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Ri-nova 01/2018: Beitrag

“Got a Token?“

A Pleading for a More Conscious Use of the Buzzword “Token“

Claudia Otto

With the ongoing “crypto movement”, which has a significant influence on blockchain technology and its development, a new cup[1] word sloshed into the law makers’ and authorities’ conference rooms: “Token”. A cup word means an indefinite, even empty term, which is to be filled with meaning by the recipient, according to his own understanding and discretion. The sender of the information adorned with this term deliberately does not want to become concrete here and therefore leaves the responsibility of linking it to other, possibly casually mentioned references and its individual meaning to the recipient. It has become a sport to attract attention with the word “token” without ever even explaining what is actually being said. 

___STEADY_PAYWALL___These “tokens” shall be distinguished as either

  • Security or securities token
  • Utility token or
  • Payment or cryptocurrency token.

After all, tokens are supposed to be “digital values”[2] in the sense of digital assets.

I. “Digital Values” – An Idea Rather Misleading Than Creating Social Added Value

1. Digital Doesn’t Matter? Well, There’s a Revolution That Might Get Overslept.

Digitization encompasses everything and will thus change all areas of our lives and coexistence in the long term; the increasing networking and relocation of processes into the digital “world” cannot be managed with the knowledge and experience of the analogue world. We will also have to rethink (macro)economic findings, just as we will have to question achievements in jurisprudence. This, however, is nothing new and unusual from a historical point of view. Also, the processes currently observed in connection with alternative means of payment and exchange as well as the attempt to replace third party control “from above” by gathering in groups with the aim of independence and supposedly “fair” (re)distribution of capital are not historically unique events. The undertaking cutting of the cord only takes place on a level where the revolt is not history-book-proven, as perhaps before the French Revolution. In retrospect, social upheavals occurred regularly and recurrently, whenever the desired changes were made possible by some kind of innovation and found a majority of support.

Such possibility of social upheaval has been opened up by the Internet and the resulting cooperation in networks, including those based on blockchain technology. In many people it meets both open ears and willing typing fingers as a result of subjectively felt dissatisfaction and injustice. One should never underestimate the (injured) ego of an individual human being. In digital space it finds completely new possibilities for development and potentiation. If many dissatisfied people meet, the consequences can be devastating.

The digitization will floor us. Therefore, it is necessary to now make an effort to understand current developments and to question them critically. Progress is always accompanied by its abuse, but that does not mean that progress should be prohibited. (Legal) limits must be set on abuse in order to make progress socially acceptable and thus for the benefit of society. If one blocks oneself from progress, it nevertheless takes place; only with all the negative consequences of the struggles for power.

2. What Is Special About “Digital Values”?

Without the need of making a superficial economic classification, it can be summarized that value creation in connection with “tokens” is generally not or cannot be explained at all. Above all, value is created from the subjective value estimation of a digital “object”, which is influenced by so-called whitepapers[3], i.e. digital colorful advertising flyers with tempting promises. In most cases, neither a performing team, a concrete product, a concrete business concept nor an understanding of one’s own product is behind the offers of “digital values”, so that more than half of the so-called ICOs fail within a short time.[4] Too often, “digital values” are one of many synonyms for the fool’s bargain strategy.

Anyone who knows the Frankfurt Legal Hackers[5] and their work knows how easy it is today to get deceived with an appealing website and a few cleverly placed buzzwords. People need to be educated and trained to protect themselves when legislators cannot (yet) do so. Because as a result of manipulation, an image of value emerges in their heads, which the suppliers make use of.

Progress goes hand in hand with its abuse. But not all advanced digital product vendors are abusive. We need practicable solutions for them.

3. Distinguish: What Is a Value and What Has a Value?

A value expressed in a character must first be defined. It is not yet “worth” anything, however. A value in the sense of a character attains an exchange value, what actually shall be described when speaking of “token”, essentially only through representation by a limitedly available and transferable medium (i.e. object) as well as its versatile acceptance. Above all, a digital object has the problem that it can be infinitely reproduced – copied – without much effort. We all know that copy protection is not absolute and can be circumvented. An infinitely available object is “worth” nothing. What can be created infinitely and by anyone does not have to be exchanged for something else of real value.

