What is an Asset Backed Token?

What is an Asset Backed Token?

A cryptocurrency is a “decentralized, digital asset that can be used as a medium of exchange”.

Cryptocurrencies are often referred to as both coins and tokens. Regardless of what they are called, they can be used as money, such as dollars, euros or pesos, or treated as more of an asset, such as gold.

Bitcoin acts more like an asset than a currency. Using it as a currency makes no sense because of its volatility.

Ultimately, Bitcoin’s value is based mood… The market’s speculation (i.e. what people think it is worth) determines its value. If the market is feeling good, the price of Bitcoin could go “to the moon”. If the market is feeling scared, the price of Bitcoin could go to zero. At any price, it is impossible to say definitively whether Bitcoin is overvalued or trades at a discount.

No one really knows what most cryptocurrencies are worth. Not JPMorgan, Peter Thiel, Charlie Lee, or even Vitalik Buterin.

While most coins and tokens are backed by nothing, asset backed tokens could possibly change that.

What is an Asset Backed Token?

Asset backed tokens are digital assets backed by physical assets.

Asset backed tokens are a form of crypto rehypothecation. The tokens have residual, fractional value that is rooted in physical assets such as real estate, art, money, or renewable energy assets. Even stocks themselves can be “tokenable”.

A share of stock represents collateral, or ownership, in a company…In this sense, an asset backed token is similar to a stock.

The owner of an asset backed token, like the owner of a share of stock, owns a piece of a something tangible, and has rights as an owner (i.e. shareholder).

Unlike a purely speculative cryptocurrency, asset backed tokens should clearly define two things:

  1. Legal rights of owners of the tokens.
  2. The value of the underlying assets that holders are entitled to per token.

As such, an asset backed token provides both upside and downside protection for an investor. An asset backed token should rarely go to zero, providing possible downside protection. And it should provide upside if the asset increases in value.

LAToken vs. Salt vs. Tether vs. Royal Mint Gold

Three examples of asset backed tokens are LAToken, Salt and Tether.

LAToken aims to connect cryptocurrencies to the real economy, by allowing crypto holders to diversify their portfolios with access to tokens linked to the price of real assets.

Last July, the company launched a trading platform for hard assets, such as real estate and gold. LAToken trades in assets such as shares of blue chips (Apple, Tesla etc), commodities (oil and gold), and real estate ETFs.

Salt offers a different approach to asset backed tokens. Salt is an online blockchain lending platform that is akin to a “crypto-Lending Club“.

By connecting borrowers with lenders, Salt makes it possible to loan actual cash to holders of cryptocurrencies.

The loans are backed by the crypto-assets… And crypto holdings can be leveraged for cash, while not forcing the borrowers to sell their cryptocurrencies.

The benefit to a borrower is that his or her holdings may have appreciated significantly against a basis. Whereas the lender can verify the cryptoassets due to the transparency of the public blockchain.

As such, Salt makes it easy for borrowers and lenders to connect via the Salt platform.

The crypto assets are collateralized. The assets are held in escrow by Salt for the duration of the loan, which may be prepaid. Salt holds the cryptocurrency collateral using a combination of “hot” wallets and cold storage.

Tether is a “stable cryptocurrency” pegged to the U.S. dollar. Tether claims that every Tether coin is backed on a 1:1 ratio by actual currency in its vaults.

Tether can be linked to other currencies, such as the Yen or Euro, not just the U.S. dollar. You can read the Tether white paper here.

A new “stable crypto” that was recently announced, which is similar to Tether, is USD Coin. USD Coin was launched by Circle, the Massachusetts based cryptocurrency startup with over 7 million users that is giving Coinbase a run for its money.

Circle offers both B2B and B2C trading cryptocurrency trading options, and recently acquired Poloniex to expand its cryptocurrency trading platform capabilities and reach.

Royal Mint Gold is real gold that can be digitally traded on the blockchain… RMG transforms physical gold into a modern digital asset.

1 RMG represents ownership of 1 gram of real physical gold. You have full ownership of your gold and it is stored at the Royal Mint.

RMG relies on BitGo, a crypto custodian, to send and receive RMG digital assets.