Today, we continue our focus on blockchain technology and surrounding rules and regulations. It is a nascent area and the subject of much debate. Last week, we discussed the jurisdictional issues this technology poses, as well as questions of liability, contract, and intellectual property. Today, we narrow our focus to one particular area of the blockchain realm: Asset-backed ventures.
The blockchain is by definition an open-ended and malleable tool. One of its most useful applications is to provide liquidity and capital where previous market inefficiencies precluded them. This makes the biggest difference for small and mid-market ventures. Crowd-sourcing income for job-producing smaller corporations will compound wealth for the international community in the decades to come in the developed world, and even more starkly in Africa and South Asia.
An emerging innovation in the blockchain space is to hinge digital coins’ value on an asset – i.e., the area of asset-backed tokens. Variations of this idea include a coinage system based on the productivity of oil and gas ventures. Investors purchase coins and fund the venture in its early stages and throughout. Once the venture starts producing and oil is sold, the investor has a right to exchange his or her coin for the market price of that asset. Hence, the supply of oil rises, the price declines, communities prosper, and investors get a healthy return. If they do not, there is a mechanism within the coin-value determination that adjusts for the poor judgment of the investor and devalues the coin. So, it behooves owners of the coin to choose fruitful projects.
Additionally, there is a parallel appraisal system for upcoming ventures. Coin owners vote on whether to invest in a given project, and the appraisal of that project is determined in part by the quality of its voters. If a voter has had a previous streak of bad judgment, it will diminish the appraisal of the project he or she is supporting by a vote. This acts as a deft indicator to investors at large as to which projects are worthy. Investors should be wary, though, of whims and groupthink as proxies for ventures’ worth, just as they should in regular corporate investment.
Another example of the imaginative applications of this technology is blockchain coins supported by fiduciaries. For example, wills that self-trigger without the need for a human fiduciary can be used to substantiate the value of a coin.
These technologies provide organic and reliable value even though such value can fluctuate. It is now for the legal system to decide whether the value held by the coins described above should be legally considered as the asset it represents or simply as a placeholder for future exchange with the asset. Tokenizing in the ways described above offers an efficient alternative to raising capital through a stock exchange. Investors can more quickly liquidate their holdings and ventures need not jump through as many hoops. But, there is ambiguity in how the tokens are legally classified. This is because they have parallel economic realities. For now, their legal classification will hinge on specific characterizations and manner in which they are sold in the market.
At our law firm, our internet lawyers help clients navigate through issues affecting digital currencies by providing expert legal advice. Please do not hesitate to contact us for any questions.