Cryptotokens may dramatically change how firms raise funds enabling less costly, more transparent, more accessible, and faster access to capital. By issuing tokens, firms access an alternative means to raise funds instead of venture capital, crowdfunding, and private equity. However, the global cryptotoken market is quite volatile as evidenced by the fluctuation in market capitalization. For example, the global market capitalization (market cap) peaked on January 13, 2018 at $57 billion but fell to $7.9 billion on December 14, 2018.
Cryptotokens, or simply tokens, hold great promise to improve the efficiency of financial markets. In some cases, tokens are issued to sell goods and services in advance and are categorized as utility tokens. The preselling of goods and services is not new to fund firm operations. For example, 29% of Starbucks sales came from orders that were prepaid during the first quarter of 2017 (Wattles, 2017). However, many utility tokens were created to circumvent securities laws (pymnts.com, 2018).
Another type of token has similarities to equity in the sense that their investors may receive dividend streams based on the issuing firm’s revenue streams and are commonly referred to as security token offerings (STOs). Industry participants are trying to distinguish STOs from initial coin offerings (ICOs), which includes utility and security tokens, by stressing that STOs are compliant with a country’s securities laws and are subject to greater regulatory oversight.
They offer the following conclusions regarding the future of cryptotokens. First, tokens raised significant amount of funds at the beginning of 2018 but by the end of the 2018, the market collapsed. Second, we remain optimistic that tokens show enormous promise to disrupt traditional funding markets and emerge as a new asset class. Third, while tokens will disrupt traditional ways to raise funds, they will not eliminate other more established means to raise funds and, in some cases, may be part of a mix of funding sources for firms. Fourth, as the infrastructure continues to develop, these platforms where tokens reside must be able to overcome technological challenges such as faster transactions times. Fifth, public authorities will have to establish a regulatory framework to protect investors from fraudulent activities and to encourage greater participation by incumbent market players.
Their chapter is organized in the following sections. In the next section, they provide some background of the underlying technology and a brief overview of the literature. In Section 3, they discuss how tokens can disrupt financial markets. In Section 4, they discuss the market dynamics of tokens. In Section 5, they discuss the evolving regulatory landscape for tokens. In Section 6, they discuss several individual tokens to better understand challenges and opportunities of this emerging market. In Sections 7 and 8, they discuss challenges going forward and offer some conclusions, respectively.