Market standards for the global token economy
International Token Standardization Association (ITSA) e.V.
Authors: Constantin Ketz, Philipp Sandner
The year 2018 has been truly exciting for the global token economy. Even though token markets have lost approximately USD 700bn or 85% in market capitalization in comparison to their all-time high in January 2018, it has been a year of extreme ecosystem growth. More than a thousand different Initial Coin Offerings (ICOs) have been launched with a total volume above USD 21bn, including the first true unicorn ICOs to date with EOS raising more than USD 4bn and Telegram raising USD 1.7bn alone. However, at the time of writing in May 2019, we find a different dynamic: many of the over 2,000 tokens that are being traded over global exchanges are slowly recovering in terms of price and market capitalization, and analysts carefully start to predict a new crypto market rally. At the same time, ICOs are declared to be dead and Security Token Offerings (STOs) have stepped onto the scene, providing a new way to raise capital in a more regulated environment that caters to the increased risk awareness of investors. Next to security tokens other types of cryptographic such as stablecoins are emerging and extending the general scope of a token’s characteristics or purpose. Hence, the market is not only expanding in terms of market capitalization and quantity of tokens being issued and traded, but also in terms of diversity. Finally,the advancing diffusion of DLT- and blockchain-based cryptographic tokens gives rise to new business models in various industries and fosters the global trend of economic and social decentralization - which will be accompanied by an increasing tokenization of assets.
Looking at the global token market developments in May 2019, one can state that DLT- and blockchain-based cryptographic tokens have come a long way. They are on the verge of becoming a recognized institutional asset class and will most likely form an integral part of modern economies. Yet, the ever growing variety of cryptographic tokens is raising questions concerning their individual specifications and regulatory treatment amongst users, investors, regulators and academics alike. Global token markets still suffer from vast opacity and the lack of tangible and holistic token market standards. Standardization, however, is an important and necessary step to open token markets for institutional investors, to provide a basis for industrial usage, and to foster widespread adoption of cryptographic tokens by overcoming the current economic, technological, legal and regulatory uncertainties.
Acknowledging the market‘s need for more standardization in order to grow and mature, the International Token Standardization Association (ITSA) e.V. pursues the aim of developing and implementing holistic market standards for the identification (1), classification (2), and analysis (3) of DLT- and blockchain-based cryptographic tokens. Initiated in December 2018, it already builds upon the support of more than 100 reputable associated founding members, including major companies, startups, token issuers, investors, exchanges, universities, research institutes, consultancies, law or tax firms and large associations (s. Figure 1). Next to the German Investment Funds Association BVI also the Association of German Banks (Bundesverband deutscher Banken e.V. (BdB)) has joined ITSA as anassociated founding member. Both organizations have just recently issued a public call for more standardization on global token markets in their latest press releases (Press release of BdB / Press release of BVI – both in German language). Catering to that call as well as to its own proclaimed objectives, ITSA is currently developing the following three standardization projects, which are already covering more than 800 of the top cryptographic tokens and thus 99% of the current token ecosystem according to market capitalization:
1. Identification: International Token Identification Number (ITIN)
Identifying or differentiating DLT- and blockchain-based cryptographic tokens may confront market players with ambiguity and uncertainty. This is often caused by coincidentally similar token names or ticker symbols, but also by intentionally created confusion as part of scams. Sometimes different tokens carry the same ticker symbol across exchanges (e.g. Bitcoin Gold and the now inactive project Bitgem, which were both using BTG). Sometimes one and the same token carries different ticker symbols across exchanges (e.g. Bitcoin, which is to be found under XBT or BTC). Sometimes a token is renamed but the old ticker symbol is kept, and sometimes a token receives a new ticker symbol while still keeping its old name (e.g. Bitcoin Cash, which was first to be found under BCC and is now listed under BCH since the nowadays inactive project BitConnect was already using BCC before). In short, dealing with cryptographic tokens, and especially trading them on different exchanges, can be a real mess. The immanent lack of transparency combined with fast market developments creates high operational risks for all parties involved.
