Tokenizing Debt: Flipping Debt into IOU tokens

A recent article stated there were ongoing rumors that Celsius wanted to convert its debt into IOU tokens.  According to leaked audio, Celsius executives were mulling converting their debt into an IOU cryptocurrency and giving it out to their debtors as settlement. This token will be given as a ratio of what the firm owes its clients and what it currently has on its balance sheet- the notion being that if the debtors could hold on to these tokens for long, then they will ultimately increase in price and generate gains for their holders. The company recently filed for Chapter 11 Bankruptcy and they are in the process of restructuring and finding the best way to clear their debt.

What are IOU Tokens

IOU is an acronym and stands for I Owe You. It is a contract that is signed by two parties indicating that they acknowledge that debt is owed by one party to the other. These contracts can be digitized and brought into the blockchain and then converted into tradeable tokens. Value of the tokens is expected to be governed by market perception of the party offering the tokens. In the event that the company can prove that it is sustainable and has multiple income streams, then the market may be bullish about it therefore boosting the value of the token. These kinds of tokens can only be employed by companies that have fallen into debt and consider their current income streams insufficient to cater for the underlying debt while at the same time sustain day to day operations. Depending on the contract, the token can be bought back by the company at an agreed timeframe or simply traded at the secondary market.

IOU tokens are ingenious ways in which Blockchain companies are spinning their debt obligations into “ temporary assets” and trading them on secondary markets. Celsius is not the only company that has leveraged this new debt model. Recently, a Chinese Mining company, Poolin, suspended withdrawals on its site and thereafter issued IOU tokens to its users. Users were given these IOU tokens at a  ratio of 1:1 of their holdings on the platform. The users have the option of selling these tokens on third party websites, reselling back on the platform or even purchase products  from the company.

Recent goings on in the industry show that IOU tokens seem to act as a viable last resort for companies facing liquidity challenges. Wide adoption of these tokens may encourage brick and mortar companies that have solid assets but are facing temporary  liquidity challenges to consider floating IOU tokens. This will deepen Defi, enhance liquidity in the ecosystem and  help develop new and advanced products for this industry.