Paul Schulte, Advisor, Banking and Financial Services
August 22nd, 2019
Paul Schulte is the Founder and Managing Editor of Shulte Research based in Singapore. Paul's roles[...]
Entrepreneurs who use Utility Tokens to reduce CAC (Customer Acquisition Cost) will create the most valuable Security Tokens
Daily Fintech | | Apr 13, 2019
This post is an update to the chapter on Investing in Utility Tokens in The Blockchain Economy digital book.
This post describes:
- The SEC rules governing Utility Tokens.
- Laws change over time and vary by jurisdiction.
- Four reasons why other jurisdictions will probably follow the SEC rules.
- Utility Tokens can be used to improve CAC/LTV, which is a critical metric driving valuation.
- Invest in Security Tokens of ventures that offer great Utility Tokens.
- Two ways that a Utility Token is different from a traditional crowdsale.
- The future cryptocurrency landscape will have 4 different types of assets.
See: A Regulation Revolution In Financial Services
The SEC rules governing Utility Tokens
The SEC rules were analysed in Ilias Louis Hatzis’s Daily Fintech post on Monday. For convenience the key rules (defined in a No Action letter for the Utility Token of a company called TJK) are copied below:
- “Token holders won’t be granted an ownership stake in the company.
- Any funds raised from the token sale will not be used develop the platform or app.
- When the tokens are sold, they must be usable immediately for their intended functionality.
- Transfers of the TKJ tokens are restricted only to TKJ wallets. External wallets are not allowed.
- TKJ tokens will be priced at 1 USD per token. Each token will essentially function as a pre-paid coupon for TurnKey’s air charter services. If TurnKey wants to buy back the token (coupon), it must do so at a discount (less than 1 USD).
- The token must be marketed in a way that emphasizes its functionality, and not its potential to increase in value, over time.”
Laws change over time and vary by jurisdiction
The Legacy Finance world has Debt and Equity. The Blockchain Economy has Utility and Security Tokens. You can tokenise Debt (just like you can tokenise Equity or any other asset) but that does not change the fundamental characteristic of that asset.
See: The Security Token Field – The Next Step After the ICO Annihilation?
Debt is illegal in Islamic Finance (for more please read this). There are workarounds that dress up debt to look like equity, just like there are workarounds that ICOs used to dress up a security to make it look like a utility token. This perspective is useful when you look at the legality of Security vs Utility tokens ie laws change over time and vary by jurisdiction.
Four reasons why other jurisdictions will probably follow the SEC rules
Yes, the SEC only has jurisdiction over one market – America, but here are the four reasons why other jurisdictions will probably follow the SEC rules:
- America is still the biggest single market.
- SEC is known as a tough regulator that is not afraid to take cross border action.
- SEC has defined some clear rules. So entrepreneurs can plan around these rules.
- There is no single regulatory market in Asia, which is the growth engine of the 21st century.
There will be minor markets that differentiate by being easier on Utility Tokens, but unless they also offer a large investor pool, that will be “noise on the line”. Europe’s legislation/regulation will be interesting to watch. Unless Europe takes a differentiated position soon, the market will follow the SEC rules.
Utility Tokens can be used to improve CAC/LTV, which is a critical metric driving valuation
CAC/LTV = Customer Acquisition Cost/Life Time Value.
You can use this to evaluate the value of both Banks and Fintechs, as we described in this post from 2015. In fact just about any company can be evaluated using CAC/LTV.
Both CAC and LTV are complex in their own right, but it is the interaction between the two that is so often confusing or difficult.
Customer Acquisition Cost (CAC) is the metric to evaluate Marketing efficiency.
See: TokenFunder announces Canada’s first Security Token Exempt Market Dealer
Churn is the kryptonite of Superman Marketing. The problem with Churn it is not directly under the control of Marketing. This is where Product is key. Another way of saying Churn is “if customers think the product sucks, all that expensive Marketing is wasted”. Churn means customers cancel the service and then Marketing have to win new customers, which is far more expensive than retaining them.
Life Time Value is not static. LTV is all about getting the balance right between cross selling, upselling and low churn – too much selling to customers may increase churn. If LTV goes down, you have to reduce CAC. Product strategy, pricing, marketing, customer service all have to be in alignment.
The story of Banking in the 20th century can be summed up as Low Churn. We are statistically more likely to get divorced than change banks. There was no point in changing Banks, because the difference between banks was marginal. The Fintech disruption changes that. Now customers have more real choice and regulation is seeking to protect consumers from lock-in strategies that make it hard for them to switch.
Crowdsales are a great way for companies to sell a service aka reduce CAC. It is Internet Marketing 101. Crowdsales have been around for a while, but Utility Tokens enable Crowdsales on steroids.
Two ways that a Utility Token is different from a traditional crowdsale.
- The buyer has the comfort that if they no longer want to use the service they can sell their Utility Tokens. If everybody wants to sell their Utility Tokens because their service is no good, token holders will lose. If the service is great but the token holder’s life situation changes they can sell their Utility Tokens.