In order to increase transparency and safety, ITSA has developed the International Token Identification Number (ITIN) as a unique identifier that is conceptually similar to the International Securities Identification Number (ISIN). Hence, an ITIN serves as a non-ambiguous means of identification for cryptographic tokens. Yet, while an ISIN is assigned to a security on request of the issuer by the respective National Numbering Agency (NNA) that may or may not charge fees for potential costs incurred, an ITIN is assigned proactively, free of charge and on global level by ITSA itself in order to provide an inclusive and holistic global market standard for the identification of cryptographic tokens. Moreover, ITINs will not only be assigned to payment and investment tokens in the financial sphere, but to all different types of tokens issued, regardless of their purpose or fungibility. An ITIN is a 9-digit alphanumeric code, composed of a Token ID and a Checksum (s. Figure 2).
The Token ID consists of 2 blocks with 4 alphanumeric capital characters each that are separated by a hyphen (8 characters in total). Not included are similar looking characters such as the letters “I“, “L“ and “O“ as well as the numbers “0“ and “1“ in order to avoid any possibility of confusion. The total of 31 remaining alphanumeric characters allows to generate over 850 billion unique Token IDs with the 8-digit code. These are generated and assigned at random to each token currently on the market. Token IDs can also be requested before token issuance by the issuing party. Notably Token IDs that include actual words are eliminated to maximize fairness and to prevent distortions upon search requests.
Each ITIN includes a deterministic checksum based on ASCII encryption. The checksum is a 1-digit alphanumeric character following the 8-digit Token ID. It is derived by first calculating the modulo of the sum of ASCII code values for the positions 1 to 8 of the Token ID, and subsequently assigning the respective ASCII code to the numerical result of the modulo. The checksum can be recalculated by everyone to verify the correct communication of the identifier and thus serves as a built-in security feature to prove the validity of each ITIN. Just like for the Token ID, the letters “I”, “L” and “O” as well as the numbers “0” and “1” are excluded to prevent confusion.
2. Classification: International Token Classification (ITC)
Building upon ITIN as identification standard for cryptographic tokens, ITSA also provides a holistic and flexible token classification standard: the International Token Classification (ITC). As a guidance tool for the global token markets the ITC framework has already been applied to 800 cryptographic tokens and shall provide clarity and transparency on their characteristics in various dimensions. This can be particularly helpful for regulators that need a tangible framework for the differentiation of tokens, but also for institutional investors that seek to define investment strategies. Token issuers can use the ITC framework to communicate their token’s characteristics clearly and conveniently towards investors and users. Users, once familiar with the ITC framework, should be enabled to grasp a classified token’s properties within seconds.
The first version of the framework (ITC v.0.9) has been developed in collaboration with independent scholars as well as industry experts under the lead of the Frankfurt School Blockchain Center (FSBC), which is an associated founding member of ITSA. Future updates will be carried out under supervision of ITSA and its members. The ITC is based on the current research landscape and incorporates the findings of various previous classification approaches. In its first version, the ITC covers economic (E), technological (T), and legal (L) aspects of DLT- and blockchain-based cryptographic tokens in four dimensions (s. Figure 3).
Dimension 1: Economic Purpose (EEP)
The first dimension is constituted by the Economic Purpose of the token and asks for the token’s raison d’être from the issuer’s perspective. The dimension currently comprises three major categories: Payment Tokens (EEP21), Utility Tokens (EEP22) and Investment Tokens (EEP23). Payment Tokens are defined as tokens that are primarily created for the use as digital currencies that are not limited to a specific environment (e.g. a specific platform, online shop or ecosystem). As such, the ITC category Payment Token (EEP21) captures many cryptographic tokens, which are currently widely considered as cryptocurrencies (e.g. Bitcoin or XRP), yet excludes others that are perceived as cryptocurrencies by the wider public but have not been created with the sole purpose of functioning as a means of payment (e.g. Ethereum or EOS). Due to the fact that “cryptocurrency” is a collective term for all sorts of tokens and lacks clear definition, the ITC foregoes to use it completely. The category Utility Token (EEP22) comprises all types of tokens that are created to provide any sort of utility within a predefined environment (e.g. access to services or products, transaction settlement, governance functions, or ownership management). As a consequence, the ITC category of utility tokens is very diverse and often features tokens that possess more than one utility attribute. In these cases, the token is for now classified according to the most important characteristic (e.g. Ethereum and EOS are classified as utility settlement tokens due to their major function as means of transaction settlement within the Ethereum and EOS ecosystems). Investment Tokens (EEP23) represent cryptographic tokens that serve as means of investment to the token holder (e.g. equity, debt or derivative tokens). In current market language most of these tokens are likely to be labelled as “security tokens”. However, in contradiction to current market practice, ITSA refrains from labelling such tokens as security tokens in this dimension, since the term is not focussing on the economic purpose of a token but on its regulatory status. Moreover, since many jurisdictions have no proper ruling yet on what is to be considered a security token, and since the ITC is designed to be applicable globally and regardless of any specific jurisdiction on which a regulatory status is always dependent, the first version of the ITC does not cover the regulatory status of cryptographic tokens at all. The idea is to add further dimensions focusing on the regulatory status of cryptographic tokens in various jurisdictions in future versions of the ITC whenever there is regulatory clarity. This approach also allows for the classification of tokens as security or non-security tokens independent of their classification according to their Economic Purpose, which is important since some regulators might not only consider Investment Tokens but also certain Utility Tokens or even Payment Tokens as securities.
