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Next step in Evolution of Capital Markets – Thought Leaders

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Next step in Evolution of Capital Markets - Thought Leaders

So you have a small business, or you are just starting out, setting up your company. Chances are, you probably run short on funding your great, big idea. Or, you have done some preparatory work to take you to a minimum viable product (MVP), but have little steam left to take your product to the market. Or better yet, your product is a proven working concept, but you still need that extra funding to take your small business to the next level.

Every business needs funding fuel to grow. Up until breaking even. And even then, to reach the next expansion levels, businesses need funding to grow and develop. Indeed, a survey on reasons why startups tend to fail in 9/10 cases admit that one of the top reasons for start-up ventures to fail is the lack of funding. 1https://www.cbinsights.com/research/startup-failure-reasons-top/

So what are your options? Not counting grants and subsidies, there are typically two main ways, of funding your business. The capital markets are largely available either in the form of debt or equity funding. The following will be an overview of the currently available funding avenues that companies have at their disposal. From the traditional private equity or debt to less conventional crowdfunding. Indeed, the most recent tokenisation method is the next step in evolution of the capital markets.

This is part 1 of a 5 part series. 

Click Here for part 2

Click Here for part 3

Click Here for Part 4

Click Here for Part 5

 

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Liza Aizupiete is the Managing Director at Fintelum, a European-based token launch (ICO and STO) platform. Liza has extensive experience in traditional fund management, and is also an experienced blockchain entrepreneur, having successfully launched and raised capital (ICO) for Globitex where she was a Co-Founder and Managing Director.

Thought Leaders

Evolving Trends in Token Powered Networks: Part 1

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Evolving Trends in Token Powered Networks: Part 1

by Mara Schmiedt, Global Strategy and Business Development Lead, ConsenSys Codefi

Summary

  • Regulatory scrutiny has increased, which has resulted in initial token distributions taking place in private rounds of accredited investors. Proposals such as the Safe Harbor present a first step in the direction of formal regulatory guidance that bridges the gap between regulation and progressive decentralization
  • Private infrastructure and capital providers are increasingly evolving into Web 3.0 native business models, uniquely positioned to support early stage bootstrapping and ongoing participation in decentralized networks
  • The road to Proof of Stake is transitioning from its lengthy research phase and genesis implementation to growth

Since 2016, a range of different token and network launch models have been deployed in an attempt to increase network participation and grow their respective communities. To date there have been +4000 attempts, test runs, and failures to efficiently and fairly distribute tokens to users that strengthen participation in a decentralized network, while avoiding a security-impeding concentration of holdings.

Have these attempts led to a golden blueprint for the right way to launch a network? The truth is, there is no archetypal, one-model-fits-all model, but one thing is certain: as the industry matures, token launches will increasingly evolve and coincide with actual network launches. What could be more fruitful than utility tokens with actual utility?

What is the outlook today? Let’s take a look at ecosystem trends and how these have evolved over time in the light of recent regulatory, technical developments, and the emergence of new players on the token-powered playing field.

 

Trend 1: The Regulatory Landscape

WHO IS ALLOWED TO SELL WHAT, TO WHOM AND WHEN…

The once proliferating, open-to-all token sale landscape that attracted early users, speculators, innovators and scammers alike, is a thing of the past and has seen recent shifts as regulators catch up to innovation.

‘It is during the development phase that questions about the securities/non-securities line seem to be most difficult to resolve.’ – Hester Pierce, SEC Commissioner

Arguably, with a fully functional network there is less need for participation restricting and complex legal agreements when ambiguity can be mitigated by ensuring that tokens are actually used instead of simply bought. Yet this requires the availability of a fully-functional network.

In an attempt to address impending compliance concerns, initial token distributions are therefore increasingly taking place in private rounds of accredited investors. Some have pointed out that these recent developments undermine what open-source protocols set out to achieve in the first place: putting tokens in the hands of users whose incentives are aligned with utility maximization of the network, rather than profit maximizing investors and private companies.

Finding a viable, compliant, and distributed funding model to finance the development of a to-be decentralized network, while ensuring tokens end up in the hands of long-term participants presents an ongoing, two-fold challenge. Proposals like the Safe Harbor and the proactive setting of rigorous, industry-leading standards, present a first step in the direction of potentially bridging the gap between regulation and decentralization.

