Programmable Wealth & Governance Creation
Source : Credit Suisse Research Institute While 2017 was the year of ICOs and Lambos, 2018 may be remembered for many things. One of the main eye-catchers is bound to be Security Token Offerings (STO).
The story of how Security Tokens got pushed in to the limelight is intertwined with the story of how ICO scams proliferated the landscape.
Critics love to point that it is just as easy for a scamster to relabel their ICO as STO and carry on with the business of scamming as usual. Of course, the controls of certain countries mean that scamsters definitely base their scam STO operations in countries with lax rules.
However, the attractiveness and the lure of STOs has been summed up succinctly in this quote by Carlos Dominigo, the co-founder of Spice Capital VC
“It’s inevitable that security tokens will transform equity just as bitcoin has transformed currency, because they afford the owner a direct, liquid economic interest and the expedited delivery of proceeds. Every type of ownership can be tokenized, which is a massive multi-trillion dollar addressable market.”
What can tokens be programmed to do?
Tokens can be programmed to behave from various perspectives.
Technology level tokens:
- To participate in the protocol consensus mechanism
- Access to operate the blockchain
- Allow the users to participate in the incentive mechanism
Transport & Application layer tokens:
- Exercise rights
- Allow for utility
- Value distribution
- Provide Legal status
- Provide a legal status within the company’s constitution to a token holder
- Token holders have the right to exercise their choices.
- Off-chain and On-chain governance
So as the above characteristics show, there is no such a thing as a ‘Security Token’.
Since some of the above-listed characteristics mimic the real world financial instruments aka securities, those particular tokens which exhibit these characteristics are termed as ‘Security Tokens’.
Examples of Programmable Governance in the Security Token
1. Compliance with KYC
2. Compliance with AML
3. Compliance with CFT
4. Voting rights on issues related to the company’s constitution / Road Map / By laws
5. Voting rights on issues related to adding / removing network infrastructure
6. Setting up, operating and closing of escrow accounts
7. Identity verification
8. Audits of various kinds — Initiation, participation, viewing, closing
9. Asset Registration
10. Asset lifecycle management
11. Attribution and distribution of Revenue
12. Asset valuation and information distribution
13. Represent equity related rights
14. Capital infusion, amendment of the Cap table structure of the company that holds the asset
15. Legal standing & representation
16. Reflect Liability exposure of the underlying asset/company that the token is attached to
17. Reflect risk exposure of the underlying asset/company that the token is attached to
18. Manage the transfer of ownership and rights of the underlying asset to another entity
19. Act as a collateral in the tokenized ecosystem
A Security Token therefore ‘enables’ access to & participation in ownership ecosystem of goods and assets. And by virtue of participation in ownership, the monetary gains due to deployment of the good / asset is channeled back to the holder of the Security Token.
Therefore Fractional Ownership, by means of holding a security token, creates a possibility of accessing monetary gains, in an easier, less-friction mechanism that can be liquidated in a far more easier manner as compared to investing-holding-liquidating a traditional security.
Fractional Ownership is Fractal
Ownership structures have similarities at a very basic level. For example, An insurance company/pension fund that invests as a LP in a VC/PE fund. The Insurance company/Pension fund can be traced to a person who invested in it by putting in their insurance premium/pension contribution every month
Tokenized ownership finally introduces granularity into the ownership model.
The ownership of assets — Historical & the Future
Historically, it was impossible for a common person (not related to the Royal family) to ‘own’ a company or an asset.
That changed in the 18th century and the 19th century with partnerships and later on, Common Equity Shares.
The Equity mechanism really exploded wealth creation and created a new form of wealth creation and distribution in conjunction with the Industrial revolution. (read more about that process and evolution in this back story: https://hackernoon.com/the-case-for-blockchain-as-a-wealth-creator-eab28cf5cf87?gi=7eb68c6cb28c)
And yet for over 2 centuries, shares could not be divided into further smaller parts. It was the least divisible unit of ownership in a company. Then came the REITs, mutual funds and exchange traded funds that put wrappers around shares and enabled holding equity ‘like’ access to ownership and profit distribution
Everything that is NOT given to us by nature (i.e Human made) has ownership.
Some natural things are considered as Assets and therefore have been ‘owned’ & consumed by humans (e.g. Land, Precious metals, Food and Livestock etc)
Every class of asset that is ‘Owned’ by humans has been traded. There are Equities, Derivatives and Funds for every asset class that Humans ‘own’
And despite all of this there are huge gaps where the opportunity to participate in all this incredible wealth has not reached everyone equally. These gaps are caused by many points of friction.
Tokenization unbundles the ownership of assets from friction imposed by :
1. Geographical boundaries of countries.
It is difficult & friction-filled process for a citizen of Mexico to own equity in an asset that exists in Singapore. That friction reduces the possibility of wealth being distributed into Mexico
2. Time zone restrictions imposed by markets that do not trade 24/7 and only for 5 days a week.
3. Settlement times that take a minimum of 24 hours
In addition to this, it provides granularity and the ability to drill down the share to tiny bits and own that tiny bit at a fraction of the cost of a full share
Blockchain provides the platform and the technology to create wealth on an unimaginable scale. Security Tokens are the change agents of our generation.