Antoine Weill, Partner at Simon-Kucher, and Professor Philipp Sandner, Founder of the Frankfurt School Blockchain Center, discuss the advantages and risks of tokens, as well as what tokenizing assets means for the future of business.
From being ranked as one of Germany’s top economists and hosting two crypto podcasts, to actively promoting startups Professor Sandner is well-known in the German crypto industry. Most notably, in 2015, he founded the Frankfurt School Blockchain Center (FSBC), a think tank dedicated to researching blockchain technology.
Our expert Antoine Weill interviewed Professor Sandner on corporate tokenization’s benefits and risks.
Antoine Weil: Professor Sandner, welcome! I’m very happy we’ve been able to make this happen. Thanks so much for your time. Before we dive into the topic of corporate tokens, I wanted to ask: When did blockchain technology spark your interest and how did the idea to establish the FSBC come about?
Prof. Philipp Sandner: Those are great questions. We had already considered the topic a bit strategically back when the Blockchain Center was in the concept stage. That was in 2015, when we thought that blockchain technology would be a big deal in capital markets. At that time, in 2015/2016, it was assumed that mainly its corporate applications would be most relevant.
Numerous banks had also announced that blockchain systems were to go live by the end of the year. That was in 2016/2017. And what happened? Nothing. Instead, cryptocurrencies’ valuation soared to nearly three trillion. It has since crashed again.
And how do students feel these days in the middle of the bear market? Are they still engaged, or have you noticed a change?
Young people are still somewhat unaffected by the bear market. That’s probably because they’re still not very financially active. I also have a podcast, and you can tell by the number of listeners – they’re only half as high as they were a year ago because people just aren’t interested.
But that’s not a bad thing. We always see fluctuation in different areas. It’s cyclical. New topics pop up and old ones fade away. People will jump on the trend again. And I could bet you that, sooner or later, Bitcoin, Ethereum, etc., will be trendy again.
There are those who say that Bitcoin has had its day and so on, but they don’t know what they’re talking about. We have the technology. It works. It’s decentralized. There’s no stopping it.
Most importantly, don’t underestimate it. There are tens of thousands of people who program for it every day. That’s far more than there are blockchain applications being programmed in the corporate sector. Sooner or later, with this mass of brilliant young people, something will come out of it.
How would you define tokens? And what fields of application do you consider the most useful?
Ultimately, a token isn’t something legal. We now know very well and have a reasonable understanding that tokens are a kind of shell that you can fill with something. Some people talk about them as a container, while others use a vase metaphor.
If I put a dollar in the container, for example, then the rules of US dollar monetary transactions apply. The way Europe regulates the whole issue makes it very difficult for the euro to “fit” into the container of the token due to, for instance, tough regulators or tough requirements. That’s why there’s no significant euro on blockchain. In other words, what I have inside the container ultimately defines the legal domain, which I can then tokenize (or make into a token).
So, in theory, a security token – for example – is nothing new, but the better term, in my view, is "digital securities.” It’s simply a security, like we’ve had for decades, but tied to a token. And the blockchain network, for example Ethereum as a smart contract platform, has the functionality to move this token and manage ownership of it.
That means, that I basically own the token and through token ownership I also own the share. But I can transfer the token over to you no matter where you are. You could be in Argentina or on the moon, it doesn’t matter. And that’s already huge because there’s no technology on Earth that enables value transfers of this kind: Peer-to-peer, across all borders, point-to-point on Earth – like Ethereum with a 20-second transaction time, for, say, 100 US dollars.
And besides the advantages you just mentioned, like speed and peer-to-peer, do you see other advantages in tokenizing assets? What about the risks?
Well, of course, there are also a lot of new risks. Let’s take Ether or Bitcoin as a quasi-organic asset of this blockchain network, for example. If I lose the Ether or Bitcoin because I have it in a wallet and I lose the password for it, then this token is irretrievably lost.
And that’s not the only risk, which I think is the main reason why companies still don’t use tokens as much as they could. Can you name a company that already uses tokens to their full extent? Okay, so there are companies like Adidas that use NFTs, but not many.
Instead, its individuals who are fully utilizing this asset. 200 million people around the world use tokens today. In the US, the White House has determined that, 16 percent of its population use tokens – that’s 40 million Americans. And the European Central Bank has said that 10 percent of Europe’s population do so – that’s another 40 million people.
But to date, there hasn’t been a great deal of interest in the corporate sector. One of the reasons for this is that the custody infrastructure for companies doesn’t exist yet. Something like a bank that stores tokens for companies only exists on a smaller scale and isn’t systematic. And self-custody – meaning companies keeping their own tokens – isn’t currently organizationally feasible.
Therefore, on the one hand, there are quite a lot of new challenges, but on the other, the potential of the technology is clearly immense. So, what can you say to anyone who still dismisses blockchain as a gimmick? Simply put: It’s unconfiscable and it’s possible to conduct point-to-point transactions all over the world in just a few seconds. It’s brilliant technology that we’re just beginning to understand.
