Practical Use of Crypto-Assets in Business

The biggest crypto companies have long since become sponsors of famous sports clubs. So, Christiano Ronaldo is partnering with Binance, while its rival Crypto.com supports PSG. Even the famous Staples Center, home of the LA Lakers and the LA Clippers, has been renamed the Crypto.com Arena.  

However, in order to achieve full adoption of crypto assets in everyday life, it is necessary that, in addition to natural persons engaged in investing and trading cryptocurrencies, companies start using crypto assets in their business. In today’s article, we will look at the 3 most common types of practical uses of crypto assets in business. 

Investment of Companies in Crypto Assets 

The first and most well-known way is the investment in crypto assets. It is generally known that a big problem for any business is the lack of capital. However, what is less known is that unused capital, which is surplus capital that is not used purposefully, is also a negative phenomenon.  

The cost of holding money always exists and in the long run, it is absolutely unsustainable to hold money. Let’s add to this low interest rates. They automatically make savings in the bank, but also invest in risk-free securities such as government bonds, practically useless due to inflation.  

The unprecedented creation of money in the past few years caused by the pandemic was not accompanied by adequate growth in production. It entailed a high rate of inflation, which discourages holding money, which is worth less and less every year.  

In addition to investing excess funds, i.e. realized profits in expanding their own business – historically speaking, companies have always had the option of investing in the shares of other successful companies. This happens in various securities, gold, oil, real estate, etc.  

Since a few years ago, companies have had the option of investing in crypto assets as a form of diversification. It is no coincidence that some globally very successful companies like Micro Strategy have decided to invest in Bitcoin; people already recognized this as digital gold and a safe haven. 

Besides direct purchase of crypto assets, companies also have indirect ways of investing. Investors reflect their interest by purchasing shares of companies dealing with crypto assets or owning them, like MicroStrategy. They also buy shares of mining companies. Additionally, they purchase digital tokens linked to the ecosystem of a large and successful company, such as the BNB token, which is directly tied to the success of the Binance ecosystem. 

For the sake of curiosity, we note that the increase in the price of Micro Strategy shares amounted to 181%, while the growth in the value of Bitcoin amounted to only 59% in the last year.  

This fact raises questions what will be the valuation method of companies investing heavily in crypto in case when the value of the crypto held on companies’ balance sheets exceeds the market cap of the company itself?! But that will be the topic in some of the future articles. 

Tokenization of Business 

Another way companies can use crypto assets is by issuing their own token. This is called the tokenization of their business model. But what exactly is a token? A token is a file or data on the blockchain.  

It contains a right, such as ownership rights to property, shares, intellectual property, financial instruments, or rights to profits or interest. It can also be the right to demand the fulfillment of an obligation. 

Tokenization is the digitized process of issuing tokens on the blockchain. Digital tokens, by their economic nature, are multifunctional business instruments. They create new sources and forms of value, unlike single-purpose financial and money instruments.  

Tokens are native instruments of digital platform business models developed on open-source technologies (Web3). They also innovate Web2 business models. 

Why would companies consider issuing tokens in the first place? The essence is in the improvement of existing business models, which can enable:  

• access to a larger number of investors; 

• easier access to capital; 

• easier payment; 

• fractionalization of assets; 

• greater efficiency (without intermediaries); 

• automation; 

• lower costs; 

• transparency. 

The common feature of all types of tokens is that they are generally transferable in a direct exchange between buyer and seller (peer to peer.) Also, the issuer provides guarantees to the holder of the token, unlike virtual currencies where such guarantees do not exist (e.g. Bitcoin has no issuer, nor does anyone guarantee its value). Distributed ledger and blockchain technology that issue tokens allow one tokenized instrument to be multi-purpose at the same time, being: 

• financing and/or investment instrument (may give the right to interest, part of income or profit); 

• a consumption instrument used to exchange for goods and services; 

• capital gain as an outcome of the difference between purchase and sale price; 

• incentive instrument for token holding in the form of interest: staking which does not represent solely an investment mechanism, but also a mechanism for enabling security and transaction verification as well; 

• governing instrument giving token holders the right to participate in the decision making process by giving proposals and voting; 

• reward or incentive instrument for the holder’s activity or behavior (new value for consumers). 

This means a company can issue digital tokens to raise capital for its operations. They do this without giving away equity or creating typical debt obligations. Instead, investors get compensated by receiving interest on their tokens. This interest can be in FIAT and crypto. Investors might also have the right to participate in part of the income or profit. 

Besides that, investors in tokens can be rewarded for their engagement or certain beneficial activities. These activities benefit both the issuer and the token holders. Investors can also be incentivized to hold tokens. For example, staking enables network security and transaction verification. 

Why should every company in the digital economy consider issuing tokens or tokenizing their business? There are several reasons. 

Innovation 

Any company that is the first to issue a token in its industry will be marked as innovative and will differentiate itself from the competition; 

Non-banking means of finance 

Access to new types of investors who can invest smaller amounts of money 

Community building and maintenance 

Namely, through the token, it is possible to achieve a synergy of interests of all stakeholders. 

New sources of income through digitalization of products and services. 

The importance of tokenization in the coming years will be huge according to Boston Consulting Group (BCG). Namely, BCG came up with a study that in 2030, 10% of the world’s GDP (around 16 trillion dollars) will be in the form of tokens on the blockchain.  

Also, Larry Fink, the founder and CEO of BlackRock, the world’s largest asset manager, made a public prediction that the next generation of markets will be tokenization of securities due to the instantaneous settlement, lower fees, and complete transparency. 

Crypto Payments 

A third way companies are already using crypto in their business is to make payments. The term payment is not entirely adequate, as it implies the use of legal tender (FIAT currency), and in most jurisdictions, crypto assets do not have the legal status of money.  

However, in addition to the purchase agreement, which implies that one party sells goods or services, and the other pays with money, it is also allowed to conclude a barter agreement where the parties exchange goods and services without the participation of money.  

Thus, it is possible to exchange crypto assets for goods, which is an increasingly common case in practice. Due to the volatility of crypto assets, which is not negligible (Bitcoin or Ether for example), stable coins are most often used for this purpose, which actually represent tokenized FIAT currencies on the blockchain. The most famous and most used is Tether (USDT), having a market cap of 115 billion dollars. 

The main reason companies use stablecoins is their speed and simplicity compared to traditional banking. This is especially true for cross-border payments, which can take days with traditional banks. 

The modern financial system, SWIFT, is based on technology from the 70s. It includes the receiving bank, sending bank, and correspondent banks, making the process expensive and slow. This system also requires fulfilling various formalities, like sending excessive documentation.  

Stablecoins solve these problems. They take only a few minutes to transfer money across the globe. The banking system does not work equally well everywhere. In some parts of the world, banking transactions are impossible or very costly. 

Stablecoins address this issue. The estimated value of global payments annually is $150 trillion. To put this in perspective, the global GDP is about $105 trillion. The potential for stablecoins in payments is immense. It is reasonable to expect more companies to start using stablecoins.