Blockchain’s promise as the internet of value relies largely on liquidity. Economic friction remains a major international trade barrier for financial products. Regulators around the world are dragging their feet at addressing some of the most fundamental aspects of the technology in practice. Progress is picking up, however. Thailand has recently allowed security token exchanges following others such as Malta or Estonia but no market is yet mature.
Early frameworks relied on crowdfunding regulations in the US, This worked for smaller amounts. Reg Cf was created during the Kickstarter boom ease fundraising efforts for entrepreneurs. It could be used to appeal to quasi-unlimited number of investors but with a mere million dollars as a total lifetime fundraising cap. Lithuania is one of the countries aiming a regulatory framework as transparent as it is friendly and thereby aiming to attract blockchain entrepreneurs. Compared to the United States, Lithuania allows crowdfunding campaigns to raise as much as 5M euros on a yearly instead of lifetime basis.
Crowdfunding legislation is woefully inadequate for financial products of any true use on Wall St. Several securities were launched in the US and filed as Reg A+ or Reg D exempt. The concerns would not come from issuance however, but in transactability. International financial accords like Basel 3 provide a new direction for all industry participants to work towards. The equivalent for Blockchain is still a ways away.
The multi-trillion dollar equity market is a small part of the total global derivative market, valued in the hundreds of trillions. However, equities like stocks and commodities trade very easily while real estate and alternative assets remain plagued by delays, fees, and unnecessary middlemen. Unsurprisingly, countries like Switzerland also have cemented a reputation as forward-thinking regulators eager to empower entrepreneurs seeking to innovate with financial technologies.
FINMA has introduced new licenses such as the light banking license and the fintech license expected later in 2019. While investors are painfully aware of the various barriers to entry in specific markets and more careful due to the constant volatility of 2018, they are still looking for investments to quench their thirst.
This coincided with the advent of security token offerings. The ability to draw a larger pool of investors for structured products is fueling the rise of this new form of investment. One of the emerging trends of 2018 was the popularization of stable coins. As the concept evolves it was also fraught with fraud.
The concept of Tokenized Securities is simple yet very powerful. Tether was invented to
avert the consequences of an expensive hack, however, it appears that until recently there was not matching those allegedly tethered dollars. Although blockchain philosophy diverges in some aspects, everyone from the hippies to the bankers can agree on key benefits including transparency, ease of transaction and traceability. It is, after all, a ledger.
The future of stable coins is in asset back securities. Auditing transparency in custodianship and compliance are key features of this emerging industry. Companies like Smart Valor are already leveraging Swiss regulations to create fiat backed stable coins and secondary markets for tokenized securities. As issuers joined these platforms with better quality financial products ranging from smaller multi-million crowdfunded dollar projects to multi-billion dollars derivatives created by major financial institution, the industry size is set to grow exponentially.
Hedge funds and banks are increasingly interested in deploying blockchain technologies. In practice, much of the successful deployments of distributed layer technologies will be behind the scenes ensuring better trading efficiency between the same institutions that trade them today.
Regulations normalizing coupled with greater institutional confidence could well mean the blockchain’s promise of greater liquidity will begin to appear in observable reality.
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