The Ethos Token Classification Framework

Today we are introducing "Ethos Token Classification Framework" - a proposal for how consumers and the industry can classify and organize tokens.  We also believe this Token Classification Framework (TCF) will play an integral role in providing essential information to Ethos users when assessing the types of coins and tokens to be added to their decentralized Ethos Universal Wallets. The TCF will also be an essential component of the overall risk framework Ethos will use during the on-boarding process for all coins/tokens in determining which assets can be included in our Basket and Liquidity related services.

We developed the TCF in conjunction with the Ethos Product Council.  It is still a work in progress, but we wanted to open the idea up to public feedback.

The TCF organizes tokens into Classes and Categories based on specific criteria.  Here's what the system looks like:

Although we would like to make all coins/tokens available to customers when using our Basket and Liquidity products and services, each coin or token must first clear a thorough risk assessment before it can be included in certain products or services on the Ethos Platform. This risk assessment is essential to ensure neither Ethos, or our customers, are exposed to unnecessary risks stemming from fraud, ponzi-schemes or legal and regulatory issues associated with the issuance and operation of non-compliant coins or tokens, whether knowingly or unknowingly by other firms in our industry.

This framework is essential for any Platform offering products and services involving coins and tokens as it is one of the essential tools every firm must deploy to appropriately mitigate risks to our business and those customers utilizing our platforms.  This video discussing TCF provides a high level overview of this framework and captures some of our thoughts as to how the framework will operate:

Note that this Classification system is still in draft format, and subject to revision.

Looking forward to hearing thoughts from the community.

https://upscri.be/27f3c1/


A Metaphor for Functional Tokens

Imagine there is a bridge that connects two cities, Atlantis and Bedford, which we will refer to as A and B. These two cities are separated by a small body of water making the bridge immensely useful in travel between A and B. Without this bridge, commuters would have to travel hundreds of miles to go between these cities, but with this bridge, travel is fast and easy. This bridge currently charges a toll of $1 and commuters happily pay this fee every day.

Suppose one day, the owner of this bridge wants to change the way that they operate this bridge. The owner says that the bridge will no longer accept dollars as payment to cross the bridge, but instead will only accept Travel Tokens which are issued by the Atlantis Bedford Bridge Authority or ABBA. Travel Tokens can be used to cross the bridge and are consumed on use. The ABBA decides to issue 20% of the tokens to anyone who wants to buy them at $1 each and will keep the remaining 80% of the tokens. The ABBA also says that the supply is immutable which means no new Travel Tokens will ever be created. Some tokens may be lost or destroyed which takes them out of circulation meaning that the Travel Token is an inherently deflationary currency.

Many people will buy the Travel Token because they need to use the bridge. These people don’t mind since they are paying the same price they were before to use the bridge. Some speculators may also buy the coin because they think that the bridge was so useful that people should be paying more than $1 to use it. They may buy large quantities of the token in order to control the supply and sell them later at a higher price. The Travel Token, however, has not changed. It still can only be used to cross the bridge connecting cities A and B.

Since the Travel Token is needed to cross the bridge, there will always be people who need to use this token and there will be an active market for people who need to buy this token to cross the bridge. These people may be buying the token from the ABBA who sell the token to pay for bridge maintenance or from other people who don’t need to use the token. The token price will fluctuate based on what people are willing to pay to cross the bridge. The token may begin to trade at $2 since that is how much people are willing to pay to cross the bridge.

Now suppose that cities A and B do not have a bridge between them at all. People in cities A and B wish there were a bridge since they need to travel frequently between the two cities, but due to political and funding issues, the bridge never gets built. Despite public demand, the two cities cannot decide on how to fund this bridge.

A savvy entrepreneur comes around and sees that there is massive demand for a bridge between these two cities, yet no one is building one. This entrepreneur realizes that there might be enough people who are willing to pay up front in order to use the bridge later on when it is built. The entrepreneur decides to sell Travel Tokens at $.25 each which will be able to be used to travel between A and B. The entrepreneur sells 50% of the total supply of Travel Tokens to the public in a sale and raises money to build the bridge.

