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TerraBitcoin: “An innovative way to raise capital”

Article by Paolo Barrai of the new association TerraBitcoin

The cryptocurrency world needs new stimuli in order to restart. The year 2017 was the year of the bubble (just like the year 2000 and the dotcom bubble). The year 2018 was characterised by the crypto winter and the collapse of prices to extremely low and interesting levels.

2019 is a year of slight recovery: the capitalisation has risen “only” by 120% from January to today and the price of bitcoin has increased “only” by 190%.

The year 2020 could be the year of new growth for the crypto market. But for this to happen, mass adoption is necessary. Cryptocurrencies have to be useful and have to be used. Otherwise, blockchains are beautiful infrastructures but if nobody uses them they lose value.

Regulators and governments around the world have been very busy in the last 20 months. They are trying to regulate a world that is unlikely to be 100% controlled. At TerraBitcoin, we are convinced that compromises are being made between the total control desired by regulators and governments and the economic growth of the crypto market itself.

After all, the old world continues its struggle to grow and withstand increasingly negative interest rates. The only way to drive economic growth in the next decade is through the tokenisation of the economy.

By now everyone knows what is bitcoin or what is a blockchain. This asset class can be considered a commodity.  More volatile than many commodities but nothing else.

So, the very concept of bitcoin (or other crypto) will not bring new liquidity to the industry, unless bitcoin alone can become a real store of value, something that currently leaves many asset managers relatively sceptical.

In the public perception, cryptocurrencies are still a cause for concern. It goes from those who consider crypto as the money of criminals (I would say an outdated position. Only some still believe in these medieval tales since everything on the blockchain is traced forever and without the possibility of corruption of intermediaries, as often happens with the global banking system) to those who consider them risky and highly volatile.

In both cases, mass adoption is a fantasy. A new approach is required.

How to raise capital

The creation of mass adoption was attempted with ICOs and IEOs, but these are no longer the right tools. There are huge challenges in raising capital for a startup or a business by issuing utility tokens.

The so-called utility tokens can increase in value only if they are used by a very considerable amount of people compared to the number of tokens issued by a startup and if they can decrease in number over time (scarcity effect).

However, the reduction in the number of tokens (burning) puts the token at risk of being classified as a security token.

Moreover, startups are by definition risky and are therefore definitely not the right driver for mass adoption. 

At TerraBitcoin we are sure that the mass adoption of cryptocurrencies is now imminent and is moving on 4 different paths, namely

  • Digital currencies issued by governments or central banks (anchored to fiat currencies), like the one they want to create in China;
  • Digital currencies issued by multinationals (anchored to baskets of currencies), as in the case of Libra, for example;
  • Tokens representing assets that have ownership rights on the part of the token holder. First of all, Gold and precious metals, but also any other type of asset that maintains value over time. This category of tokens will become important in case of loss of confidence in the fiat currency or in the event of an increase in negative interest rates;
  • Security Tokens

With regard to security tokens, it is worth pointing out that a strong development will come from the tokens linked to real estate. Recently, there have been many announcements of tokenisation operations for this asset class. 

Real estate has always been considered a low-risk investment and so the introduction of tokens will guarantee in a few years a significant mass adoption and good liquidity in the case of tokenisation of major properties.

There are also other security tokens that are not representative of “shares” or “shares in companies”, but that can give advantages to investors which shares sometimes do not offer.

A token financing solution that, if well designed, leads to benefits for both the company and the investor.

An example of innovation in this direction comes from the tokens issued by many cryptocurrency exchanges. 

Binance and Bitfinex, for example, have launched a new type of token that in our opinion has enormous potential for development in the economic reality of the next decade. These are tokens that are used to get discounts on fees and preferential treatment for accessing certain events or services. Most importantly, there is a buyback on the market (in the case of Bitfinex) of the tokens themselves made with a predefined and non-changeable percentage of the company’s turnover.

In the case of Bitfinex, the purchase of tokens will always take place until only one token remains on the market. The scarcity effect generated could lead the token evaluation to tend towards infinity over time.

Companies could use similar forms of financing with clear advantages. We believe that this mode could become a standard for the market and even replace the traditional concept of shares.

Issuing a token is an easy way for a company to finance itself without diluting the entrepreneur’s shareholding and without having to deal with a banking system increasingly sidelined as a controller and an old-age cane for a diseased financial system.

But how would such a token work? An example with Ferrari

It is quite simple to illustrate it with an example. We exclude startups from this token financing opportunity because they are risky, which means they are of much less interest to the large mass of investors and therefore would bring little adoption to the crypto market.

Let’s take an existing company, healthy and with a good turnover. We will use Ferrari because everyone knows it, but we could take any company. In 2020, Ferrari could have a turnover of 4 billion euros.

Let’s suppose Ferrari needs to raise 500 million for the launch of a new business and doesn’t want to use either banks or the bond market. The company could issue a token that does not give the right to vote or to have shares but gives the right to enjoy a percentage of the turnover. 

Suppose that 0.2% of Ferrari’s turnover, which is 8 million (in the case of the 4 billion), could be made available forever or even for a certain number of years to Ferrari token holders.

The parameters of the new form of funding

It is obviously important to design the token with certain parameters in mind:

  • Duration of the token (limited to a total of years, but also of infinite duration and linked to the life of the company as in the case of shares);
  • Convertibility: What happens at maturity?
  • Convertible into equity token and/or capital redemption;
  • Percentage of turnover made available: it can be constant or decreasing over the years. There can be a floor and/or a cap;
  • Distribution or Burning: Percentage of Turnover distributed (as if it were a dividend) or Percentage of Turnover used for a token buyback (burning).

The models can be the most varied and this flexibility is also appreciated by the company that can best adapt the token model to the characteristics of its business.

This percentage of the turnover is not linked to the board of directors of the company, but is linked to the prospectus of the token emission and obliges the company a priori. As a result, the investor has a much better guarantee compared to the dividend

The company creates an additional constraint, but does not bring in new partners by diluting the capital nor does it bind itself with banks or cumbersome private equity. These tokens are considered to be a debt for the company.

In the case of burning, it would also be interesting for the investor from a tax point of view, given that the taxes are postponed to the moment of the sale of the token and not to the collection of the dividend.

One can also think of hybrid models of burning tokens and dividends. But not only that. The token can be used by the investors to access discounts on Ferrari cars or company gadgets. It allows them to access events intended for Ferrari VIPs (such as Grand Prix events).

Obtaining a discount or entering an event involves the use of a certain number of tokens for the investor: as a result, the company reduces the cost of the token and builds customer loyalty.

Let’s go even further: token staking can be encouraged. That is, if a certain number of tokens are held, investors are entitled to several discounts or a special fast lane (see airports) or an extra dividend, etc…

And we could go on for hours in proposing Tokeneconomics models.

This is a combination of financial engineering and marketing. A form of consultancy that is difficult to find when working with leading and renowned advisors who have little knowledge of this subject.

The company would be raising capital at an attractive cost. There are very few constraints, and, if well managed, the token can create a virtuous cycle. Investors may feel part of a family, with the token becoming a powerful tool to strengthen the company’s image, brand, customer relationship and a powerful marketing tool.

Token financing has just started but the future is bright. There are great opportunities to be seized, both by entrepreneurs and prudent investors.

This article was prepared with the help of the TerraBitcoin Ltd team. The team has launched several blockchain initiatives in many parts of the world. We are advisors to some companies in Europe that are evaluating the issuance of tokens with some of the features illustrated in the article.