But are there other use cases that could become popular in the future? What might happen in the commercial sector in the next two, three, or four years? Where do you see potential?
I honestly don't see that much potential for the commercial sector. The potential for individuals is far greater. The numbers already show that today.
For me, blockchain isn’t just a technology. Crypto, especially, is ultimately an approach to reorganizing certain things – namely, in a decentralized manner, partially not through corporate hierarchies but through individual, decentralized networks. All these stories about smart contracts prove that it works, and that thousands of people are already using these systems.
However, this matter of organizing things differently doesn’t necessarily translate to how a company could use them. This makes it very difficult to see a sudden adoption rate of, say, 5 percent among companies. I just don’t see it.
Yet when it comes to individuals– and that’s why the NFT scene is so exciting – that’s when companies want to engage. The best example is using NFTs to mark customers, if you will, like a kind of digital twin. This is so that in the future, customers can be reached in a completely different way than they are today by Facebook, Google, and the like – in compliance with data security.
That’s extraordinarily fascinating. And you can see that Adidas and Nike, for example, aren’t using NFT technology for corporate processes or efficiencies but for the individual component. This is possible because the NFT is owned by, say, a sports fan who wants to buy a pair of Nike or Adidas shoes.
Have you already seen specific examples of this? Or do you think that some approaches will become established?
Currently, developments are coming on slowly, but it can be explained in the following way. Let’s take me as an example: My name is Philipp and my identity exists electronically in the form of an Ethereum address, which starts with “0x” and ends in “abcd.”
This address can be hidden in a QR code (can be generated easily using a secure QR code generator). So, imagine I go into an elevator. The elevator has a camera. I hold my cell phone in front of it, it then scans my QR code. From that, the elevator knows my Ethereum address, which contains a few parameters about me – like my age and place of residence. It’s semi-sensitive information, not precise.
Then, what does the elevator do? It shows me ads that are somewhat relevant for my social group: 42-year-old male living in a city. We already see this today, but, in principle, I’ll be shown ads in a slightly different way than if I were, for example, an 18-year-old city-dwelling woman or a 62-year-old woman living in a village.
The exciting thing is that the elevator has to comply with data protection regulations. This means that if the elevator wasn’t data protection compliant, I wouldn’t have to transfer any data to it. And I’m also not asked by any third party, like Facebook, to provide this data.
You also briefly touched on the topic of “legality.” What’s the “legal” value of a utility token or a NFT? For example, if there are benefits, like rebates for example, has the federal government looked at this yet? Is there some other legislation or developments overseas? Also, what happens if anything goes wrong with a smart contract or a utility token?
That’s a great question because it always depends on who is acting. If an intermediary, such as a bank, is acting on my behalf, then the bank has the problem. After all, that’s precisely the reason why companies have been relatively wary of blockchain technology. Yet blockchain technology, because of its inclusive nature, also enables me to personally operate this smart contract as Philipp. Then it’s my risk, meaning it’s intermediary-free.
This demonstrates that due to the risks involved, the traditional intermediaries – banks and stock exchanges – are keeping a relative distance from tokens. They’re starting with initial testing because the risk of something going wrong is considerable. But it’s good that we can say that here in Germany the regulation is well developed. For example, more than two and a half years ago, the Ministry of Finance initiated what they call crypto custody rules.
According to these, the state defined how stock exchanges and banks must hold Bitcoins and other cryptocurrencies and how they can offer products and services to customers. There are already a few smaller banks that use these rules, and some larger banks will do so in the future. This means that in Germany the legal basis has been created for banks to offer services with cryptocurrencies to the customer.
That’s remarkable because many other countries in Europe don’t have such clear rules. These rules were then written into the board by the Markets in Crypto-Assets (MiCA) regulation, which comes into force in 2024. Everything that has to do with crypto, Bitcoin, DFI, and large parts of NFT will be regulated to some extent by the MiCA regulation. This will be for 400 million EU citizens – that’s impressive!
All these developments are very exciting! So, do you think that the use of tokens in business – focusing on the relationship between companies and customers – correlates with the development of crypto market capitalization? In other words, influences the price of Bitcoin. Or do you expect there to be much less volatility and maybe continuous growth as opposed to what we’ve seen so far with Ethereum and Bitcoin?
Yeah, that’s a good question, too. Bitcoin and Ethereum prices are always front and center, which makes the tremendous price volatility very clear. While I think this will reduce over time, I also believe that it’s going to stay that way for a while. That means that the large price fluctuations are something that we just have to accept.
To be honest, it will only normalize once the whole system has stabilized and matured. However, we mustn’t forget that while the media coverage of rapidly fluctuating prices is in the foreground, an incredible amount of programming is still going on in the background.
This isn’t widely talked or written about but even now, since May, crypto prices have dropped significantly. And sure, a few companies may have gotten smaller and lost a few people, but the technicians are all still there. Even if they’re currently going largely unnoticed, they’re still programming. It’s really fascinating how this ecosystem continues to evolve, automatically.
Professor Sandner, thanks again for your time and exciting insights.
Watch the interview here
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