The Birth of an Asset Class: Expert Blog
Though still in early development, cryptocurrencies already exceed many capital markets. Blockchain assets will have to go through the same problems as did equities and bonds when they first appeared.
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We have passed a tipping point for the evolution of Blockchain technology as the token universe moves firmly into asset class territory.
- The market has consistently held value in excess of $100 bln since the summer, with daily volumes in excess of $4 bln
- The rhetoric on Bitcoin has become more measured with broader considered views and a shift in focus to the potential of the technology
- Every day a stream of the large global corporates announce Blockchain initiatives
- The sophistication level of financial products providing Blockchain asset exposure is increasing
As a former senior investment banker and having spent almost two decades focused on Asian equity capital markets, I am used to seeing local markets that in the broader global equity market context would seem subscale. Blockchain assets in token form represent over $170 bln in value today. The GEM market in Hong Kong (growth market) is a sub $40 bln market, and several Asian countries do not have equity markets above $170 bln in total market cap. Even more instructive is the daily volume traded at $4 bln+ the volume of activity on many days in Blockchain assets exceeds that of some of the more mature Asian markets such as Taiwan.
The institutional fiat world is taking note, with the headline numbers of the market justifying attention, we have seen the level of inquiry increase from blue-chip financial institutions as they begin to get up the learning curve. The wall of capital that will flow from this is still being educated, but the discussions are taking a more committed tone.
We are still in the very early days of this technology and it is by no means settled on what the core lower level protocols will look like, but with the promise of interoperability we should end up with a multi-winner landscape subject to specific use cases.
The ICO market has rightly begun to struggle. The early days have been characterized by generally weak governance standards and poorly conceived offering structures. There are notable exceptions but even the quality issuers have been taking advantage of the market momentum to stretch rights, obligations and terms. A cleaning up and raising of standards is inevitable as the market moves to a more discerning view of what has value. Regulation has a part to play here.
Sensible regulation is essential to the asset class and frameworks applied correctly will help to drive institutional adoption. There will be volatility as regulators find their feet but globally we have seen, in general, constructive views on regulation from the US SEC and many regulators have followed their lead. Those issuers that have been disguising equity offerings in ICO form will not survive. Even when an offering is clearly not a security, regulator and legal frameworks globally should provide customary consumer protection while maintaining a balance not to over regulate. The countries with capital control challenges will in the short term have the tightest form of regulation, but this is a prelude to sovereign adoption rather than an attempt to shut down the technology.
We will, of course, have bumps in the road and each asset class as it develops faces significant setbacks, Blockchain assets will not be different. Importantly though the speed of adoption and integration could be unprecedented given the security benefits afforded by the technology. The banks and other trusted intermediaries (see Equifax) have been unable to secure single point databases with security breaches occurring daily at some of the largest and most trusted institutions. Currently, public Blockchains provide us with scale solution to security and the recent upgrade of the Ethereum protocol is instructive in enabling an à la carte privacy solution on public Blockchains. We are already seeing governments beginning to adopt the technology and security is a key driver.
For a sub $200 bln industry we have had a huge amount of commentary from senior business leaders, some have demonstrated a lack of knowledge and depth in understanding. More still have demonstrated they are bound by a fiduciary duty to their shareholders to protect their revenue stream. It is notable that the considered comments on the tech from Christine Lagarde and others have tipped the balance back into a more positive discourse. There are of course challenges with Bitcoin which are well documented but we are moving beyond casual rhetoric that its primary use is to facilitate money laundering and has no utility.
The global banks have paid more in fines since the financial crises than the total value of global Blockchain technologies. The utility for the global under-banked who possess smartphones and no way to enter the existing financial system is defining. The more interesting story and corporate public discussion are turning around the technology itself and the 40%+ of the Blockchain asset market, which is not Bitcoin. Although still early it is clear that much of the margin in the financial [and other] industries will be significantly reduced as transparency and direct access prove materially advantageous to clients.
A young market
The market will have substantive, non-trivial issues in all these areas but growing pains are just that and we are at the point where the broader focus needs to be on practical integration and adoption.
We are witnessing the start of a move from a state of corporate capitalism to an increasing skew towards individual capitalism. The democratization of finance, as well as other industries, is upon us and tectonic shifts are being felt. As we embrace the new we need to take the R&D from fiat capital markets that have flourished for decades, learn and take the best parts of these forward into a more equitable and transparent future. In concert, the existing oligopolies will need to resize businesses and adjust business models and it is this interplay which will define the breadth and speed of the development of the asset class.