HOW X8 INTEGRATES ALL EXISTING LEGAL REQUIREMENTS INTO A WORKING TOKENThis article explains why the tokens of the X8 project are different from the vast majority of tokens currently offered on the crypto market. The text also clarifies how our tokens actually comply with the guidelines of the regulator and answers various observations about how a crypto project can work in the developing crypto market, where the environment as we approach 2018 is becoming much stricter concerning new projects than it has been up to 2017.
99,9% OF TOKENS ARE SECURITIESAccording to the key European regulator, ICOs could be derivative activities. The European Securities & Markets Authority (ESMA) warned investors that ICOs can cover fraudulent and illegal activities as described in this linked article. The main stance of the regulator is to point out obligations to conduct affairs properly and follow the rules that are already in place.
There is great cognitive dissonance existing between the general blockchain community and traditional institutions. The former is largely not specialized in various in-depth distinctions between types of assets and asset classes. Most blockchain projects do not ask themselves how the type and the nature of the token product that they make will determine how it will be bound into the regulatory framework of the financial market. And as the article on news from ESMA nicely puts it, wordings in whitepapers will not be able to convince someone that something is not a security if it behaves and works like one.
On the other hand, traditional institutions don’t yet comprehend the significance of the blockchain community, which is a necessary element for concepts to be implemented into actual technical solutions, which work in a decentralized manner. In the simplest of terms, it is required to have interest from developers or supporters, who will invest their work into implementing yours or someone else’s solutions to be able to connect to other projects on the chain. This is what creates a market place and is an important part of what blockchain is capable of. It’s technical and it has to be practically achieved if any product wants to become widely adopted in the decentralized digital realm.
DOES TOKENIZATION MAKE SENSE?It all boils down to how well a certain business activity can be translated into the tokenized world. It does not work in the same way for differing types of businesses. It is also difficult to copy a traditional business model into blockchain. Simple business models that rely on fees can become impossible to implement because of the potential breach of rules regulating the area of securities in the financial markets.
Can blockchain solutions therefore be just simply copy/paste concepts applied to a new architecture? Technically, of course, the answer is yes. However, the regulator points out that venturing into blockchain does not mean becoming exempt from existing rules that cover known financial and economic activity types. Nevertheless, that is mostly what is happening, as many projects attempt to rebrand traditional business concepts and pin a crypto badge on it.
ICOs COULD BE DERIVATIVE ACTIVITIESThe approach of the regulator is to first push and filter out projects, which include the use of leverage or constitute a portfolio of leveraged instruments. This is because derivative instruments fall under a different section where public offering to a non-professional audience is restricted. Furthermore, risks of losses linked to investing into derivative instruments must be specifically declared as such, which sometimes may even include the risk of losing more than your deposit.
The derivative argument goes further than the argument of a security. A security can simply be a share of a company, which pays out dividends to investors. It represents an ownership in this case. A derivative instrument however constitutes a right or an obligation linked to its ownership, which has its own price, future delivery date and is traded on a margin with less than total deposit for example. It can be much riskier than a simple share and it can incorporate leverage. If this is the case in an ICO, the regulatory requirement would be even stricter than that required for general securities, making the environment for leveraged portfolio management business models in crypto most difficult at the moment.
DECREASE IN COMPETITEVNESS OF DIGITAL SECURITIESThese developments hint at an instrument the regulator could use to moderate the fiat-to-crypto flows. If most ICOs are securities and at least some of them are even derivatives, then this covers the ground for differentiation of tokens from the perspective of taxation. There is a clear tax code for securities. Furthermore, in certain jurisdictions the profits from investments in derivatives are taxed at a higher rate. It could be a factor in taking some wind out of the enthusiasm of investors, who are counting on returns without any taxes.
This means that constructive business models based on an honest arbitrary fee approach will not be able to lessen the burden of taxation by simply moving to blockchain. In this sense “blockchain is not offshore” could be the message. How this will unfold is unknown, yet it is clear that it narrows the view about possibilities that comply with regulatory standards worldwide. This also could, in part, answer the question of why there is a need for a token and what kind of a token that should be.
CURRENCIES AND UTILITY TOKENS ARE EXEMPTCurrencies are exempt because they are a non-leveraged instrument, which is not based on assets. Bitcoin falls beautifully into this category, as do all traditional currencies as well. Imagine you decide to travel from one continent to another, and you buy some foreign cash currency for your trip. After you return you exchange what’s left back into your local currency. The exchange rates would be different, but if it is a positive difference, you made money and you keep your difference without any taxation.
This cannot happen if you would use a crypto token which would be asset-backed. However, if the token is not backed by assets then the question is can a token be backed by anything? The answer is yes it can. It can be backed by another currency. As long as there is no financial leverage in the structure and that the constitution of an instrument is 100% of currencies and the token does not constitute any ownership of assets, the instrument is neither a security nor a derivative.
