9 QUESTIONS MARTIN DELLA CHIESA, FRANÇOIS HIAULT AND CLÉMENT TEQUI FROM ACCURACY. (2/3)
1. Do you believe in utility tokens?
Utility tokens developed significantly in 2017 in the context of the ICO boom thanks to ERC-20 token models based on the Ethereum platform.
For a time, many considered them the future of business models: the ability to use the ICO mechanism to organise a large-scale crowdfunding process on Blockchain infrastructure was a huge innovation. However, this phenomenon may lead to some specific questions: What is the link between the token and its economic value? Is it possible to isolate speculative and intrinsic utility value?
A utility token (during the ICO phase) is the advance sale of a future service. Once the product is ready, the utility token is the digital monetary gateway to access the sold goods (e.g. specific data or a service).
The token’s supply policy is an important factor in order to maintain a token price that is coherent with the economic value of the goods being sold: many factors such as the quantity of money (the supply) and its velocity can have huge impacts on the price. In our opinion, the BTU protocol well understands this monetary policy issue. Recall that the BTU protocol offers the possibility to create a booking platform for any type of reservation (hotels, transport, museums, etc.). To maintain the stability of the token price, the token velocity is reduced as tokens are blocked during the booking period and the supply is fixed.
We insist heavily on monetary policy considerations; people must bear in mind that if volatility is too strong, it curbs the development of the project. What we have observed during 2017 and 2018 is exactly this problem: most utility tokens have had too high a volatility to convince people to use them daily. Moreover, many utility tokens are linked to projects that are not yet live because the project teams lack the necessary skills to develop robust solutions.
Utility tokens have to answer a token economics issue linked to the circular economy and the alignment of interests. A utility token, which is only introduced in a traditional business model as a means of financing, does not have any intrinsic value. Indeed, it creates a barrier between consumers and the goods being sold because they need to acquire the currency to acquire the goods. This barrier is clearly an obstacle to the development of a large consumer base.
In short, we believe in utility tokens, but they need to be well thought out and designed by keeping in mind the above constraints.
2. What do you think of security tokens?
Roughly speaking, security tokens correspond to tokenised equity. They are the first step in economy tokenisation.
Thanks to security tokens, traditional companies can test Blockchain technology (considered as an exchange infrastructure) with more limited regulatory concerns. As explained below, utility tokens are still immature and do not always have a complete market with consumers and a clear regulation status. In these conditions, we understand that it can be difficult for traditional companies to cross the road to token economics. With security tokens, however, the deal is different because it allows companies to introduce traditional asset classes to a new exchange infrastructure and actually test its robustness.
Security tokens do lead to some serious financial innovation, and they present certain advantages. For example, they can increase the liquidity of some assets due to the possibility to exchange small fractions of them. Moreover, they offer the possibility to maximise cost efficiencies in financial transactions worldwide.
However, we do not consider that security tokens alone can represent all the potential of the technology because token economics do not fully come into play with them. One of the reasons behind Blockchain’s creation was the possibility to create new business models linked to a circular economy, the alignment of interests and the decentralisation of market places. Again, we are convinced that the innovative potential of Blockchain lies in the technology itself, that is, the distributed ledger with transaction protocols, as well as the tokens considered as programmable currencies leading to the possibility to create entirely new business models.
It is important to keep in mind that each project has its own token with its own features. When analysing the token economy, we need to think locally and not globally, or as Richard Olsen, the founder of the exchange platform Lykke, puts it: ‘There won’t be millions of tokens. There will be millions of kinds of tokens.’ (David Siegel, The Token Handbook). This plurality has led to using the term ‘crypto-asset’ in place of ‘token’.
In this context, a single classification and analysis framework seems essential from a regulatory, strategic and financial perspective. We propose an interpretive framework aimed at capturing all of the projects, covering the following criteria: use, origin, supply, existence of the crypto-asset, technology, associated rights, and degree of centralisation.
- Use classifies crypto-assets by their objectives (monetary, utility, financial, hybrid).
- Origin identifies the players entitled to issue crypto-assets within the ecosystem (single issuer, group of issuers, completely decentralised issue).
- Supply corresponds to the number of units to be created by the authorised participant(s) (fixed, continuous but limited, unlimited).
- The notion of existence covers the lifespan of an asset and can be broken down along the following axes: single use, multi-use, and permanent. This notion is linked to velocity.
