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Asset-Backed Tokens Gain Popularity in Challenging ICO Landscape

Asset-Backed Tokens Gain Popularity in Challenging ICO Landscape 101
Source: iStock/Stas_V

Faced with an increasing number of challenges ranging from regulatory crackdown to possibly growing weary among investors about the current, and often-abused, ICO model, some Blockchain startups are exploring new ways of raising capital.

One such strategy that startups have begun to explore is to offer both an Initial Coin Offering (ICO), as well as a traditional Initial Public Offering (IPO), meaning that investors could not only purchase digital tokens, but also shares that represent legal ownership and rights to receive dividends from the company.

Because IPOs make it far more likely to receive regulatory approval given its compliance with current laws, this could be just the beginning of a new trend. The trend could also bode well with investors because it gives them a say in the companies they invest in, as well as regulatory guarantee that their investment will not be abused.

‘Just getting started’

Lasse Pettersen, Business Development Manager at ICO consulting firm Fusion ICO, explained to Cryptonews.com that the perceived conflict between token holders and shareholders is a challenge that will ultimately be overcome, because token holders will ultimately become equal to shareholders as company shares become tokenized.

He further explained that he believes the trend of putting real assets on the blockchain, be it company shares or commodities, is “just getting started.”

“Putting real assets on a blockchain and tokenizing them is a great tool for collateral, as well as providing liquidity to illiquid assets. I believe this is a huge advantage for an investment portfolio as it would allow you to more easily diversify into traditionally illiquid assets,” Pettersen said.

The new trend of asset-backed ICOs has also sparked debate online over potential advantages and disadvantages, with some questioning the actual voting rights guaranteed by the shares and others arguing this is a positive move.

One user on Reddit pointed out in a post that token holders might not have all the rights usually associated with owning shares of a company, including rights to remove CEOs and to influence the company’s decision-making.

“These tokens look like a seriously weaker version of shares, token holders have no real power so how is this innovative system better than the ‘old’ one, we have bought a part of the initial capital of this company without having any control on the company itself,” the user wrote.

Other Redditers argued that this is also normal in company shares. “You get A shares which have all the voting power… then you can get B shares which just gives you right on the dividend,” the user wrote. “I don’t see this as a problem.”

Potential conflicting interests between token holders and shareholders, voting rights, legal ownership, and rights to receive dividends are just some of the issues that token buyers should demand detailed information about before making any investments. Whether problems will arise or not remains to be seen, but it is obvious that many questions need to be answered by any company that is attempting to merge traditional business ownership, real assets, and digital tokens. Time will tell if this is a sustainable model that will succeed in the long-term.

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Background

The trend has been getting more attention in the industry after Lithuania-based sports and health data monetization start-up Lympo announced that it would issue an IPO.

The company is planning to distribute up to 20% of the shares to current holders of the company’s native digital token, known as LYM, as reported by Cryptonews.com. The move would essentially create a token backed by a “real asset” – in this case company shares.

Following Lympo’s announcement, author of the peer-to-peer BitTorrent protocol Bram Cohen said his new cryptocurrency Chia is in talks with the US Securities and Exchange Commission about issuing a mini-IPO to avoid potential abuses in the current ICO process, while also addressing concerns regarding regulatory uncertainty and investor protection, according to TechCrunch.

“We’re going to operate the company with the transparency and accountability expected of a public company, which is very different than most ICOs,” Chia President Ryan Singer was quoted as saying.

Chia, which claims to be an energy-saving rival of Bitcoin, has raised USD 3.395 million and could raise another USD 50 million through the planned mini-IPO.

However, Chia and Lympo are far from the first to see opportunities in asset-backed tokens. Singapore-based REIDAO is also planning to make use of the possibilities Ethereum smart contracts provide to grant token holders ownership rights to underlying real estate assets, according to reporting by Bitcoin Magazine.

REIDAO plans to create unique token IDs for each individual property under management on its platform, and valuation of the token would be based on the value of the underlying property.

And it’s not just real estate, as other real asset such as oil, gas, or precious metals could theoretically back tokens too. Though it might sound like a big stretch, some are even calling for Saudi Arabia’s oil giant Aramco to scrap its massive IPO plan and issue an ICO instead. Forbes contributor Dante Disparte argues in an opinion piece that the Saudi company could save up to USD 200 million in investment banking fees if it instead chose to issue an ICO backed by its assets.

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