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Token Structuring

When issuing a token -- like when issuing a security -- the most important part is to get the structure right so that the issuer achieves what they want to achieve. The most important element of the token structure is the token economics, or tokenomics: what cash flows (and in which currency) does the token owner receive under which circumstances, and what additional rights (eg to transfer it to someone else, or to vote) does a token bestow on its owner.

Tokens are often modelled on the equivalent securities. For example, a debt token is an obligation of the issuer to pay the investor a certain stream of pre-determined cash flows. An equity token is claim on the residual interest of a company, and like the eponymous security it us would usually give right to voting rights. A participation token is in between those two token types, in that it is a claim that depends on the revenues or earnings of the company, and that is similar to preferred shares in the world of traditional finance. Those three token types (and their hybrids like convertible tokens that are a mix between debt and equity) form the basis of the investor-facing tokens that companies can issue.

In addition to this, companies can also issue customer-facing or business-partner-facing tokens. In those categories one could for example find reward (card) tokens, gift (card) tokens, and membership (card) tokens that are the blockchain equivalent of the eponymous cards in the traditional world. Asset management companies can also issue tokens to their customers, for example asset tokens representing specific assets, fund tokens representing specific investment funds investments that are managed by a manager, or portfolio tokens that can combine and hold asset and investment tokens and whose composition is managed by the client.

When representing investments (or cards) by tokens on a blockchain it is possible to add interesting functionality. For example, it is possible to transfer funds (crypto and fiat) through a token. It is also possible to communicate with the token holders through the token, where communication includes issuer broadcasts (eg, distribution of annual report or required notices) and bidirectional communication, including voting. This not only simplifies existing processes, but it also allows to implement governance structures (eg, project-specific voting) that are not practical in the world of traditional finance.

When we work with our clients we help them structure the token that optimally reflects their targets and goals that are behind that particular issuance exercise. Generally we would look to maximising overall investor value (and therefore issuance receipts) by taking into account the other issuer concerns such as flexibility and ability to service the issued tokens in an as easy as possible manner.

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