ExpertInsights@IBV

Moving to a token-driven economy

Enabling the digitization of real-world assets IBM Institute for Business Value
2 Moving to a token-driven economy

Unlocking assets
Today, it takes one click to buy an airline ticket
or a new sweater, but if you want to buy stocks
or get a mortgage, transactions are more time
intensive. Whether it’s waiting for documents or
settlement, many types of transactions aren’t
instant. Assets like gold, real estate, fine art or
carbon credits are more difficult to transfer, often
obligating buyers and sellers to contend with
mountains of paperwork and lengthy procedures.
By representing physical assets as digital tokens
on a distributed digital ledger or blockchain, it’s
possible to unlock the value of real-world assets
and to exchange them in real time.
Moving to a token-driven economy 3

Accelerating the exchange of value

Today’s cross-border payment processes are Digitization of assets is a process in which the
fraught with time delays, complexity and ineffi- rights to an asset are converted into a digital Tokens in real estate
ciencies. Payments are the backbone of global token on a blockchain. Ownership rights are Global real estate value was recently
estimated at USD 217 trillion.1 In real estate,
commerce, but payment in real time has yet to transmitted and traded on a digital platform,
token ownership can be used to give the
be achieved. Whether it’s payments or other and the real-world assets on the blockchain are
holder a portion of the rights to a physical
asset classes, the ability to move real-world represented by digital tokens. The transparency property.
assets onto a blockchain offers the advantages of blockchain combined with the convenience of
Unlike a traditional real estate transaction,
of a secure digital platform, while retaining the transacting tokens can make previously illiquid the asset can be subdivided into numerous
characteristics of the asset. asset classes more accessible and attractive. fractions or tokens, which might then be
offered for sale. A purchaser receives benefits
Securitization is the process through which Many types of financial assets are already
from the asset such as rental income and
contractual obligations such as mortgages, car digital, such as when cash is represented as proceeds if the physical property is sold. By
loans, personal debt or receivables are pooled, numbers on a screen. But tokens enable certain using tokens, a relatively illiquid property
and their cash flows are sold as standard units assets to move swiftly across digital platforms becomes highly liquid with minimal friction in
to investors. Since the early 1970s this process or networks. Opportunities for cross-border buying and selling.

has become more common and broadly applied. trade increase as geographic barriers are
But “tokenization” goes one step further. removed. Tokenization can unlock new markets
Instead of restructuring cash flows like securiti- for previously frozen, underutilized or illiquid
zation, it monetizes the “right to use.” assets and offers possibilities for new types of
fractional ownership.
4 Moving to a token-driven economy

Token-based economy opportunities and challenges

Token-based assets are rapidly gaining called a central-bank digital currency (CBDC). Of course, fraud and extreme volatility are
widespread acceptance. The initial coin The goal is to complement electronic payment some of the concerns surrounding the token-
offering (ICO) market is a case in point. This modes from commercial entities with a driven economy as well, and the applicability
new method of crowdfunding recently broke state-sponsored solution that is as inclusive to ICOs and tokens of certain securities and
the USD 4 billion barrier globally.2 ICOs involve and ubiquitous as traditional banknotes and similar regulations is unclear. Some ICOs have
the creation and sale of cryptocurrency or coins used to be. been suspended because they were deemed
tokens to fund projects. With an ICO, a project to constitute illegal distributions of unregis-
In Sweden, so few people conduct transac-
has a viable alternative to the traditional tered securities.
tions with cash that many of the country’s
routes of obtaining money through banks or
banks don’t offer over-the-counter cash trans- Because today’s cryptocurrency exchanges
venture capitalists, which typically involve a
actions anymore.3 Although officials admit it’s operate without registering with regulators,
lot of time and some sharing of control.
not yet feasible and perhaps not advisable to participants don’t currently benefit from the
ICOs also bypass the limits of traditional go to a completely cashless society due to lack safeguards of a regulated stock exchange. For
crowdfunding by introducing a secondary of monetary policy, it’s becoming clear that example, on a stock exchange, you’re not
market to their funders. This secondary producing, distributing, handling and replacing allowed to trade with yourself because it’s
market is why, despite ICOs generally being banknotes and coins is expensive. These considered price manipulation. Yet this type of
considered high-risk ventures, many people physical forms of money also aren’t trackable trading happens regularly on Bitcoin
are willing to take the chance in the hopes of and can be subject to counterfeit and fraud. A exchanges.4
large payoffs later. well-designed CBDC solution moves toward
addressing these issues.
Digital currencies are another area that has
grown quickly. Recently, Sweden has begun
looking into creating a new form of money
Moving to a token-driven economy 5

