Bisons to Tokens: The New Reality of Business Financing

By: Berta Ares, General Manager, BME Inntech Jul 2021

Yuval Noah Harari, author of “Sapiens”, points out that one of the characteristics that differentiates Homo Sapiens from apes is their ability to “represent abstractly”. Harari gives the example of the ancient bison rock paintings of the Altamira caves in Spain. That capacity for abstraction that started with the bison and developed over millennia has taken a new step with blockchain; because, after all, what is a token if not the representation of an asset?

Blockchain-based technology represents a technological paradigm that can change the way we relate to each other in a globalized and connected world. There are endless possibilities and use cases, and they affect all existing business spheres as well as those that we can as yet only imagine. It is a puzzle with few pieces (tokens, smart contracts and a decentralized network) and infinite results.

A token is a representation of value. There are different types. Those we call tokenized assets are like the bison of the cave; they are backed by an asset in the "real world" (e.g. tokens representing equities or artwork). In contrast, for native digital assets, value is created the moment the token is generated, and therefore they themselves have value. Such is the case for cryptocurrencies.

Tokens can be also classified depending on their use: Currency Tokens (which are used as money), Utility Tokens (coupons that can be redeemed for using a platform), Security Tokens (regarded as an investment contract), and Asset Tokens (representing objects in the real world). Whatever the type of token, the idea is to clearly identify the unit of value in order to be able to trade with it in a secure, convenient, and very efficient way.

Tokens feature a code (smart contracts) that describes in detail their behaviour based on the possible events or conditions that occur, so that the corresponding contractual clauses are automatically applied. This contract is defined and registered in the Blockchain network the moment each token is created and will be executed automatically without it being controlled by any of the parties.

Endless possibilities

If we think about the areas that could benefit from such a completely automated and secure relationship, the possibilities are endless, and although we can’t even fathom some of them at present, others are already very advanced.

Blockchain allows us to register any object, good or asset in a network, and then have absolute control of recording the different properties. In this way, we can have full knowledge of the legal origin of the goods, their history, including even details such as a record of accidents (in the case of a vehicle) or past renovation works (in the case of a property).

Any system that manages subscriptions and rates can benefit. Blockchain would make it possible to hire a service with public and unalterable renewal conditions, which would be applied automatically to different events (service use level, incidents or any other circumstance). All this without cumbersome management by the user and without having a team of people dealing with it.

For capital markets, blockchain also holds the promise of very relevant efficiencies, simplifying processes to a minimum and, above all, opening up new possibilities to digitize previously illiquid assets.

However, in doing so, we face significant challenges.

The regulatory framework is the first of these. Progress is being made, and there are directives in Europe such as MICA and Pilot regime that will offer options that are not yet clear or feasible, but it is important that we move quickly if we do not want to miss the chance to compete with other innovation centres. It is also essential to regulate with a certain range of flexibility, because it must be assumed that in no case will it be possible to beat the speed of technological progress.

Adoption challenge 

The most important challenge facing capital markets, in any case, continues to be industry adoption. Our current infrastructures are the result – both in trading and post-trade processes – of decades of evolution at a very high level in terms of technology and efficiency and security. Blockchain’s value proposition is a disruptive and very efficient model, but one that involves rethinking many of the current processes and players, and agreeing on new models.
That is why it is necessary to advance in parallel with the current and the new models, which allows us to test, evolve and strengthen processes in a collaborative way.

Last week, the projects chosen for the launch of the Spanish Sandbox were announced, and BME’s Digital Asset Marketplace was among those selected.

It is a platform that digitizes the financing process for small and medium-sized companies (SMEs). It is conceived as a meeting point between SMEs and their potential investors. The project is the answer to the urgent need of alternative financing formulas for SMEs through a platform model that facilitates visibility and liquidity. To build this model, one of the key elements is blockchain technology. In this case, technology is much more than just a tool.

Universal advantages

Digital Asset Marketplace facilitates transparency in the processes and visibility of supply and demand. All participants in the process gain advantages. Investors are presented with a broader range of offerings, with organised and certified information through a single portfolio. Issuers will have greater visibility and data analytic tools for analysing investment profiles that will help them to optimise their supply. Investment firms will have a unified control for their management, greater visibility, and automation. And the regulator will receive unified reporting information and could directly access the platform for monitoring or intervening, as required.

But the great advantage is the ability to create a financing ecosystem in which everyone participates and co-creates the activity. This will allow us to test options, meet needs and evolve the model towards the optimal and common solution.

Tokenisation will represent a new industrial revolution for the markets, like the one that took place at the beginning of the 1990s when physical securities disappeared to become book entries. This revolution, similarly, will bring levels of transparency and traceability never seen before along the entire value chain, especially with regard to post-trade, and will generate new demands for talent in organisations, with a much more technological profile than at present.

In short, just like those painted bison, it stands for PROGRESS.