Columnist

The creation of accessible global capital markets is the door to a golden age

Coin Rivet columnist, Irina Litchfield, gives her view on why global capital markets can be unlocked by leveraging blockchain technology

Don’t we already have global capital markets?

The answer to this question is – kind of.
It is only accessible to the wealthiest people in the world and is extremely expensive to carry out.
If you’re a citizen of Mexico and have made a few million dollars in the telecom industry, it’s fairly straightforward to get an account at an Investment Bank. With that, you can invest in US securities, probably some emerging markets equities, bonds, etc. Basically, anything that the Investment Bank wants you to be able to invest in. But that’s, obviously, the rarified exception that proves the rule.
It’s an exception for two reasons.

Access

How many developing world citizens accrue millions of dollars? Vanishingly few. It is extremely challenging to create wealth in the developed world, but imagine trying to do it in Bolivia. It’s an entirely different scale problem.
Inventory
Imagine that, as a privileged Central American national who was able to get an Investment Bank account, you want to invest in an exciting Israeli space company you read about on Reddit.
Too bad.
Unless you get a bunch of investment gatekeepers to decide the deal is “right for them” (and, I guess, you) as it’s your money that’s at risk, you are out of luck. And forget about buying an exciting cryptocurrency like Monero or Digibyte. You can probably get Bitcoin, and *MAYBE* Ethereum, but you’re very much at the mercy of your bankers.
When I talk about the Creation of Global Capital Markets, I am talking about inexpensive, true, open global marketplace available to all, not just the most privileged.
I want a world where a cab driver in Abuja, the capital of Nigeria, can invest in the exciting space company she reads about on Reddit.

How do we get there?

That is our north star.
Now, many questions follow this statement.
Why has not this been done before?
Why do we need it?
How do we make it a reality?
And is it even possible to do so?
Let me address why it has not been done before first.
No, it is not because the world is evil and the privileged want to keep it all to themselves.
It is simply because up until now we did not have proper mechanisms to carry it out.
Attempts have been made to make it a reality, but every time we tried to, it was clear that it is simply too expensive.
Every country has its own regulatory regimes around the capital. Whether they’re strictly regulating what kinds of accounts their citizens are allowed to have.
And whether they even want that capital to leave the country, or if they want to strictly regulate the types of investments made in their country.
So, the answer is: It’s complicated and a hard landscape to navigate.

So why do we need it?

Because people want it.
We live in a world of global connectivity, people now have access to any information at their fingertips. And most importantly they want to participate in investment opportunities.
The Nigerian cab driver very much wants to invest her pay in exciting opportunities she reads about. She thinks she can generate Alpha, and who are we, as capital markets professionals, to deny her that?
We saw clear global demand during the ICO Era in 2017/18. People were willing to deal with incredibly convoluted products and buying experiences to access exciting investments.
This is not some kind of world bank study showing that we think people want to make risky investments (which is the very essence of capital formation), we SAW it happen. The market very clearly announced that it wants this type of access.
*Capital will flow to these investments.*
Now, that was a time when a lot of offerings were less than legal, but that’s not the point I am making here. The point is: we saw a huge demand for investment opportunities from investors from all over the world. They all understood the risk, they all did their own research and outdated “dialling for dollars” was no longer needed
For those of you who are not familiar with what dialling for dollars means, here is an explanation.
During early IPO times in the early ’90s, all stock was pushed to the “unsophisticated” investors (another outdated term) by brokers literally getting on the phone and calling potential investors in hopes to sell stock to them. Can you imagine how expensive and inefficient this was? It was the only way, so by definition, it was the best way.
However, in the new world, in the world of today, we no longer need, nor we want to be sold stock. Especially via cold calling brokers. We have evolved to a new level of sophistication to be comfortable to process information and to draw our own conclusions.

So, how do we make this a reality?

