Bitcoin and Crypto Have No Underlying Value
Cryptocurrencies including bitcoin have been accused of having no value. Furthermore, the ICO space has been rightfully scolded for a large number of ICOs being built on vapor, perhaps somewhat akin to the dot.com boom of the late 1990s, during which most dot.com companies failed due to business models bereft of substance or logic. The number of worthless business models and scam artists in the ICO space has certainly left a negative imprint. Nevertheless, we believe blockchain remains transformational across many industries. Blockchain-based ICOs shall replace traditional venture capital as ICO capital raise is vastly more efficient and transparent than the arbitrary, intransigent, and oligopolous VC world. ICOs done right bring transparency and market forces while the cold light of day replaces the secretive elite, “behind closed doors” Venture Capitalists. Blockchain removes unnecessary middle men, thus capital raise can be done in a fraction of the time, and projects can be completed well under budget.
A New Asset Class
As a consequence of this, we have been motivated to launch one of the world’s first asset backed token (ABT) ICOs backed by real estate. The reliability of blockchain technology enables fractional ownership via a highly efficient distribution of value while greatly enhancing liquidity in what has traditionally been a fairly illiquid market. Multiple investors can now directly or indirectly own a piece of real estate, some land, an apartment, or an entire apartment complex or the use thereof. Blockchain provides a solid foundation where a far more efficient capital employs real banks, real attorneys, real accountants, real appraisers, and real sales agents to all work together to develop land into liveable homes and apartment complexes.
World’s Most Advanced
We are launching the project in what has been billed by various media sources as the world’s most advanced digital nation, Estonia. Tallinn, with its stunning Hanseatic buildings is interspersed with the world’s advanced digital start-ups, home to Skype, record bandwidth speeds, highest internet connectivity, and ranked number 5 in number of ICOs (see despite only having a population of 1.3 million. This contributes to Tallinn’s breakneck rates of growth, thus bodes well for land values with many new families in formation seeking apartment and home accommodations near the city center.
Investment Access to & for Small and Mid Cap Assets
• Our real estate asset backed tokens address the issues of cryptoassets having no underlying value and a vast number of Initial Coin Offerings (‘ICOs’) built on rather questionable business models.
• Blockchain reliability and efficiency boosts liquidity in historically illiquid markets such as real estate.
• Economic growth rates of Tallinn and Estonia are supercharged by the country’s reputation as one of the world’s most advanced digital nations, fuelled efficient regulation, a digital cadaster, digital signatures, and e-Residency.
• e-Residency enables individuals and companies to securely transact business with no geographical boundaries.
• Black swan proof: Even if the cryptospace or bitcoin were to go to zero, or regulatory burdens were to become too onerous, the foundation of our project remains so that Participants still have access to a solid property development.
• Underlying asset value, project capital gain, and yield potential encourages Participants to hold tokens instead of taking short term trading profits, thus reducing volatility and removing the often quoted high token velocity problem.
• A hedge against the current crypto bear market for the next 9 months by pegging the token to the value of a tangible asset.
The Platform for the Tokens
Based on the comprehensive operations of its partner, Coin Metro, a leading crypto exchange domiciled in Estonia, Hansecoin has developed a secure, simple and centralised virtual wallet set-up for its initial platform token. In parallel, accelerated by the virtual token issuance the blockchain platform infrastructure with its hard- and software components, the tokensiation module, and integration with CoinMetro will be developed to ensure that HanseCoin can subsequently issue blockchain based, decentralised, tradable tokens on either ERC or RSK basis which are regulatorily compliant for issuance on an exchange.
The Asset Backing
Our 6.64 hectares of land with space for at least 214 apartments and 28 houses, just 15 minutes from Tallinn’s city center, has an existing detailed (zoning) plan, infrastructure access and large parts built out, engineering projects and building permits for its first set of buildings. The land is thus “shovel ready” to be developed. We therefore plan to raise €6.6 million of construction capital via an initial asset backed token offering to be launched this fall.
In the near future, new regulation will be introduced across a variety of relevant jurisdictions set to also allow security tokens to be created and capital market listed, but as of today, exchanges may remain reluctant as no licensing exists for them to even obtain. Instead, we believe new and simpler versions of tokens replicating fragmented ownership in a preference share form will come about and attract a substantial amount of coinmarket liquidity.
