Cryptocurrencies and the rise of blockchain can be a polarizing topic. Leon Saunders Calvert, Head of M&A and Capital Raising Propositions at Refinitiv, explores.
- Our latest investment banking digitalization webinar, which was hosted alongside our partners from OddUp, explored cryptocurrencies and the rise of blockchain.
- Digital ledger technologies are being increasingly deployed across real-world industries to provide greater confidence and efficiency in all manner of commercial exchange and record.
- For those prepared to capitalize on the vast efficiency gains of the digital ledger by building out their services, there are opportunities to grow the customer base and steal market share.
Those attracted to cryptocurrencies and the rise of blockchain tend to be innovators, early-adopters, entrepreneurs and, yes, perhaps some are overly enthusiastic. While those of a more conservative mindset are inclined to view it as a fad.
But if you look beneath the ‘crypto’ applications, and at the essential nature of the underlying technology, one can see that the revolutionary ideas of non-state sponsored means of exchange and store of value become something of a side-show, or at least, a separate issue. What emerges is that the disruptive potential of the underlying technology appears increasingly appealing and transferable.
Digital ledger technologies
Part of the confusion lies in the early applications. Cryptocurrencies, such a bitcoin, have captured the imagination of the (mainly retail) investing community and have experienced huge growth and volatility in recent years, as well as reputational challenges associated to its use in crime. Whether they usher in a utopian world of incorruptible, immutable, digitized, tokenized exchange, is, at this point, anyone’s guess. However, the secondary revolution offered by the underlying technology, blockchain — or more accurately, the digital or distributed ledger — seems to be gaining in tangibility.
Digital ledger technologies are being increasingly deployed across real-world industries to provide greater confidence and efficiency in all manner of commercial exchange and record — from food and agriculture, to music copyrights, diamond tracing and disease control. These are industries that are disrupting themselves because they see a business advantage.
Parts of the financial services industry most closely connected with the physical transfer of assets are, perhaps predictably, most far-advanced in trialing digital ledger technologies, such as in trade finance. But I would suggest that it is only a matter of time before this disruption hits the intangible mainstream financial markets, including those for capital raising.
When I share my own view that within the next ten years all securities issuance and capital raising activity will be executed over the blockchain or similar digital ledgers, I am met with two polarized responses. The first, typically from the fintech community, is that I am hopelessly pessimistic, and disruption will much faster and more radical. From our more established investment banking relationships, the message is quite different: ‘this is a side-show, it will never affect us.’ It has never been less popular to provide a prediction that is an average of the sum of all views.
Why do I think it will happen? Because the benefits for capital raising via the digital ledger, are numerous. The fact that it will connect issuers and investors has manifold benefits, including increasing liquidity and offering a speed and cost of transaction that is many times lower.
For investment banks, this could be good and bad. Clearly, being disintermediated can be an existential problem if you really are just a ‘middleman.’ In some types of transactions, investment banks do little more than connect issuers and investors. In other types, there is significant additional value add they provide which cannot easily be disintermediated by technology (i.e. valuation and negotiation services, underwriting and risk reduction, selling the deal to investors via roadshows, etc.)
But for those prepared to capitalize on the vast efficiency gains of the digital ledger by building out their services, say to underserved SME (small and medium size companies) markets who have struggled to get access to capital post credit crisis and banks have had to rein in their lending capacity, there are opportunities to grow the customer base and steal market share with a differentiated offering.
Beyond technological barriers
At the same time, I don’t think it will be as easy or as fast to drive adoption from retail investing to the institutional finance space as the fintech community hopes and predicts. To a large degree, the technology is ready. But it is never just technological barriers that count.
Capital raising is a highly regulated activity, and regulatory certainty will need to be achieved for larger business to migrate. This will take time. And then there are the human elements of business: inertia, risk aversion, fear-of-going-first.
The start-up world
One community that is not afraid of going first is the start-up world who have also been the quickest to take advantage of online financial marketplaces. This space is using the tokenization techniques initially to drive the ICO (Initial Coin Offering) market, and now the superseding STO (Security Token Offering) market in which traditional securities and financial instruments can be issued in tokenized form over the digital ledger, rather than needing to issue cryptocurrency.
They are the first to benefit from the increase in speed and efficiency this brings to the capital raising process. My colleague Sam Chadwick, director of strategy in innovation and blockchain, gives a brilliant overview of this part of this world, and how it is starting to move across towards more traditional financial securities. As he demonstrates, Refinitiv is paying the closest attention to this emerging threat and opportunity such that we can support innovation on behalf of our clients and work towards the reduction of risk and friction in deal making. Stay tuned.