The subject of cryptocurrencies and the burgeoning blockchain technology often sparks passionate debates. Leon Saunders Calvert, Head of M&A and Capital Raising Propositions at Refinitiv, delves into this complex landscape.
In our most recent digitalization webinar for investment banking, held in partnership with OddUp, we delved into the world of cryptocurrencies and the rise of blockchain. These digital ledger technologies are increasingly being integrated into real-world industries, boosting confidence and efficiency in various commercial exchanges and record-keeping processes.
For those willing to harness the immense efficiency gains offered by digital ledgers and incorporate them into their services, the potential for expanding their customer base and gaining a competitive edge becomes apparent.
Enthusiasts of cryptocurrencies and blockchain technology are typically innovators, early adopters, and entrepreneurs. However, skeptics often view these innovations as mere passing trends. Yet, when we shift our focus away from the “crypto” applications and examine the core technology, we uncover the disruptive potential of blockchain and digital ledgers.
Digital ledger technologies are making inroads across industries like food and agriculture, music copyrights, diamond tracking, and disease control. These sectors are embracing digital ledger technology because they see tangible business advantages in doing so.
Industries closely linked to physical asset transfers, particularly within the financial services sector, are at the forefront of testing digital ledger technologies. Trade finance is a prime example. Still, it’s only a matter of time before this disruption extends to the intangible aspects of mainstream financial markets, including capital raising.
When I express my belief that all securities issuance and capital raising activities will transition to blockchain or similar digital ledger systems within the next decade, I encounter two opposing reactions. Fintech advocates often argue that I’m too pessimistic, anticipating even more rapid and radical disruption. In contrast, established investment banking circles dismiss the idea as a side-show that won’t affect them. Providing an average prediction that encompasses all viewpoints is more challenging than ever.
Why do I believe this transition will happen? The benefits of capital raising via digital ledgers are manifold. It will facilitate connections between issuers and investors, increasing liquidity and reducing transaction costs and processing time significantly.
For investment banks, this could be both a blessing and a curse. Disintermediation could pose an existential threat, particularly when they primarily act as intermediaries connecting issuers and investors. However, in certain transactions, investment banks offer substantial additional value, such as valuation services, underwriting, risk management, and investor outreach.
But for those ready to capitalize on the efficiency gains brought about by digital ledgers, especially by extending their services to underserved small and medium-sized enterprises (SMEs) struggling to access capital in the post-credit crisis era, there are opportunities to expand their customer base and gain a competitive edge with a unique offering.
Nevertheless, I don’t anticipate that transitioning from retail investing to the institutional finance space will be as easy or quick as the fintech community envisions. While the technology is ready, regulatory certainty is a critical prerequisite for larger businesses to make the switch. Achieving this will take time. Moreover, there are human elements at play, such as inertia, risk aversion, and the fear of being early adopters.
One community that’s not afraid to take the lead in this transition is the startup world, which has been quick to exploit online financial marketplaces. This space is employing tokenization techniques to drive the ICO (Initial Coin Offering) market, and now the STO (Security Token Offering) market, where traditional securities and financial instruments can be issued in tokenized form on digital ledgers, eliminating the need for cryptocurrencies.
They are the first to benefit from the increased speed and efficiency this brings to the capital-raising process. My colleague Sam Chadwick, director of strategy in innovation and blockchain, provides an insightful overview of this sector, highlighting how it’s gradually transitioning toward traditional financial securities. Refinitiv is closely monitoring this emerging opportunity and threat, working to support innovation on behalf of our clients and reduce risk and friction in deal-making. Stay tuned for further developments.