Such asset backed tokens should remain designed and classified as utility tokens, thus the applicable crypto exchanges would be happy to list them for trade. Our asset backed utility tokens are designed to function as a two-step participation with process controls and procedures allowing Participants to gain access to an attractive project development and its yield potential. As part of the process, whilst our platform provider has a comprehensive, BSI certified (ISO 27001), and secure KYC and AML process in place from leading verification experts Veriff from Estonia. We plan to help motivate others onto Estonia’s e-Residency platform by allocating a small amount of bonus tokens available to any Participant joining in the first two weeks and signing up for Estonia’s e-Residency program. The latter enables registered individuals and their companies to transact business, employing secure digital signatures, across this platform with no geographical boundaries. eResidency complements the existing KYC requirements which Participants on-boarded by Veriff already fulfill as every participant’s identity is recorded digitally.
As described in the whitepaper technology annex HanseCoin 8, as the future Project Participation Token, is structured as an Ethereum ERC-223 based utility token, under applicable compliance with the requirements of the Estonian Financial Supervisory Authority (EFSA), issued by Hansecoin OÜ (the ‘Issuer’) on the basis of its collateralised usufruct rights in the asset company, Tiskre Eesti Mõnus Kodu OÜ (‘TEMK’), the Asset Company.
Starting with a Virtual Project Access Token, the tokenisation approach provides reporting rights versus the issuer company in regard to relevant project information and employs the funding against a usufruct over the underlying project held in the Asset Company as a business. It encompasses a discretionary conversion process allowing the Issuer to progress after the platform development from the customised, vested, non-tradable, non negotiable Virtual Project Access Token, to a tradable, negotiable, crypto currency exchange listed Project Participation Access Token of the Issuer Company.
During the course of the transactions the regulatory and legal environment may change, simplify and facilitate other structuring opportunities. As an example, given that the Issuer versus the Asset Company at such time holds a share pledge to collateralize its investment the Asset Company eventually may offer a conversion of the subordinated convertible loan into preference shares as set-off against the usufruct. In such an instance, albeit it unlikely, with registered shares of the Asset Company at hand the Issuer may decide to offer subject to then applicable regulatory requirements another token or even regular preference shares to HanseCoin token holders and rescind the token. Should the Issuer decide to distribute more Virtual Project Access Tokens up to the defined Hard Cap or Token Issuance Limit, existing Participants have a right of first refusal.
Staged Capitalisation Structure
The Long View
Judging by historic financial bubbles such as the dot.coms, we may see new lower lows well into 2019 or slightly beyond as shown in the chart below.
If 2015-2016 is any guide, it may take another 1-2 years for bitcoin to regain old highs around USD 20,000. But given the major tailwinds at bitcoin’s back as shown above, it may reach its old highs of around USD 20,000 sooner than we expect. Of course, before it gets there, if its current correction repeats the correction from its peak in December 2013 to its trough in January 2015, it could see lows of USD 2950, or 85% from its prior peak of around $20,000. Bitcoin has corrected as much as 94% twice in its price history. A 94% correction off peak would equal USD 1,180.
Nevertheless, the bitcoin bear market that has so far pushed bitcoin to prices at the time of this writing to just around USD 7,000, or -65% under peak prices achieved in December 2017, has motivated the often demonizing media to once again call into question bitcoin’s value.
Even in mature markets, whenever fear dominates the markets participants tend to seek assets perceived as having lasting quality as a safe haven. Preserving capital becomes a priority over pure speculative gains. Mass sell offs or widespread panic-driven price action drives market participants to asset classes that shows little to no correlation to the underlying market in turmoil. In an immature, extraordinarily disorganized, chaotic market segment such as the cryptospace such port of call did not exist.
The tokenisation approach of Hansecoin OÜ now provides for an effective hedge against the current crypto bear market for the next 9 months: the initial token secures the current value of the Participant’s holding, previously in ETH, as the token is pegged to the nominal € value of the underlying tangible platform and infrastructure development, project asset and, ultimately, its financing.
