Emerging crypto-assets, stablecoins and bitcoin are triggering a structural convergence across the Capital Markets sector. It is affecting Investment Banks, Private Equity, Exchanges, Custodians and Brokers. It is irreversible, and we can already predict the winners from the losers as the race toward Crypto-Capital Markets accelerates.
Not just bull versus bear, but crypto versus tradition -- participants are challenged to build a new operating framework for Crypto-Capital Markets
A New Way to Exchange Capital Value
Bitcoin and Capital Market firms are in the same business, the business of exchanging value.
The difference is, Capital Market firms use instruments, or containers of value, that must be brokered, exchanged, reconciled, settled, and custodied. In stark contrast, crypto-native assets enable the exchange of value by embedding those functions into the network’s protocols.
Whereas a current financial instrument must be settled, bitcoin is self-settling. Bitcoin can be self-custodied; most importantly, bitcoin paradigms offer direct and open access to the exchange of value. The open-sourced invention of bitcoin eliminates entire functions and changes how a Capital Markets firm can add value.
Cryptocoins signal the impending obsolescence of current workflows. Yes, today, direct access to blockchains is difficult. But it is only a matter of time until the user interface evolves from a ‘DARPA-like’ beginning to an easy-to-use internet.
Until now, innovation in Capital Markets has been marked by incremental improvements, customization and specialization. Exchanges innovated order types and rules. Settlement and custodial firms innovated collateral and credit flexibility. Everyone worked faster and smarter. Firms went digital. But no one addressed the inefficient and fractured workflow. These self-regulated firms did not address their own practices. There was no drive to efficiency. So, no one innovated their business model, that is until now.
The open-sourced invention of bitcoin, eliminates the need for stand-alone functions of access, exchange and custody while it allows real-time monitoring, risk and investment management analytics in a distributed, yet governed, wallet.
Crypto-instruments can collapse dozens of tasks across multiple firms into a wallet with analytics. This may seem scary for some, but for others it’s an opportunity. Simplified workflows allow firms to pursue new linkages between industries and find ‘low-friction’ entry points into new markets.
The winners are already building crypto capabilities and are testing the economics of new business models. Winners are buying adjacent businesses, collecting regulatory licenses and tightly integrating services. They are in a race to prove out a new operating framework for Crypto Capital Markets.
Satoshi’s invention, manifested by bitcoin, will forever change financial business models. Not many firms will make it through the transition, but it’s nice to see a few incumbents take a lead in Crypto-Capital Markets.
The race is on.
© Marie Giangrande Jan 2019