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TLDR below. This is not financial advice.
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Tokenised asset classes can be classified into seven classes and the acronym to remember for this is T U S P I C E.
Asset class is a way of grouping assets that exhibit similar characteristics. Each item in the class is subject to the same laws and regulations. Asset classes include stocks, bonds, foreign exchange, real estate, etc.
Like asset classes, tokenised asset classes is a way of grouping types of tokens that exhibit similar characteristics. The way of grouping the tokens is based on the value they represent.
Tokens within a class have similar characteristics and behave similarly in the marketplace.
Tokenised Asset Classes
Classification of the value the tokenised asset classes are based on the traditional way securities are categorised. Taking a step further as we can tokenise more things, we now have an expanded list of tokenised asset class.
Tokenised securities: These are basically securities that are off-chain but you’re tokenising them and creating a digital version of them and putting them on-chain.
Tokenised securities are the tokenised version of financial securities that exist outside of blockchain.
In finance, securities are financial instruments to give owners exposure to certain assets. The US Securities and Exchange Act of 1934 partially defines a security as any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing arrangement.
Think of tokenised securities as a representation of assets that can accrue profits. It can be a tokenised stock, where you own a stock equity of a company. It can be a tokenised property, where you own part of the property. Ultimate, it is a digital tokenised representation of the underlying asset that exists off-chain, outside the blockchain. The difference is that you can trade it on-chain on a specific blockchain or across blockchains.
Tokenised securities are fungible. The fundamental value comes from the investment asset itself, outside of blockchain. Blockchain is a tool to allow the security asset to be traded in a different ecosystem — in the jurisdiction of a specific ecosystem or a token specific ecosystem.
Utility: This is usability within the ecosystem, so utility tokens in general.
Utility tokens are a class of tokens that allow an economic agent to access the platform. Think of our university giving you a credit to book the university’s facilities. Or perhaps an airline’s frequent flyer programme, where you can access hotel and car rental partners and upgrade your flights in exchange for points (miles) that you have earned. These are tokens used to access the platform (university facilities) or network (network of airline partners). Users of the system use these tokens to interact with each other in the market.
There are multiple types of utility tokens. A token’s utility could be as a discount token to get access to a SaaS model market. The token allows an agent to get access to the software. It could be a social token or community token of an individual like an artist, celebrity or influencer. The token allows the agent to get access to the artists’ work or celebrity’s network. It could even be a form of loyalty points to get access to premium content created by the market.
Utility tokens can be fungible or non-fungible, depending on how they are designed, structured and created. Their fundamental value comes from their inherent utility in the market to access goods and services. This market can be decentralised or centralised.
Security token: This is security that is done on-chain so the asset comes from on-chain. Tokenised security is an asset that comes from off-chain like government bonds. The security token is security that exists in the on-chain world. For example, a token that represents the equity of a crypto company.
Consultation paper CP19/3 of January 2019 from the Financial Conduct Authority in the UK on cryptoassets discusses the difference between tokenised security and security token.
The main difference is where the asset is created, either on-chain or off-chain. Unlike tokenised securities, security tokens are created on-chain with the asset being blockchain native.
Think of them as a representation of stock equity of a token-based protocol. Instead of issuing traditional equity in the US market, the protocol issues equity in the form of tokens. The security originates from the token-based ecosystem.
Security tokens are fungible. The fundamental value comes from the revenue generated from the token-based ecosystem. This value is more than just cash flow, but also the impact of mechanism and token design affecting the economic relationships between agents.
As of Q2 2021, there are no laws differentiating tokenised securities nor security tokens. There is a difference between both, and the same laws should not be applied to govern both classes.
Pegged Token: Think of pegged token as an asset for you to trade and exchange outside your ecosystem.
Pegged token functions like exchange token. However, instead of just exchanging between agents of a particular market, this class of tokens allows economic agents to exchange across various markets. For exchange tokens, the token is a barometer of information in the particular market, agreed by agents in the market. However, when transacting across markets, this barometer of information captured by exchange tokens might not be accepted by agents of another market. Thus, a stabletoken which is pegged exists as a wider barometer of information to allow agents to transact across markets.
