| As the paradigm of the digital economy changes rapidly, blockchain and the token economy are establishing themselves as the core technologies fundamentally restructuring existing financial systems and economic structures. The emergence of Bitcoin became the opportunity to introduce the innovative technology of blockchain to the world, and subsequently blockchain has expanded into various fields including finance, supply chains, administration, and AI data management. Also, as the concept of tokens — comparable to traditional currency systems — has emerged, various forms of digital assets such as stablecoins, security tokens, and asset tokens have appeared. In particular, as AI technology and blockchain-based token economies converge, a new economic model called the 'AI Token Economy' is being formed. This chapter aims to explore in depth the changes in the digital economy, from the basic concepts of Bitcoin and blockchain to the evolution of blockchain, the differences between tokens and currency, and the future that the convergence of AI and blockchain will bring. |
What Is a Token?
Tokens have existed since before the emergence of blockchain networks. Traditionally, tokens have been utilized in various forms representing economic value, and in the field of computer science were used as means of managing permissions to perform specific tasks or access rights. More specific examples include tracking codes used in postal services to track packages, or QR codes for boarding trains and airplanes.
The development of blockchain technology has further expanded the concept of tokens. Just as the internet revolutionized traditional communication systems, tokens can bring similar changes to the financial world. Tokens represent assets or access rights, and are collectively managed by distributed ledgers. Also, through smart contracts they can be issued with just a few lines of code, enabling operation in a much more efficient and automated manner than existing centralized financial systems.
Tokens can be accessed through "wallets" connected to blockchain networks, which play the role of managing the public-private key pairs connected to the corresponding blockchain's address. To use specific tokens, only people possessing the private key of the corresponding address can access them, guaranteeing security and reliability.
Tokens can perform various functions including physical, digital, and legal permissions, going beyond simple stores of value. This enables more transparent and efficient collaboration across markets and jurisdictions and promotes fair interactions among market participants. Also, tokens can play a role in inducing individual actions to contribute to collective goals, and may also have a structure where they are created when specific actions are verified. Also, cryptographic tokens can represent ownership (property rights), access rights, or voting rights, which are safely managed within the blockchain network.
To understand the attributes of tokens in this way, multiple perspectives must be considered. Major perspectives for analyzing these include technical aspects, rights aspects, fungibility, transferability, durability, regulatory aspects, incentive structures, supply, token flow, privacy, and stability. For example, tokens are divided into two main types according to whether they are fungible. Fungible tokens have equal value and can be exchanged with each other, while non-fungible tokens (NFTs) each have unique attributes and cannot be substituted for each other.
Non-fungible tokens can be utilized to express various rights and ownership including identity authentication, certificates, intellectual property rights, and access rights, beyond simple digital assets. Specifically, they can exist in various forms such as licenses, certificates, digital keys, access rights, identity authentication, wills, voting rights, tickets, royalty points, copyrights, supply chain tracking, medical data, software licenses, and warranties. These diverse application cases demonstrate that non-fungible tokens are technology that can play an important role in the real economy including notarization, authentication, and rights protection, beyond simple digital collectibles.
From Currency to Stablecoin
Currency, created to resolve the "coincidence of wants" problem that arises in barter economies and make economic exchange more efficient, is an essential element in market economies, playing the role of facilitating the exchange of goods and services. In that respect, currency performs functions as a measure of value, unit of account, medium of exchange, and store of value, and has attributes such as liquidity, fungibility, durability, portability, recognizability, stability, and counterfeit prevention.
The types of currency have also changed with the flow of time. Initially, commodity money or representative money was used, and in modern economies, fiat currency issued by central banks is most widely used. However, with the development of digital technology, as cryptographic tokens have emerged, attempts to replace or supplement the functions of existing currencies have continued. However, it is true that the price volatility of Bitcoin and many other cryptocurrencies has been criticized as a factor undermining stability as currency.
Stablecoins emerged as a concept to resolve this volatility, being virtual currencies pegged to specific assets (mainly fiat currencies). The most widely known stablecoins are Tether (USDT) and USDC, which are linked 1:1 to the U.S. dollar (USD). However, stablecoins can be pegged to various fiat currencies beyond the dollar. For example, in Europe there is Stasis Euro (EURS) based on the euro (EUR), and in Switzerland there is CryptoFranc (XCHF) based on the Swiss franc. Through this, investors can secure direct access opportunities to specific regional economies, and can also utilize them as a hedge against the highly volatile U.S. dollar.
Stablecoins not only play a 'chip' role in the virtual currency market, but also play an important role throughout the financial system. They become not only a stable store of value in the highly volatile cryptocurrency market, but are also utilized in international payments and remittances and overseas business. Compared to the traditional banking system, they provide reduced remittance fees and faster payment speeds, and in countries experiencing severe inflation, they can be utilized as tools to defend against the decline in the value of the domestic currency. Also, in countries where strong capital controls are in place, stablecoins can become a means of guaranteeing capital mobility.
Stablecoins are also compared with Central Bank Digital Currencies (CBDCs). CBDCs, digital currency directly issued by central banks, are differentiated from stablecoins in that legal reliability and stability can be guaranteed since they are government-controlled digital currency. Meanwhile, stablecoins issued by individual companies have broader accessibility and have strengths in terms of integration with existing virtual currency ecosystems. If operated transparently and stably through appropriate regulation, stablecoins appear likely to play an important role within the financial system long-term.