Now imagine that you have a service on blockchain, which controls your currency risks while you are traveling as described. Perhaps at some point during your travels the exchange rates become more favourable, but you are somewhere where you cannot do anything about it. This blockchain service makes sure you don’t miss many of these opportunities because it backs your currency with a basket of cash currencies and observes the movements between them in order to find the most competitive overall exchange rate. An individual would need to visit exchange offices, observe the exchange rates and update his or her global wallet rather regularly, so it is not practical. Instead, you use a cryptocurrency token, which simplifies it all. It can go everywhere with you because it works on blockchain and it does not consist of any assets.
IS GOLD AN ASSET?When former FED Chairman Ben Bernanke was asked by congressman Ron Paul (R) about how he sees the role of gold and if gold is money, the Chairman clearly stated that gold is an asset, not money. In another question asked about what is backing the US Dollar then, the answer from Ben Bernanke basically was the dollar was backed by all the goods and services that the dollar can buy.
Implications of this historic interview are that crypto coins like The DAO or Xaurum, which include gold backing, could not escape the definitions of securities because gold is an asset. Nevertheless, this is an area where we completed a lot of research and have a great deal of experience. Intuitively, gold should be a part of every safe and stable currency. Legally however, if you are not a central bank, it has to be in the form of cash.
This points towards only one thing – gold coins. Gold coins have a declared fiat cash currency value and are not assets but are actually money or legal tender. Simply put, if a crypto token would use gold bullion as the backing for its tokens, it cannot be a currency, because it would hold assets as reserves.
WHAT ABOUT FOREIGN EXCHANGE TRADING?When the forex market is used for speculation purposes or for purposes of achieving an investment gain involving margin trading it represents a risky activity. An illustration might be a hedge fund using a discretionary trading strategy and 5 to 1 leverage to increase the returns in the market from 2% to 10% or more, for example.
On the other hand, foreign exchange can be used just to exchange currencies without any prediction of which way the price of one or another currency might go. In this way, it can be used to effectively balance out your dependence on just one currency. Diversification reduces the risk of any single currency’s collapse.
On a foreign exchange trading account one can have dollars and diversify them electronically using the spot price. You do not speculate on a currency, which you do not own. Such activity is different from speculative trading because it has backing in real currency for which it tries to negotiate an optimal exchange rate. The goal is in wealth preservation, not in achieving a return. When one currency is exchanged into another currency without any leverage and with diversified risk, the upside volatility decreases as well. It gives an overall effect of safety and balance, but because it is continuously searching for an optimal overall exchange rate it has a better chance to sustain value in the long-term. This helps to fight inflation, or at least if there is inflation you still get a part of the inflated value back, which lets you sustain your purchasing power more readily on really long hauls.
WHY IS THERE THE NEED FOR A TOKEN?People do not follow this wealth preservation approach, because it is expensive to do so, plus time-consuming and complex to maintain. Sometimes it requires responses during periods which are impractical and when somebody cannot do anything about it. Sometimes it requires a fast response, which is not achievable manually. It requires preparations, dedication and continuous calculation to keep your optimal diversification.
Fortunately, technology can make this benefit more accessible, because it calculates vast amounts of data quickly and can respond, increment by increment, without any wavering in focus. Without a token, each individual would have to create an X8 portfolio by himself or herself. X8 is a very sizeable portfolio to create. In order to be effective and viable, due to running costs, it has to be more than several million dollars in magnitude.
It is also not possible to make a small X8 portfolio due to minimum trade size limits set by brokers, because it doesn’t pay off for them to trade 20, 50, 100 dollar amounts. The result is that it is not possible to exchange very low, low or even medium amounts in a portfolio and then frequently maintain optimal ratios. Small and medium size savers cannot diversify their risk due to a cost equation in the value chain.
UNLIMITED EXCHANGE AT FAIR VALUEThe token enables a system, where the benefits of the functionality can be channelled to the end-user at zero fees. To the user the token has utility value. The token provides the utility which, once set up, does not impose any additional charge onto the user. This means that the market will be able to determine the value of the utility freely and the utility will be equal for all users regardless of the prevailing price of the token.
Larger users will also not need to pay more than utility value for the service because with increasing size they will not need to spend additional costs on overcoming entry hurdles. For a computer a calculation on numbers 100 times larger in scale is not 100 times more expensive. It also means that there is no hidden profit in the system as it scales up and it remains competitive as a utility.
A TOKEN FOR EVERY USEROnly a token can make this mechanism possible. It solves the problem of getting a fair reward for holding cash. It makes the use of cash less costly and more protected against harmful market drops. It reduces the entry hurdle for users who are able to use this stable money principle so that small- and mid-size users can benefit from it.
It enables a 100% backed and stable token, which is not based on assets. Because it does not include any fees in the model, the entire value for the user is actually in the token itself. To work properly it needs to be able to operate on a worldwide scale and it needs to be able to circulate freely and to service everyday activities in the digital world.
This combination of characteristics that we have presented is one of only a few which allows complete value to be built into the token itself. That is a big part of why the market needs this token. The world is looking for tokens, which can be valuable and can work practically for a large number of users. The benefit it can provide cannot be delivered to the market through any other form than as a token. The market also benefits from a new member who adds stability and a product to that market which can, in turn, attract new future users who will welcome this new token solution.
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