They are considered stable because the tokens do not fluctuate much, relative to the underlying asset that it is pegged to. The underlying asset can exist on-chain or off-chain. It is an asset that agents in different markets are willing to accept and transact in. The common underlying asset pegged by stablecoin can be a country’s currency like US Dollar, Singapore Dollar. But it is also possible to peg the stable token to a basket of goods like the consumer price index of the US consumers in 2019, or a basket of assets created and agreed upon by certain markets.
Stable tokens are fungible. Its fundamental value comes from the underlying asset that it is pegged to. The important value is that it is accepted and used as a means of transaction (or currency) between agents of different markets.
For example, the US dollar is accepted in the US market as a means of transaction. It is also accepted as a means of exchange between agents in Nigeria, Venezuela, Brazil and other markets outside of the US. However, the same cannot be said for the Iranian Rial.
Intellectual property: This is where NFTs or non-fungible tokens come in because they are capturing the value of this intellectual property. It could be music, art, or video but it represents intellectual property that has value.
According to the World International Property Organisation, intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. IP enables the creator to earn recognition or financial benefit from what they invent or create.
There are two main classes of intellectual property: tokens representing the recognition of the IP itself, and tokens representing the financial benefit going to the creator for work done by others.
Commodities: This would be like silver, gold, Bitcoin, or any other commodity and you’re basically creating a tokenised version of it.
In economic terms, commodities are components of commerce that are standardised and hence easy to exchange for goods of the same type, have a fairly uniform price around the world (excluding transport costs and taxes), and they help to make other products.
Think of them as raw materials and resources that allow commerce to be carried out. In the physical world, commodities are primary resources like iron ore, copper ore or wheat. Commodities can also be manufactured like computer chips, chemicals and Bitcoin to allow for transactions between peers.
Commodities are fungible. That means they are interchangeable with one another. The fundamental value of commodities comes from their usability to carry out commerce. They can be traded on spot and derivative markets. Brand name also matters in commodities.
Exchange token: Its function is basically to be used for exchange of goods and services but the utility or the usability is only within a particular ecosystem.
Exchange tokens function like money within a specific token-based ecosystem. Money is used as a standardised means of measurement to trade, transact and exchange between economic agents in aspecific market. When we trade, we are capturing information to engage in a social contract with another agent in the same market. Thus, money is a barometer of information in that specific market.
In economics, money has three main purposes: store of value, unit of account and medium of exchange. Think of USD, GBP, EUR. And then there are sub-categories — physical fiat money issued by a country’s central bank, and digital money. In digital money, you have cryptocurrency (BTC), virtual money (World of Warcraft’s money) and even central bank digital currency CBDC (central bank issued digital money). These exchange tokens are used to trade, transact and exchange with other economic agents in the specific ecosystem like World of Warcraft money used in World of Warcraft, but not in Monopoly.
Exchange tokens exist as a “barometer of information”, as a calibrated parameter of the ecosystem, agreed upon by all participating agents of the market. Thus, it is fine to trade and exchange with this token in the specific market itself. Other markets could potentially accept the information captured by the token, but it is not a necessary condition.
For example, the US dollar is accepted in the the US market. It is the asset used to trade and exchange between agents in the US market. The Iranian Rial is used as the asset to trade and exchange between agents in the Iranian market.
Exchange tokens are fungible. The token’s fundamental value comes from its ability to be exchanged for other goods and services within the market and by its acceptance by a large number of participants. Another important value is its ability to remain relatively stable as a means of exchange within the market.
For example, services created on-chain cost 15 $TOKEN in January, and also relatively the same in September. Of course, with the possibility to arbitrage between different markets, different countries and different platforms (off-chain and on-chain), this can be quite challenging. Economists try to do this with the Big Mac Index created in 1986.
TLDR: Tokenised asset classes can be classified into seven classes with the acronym T U S P I C E. The seven classes are Tokenised securities, Utility, Security Token, Pegged Token, Intellectual property, Commodities, and Exchange.
More details will be out on Edition 2 of the book.