The Token Is Dead, Long Live The Token

Opinion by: Daniel Taylor, head of policy at Zumo

Crypto X communities think tokens are toast. Here’s why they’re right — and dead wrong.

If there were one chart to sum up today’s crypto token meta, it would be Bloomberg chart-boxing its comparison of Bitcoin (BTC) against an altcoin basket. Bitcoin holders are jubilant, watching it approach an all-time high. Tokenholders are bloodied and bruised, seeing their holdings wither away while Bitcoin soars.

With BTC dwindling to just 11.6% of an average retail investor’s portfolio, it’s been a painful divergence. This is the story of how tokens failed — and why there’s still a chance for the token.

What went wrong with tokens

The unhitching of the token wagon comes down to three well-known elements.

Ironically, crypto gave in to insider concentration and almost exclusively non-public value capture.

Big crypto projects of recent years have launched with most tokens reserved for teams and private backers, with only a small minority reserved for the general public.

It has come to be seen as “normal” that most tokens go to private fundraising rounds and that a token should go through a 95% depreciation after going public. 

That’s not something anyone should accept.

Utility and governance tokens got misunderstood by investors as passive price appreciation vehicles. People wanted to believe that passive token holding can deliver price upside when typically active protocol actions — staking or liquidity provision — entitle participants to a direct share in network or application value.

The price charts of prominent utility and governance tokens play out this confusion and the general lack of association between tokens and equity-style revenue sharing. And that’s for the minority of token-based projects with any revenue to link in the first place.

Investors have been gated mainly within the “crypto” token market. That means no wide-scale (legally robust) access to tokenized forms of “real-world” assets, whether equities, bonds or any other existing asset.

This, in short, is how we got to where we are: Most crypto tokens have struggled to sustain long-term constructive market performance.

The great token revitalization

Despite all this, the writing is on the wall that long-identified structural deficits are finally being addressed. In token fundraising, frameworks like the EU’s Markets in Crypto-Assets (MiCA) have shown how regulation can drive innovation and provide guardrails.

With the proper disclosures, EU investors now have a regulated framework to participate in public token offers. This has spurred a wave of general access token fundraising projects that seek to revitalize the best of the initial coin offering spirit: open public access to early investment opportunities based on merit, not connections, regulatory exclusion or privileged position.

In token structuring, emerging regulatory clarity around the expectations on token issuers sets the stage for better quality assets.

Related: Real-world asset tokens are the new ETFs — CoinFund president

Token designs that have shied away from providing tangible investor value have often been shaped by regulatory ambiguities and the desire not to be caught by traditional investment regulation. As the UK’s emerging approach to token offerings shows, however, regulation is now coming to the crypto token, regardless. Whether you offer an “unbacked” crypto asset or a more security-style token doesn’t matter. The concepts applied — asset dealing authorizations, market abuse controls, investor information documents and insider disclosures — are the same for all.

Burden and necessary adaptation aside, this is a long-term good thing. 

Tokens can be designed from the outset to capture holder value. More than that, doing anything else will no longer be a choice. Rigorous token disclosures will soon expose rigged tokenomics. And exhaustive due diligence requirements placed on centralized execution venues will prevent all but the highest quality assets from reaching widespread trading.

This by no means precludes investor free choice in decentralized settings. As far as wider token design is concerned, however, it will highlight where the emperor has been shown to have no clothes.

Finally, in the sphere of real-world assets (RWAs), crypto investors can look forward to being able to invest in a whole suite of tokenized assets, and not just crypto-native tokens. The provision of tokenized RWAs is primarily a legal question, not a technological one. How are the underpinning assets and rights secured and assured? This subsector of tokens, which requires traditional finance, requires the government.

Both are engaging with tokenization in full force. While BlackRock et al. grow out their first tokenized offerings and openly champion the tokenization narrative, governments continue to unveil strategies to embed tokenization in the next generation of financial plumbing. Combined, it offers the investor a diversity of exposure that cannot be achieved in a “crypto-only” portfolio.

Long live the token

The combined effect of these dynamics is profound. Where retail direct investment has been blocked, a path to primary public fundraising beckons. Where projects have been disconnected from fundamentals, a structured investment framework emerges. A breadth of tokenized investment types is available, where investment options have been concentrated.

The converging future is one of tokenization embedded permanently into capital markets and widespread decentralized applications that flow value directly to a global base of tokenholders.

It requires a purge and a reinvention. In the meantime, don’t write the token off.

Opinion by: Daniel Taylor, head of policy at Zumo.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.