Outside the cryptospace and blockchain hype, what remains when the fog lifts? Shovel ready land that is being transformed into residential property. Even if the cryptospace and bitcoin were to go to zero, or regulatory burdens were to become too onerous, the foundation of our project remains intact. All participants in the envisaged Project Participation Tokens have access to a solid property development, have a structurally protected participation in the underlying capital gain and can enjoy the yield generated from the project.
Viability and Scale. Once the Issuer and its partners show our ABT real estate concept functions well for our initial project from a regulatory, marketing, and project execution standpoint, it shall be scaled into other projects, initially for but not limited to solely land banking and property development or residential real estate, albeit that the Issuer, its shareholders and partners have a pipeline of suitable projects in various stages at hand across the region which, if structured and pursued with the right set of participants, servicers, and managers shall be of interest. Today, fractional ownership of real estate alone is an untapped multi-billion market. Fractional ownership enables a real estate owner to split up their home or property investment and sell off equity stakes in what soon should be tradable security tokens. The real estate equity can then be freely traded until, one day, when the property is upgraded, sold or re-leased, the owner and equity investor can both enjoy any gain in the property’s value.
Suitable Asset Classes. An asset backed tokenisation does not end with standard real estate. This can also be done with other associated hard assets such as factories which include machinery and equipment. Indeed, the founders are invested in industrial assets, farming and agritech. We believe that such capital intensive segments are ideal candidates for subsequent, larger asset backed tokenisation capital raises.
Transaction Cost and Liquidity. ‘Using blockchains, you can securitize any asset for 1/100th the cost,’ according to Multicoin Capital partner Kyle Samani. ‘We will undoubtedly see tokenised real estate securities in 2018,’ according to Prof. Stephen McKeon of the University of Oregon. With lower transaction costs than previously more indirect approaches including Real Estate Investment Trusts (REITs) and real estate related Exchange Traded Funds (ETFs), tokenizing real estate could also make the space, which has been attractive to investors but often difficult to trade, significantly more liquid. An analyst at Apex Token Fund explained, ‘A new level of liquidity is created when tokenizing traditional assets. This liquidity makes it faster and easier to rebalance a portfolio as the market changes.’ With applicable concerns over inflation and rising interest rates at hand, more liquidity at lower transaction cost can be a key to generating better equity returns for smaller investors.
Virtual Project Access Token (VPAT)
The Participants remit their ether to an Ethereum Address as a payment on account into a secure central virtual wallet of the Issuer Company (’IC’) with a record in form of a receipt (a Virtual Project Access Token or ‘VPAT’, with a receipt notice comparable to a voucher to be used in connection with the platform development and subsequent project use case up to a minimum VPAT amount equivalent to a target capital of € 6.6 m with a maximum amount set at € 7.345 m. The project’s soft floor for initial capitalisation is at €5.375m, whilst the hard floor or minimum initial capital is at €3.275 m which enables to develop the platform and secure the use case. If less is raised until a future PPT issuance on the basis of the Hansecoin platform the VPAT may have to be rescinded. Lower capitalisation would lead to the platform and, ultimately, any use cases such as the envisaged underlying project, being realised in deferred stages and over a longer period.
The VPAT is fixed to a specific € value and vested for the first nine months upon closing reflecting the initial construction period of the Use Case, i.e. the underlying AC’s project. The customised and platform development specific VPAT is neither transferable nor negotiable during the vesting period. Every Participant is on-boarded prior to being able to remit funds to the Ethereum Address through the on-boarding and compliance partner Veriff (KYC and AML) via token sale platform CoinMetro operated by CoinMetro OÜ. The latter acts as the crypto exchange, payment processor and virtual wallet service provider under Estonian FIU License Number FRK000121 for the IC.
The VPAT issuance covers the challenge of timing and regulatory tokenisation restraints during the platform
infrastructure development phase in parallel to which the use case is secured, structured and project tokenisation prepared. The token code of Hansecoin 8, the first PPT as submitted for audit to a suitable external audit partner, is also be published so that people from across the industry can analyse and test it. The process can be structured in collaboration with the audit partner as a game, i.e. those who find key, relevant technical bugs are ultimately rewarded with incremental amounts of bonus tokens.