The Issuance and Trading of Tokens
Tokens are issued on blockchain networks and can only be managed within the network. Due to interoperability problems, tokens cannot naturally move between networks, so a specific trading system is needed to buy and sell tokens. From the initial token issuance process through circulation in exchanges, the token economy operates through various structures and mechanisms.
Token Sales rapidly spread with the emergence of the Ethereum network, and anyone can freely issue and sell tokens through smart contracts. Initially the name ICO (Initial Coin Offering) was used, but as the concept of "token" gradually became generalized, the term ITO (Initial Token Offering) emerged, and security tokens developed into the form of STO (Security Token Offering). In particular, due to numerous market failures from existing ICO methods and regulatory and security problems, new forms of token sales such as IEO (Initial Exchange Offering) emerged. In IEOs, exchanges mediate the token issuance and sales process and perform user authentication and sales oversight. Through this, issuers can reduce administrative burdens and reduce marketing costs by utilizing exchanges' existing user bases.
Token Exchanges in this way play a role like an online bank that stores users' tokens and enables them to be freely traded within the platform. Currently, most exchanges such as Binance and Coinbase operate in the form of Centralized Exchanges (CEX), supporting users to easily buy and sell tokens and enabling exchange with fiat currencies. Also, personal wallet creation and management functions are provided, and services for storing users' private keys are included. However, CEXs with their centralized nature carry vulnerabilities such as hacking, mismanagement, trading volume volatility, and censorship.
Decentralized Exchanges (DEX) emerged as an alternative to resolve these problems. DEXs enable users to trade tokens more freely by enabling direct (on-chain) transaction settlement on blockchain ledgers without the intervention of central authorities. Through this, an environment can be created where users residing in different countries can automatically connect and trade.
The token issuance and trading process, based on blockchain technology and smart contracts, is creating an innovative model differentiated from existing financial systems. As the burden on issuers has decreased with development from ICO to IEO, and decentralized exchanges have emerged to complement the shortcomings of centralized exchanges, movements are appearing. These changes will continuously evolve alongside regulatory and technological developments and will act as key elements driving the expansion of the token economy.
Asset Tokens vs. Security Tokens
The tokenization of existing assets refers to the process of creating tokenized digital twins of physical objects or financial assets. At this time, tokens function as counterparts to physical assets and are collectively managed by distributed ledgers. The term "asset token" is thus a comprehensive concept that can include all types of assets such as commodities, artworks, real estate, and securities. Meanwhile, "security token" is a specific type of asset token that is classified as a security according to financial market regulations. However, what is considered a security can be interpreted differently according to the laws of each country.
For example, in the United States the standard for determining whether something is a security token is the "Howey Test," which considers something a security if four conditions are met: △investment of funds, △common enterprise, △expectation of profit, and △efforts of others. The SEC (U.S. Securities and Exchange Commission) argues that XRP meets these requirements as an "Investment Contract" and that Ripple Labs raised funds by selling unregistered securities. In contrast, Ripple Labs countered that XRP is a digital asset like Bitcoin (BTC) or Ethereum (ETH) and is not a security because investors do not expect profits based on Ripple Labs' efforts. In July 2023, a U.S. federal court ruled that sales to institutional investors were securities, but exchange trading targeting general investors was not.
This ruling is the first case recognizing that the security nature of cryptocurrency can differ depending on how it is distributed, which suggests an important change in the regulatory direction of the cryptocurrency market. In particular, if the manner in which general investors trade on cryptocurrency exchanges is not subject to securities regulation, there is a high possibility that similar logic could apply to other projects such as Ethereum, Solana, and Cardano, which appears likely to be an opportunity to reduce regulatory risk and establish clearer legal standards. Also, considering the impact of U.S. securities law on the cryptocurrency industry, this ruling will play an important role in establishing legal standards for various blockchain-related business models such as NFTs (non-fungible tokens), STOs (security token offerings), and digital asset exchange operations, and will be an important precedent determining the legal status of future digital asset trading and tokenized assets.
From a legal perspective, the tokenization of physical assets (or rights to them) and the tokenization of other virtual rights have very important implications. Existing tools representing virtual assets (such as paper certificates and digital certificates) are also highly likely to be replaced by tokens. Most importantly, depending on the regulatory environment and the configuration of smart contracts, asset tokens may be eligible for global trading. The opening of global markets further increases liquidity and provides new opportunities to both entrepreneurs and investors. This may also make it easier to purchase stakes in foreign assets that were previously difficult to acquire.
For example, in the real estate industry, smart contracts have the potential to simplify rights management and transaction procedures. When real estate ownership is tokenized, it can be easily registered and managed in public infrastructure, and P2P (peer-to-peer) transactions are also possible if regulatory requirements are met. The hash data of each property is recorded on distributed ledgers, providing a universally shared dataset on all property-related activities such as past owners, repair history, and amenities. Furthermore, tokens can be issued not only for existing properties but also for real estate projects under development.
The tokenization of the art and entertainment market also has the potential to resolve several inefficiencies of existing systems. Asset markets such as the art market and real estate market that normally require enormous initial economic investment can also enable fractional ownership through tokenization, through which new use cases that were previously impossible can emerge. For example, instead of purchasing a single artwork for millions of euros, it is now possible to purchase a portion of that work. Also, changes could occur in various aspects such as provenance verification, digital rights management, settlement, and crowdfunding. Asset tokens thus have great potential to bring innovation not only to financial markets but also to the economy as a whole, and security tokens will be an important starting point promoting such change.
