As we emerge from the coronavirus-induced economic lockdown, it is vital to consider what comes next for business. Written by Bundeep Singh Rangar for The Global Investor.
In the UK, the Office for Budget Responsibility estimates that government’s life-saving interventions to prop up the country through the crisis could cost over £100bn. Meanwhile, the European Union has predicted that a recession of “historic proportions” will happen this year.
What this means is that fiat currencies linked to sovereign governments are going to become very expensive. Someone has to pay for the mountain of debt being racked up by governments, and that will potentially mean higher taxes, or higher inflation which erodes the value of wages and savings.
Larger companies may be able to raise capital through traditional measures, but it is going to become more expensive. And what about pubs, independent restaurants, and local football clubs? These places are often cornerstones for communities, and they are likely to be hammered by a recession. They cannot issue equity on the stock market — it is prohibitively expensive.
As the economy reopens, what role could crypto play in helping these businesses access capital and get back on their feet? Perhaps now is the time to normalise a practice called tokenisation.
Many will already be aware of cryptocurrencies like Bitcoin and Ethereum. These digital coins are gradually becoming more accepted around the world, and the current crisis is likely to accelerate their wider adoption — especially as many may fear physical coins and paper money could transmit the coronavirus.
Politicians from the US to China are discussing creating digital equivalents to their currencies, as they are easier and cheaper to distribute, and prevent fraud. Meanwhile, regulators are becoming more understanding and accepting of crypto, as technology provides more robust protection and oversight. Even leading financial institutions, from Fidelity to Goldman Sachs, are taking cryptocurrency seriously.
Cryptocurrencies are effectively tokens that represent a store of value and can be exchanged. But while a cryptocurrency is traded publicly, crypto tokens can be created privately, and for specific purposes.
Tokenisation is the process of taking an asset, and dividing ownership of the asset into several cryptographic tokens. Much like a share certificate or loan note represents that the holder owns equity in a company or a stake of a debt, so too can tokens represent fractional ownership of an asset.
The difference is that it is a much cheaper and more efficient process than traditional share ownership. Selling shares in a business often requires dealing with an investment bank and financial institutions, as well as paying for a registrar to handle and distribute share certificates. It is a high-cost and complex process.
In contrast, because crypto token exchanges are recorded onto a blockchain, it is more decentralised, democratised, and low-cost. After the Covid-19 crisis, private institutions looking to liquidate their assets should consider issuing tokens as a cheaper and more direct approach to raising capital.
This is not uncharted territory. The beer chain BrewDog has raised millions of pounds by selling shares directly to customers through its “Equity for Punks” scheme, while crowdfunding websites like Crowdcube and Seedrs have transformed how businesses can raise capital from everyday investors, by largely digitising the process of issuing shares.
Tokenisation offers similar benefits, enabling that local pub or restaurant to sell token-based fractional ownership to loyal customers. These tokens can offer other bonuses, such as a discount or a share of profits. And unlike crowdfunding-based equity, these tokens are inherently tradeable, thanks to being recorded on a blockchain; they don’t need to be listed on a stock market, the tokens are tradeable in and of themselves.
Of course, if you’re a small business owner, the idea of becoming a blockchain expert in order to issue tokens will seem daunting. But you won’t have to. In addition to liquidity (i.e. the ability to buy and sell) being offered via crypto-issuing platforms, big tech is also limbering up to offer infrastructure solutions for the rapid issuance of tokens via a recognised currency that is automatically incorruptible.