 

Trend 2: The Rise of Proof of Stake

…AND WHY 2020 IS A MONUMENTAL YEAR FOR THE FUTURE OF PROOF OF STAKE

As of September 16 2020, the cumulative market capitalization of stake-able crypto-assets is $35.7 billion, with over a half (~52%) of this value currently locked in staking.

Evolving Trends in Token Powered Networks: Part 1

Source: Stakingrewards.com, 2020

Proof-of-Stake (PoS) networks utilize staking rewards, which are minted by the protocol, as an incentive mechanism to ensure users participate honestly in validating on-chain activity.

Today, it’s all about Proof-of-Stake chains entering the market. With layer 1 blockchains such as Tezos and Cosmos, as well as layer 2 solutions such as Matic and Loom launched in 2019, the lengthy research phase on the road to PoS is finally transitioning from genesis implementation to growth. In 2020, the long-anticipated launch of eth2 and Ethereum-powered DPoS layer 2 solutions such as SKALE mark a pivotal moment for the future of Proof-of-Stake adoption.

Moreover, the recent developments in Proof-of-Stake systems reveal the importance of designing and optimizing the initial launch of the network to achieve desired participation rates and ensure long-term viability. Within this context it is critical that pure or delegated Proof-of-Stake protocols distribute tokens so that a sufficient number of different actors can stake tokens and run nodes to secure the network. Poor and disproportionate distribution across individual actors can impair the network’s security or influence the general perception of the legitimacy of the networks’ governance.

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Thought Leaders

Reinventing Wealth Management: How Technology is Shaping The Way We Manage Investments

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Reinventing Wealth Management: How Technology is Shaping The Way We Manage Investments

Traditionally, wealth management has been a human-based professional service that provides financial and investment advice to clients of high-net-worth and ultra-net-worth category. Since the wealth management industry is made lucrative due to its one set fee charged to clients; despite the implementation of innovative technology, investment advice is largely still available to the wealthy and closed off to others. However, assets available to the well-off are becoming more accessible to non-wealthy clients, too.

Wealth management meets technology 

The entire financial services industry has been shaken by the technological revolution, which in turn, has shaped the world. Wealth management in 2020 is no exception to this trend. Fintech has reinvented the landscape of investment management by incorporating Big Data, Artificial Intelligence and machine learning to optimise portfolios, mitigate risks and evaluate investment opportunities.

Fintech companies have become adaptive and attentive to the needs of the new generation of investors. Millennials demand, on the whole, easy, precise and flexible access to information on all aspects of their lives. It’s been found that affluent millennials are becoming increasingly comfortable using technology to manage their money. Mobile apps, Robo-advisers and AI tools provide a greater degree of control than traditional financial management methods.

Technology in action: Managing investments with intelligence 

The emergence of fintech has revolutionised, improved and automated the delivery of financial services. Global investments in financial technology businesses have surpassed $100 billion over the past decade.

Reinventing Wealth Management: How Technology is Shaping The Way We Manage Investments

Robo-advisers 

The proliferation of artificial intelligence has transformed the way financial advisors interact with their clients. The industry has long since been anticipating the disruption of the financial advisor model. The 80s and 90s gave way to online trading and the 21st century brings us Robo-advisers – i.e. the computer-generated investment platform that provide augmented, algorithm-driven financial planning services with little human input. Global assets under management by Robo-investors as of 2020 were nearly $1.1 trillion – and are expected to grow at an annual rate of 25.6% (Statista).

Typically, a Robo-adviser collects financial data from individuals through some form of survey and uses the information to offer advice and automatically invest client assets. The best of these automated services offer easy account setups, goal planning, portfolio management, security features, and of course, low fees.

Wealth management apps 

Mobile portfolio management apps can provide information and the necessary tools to manage your investments from workplace pensions to ISA’s and personal capital. Many apps can sync with your existing accounts – completely free.

ARQ, for example, uses AI to connect investments and generate data to provide users with actionable insights into how their portfolios are performing. They’re dedicated to transparency by providing scores on what’s actually considered to be a good annual performance and whether the fees their users are paying are too high. Unbiased analytics display a number of metrics to show the value of investments relative to others.

Reinventing Wealth Management: How Technology is Shaping The Way We Manage Investments

Wealthsimple, founded in 2017, offers an unambiguous three-tier investment strategy depending on a user’s ‘risk profile’- conservative, balanced or growth. The premise behind Wealthsimple is to invest your money across the entire stock market; as opposed to a sole company’s stock, to induce a long-term practical investment strategy.

