War at economy — securities versus utility tokens

Is it really so bad?

In Poland, we have a saying “the milk has spilled.” This means that something happened and you cannot do anything about it. But I have a different saying: “the milk has spilled. Make a yogurt.” It means that every situation has its perspectives. If you have contaminated milk with bacteria, you should make a yogurt to do something of what you have.

The perspective of the market in eyes of financial authorities

The same situation concerns SEC and acknowledgment of securities. Well, in general, it is good that there are financial authorities, who protect ordinary people from bad investments. By ordinary people I acknowledge people who do not have any experience or education in investments. However, putting all the cryptocurrencies and ICOs into one basket is terribly incorrect. ICOs are the best thing of the 21st Century that happened to the startups market since the year 2000. ICOs give chances to realize projects without having majority shareholders, but still, those shareholders have a liquid market of tokens, which lowers the risks of investment and gives opportunities for a smooth exit.

I look at this market at the perspective of a person, who had shares in a Seed and Venture fund. We did not have such tools like tokens this time, basing only on present tools of the financial market. It is well known in the Seed and VC market, that 90% of the investment will not ever realize goals that they have established — due to team problems, market changes, competition, “fashion” for the project, and dozens of other factors. This is calculated in the risk. But those 10% of startups, when they realize the project as assumed, will cover the loss of others and gain profit. Very similar situation is on the ICOs market — people lost so many, but many people had success stories. It was sometimes a matter of strategy, sometimes luck. This is life. And pure capitalism. The dark side of this is when start investing people who do not have knowledge and base only on “feelings”, that is the moment, where the trap begins.

Securities

In very general definition, securities are derivatives from which you can make profit. But this is too general. For example, a derivative is a credit made to your plot to invest in something else. Is it a typical security? Not necessarily. Typical securities example are bonds. This is when you lend money from external people to realize your investment (good example: ZrCoin), making a buyback of bonds with profit. Most of the ICOs refer to such mechanisms, like:

• dividends — promise of profit share (mostly 80%), mostly from yearly profits
• bonds — promise of buyback when a defined goal happens, with specified rate of return
• representation of shares listed on exchanges — promise of capital representation not related to formal representation

These examples are typical securities. And this example require some regulations (maybe not as restricted like in classical market), to protect people from scams or breach of contract.

Utility tokens

Utility tokens are something different. This is the future of projects financing in form of a contribution. Utility tokens represent technical or service value of the project. This mechanics is well known in games (pre-orders) or early-access models. Utility token characterizes with:

• value related to services or technical side of the project, like early access to a alpha stage of the software
• tokenization of some business flow (like authorization of agreements in blockchain)
• tokenization of well-known models (like our tokenloyalty.io project tokenizing loyalty programs).

Utility tokens do not represent securities value. But, because the tokens is tradeable on exchanges, it represents the simple “demand and supply” law. It means, that when the service or technical value grows, grows also the demand to token (people are buying it), which influences the price. Great example for this are baseball cards. Because there is collector’s demand on it, they reach up for values, sometimes related to a specific series of such card of a specified person. But as a “card” itself, it is just a promotional tradition.

Tokenloyalty.io project builds it value in two ways — we call it “basic” or “nominal” value, while the second value is called “added value”. First value is represented by demand and supply — the value that will originate from the exchanges, which is well known mechanics, like in case of Bitcoin, Waves or Ethereum. The second model represents the marketing value. We will introduce 2–5 initial merchants to open campaigns in our ecosystem, which will offer goods for the loyalty (we call it “pay for the effort”). But the campaigns construction is not related to securities — because tokens act like “tickets” or “gift cards”. For example, token on exchanges may be worth 4000 Satoshis (BTC value), while in campaign of clothing company it may represent a 90% discount for purchase of its clothes (as one-shot). As one can see, a collector’s value may be to one person of 4000 Satoshis, while to other, 20 dollars, because he planned to buy a jacket. Tokenization of the market into one system of tokenloyalty.io will give to collectors full liquidity to exchange our tokens, not only on exchanges, but with the internal value. By selecting the Waves technology we have analyzed all the pros and cons, especially related to the business model (low, solid defined, internal fees for token transfer). Also we observed the inventor, Alexander “Sasha” Ivanov, who does a huge work for Waves to be future-law compliant in terms of securities and utility tokens.

Summary

So, as you can see, it is really a matter of definition of the project and token itself. If you are aware of all the risk related to security tokens, be free to invest. But in my opinion, real future lays in the utility tokens and use of blockchain technologies in real business, not only its financial branch. As people in the crypto world say, “blockchain for the people”.

Grzegorz Sperczyński

Role in the project: CEO of tokenloyalty.io

Author of a book on assets building in early-stage companies. Ex co-founder of seed capital and VC fund. Took many roles in project management of new (own-established and contracted), innovative projects. Founder of the initiative that helped to implement new technologies on Polish and of foreign markets (i.e. Cada Casa system, Krauck Systems, and more). Specializes in preparations for investments, reconstruction of business, networking support in sales, strategic consulting and business model. Trusts in innovation as a rule of progress.