I am pleased to inform you that it is possible because of innovation, specifically blockchain. We are finally at the point where with certainty we can say that this technology allows us to create a secure and inexpensive process that gives us the ability to eliminate countless, expensive intermediaries that are in place to ensure compliance.
Regulatory compliance of securities is complex, and it is so to prevent fraud. Every security needs to be authenticated before it is transferred. There are over 20 databases in one transfer. Each of these databases (generally run by different organisations ) must be licensed, paid, and synchronised to ensure validation of authenticity.
Answers to the following questions must be answered with 100 percent certainty:
Is the security what we think it is?
Is the person who we think they are?
Does the person own the security?
Is the intended buyer whom they say they are?
Is the intended buyer a resident of the country they say they are?
Does the intended buyer have funds available to buy the asset?
Did the intended buyer get their money legally?
Does the intended buyer tend to finance terrorism with this purchase?
Is the asset that they think they are buying a real asset?
Does the asset they think they are buying transact in their country?
Does the intended buyer have an actual understanding of the asset’s attributes (security, bond, coupon payments, dividend history, etc?
Does the seller actually own the securities?
Are the securities the seller owns able to transact (not encumbered somehow)?
Can the seller legally transact with the intended buyer?
All these questions must be validated within just one, closed border jurisdiction. Add cross-border transfer complexity to that and you can see why it becomes very expensive to transact at scale (which is a requirement for the public – or large private – offerings) in just one jurisdiction not even talking about global offering.
Blockchain allows us to create transactions that are self-authenticating.
Early user interface issues aside, it’s now becoming possible to do these types of “self-authenticating transactions” using blockchain technology.
Nearly all of the above questions can be easily addressed using this tech.
For example:
How do we know this asset exists? Answer -Math.
How do we know it’s owned by this person? Answer -They can prove it unambiguously.
How do we know it’s transferrable? Answer –
The source code.
The nature of immutability allows us to answer so many of these questions
The way we look at the securities becomes absolutely *different* in every way when there is literally a immutable single source of truth that can be known before any transaction.
We now also have more than a decade of analysing blockchain technology and it is clear that it is unbelievably secure.
The fundamental developments in game theory, technology, and distributed systems, in general, continue to stand the test of time – even as the bounty for attacking them grows.
For example, if someone was able to compromise the Bitcoin blockchain – or even Ethereum, they would be able to extract billions of dollars themselves. That’s a big bug bounty!
That bounty is out there, has been out there, and will continue to be available.
And all signs point to this technology remaining secure because it was architected, at a very low level, to be secure.
Think about it, basically, every major bank, corporation, and even government been hacked. But not bitcoin.
So, it is clear that we now have proven, secure technology that eliminates the heavy burden of countless intermediaries and allows for the cost-effective offering – tokenised securities.
But, that’s only half of the recipe for the successful creation of truly Global Capital markets.
The other half of it is one that seems most challenging to many.
There is an understanding that all jurisdictions are driven by the incentive to block capital from leaving and so the legislations were built around that.

So, why all of the sudden regulators would want to allow cross border transfer?

Simple, to attract more capital and welcome foreign business growth into their jurisdiction. For several years now we have been witnessing a rise in many jurisdictions providing favourable legislation in hopes of attracting and relocating businesses from other countries. Brain drain has been a real issue for those countries that are not willing to adapt to the new world.
Also, remember, I told you that Global Capital markets infrastructure already exists. It exists for the wealthy. So the regulators don’t really need to create new laws.
In reality, all regulators care about is making sure that the security is not a fraud and so, the innate nature of DLT ( distributed Ledger Technology ) makes their job much easier. It is an immutable, self-authenticating record keeping system. A paradise for regulators.
These are the reasons why it is now possible to create inexpensive public offerings.
Once you create public offering on tier one securities exchange, you then can create a Depositary Receipt – which is a standardised offering that can be listed in other countries.
A depositary receipt is essentially an entity (like a bank) buying a bunch of shares of stock in a company in another country. For example, a bank in Sri Lanka may buy 10,000 shares of Apple for sale to Sri Lankan citizens. They then securitise this holding and list that holding on their local stock market. The easiest thing to reason about is the case where they buy 10,000 shares of AAPL, and then list 10,000 shares of this new company (that just exists to hold the AAPL stock) on the local stock market. Someone with a local brokerage account can buy a share (or part of a “share” of this Sri Lankan security and feel pretty comfortable that they’ll be richer if the price of AAPL goes up, less rich if it goes down, and hopefully they can buy more or sell it if they want to manage their exposure to AAPL. These transactions will happen according to their local securities laws and in their native currency.
Depositary Receipt it’s like a standard shipping container, regulators from other jurisdictions then do not need to look inside this receipt to see what it is. Apple does not need to think about or care that someone bought 10,000 shares and is now selling an interest in its shares in Sri Lanka. And the Sri Lankan regulators can do some very light and standard due diligence to ensure that the Sri Lankan issuer (a bank) does indeed own the shares of AAPL that they are selling an interest in.
So the Shipping Container is a great analogy here. A depositary receipt allows securities to get around the world effectively.
This are simple but yet complicated steps to Creating true Global Capital Markets accessible to all.
Let’s democratise access. Let’s distribute the wealth creation much more widely
To summarise: we finally have proven technology that allows us to forego extremely expensive steps needed for a company to go public and regulatory infrastructure and incentives allow us to utilise this proven technology to make public offering truly global. Blockchain allows companies to go public inexpensively.
Now we have the last question to answer:

Why? Why do we need True Open Global Capital Markets?

We need this for wealth creation. For wealth distribution across our planet. We need it to empower entrepreneurs around the world to build companies and create solutions for the ever-growing complexities of modern reality.
It’s time for the next natural step in the progression of human civilization, a step toward the golden era.
The views expressed in this article do not represent those of Coin Rivet.

Related Articles

Between Deplorables

I was wandering around a massive expo quite recently,  when I chanced upon a seminar on the future of law in a world run by blockchain. It was by...