The Travel Token doesn’t yet have any use, but there are many people who want to use the bridge and are excited for the prospect of being able to travel between the two cities. They decide to buy the token early since they think it will be more expensive to buy the token later if they want to use the bridge in the future. They understand there are numerous risks involved in this project that are all out of their control as they have no ownership rights in the bridge. They also understand the bridge may not ever be built or the bridge may have heavy traffic, but they buy Travel Tokens anyways because they think the bridge will change commuter travel between A and B.

Eventually, the bridge is finished and people are very happy with it! The Travel Token now trades on the market at $2 each because the bridge saves so much time for commuters between the two cities. The entrepreneur is happy because they now own a very successful bridge authority collecting lots of Travel Tokens which can be sold back onto the market to pay for bridge maintenance and employee salaries.

Now suppose the bridge has become highly popular and the token price is extremely expensive and now trades at $4. To better justify such a high price of the token, the bridge authority decides to allow round trips on the bridge with a single token. That means that the Travel Token can now be used for 2 trips instead of 1. The token jumps in value because that means each token has more utility, but only to $6. That means that the effective cost of crossing the bridge has been reduced from $4 to $3.

Early bridge backers now hold Travel Tokens that have increased in value. They may use their newfound wealth on traveling across the bridge at a cheaper original cost of $.25, which allows them to use their savings to increase wealth or consumption, or they may find that there are other people they can sell their Travel Token to who want to cross the bridge. The Travel Token has a large market cap, but that market cap is justified by the number of commuters that use the bridge every day. Over 1 million drivers cross the bridge daily each spending 1 Travel Token meaning that there are $4 million worth of tokens being collected by the ABBA every day. The ABBA may choose to sell these tokens back onto the market instantly meaning the market cap of the token stays constant. If the ABBA sells fewer than $4 million worth of tokens a day, the demand side of the token will be larger than the supply and the price will begin to increase. The price will continue to increase until other commuters decide to simply sell their token at a profit and drive the long way around since it isn’t worth that much to them.

Suppose the Travel Token can also now be used for a bridge connecting cities B and C. The supply of the Travel Token remains constant, but the demand has increased causing a positive price increase for the Travel Token. There may be fewer bridge commuters on the bridge between A and B, but the increased number of commuters that come from bridge B and C push the price of the Travel Token higher. The ABBA can reduce the number of Travel Tokens that are consumed to cross the bridge to keep costs down for customers if the market does not appear to be in equilibrium. As the token gains more utility, the price increases which is justified because now a single token can do a lot more than it could before the bridge was even built.

While just a metaphor, this is a good example of the "token economy."  People are willing to fund projects for functional access tokens if they believe in the project.  Many early token purchasers consider themselves to be "contributors" to a project.  Additionally however, they believe the value of the token can rise if the service - a bridge connecting two markets or ideas - is successful.  This is an idea that is both old and new at the same time, and shows the potential of human collaboration and cooperation.

https://upscri.be/27f3c1/


Our Views On Recent Regulatory Events

Hello Everyone,

Over the last few months our industry has heard from Regulators in Singapore, United States. South Korea and China with regards to Initial Coin Offerings and Token transactions facilitated by Coin / CCY Exchangers. In our view, much of this rush to judgement has very little to do with legitimate Functional Tokens (like Ethos) and more to do with those firms in our industry who unknowingly offer Tokenized Securities, which promise ownership rights, and those individuals or firms involved in outright fraudulent activities.

Unless our industry can find a way to cleanse our eco-system of these bad actors and increase our overall commitment to consumer protection, I’m afraid the end result will only be a significant increase in the velocity of regulator opinions. As an industry with significant potential, it is absolutely essential that we get our act together and begin to remove scammers from our eco-system immediately while also clearly distinguishing Functional Tokens from Tokenized Securities by developing an industry wide template for the future issuance of pure Functional Tokens. Unless we begin to take these necessary steps, together, the risks of rules being thrust upon our industry will grow ever larger with every passing day. To avoid this end, Ethos has fully committed itself to doing whatever is necessary to ensure the long term sustainability of this industry.

