide between ownership and liquidity gradually disappears. Since then there has been a substantial increase in conversation around security tokens, which is really exciting because the opportunity is massive! With every passing day my conviction around tokenized securities grows, and I truly believe they are going to fundamentally alter the way the financial system works. I am going to write a series of posts on the subject because it is important to continue to talk about how security tokens differ from utility tokens and how we can work to ensure this ecosystem is built within a framework that will allow it to thrive. In this post I aim to highlight some of the critical issues with utility tokens and introduce the value proposition behind security tokens.
Over the last few years there has been an explosion of interest in blockchain. It has become a common occurrence to overhear people talking about bitcoin at coffee shops and to get random altcoin investment advice from cab drivers. As with many innovations in the past, the tremendous rush of interest has led to a ton of hype and it has been particularly difficult to sort out the signals from the noise. This is compounded further when you have many successful people claiming that Bitcoin and other cryptocurrencies are worthless, fraudulent or, as the Oracle of Omaha dubbed it, “rat poison squared.” Some of the most prominent naysayers include the CEO of JP Morgan, Founder of Vanguard, CEO of Credit Suisse, Founder of Oaktree, and, of course, Buffet himself. All of these people are incredibly intelligent, but it doesn’t mean they cannot be wrong. One of my favorite videos to date is this rant from Dave Portnoy that exemplifies how many people have felt recently: confused. As someone who believes there is massive potential for this technology, it concerns me when hype drowns out the real efforts to create value.
The reason I am so excited is that I believe tokenized securities are the killer application for blockchain, the one that will bring the Warren Buffets and Howard Marks of the world to recognize the change that is about to begin. The security token revolution, where we take the best of the utility token/crypto mania and we pair it with the real world, is here and it is exciting! Satoshi and Warren Buffett just might be more alike than people think. I will preview the reasons why this will happen here, and then in a longer form series I will go through and substantiate these claims.
Liquidity in the ownership of private assets sucks. From real estate, to private companies, to art; the single worst thing about these investments is the lack of liquidity — permanent or at least very long term holding periods plague the current environment. This will all change.
Dumb, static contracts will be overtaken by designer smart contracts. The most basic form of company ownership, common stock, has very limited functionality and cannot be well-tailored to the company’s or the investor’s needs. Security tokens offer the opportunity to preserve the traditional components of equity ownership and add to them the enhanced features, increased liquidity and customization blockchain affords.
Entrepreneurs will be able to stay entrepreneurs. I hate being told what to do. Getting good advice and making the right decisions is important for any entrepreneur but the idea of being forced to do something, like selling early, keeps me and most other entrepreneurs I know up at night. I am not a libertarian per se, but I simply don’t love the idea of starting a company, raising money for it, and then getting a boss who can control my fate. Whether that boss is a group of hedge funds in the public market or a group of institutional investors and LPs, these groups’ incentives often become misaligned. The whole point of building a company is to create something sustainable and different, and currently the only options for a company that wants to grow and stay under the same ownership are to take on new investors (often a headache), sell to a larger company, go public on a major exchange, or build very slowly using profits. Tokenized securities offer a more attractive alternative and will become the dominant form of raising capital in the years to come.
This is all just the beginning, and in the next series of posts I will tell you how and why this will all happen.
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