Critical success factors

Because of the security and fraud risks, enter- In this scenario, users can freely join the
Tokens transform energy markets
prises have focused mainly on private, or closed, network, but must obtain permission or be
Making carbon credits easier to use is a great
blockchains where participation is limited to verified to participate in the validation of trans-
example of how blockchain can transform
known, trusted parties. At the other end of the actions. Once they join, they receive a key to get
existing markets. Carbon credits enable
spectrum are completely permissionless public in. Security-wise, it’s similar to a full-trust organizations to reduce their greenhouse gas
blockchains like Bitcoin that are centered on network, but with the accessibility and advan- emissions by paying third parties to create
cryptocurrency. Anyone with a computer can tages of a public network. The goal is to bring carbon emissions reductions.
join and the participants are typically unknown. enterprise capabilities, security, scalability, But the process of measuring those emissions
permissioned constructs and strong identity throughout a complex supply chain is
However, the ability to exchange an asset for
management to public networks where assets confusing and costly. Purchasing these
something else is achievable in public markets financial instruments is equally complex.
can live and move more freely.
and makes tokens significantly more valuable. These barriers leave companies at odds with
Security is vital to the success of a token-based Regulatory and government approval is another regulators, institutional investors and
economy, which is why there’s a need for a key to success. The potential of a token-driven consumers, all of whom are demanding
companies improve their social and environ-
hybrid approach: a public but permissioned economy can only be realized if it gains
mental governance.
blockchain. regulatory and government acceptance.
Veridium is working with IBM to help
transform the cumbersome carbon credits
into a new type of fungible digital asset that
can be exchanged or traded with less friction.5
By integrating the entire process of carbon
accounting and offsetting in a token on a
public, permissioned blockchain network,
ownership rights can be transmitted and
traded more easily.
6 Moving to a token-driven economy

Historically, regulatory entities and govern- appropriate anti-money laundering and financial
Tokens in emerging markets
ments often have inhibited innovation due to crime controls are put in place to enable them to
Entrepreneurs in emerging markets often
institutional resistance to something new. become a mainstream, more widely accepted
have more difficulty in obtaining capital
funding than their counterparts in developed
Although these groups may intrinsically be method for value exchange and money
markets. In most emerging markets, it’s inhibitors, their approval is vital. Including input movement.
expensive, slow and inefficient to from regulatory and government entities early
Privacy is another critical success factor. On
incorporate and manage a corporate on will allow them to better understand the
structure. Economist Hernando DeSoto digital exchanges, zero knowledge proofs (ZKP)
advantages of asset digitization, and so become
estimates that up to USD 20 trillion of capital are a powerful way to confirm that what is
part of the solution.
owned by the world’s poor is non-fungible private remains private.8
due to lack of quality institutions.6 Any time new channels are introduced for
At a high level, ZKP is used to prove that
By turning citizens in the world’s poorest commerce, they almost always become a
something is true without revealing any further
countries into recycling entrepreneurs, The potential vehicle for laundering money. This is
Plastic Bank aims both to lift millions out of information. ZKP can be used in environments
especially true in the early days, when platforms
poverty across the globe and clean up the where privacy and confidentiality are critical.
are less mature, have not evolved potential
ocean. Much of the plastic originates in For example, suppose an employee takes a drug
underdeveloped countries with minimal security controls and are not yet fully regulated.
test. With ZKP, the employer could receive only
waste management infrastructure where Many of the same benefits of cryptocurrency,
the pass-fail result of the test without any other
citizens often survive on less than a dollar a such as the privacy, openness and streamlined
day. The Plastic Bank worked with IBM and
data about the employee, such as medical
exchange of value, also could make it a fitting
service provider Cognition Foundry to history. In the context of token-based assets,
vehicle for illegal movement of money. As these
develop a blockchain-powered token ZKP brings a new level of security. Payments
rewards and recycling incentivization system
vehicles become more widely adopted and
and exchanges are happening, but extra details
to turn plastic into a new kind of currency.7 mainstream, it will be critical that the
about transactions can remain private and
confidential.
Moving to a token-driven economy 7

The move to token-based assets Experts on this topic

Token-based assets have the potential to These changes are expected to reshape global Jesse Lund
open up markets and offer new opportunities economies, empower underserved markets, Global Vice President, IBM Blockchain,
because of the decentralized nature of block- and usher in a new era of global commerce. IBM Industry Platform
chain. Much like the internet 25 years ago, a Imagine 15 years from now, the possible impact Jesse.Lund@ibm.com
steady progression of innovation can arise from of a token-based economy on societies around https://www.linkedin.com/in/jesselund
a real-time, interconnected world with the the world.
Shanker Ramamurthy
potential to sequentially and substantially
Consider these questions: General Manager, Strategy and Market
disrupt markets. Development, IBM Industry Platform
– What problems exist in how your assets are sramamur@us.ibm.com
Putting real-world assets into digital form using
traded or transferred today? https://www.linkedin.com/in/
tokens so they can be exchanged easily and shankerramamurthy
without friction promises to be disruptive. – How can your solution enable trusted data to

