Why asset-backed tokens are destined to leave other cryptocurrencies in the dust
In the brief history of initial coin offerings (ICOs), too many investors have been too eager to throw caution to the wind and take a punt on anything containing the buzzwords ‘blockchain’ or ‘cryptocurrency’ without understanding how they work.
This has made life relatively easy for fraudsters and charlatans, and for poorly thought out projects that never had much chance of ever seeing the light of day. As few projects offer any security against the tokens they issue, if the project is fraudulent or fails, investor funds can disappear. It doesn’t have to be like this.
“The first cryptocurrencies were bought on the vaguest of promises, based on the fact that blockchain technology had serious potential but not one that most people understood well,” said Stephen Larkin, the CEO of Africa New Energies, an Africa-focused oil and gas explorer which is seeking to raise $60 million to fund a ten-well drilling programme in Namibia.
“The tulip-like euphoria resulted in typical bubble behaviour where the uninitiated purchased with the sole intention of realising significant capital appreciation. They got hurt,” Larkin added. “But as with any new technology, the irrational bubble is replaced by a sober period of regrouping where only those coins that promise real value will survive.”
Asset-backed tokens are the logical solution to these problems
Asset-backed tokens (ABTs) – tokens backed by physical assets – are the logical solution to these problems. Tokens underpinned by some form of security such as land, gold or shares would not only make life harder for fraudsters and fakes, it would also motive many more people to invest in this new emerging asset class.
ABTs would also help to tame if not eliminate the volatility that has hounded cryptocurrencies since their inception, and bring much-needed stability to this new asset class – attracting even more mainstream investors in the process.
Blockchain evangelists are convinced that cryptocurrencies are destined to replace the fiat currencies issued by the world’s central banks. To the less credulous, that seems somewhat far-fetched. But they could carve out a niche for themselves sitting alongside fiat currencies. The run-away success of ICOs over the past two years or so suggests that this is what is actually taking place as we speak.
Most tokens that have been issued in ICOs in recent years have been utility tokens – although a good number of these have been security tokens masquerading as utility tokens in order to slip under the radar of regulators.
But utility tokens are hard to valuate with any precision. Their value is highly subjective, and are driven largely by speculative market forces.
According to Larkin: “Few utility tokens offer any initial value, whereas asset-backed tokens such as the Aziza Coin which owns 20% of Africa New Energies, are backed by real assets that will become increasingly valuable over time.”
In contrast to utility tokens, ABTs are in a different class altogether. Their value is linked to a tangible object – land, gold, shares or oil – that represent real world assets. To put it another way, ABTs effectively tokenise assets. They digitalise those assets, and record their essential characteristics on the blockchain.
‘Asset-backed tokens bring multiple advantages’
This brings multiple advantages, including liquidity, securitisation, irrefutable ownership rights, along with reduced volatility mentioned earlier. Assets with liquidity – such as stocks and shares – are highly prized by investors, compared to assets like houses and cars, which are less liquid and take longer to buy and sell.
ABTs also provide securitisation of the underlying asset. Most asset classes must be held by a primary owner. Joint ownership is something of a rarity as it effectively dilutes ownership. Tokens, by contrast, increase the potential for shared or fractional ownership, without diluting the thing that is owned.
Finally, ABTs help facilitate ownership rights. This is useful in the developed world, but vital in the developing world where the rule of law and judicial institutions are often weak and struggle to uphold property rights. Digital asset ownership makes it near impossible for rogue governments to seize private assets.
The Aziza Coin has from the outset marketed itself as a security token compliant with all KYC and AML regulations. This effectively puts it in the vanguard of the emerging ABT movement, which is on target to dominate the token-issuing sector.