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
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Forbes | Michael del Castillo | Feb 19, 2020 Credit card giant Visa has granted its principal membership to a cryptocurrency company for the first time. Officially awarded to cryptocurrency exchange Coinbase in December, but not revealed to the public until today, the membership cuts out a crucial, and expensive middleman from the process of issuing a debit card that lets users spend their own bitcoin, ether and XRP anywhere Visa is accepted. Perhaps even more importantly though, the principal membership makes Coinbase the first cryptocurrency company with the power to issue debit cards for others, including other cryptocurrency companies and more traditional firms alike. Visa confirmed it granted Coinbase the principal membership, clarifying that the company itself won’t actually accept cryptocurrency when the project goes live later this year. See: Visa R&D Arm Develops a Blockchain System That Could Replace Financial Data Aggregators While Coinbase says it’s not planning on issuing cards to others anytime soon, the principal membership status marks a potentially important new revenue stream for the company, which Forbes estimates saw a 40% decline in earnings last year. By simplifying the process of spending cryptocurrency anywhere Visa is accepted, the membership also lays the foundation for ...
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Read More
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Read More
Forbes | Michael del Castillo | Feb 19, 2020 Credit card giant Visa has granted its principal membership to a cryptocurrency company for the first time. Officially awarded to cryptocurrency exchange Coinbase in December, but not revealed to the public until today, the membership cuts out a crucial, and expensive middleman from the process of issuing a debit card that lets users spend their own bitcoin, ether and XRP anywhere Visa is accepted. Perhaps even more importantly though, the principal membership makes Coinbase the first cryptocurrency company with the power to issue debit cards for others, including other cryptocurrency companies and more traditional firms alike. Visa confirmed it granted Coinbase the principal membership, clarifying that the company itself won’t actually accept cryptocurrency when the project goes live later this year. See: Visa R&D Arm Develops a Blockchain System That Could Replace Financial Data Aggregators While Coinbase says it’s not planning on issuing cards to others anytime soon, the principal membership status marks a potentially important new revenue stream for the company, which Forbes estimates saw a 40% decline in earnings last year. By simplifying the process of spending cryptocurrency anywhere Visa is accepted, the membership also lays the foundation for ...
Read More
Read More
Forbes | Ron Shevlin | Feb 21, 2020 LendingClub, one of the nation’s first peer-to-peer lenders (oops! I mean, “marketplace” lenders—real ”peer to peer” lending lasted all of about a month), announced it plans to acquire Radius Bank, a relatively small Boston-based bank, unknown to most people outside of the industry (and within, for that matter). The press release announcing the pending deal contained the usual platitudes from the acquiring CEO: “This is a transformational transaction that allows us to reimagine banking in a way that is free from legacy practices and systems. We will create a category-defining experience for our members that will dramatically enhance the resilience and earnings trajectory of our business.” Despite the buzzword-laden proclamation, this acquisition makes a lot of sense for both parties for reasons that go beyond what many observers have reported on. The Short-Term Benefits Aren’t About Radius Bank Much of the discussion about the deal has focused on the obvious and shorter-term benefits of the acquisition, including a more stable source of funding and a $40 million reduction in bank fees and funding costs, both of which will help boost the spread Lending Club earns on the loans it keeps on its ...
Read More
Read More
Pymnts | February 18, 2020 Online bank N26‘s decision to exit the U.K. has customers feeling left behind, CNBC reported. The Berlin-based digital bank said it would not be able to operate in the country anymore in the wake of Brexit, as it will no longer have a license to do business there. The startup will shutter all of its U.K. locations on April 15. N26 made its entry into the U.K. in October of 2018 — more than two years after the U.K. made its decision to leave the European Union, but six months before Brexit was officially planned. However, the fact that N26 used Brexit in its reasoning to leave the U.K. hasn’t sat well with some. One customer in London told CNBC that he was “outraged” that the company had used Brexit as an excuse, calling it “fake news.” He said N26 needed “an excuse” for investors, and had found in Brexit a convenient scapegoat so that it wasn’t N26’s own failure. Others said they were disappointed in the closure, enjoying the extra bonuses that come with accounts. See: Majority of London FinTechs not prepared for no-deal Brexit N26 is one among a new breed of branchless ...