Dimension 2: Industry (EIN)
The industry that a token is intended to be used in by the issuer represents the second dimension of the ITC. The dimension’s categories are rather broad and generic since they are based on the North American Industry Classification System (NAICS) for facilitated adoption and comparability. The sub-categories, however, are designed according to the characteristics of the global token economy and allow for improved differentiation between cryptographic tokens with regards to their specific fields of use. By default, Payment Tokens and Investment Tokens would be assigned for instance to the industry category Finance and Insurance (EIN10) and the respective industry sub-categories Payment Services (EIN10A) and Investment Services (EIN10D). Yet, since this allocation does not add any significantly new information beyond what is already covered in the dimension Economic Purpose (EEP), Payment Tokens and Investment Tokens can also be reassigned to other industries where appropriate. This could be the case for example, where a Payment Token is intended to serve as currency in esports and thus is reassigned to the industry sub-category Entertainment and Gaming (EIN17B). Moreover, for debt and equity tokens the industry of the company issuing debt or equity is usually considered as the industry of the token.
Dimension 3: Legal Claim (LLC)
The type of legal claim, which a cryptographic token does entitle its owner to, forms the third dimension of the ITC framework. This dimension can be regarded as a preliminary step to future ITC dimensions on the regulatory status of a cryptographic token in various jurisdictions, as the analysis of the rights, which a token provides its owner with, mostly forms part of any regulatory assessment. The dimension features three categories: No-Claim Tokens (LLC31), Relative Rights Tokens (LLC32) and Absolute Rights Tokens (LLC33). While a No-Claim Token does not entitle its owner to any other right than to the token itself, a Relative Rights Token provides certain rights against at least one natural or legal counterparty (e.g. the right to the payment of interest and principal by a third party in case of a Debt Token, or the specified right to access and use a certain platform run by a third party in case of an Access Token). An Absolute Rights Token provides its owner with a right that is not dependent on a third party but exists independently. For instance, ownership rights in intellectual property are an absolute right, which can be managed and transferred through an Absolute Rights Token. In general, most cryptographic tokens currently on the market are No-claim Tokens due to the decentralized nature of their ecosystems and the lack of a third party that a claim could be raised against. Moreover, most jurisdictions currently still do not allow for the management and transfer of absolute rights through blockchains.
Dimension 4: Technological Setup (TTS)
The Technological Setup, as fourth and currently last dimension of the ITC, describes the technological properties of a cryptographic token and asks for the level of its implementation. The ITC differentiates between two major categories: Ledger-Native Tokens (TTS41) and Non-Native Protocol Tokens (TTS42). The first category (TTS41) represents all tokens that are directly implemented on the blockchain orany other distributed ledger and hence function as an integral part of the respective ledger. For example, Bitcoin is a native token issued on the Bitcoin blockchain. By means of sub-categories, future versions of the ITC will also distinguish between the type of ledger that the token is implemented on (e.g. blockchain, directed acyclic graph (DAG), etc.). The second category (TTS42) comprises all tokens that are not created on the ledger-level but on the protocol-level on top of an existing blockchain or distributed ledger. Here, sub-categories differentiate between the type of protocols (e.g. ERC20). For example, the Basic Attention Token is a Non-Native Protocol Token that builds on the ERC20 standard protocol. The Technological Setup of a cryptographic token is not only an interesting dimension for academics and developers, but it is also an important parameter for its risk and value assessment.