- The buyer feels more committed to the success of the venture. Some of that commitment is psychological and some of it is quite practical. A Utility Token is like a Loyalty Coin (more than it is like a Security) but it is a Loyalty Coin with some fungibility (you can sell it for cash if the venture/service is a success and demand exceeds supply).
Continue to the full article --> here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Bitcoin Market Journal | Evan Karnoupakis | Aug 19, 2019 Satoshi Nakamoto—A Japanese name conveying “wisdom” and being of “central origin.” What if that name was meant to conceal the true origins of bitcoin and blockchain technology? After all, Americans are notorious for confusing differences amongst Asian cultures. If you take the first and last letters of both the first and last names, you get S-I-N-O, meaning “of or related to China.” This may seem like quite a stretch until you recognize the dominant position of China in the Blockchain World. Consider that China: Controls 72 percent of bitcoin mining power. Owns two-thirds of blockchain patents, while having applied for 48 percent of blockchain patents compared to only 21 percent by the United States. Has a national policy that supports blockchain initiatives and has included blockchain in its current 5-year plan. Is the home of 25 percent of all new blockchain projects (according to Blockdata). Is the largest fintech market in the world, accounting for 46 percent of all fintech, and is home to four of the world’s ten largest fintechs. How could China have invented blockchain? After all, China doesn’t innovate; all they do is copy. Right? Wrong. First, ...
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Read More
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Bitcoin Market Journal | Evan Karnoupakis | Aug 19, 2019 Satoshi Nakamoto—A Japanese name conveying “wisdom” and being of “central origin.” What if that name was meant to conceal the true origins of bitcoin and blockchain technology? After all, Americans are notorious for confusing differences amongst Asian cultures. If you take the first and last letters of both the first and last names, you get S-I-N-O, meaning “of or related to China.” This may seem like quite a stretch until you recognize the dominant position of China in the Blockchain World. Consider that China: Controls 72 percent of bitcoin mining power. Owns two-thirds of blockchain patents, while having applied for 48 percent of blockchain patents compared to only 21 percent by the United States. Has a national policy that supports blockchain initiatives and has included blockchain in its current 5-year plan. Is the home of 25 percent of all new blockchain projects (according to Blockdata). Is the largest fintech market in the world, accounting for 46 percent of all fintech, and is home to four of the world’s ten largest fintechs. How could China have invented blockchain? After all, China doesn’t innovate; all they do is copy. Right? Wrong. First, ...
Read More
Read More
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Read More
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About NCFA Canada | C. Asano | August 23, 2019 TORONTO, Aug 23, 2019 – The National Crowdfunding & Fintech Association of Canada (NCFA) today announced that Paul Schulte, Founder and Managing Editor of Shulte Research in Singapore, has joined the Association`s international Advisory Board to advise in the areas of Banking and Financial Services (profile). Paul's roles in banking & financial services in the past 30 years include equity & fixed income research (buy & sell sides) in emerging markets. In recent years, technology has evolved rapidly to challenge all facets of financial services his core belief is: Liquidity & credit are everything; get bank liquidity & solvency right and the rest follows. Aside from being the founder & editor of Schulte Research, he has taught for 18 years IN MBA programs: Tufts, HK UST, HKU, LMU Hilton School in LA & SUSS in Singapore. He has also worked for the Number 1 investment bank from Switzerland, US, UK, Japan, PRC & Holland starting in 1990. Paul has been a source for the WSJ, NYT, Bloomberg, Nikkei, FT, Economist, Barron’s & Forbes. His clients include some of the largest sovereign, pension, mutual and hedge funds globally. He served as ...
Read More
Read More
Schulte Research | Paul Shulte | Aug 21, 2019 China is barreling forward on reforms and rolling out the crypto currency. It will be the first central bank to do so. This will give added momentum to Libra. Libra could become a new anchor market for global IPOs. Take this seriously. Join if you can. I’m pretty sure I’m right that it has backing from the very top of the US govt. 1. Cryptocurrency — The China coin is due to be rolled out in November. I hear that the distribution of the coin will be limited to 7 players: The big banks: CCB, ICBC, BOC, ABC. Alibaba and Tencent. Positive momentum,,, Union Pay. Interesting — to keep this alive. All others will be secondary. The PBOC head did on SUnday make an explicit reference to Libra. As I suspected, China rightly sees Libra as a challenge to China’s early commanding lead in e commerce and payments in all of Asia and through the Silk Road. It clearly is. Interestingly, HSBC and Stan Chart are cut out. No foreign banks in the consortium. No foreign firms in Libra (except, weirdly, Mercato Libra from Arge). 2. China ...
