The chicken and the egg problem for digital securities exchanges

What’s the current state of digital securities exchanges and how to increase adoption

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By Vanessa Malone

Security Token Market recently put out a report discussing the current state of security token trading, also known as digital securities. In their research, they identified 60 digital securities exchanges around the world. Of those 60, only 3 regulated exchanges are live with a combined daily trading volume of $193,731.¹ Of those 3, only 2 are approved to operate as Alternative Trading Systems (ATSs) in the U.S.

To put this in perspective, there are approximately 190 Cryptocurrency Exchanges and thousands of actively traded cryptocurrencies.² The average daily trading volume for the largest cryptocurrencies BTC, Ether, and XRP are $773M, $408M, and $241M, respectively.³ It is common knowledge that many crypto exchanges inflate trading volume, so we pulled these numbers from Messari, which filters out exchanges that don’t show consistent patterns of what they refer to as well functioning markets.

Nevertheless, this data still has to be taken with a grain of salt. Cryptocurrencies are still highly volatile and their value is widely considered to be mostly based on speculation.

On the other end of the trading spectrum are traditional securities exchanges. According to the World Federation of Exchanges, there are over 250 traditional securities market infrastructure providers. Of the global stock exchanges,16 of them have a market capitalization of over $1 trillion each. These exchanges trade billions every day.⁴

Digital securities exchanges are, of course, leagues away from reaching the level of traditional securities exchanges but it’s important to have context on them. Why? Because digital securities are much more aligned with traditional securities.

Digital securities are just digital representations of ownership in an underlying asset or company. Think of them like the next generation of current securities. All that’s new is that these securities have a blockchain wrapper to enhance transparency, accessibility, settlement and other incredible improvements, especially when paired with technology such as the Horizon tech stack.

Considering the NYSE was founded in 1772 and Nasdaq was founded 50 years ago, it doesn’t seem too far-fetched to say that today’s capital markets could use a technology upgrade.

The world seems to believe so too. In 2019, digital securities market capitalization represented just 0.4% of the $79 trillion dollar global equities market.⁵ The blockchain digitization for the next generation of real-world equities is forecast to grow to over $2 trillion dollars by 2030.⁶

That said, what are the factors inhibiting digital securities exchanges from taking on, or upgrading traditional securities issuance and trading?

We have many blogs detailing the regulatory obstacles and items that need to be addressed in order for competitive trading venues to be approved. For now, let’s focus on the chicken and the egg problem when it comes to attracting issuers and investors onto this new type of exchange.

Exchanges need quality and interesting issuers to list on their exchanges, while issuers want to list on exchanges with active traders.

1. The problem with attracting issuers.

There is a big problem with attracting quality, viable issuers onto a digital security exchange. Out of the two current regulated exchanges, the one with the most listed securities has five. Because the concept of blockchain securities is still so new, it’s crucial to list credible, known securities on these marketplaces. But to attract bigger and more recognized issuers and companies, exchanges need to have compelling technology solutions to support an issuers’ needs better than the current traditional securities route.

Issuers don’t necessarily care about the “why” when it comes to blockchain, they care about the “how.” How will this new type of exchange support their company’s goals and its prospective investors in a better way?

This gap was the reason Horizon built a fully integrated compliance and trading ecosystem with a user-friendly interface from securitization through to secondary trading.

2. The problem with attracting enthusiastic traders.

Now onto the problem with attracting enthusiastic traders. The crowd is simply not interested in the current listed digital securities. Aside from the dismal trading volume, proof that investors aren’t currently interested in digital securities is made apparent in a statement mentioned earlier surrounding crypto exchanges.

It is common knowledge that crypto exchanges are riddled with wash trades, inaccurate volume, and other market manipulations. Most crypto exchanges are centralized, which means investors have to entrust their private keys with these entities. Despite all of this, millions of people take the risk in order to trade cryptocurrencies every day.

Many traders do this because they want to be part of something exciting and new. While blockchain is exciting and new, it’s not simple to understand.

Solving for the chicken and the egg problem

The blockchain community as we know it is still relatively small. Honing in on the fact that issuers don’t necessarily care about the “why” when it comes to blockchain, and that investors want an exciting and new experience related to things they’re passionate about, the Horizon team believes we’re onto something that removes the chicken and the egg problem.

Imagine going after assets that are well-known, understood, and who investors are dying to engage with. Now add in a comprehensive and user-friendly technology platform to support interested investors. We hope to be able to release some more details soon about an upcoming platform which aims to harness a global fan base and athletes. Learn more and be one of the first to hear new updates by joining the waitlist at https://globalfanexchange.com/.

Footnotes:

¹Security Token Market Report: January 2020

² Investopedia

³Messari Screener

⁴WFE

data.worldbank.org

finyear.com

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Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities.

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