Changing the Capital Raising Landscape
This week’s blog post was inspired by an interview that I had within the financial services field and a topic of conversation that arose was blockchain and the greater impact of tech in the finance industry. In conjunction with an article I read published by the Harvard Business School on blockchain’s impact on the financial services industry (https://hbr.org/2017/03/how-blockchain-is-changing-finance), I hope to provide some of my thoughts on the topic.
Harvard cites that 45% of financial intermediaries, such as payment networks, stock exchanges, and money transfer services suffer from economic crime every year. Estimated savings potential from a blockchain solution is $20 billion a year. Many banks have began implementing a blockchain platform for trade settlements to make the movement of value more frictionless. Hundreds of billions of dollars in the form of equities, bonds, currency, commodities, and a plethora of complex derivative products are moved between banks, asset managers, pension funds, and retail accounts on a daily basis. This creates an immense market opportunity for reducing fees in value transfer. This is moves alongside greater industry trends such as the first no fee ETF being introduced by fintech unicorn Social Finance. AI, machine learning, and quant algorithms based on price action could displace the role of traders in liquid vanilla financial product swaps. That being said, I do not see sales and trading roles becoming completely obsolete, especially in less liquid markets with more complex products that require human judgement.
While larger financial institutions have began implementing blockchain, a more interesting introduction of the technology would be through a disruption of the traditional private equity and venture capital industry. This could greatly improve the flow of capital between investors and entrepreneurs. With a decentralized platform in which start-ups can list their projects on a completely visible ledger, private equity funds would save significant time sourcing deals. It could merge the blockchain technology leveraged by ICOs while maintaining a USD denomination for funds. This would eliminate some of the volatility concerns of raising funds in digital assets. It could also increase the available supply of funding, which would decrease the bargaining power of individual VC or PE firms, that traditionally exploit the market conditions to leverage unfair terms for funding. Overall, a better connected platform that provides easier access to capital for entrepreneurs could lead to a drastic amount of innovative and impactful startup ideas. This solution would integrate blockchain into the traditional capital raising arena, while moving away from some of the challenges of cryptocurrency.
I would be careful citing material from 2017 around how "blockchain will revolutionize all of finance." These materials paint a really rosy picture of how blockchaining finance will lead to a blockchainified decentralized future of blockchainy amazingness. We saw what happened in 2017 and 2018 when "greatly improve[d] flow of capital between investors and entrepreneurs" enabled massive scams and a wealth of "projects" (including enormously valued smart contract platforms like EOS) that have yet to show anything for all of the capital raised. That being said, I mostly agree with what you're saying in the second paragraph. The concept of smart securities has some interesting potential. Check out this presentation for a detailed look at smart securities.
Blockhains do not make transactions faster or more effective (i.e., the classic Visa vs. Bitcoin transactions per second comparison), they simply allow for the removal of intermediaries. For the traditional financial players to allow this doesn't make much sense to me. If I put my conspiratorial hat on, the focus on "blockchain for improved financial processes" seems to be a slight of hand by established financial players to seem like they're adding layers of security and auditability without actually adding any value and distracting from a threat to their business model. It also seems like a way for companies like IBM and Microsoft to extract more value from their clients by selling them "state of the art" technology with the hot blockchain buzzword.
I agree with your comment on citing material from 2017. I think that it still brought up some good points, but something more recent would have been more effective.
I still think that most of the scams played off of the hype of blockchain and "coin offerings." In an equity offering, I think that investors would be much less tempted to blindly throw money at a company. I more envisioned stripping out the issuance of "coins" and simply use a blockchain network as a means to connect a greater number of projects to investors. I think a blockchain platform centred around equity issuance removes the hype that lead to scams and will make it easier to connect private equity firms with entrepreneurs.
I might be misunderstanding, but I I hope to discuss this further.
I see what you're saying now. I think equities could definitely benefit from being blockchain-based.
Let me know if I'm wrong or you disagree.