Token Reform: from Epic to Epic Fail
Updated: Aug 19, 2018
For anyone familiar with the Chinese crypto circle, the one buzzword for the past month was “token reform.” The story around it was dramatic, somewhat bizarre even. And reception ranged from rapture, cynical, to contempt. But if you happen to be out of the loop, the following recap might shed some light on what actually happened. First, we need to dial back the clock a bit, to the beginning of July.
How Did "Token Reform" Become A Thing?
On July 5, FCoin, the Exchange known for a "trans-fee mining" model and clogging the Ethereum network at its peak, made an announcement. They were to test launch a program called "token reform," and would upgrade their main board to accommodate for new projects that qualify for the program.
By definition, "token reform" refers to the attempt to boost real economy via tokenization--more specifically, through introducing blockchain and crypto tokens to those traditional enterprises that have mature products, services, and customers. The purpose of the reform is to help companies unable to go public to raise funds quickly, and at the same time, bringing market-tested use cases to an "all-white-paper-and-no-product" cryptocurrency market.
If the idea itself was far from novel, the speed of execution indeed set a precedent. Within days, one disclosure after another, FCoin's reform program seemed to be well on track, and the notion quickly caught fire in the Chinese crypto circle.
The endorsement from two people helped to build the hype. One of them was Yuandao, Chairman of 21ViaNet Group, the other being Meng Yan, VP of CSDN. In fact, it was the duo who introduced and popularized the concept of token economy to the Chinese Crypto circle in 2017, paving the way for this program. And on the same day of FCoin's first announcement, they made one of their own as vocal supporters of the endeavor. Soon, they were picked to oversee the program development.
Many raved how this could open a new chapter of blockchain adoption. Of course, there were doubters, but more were anticipating. It all seemed promising until August, when a project called QOS got listed on FCoin Exchange, marking its debut as a "token reform" project.
The Downward Spiral
Contrary to predictions, QOS crashed. Badly. It tumbled 80% off its initial price four days after going public. FCoin then decided to pause all trades.
People started digging around and discovered Homa, a prominent refrigerator ODM in China, was involved. Four of Homa's current or former personnel appeared to be on the QOS team, including the company's chairman of the board, Zhao Guodong.
But Homa is already a public company. What brought it into this game? As it turns out, the company hasn't been doing well financially. Since getting listed on Shenzhen Stock Exchange in 2012, it went through multiple trade suspensions, the latest one still in effect at the time of this article. Also, Homa's 2017 annual report showed an abysmal net cash flow of ¥ -833 million, a -228% drop from the year before. It is suspected the company counted on the token reform to pull itself out of a dire situation.
Despite Homa publicly denying any tie with FCoin, claiming it was Zhang and co.'s "personal conduct," their mere appearance in QOS's white paper was enough to tarnished the reputation of the reform.
On August 13th, FCoin initiated an emergency referendum. The vote result showed the community decided to wipe out the entirety of un-mined FT (FCoin's token) all at once, entering an era of FT deflation. At the same time, the token reform was thrown out of the window. An "epic" start ended in an epic failure.
A Proposal Set to Fail
It was easier in hindsight to spot the danger signs of this reform. Analysts pointed out FCoin's motives was not pure from the beginning. Their "trans-mining" model was struggling, and people suspected the reform was just a new trick to attract money, with no solid ground to begin with. Besides, FCoin was notorious for changing the game rules on a whim, this time no different. It added to the panic when the price went down.
Some suggested FCoin underestimated the difficulty of the reform. It would be extremely challenging for large enterprises to realize tokenization, as there would be too many interest parties to satisfy. Moreover, ICOs are currently illegal in China, and tokenization could easily be interpreted as a way to bypass legislation, a risk most big companies would rather avoid.
Besides, any successful tokenization would require a reliable public blockchain at its base. Building a high-functional and secure public chain was not an easy task. And puzzlingly, QOS decided simply to create one on their own, a kind of expertise they had yet to prove they possess.
As Binance co-founder He Yi quipped, a bad asset was a bad asset; it wouldn't suddenly turn into prime assets with the touch of a token. Likewise, token reform was no cure-all remedy. It could never solve all the business problems.
But...Is There No Hope?
Though some people were turned down by the debacle, others were more optimistic. To quote Wang Lei, Senior VP of Xinmoney Blockchain, "the best test field for token reform should be the convenience store at the street corner, the dental clinic near your company, your favorite hot pot chain, and hundreds of millions of local service." He believed those businesses had the advantage of existing loyalty programs, with reward points, coupons, membership and even off-chain tokens circulating within the system, which perfectly meshed with the ideals of a token economy.
It was still too early to predict when the next "token reform" would take place and in what form, but at least to a few, hope is not yet lost.