- The notion of technology identifies the technical ‘layer’ on which the crypto-asset is built. We can distinguish between:
o DApp tokens: crypto-assets enabling access to an application
o Non-native protocol tokens: type of token implemented within an economic protocol
o Native tokens: tokens implemented at the level of the Blockchain protocol itself
- The rights associated with a token differ according to their uses; we can distinguish between:
o Voting/ownership: rights often associated with the security-type token
o Use: right linked to using a service or network
o Work: right to contribute to the network. You must possess this asset to contribute to the network, which then rewards its participants in crypto-assets.
- Blockchain technology is often associated with the concept of decentralisation, loyal to the philosophy of its pioneers and the promise of technological horizontality. In reality, interactions between different players and the economic transformation in progress are much more complex than a simple shift from centralisation to decentralisation. The degrees of centralisation therefore vary widely, including in the initiatives from the so-called ‘new economy’. We distinguish between the following types of projects:
o Centralised: use a business’s service, the consumer pays in tokens in a way that is similar to how a traditional business works, except that it collects its revenue in tokens and not in traditional currency
o Semi-centralised: use is limited to certain network nodes; this is particularly the case with permissioned Blockchains
o Decentralised: once the crypto-asset has been issued, it circulates freely from peer to peer, without the involvement of any central body.
By integrating these parameters on a scale of 0 to 3, we obtain the diagram below, which provides a comparison of the crypto-assets. Such an analysis enables entrepreneurs to make token-economy-based financial decisions in line with their strategic objectives; it also allows investors to classify their investments. This classification is an essential tool in rationalising the value and price of these new assets.
Classification of crypto-assets
Source: Blockchain — the key to unlocking the value chain,
Martin Della Chiesa, François Hiault and Clément Tequi, Accuracy Prospectives.
Besides, it is also quite interesting to compare the characteristics of crypto-assets with traditionnal asset classes (see below an example for Bitcoin and a utility token).
Bitcoin asset characteristics vs traditional asset classes
Source: Blockchain — the key to unlocking the value chain,
Martin Della Chiesa, François Hiault and Clément Tequi, Accuracy Prospectives.
Example of a utility asset characteristics vs traditional asset classes
Source: Blockchain — the key to unlocking the value chain,
Martin Della Chiesa, François Hiault and Clément Tequi, Accuracy Prospectives.
3. Do you think that France could really become a hotspot of the crypto-sphere and ICOs on a global scale?
The crypto-economy is a global market. There are projects all over the world: France, UK, China, South Korea, Japan, Russia, Israel, USA, Brazil, Switzerland, etc. The main projects are international and have consumers throughout world thanks to ICOs that allow fundraising on an international level.
France has key assets to become a major hub in the crypto-sphere. Its competitiveness should be analysed through four pillars: education, legal framework, investment flows and local market.
With regard to the first three pillars, France is clearly highly competitive.
Thanks to its renowned education system, France produces top-class engineers, though it is urgent to expand and push Blockchain education further in its universities and schools. Students have to learn how to code and develop Blockchain projects; they have to understand the logic of the crypto-economy and become familiar with the ecosystem. Blockchain must be taught as a specific field of study.
Regarding the legal framework, there can be no doubt that the current government is trying to have a positive attitude towards Blockchain. It has created the AMF visa for ICOs, in continuing partnership with the crypto ecosystem. The visa offers a good balance between flexibility (it is optional) and security (the AMF guarantees an independent audit of the project). Moreover, it sends a signal to the market: a project validated by the AMF should, in theory, be more serious than a project without the visa. Further, the choice of a flat tax amounting to 30% for gains on cryptocurrencies increases clarity and stability, creating a better investment environment. However, we believe that this mechanism could be reduced to cope with international competition. Executives can indeed choose to move to “tax haven” countries like Germany with its 0% tax rate for cryptocurrency holders that have held a cryptocurrency for more than 1 year. One of the main regulatory obstacles in France is the legal right to a bank account: most Blockchain projects involving cryptocurrencies have difficulties opening a bank account, because crypto-currencies still represent an anti-money laundering risk from a bank’s perspective.
As regards investment, France is an attractive country: for overseas investors in 2017, France is the second most attractive country in Europe behind Germany with $50bn of FDI in 2017 (source: Rapport sur l’internationalisation de l’économie française). Thanks to this confidence, French players are easily able to find financing for ambitious projects. For instance, Ledger, the French flagship in the Blockchain ecosystem, raised $70m in 2018.
Despite all these assets, France remains inherently a small local market with c. 65 million inhabitants. We therefore need to think at the European level in order to compete with the USA or China. France can act as Europe’s leader in the crypto-sphere thanks to its assets analysed above, becoming the equivalent of the USA’s West Coast. The road is long and tough, but no door has been closed just yet.
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