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Case study of tokenised economy
Though the cryptocurrency exchange FTX has filed for bankruptcy recently, the potential of virtual assets (VA) is self-evident as mentioned in the Hong Kong government’s policy statement at the end of October. King Leung at Invest Hong Kong further explained: "Our focus and ambition is not just on cryptocurrencies, more narrowly-defined in Bitcoin, Ethereum, and other alt coins. After all, this VA segment only had a market cap of US$3 trillion at its recent peak in 2021. Instead, the true market potential of VA is the tokenisation of all the other 'traditional' assets, such as real estate, bonds, intellectual property rights, private equity, etc., which amount to hundreds of trillions of market cap."
I cannot agree with him more.
We are familiar with tokens, and many recreational parks have already used tokens in their operations. In the VA context, there are many benefits of tokenised financing, such as low transaction costs. According to estimates by PricewaterhouseCoopers, the cost of public listing of a company can be as high as 22% of the transaction value, while tokenisation is expected to be less than 5%. As the ownership of a company is finely split, it is easy for small investors to enter the market. Other benefits include high liquidity and transparency. Below are some interesting cases in recent years for us to examine:
Socios, the crypto company introduces "fan tokens", sells them to football club supporters, and shares the proceeds with the clubs. Holding tokens is supposed to connect fans with their favourite teams by giving them a chance to vote on, for example, the celebration song that is played in the stadium or the design of the team’s bus. The company has signed cooperation agreements with 170 clubs, with different prices for each one. Paris Saint-Germen fans can buy one of the nearly 20 million tokens issued, priced at €7.36 (about HK$57) each as of early November; while for the less well-known Club Universidad de Chile (UCH), it takes only €0.99 (about HK$7) to buy a voting right.
In Switzerland, Mt Pelerin, a blockchain company providing banking and financial services, launched the world's first tokenized share MPS token in 2018. Holders can vote at the annual general meeting and receive dividends. SwissRealCoin (SRC), which was launched in the same year and also from Switzerland, is a stable cryptocurrency linked to a portfolio of local commercial real estate. The tokens backed by physical assets can theoretically reduce price volatility.
In reality, like most cryptocurrencies, token values may fluctuate wildly. For example, Chiliz, the token used by Socios, has fluctuated in value from US$0.08 to US$0.59 last 12 months; MPS token also dropped from US$17.9 to US$1.93 during the same period, which must have scared many retail investors. SRC announced that the commercial real estate token project was set on hold without disclosing the reasons.
At present, the tokenised economy is still in the infant stage of development. We need flexible and forward-looking policies to protect retail investors and promote development. At the same time, a tokenised economy operating with full functions also needs an ecosystem composing of exchange, wallet provider, custodian, standard-setting and regulatory agency, auditing and insurance institution to integrate with each other to meet the diverse needs of investors.
Dr. Winnie Tang
Adjunct Professor, Department of Computer Science, Faculty of Engineering; Department of Geography, Faculty of Social Sciences; and Faculty of Architecture, The University of Hong Kong