Read More
Read More
NCFA Canada | Craig Asano | Aug 20, 2019 TORONTO, ON Aug 20, 2019 The National Crowdfunding & Fintech Association of Canada (NCFA) is pleased to announce that the Exponential Group (Exponential Ventures, Exponential Capital and Exponential Markets) has joined NCFA as an industry partner. NCFA's industry partners are builders, investors and innovators who have provided a significant level of service and/or contribution towards the sustainability and growth of NCFA and related fintech sectors globally. We encourage the fintech ecosystem to support and collaborate with NCFA's global network of industry partners by engaging directly with their ventures of mutual interest. "Since founding NCFA in the summer of 2012, one of it's core missions has been working with communities of change that are passionate about enabling inclusive opportunities for 'big vision' companies seeking to change the world but need access to capital and resources to innovate competitive products and services that otherwise may not exist. These companies often focus on new economies of scale that look beyond 'for profit' models alone. Supporting and leading this change by developing new infrastructure and partnerships while leveraging new technologies can be a beacon of light resulting in massive transformation and change." - Craig Asano, ...
Read More
Read More
MIT Technology Review | Mike Orcutt | Aug 15, 2019 Complying with regulators could mean the difference between going mainstream and remaining forever on the margins of the global financial system. One of the biggest knocks against cryptocurrency has always been its status as a refuge for tech-savvy criminals. Even as some bigger players—particularly exchanges that handle many billions of dollars in crypto-wealth each day—have gone out of their way to play nice with regulators, the image persists, in part because some crypto firms have evaded regulators by moving to jurisdictions that are less strict. But the end of the lawless era may be nigh. A new set of global anti-money-laundering rules aimed at cryptocurrency exchanges has been handed down by the Financial Action Task Force, an intergovernmental organization that sets standards for policing money laundering and terrorist financing. The rules, which call on exchanges to share personal information about their users with each other, are controversial. Many cryptocurrency enthusiasts think the privacy that drew them to the technology could evaporate. On the other hand, complying with the rules is likely to make the industry more attractive to mainstream financial institutions and users. In other words, cha-ching. See: A Global ...
Read More
Read More
Pryor Cashman | Jeffrey Alberts and Dustin N. Nofziger | Aug 13, 2019 The Federal Reserve Board has announced plans to develop a real-time payment service that should appeal to FinTech companies and community banks. The Board announced last Monday that it will develop a new round-the-clock real time payment and settlement service to support faster payments in the United States. This new real-time gross settlement (RTGS) service, which will be known as the "FedNow Service," is anticipated to be available in 2023 or 2024. The Board is currently soliciting comments on all aspects of the proposed service in order to finalize its design and features. The Board's intention to operate a RTGS service is a win for community banks and FinTech companies, although it may threaten those FinTechs with business models centered around providing real time payments. The Board's plans were not developed in a vacuum. The Clearing House (TCH), which is owned by 30 of the world's largest commercial banks, previously rolled out a RTGS system known as the "RTP network" in November 2017 – some six years before the Board anticipates that its FedNow Service may first become available. The RTP network reportedly cost over $1 billion ...
Read More
Read More
Forbes | Ron Shevlin | July 1, 2019 OBSERVATIONS FROM THE FINTECH SNARK TANK A Seeking Alpha article titled Why Fintech May Not Be Fit For Public Consumption states: The year 2019 seems set to be a record-setting one for venture capitalist exit value capture by means of tech IPOs. But fintech doesn't seem to be a part of this picture. VCs are certainly putting money into fintech startups. There were 170 financings in the US in the first quarter of 2019. But, as Pitchbook says, 'not one of the most valuable fintech companies in the world seems particularly close to an offering.' " The article chalks this up to three primary causes: 1. Poor IPO performance in 2018. According to the article, "One reason nobody is in a hurry to go public is that the results of the last crop of fintech concerns that did go public have been unimpressive. Adyen and IntegraFin are prospering, but neither GreenSky nor EverQuote is "lighting up the heavens" according to Seeking Alpha. See: OurCrowd Double IPO Success Provides Crowdfunding Validation 2. Mega-round financing. Seeking Alpha postulates that investor interest in mega-rounds--e.g., Qatar Investment Authority's investment of $500 million in SoFi and Tiger Capital leading a round that raised $300 ...
Read More
Read More
CNBC | Kate Rooney | Aug 12, 2019 Money spent in venture capital and other alternative investments is surging as investors look for riskier, but higher-yielding investments. The trend coincides with relatively low returns from more conventional Wall Street investments such as stocks and bonds, and a drop in the number of publicly traded companies. “In a world where big institutional investors find themselves starved for returns, it’s not surprising that they have steadily increased allocations to private markets and you’ve seen capital continuing to flow into the asset class,” says McKinsey Partner Bryce Klempner. Many global investors are turning toward Silicon Valley instead of Wall Street in search of returns. The total invested in private markets hit all-time highs last year and continues to break multi-decade records this year. In the first half of the year, total investments in venture capital hit a 19-year high of $53.3 billion, according to data from Refinitiv published last week. That marked a 21% increase by total dollar amount compared to the first half of 2018. See: $5 million Equity crowdfunding extended to private companies The steady stream of funding comes alongside a drop in the number of publicly listed companies, rock-bottom global ...
Read More
Read More
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