Tokens are tulips or teabags or…

Many years ago, at the height of the Dotcom boom, I was involved in a couple of consulting projects advising investment banks on technology infrastructure. I can remember that in one of the teams I worked with at that time had a generic dismissive term for nonsensical dot com startups that had no sustainable business model and were created simply to fleece retail investors in IPOs while rewarding their investment banking chums. This was “usedcondoms.com”.

Whether it is now politically-incorrect to use the term or not I am not certain (I am sure that social media will let me know pretty quickly) but it still pops up in my head when I read about some new non-fungible token (NFT) jape, which is almost every day at the moment. I’ll see something about a machine generating pictures of chimpanzees with assorted random sunglasses on and just file it away under usedcondoms.eth and think no more about it.

I discovered that used condoms do have a sustainable business model associated with them after all. Click To Tweet

Unfortunately I am going to have to train myself in some new terminology, since I discovered that used condoms do have a sustainable business model associated with them after all. The police in Vietnam discovered a working operation in the province of Binh Duong following a tip off. Instead of praising the freelance prophylactic entrepreneurs for their valuable ecological stand against single-use disposable consumer products, the forces of law and order raided their warehouse and confiscated a few hundred kilos of bags stuffed with more than 300,000 recycled condoms. According to news reports, the condoms had been boiled, dried and reshaped with a wooden prosthesis. The warehouse owner, a 34-year-old woman who said she received a monthly delivery of used condoms from an “unknown person”, came clean on the economics: she got 17 cents for every kilo of recycled rubbers, so the police had confiscated a substantial amount of her dongs (in fact, about a week’s worth at average wage).

I think I’m going to have to choose a more British epithet and ask whether NFTs are going to be another Paypal or another usedteabags.com* or whatever.

Listen to the Flower People

Actually, I think a more useful analogy is tulip bulbs. As you will have noticed, discussions about Bitcoin frequently refer to the well-known speculative mania of the Amsterdam “tulip bubble” in the 17th century. But as I pointed out in Forbes last year, that was not a mass market mania but speculation by a small group of rich people who could well afford to lose money. What’s more, when the bubble popped it left behind a more efficient and better regulated financial market that played a significant role in creating the Dutch golden age. So great was the impact of this more efficient financial intermediation that balances at the Bank of Amsterdam became a pan-European currency and, as noted in an Atlanta Fed paper on the subject, the Dutch florin played a role “not unlike that of the U.S. dollar today”.

So, saying that NFTs are like the tulip bubble is, in fact, saying that a relatively small number of people will lose a lot of money, but the long term outcome will be a more efficient financial system, which is pretty much what The Economist meant when it observed that “because tokens can be digital representations of nearly anything, they could be efficient solutions to all sorts of financial problems”.

When I’ve spoken to serious finance people about tokens they have all pretty much said the same thing: when the regulatory structure is in place, they will tokenise everything. Everything.

* Uh oh. I’ve just discovered that there are in fact 27 things to do with used teabags, so I’m going to have to go back to drawing board (well, bath) and come up with something else sharpish.