Setting up your Wealthsimple account on the app is simple. Fill in the form, select your risk and add the amount you’d like to invest. The algorithm processes your data and you’ll be presented with a portfolio and personalised dashboard illustrating how stocks are performing in real-time.

For the more visual investor, Personal Capital is an app that lets you track your budget and investments by displaying graphs by asset class or investment account – making them easy to read, track and manage your portfolio. The interface is incredibly intuitive and the visuals reactive on laptop, tablet, desktop and mobile.

Reinventing Wealth Management: How Technology is Shaping The Way We Manage Investments

Whilst there is more to say about the budgeting functions of other apps, Personal Capital serves primarily as a financial aggregator – bringing together all of your accounts on a single platform. The tool starts by determining your risk tolerance, goals and timeframe and generates a portfolio by investing across multiple asset classes for diversification. It should be said that the high fees of 0.89% are offset by Personal Capitals close-to-human investment management service.

Wealth management firms embrace technology 

The wealth management firms who actively embrace financial technology tools – whilst maintaining their human input in helping investors navigate the increasingly complex financial infrastructure – have been found to be more likely to grow.

45% of wealth managers said that financial information from technology and data analysis using AI help them refine the advice they give to clients (PwC). 36% agreed that their clients will be able to see their investments clearly with AI.

B2B platform Cred, embraces AI to change the way financial institutions acquire and engage clients in investment advisory. The Barclay-based company helps financial institutions increase conversion rates, engagement and Assets Under Management. Wealth management firms using Cred’s data platform helps them utilise their client data to build relationships and offer the right financial products at the right time – increasing efficiencies for the firm and individual clients.

AdviceRobo is a software developed to assist wealth managers by providing predictive risk services using AI to generate behavioural data.

Reinventing Wealth Management: How Technology is Shaping The Way We Manage Investments

They help financial institutions by providing psychographic credit scores measuring financial attitudes, motivations and behaviour of people through online interviews. Detailed reports give wealth managers deeper insight into their client’s financial health – allowing them to optimise their client’s portfolios.

The accumulation of Big Data means that the pool of client information available to wealth managers is constantly increasing – meaning there is always room for optimising advice.

Morgan Stanley Online allows client accounts to be accessed via CRM which can be seamlessly fed into multiple financial planning software – which can be viewed by advisors and clients alike.

Technology has warmly welcomed the evaluation of ‘what-if’ scenarios. High net worth individuals can easily use Morgan Stanley Online to see the direct impact of or feasibility of spending – without consultation. A user’s spending and investment decisions are connected to their advisor – who will be alerted when a client is making an inquiry.

8 out of 10 wealth management executives have regarded technology as a significant factor in gaining market share (Deloitte). The future of investment management is largely reliant on the development of technology. Innovations in fintech have freed advisors from mundane tasks so they can spend more time providing specific insights based on individual customers.

Technology clearly has a role to play in the communication processes between clients and advisers, the way investors manage and track their portfolios, as well as the way data, is both collected and used. All of which continues to shape the way we manage investments.

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Digital Securities

Solving the Liquidity Puzzle for Security Tokens – Thought Leaders

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Solving the Liquidity Puzzle for Security Tokens - Thought Leaders

There is a wide consensus in the financial industry that blockchain technology is going to disrupt the securities market. However, despite the claims, there is no double-digit annual growth of securities on blockchain, which would be expected from a disruptive technology. The reason for that are regulatory roadblocks that don’t allow delivering the biggest promise of digital securities – liquidity for previously illiquid securities. In this article we break down this problem and present a solution.

What are security tokens/digital securities?

From a legal perspective, security tokens are common securities and are subject to the same regulations. The difference is that records about securities ownership are stored on blockchain instead of paper-based or other forms of records. That’s why they are often called digital securities.

Innovative technology significantly improves operations with securities, making them digital and automated. In particular, transfer of digital securities is much easier and may happen in minutes or seconds instead of weeks, spent on signing physical contracts, doing compliance checks and updating government registers.

Why liquidity is so important for security tokens

Liquidity of an asset defines how easy it can be sold. For example, publicly listed securities are highly liquid, while real estate and startup equity are highly illiquid. Although security tokens have multiple advantages, greater liquidity is a principal one. For this reason, they often represent ownership in traditionally illiquid assets.