So “token” per se has nothing to do with economic “value”, but rather with a character or a string of characters. The medium that represents these characters in order to objectify them must be limited[6] in order to achieve economic value. In addition, an object which exists exclusively in digital form can only acquire value if its fundamentally unlimited reproducibility is certainly limited. Only the combination of limited digital objects and the protection against duplication can create an exchange value at all. That is why “value” does not derive from the digital object itself.

4. What Is Blockchain Tokenization?

The so-called blockchain-”tokenization” means that anyone can assign objective value to any object of subjective attention. That means, simply explained:

You write “100 EUR” on a napkin in a restaurant; perhaps in the color green, so that the creation is a bit closer to reality. This napkin is the “token” created by you. Now you can try to use it in the checkout process. However, it is very likely that you will not be successful. If you are lucky, craziness is all you will be accused of. Only because you are of the opinion that this one napkin now has a value of 100 EUR, while hundreds of other napkins of the same type have not, this selected one still has no objective value of 100 EUR, which enables a redemption into a genuine 100 EUR note or is even tradable on a stock exchange. The result cannot be any different, either, if you did the same with whole packets of napkins aiming to put them into circulation as part of an Initial Napkin Offer, mirroring the idea of so-called Initial Coin Offers (ICO).

This is exactly what is currently being tried to convey under the fashionable term “tokenization”. Although there is talk of a secondary market in which the “tokens” initially acquired from the (alleged) provider during an ICO are tradable and thus exchangeable for cash substitutes, such a market only exists for very specific “tokens”. However, only for an indefinite time, which can be over any day.[7]

II. Call Me “Thang”

“Tokens” should rather have to do with real values. With ethical and economic values.

As already inferred above, a “token” is merely a character or a sequence of characters, but the term “mark” is also commonly used. The term “token” can be replaced by any other word like “thing” or “thang”. There is no definition, “token” can have an incredible number of meanings depending on the context.

In the context of programming, a “token” is the smallest element of a computer program. Each of its components is a “token”. Basically, five types are named which describe their respective functions within the framework of a programming language: Keywords, identifiers, operators, separators and literals or constants. Without having to know what these types actually do, it is sufficient to understand that a “token” is obviously not limited in availability, but can be created indefinitely. An economic value cannot be created here in the first place. At most through the work inherent in a finished, usable computer program.

In the context of gambling, a “token” is a chip. But at first glance this context does not seem to fit. The one of programming appears to be closer.

III. “Token” in the Blockchain Biotope

The term “token” is basically technology-neutral, i.e. it does not depend on a concrete technology in which it is used. However, as we have already experienced in the case of “smart contract”, in connection with blockchain technology a very unique term has established itself contrary to its wording. A smart contract is not an “intelligent contract”, it is simply a computer program.[8]  The confusion, mainly fueled by legal professionals, has led to a situation, where small computer programs and the core technology blockchain receive more attention and are subject to more expectations than those will ever be able to meet. You might think of it as developers’ marketing[9] or not; it does not matter. In any case, it is certain that no other term made the economy dream as much as the term “smart contract”.

The term “token” creates the same attention and unreal expectations at the moment.

1. “App Token”

Blockchain app “tokens” are – figuratively speaking – the napkins described above in the context of applications (apps), i.e. computer programs called smart contracts, alone or in combination with other smart contracts. The term “token” here no longer refers only to the smallest element of a computer program, but also to its product, which can be arbitrarily designed and quantified. An economic value is supposed to be created and exchanged here by a simple calculation process, called ICO. If the smallest component, which can be reproduced at will, and the product of a computer program are named the same, one should be alerted.

2. Coins As So-Called “Native Blockchain Tokens”

Often used synonymously with “token”, a coin denotes the protocol[10] or in-house chip of a blockchain network, such as Bitcoin, the virtual currency of the Bitcoin protocol and network.

