Wednesday, July 5, 2023

The strange new world of multifunctional assets

I would never own it, but the cryptocurrency BNB is probably one of the strangest most interesting assets I've ever analyzed. No other asset (perhaps ever?) provides its owner with so much functionality. 

Is the sort of multi-functionality offered by assets like BNB a feature that all assets will have in the future? Is this the dawn of a multi-functional asset world? I'll explore this question at the end of this post.

BNB was issued by Binance, the beleaguered global crypto exchange, through an initial coin offering in 2017. It has around four, maybe five (?) different functions.

1. a medium of exchange

 BNB can be digitally transferred in a P2P fashion to other people. You can use it to buy stuff, send funds to friends or family, or move funds between crypto exchanges. It's like cash, except electronic (and volatile).

2. an investment security

BNB provides yield to its owner, sort of like a stock or bond. Most securities issuers pay securities owners an explicit return in the form of a stream of dividend payments or interest payments, generated out of the issuer's revenues. Rather than paying a return directly, Binance repurchases and cancels BNB using a portion of revenues.* It dubs this process burning, but it's functionally the same thing as paying a dividend.

3. loyalty points

Like the points issued by Starbucks, BNB can be used at the exchange to get deals on trading fees and access to other Binance perks and services.

4. a ticket, or commodity

In addition to running a big crypto exchange, Binance controls a "decentralized" blockchain. The only way to use that blockchain is to have some BNB on hand to pay fees. No BNB, no play. So we can think of BNB as a ticket to get network access or, alternatively, a very select sort of commodity. That is, in the same way that the demand for pork bellies is driven by people's desire to consume bacon, the demand for BNB is driven by people's desire to consume the services available on Binance's blockchain.

So BNB is Swiss army-knife asset, with four functions packed into one instrument. There's probably more that I've missed.

The dawn of a multi-functional asset world?

Might this sort of multi-functionality, heretofore confined to the crypto ecosystem, become popular in the regular world? 

Let's imagine what Apple multi-functionality might look like. Apple shares wouldn't just be securities providing a yield. They could also be sent to friends and family as payment, or used to buy apples at the grocery store. They could also be used as loyalty points, say to get perks at the Apple store (i.e. priority in line to see a technician), and as a necessary commodity for accessing certain types of Apple product functionality.

Or, imagine if your Air Canada ticket also provided a flow of dividend payments, like Air Canada shares do. And say that ticket could also be used as a digital medium-of-exchange for buying stuff and/or remitting funds back home to family.

One thing that has historically prevented this sort of multi-functionality is that securities, media of exchange, coupons, loyalty points, and tickets have always existed on separate databases, each with its own set of rules,  none capable of communicating with the other. When you start out from scratch, however, with a single database, as was the case with blockchains, and thus a unified set of rules, then that opens the door to multi-functional assets.

But even if the technological problem is solved (as well as a legion of legal and regulatory issues), there's another key reason that multi-functionality may never become widely adopted. It may not offer end-users an ideal customer experience. The problem is that functions start to interfere with each other, the final result being that the total usefulness of the multi-functional asset is less than the total usefulness of the set of separate assets, each offering its functionality independently.

For instance, if loyalty points are imbued with features that turn them into securities, then they will become much more volatile. For folks who simply want to be able to reliably and consistently consume a given product, these fluctuations will be a turn-off.

Alternatively, if a bundle of features (like p2p transferability and loyalty benefits) are added to an existing security, this will probably increase its price, upsetting many asset managers who don't want those perks, but want to enjoy a stream of dividends at the cheapest price possible.

So even though new technologies may allow for multi-functional assets, a multi-functional world may never actually emerge because people naturally prefer that functions be split apart.

* More specifically, the revenue stream that funds repurchases, or "burns," of BNB comes from user fees levied on users of BSC Chain, Binance's "decentralized" blockchain. There's a formula that calculates how much fees get burned. Prior to this, revenues from were used to fund repurchases and cancelleations of BNB.


  1. Wouldn't another point simply be utility for the issuer? Why will an airline allow a ticket to also become a security? In the current dynamic, they can sell a ticket to a customer, as well as a security.

    1. I dunno, but here's an airline that is issuing digitally tradeable tickets:

      The airline's stated reason for doing so:

      "Flybondi says the NFT ticket 'offers a more flexible travel experience that allows passengers to even buy in advance without having to define their travel plans or who the travelers will be.' In return, the airline is able to reduce customer service costs and increase its revenue from trading fees."