Mass adoption of security tokens first and foremost requires interest from investors, which will create incentives for businesses to issue digital securities instead of traditional ones. For investors, lack of liquidity is the biggest problem of securities that are not listed on exchanges as it makes investments in them riskier and makes investors wait for decades until they pay off. Therefore, unlocking liquidity of security tokens is crucial for their mass adoption.

Why is liquidity in the conventional meaning of the word is out of reach for security tokens

In the narrow sense of the world, securities are considered liquid if they are traded on a stock exchange. For this reason, lack of regulated secondary markets is considered the main limitation. However, this ignores the fact that there are already operating exchanges for security tokens: tZERO, Open Finance, MERJ, GSX – but very few tokens are listed there. Furthermore, Open Finance is on the edge of delisting all security tokens because their trading does not generate enough fees to support operations.

Therefore, the problem is not in the lack of marketplaces. It is in fact that listing on an exchange is overly complicated. It requires registering the offering at competent authorities, having minimum trading volume, minimum market cap, being under increased reporting requirements, which often include annual audit. Basically, it requires becoming a public company. These requirements will arise not only in the case of listing on a classical exchange but any kind of regulated market. This means that listing on a regulated trading venue is not feasible for most security token issuers.

Such a flawed understanding of the problem stems from crypto origins of security tokens. They were seen as a regulated continuation of utility tokens and cryptocurrencies, for which listing on exchange is much easier, so it became a synonym for liquidity. This myth should be debunked in order for the market to move to more realistic sources of liquidity.

How is liquidity for security tokens possible?

To answer this question, we need to go back to an original definition of liquidity, which is the ability to quickly sell assets at any moment. It has two main components: complexity of conducting the transaction and how easy it is to find a counterparty.

The former problem is solved by blockchain technology. Its main benefit for private securities is that it vastly simplifies conducting the securities transaction, making it possible to do everything online in a few minutes. Conventionally, transfer of securities would require signing physical agreements, reporting changes to the government register, settling a transaction via a wire transfer, and doing manual compliance checks on individuals engaged into the transaction.

Complexity of the transfer also impacts the number of potential counterparties. When the transfer is complicated and expensive, it becomes not feasible to transact small amounts. This cuts off smaller traders and investors from the market, making it even harder to find a counterparty.

The problem of finding a counterparty is traditionally solved by an order matching mechanism of exchanges, which for security tokens is not feasible. Therefore, the key to unlocking liquidity is in creating an efficient way to find counterparties for transactions that would not be considered a regulated market. 

This way is already known. It is a bulletin board for P2P transactions. As these transactions are private and do not involve an intermediary, they don’t require regulation. However, there are a number of nuances and requirements for such a venue not to be regulated, which will be covered in a separate article.

To the author’s knowledge, at the time of writing there is no venue that enables legally compliant and efficient P2P liquidity for security tokens.

What impact unlocking the liquidity of security tokens will have on capital markets?

Currently, venture investors may sell their shares only if businesses they invest into go public or are acquired. This has two implications, which both lead to money being used inefficiently and slow down the economic growth.

Firstly, it means that only businesses with the potential for IPO are worth investing. Businesses that can offer a solid yield but don’t offer “disruption” and outsized returns are deprived of funding. These are often businesses with a need for high capital investments – manufacturing, agriculture, physical infrastructure etc. The problem with a lack of capital investment is covered in a widely discussed article in Andreessen Horowitz blog “It’s time to build”.

Secondly, illiquidity makes VCs prioritize growth over profitability because when most investments don’t pay off even a 10x exit from successful ones may be not enough. It creates incentives to scale even when the business model is not tested enough, leading to extremely large companies, such as WeWork or Uber, struggling to deliver a profit.

The plague of private markets has impacts on public markets as well. It leads to the emergence of the IPO bubble, when more than 80% of newly public companies are not profitable. It is problematic because public securities are considered less risky, and thus fit into portfolios of retail funds and pension schemes, harming them by being overpriced.

Thus, solving the liquidity problem will have a drastic impact not only on the VC industry but on the entire economy.

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Trading Risk Disclaimer: There is a very high degree of risk involved in trading securities. Trading in any type of financial product including forex, CFDs, stocks, and cryptocurrencies involves a high level of risk.

This risk is  higher with Cryptocurrencies due to markets being decentralized and non-regulated. You should be aware that you may lose a significant portion of your portfolio.

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