There are a number of major players today — including startups, incumbents, companies and even nations — looking to take control of global crypto markets. Recently, Gibraltar announced the launch of a new offering to enable compliant secondary trading for tokens. They plan to offer liquidity , an investor pool, listing requirements, and become the world’s premier blockchain exchange.
Numerous other companies are battling for this same position in the industry.
Let’s get something straight, if you have individual companies, or one very specific stock exchange, pooling and controlling the end to end flow of capital, that is not efficient. You cannot, and should not control the investors, token, exchange and listing requirements. Doing so only serves the intermediary and creates unneeded friction.
Even today, with our current financial system, a stock exchange functions as intermediary for exchange. Brokers, banks and other entities advise and pool investors, thereby facilitating capital flow. The exchange is centralized, the investors are decentralized to a degree, at least on a local level.
For blockchain, points of centralization typically mean points of weakness in terms of security, stability, and a fair market. Luckily, there are a number of ways to enable compliant secondary trading without centralization.
Recently, I was playing around with a 0x, Radar Relay — whom is built on top of 0x (not endorsements for either). It was surprisingly simple to trade your tokens on global decentralized networks with ease. Global peer to peer indexing allows anyone to post a buy or sell order, against market rates, using a smart contract to fulfill the order, rather than an exchange.
From a legal and finance perspective this does create new problems, so there has to be some middle ground. Compliance and due diligence checks should and will be done to ensure the integrity of the blockchain ledger as a trusted and legally viable record of trades in the event the token is determined to be a security.
Some members of the decentralized community may feel that compliance defeats the purpose of blockchain. A quick sampling of transactions show a tremendous amount of fraudulent or criminal activity across all mediums of transaction whether they be fiat cash, securities, or cryptocurrencies.
Compliance, checks and balances can be put direct in a token contract, reducing the price of compliance to the computational cost of processing a transaction, it’s automatic. Smart contracts facilitate automatic transactions, this is a stark contrast to the status quo today where banks around the world spend upwards of 7% of gross revenue on compliance — which usually entails someone crammed into a cubicle ticking boxes.
An aside — its funny how countries known for their tax havens, secrecy laws, money laundering and loose regulations are stepping over each other to get into the business of token offerings and exchanges of cryptocurrencies. Recently, this came up in one of our team meetings — resulting in the following comment:
‘You can only build so many protocols, but you can bet Brookfield Asset Management will not be launching an infrastructure project with a [token in Gibraltar]. To give you a perspective on how big real markets are, Brookfield (Canadian based) sold a 60% share in a infrastructure project last week for $1.2B... that’s one transaction! $4B (the total funds raised by cryptocurrencies in 2017) in speculative projects is small potatoes’.
It is easy to get caught up in the ‘crypto-craze’ but when you zoom out to look at the market as a whole you see that there is so much more at stake!
But I digress…
So now we have compliance, decentralized global exchanges and automated law — to a degree.
Living animals aren’t the most liquid asset
When you can assign value to each token and trade in-between tokens and value systems, that fungibility can be a beautiful thing — it’s almost as if we are going back to a barter economy with full liquidity. Where you can sell half a cow without killing it!
Those not involved in markets today, forget that there are always market makers — we have always had them, and we always will. Using a market maker you may pay a premium to get something instantly ( i.e off load your tokens in a snap) versus waiting for something to clear. We see this in day to day life, you pay interest on a loan, or a late fee somewhere, or in video games like FIFA where you can quick sell a card instead of waiting for someone to pick it up at market price. The opposite is true where you may get a discount for a large purchase order, or at least an easier trade with a big block of shares.
That’s just market dynamics, those don’t go away —it eases friction in the flow of value and capital. If we didn’t have market makers, people would get in trouble — there’s always a need for the option of a quick offload or buy, and someone needs to fill that gap.
But don’t kid yourself —and most of the current investors in tokens ought to take heed — if you have a bad product or valueless token, you might not ever get a buyer. Just like a completely trash business might not get liquidity, apart from the pump and dump schemes we see increasing in both traditional stock exchanges and initial coin offerings.
The bottom line… the world is changing, decentralization and tokenization is here to stay. The traditional and decentralized economies will become more integrated, and fungibility between individuals is alive, well and it works, right now! This will increase in utility as more projects like Airswap, 0x, and the resulting tertiary enablers such as Rapid Relay continue to gain traction.
Once an asset is tokenized using blockchain it can trade much more efficiently, but this does not eliminate the need for compliance and market making. While many intermediaries can expect to be removed from the equation in the next few years there are still many opportunities for intermediaries who seek to reduce friction without disrupting the flow of capital, without causing harm.
This means a big shift in the status quo for both traditional and decentralized finance, those that do it the old way — watch out, the world doesn’t need to work that way anymore, things are moving too fast to have too many intermediated pools.
As 2018 unfolds, watch out for the money and power grabs as the nascent token market starts to mature and the true stewards of the next generation of capital emerge to bring value to the market with integrity, privacy, accessibility and decentralization.
-Q
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