Crypto’s Place In The New Economy for 2020 and beyond, by Tiana Laurence

By Tiana Laurence, EVP at ABE Global, a next-generation securities exchange

Crypto’s Place In The New Economy

The long-term viability of any economic model is only as good as its short-term stability. That in itself makes blockchain-based markets somewhat of a paradox. The blockchain industry sees the potential for blockchain-based equity and currency to be the present and future of economics. At the same time, it’s the digital wild west, with the technology sometimes learning as we go — and as much as governments and big businesses have invested, high-risk/high-reward situations come out of nowhere.

 Thus, you have a little bit of both sides going on. People trust these markets enough to invest in them but there are certainly instances when it feels more like gambling against the odds rather than investing.

 It turns out transferability is both a blessing and a curse for blockchain-based markets. A prime benefit of tokenizing assets such as equity is the overall ease of transferability.  However, the market is learning that transferability does not equal liquidity. This presents a major obstacle for promoters of security tokens: how to deliver a path to liquidity and how to communicate that to investors.

 That remains a critical issue as the industry tries to gain not just a foothold with the investment market, but a real significant piece of the pie. Crypto exchanges have failed to deliver daily liquidity to tokenized deals.  In fact, 90%+ of token deals collapsed due to liquidity failures. Meanwhile, traditional exchanges cannot give clear guidance to how security token offerings (STOs) can reach markets structures optimized for low-cost liquidity.

This conundrum leaves STO issuers stuck between a rock and a hard place thanks to the double-edged sword presented by global 24-hour trading. Sure, it’s convenient for traders to be always on, but that pace has a ripple effect not found in traditional markets. The high accessibility of 24-hour trading sucks the liquidity out of the market and drives down prices. Also, a crypto exchange is not an exchange, at least by the definition of “exchange” under federal securities laws. A lack of regulation, then, is both beneficial and limiting. There is greater access than ever before, and because of that, greater risk.

What’s the solution? The National Securities Exchange (NSE) allows registration of alternative trading systems (ATS), and this establishes a regulatory framework for trading. However, they limit the number of individuals that can purchase and trade STOs to the accredited crowd. In the United States, that is at most 8.8M households and the chances that they are also in the market for an exotic new digital financial instrument are most likely slim.

Crypto markets

So what does a market need to work? What is necessary beyond buyers and sellers — which crypto markets deliver in spades?

If a market can expedite onboarding new asset holders (this is getting progressively easier though challenges remain on the buyer side: education on assets, process, and holding), then what? Let’s break down the process to identify where the biggest hurdle remains.

The first thing a market needs is someone to issue an asset. Humans have been issuing securities of one kind or another for centuries. The Dutch East India Company (VOC) became the first company in history to IPO all the way back in the 1600s. STOs are just the latest twist to this old concept. But innovation always arrives with some level of resistance; historically, innovation requires a 10-fold improvement over the old version before the public moves to mass adoption.

This is known as status quo bias. Thus, one of the biggest challenges facing crypto exchanges is to hit this threshold for both buyers and sellers. So far, it hasn’t happened, and the reason why stems from hacking and scams. These create problems directly (destabilizing a STO) and indirectly (creating doubt in the overall platform’s safety). So legitimate firms that wish to raise capital are disincentivized from using a token.

From a seller perspective, the goal is market demand. Often a whale will come in and jump-start a token raise but they also are expecting sufficient market demand to profit for their early purchase. Cryptomarkets cut out broker-dealers that hold the trust and accounts of retail investors. This leaves things a little nebulous, and again, retail investors need to see a 10X advantage before switching how they choose to manage their finances.

Market makers are one of the missing ingredients in many STOs. The role of a market maker is usually a person acting as a market participant or member firm of an exchange that buys and sells securities at prices it displays. This creates a stabilizing force in the price, as they always displace a buy/sell price and create a known ceiling for the market.

All of the above is helpful in understanding how STO markets can be supported, but one problem remains: those are all patchwork solutions. This may be an unpopular idea, but as it stands, crypto markets still need regulators. Regulators create a common language that allows everyone in the market to cooperatewith an accepted understanding. Regulators also ensure that everyone plays by the rules and that the interest of the weakest parties are protected in a market. In the investment world, these are often the less educated buyers and sellers — people who may grow to become important players down the road.

None of this changes the fact that STOs are amazing. They may allow for a new wave in the globalization and democratization of capital raising. But to fully realize the potential of STOs, the industry must find a way to bridge all the stakeholders for a rock-steady foundation. In the end, better oversight may be the best way to do this, and while that may rub some crypto purists the wrong way, in my experience it’s better to have a reliable solution that simply works than none at all.

See more by Tiana Laurence here.

Where Did The $22.5 Billion Go?

Excited to join the ABE Global team! https://t.co/WrIIMLGgPr pic.twitter.com/AIjwrYaWt3

— Tiana Laurence (@LaurenceTiana) March 20, 2019

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