Basically, the coin forms a unique information in the communication between the network computers (peers) communicating according to the respective protocol rules.[11] This information is understood by all peers. Since the peers do not always want to share the same information with each other, Bitcoin is a unit (of account)[12] in order to be able to design and weight the shared information differently. In the case of Bitcoin, the numerical limitation of the number of coins laid down in the protocol[13] is an essential reason for their economic value, which is therefore not solely subjectively determinable.

In the case of Ethereum, the protocol’s own coin is Ether. Since Ether is based on a different blockchain database with its own communication protocol and thus represents an alternative to the Bitcoin network, Ether (like all other non-Bitcoin coins) is also referred to as alt-coin. Ether cannot be communicated in the Bitcoin network, Bitcoin cannot be communicated in the Ethereum network: Ether and Bitcoin are alternative.

Since each of these coins is an information, which all peers in the respective network must understand in order to communicate successfully with each other, it is called “native (blockchain) token”. “Coin” again concretizes the “native (blockchain) token” in so far as it is intended to describe the “embodiment” (objectification) of something valuable, which above all follows from the inherent computing power made available to the network.[14]

IV. The Real Problem of Duplicating Blockchain “Tokens”

Whether valuable or not, the problem of double spending[15] remains. Under certain conditions, the same digital object can be doubled, i.e. one and the same amount of coins can be used twice for payment. You cannot tear a banknote to double its value. Also its simple copy is recognizable as such and worth nothing. Of course, there is always the risk of good counterfeiting of banknotes, whereby value is suggested to the detriment of the real money exchanger. In contrast to coins, however, counterfeits always remain worthless; in the case of double spending, coins are actually copied by doubling the value. The same applies to app “tokens” if they can “embody” a value at all.

In addition, there is the question of what happens in the case of a planned so-called hard fork, i.e. a deliberate splitting of the blockchain into two strands. After the splitting of the Bitcoin blockchain into Bitcoin and Bitcoin Cash, Bitcoin owners found Bitcoin (BTC) and Bitcoin Cash (BCH) coins in equal numbers in their wallets:[16] Their “token” number was therefore doubled, even though Bitcoin Cash (BCH) did not have the same value as Bitcoin (BTC). However, this obviously possible duplication will not always be desirable as in the specific case, especially if it dilutes the value of a particular asset represented by the digital object. Also the undoing of unwanted events in the blockchain is possible by means of so-called hard forks, as the case “The DAO” has shown:[17]  This hard fork has led to two alternative realities, meaning that having and not having can exist simultaneously. The same blockchain “object” can therefore be “possessed” by different persons at the same time. In the end, the object and possibly embodied value exists twice if one does not want to or cannot decide for one of the two realities.

V. Conclusion: “Token” per Se Have No Objective Economic Value

A “token” has no objective economic value without further ado, at most in individual cases a network specific information and exchange value has been defined by the peers in agreement. For an objective evaluation, its valuable or value-preserving property requires at least a quantity-limited but permanent availability and a sufficiently broad understanding of its significance for the purpose of acceptance. Bitcoin has proven that it is possible to add value to digital information. Whether it is really objective is arguable.[18]  However, Bitcoin has also proven that extremely energy-intensive computing power as a justification for “digital value” is not a solution for the future.

Above all, the business with the blockchain “tokens” has one essential purpose: the shift of real world assets – in large sums within a short time – to the “token” providers, often in connection with false promises. In the exciting digital blockchain world, this is much easier and more efficient, especially anonymous[19]. In addition, no value of sufficient duration in order to be exchanged without loss is created. The constant latent danger of devaluation through infinite multiplication, whether in alternative realities or not, persists.

