The view from Hong Kong — Part III
What are property rights and why do they matter in the Crypto World?
The taming of the Wild West of the United States took a long time and, in some ways, was a complex process. At the heart of the process, though, was a simple concept. That concept was that the property rights of people who lived and worked in what had previously been a fairly lawless place would be protected. A person who could demonstrate ownership of a farm or a horse, say, could have some redress and restitution if these were taken away illegally.
Since then, the definition and protection of property rights has been a key element wherever any developing country or territory has sustained enough growth over the medium term to become relatively rich by the standards of the rest of the world.
In a review entitled ‘Best Practices for Token Sales’, which was published in December 2017, the Fintech Association of Hong Kong (FAHK) noted that an important characteristic of crypto-coins is that they include ‘bundles of rights’ for the holders. What makes them different to other things that include ‘bundles of rights’ (e.g. shares or bonds that are traded on a conventional stock exchange) is that the records of the rights and the holders are stored on blockchains.
The FAHK argues that a crypto-coin is defined by the property rights that it confers. Possibilities include:
Share/proprietary right. This is where a crypto-coin confers on the holder a share or other proprietary right in a company or property.
Membership right. This is where the holder is able to access a product or service as a result of his/her ownership of the crypto-coin.
Profit right. In this case, the holder of the crypto-coin benefits from the profits or the revenues of the enterprise. He/she is essentially a Joint Venture partner, but may not have the same rights as the actual owners of the enterprise.
Derivative interest. This is where the crypto-coin gives entitlements or includes other features that are determined with reference to something that is unknown and/or fluctuating.
Contribution right. In this case, the holder of the crypto-coin has the ability to play some role in developing and/or maintaining the product or service of the enterprise in question.
Governance right. This right enables the holder of the crypto-coin to influence the governance of the enterprise (e.g. by having the ability to vote in elections of board members).
Payment/ medium of exchange right. This is the ability of the holder of the crypto-coin to use it to pay (or to be paid) for goods and services.
Other right. There are many other possibilities. In a situation where a crypto-coin has many of the characteristics of a bond that is traded in conventional markets, for instance, the right may be to receive the repayment of the principal.
Using this approach, Bitcoin would for example be seen as a bundle of three rights. First, a proprietary right is conferred on anyone who mines the crypto-coin or who buys it in the secondary market. Through the records on the underlying blockchain, the Bitcoin demonstrably belongs to him/her. Second, a payment/ medium of exchange right is conferred in that there is some potential for a holder to pay for goods and services with Bitcoin (or be paid in it). Third, there is a derivative interest. The price for which Bitcoin may be sold through a crypto-exchange is determined by market forces.
The terms of the Initial Public Offering (IPO) will show how, where and for how long the bundle of rights attaching to the crypto-coin may be traded through one or more crypto-exchanges.
Exactly what are the rights that are conferred to holders of a particular crypto-coin really matter. They may be very similar to the rights that are conferred to investors in securities that are sold in a conventional Initial Public Offering (IPO). Alternatively, they may be very different indeed.
If an entrepreneur who is considering the creation of a new crypto-coin by way of an ICO cannot explain very briefly and clearly what are the property rights that are bundled into the crypto-coin, the deal is unlikely to be successful.
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