I spend a lot of time on the road, ranging from investment conferences to technical conferences to everything in between, and I’ve made an intriguing observation: Cryptocurrencies are often mistaken for stocks.
It’s interesting because this isn’t accurate.
Cryptocurrencies (what we call coins/tokens) are inherently linked with software, a fact often underestimated and misunderstood. They belong to a system built on blockchain, where tokens interact, perform functions and deliver services. A cryptocurrency should not be reduced to a mere ticker symbol. To be frank, I don’t even really like the word cryptocurrencies because it implies that these are forms of currency. They are exchangeable, but this does not make them money.
Cryptocurrencies also are not necessarily commodities. While equities symbolize ownership and commodities are often used or consumed, many cryptocurrencies take action — making them entities in their own right. They do things. They are real software, not just characters on a screen.
Tokens in this class have associated smart contracts. Frequently, they act as protocols, creating dual-sided marketplaces where supply and demand meet, forming a market and identifying a price concurrently. Think about it like this: It would be like Uber, but without the company Uber. We could have drivers on one side of the equation and passengers on the other, matched up without a middleman. It’s exciting, it’s innovative, and it’s going to be transformative.
Carlotta Perez and her excellent work “Technological Revolutions and Financial Capital” suggests that innovation is at the helm of long-wave economic cycles — and innovation is a result of the creation of new forms of production capital.
In turn, we’d like to argue that we’ve left the information age and that we’re now in a new long wave economic cycle, a new financial age that we’ve dubbed The Age of Autonomy. This would mean that there is new, innovative production capital that drives this age.
Consider, then, in this new long wave cycle, the cryptocurrencies that we view as money are actually production capital. They are assets that do things and drive innovation. As such, it’s essential to think of them not as currencies, but assets that are unique and distinct in order to understand their real value and impact.
Let me explain.
The evolution of capital
Types of capital evolve as society evolves, and it is important to understand the distinction between production capital and financial capital.
Production capital involves assets that are created to generate outputs for trade in the marketplace. The creators of the capital retain control over these assets and primarily determine their value. Financial capital, however, represents a claim on an enterprise’s income or assets.
We saw production capital really take hold in the Industrial Age. Factories were the economic powerhouses, facilitating mass production of goods, an idea unheard of before mechanized production. This shook things to their foundation. Companies like Ford then spearheaded manufacturing by introducing the assembly line, thus facilitating production beyond the capabilities of human labor.
As we transitioned into the Information Age, intellectual property (IP), including inventions, artistic works and designs became the new form of capital, propelling the knowledge-based economy while at the same time computers, networks and hardware became the production capital that drove this age as well.
Now, in the Age of Autonomy, tokens have surfaced as an innovative form of production capital. These tokens, much like factories, IP and computers, are able to stimulate economic activity. This is what everyone is missing.
Just to make this abundantly clear, production capital, which includes factories, intellectual property and as outlined here, tokens, significantly differ from financial capital like stocks and bonds.
It’s worth mentioning that the US Securities and Exchange Commission, a regulatory body for financial markets and investor protection, traditionally doesn’t oversee production capital, so for their desire to control the cryptoverse means that, from their definition, token needs to be all financial capital. But consider that they aren’t.
Tokens are the evolution of production capital
Earlier, we mentioned the concept of a two-sided marketplace without a company behind it — Uber without Uber, if you will. Consider that tokens can provide these two-sided marketplaces because of their unique nature. Let’s examine this further.
As an example, we see this in tokens like helium (HNT) and ocean (OCEAN). These are protocol tokens, offering services within a two-sided marketplace. In the case of OCEAN, the token provides a two-sided marketplace for data. This could be personal data or shopping data or irrigation data, say, for a farm. Really, for any kind of data that could be bought and sold, the Ocean Protocol is the ecosystem and token that provides this service. There’s an Ocean Market where you can “shop” for data.
Similarly, with the HNT token, you’re accessing the Helium Network, which provides users with internet access over radio waves, which is especially useful for IoT devices and smaller devices that use smaller traffic. Hotspot operators provide network services, and device owners consume these services. There’s an entire ecosystem in the Helium Network, and it’s powered by the HNT token.
In these cases, the token is facilitating the interaction between both parties — it’s doing work. It’s production capital.
In the same way a factory leverages an assembly line to enhance production, blockchain networks use tokens to operate. So, from a broader perspective, just as the assembly line, a new and innovative creation, drove the industrial age, so too will these new and innovative creations drive the Age of Autonomy. Back to the comparison to stocks, this transcends what traditional shares or bonds can offer, marking a new era in our economic evolution.
The potential pitfalls of misguided regulation
Recognizing tokens’ revolutionary potential as a form of social production, it’s vital to understand the potential risks associated with poorly formulated regulation. Historical lessons such as England’s Red Flags Act of (Locomotive Act 1865) serve as a stark reminder. This act, designed with safety in mind, mandated a flag-bearer to precede each automobile, inhibiting progress and hampering the English auto industry for years.
Today, with tokens and the digital economy in play, a similar ill-conceived regulation could hinder America’s active participation in the rapidly developing economy of the Age of Autonomy.
Crypto asset classes cover a broad range of tokens, each with a distinct role within the broader blockchain ecosystem. These include utility tokens, platform coins, protocol tokens, governance tokens, NFTs and crypto commodities. These novel forms of capital bear little resemblance to traditional securities; instead, they herald a new type of production capital that underpins decentralized systems.
Back to the SEC. SEC activities seem to overlook tokens’ inherent nature and value, aiming to categorize them as securities. This oversimplification neglects their unique potential and could hinder their transformative impact in the Age of Autonomy. For the SEC to control tokens, these regulators need to see tokens as financial capital, which does shed some light on their activities and claims. This view, however, can radically hinder innovation, which I would argue does not benefit anyone.
Just because the SEC claims that cryptocurrencies are financial capital does not necessarily make it so. But, because the crypto asset industry is so new, regulators have been trying to figure out which bucket they fit in. And, fortunately, we do see progress.
In the SEC v. Ripple case, a district judge recently ruled that sale of XRP on an open exchange does not fit the category of the sale of a security. This is a watershed moment, all the more so because XRP doesn’t necessarily fit the bill of a two-sided marketplace or production capital — it’s simply a vehicle for facilitating institutional cross border payments. But, if magistrates are seeing that such a token is not a security, it certainly bodes well for those tokens that are production capital. It strengthens the case and gives us real legal precedent that we have been needing for quite awhile now.
Ultimately, as we navigate the classification and regulation of crypto assets, it’s essential to understand their nature.
Just as IP royalties or factory cash flows don’t fall under SEC supervision, tokens that act as two-sided marketplaces shouldn’t either. They are new and innovative forms of production capital and they are pivotal to forward progress as we march into the Age of Autonomy.