However, it is to be expected that private means of payment[20] such as Bitcoin will make their way into the future. It is also to be expected that companies will issue shares in comparable electronic form in the future. Many advantages can be seen here for financing small businesses and projects where real work and performance – in whatever form – create value. Whether the quite special blockchain technology will form the basis for this is doubted here,[21] not only for technical[22] but also for practical reasons: It is not clear why a shareholder should wish to document all shares and their allocations[23] in a database on his own computer.[24] It is also questionable whether, in the case of a so-called hard fork, he could accept that his “possession” no longer exists in an alternative re-     ality. A hard fork creates the risk of total loss, for example in the case of a correctness certificate issued by a government agency for the other strand.

The blockchain technology should not be prohibited or limited in its development due to the conflict of possible harm and future gains. We should learn from undesirable developments and the possible impossibilities and, with its further development, find and promote opportunities. But treating “tokens” as “digital values” and even enshrining them as such in laws is not an opportunity, but a mistake. The classification of the Bitcoin as a unit of account in the sense of Sec. 1 para. 11 s. 1 no. 7 alt. 2 German Banking Act (KWG) is not based on a legal definition, but on the interpretation of BaFin, which itself has no legislative authority.[25] The allegedly urgent need for regulation is questionable since Bitcoin and Ether are more likely to retain less economic and legislative significance than, for example, securities in exclusively electronic form.[26] That is why the next step should be to define “electronic securities”[27] in a technology-neutral way, taking into account their specific risks such as duplication, unclear lifetime, manipulability and platform dependency. The definition of an “electronic security instrument”, which is not subject to any “official” documentation other than that in the database creating it and possibly splitting it itself, should contain, with reference to Sec. 151 of the German Criminal Code (StGB), the demand for special protection against duplication, here called “imitation”. Contrary to the widespread belief, blockchain technology does not provide secure protection against duplication and one strand therefore cannot provide any proof. The future must not be built on the blockchain’s alternative realities: We would no longer be able to resolve conflicts because each party to a dispute would be “right”.



[1]  An own word creation based on the question of whether the (drinking) glass is half full or half empty. It is always a subjective assessment that reveals much about the evaluator. Since it does not depend on the material, only the filling, here the less ambiguous term (drinking) “cup” is chosen.

[2]  As explicitly defined by the Bundesverband Blockchain, “Regulierung von Token” of 6 April 2018 (v.2, p. 8, https://www.bundesblock.de/wp-content/uploads/2018/04/180406-Token-Regulation-Paper-Version-2.0-deutsch_clean_14.00.pdf (last downloaded on 20 September 2018); more cautious: BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht, Federal Financial Supervisory Authority), “Blockchain-Technologie – Gedanken zur Regulierung”, 1 August 2018, https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/BaFinPerspektiven/2018/bp_18-1_Beitrag_Fusswinkel.html (last downloaded on 23 September 2018).

[3]  Otto, Ri 2018, 16 (23, Fn 44).

[4]  Spencer, “The Failure Rate of ICOs is Skyrocketing in 2018”, 10 August 2018, https://medium.com/futuresin/the-failure-rate-of-icos-is-skyrocketing-in-2018-c6d2cb680807 (last accessed 29 September 2018); Athawasya, “ICOs have endured a 70% failure rate: Report”, 27 September 2018, https://bcfocus.com/news/icos-have-endured-a-70-failure-rate-report/24104/ (last accessed 29 September 2018); Kirsch, „Anleger erleiden mit deutschen ICOs Verluste bis zu 90 Prozent“, https://www.wiwo.de/finanzen/boerse/kryptowaehrungen-anleger-erleiden-mit-deutschen-icos-verluste-bis-zu-90-prozent/23117376.html (last accessed on 30 September 2018).

[5]  “Fake Legal Tech”, https://www.meetup.com/de-DE/Frankfurt-Legal-Hackers/events/254274419/ (last accessed on 23 September 2018).

[6]  (…) and at the same time versatile, transferable and tradable (…).

[7]  See the Ethereum Legal Agreement, https://www.ethereum.org/agreement (last accessed on 23 September 2018) and Otto, Ri 2018, 102 (106).

[8]  Otto, Ri 2017, 24 (29).

[9]  Otto, Ri 2017, 24 (33).

[10]  Otto, Ri 2017, 24 (26).