Read More
Read More
TechTalks | Andrey Sergeenkov | Feb 12, 2020 As 2018 drew to a close, crypto skeptics were ready to write obituaries after the devastating bear market that year. Talk of blockchain and cryptocurrency demise was rife among seasoned analysts. Just over twelve months later, the industry has shown remarkable resilience to rebound back. Regulators are a segment of stakeholders who seem to be appreciating that crypto is here to stay, with Federal agencies in the US and Chinese authorities praising the potential of this technology in their respective countries’ digital future. Blockchain technology has gained independent credibility over and above its application in cryptocurrency. The opportunities are endless as the emerging enterprise sector continues to draw plaudits. So far, this technology has grown in spite of regulatory infrastructure rather than because of it. A suitable regulatory climate is essential for widespread adoption. See: The Decade in Blockchain — 2010 to 2020 in Review This is how Jason Lee, Vice President of NEM Foundation, describes the industry’s evolution: “2017 was the year of the blockchain craze. In 2018, we hit the brakes towards the end of the year. For 2019 and the start of 2020, Don Tapscott at the World Economic ...
Read More
Read More
Betakit | Isabelle Kirkwood | Feb 10, 2020 PwC Canada and CB Insights have released the MoneyTree report on Canadian investment trends for the second half and full year of 2019 (all figures in USD). “Increased competition for funding from global investors has created a healthy funding environment for Canadian startups.” Last year saw Canadian venture capital (VC) funding rise to a record-setting $4.1 billion. Although Canadian funding experienced an 11 percent decline in deal count last year, the report tracked a 16 percent increase in year-over-year funding. Some massive rounds from last year were not included in this year’s report, including Verafin’s round, as the company did not disclose the debt and equity break out, and Sonder’s $210 million raise as the company is now headquartered in the United States. A strong year for AI, FinTech, cybersecurity Artificial intelligence companies saw increased investor attention in 2019, investment in Canadian AI companies more than doubled in the second half of 2019. Last year’s funding to Canadian AI companies saw a 49 percent year-over-year increase in 2019 to $658 million with deal count reaching a new record at 57 deals. See: The paradox of 2020 VC is that the largest funds ...
Read More
Read More
Forbes | Billy Bambrough | Feb 18, 2020 Samsung, the South Korean technology giant and creator of the Galaxy smartphone range, could soon become one of the biggest drivers of bitcoin, crypto and blockchain adoption. While bitcoin traders and investors are focused on the upcoming bitcoin halving, a looming U.S. bitcoin crackdown, and rocky crypto trading volume, Samsung is putting the power of bitcoin, crypto and blockchain in people's hands. Last week, Samsung, which makes up 19% of global smartphone sales and last year sold almost 300 million phones according to data site Statista, unveiled it latest Galaxy smartphone range with its new flagships the S20, S20+ and S20 Ultra models. These new 5G enabled smartphones build on the Galaxy S10 ranges' bitcoin, cryptocurrency and blockchain support, which last year was revealed to boast a built-in bitcoin and cryptocurrency wallet. "We created a secure processor dedicated to protecting your PIN, password, pattern, and Blockchain Private Key," Samsung wrote on its website, announcing the new S20 Galaxy phones. "Combined with the Knox platform, security is infused into every part of your phone, from hardware to software. So private data stays private." Samsung's so-called Blockchain Keystore was introduced last year, initially with ...
