Maybe Crypto Doesn’t Solve a Problem…and That’s OK.
“We believe that the crucial question underpinning the real value of cryptocurrencies themselves, is what economic problem they actually solve?”
That’s a question I read today in an article posted on Fortune, and it’s posed by Allison Nathan at Goldman Sachs. The article includes more quotes, like the ones dismissing cryptocurrency as a viable alternative in “some corners of the world”(read: places that lack potential customers for us…so uhh, go ahead..knock yourself out). The article is slightly misleading in that it doesn’t mention that Allison Nathan is likely discussing security tokens. The writer touches on the assertion made by Allison that most cryptos today “will likely trade to zero” (no argument here regarding shitcoins) when they are replaced by “new and improved versions.”
New and improved versions…
Well no shit, Nathan is referring to security tokens. Discussed in some detail in this post and on Uncrypt’s Sunset Crypto podcast, security tokens will be used as trading vehicles and added into the functionality of existing asset classes. This is real and being piloted here and now, thus Goldman is aware of it. Security tokens will be made available to accredited investors, and have a lot of common sense functionality, such as built in Know Your Client and Anti-Money Laundering checks directly into the purchase and sale of tokens, as well as real-time provenance tracking of high-velocity securities. Equity shares distributed as smart contracts make a lot of sense for stock markets.
In this context, the premise is correct: “Cryptos can often seem like a solution in search of a problem.” Security tokens have potential to be a better mousetrap in terms of securities issuance, but they aren’t really “solving a problem,” per se, as far as there isn’t a glaring problem that needs to be solved. But that’s not what innovation is necessarily about.
Blockchain tech is already being adopted by big banks to speed up settlements and clear up the process by which interbank borrowing takes place. True, simple adoption of Blockchain does not by itself necessitate a cryptocurrency BUT attaching a settlement layer crypto (hello Basecoin) can make interbank borrowing flow smoothly on a global scale across many different fiat currencies. This is one of the counteless use cases that I’ve already heard from ex-investment bankers that have moved into the blockchain space to pursue projects to disrupt the financial sector, many including a token issuance of some kind.
That’s not even getting into how security tokens would simplify securities issuance on the part of the issuer — making the process accessible across the spectrum from major institutions looking to tokenize their own equity shares (possible, though far off) down to the individual level where people can form digital SPV’s to tokenize their assets into liquid token-shares that are tradable on exchanges (possible, and not far off; it’s currently in process and will be made available this year by Polymath).
The United Kingdom is considering tokenizing its gold reserves to add a liquidity jolt. Surely looks like plenty of people out there are seeing economic value in cryptocurrencies, even if there isn’t a “problem” to solve, Allison.
Utility tokens are a different story, and we are amidst an explosion of ICO’s depositing their tokens into the market. At this early stage, scammy projects are an inevitability, shitcoin tokens will come and go, and we still have to work through the paper-thin explanation of why many utility tokens shouldn’t fall under securities laws.
However, some great projects have raised funding for themselves via initial coin offering and have utility tokens based on a real world use case. The companies that created these projects were able to side-step the traditional venture capital process and avoided major investment entities. They raised money from their communities and yes, speculators. But the point was that venture capital was democratized and made available to regular people that otherwise would have no chance to invest in startups. The high risk is there, but we’ve seen some very high rewards to those who didn’t have access to that kind of investment before. THAT is innovative. And surely, there is value in cryptocurrency in that regard, even if there wasn’t a “problem” with venture capital (though some might argue the exclusivity was).
Has this created new problems? Absolutely. When in history has disruption not caused new problems?
I just keep going back to the quote we started with. It’s risky thinking from a business point of view. Just replace the words “we” and “cryptocurrency.” Here’s a template:
“(current industry leader) believe that the crucial question underpinning the real value of (insert disruptive company/technology), is what economic problem they actually solve?”
I’ll try an example:
New York City Taxi Commission believes that the crucial question underpinning the real value of Uber, is what economic problem they actually solve?
I’ll try again, this time with a recent example brought up by a great article from this past weekend:
Microsoft Encarta believes that the crucial question underpinning the real value of Wikipedia, is what economic problem they actually solve?
Blockchains don’t require cryptocurrency to function, but without the crypto aspect, blockchain is a tool for existing business to simplify their back office process, or implement some new functionality. Blockchain technology combined with cryptocurrency however, allows people or startups to create decentralized applications (dapps) or at least semi-decentralized applications to legitimately compete with existing centralized structures.
Innovation is less about solving problems and more about creating solutions that many didn’t even realize they needed. If securities issuance isn’t broke, why fix it?
Famous last words.