[11]  A blockchain network is essentially just a messaging system, a communication network, Otto, Ri 2018, 16 (28).

[12]  Therefore correct classification of BaFin as a unit of account: BaFin, “Bitcoins: Regulatory assessment and risks for users”, 19 December 2013, https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2014/fa_bj_1401_bitcoins.html (last accessed on 23 September 2018).

[13]  https://en.bitcoin.it/wiki/Controlled_supply (last accessed on 23 September 2018).

[14]  Otto, Ri 2017, 5 (19); deepening Otto, Ri 2018, 16 (33 f.), …

[15]  Otto, Ri 2017, 5 (9); Ri 2018, 16 (28).

[16]  Preuss, “Explains: How do I get my Bitcoin Cash (BCC/BCH) now”, 2 August 2017, https://www.btc-echo.de/erklaert-wie-erhalte-ich-jetzt-meine-bitcoin-cash-bccbch/ (last accessed on 23 September 2018).

[17]  New Alchemy, “A short history of smart contract hacks on Ethereum”, 8 February 2018, https://medium.com/new-alchemy/a-short-history-of-smart-contract-hacks-on-ethereum-1a30020b5fd (last accessed on 29 September 2018); see also Otto, Ri 2017, 5 (8).

[18]  For references to price manipulation regarding Bitcoin, see for example: Bleier, K., “Bitcoin-Höhenflug war gezielte Manipulation”, 13 June 2018, https://futurezone.at/b2b/bitcoin-hoehenflug-war-gezielte-manipulation/400050593 (last accessed on 23 September 2018).

[19]  Although the Bitcoin and Ethereum networks are pseudonymous, providers can easily create anonymity.

[20]  In this case, Bitcoin is contractually agreed as the means of payment, for which no official permission is required: BaFin, “Virtuelle Währungen/Virtual Currency (VC), https://www.bafin.de/DE/Aufsicht/FinTech/VirtualCurrency/virtual_currency_node.html (last accessed on 23 September 2018).

[21]  Otto, Ri 2018, 102 (106) and in this issue, Otto, Ri 2018, .

[22]  Otto, Ri 2018, 16 (29), 102 (106).

[23]  Shipments, movements, transmissions in a blockchain database or in a blockchain network are merely documented changes (= transactions), i.e. reallocations of information. It is documented that an information is no longer being allocated to the respective “transaction sender” but to the “transaction receipient”.

[24]  Note the hardware required for this, Otto, Ri 2018, 16 (19, 34) and in this issue, Otto, Ri 2018, 34 (50).

[25]  Kammergericht Berlin, judgment of 25 September 2018 – Case (4) 161 Ss 28/18 (35/18).

[26]  It is not considered realistic that Bitcoin and comparable coins could gain monetary importance due to their purely network-internal and thus network-dependent usability.

[27]  Pursuant to Sec. 2 para. 1 of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act) (in accordance with Sec. 2 para. 2 of the Wertpapiererwerbs- und Übernahmegesetz, WpÜG – German Securities Acquisition and Takeover Act), in implementation of Art. 4 (1) No. 44 of the Revision of the Markets in Financial Instruments Directive (MiFID II), all classes of transferable securities, which are tradable on the financial markets by their nature, with the exception of payment instruments, are securities, irrespective of a paper form (“issue of certificates”). BaFin speaks of “security-like tokens or crypto-tokens” and examines at https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/BaFinPerspektiven/2018/bp_18-1_Beitrag_Fusswinkel.html (last accessed on 23 September 2018) whether they meet the requirements of Sec. 2 para. 1 WpHG for securities. As this very recommendable examination shows, “tokens” may indeed qualify as securities within the meaning of the law in individual cases. However, this examination does not take into account, and rather assumes to be unproblematic, the risks deriving from the unclear “lifetime” as well as the “reproducibility” in connection with the platform dependency and the lack of special protection against changes by third parties (cf. https://www.ethereum.org/agreement), which do not exist to this extent for classical securities traded electronically.

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