Read More
Read More
Bank Innovation | Rick Morgan | Jan 22, 2020 HSBC is improving payments for its business clients through a suite of tools launched last week called Treasury APIs, which are designed to speed up payments for small businesses and large corporate clients alike. HSBC’s Treasury APIs embed payment capabilities into other workflows. According to the bank, this allows treasurers to make payments from their own workstations without logging into a proprietary bank platform. Clients receive confirmation that a payment request has been received and can track payments from their accounts to recipients. Nadya Hijazi, head of digital, global liquidity and cash management at HSBC, said clients using the tool include e-commerce platforms, treasury teams and mutual fund teams. The new products let HSBC business clients pay suppliers more quickly; Hijazi said payments that used to take anywhere from one or two days in the past now take about 10 or 20 seconds. HSBC, which is headquartered in London, has $2.7 trillion in assets. Treasury APIs are now available in 27 markets throughout Asia, Europe, the Middle East and the Americas. The bank piloted the tools in India last summer. See: HSBC Canada Breaks from Big Six Banks in Call to Encourage Fintechs In addition to paying suppliers, HSBC business customers can also issue ...
Read More
Read More
Investment Executive | James Langton | Feb 12, 2020 Regulators grapple with crypto trading Global securities regulators are monitoring the emerging crypto asset sector, but aren’t yet seeking to establish global standards for crypto trading platforms. The International Organization of Securities Commissions (IOSCO) has issued a report detailing the risks associated with crypto trading, including concerns about platform access, asset safekeeping, price discovery, transparency and conflicts of interest. See: SEC Commissioner Speech: A Proposal to Fill the Gap Between Regulation and Decentralization Many of these same issues arise in the regulation of traditional securities trading too, the report noted. So, to the extent that particular crypto assets are considered to be securities, “the basic principles…of securities regulation should apply,” the report said. However, crypto trading platforms may also raise novel regulatory concerns due to their particular business models, IOSCO warned. The report said that some regulators have determined that their existing frameworks for overseeing traditional trading venues will also apply to crypto trading, but that some are also considering new requirements “to account for the novel and unique characteristics” of crypto trading. The group’s report — which was prepared by an IOSCO committee led by the Ontario Securities Commission (OSC) — ...
Read More
Read More
Wharton Knowledge | Kalin Anev Janse | Oct 10, 2019 Can Fintech Make the World More Inclusive? The potential gains for the start-ups driving fintech (financial technology) are obvious. But the possibilities for extending financial services to the underserved – or those without services at all – are already being realized. With proper oversight and regulation even more is possible, notes this opinion piece by Kalin Anev Janse, secretary general and a member of the management board of the European Stability Mechanism (ESM), the Eurozone’s lender of last resort, and Gong Cheng, senior economist and policy strategist at the ESM. “It is thus essential for researchers and technical experts to shed light on the considerable social impact and promise fintech is offering and to find solutions to contain potential risks.” Financial inclusion – making banking services accessible and affordable to everyone globally – has been a buzzword for the last few years. Technology-based financial services have propelled innovation to “bank the unbanked” making daily financial operations accessible and user friendly for almost everyone – especially people who had no access to banks before. Emerging markets like China, Kenya and Indonesia are leapfrogging the developed world. So – how is fintech making the ...
Read More
Read More
Coindesk | Nathan DiCamillo | Feb 13, 2020 Fresh on the heels of an $18.3 million Series A funding round in August, crypto lending startup BlockFi has secured a $30 million Series B. Announced Thursday, the new funding will help the firm expand both its product offering and geographic footprint. “We decided to opportunistically raise the Series B to expand the balance sheet and give ourselves the ability to invest in the things we’re doing this year,” BlockFi CEO Zac Prince said in an interview. The Series B was led by Peter Thiel’s Valar Ventures with participation from repeat investors Morgan Creek Digital, PJC, Akuna Capital, CMT Digital, Winklevoss Capital and Avon Ventures. New investors included Castle Island Ventures, Purple Arch Ventures, Kenetic Capital, Arrington XRP Capital and HashKey Capital. Having Hong Kong-based HashKey as an investor will help BlockFi expand into Singapore later this year, Prince said. While the company has been serving customers in the region, this would be its first physical presence there. See: Why DeFi’s Billion-Dollar Milestone Matters In the Asia-Pacific region, BlockFi expects to attract a lot of institutional customers, Prince said, given the number of mining companies, asset managers, exchanges and market makers that ...
Read More
Read More
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