After the crisis in the crypto industry and the drop in the leading cryptocurrencies' exchange rates, blockchain startups have become much less active in conducting ICOs. And this is fully justified, if one looks at the numbers: compared to late 2017-early 2018, the market capitalization, as well as the rates of bitcoin and other cryptocurrencies, dropped threefold, and the amount of funds collected by projects via ICOs dropped fourfold. Disappointing statistics also give no cause for optimism: the data shows that more than half of ICOs conducted in Q2 2018 have failed. A logical question arises: what will be the end result?
I am certain that any crisis presents new unique opportunities for the market players. This is especially true considering that the world economy is cyclical in nature, and every fall is followed by the rise. Today's cryptomarket is responding to the new realities by changing its development vector, and in the course of this process a need emerges for new, more sophisticated products which would allow companies to reach new heights.
Currently, there are just two types of tokens that crypto companies work with: utility and security tokens. Until recently, utility tokens were the most popular ones, and in practice they were used more or less as the projects' internal payment mechanism: they may offer their holders certain advantages in using the project's products, simplify the use of services, grant various types of access, operate as a discount card or just be the internal means of payment . It is important to note that utility tokens were typically not interpreted as a financial instrument, which means that they did not fall under clear legal regulation.
And this is where the main issue is. Considering that many countries informally leading the crypto industry are getting closer and closer to regulating cryptocurrencies and ICOs, and that the market is currently preparing for the entry of major institutional investors who are primarily interested in working with regulated financial instruments, projects and other market players are in need of not just regulated instruments for crowdselling – they want instruments that would allow them to operate on the global market over the long term.
And in theory security tokens could become just that kind of instrument. The securities model underlying this token is a well known market instrument thoroughly understood by professional market players – it is an investment asset bought to make a future profit. They may be a credit tool, a stake in the company's profits, a source of passive income, etc.
This could indeed be a suitable solution if only projects seeking investments could instantly and completely change and rethink the logic behind their product and their strategy of attracting investments, and go through all the required preparatory steps (such as business and financial planning, structuring the deal, engaging with professional securities market players to create the demand etc.). Another serious obstacle would be the great discrepancies in this segment's legal regulation in different countries, which means that the specific target countries would have to be selected very carefully.
So what can be done? In my opinion, the solution is to create an absolutely new tool for crypto projects – what we’ve been tentatively calling “composite tokens” – and in this way launch a new economic model, or "composite tokenomics." The new model’s main feature is that it relies on both the utility and security tokens. Combining the advantages of both approaches while minimizing their disadvantages may help companies achieve greater success.
In its general outline, the composite tokenomics model allows for simultaneous operation and interaction of two types of tokens, depending on certain conditions: regulatory, financial, economic, operational and so on. For example, in a particular country, due to high demand, the project may be attracting investments through tokenized securities, and in another country, because of the great number of users interested in using the project's products of services, it is selling utility tokens. This two-pronged approach allows the project to bring into the fold truly interested investors and users. Moreover, depending on regulatory restrictions in each particular country, the project may choose the model that best meets its current goals: offer their tokenized securities or sell their services to interested parties, if in a particular country foreign issuers may not attract investments without the disproportionate allocation of resources, which would fail to bring the expected benefits to either the project or the investors.
Another scenario that cannot be excluded is that the project, having completed its utility token sale, will offer its users the option to convert them into tokenized securities, subject to applicable laws. As an example: let's imagine a platform which, among its other services, allows interested parties to conduct fundraising activities, but users need utility tokens to access the platform. Once on the platform, each individual project may issue its own security tokens to users who meet the investor qualification criteria, and such users will then receive income from the project's successful implementation. In this way, composite tokenomics allows projects to create one universal product instead of two distinct and unconnected ones, with each of the constituent parts meeting the users' specific needs.
The use of utility tokens in the above examples will enable projects to mitigate their costs associated with conducting the sale and the subsequent servicing of its tokenized securities, bring their product to certain markets in the shortest possible time, modify it as needed to meet the market demand based on the audience's prompt feedback, and use security tokens only in those markets where their attractiveness to investors could be reasonably predicted.
One of the unequivocal pluses of this strategy is that it is bound to heighten the interest in the project and attract not only the existing market participants but also institutional investors used to working in traditional securities markets and classic economic paradigm. For the earlier this spells better transparency, engagement and accountability, which, it would be reasonable to expect, would bring a great flow of investments into the project's regulated instruments, i.e. security tokens. For the latter this means a clear and well understood classic securities market, presented in a new digital form, which even by itself offers institutional investors additional advantage and allows them to quickly enter and secure a foothold in a new market.
In our opinion, these factors, among others, will determine one of the probable development trajectories for the entire cryptomarket. A shift to more advanced, legally regulated instruments will make it even more attractive in the eyes of today's and tomorrow's investors. And this is precisely why, despite all crises, I view the future of the crypto industry with great optimism.
This article is just an opinion and is not intended as a call to action. All persons interested in the security tokens market are strongly advised to seek advice from qualified attorneys.