In general, the ITC framework is designed with the aim of giving clear guidance and structure while at the same time avoiding rigidity and facilitating the incorporation of future market developments. Therefore, future versions of the ITC will not only include new dimensions such as the regulatory status of a cryptographic token in different jurisdictions or the way of a token’s distribution, but will also feature new levels of detail in each dimension by adding further classes within the sub-categories. An outlook is given in Figure 4.
3. Analysis: International Token Database (TOKENBASE)
TOKENBASE is the third project of ITSA and is intended as the go-to standard database for the analysis of DLT- and blockchain-based cryptographic tokens. The database incorporates both ITIN and ITC and merges this qualitative data with third-party quantitative market data (daily prices, circulating and maximum token supply, trading volumes, etc.) from reputable providers. By combining both types of data and including additional information such as a token’s mineability or links to relevant web sources (e.g. token’s website, or github and reddit urls, etc.), ITSA is creating a unique token database that offers a built-in multi-dimensional token classification framework for enhanced structural market analysis. This allows for instance to compare the market capitalization of Utility Tokens (EEP22) that are used in the Advertising, Marketing and Public Relations industry (EIN09A) to the market capitalization of Utility Tokens (EEP22) in the Betting and Gaming industry (EIN17E) over time, or to assess differences in the price development of Unpegged Payment Tokens (EEP21U) and Utility Tokens (EEP22). In Figure 5 you can find a cross-dimensional sample comparison of the token category distribution within the dimension Economic Purpose (EEP) for all 800 cryptographic tokens with the token category distribution within the same dimension for the subset of ERC20 Tokens (TTS42A).
Figure 5 above indicates that the subset of ERC20 Tokens (TTS42A) tends to feature relatively more tokens that are created with the Economic Purpose (EEP) to serve as a means of utility provision or as a means of investment in contrast to a means of payment, than the basic population of all cryptographic tokens in the database that tends to comprise a higher percentage of Payment Tokens (EEP21). The addition of qualitative data creates not only vast opportunities for researchers but also for investors and regulators. It allows to dive into completely new ways of analysis. In Figure 6 you can find a sample extract of TOKENBASE with the ITC classification data for the top 30 tokens according to current market capitalization.
ITSA is constantly working on the extension of the database’s token coverage, as well as on the depth and degree of detail provided with regard to external market data. In this regard, TOKENBASE is also intended to serve as market data aggregation tool, which shall enable and facilitate the comparison of data provided by various different suppliers in order to increase transparency and to highlight inconsistencies or frictions across the data feeds. Moreover, the upcoming spring of Investment Tokens (EEP23) will lead to an incorporation of additional token information such as official reports, ratings, maturities or the name of the issuing entity in the medium term. Finally, a potential future surge in the number and types of Ownership Tokens (EEP22O) in the course of an ongoing tokenization of assets and rights will call for a further adaptation of the database just like a further breakdown of the Ownership Token sub-category of the ITC. In general, the development of TOKENBASE and the ITC go hand in hand in order to ensure seamless consistency and usability. As TOKENBASE does serve as well as public ITIN registry, some parts of the database can be accessed freely. Most parts however are currently reserved for ITSA members only.
Become a member of ITSA!
If you as an individual (1) and/or your organization (2) are interested in supporting the cause of ITSA, we would be delighted to welcome you as a member. To find out more about the current projects of ITSA and our membership options, please visit us at www.itsa.global.
Furthermore, we are also looking forward to receiving your feedback and questions on ITIN, ITC and TOKENBASE under: email@example.com.
Let’s develop the standards for tomorrow’s tokenized economy together!
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Constantin Ketz is co-initiator and vice chairman of the International Token Standardization Association (ITSA). Next to his research on token markets and the applications of Distributed Ledger Technology (DLT) in the financial industry at the Frankfurt School Blockchain Center (FSBC), he works as a consultant for DLT and financial technology solutions with a focus on debt capital markets and asset securitization. Mr. Ketz holds a B.Sc. in Economics from the University of Mannheim as well as a Master in European Public Affairs from Maastricht University and the European Institute of Public Administration (EIPA). You can contact him via email (firstname.lastname@example.org) or via LinkedIn (https://www.linkedin.com/in/constantinketz).
Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner in particular includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@example.com), via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).