 

 

Back to more specific recent events. As most of you know by now, the Chinese Government issued a policy statement on Monday banning local companies from offering ICO’s onshore. However, what most people overlooked, a day earlier the South Korean Government showed the clearest posture to date by a report that stated the local government has every intention of regulating cryptocurrencies, which will most likely occur sooner rather than later. These are all the very reasons why we adopted our strategy to design the Ethos Platform with the full understanding that our industry will be heavily regulated. I know global users in the space may not like the idea of regulations within our global eco-system but we need to accept this reality as it is indicative of the serious and powerful potential of our industry. Regulations just mean that we are moving to the big stage, it’s “Prime Time”!  

Considering all of the above, let us breakdown China’s most recent Crypto Policy Stance (Please see our interpreted translation of their actual announcement at the end of this blog). Before we begin, let us all be reminded that government opinions such as these should not come as a surprise to any firm in this space who has done proper planning and developed comprehensive strategic plans. We at Ethos were not caught off-guard by any of this for this very reason.

Our Translation of their Announcement: (Both systematic and human translation tools)

The recent public issuance of token financing activities, including those initial tokens (ICO), has increased in large numbers where these highly speculative activities may involve companies suspected of engaging in illegal financial activities, which could seriously disrupt the economic and financial order. In accordance with the Law of the People's Bank of China, the Commercial Bank Law of the People's Republic of China, the Securities Law of the People's Republic of China, the People's Republic of China, the People's Republic of China, the People's Republic of China, the People's Republic of China, the People's Republic of China, the People's Republic of China, the People's Republic of China, the People's Republic of China, the People's Republic of China, The Republic of China Network Security Law, the People's Republic of China Telecommunications Ordinance, and other laws and regulations, the relevant matters involving illegal financial institutions and illegal financial business activities are as follows:

  1. Accurate understanding of the essential attributes of tokens financing activities

Token Offering financing refers to financing via illegal sale and circulation of tokens, and raising funds from investors in the form of Bitcoin, Ethereum and other so-called "virtual currency".  This activity is essentially a non-approved illegal public financing method, suspected of illegal sale of Tokens, illegal issuance of securities, illegal fund-raising, financial fraud, pyramid schemes and other criminal activities. The relevant departments will closely monitor the situation, strengthen cooperation with the judicial departments and local governments, in accordance with the existing working mechanism, strict law enforcement, resolutely control the market chaos. Any discovered suspected criminal problems should be transferred to the judiciary.

The tokens or "virtual currency" used in Token Offering are not issued by the monetary authorities, do not have legal and monetary properties such as indemnity and coercion, do not have legal status equivalent to currency, and can not and should not be circulated as money in the market.

  1. No organization or individual may engage in unauthorized Token Offering financing activities

As of the date of this announcement, all types of Token Offering financing activities shall cease immediately.  Organizations and individuals who have completed the financing of the tokens should make arrangements for repatriation, reasonably protect the interests of investors and properly handle the risks. The relevant departments will seriously investigate and deal with non-discontinuation of tokens sale financing activities and illegal activities related to already completed token offering financing.

  1. Strengthen the management of tokens and financing trading platform

As at the date of this announcement, any so-called token financing and trading platform may not engage in the business of exchanging legal currency with tokens and "virtual currency"; may not buy, sell, or act as intermediary for buying and selling of tokens or "virtual currency"; may not engage in the service of providing pricing and information of tokens or "virtual currency".

For the existing illegal token offering financing trading platform, the financial management department will be refer the companies to the telecommunications authorities in accordance with the law to close their website platform and mobile APP, to the internet authorities to the delist and remove their mobile APP from app stores, and to the business administration authorities to revoke their business licenses.

