By now, some readers may be familiar with hot button (if somewhat ambitious) phrase, "the tokenization of everything." For those that haven't heard the expression, it refers to the migration of real world assets onto blockchain environments. The idea here is that the programmability of tokens will result in desirable ownership features (lower transaction costs, automated service functions, etc...), which in turn will produce liquidity in traditionally illiquid asset classes.
Although there are some limitations to the liquidity created by tokens, tokens represent a potentially new dynamic for assets that don't currently trade in a robust secondary market like VC, real estate, or collectibles. So far, token issuances have been the sole domain of blockchain startups.
But what if it were possible for multinational corporations like IBM, Facebook, or Nike to get in on the fun and issue their own tokens? What would that look like, and (more importantly) what would the benefits be?
Why Would Businesses Want to Tokenize?
As it turns out, there are a number of good reasons for a company to tokenize at least part of its business. First off, just take a look at all of the capital the ICO market raised over the past year. The first quarter of 2018 saw over $6.3B capital raised through ICOs alone. Does this indicate the existence of a bubble? Potentially.
Does it also validate token issuance as a form of capital raising? You betcha. ICOs allow organizations to tap into a global base of investors, many who would not have otherwise had access to capital markets. Let's quickly review some of the benefits:
1. Access to Capital - We've already seen the potential tokens have for creating liquidity. Token issuances offer a new form of capital raising, one that (significantly for private enterprises) does not necessarily involve equity dilution.
2. Aligned Incentives - There are cases where company interests are not aligned with those of its customers or shareholders (think Facebook's monetization of customer data). Tokenization would allow for the creation of a new governance structure in which users would have more of a say over platform direction.
3. Shareholder Transparency - Companies have a famously difficult time understanding who actually owns their stock, especially on a retail level. In 2013, Dole Chairman David Murdock took the company private only to discover that there were actually 49 million outstanding shares instead of the 36 million on record at Dole. Recording company shares on a blockchain would allow organizations unprecedented transparency into their investor base.
4. New Forms of Customer Engagement - We'll dive into this one more deeply later, but this factor is also related to transparency. Imagine if a company wanted to tokenize certain products, selling them essentially as digital coupons. The company could track who bought those coupons and gain important insights into customer behavior. But again, more on this later.
To be fair, there are a number of reasons for not wanting to tokenize as well. First off, tokens are a nascent and relatively untested technology. While it may be well and good for smaller companies to experiment with tokenized shares (Kevin O'Leary has said as much), the risk-reward really doesn't exist for behemoths like Facebook, who stand to lose quite a bit if something goes wrong.
Second, the liquidity and market infrastructure doesn't exist yet to support tokenization of a Facebook sized company. Facebook has roughly 3 billion shares with a market cap of $600 billion at the time this article was written.
The entire market cap for crypto assets is under $300 billion. Major US exchanges like the NYSE and Nasdaq don't support crypto assets for the time being, and it's unlikely that exchanges like Binance or Coinbase could support the kind of volume required to trade digitalized FB shares.
Finally, there's the issue of governance. It's true that a company wouldn't necessarily HAVE to confer equity or decision-making rights with their tokens, but that would make it unlikely to attract good developers or a strong community.
Companies that issue tokens only as digital representations of securities will likely find themselves at a disadvantage to companies that create rich ecosystems for developers and reward shareholder participation through strong governance.
A Happy Medium - Partial Tokenization
Luckily, the decision to tokenize isn't binary. In fact, many Fortune 500 companies have already begun to investigate how to tokenize specific parts of their business. Let's take a hypothetical example provided by Marco Santori of Blockchain.
Let's say that Nike was interested in tokenizing part of its business. For the sake of argument, let's say that in this arrangement one token becomes equal to one pair of Nike Air Jordans. Nike decides it wants to create one million tokens (we'll call them NTs) equivalent to one million Air Jordans and circulate them to their customers.
In many ways, a token issuance like the kind I'm describing is like a miniature IPO for one part of Nike's business (in this case, their Air Jordan sneakers). The mechanics of a sale like this would be largely the same as a traditional IPO.
Similarly to when a company first offers shares to the public, Nike would likely use one or several underwriters who would receive the NTs at a discount (let's say 80 cents on the dollar) and then turn around and sell them to the public.
These underwriters (who could be anyone with a large enough balance sheet to warehouse the risk of not finding buyers) could then sell the NTs to Nike customers, who would be happy to buy the tokens for anything under the face value of the Air Jordans.
The difference between a token issuance of this type and an IPO is that the ultimate purpose is not liquidity. Instead, tokenization would allow Nike unprecedented visibility into customer behavior patterns by tracking how these coupons move through markets. Nike would be able to:
A. Know exactly who the owners of are NTs in real time, allowing them to target customers more effectively and improve sale conversion rates
B. Track volume of NTs on exchanges to prepare inventory for massive sales periods (i.e if average transaction volume of NTs is 1,000 / day and moves up to 10,000 / day, Nike would over time develop a good idea of what that means in terms of inventory requirements)
C. Offer incentives to NT holders during seasonal slowdowns to stimulate sales
D. Layer loyalty programs on top of NTs, financially incentivizing token holders to support the Nike brand.
The New Joint-Stock or Limited Liability?
Tokenization is one of the most exciting opportunities in the crypto ecosystem right now. In the past, innovations like the joint-stock company and the concept of limited liability have given birth to entirely new ways for individuals to cooperate.
Take the creation of the Dutch East India Company (alternatively known as the VOC), the first large-scale joint-stock company that monopolized trade with the East Indies for over 100 years.
One day, blockchain networks may provide a novel framework for individuals to cooperate and produce value (i.e, structure a company). We've already seen early experiments in this with the creation of the DAO, although that one didn't end particularly well.
For the time being, tokenizing parts of existing businesses represent an exciting opportunity for organizations, investors, and consumers. In the words of Marco Santori, "The world of tokenized securities is enormous, it will be a $14 trillion market; but it will be tiny compared to the world of tokenized, literally, everything else."