Why Tokens are Eating the World
Vinny Lingham

Token Gestures?

Hi Vinny

Thanks very much for your thoughtful article. This is a rather long response… sorry! I didn’t mean to go on so long, but I was particularly interested in the distinction and separation you make between:

1. the digital ‘coinage’ underpinning (and funding) the blockchain infrastructure platform on which the tokens are created;
2. the tokens as a representation of a real world asset, equity share or other security;
3. the currencies - whether crypto-decentralised or fiat-government - at the ‘off ramps’ or exchanges.

I think your piece sensibly and practically positions tokens today at the margin of fisc currencies such as USD as the monetary ‘reference’ system.

Just to go back to basics for a moment, my understanding of ‘money’ is that it has three main functions: as a medium of exchange, a unit of account and as a store of value. Bitcoin for example is great as a global medium of exchange (…. not fast enough for digital cash), but limited as a unit of account because of its still narrow adoption in society and moreover poor as a store of value because of its (historic) volatility. I guess your view of tokenisation is that the ‘unit of account’ for valuation still needs to be a dominant fisc currency in order to do business in : i.e. acquire and sell stuff, reward, and grow.

ICO’s and token sales are a very exciting new way of funding, especially in developing or fast growing economies, starting without local ‘legacy’ institutions - a clean sheet. Governments could be instrumental in setting up the rules and controls, perhaps even explicitly linking the nominal value of the coin or token to the national fisc currency at issue.

However, this is a very different path to crypto / new economy money, where the money supply is encoded in the platform with the intent that it will in due course - in the long run - become an alternative unit of account and store of value. Bitcoin is of course the dominant cryptocurrency, but as yet it flawed as a unit of account or store of value. Ether and all other alt-coins are even further from that ambition.

If our goal or hope is the long term emergence of a dominant global and decentralized cryptocurrency capable of credible use as a reserve currency, ‘uncensored’ and challenging the fiscs and the USD as the international reserve currency we could be a long time waiting!

Your suggestion in the meantime that gold be tokenized, returning to a ‘gold standard’, is an interesting alternative fix to the volatility problem. A gold token would thus become the unit of account and store of value. It would gain more public acceptance through its history and familiarity as a unit of exchange, scarcity value and its properties as an attractive, divisible and hard-to-counterfeit asset.

But the price of gold is also very sensitive to speculation. Some say that as bitcoin grows it will emerge as the subsititute for gold and silver as a more effective store of value, with a more predictable money supply and function as a pure currency, without secondary intrinsic value or utility in jewellery, decoration or electronics. The price of gold could fall dramatically to its residual utility value.

For those reasons I think tokenising ‘reference assets’ is a useful short term approach to bringing stability to valuations, but in the long term a digital currency widely accepted as a unit of account and medium of exchange could still be the way to go. A proliferation of different tokens, all competing to be a unit of account could be very inconvenient. It’s a bit like all those annoyingly different loyalty scheme points in the world of retail. I tend to think that in future an infrastructure coin, token and currency/unit of account all sharing the same international value system could be the simplest and most convenient outcome.

I’m not a bitcoin ‘maximalist’, but I do think it is useful to have some pre-eminent crypto unit of account and liquid market in the exchanges to back up the new world of frictionless coin and token financing you describe. I’d like that to be as free of traditional banking intermediaries as we could make it.

I think we need sensible regulation and support from enlightened governments, working on a global basis, to help ‘bake in’ some basics in control of exploitation and fair taxation, especially for the growing economies that could benefit so much from faster, fairer and cheaper financing. Governments are generally slow to act, and when they do, regulation can be unpredictable. I hope that somewhere in the global standards work (ISO?) there is industry work in progress to do some smart thinking on behalf of governments. Without that work we could end up with a bunch of ‘token gestures’ rather than an exciting and credible alternative financing platform.

Tokens will no doubt one day eat all the assets in the world. Cryptocurrencies may take a big bite out of the fisc and reserve currencies and gold. Meanwhile on a smaller scale, the more ‘local’ micro-economic uses of tokens might take off within trusted communities. They could do this at the ‘edge’ of the fiscs, especially where the fiscs and their intermediaries under-serve or even exclude some communities and eco-systems - for example the unbanked or low income citizens. The sharing economy is another great example.

Sorry about the length of this comment. Thanks if you got to the end of it …. I confess that I have no great experience of ICO’s or tokens myself, other than some work on a ‘social loyalty’ token scheme last year, but I’m keen to learn more, particularly from a governance and government angle. I’d be keen to hear more about your experience of the process. Well done with the Civic ICO – it would be great to hear more about it in your blogs when you have a chance.