Four broad propositions

Crypto projects often combine several purposes. Separating them makes both benefits and risks easier to see.

A native digital monetary asset

Bitcoin enables people to hold and transfer a scarce digital asset without a central issuer maintaining the ledger or promising redemption.

In practice: an investor can withdraw BTC from an exchange to a wallet it controls. The investor no longer depends on that exchange to approve a later transfer, but becomes responsible for key security, recovery and correct transaction execution.

The technical ability to hold and transfer BTC does not establish what it should be worth. Its market value depends on continued demand for the properties users attribute to it. The payment mechanism and the investment thesis therefore need separate assessment.

A shared programmable environment

Ethereum and other smart-contract platforms allow applications to use a common recorded state and invoke one another's logic.¹²

In practice: a lending application can receive collateral, check a programmed borrowing limit and transfer a loan token within one execution environment. The program can apply the stated rule consistently. It cannot by itself guarantee that an external price input is accurate, that the collateral can be sold at that price or that the loan token will retain its assumed value.

The proposition is not merely “finance with more software”; conventional finance already uses extensive automation. The distinctive question is whether shared execution across participants reduces reconciliation, enables useful coordination or creates access that the feasible alternatives do not provide.

A transferable reference-value asset

Stablecoins seek to combine a familiar denomination, such as the US dollar, with transfer on a blockchain.

In practice: a company can send a dollar-referenced token to a supplier on a Sunday. The network may process the token transfer even though banks are closed. The supplier may nevertheless need an issuer, exchange or dealer to convert the token into bank money. Continuous token transfer and continuous access to usable dollars are different services.

The assessment therefore includes the value-support mechanism, redemption rights, banking access, market liquidity and any power to freeze or restrict tokens. Chapter 6 examines those arrangements.

A new representation of an existing claim

A fund share, bond, deposit or other conventional claim can be represented as a token. The token may support common processing, programmable restrictions or exchange against another token. It does not remove the underlying issuer, administrator or legal arrangement.

In practice: an eligible investor buys tokenised fund shares. A blockchain records the token transfer, while the fund administrator maintains eligibility, valuation and redemption processes. If the token moves to an ineligible address, the network's technical record does not by itself determine whether the fund recognises a valid transfer of the legal interest.

Binance has also begun accepting BlackRock's tokenised Treasury fund, BUIDL, as off-exchange collateral, so traders can post the token with a custody partner while still trading on the exchange.1 For bonds, UNESCO's factsheet describes potential cost savings of 35-65% for digital bonds, but notes that as of September 2023 only $500 million of digital bonds had been issued, against $6.3 trillion of US bonds.2

Tokenisation is useful when the new representation improves a real process. Merely replacing one database entry with a token does not prove that issuance, servicing, settlement or customer access has improved.

These four propositions can coexist without rising or falling together. A portfolio manager can reject a particular token valuation while supporting tokenised collateral. A payments company can use stablecoins while minimising its exposure to them. A useful application can operate on a network without making every asset associated with that application attractive.