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How to implement a blockchain-based subsidy model: part 3

Now that we tackled without even noticing the phases of analysis, initial planning and all the technical aspects of token implementation it might be useful to further research the planning phase, regarding legal aspects and marketing. No more talking, let’s start: the basic project idea is still the same. If you are unfamiliar, I suggest…

Lorenzo Leprotti
7–10 minutes
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Now that we tackled without even noticing the phases of analysis, initial planning and all the technical aspects of token implementation it might be useful to further research the planning phase, regarding legal aspects and marketing. No more talking, let’s start: the basic project idea is still the same. If you are unfamiliar, I suggest you check out the “How to implement a blockchain-based subsidy model” in both parts. In a not very far future, the whole research will be republished as a paper so you will have the whole overview.

From a legal point of view, utility tokens are considered in the US as digital vouchers for goods or services because, essentially, the issuer pledges a service or delivery of goods when redeeming the token. Also, the utility token symbolizes rights and obligations between the issuer and the purchaser. The issuer promises the purchaser a future service, which can be specified in the white paper or the terms of use.  In the case of tokens, however, transferring this value is rather difficult due to the lack of a certificate: because they remain intangible, tokens just represent the underlying rights, without a legal character. At the same time, the European Commission established that the legal coverage regarding vouchers is not applicable to the tokens which, after the emission, become a virtual currency or an investment instrument that can be negotiated in a secondary market. This distinction is relevant since in Italy, for example, vouchers are taxed with VAT, while the “hybrid tokens” as described before are susceptible to a series of taxes as another means of investment. Then, in the event of discounts for UT users, let’s say for buying a product, VAT is paid on the service, while the exchange of UT is not tax-relevant since it only changes the user. More complex types of utility tokens, like the ones issued by Decentralized Autonomous Organizations (DAOs), under which they also have their governance tokens, are currently not regulated in Estonia or elsewhere in the European Union. Why should Estonia matter? Perhaps to show that even a quite little relevant country in the Baltic is quickly adapting to the many use cases of this technology.

MiCAR regulation objectives, source: Banking Hub

In the future, digital platforms publicly offering utility tokens to consumers and investors or listing tokens on a trading platform within the EU will need to comply with the “Markets in Crypto Assets Regulation” (MiCAR) beginning in 2024. This will result in significant direct and indirect costs for issuers. From the point of view of the authorities, their goal is to prevent acts of insider dealing and market manipulation, by adding mandatory disclosures in the white paper. To the companies, it will still be cost-efficient to pay financial consulting and legal fees in exchange for less litigation risk and maximum offering success. An interesting paper about the future developments in this field was written recently by FinTech professor D. Florysiak, who stated in the abstract: “Due to the relatively high costs of being public, I expect only larger digital platforms to list their tokens. The regulation (…) protects consumers and investors and allows innovation by preventing token market failure due to a large fraction of fraud token issuers.”

The last point to analyze is the marketing plan. In fact, the marketing team will be very much involved in the project since a critical point, as I will explain at the end, is not how to implement utility tokens, but rather if it’s an appropriate investment. To this extent, another very relevant point is how to connect ‘ordinary’ people to the geeky world of blockchain. As a first impression, the possible recommendations to company A (again, check the last articles for details) would very likely circle around these common grounds:

  • Education: spread awareness about blockchain, its functions and the potential benefits it can offer. It can be done through community events, online courses, blogs, corporate websites, and many others. The key aspect here is the simplicity of the language used.
  • User-friendly interfaces: cooperation between the marketing team and Web3 developers
  • Community building: from online platforms mainly but requires time.

A similarity between these possibilities is that they are all based on the aptitude of people towards technology. Without digging too much into any sort of psychology or history, a way to analyze it is by using a Technology Acceptance Model (TAM). Invented at the end of the ‘90s, it still is one of the most influential models of technology acceptance, with two primary factors influencing an individual’s intention to use new technology: perceived ease of use and perceived usefulness. Despite being fairly easy, it serves as a useful general framework and is consistent with several investigations into the factors that influence older adults’ intention to use new technology. According to TAM, technology acceptance is a three-stage process, whereby external factors (system design features) trigger cognitive responses (perceived ease of use and perceived usefulness), which, in turn, form an effective response (attitude toward using technology/intention), influencing use behaviour. Further developments called TAM2 or TAM3 included other variables to the simple TAM, like job relevance, result demonstrability, experience, and computer anxiety.

First TAM model, source: Theory Hub

Alternatively, another useful tool is the technology adoption curve. It is used to define a sociological framework and demonstrates how different people ranging in demographics and psychological characteristics adapt and react to new technologies and innovative products. Furthermore, the curve shows that the percentage of innovators is the first segment of technology adopters and constitutes a small part of the total market. Psychologically speaking, we refer to ‘innovators’ as those who are action takers, extroverts and those who are willing to take risks and give the new technology a shot: they are generally prone to risk, which explains why they are so few. Just after them, there is the ‘early adopters’ category. Although they are like innovators, they tend to be more cautious regarding their reputation: this means that before recommending technology to others, they make sure that their word is trustworthy. According to Everett Rogers’ book “Diffusion of Innovations”, these percentages amount to 2.5% of innovators and 13.5% of early adopters.

Percentages in the technology adoption curve, source: Userguiding

All this literature review was mentioned because in the end to provoke a network effect we will have to target that exact combined 16% of people by providing them with the means they require. Since we can’t possibly think about selecting people in a precise way, they should be the ones defining themselves: that’s why education, IT infrastructure and the community will still communicate using slightly technical language and operate on appropriate channels and in particular areas.

Once even the marketing part is covered, with the team assembled, the roadmap for our project can finally come to life, and questions arise. The big problem with this idea, which is implementing a utility token-based subsidy model, is that it may not be worth it. On one hand, the blockchain technology supporting all this has some incredible features, but on the other hand, it is difficult to use, to implement and to connect people with it. Personally, I see a project like this beneficial just for companies that are already in a tech-related field and therefore possess the knowledge and the right users to do so. The most important parts of the whole project are the first ones, especially when thinking of company A.

In the shoes of a consultant, perhaps someone specialized in the innovation division, I would hardly think of this project to be the best option. Imagine that you were to help a company to improve its customer engagement or sales. Would you advise them to implement utility tokens? As fascinating as the whole research was, companies don’t (typically) have money to put on the line for risky projects like this. The combination of having to hire external staff, convincing customers to jump in on the new technology and complying with ambiguous regulations is something that only a small niche of companies would agree on doing.

Finally, this research was not useless: not only because it took me six months to finish, but because it highlighted several aspects, like that:

  • Utility tokens are a valid option, they were implemented in the past and are not even too difficult to engineer.
  • Regulations are ambiguous because it’s still a rather new technology. Expect some changes.
  • There are a lot of fields in which companies won’t find this project cost-efficient.
  • Network effects are highly effective and not using them is a huge disadvantage. It’s just a matter of improving the basic mechanism by adding blockchain.
  • There could be extraordinary results if we think of using innovation to shape a company’s idea to the public. The early adopters may not be looking for the most secure thing, but rather for a hot issue.

SOURCES (last checked 13/7/2023):

COVER IMAGE courtesy of Pexels

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