Between now and 2021, we expect the block- be shared across multiple parties? Bridget van Kralingen
chain opportunity for providers of blockchain – What benefits or efficiencies can you gain Senior Vice President, Global Industries,
platforms, services and owners of blockchain through transferability without a central Platforms and Blockchain
bvk@us.ibm.com
networks to grow five to ten times greater with intermediary authority?
https://www.linkedin.com/in/
a significant portion of this opportunity in the bridget-van-kralingen-89524415
– How can you aim for greater privacy and trust
digital token economy.9 Industries will reinvent
among members of your current business
themselves, and new digital assets and asset About ExpertInsights@IBV reports
network?
classes will give rise to entirely new primary
ExpertInsights@IBV represents the opinions
and secondary markets with low cost and – In what ways can you quantify the value asso-
of thought leaders on newsworthy business
minimal friction. ciated with making transactions settle faster, and related technology topics. They are based
such as reduced counterparty risk, reduced upon conversations with leading subject
settlement risk or balance sheet exposure? matter experts from around the globe. For
more information, contact the IBM Institute
for Business Value at iibv@us.ibm.com.
© Copyright IBM Corporation 2018 Notes and sources

New Orchard Road 1 Savills World Research. “Around the world in dollar and cents.”
Armonk, NY 10504 2016. http://pdf.savills.asia/selected-international-
Produced in the United States of America research/1601-around-the-world-in-dollars-and-cents-
May 2018 2016-en.pdf

IBM, the IBM logo and ibm.com are trademarks of International 2 “Value of Initial Coin Offerings market breaks through
Business Machines Corp., registered in many jurisdictions $4 billion barrier.” Consultancy.uk. January 29, 2018.
worldwide. Other product and service names might be https://www.consultancy.uk/news/15738/value-of-initial-
trademarks of IBM or other companies. A current list of IBM coin-offerings-market-breaks-through-4-billion-barrier
trademarks is available on the Web at “Copyright and trademark 3 Focardi, Sergio. “Central-bank digital currencies: toward a
information” at www.ibm.com/legal/copytrade.shtml. cashless society?” The Conversation. April 10, 2018.
This document is current as of the initial date of publication http://theconversation.com/central-bank-digital-
and may be changed by IBM at any time. Not all offerings are currencies-toward-a-cashless-society-93903
available in every country in which IBM operates. 4 Gandal, Neil, Hamrick, JT, Moore, Tyler, Oberman, Tali.
THE INFORMATION IN THIS DOCUMENT IS PROVIDED “AS IS” “Price Manipulation in the Bitcoin Ecosystem.” 2017.
WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING http://weis2017.econinfosec.org/wp-content/uploads/
WITHOUT ANY WARRANTIES OF MERCHANTABILITY, FITNESS sites/3/2017/05/WEIS_2017_paper_21.pdf
FOR A PARTICULAR PURPOSE AND ANY WARRANTY OR 5 IBM press release. “Veridium, IBM and Stellar To Digitize
CONDITION OF NON-INFRINGEMENT. IBM products are Carbon Credit Trading on the Blockchain Using Digital Tokens.”
warranted according to the terms and conditions of the May 15, 2018. http://newsroom.ibm.com/2018-05-15-Veridium-
agreements under which they are provided. to-Use-IBM-Blockchain-Technology-to-Create-Social-and-
This report is intended for general guidance only. It is not Environmental-Impact-Tokens
intended to be a substitute for detailed research or the 6 Hodgson, Camilla, “The world’s 2 billion unbanked in
exercise of professional judgment. IBM shall not be 6 charts.” Business Insider. August 30, 2017.
responsible for any loss whatsoever sustained by any http://www.businessinsider.com/
organization or person who relies on this publication. the-worlds-unbanked-population-in-6-charts-2017-8
The data used in this report may be derived from third-party 7 The Plastic Bank. “Tackling ocean plastic and global poverty
sources and IBM does not independently verify, validate with blockchain-based token rewards.” 2017. https://www.
or audit such data. The results from the use of such data are ibm.com/case-studies/plastic-bank
provided on an “as is” basis and IBM makes no representations
or warranties, express or implied. 8 Camenisch, Jan and Els Van Herreweghen. “Design and
implementation of the idemix anonymous credential system.”
https://dl.acm.org/citation.cfm?doid=586110.586114
07015807USEN-01
9 IBM Market Development and Insights and IBM Strategy
analysis.