The IC can access its virtual wallet for the purpose of partial or whole conversion of its available ETH therein in order to fund the infrastructure and programming development of the platform, applicable structuring, and securing the Use Case. The IC retains a liquidity reserve until the issuance and distribution of the Project Participation Token
(please see below).
Subsequently, the Participants have the option to rescind their participation in part by selling back the VPAT to the IC at nominal value up to a total of 20% of their initial participation and 20% of the total of the whole VPAT (‘Partial Sale Rescission’). During a period of 14 calendar days, the IC accepts the Sell Back and thus redeems the applicable funding when a Participant notifies the IC. VPATs not rescinded can subsequently (a) be extended for a term to be advised on should the platform development of the Issuer so require, or (b) burned in the unlikely event that the platform development were to have failed, or (c) burned and followed by a bonus token offering in form of a then regulatory compliant PPT offering at special discount terms for previous VPAT holders. The IC is not obliged to return the VPAT contributions. The VPAT will be swapped, burned or extended.
Project Participation Token
In keeping with the then existing regulatory environment and requirements the IC mints Project Participation Token (’HanseCoin 8’ or ’PPT’) with a specified hard capitalisation limit (Hard Cap) and, pursuant to the Sell Back period having expired, offers them as a bonus to VPAT holders.
As to process, the IC mints 100% of Project Participation Tokens into a wallet vault. The IC has no manual control over it, the related smart contract handles the existing options and procedures. Amongst the PPT will be a limited amount of team bonus tokens which are vested for a 24 month period and remain in the wallet vault to incentivise the performance of the project team. The minting of PPTs occurs whenever the platform under development in close collaboration with CoinMetro is ready, the smart contract is audited and launch and regulation compliant for subsequent distribution which based on current regulatory requirements is envisaged to occur not later than 9 months from the VPAT placement having reached a soft floor of €5.375 m as start of the project, being the initial release of the minimum project funding from the IC to the AC pursuant to a partial or complete raise of participations through the VPAT.
The PPTs are envisaged to be based on an ERC 223 protocol. Upon distribution they are listed with on the Coin Metro exchange and the tokens will become tradable. Under Estonian FIU License Number FVR000143 CoinMetro is granted the ability to provide fiat to crypto, crypto to fiat, and crypto to crypto exchange services. However, CoinMetro is not regarded as a capital market under applicable securities regulation and, therefore, PPTs will not be negotiable on capital markets.
Any tokens not sold beyond the target level of € 6.6 m at the time of distribution are burned. The amount of tokens minted must cover possible yield or bonus token issuance. It has to be considered that at the outset the IC cannot guarantee whether the project will spin off less than the indicated base of 7% or the targeted 11.4% or more. Thus, a sufficiently large excess of tokens must be minted. The IC upon receipt of funds under the PPT will release funding to the AC as per the underlying contractual agreements, i.e. the Usufruct Agreement, Subordinated Convertible Loan Agreement (‘SCLA’) and the associated Share Pledge Agreement with a view to enabling the AC to employ resources as per its capital spending plan as part of construction financing.
Virtual Bonus Tokens
At the end of 24 months, the AC notifies the IC with a 14 calendar days advance notice as to whether it has generated the indicated targeted ongoing yield form the underlying project of up to 7% p.a. on the amount of capital provided to it by the IC under the SCLA and under the usufruct sweeps out such net yield in € to the IC.
The IC then mints the corresponding amount of Virtual Bonus Tokens and reports to the Project Participation Token Holders that it will issue and distribute such Virtual Bonus Tokens into the Participant’s virtual wallet via the CoinMetro token sale platform within 14 calendar days to them. These Virtual Bonus Tokens are fixed in value and time restricted for 30 days, i.e. their holders have the right to sell them back for ETH to the IC upon which they have their yield bonus and the tokens are burned. Failing to sell them results in the tokens being converted into a number of Project Participation Tokens corresponding to the nominal value of bonus tokens which are then distributed to the respective token holders but become listed, tradable and thus floating in value.
