In 2017, finance has changed dramatically.
With the increasing popularity of cryptocurrencies and the spring of Initial Coin Offerings, I would suggest that the award for the buzzword of the year goes to: Tokenising.
A token, usually understood in the English language as a thing serving as a visible or tangible representation of a fact, quality, feeling, etc however it is not really tangible or a physical thing when it comes to the crypto world.
In fact, a token is more of a intangible title that companies issue, release and make exchangeable for another value.
For instance, if company A, preparing to file for an Initial Coin Offering (ICO) which in some parts of the world are also referred to as Token Generation Event (TGE), decides to issue the token called ABC and distribute it on a blockchain ledger, such as Ethereum, and make it available as a source of fundraising for potential investors.
The ABC token would then be purchased at a value that is initially decided by the company A and might, in most cases, fluctuate value based on the market demand and supply.
The transaction is usually from crypto to crypto, so tokens cannot really be purchased in USD or other currencies.
Also, the tokens are usually linked to a so-called Smart Contract able to regulate when the investor can then start using, circulating or exchanging the token.
The Smart Contract measure is put in place to avoid that investors could perform a nasty pump-and-dump of the token price, generating enormous profits for themselves, but leaving the company A penniless in the moment of need (i.e. when the business operations are about to start).
This is in brief a token, and in 2017 there have been thousands of them generated, pumped-and-dumped (despite the efforts of the issuers), exchanged and utilised.
Due to the jurisdiction regulating financial transactions from country to country, in some parts of the world, tokens cannot be just purchased by investors expecting a dividend or a profit, because that would transform the token in a financial tool called security, which is usually highly regulated and not allowed to be issued unless the company fulfils strict guidelines defined by the regulator or the monetary authority in charge.
To go around the corner and avoid the security trap, many ICOs issue tokens that are defined as utility (and occasionally as technical tokens). A utility token makes an ICO very similar to a crowdfunding campaign, where the investor expects something in exchange from the purchase of the token, but rather a service than a mere financial return.
For instance if company A wanted to produce a platform where users can buys and sell products, the token issued for the ICO would be likely similar to a sort of currency that the investors could use as a user on the platforms, so their return of investment would be in products and services rather than in actual earnings.
Tokens are great tools to exchange in modern finance, however many of them end up being valueless due to their extreme volatility.
In a recent case, an ICO that collected the equivalent in Ethereum of $135 million, saw the value of their token falling by 50 per cent overnight.
Investors were not pleased of course.
A measure to drastically reduce the volatility of the token’s price could be to associate a physical asset to the digital one.
For example is company B issued a token called BCD and decided that the value of the token was equal to 1 gram of gold, and for every token BCD purchased by the investors, the company bought a physical 1 gram of gold, the investment would be 100 per cent backed and guaranteed by the value of gold.
As much as this applies to gold, it can be matched by any physical value.
For example, in Oman, where decorative palm trees are a serious business (in terms of volume), these could become the asset backing the digital token.
In simple terms, a decorative palm tree is worth very little when is not purchased.
It is rather a store of value with no liquidity, hence it cannot be exchanged until the point when it is purchased in fiat currency (i.e. Omani Rial). However, by generating a digital token linked to the stored value of a decorative palm tree, the issuer could guarantee the physical value of the token, with very much physical asset that could hardly be purchased and transferred with ease, giving access to investors to a solidly backed token in a very precious natural gift.