Tokens + tokenization + DApps

The year of the token

by Manie Eagar, Co-founder and Chair of the Digital Finance Institute

One of the ‘hot’ topics at the recent Money 2020 Conference In Las Vegas was tokenization thanks to the Apple Pay announcement and the increasing awareness of ‘this bitcoin thing’ as the bankers and regulators there elected to refer to Bitcoin projects.

The first question of course is, now that Apple has patented their version of it, what are tokens and what is ‘tokenization’?

The wiki explanation reads as follows: “Tokenization is the process of replacing sensitive data with unique identification symbols that retain all the essential information about the data without compromising its security.

“The concept of tokenization, as adopted by the industry today, has existed since the first currency systems emerged centuries ago as a means to reduce risk in handling high value financial instruments by replacing them with surrogate equivalents. In the physical world, coin tokens have a long history of use replacing the financial instrument of minted coins and bank notes. In more recent history, subway tokens and casino chips found adoption for their respective ecosystems to replace physical currency and cash handling risks such as theft.”

Antiquated payment systems are being challenged by the raft of new alternative digital and cryptocurency payment systems - Apple Pay on the one end and the bitcoin blockchain on the other.

Tokenization in alternative payment systems

Building an alternate payments ecosystem requires a number of entities working together in order to deliver near field communication (NFC) or other technology based payment services to the end users. One of the issues is the interoperability between the players and to resolve this issue the role of trusted service manager (TSM) is proposed to establish a technical link between mobile network operators (MNO) and providers of services, so that these entities can work together. Tokenization can play a role in mediating such services.

An example here is the use of the Kenyan M-Pesa token that converts money to ‘airtime’ and back to a financial value at point of purchase or transfer between transacting parties on the Safaricom/Vodafone.

For Brian Kelly from CNBC, “The concept of a “tokenization” or a one-time card number that does not transmit personal data is a similar concept to the Bitcoin blockchain. Certainly technology purists will argue that the blockchain technology at the heart of Bitcoin is superior, but to the consumer, the difference is indistinguishable. (Title: Why Bitcoin could get a boost from ‘Apple Pay’).

The Bitcoin blockchain more than adequately addresses the tokenization aspect of transactions. Kelly argues that if Bitcoin applications could follow the same strategy of Google’s Android as opposed to Apple’s closed ecosystem approach the whole market could become an opportunity.

The consumer does not care what technology lies behind the payment applications that they apply as long as it is secure, frictionless and accessible. Of course Apple is leveraging its brand and that is one hurdle that Bitcoin has not yet overcome – to instill a high level of confidence and demand from the merchant and consumer alike with positive brand recognition.

Kelly continues: “Offering a product that is open source and virtually free is how Android became the top mobile operating system in the world. Digital currencies should borrow from Google’s playbook in order to compete with Apple.

“The open-source nature of digital currencies gives them a major competitive edge as the best technology can be immediately integrated without the need to navigate a corporate culture. This gives digital currencies a first mover advantage as consumers begin to embrace a digital payment network. Android was able to gain market share by offering apps that Apple had yet to approve and therefore opened itself to the early adoption of game changing tech.”

Even the CEO of Visa has announced recently that tokens are their new network revenue stream. Charels Scharf declared that “not only is tokenization ‘the single biggest change that’s been made in the payment networks easily over the past 15 or 20 years and maybe longer,’ but he spoke about how it enables Visa to control the data and to potentially charge a lot more for it” (quoted in

“Tokenization has opened up this whole world for us to be able to use digital devices to be a meaningful part of the payments flow in a way that (those payments) wouldn’t have in the past,” Scharf told attendees at the Bank of America Merrill Lynch 2014 Banking & Financial Services Conference. “Those of us that participate in the token infrastructure can make decisions on who you want to give access to, whether you want to charge for it and things like that. So it’s hugely meaningful to our ability to open up new channels and to make sure there’s clarity in terms of who controls the payment information. We put a rate schedule out there for tokenization. We said we’re waving everything through the end of 2015. We want people to adopt tokenization. We think it thus creates a meaningful set of opportunities that would be difficult for us to participate without something like tokenization.”

Looking for the next big things? Bring on the token-economy

On my speaking rounds I often get asked what is the next big thing and where will the new initiatives and startups come from in the cryptocurrency space? I believe the answer lies in securitization and ease of use of the digital finance systems currently under development and in decentralized tokenized apps.

In the words of David Johnson, founder of the DApps Fund which has helped with MaidSafe, API Network, Swarm, Storj, Rivetz and Factom, the “DApps Fund I is building the future of Decentralized Applications. DApps are based on a token-economy utilizing a block chain to incentivize development and adoption.”

Attending the Factom presentation at Money 2020 CEO Paul Snow referred to their white paper where they explain how “in today’s global economy trust is in rare supply. This lack of trust requires the devotion of a tremendous amount of resources to audit and verify records - reducing global efficiency, return on investment, and prosperity”.

“Moreover, incidents such as the 2010 United States foreclosure crisis demonstrate that in addition to being inefficient, the current processes are also terribly inaccurate and prone to failure. Factom removes the need for blind trust by providing the world with the very first precise, verifiable, and immutable audit trail.”

In an interview with the Wall Street Journal Paul Snow and Peter Kirby explained that banks are not the only institutions that might be interested in such a service. They believe Factom could make the job of auditing public companies easier for accounting firms and thus reduce the compliance costs for such companies. Factom could also be used to keep track of different stages of a supply chain or a series of business processes, or it could capture in “provable” form the ever-changing portfolio of reserve assets for any financial company that’s required to back its operations with reserves.

Ultimately, the goal, they said, is to win over government regulators, who they hope will come to see blockchain-imbedded databases as a powerful way to compel transparency in finance and other business sectors.

The Distributed Apps sector has been particularly active of late drawing a significant portion of VC funding. This sectors bears watching closely in the coming year.

Reference: The Digital Finance Institute recently launched as a global center of excellence to advance digital finance policy and regulation, innovation and inclusion.

Its mandate is to support international fintech innovation with balanced regulation that addresses financial inclusion globally, and to draw more women into the fintech space.

“With the evolution of the Internet of Things and Bitcoin for example, fintech is developing at an incredible pace globally and it is important that we start balancing innovation and regulation to ensure that economic development in this area can thrive without overly burdensome regulation and without causing more of a financial inclusion problem around the world”, says Christine Duhaime, co-founder of the Digital Finance Institute (DFI) and a prominent regulatory and counter terrorist financing lawyer in Canada. Twitter: @DFInstitute