More than “just” crypto: What opportunities does the token economy offer?

What is token economy?

Token economics is a new form of economic activity. Its basis is blockchain or distributed ledger technology (DLT), which allows all imaginable values, rights and obligations to be represented through so-called tokens. These can be understood as “digital certificates” that securitize values and at the same time make them forgery-proof and tradable.

Tokens therefore have the potential to make economic processes more efficient and transparent. The most important tokens and their areas of application are:

• utility token
  Utility tokens represent a certain benefit or value. For example, they provide access to certain services or products, such as tickets, vouchers or special services. Companies offer them to generate interest in their products or to make it easier for users to access blockchain-based applications. In contrast to security tokens, utility tokens are not considered an investment opportunity, as they do not actually acquire ownership rights.
  
• Investment Token
  Investment (or security) tokens are associated with the Ownership of real assets linked. Each investment token represents a digital portion of a tradable asset. This can be real estate, diamonds, classic cars, works of art or other valuables. Investment tokens and their transactions are stored in the blockchain and assigned to the owner.
  
• Equity Token
  Equity tokens are a variant of security tokens, which, however, is always associated with the allocation of shares in the underlying company and voting rights. Equity tokens are therefore considered the digital equivalent to stocks.
  
• Payment token
  Payment tokens are digital currencies such as Bitcoin, which can be used as an alternative means of payment.
  
• Non-Fungible Tokens
  NFTs are non-exchangeable, non-shareable and unique tokens that represent a specific asset on the blockchain. Non-fungible tokens are particularly popular in the art and music world and the metaverse, but are increasingly being used by other industries and industries as well. For example, as proof of the originality and origin of medicines, documents or machine parts.

Both physical and intangible goods and assets can be “poured” into tokens. Accordingly The field of application of the token economy is broad. Take the capital market as an example: In recent years, numerous crypto exchanges and FinTech companies have emerged that are driving DeFi (Decentralized Finance) and the digitization and liberalization of financial markets. Tokenization accelerates processes, makes intermediaries redundant, reduces costs and addresses new user groups. A win-win situation for the customers and companies concerned.

Logistics and supply chain management are also suitable areas of application for the token economy. For example, using tokens, customs issues and the associated settlement processes can be addressed, simplified and accelerated. The energy sector can also benefit from tokenization, for example by facilitating direct trade between energy producers and consumers as shown in tokens.

What are the risks and challenges of blockchain technology?

Despite the numerous benefits that the token economy could offer to all participants in the value chain in many industries, there are still major challenges ahead. For example, the regulation of tokens.

Regulators in different countries are taking different approaches to categorizing cryptocurrencies and tokens. That is why regulators worldwide, working towards consolidation and coordination on a global level, are key drivers of the growth of the token economy.

Another obstacle that exists in the BMWK study “Blockchain expert dialogue” became clear is the lack of knowledge about the token economy and lack of developer know-how. Interested companies often have to build up this very specific knowledge themselves. This is particularly a challenge for small and medium-sized companies. There is also a lack of cross-platform standards and clear regulatory frameworks.

That is why the Federal Government agreed in 2019 with the”blockchain strategy“set the goal of supporting the token economy, taking advantage of the opportunities offered by blockchain technology and mobilizing its potential for digital transformation. The strategy paper includes the focal areas: promoting innovations, initiating investments, ensuring IT security and data protection, and involving stakeholders. Improvements in these areas should make Germany an attractive location for developing blockchain applications and investing in scaling them. At the same time, companies, SMEs and start-ups as well as the public sector, countries, organizations and citizens should be able to make informed decisions about the use of token structures.

How can companies and customers benefit from the token economy?

The experts interviewed as part of the “Blockchain Expert Dialogue” agree that areas in particular where the exclusion of intermediaries and/or asset transactions play a role can benefit from the token economy. In this context, token applications of fractional ownership be particularly interesting. Put simply, young, visionary companies use investment tokens to distribute an object among many investors without intermediaries such as banks, notaries or brokers. For example, real estate financing or real estate investments can be implemented easily, cost-effectively and also accessible to retail investors. Opportunities for implementing the token economy in the area digitized assets offer collaborations with FinTechs, which are usually agile, have short decision-making processes and have the necessary technical and regulatory know-how.