Asset Backed Tokens
Asset backed tokens are one of the best applications of blockchain technology to traditional financial instruments, bringing liquidity and price discovery to illiquid markets, with the potential to free up trillions in economic value.
Asset-backed tokens 101
Asset-backed tokens facilitate the cost-effective, fast, and secure trading of real-world assets on the blockchain. There is tremendous excitement in the crypto economic sector and beyond over the ability of an asset holder to issue this new class of securities, also known as a “security token,” via a security token offering.
An asset-backed token’s value derives from the underlying asset which backs it. For example, an asset-backed token value linked to a physical asset, such as gold, the Euro, or real estate, will have a 1:1 price ratio with the underlying asset. Fiat-backed token value is fixed via a token exchange, whereas precious-metal-backed token value is fixed via an external ‘oracle.’
Whilst gold is a highly liquid asset, and fiat currency is a manifestly liquid asset, asset-backed tokens come into their own when backed by difficult-to-liquidate assets such as fine art, real estate, derivatives, investment-grade wines, and other non-fungible assets. These asset classes suffer from illiquidity, with billions of dollars in value parked in vaults, acting as a hedge against inflation for their backers. Illiquid asset markets are afflicted with multi-tier value chains wherein middle-men extract portions of the investment value in return for assuming counter-party risk.
With the global value of all real-world assets pegged at around $260 Trillion, securities tokenisation presents asset owners and investors with phenomenal opportunities, particularly in regards to illiquid assets with limited or poor market making and price discovery.
ICO Launch Malta has been commissioned to develop several ‘flavours’ of asset-backed tokens, ranging from fund trackers linked to the underlying investment fund’s portfolio, to fractional real estate. Below are descriptions of some of the more common types of asset-backed tokens we have developed. You can also read about our other non-asset backed security tokens models here
Different flavours of asset-backed tokens
Fiat-linked stablecoins are asset-backed tokens whose value is linked to a specific currency to mitigate token market volatility. Examples include Tether, TrueUSD (USD pairs), and EURS (EUR backed).
Fiat-based stablecoins are used by traders to exit the market in times of uncertainty whilst maintaining liquidity on a token exchange, allowing for a swift reentry. Moreover, businesses use stablecoins as a payment method that is generally free of the volatility of traditional cryptocurrencies. The benefits of fiat-backed stable coins – decentralisation, cheap and instant remittance, and price stability – constitute a significant cryptocurrency adoption driver in the business sector.
Similar to the linking of fiat-backed token values to a fiat currency, metal-backed tokens have a value linked to a specific precious metal. Taking the most common example, gold, tokens backed by gold can represent grams or ounces of the metal. Examples include Tiberius, Goldmint, and Digix Gold.
In metal-backed token issue ICOs, the physical gold represented by the tokens is stored with an independent custodian, with frequent audits on reserves validating the issuer’s claims to 1:1 backing. This double-tier verification provides the market with the confidence it needs to trade a metal-backed token on exchanges or hold it as a store of value.
Asset-backed tokens facilitate the creation of tokenised investment instruments, with each token representing an equal share of ownership in a fund. Examples include TaaS, BCAP (tokenised VC fund), and C20 (Top 20 weighted market cap backed).
As a reflection of the traditional financial sector, many crypto investment funds have emerged with strategies centred on either investment diversification or equity investment in blockchain startups. Common investments tactics for crypto-fund tokens include buying the top 5/10/20 coins by market cap, participating in ICO Presales, or investing in token-equitised startups.
Real Estate and other real-world asset-backed Tokens
The most powerful use case for asset-backed ICOs is the creation of enormous liquidity pools from assets in immature markets, thus eliminating price slippage and liquidity premiums, and enhancing price discovery. Examples include KWHCoin (clean energy backed), Maecenas (tokenised art platform), and Property Coin (real estate backed).
There is a vast potential for real-world asset-backed tokens in clean energy, carbon credits, art, and real estate. Real-world asset-backed tokens can be augmented with dividend and share of profit functionalities, transmuting the illiquid asset into a passive income investment.
Equity-backed and Debt-backed Tokens
Equity-backed and debt-backed tokens represent percentage ownership of a company’s equity or debt. Examples include Steem Dollars, Kairos Class T, and tZero.
The primary use case for equity-backed and debt-backed tokens is for crowdfunding a company whilst disintermediating investment banks, VCs, middlemen, and stock exchanges. The level of regulatory oversight required to issue equity- and debt-backed tokens will likely provide investors with peace of mind.
How to do things right
Some of the above examples include dubious security tokens, which, while commonly used, have failed on one of the points below, causing a loss of confidence in the community (yes, we’re talking about you Tether). Any prospective issuer of a security token offering has to be committed to the following investor-centric governance mechanisms (amongst others):
- Publishing full, third-party audits of all reserves.
- Maintenance of a simple backing ratio and calculation methodology that non-sophisticated investors can understand.
- Market maker utilisation if arbitrage arises, thus guaranteeing that the token trades at its net asset value.
How we can help
ICO Malta has developed a portfolio of STO protocols which will facilitate the development and issuance of your security token offering, contact us today for details on our turnkey STO service.