  1. Financial institutions and non-bank payment institutions shall not carry out business related to tokens financing transactions

Financial institutions and non-bank payment agencies may not directly or indirectly provide products or services related to token financing transactions involving "virtual currency" including account opening, registration, trading, liquidation, settlement and other products or services, as activities involving tokens and "virtual currency" shall not be covered within the scope of their insurance liability. Financial institutions and non-bank payment agencies should promptly report to the relevant departments if they suspect the illegal issuance of financing transactions involving virtual currency.

  1. The public should be highly alert to the risk of currency issuance financing and trading risks

There are multiple risks in the issuance of coins and transactions, including false asset risk, risk of business failure, and risk of investment speculation. Investors are required to bear the risk of investment. We hope that the majority of investors will not be deceived. Due to the use of "currency" of the various types for illegal financial activities, the public should strengthen their ability to recognize illegal activities and increase their awareness of risk and timely reporting relevant activities they may suspect to be illegal.

  1. Give full play to the role of industry organizations self-discipline

All financial industry organizations should carefully interpret policy, and urge their members to consciously resist illegal financing activities related to the issuance of virtual currency for financing transactions, and strengthen investor education to protect against market chaos and jointly maintain the normal financial order.

Making Sense of the Ban

First, what does this policy stance cover? It covers only China based firms wishing to launch, or previously launched,ICO's occurring in country (Not anything offshore) AND China based Trading Platforms who facilitate the exchange of tokens or "convert" tokens with fiat whenever any of these activities involve China Residents (Not anything offshore).

Second, what does this mean? This means China based ICO's involving China resident participants are on hold for the foreseeable future. It is not entirely clear to us if China based ICO's can, however, be offered offshore to non-China residents. China based Trading Platforms can continue to facilitate trading of tokens and virtual currencies for offshore customers but cannot facilitate trading of tokens or convert tokens directly with fiat in country / onshore for China Residents unless it is part of the repatriation process related to previous token sales.This last point is a bit at odds with itself as allowing offshore exchanging by locally based Exchangers conflicts with the overall reasons for China Regulators to act so I think this point should not be overlooked as further clarity is needed.

Third, in our view this policy action is driven by several key factors including consumer fraud and illegal securities issuance but more importantly to ensure these activities do not skirt China’s Foreign Direct Investment (FDI), Outbound Direct Investment (ODI) Schemes and other capital outflow mechanisms such as its Qualified Domestic Limited Partnership (QDLP) or Qualified Domestic Institutional Investor (QDII) programs, which are all considered by the Government to be necessary tools for protecting the overall soundness of their capital market system.

However, as Token Sales involving the issuance of pure "Functional Tokens", rather than Tokenized Securities, clearly do NOT involve foreign ownership concerns I believe local firms in China will be able to offer legitimate Token Sales once the dust has settled. Additionally, I also believe foreign based Token Sales involving pure Functional Tokens offered to China residents will also be possible at some point in the near future. Although, for both of these things to happen, China will first need to revisit all of its inbound / outbound capital flow policies and securities laws to ensure virtual currency based financing activities do not go unchecked. This will surely take some time but they are inevitable in our view as China has been investing significant amounts of public capital in Blockchain and Smart Contract Technologies and it is highly unlikely that cryptocurrencies will not be a part of their eco-system going forward.

From Ethos' perspective, none of these actions impact our business, past or present. As many of you know, we’re able to limit disruption to our business model as we made a conscious decision early on to build our platform based on the critical assumption that existing securities / investment related laws will apply to crypto businesses. This was a critical decision for us as it allows us to limit all current and future disruption to our business. Thus, we continue unabated in our development efforts.

Lastly, we do want to make one very important point. All of the steps taken by local regulators are or will be premised on protecting consumers. Ethos embraces these changes for these very reasons, as we also share the commitment to protect global consumers. As such, we are fully committed to collaborating with regulators in any jurisdiction who seek to better understand our industry.

Thank you.

https://upscri.be/27f3c1/