CTOs are a new breed of financial instrument, and bid to save decentralized project funding.
The TOKEN project has announced the issuance of a new type of financial instrument in the crypto space – a Combined Token Offering (CTO) – which locks tokens that would normally be burned after ICOs (from multiple projects) into a smart contract that mints a single new token . The participating projects would jointly and collectively fund this new token’s listing on an exchange that has significant liquidity, and then sell their CTO tokens on this exchange.
According to the release, agreement has been reached with an exchange that plans to list the first CTO as a security token to an accredited KYC-only user base (excluding US investors), and three projects so far are considering participating in the first issuance.
The first issuance will close on November 30th 2018.
TOKEN’s Founder Fraser Brown from Dublin, Ireland worked as an innovative finance specialist for four years prior to joining the blockchain space, and is credited with supporting a number of breakthroughs in climate finance mechanisms especially relating to agriculture and reforestation in developing countries.
According to Brown, “Drastic changes are needed immediately to salvage decentralized project funding. VCs are walking off with the crown jewels while the people recover from the collapse of the ICO sector. We don’t honestly know if those people will come back. Something new was needed that does not involve giving up and handing over ownership and control to the incumbent financial sector. That is what inspired us to start looking for a new instrument all together”.
Paul Scott, a former bank treasurer from South Africa who recently joined TOKEN as Operations Chief compared the new instrument to “the best parts of financial innovation seen in collateralized debt obligations and other securitization, but with fundamental differences and improvements that are only possible due to blockchain”.
The new instrument is distinctly unlike obligations relating to debt or ownership (equity) because, if anything, the “obligation” relates to utility. Critically, each project’s tokens that are currently trading elsewhere or even on the same exchange will not be affected by the existence of the CTO token in the market because it does not alter the supply of utility in any way. As a consequence, tokens that were being burned can become a liquid asset on secondary markets. Assuming that good ICOs are currently reaching 50% of their hard cap on average, that is around $1billion in new potential finance available to projects per month.
The aspiration does not stop there. TOKEN wants to leverage this instrument to fund high potential presales (startups) by negotiating with participating projects that a percentage of each new issuance will be used in swap deals with top projects listed on the TOKEN Alpha platform. As such this represents a new form of venture capital coming from within the sector that ultimately benefits the sector as a whole. This is value that was until now lost completely because the tokens were burned. The model also has zero reliance on the acquisition of direct “ICO investors”.
Brown claims, “Utility tokens needed to power dApps and drive decentralization, but that have limited volume (and, indeed, use at present) do not need to die and vanish as some postulate. This new instrument actually de-risks the underlying asset class, while creating a more broadly desirable investment, which will attract better volumes. In roulette, the 1st 12, 2nd 12 and 3rd 12 blocks offer much more likelihood that you will stay at the table longer than if you just put everything on number 14. The actual dApp’s tokens sold at presale and ICO can be traded merrily on DEXs (decentralized exchanges) by those that want to use them and any that want to cash out. On bigger exchanges, we think CTO tokens will be popular among traders.”
When asked about regulation, Brown and Scott showed no chagrin. Scott said, “this instrument requires nothing other than a smart contract to create it. It’s hard to even point to who or what the issuer is”.
But the instrument could face end of life challenges. How can it be liquidated to release its value, and by whom? What if one of the underlying tokens fails altogether? The team says that these are questions that will be worked out with the first cohort of projects, and the best legal advisors and smart contract developers. If they get these answers right, this type of instrument could be something that attracts one innovation after the next, and all without the blessing (or indeed, rent-seeking) of a financial sector vying to bring cryptocurrency to heel within its existing systems and rules.
With now over 70 of the biggest names in blockchain partnered with the project, TOKEN is starting to formulate and implement plans that reinvent blockchain project fundraising, and are needed for the crypto space to remain truly decentralized and for “average Joe” to limit his risks.
Figure 1: The Combined Token Offering mechanism
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