Tokens – the problem is CHANGE!

Token is the buzzword d’jour.

Apparently, according to among others the Bank For International Settlements (BIS), lots of economic problems can be solved and vast value unlocked if digital balances are turned into ‘digital tokens’ and exchanged openly between consumers and business.

According to Citigroup, a proponent of one type of token, the Regulated Liability, sets out the parameters:

“A network that tokenizes regulated liabilities on the same chain may deliver a next generation digital money format without the downsides of more narrowly drawn proposals. Safe digital money needs to be: (a). regulated, (b). redeemable at par value on demand, (c). denominated in national currency units and, (d). an unambiguous legal claim on the regulated issuer.”

In short – like money but issued by a private entity rather than the government.

Other types of ‘tokens’, such as Stablecoins and Tokenized Deposits fall into the same category of privately issued liabilities.

There are, of course, a myriad of technical details involved mainly around the magic of Blockchain or DLT (Distributed Ledger Technology) but let’s for a moment just consider the impact on real commerce.

Let’s say I hold a newly issued/minted token worth $1,000 from Citigroup, let’s call it a CitiTok, and yes, I can go to any Citigroup office and get $1, 000 for it. Safe as houses, or at least safe as Citigroup.

[We will ignore for the moment the question why I would acquire a CitiTok if it does not carry interest – let’s move on]

So now I have this bright shiny ‘grand‘ in my safe  digital wallet on my mobile phone and decide to go to a retailer to but a new digital radio, on sale at say $425.

I buy the radio and pay with my CitiTok token. 

“That will be $425 and here is your change $575 in CitizenToks (issued by my bank Citizens bank)”

“Hold on a minute – I don’t want CitizenToks, I don’t trust Citizens bank, I trust CitiToks”

“Sorry Sir, I don’t have CitiToks, do you have any ChaseToks?”

“No”

“OK then, what if I discount the radio and give you $580 change in CitizenToks”

“Good deal, thanks, I will probably cash them in at the Citizens Bank around the corner, anyway”

Now I could have gone around the corner to my Citigroup ATM cashed in my $1,000 for ‘real’ money and paid with cash but sort of defeats the purpose.

See what happened there?

While all digital tokens will be issued and redeemed at face value, they will not be TRADED at face value!

In fact, they will be traded at a discount which is tied to the CREDIT rating of the issuer. Here Citigroup has a higher credit rating than Citizens and hence their tokens are ‘worth’ more.

Imagine if tokens were widely used?

Let’s buy the same digital radio again.

“That will be $425!”

“I have 200 ChaseToks, 125 BankofAmericaToks and 100 RepublicToks, OK?”

“No Sir, we don’t like BankofAmericaToks (too expensive to change), have you anything else?”

“No but if I give you 220 RepublicToks, it's all I have, will that be OK?

“Sure, deal done!”

See what is happening here? Not all tokens will be treated the same, they are not Government money! And all issuers are different, their fortunes rise and fall.

Economists have a fancy term for this “the singleness of money” and privately issued tokens break this singleness of money – not all 'money' is the same!

So, while at the consumer level this may appear trivial, when dealing with millions of dollars in business transactions it becomes a real issue of profit and loss.

And, can you imagine accounting for ‘cash or equivalents’ with hundreds of tokens that are trading at different discounts? Marking the cash book to market!!

So how could this work in practice?

The only way is for Tokens to be issued in a real market is with an approved credit rating and to be traded at a discount that is tied to that rating. 

Actual purchase ‘prices’ will vary according to the various tokens proffered and change offered. The price of an item will vary everyday as the stock price of the token issuer changes.

Every transaction will be like a Foreign Exchange transaction!

So, in real life, privately issued tokens will NOT be treated as payment instruments but as credit instruments

Have we been here before?

Yes, this is almost identical to the Commercial Paper market, which by the way, in the USA and some other jurisdictions, has already been ‘dematerialized’ or digitized. And settlement in those markets is widely recognized as being very difficult! As for Collateral Management – a nightmare!