Blockchain has potential to solve private market problems of efficiency and liquidity: panel

INTEGRATING blockchain technology into private markets could bring about greater efficiency and liquidity, the 2 key issues plaguing the booming space, speakers at a panel at the 4th Annual Security Token Summit said on Monday (May 16) in New York City. 

At the panel, entitled Alternative Trading Systems: Opportunities and Challenges, speakers said interest in alternative markets has been rising rapidly over the past few years but its illiquid nature could be a cause for concern. 

Douglas Borthwick, chief business officer of crypto and security tokens trading platform INX, said the parties involved therefore have to “start moving and pushing the envelope” to inject liquidity.

One way to improve liquidity is to improve access. ADDX chief executive Choo Oi Yee said many investors currently do not have access to private markets, which adds to the illiquid nature of the scene.

Blockchain technology could allow alternative asset classes, currently only available to accredited investors, to reach retail investors across the world.

“Once you solve for size, and once you solve for the liquidity, then I think the regulators have to rethink the availability of private markets to retail (investors),” she said.

ADDX already employs blockchain technology to break large assets up into portions that are more investible – what the industry refers to as tokenisation.

The technology has also helped to simplify some parts of the investment process, and increased efficiency by allowing certain transactions such as bond coupon payments to be settled instantaneously.

Borthwick said the transparency of blockchain technology is “remarkable”, adding: “You can have a level of transparency that just doesn’t exist in the current capital markets.

“The whole concept of being able to do things secretively…that we see today in traditional capital markets disappears with the blockchain because the transparency is absolute.”

Some panellists argued, however, that liquidity should not be a key focus for market participants.

Kyle Sonlin, chief executive of Security Token Market, said the liquidity argument for private companies is perhaps “not incredibly relevant”. 

David Weild, chief executive of investment bank Weild & Co, concurred: “Investments is a movement business, not a storage business. Just because you have liquidity doesn’t mean you’re going to have a happy outcome for either the investor or the issuer.”

He added that some securities in private markets could “trade down” unless there are intermediaries that can help to remarket the tokens or shares.

“Getting a real robust market that trades up is something that is not just about the size of the offering.”

On the sidelines of the summit, ADDX’s Choo said in an interview said that there is a “good chance” that private market exchanges will be as large as public exchanges by 2040 when measured by transaction volume.

ADDX is already seeing annual growth of 120 per cent, in terms of the number of individual investors who have signed up for accounts. 

“Over time, given the starting position that the private markets are already larger than the public markets in (assets under management), it shouldn’t come as a surprise that private exchanges eventually become as large as public exchanges – because the technology will allow these private market assets and securities to be put on private exchanges that operate efficiently,” she said. 

This will bring about a redistribution of wealth from institutions to individuals, which will address wealth inequality, said Choo.

Companies could also choose to stay private for a longer time as they will be able to raise enough capital in the private markets, and allow their early investors to exit their positions and realise their profits without the company having to do an initial public offering.

“That allows companies to focus on long-term goals and priorities, and not have to constantly think about quarter-to-quarter profits, as required by the public markets,” she added.