Pursuant to the first bonus date, the AC reports and if applicable sweeps out net yields to the IC on a semi-annual basis whereupon the IC repeats the aforementioned process.
At the end of 48 months from the closing date, the AC reports as to whether it has successfully managed to
complete its project. The IC will receive from the AC the net yield plus redemption of the principal capital provided under the SCLA. The IC provides a virtual bonus token in the corresponding amount of the net yield to the token holders as per the above. For the principal with 30 day’s notice it offers to either (a) repay the principal at nominal value to Project Participation Token Holders, or (b) swap the token at a small discount (bonus) into a new Virtual Project Access Token for a new project prior to the end of such 30 days, or (c) swap it at a small discount (bonus) into a new token, the ‘HanseCoin’ (no project numbering), as a master token or coin by then established for the IC to invest into existing and ongoing projects. Failure by the token holders to revert and execute within the 30 day period forces the IC to swap the tokens into a Virtual Project Access Token at nominal issuance price with a vesting period to be determined as per the underlying projects reviewed by and arranged with the IC.
If the project remains ongoing, the AC will offer the IC partial redemption of the SCLA and continuous yield coverage for a period then to be determined on the basis of Project Manager forecasts as to its completion. The IC will offer Participants to roll-over their participation or be paid out. If more Participants wish to not roll-over than what the partial redemption amount provided by the AC to IC allows, the IC will consider the AC in unmitigated default, execute its share pledge agreement in view of the SCLA, which collapses the usufruct and realise the optimal value from selling the AC’s assets for the benefit of the Participants.
The Use Case
As such the combination of the PPT and VBT allows for a sequence of issuances, mitigating regulatory and legal compliance risks. With a second project in hand (Tiskre II), which we shall bring to market right after the closing of the first participation up to its hard cap, the IC notably has substantial flexibility to allow Participants to swap between projects of different staging as they progress in parallel.
If and when it becomes necessary or suitable to issue a master coin or token, the existing token holders will be offered to swap theirs at a small discount (bonus) into HanseCoin to continue investing into the existing ongoing projects, and potentially subsequent projects. Obviously, covering both early stage, construction stage and yielding projects would render the process substantially more resilient and attractive as a template or platform for the IC to become an open ended project finance manager and arranger.
It is worthwhile noting that any pursuit of establishing a HanseCoin as then a service platform in future would require to have inbuilt blockchain programming covering RegTech (Regulation Technology Solutions), Reporting (Accounting, Compliance and Auditing), and Cafeteria Procurement (a series of available Service Providers supplying applications, program solutions, packages, web engines, SDKs, even support staffing and maintenance). Such underlying toolkits as building blocks will require significant commitment by HanseCoin’s founders, its advisory board, partners and servicers in the near future.
Even if the VPAT or the subsequent PPT were to be deemed by future regulation to contain features relevant to equity or bonds and/or these tokens could currently be regarded as a
potential transition from utility to security tokens (i.e. a future ’master’ HanseCoin). The transitional equity like token is not a security as defined by Estonian Securities Market Act and the potential for a master token is solely dependent on the outcome of future regulation in regard to the availability, form and specifications of such possible security tokens and, ultimately, whether they would be attractive to participants in a then market.
In summary, the described token offering is governed by Estonian law. Neither VPATs, PPT nor VBTs as currently structured or enivsaged are securities and do not carry with them any rights as may be commonly associated with securities. Therefore, Estonian capital market regulation does not apply to this token offering. Rights of the Participant in the token offering are limited to statutory and contractual rights. Notwithstanding the aformentioned, the Issuer is keen to ensure that should any blockchain tokenisation become classified to fall under applicable securities law, to issue future tokens accordingly, in regulatory compliance and in the necessary technical form so that a crypto exchange can list them. Alternatively, HanseCoin would be able to change the regulatory environment to the extent practicable for tokens backed by assets domiciled in the EU or other relevant economic areas.
In collaboration with its partner CoinMetro which is en route to seeking licenses from Estonian regulators for investment services, portfolio management and rendering a multilateral trading facility (MTF), HanseCoin is already preparing for the applicable structuring and documentation to be filed in Q4 to fast-track its tokenisation approach also as a possible security.
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