Viewpoint by: Daniel Taylor, policy lead at Zumo
Crypto X communities believe tokens are finished. Here’s why they’re correct — and completely mistaken.
If there were a solitary chart to encapsulate today’s crypto token landscape, it would be the Bloomberg graphic illustrating the comparison of Bitcoin (BTC) against a basket of altcoins. Bitcoin holders are ecstatic, watching it near an all-time high. Tokenholders are battered and bruised, witnessing their assets diminish while Bitcoin ascends.
With BTC dwindling to merely 11.6% of a typical retail investor’s portfolio, it’s been a grueling divergence. This narrates how tokens have faltered — and why there remains potential for the token.
What went awry with tokens
The disconnection of the token system can be attributed to three familiar factors.
Ironically, crypto succumbed to insider concentration and predominantly non-public value capture.
Major crypto projects in recent years have been initiated with most tokens allocated for teams and private investors, reserving only a small fraction for the general populace.
It has come to be regarded as “standard” for most tokens to be directed towards private fundraising rounds and for a token to experience a 95% decline after going public.
That’s not something anyone should tolerate.
Utility and governance tokens have been misconceived by investors as passive price growth instruments. People wanted to believe that simply holding tokens can yield price gains when, in reality, active protocol engagements — such as staking or liquidity provision — grant participants a direct stake in network or application worth.
The pricing trends of leading utility and governance tokens illustrate this confusion and the overall disconnect between tokens and equity-style revenue sharing. And that’s true for the minority of token-based projects that possess any revenue to connect to in the first place.
Investors have primarily been confined within the “crypto” token market. This indicates a lack of broad (legally sound) access to tokenized forms of “real-world” assets, whether shares, bonds, or any other existing asset.
In summary, this is how we arrived at this juncture: Most crypto tokens have wrestled to maintain sustainable long-term positive market performance.
The major token revival
Despite all this, signals indicate that long-identified structural deficiencies are finally being rectified. In token fundraising, frameworks like the EU’s Markets in Crypto-Assets (MiCA) have demonstrated how regulation can foster innovation and provide protective measures.
With adequate disclosures, EU investors now have a regulated platform to engage in public token offerings. This has triggered a surge of accessible token fundraising initiatives aiming to rejuvenate the best elements of the original coin offering spirit: open public access to early investment opportunities based on merit, not associations, regulatory exclusions, or privileged positions.
In token structuring, emerging regulatory clarity regarding the expectations placed on token issuers paves the way for higher quality assets.
Related: Real-world asset tokens are the new ETFs — CoinFund president
Token frameworks that have avoided providing concrete investor value have often been influenced by regulatory uncertainties and the intention to evade traditional investment regulation. However, as the UK’s emerging stance on token offerings showcases, regulation is now inevitably reaching the crypto token sphere. Whether you present an “unbacked” crypto asset or a more security-style token is irrelevant. The concepts applied — asset dealing authorizations, market abuse controls, investor information documents, and insider disclosures — are uniform for all.
The burdens and necessary adjustments notwithstanding, this is ultimately a positive development.
Tokens can be crafted from the beginning to capture holder value. More importantly, anything else will no longer be an option. Stringent token disclosures will soon unearth manipulated tokenomics. And comprehensive due diligence criteria placed on centralized execution venues will bar all but the most superior quality assets from achieving widespread trading.
This does not, in any way, hinder investor choice in decentralized environments. As far as broader token design is concerned, however, it will reveal where the emperor has been shown to lack attire.
Finally, in the domain of real-world assets (RWAs), crypto investors can anticipate the ability to invest in a diverse array of tokenized assets, and not just crypto-native tokens. The provision of tokenized RWAs is chiefly a legal issue, not a technological one. How are the underlying assets and rights secured and guaranteed? This subsector of tokens, which necessitates traditional finance, mandates government involvement.
Both sectors are actively engaging with tokenization. While BlackRock and others expand their initial tokenized offerings and openly endorse the tokenization narrative, governments continue to roll out strategies to incorporate tokenization into the upcoming generation of financial infrastructure. Together, they offer investors a range of exposures that cannot be obtained in a “crypto-only” portfolio.
Long live the token
The combined impact of these trends is significant. Where retail direct investment has been obstructed, a path to primary public fundraising is emerging. Where projects have been detached from fundamentals, a structured investment framework is forming. A variety of tokenized investment types is now accessible, where investment options had previously been limited.
The converging future is one of tokenization ingrained permanently into capital markets and widespread decentralized applications that transfer value directly to a global base of tokenholders.
It requires a cleansing and a reinvention. In the meantime, don’t dismiss the token.
Viewpoint by: Daniel Taylor, policy lead at Zumo.
This article serves general informational purposes and is not meant to be and should not be interpreted as legal or investment advice. The perspectives, thoughts, and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.