Gu Yanxi: The dusk of the Nasdaqs

On April 4th, US time, American exchange holding company Miami International Holdings announced that it had reached a cooperation with Templum. The two companies will cooperate to apply for the establishment of a new digital stock exchange. The new company will leverage Miami Holdings' experience in exchange operations and Templum's experience in digital securities to create this new digital stock exchange. The exchange plans to submit an application to establish an exchange with the US SEC. Prior to this, BOX Exchange had partnered with tZERO to form a digital stock exchange and had submitted an application for the establishment of a new exchange to the SEC.

The two newly established digital stock exchanges will outperform existing stock exchanges in all aspects of the secondary market, and will inevitably lead to the flow of transactions in the market to these emerging digital stock exchanges. I believe in 2018 that exchanges based on blockchains and licensors will definitely replace existing stock exchanges (see my article, why does STO definitely replace IPOs? ). The development of the industry is now more and more proof of my judgment. Traditional stock exchanges represented by Nasdaq will soon fall behind in competition if they do not quickly adapt to the changes brought about by these new technologies.

The impact of blockchain and encrypted digital assets on the securities industry will be reflected in the following aspects.

1, asset type

In terms of asset types, the new exchanges established by the two schemes will trade digital securities. In other words, they will use the pass to map real-world assets and equity to the digital asset world and trade in the secondary market. The trading products covered in this way are not limited to the company's equity, but will include more asset types.

The current US STO market is mainly based on trading alternative assets, such as real estate and private equity. These asset types are characterized by a small number of individual assets and a wide variety of them, which is not conducive to customization to a large number of standardized trading products. At present, the US STO market will not pose a threat to the trading company's equity-based trading. However, the two emerging digital stock exchanges will trade the company's equity on the exchange in a pass-through manner, which directly moves the cheese of the existing exchange.

2. Financing stage

In terms of financing, ST-based financing can enter the public secondary trading market earlier than current IPO financing. At present, the mainstream securities financing process is usually issued through multiple rounds of private placement, and then distributed to all retail customers in the secondary market by public offering. The conditions for listing include financial operations data for several years that have been audited. However, in these new digital stock exchanges, financing companies can start public financing at a lower threshold with a lower threshold.

The first two years of financing based on practical certificates allowed the market to see the power of financing based on the certificate. Some project teams can get huge amounts of money in the market based on a white paper early in the project. Of course, due to its non-standard nature, its vitality cannot last. However, in the current US STO market, the financing party can conduct public financing in accordance with Reg A+ terms. Although it requires two years of audited financial statements in accordance with this clause and requires approval by the SEC, this standard is already lower than the usual listing requirements. If an emerging digital stock exchange approves a company's listing in accordance with this regulation, it will obtain a listed company upstream of the financing phase, reducing the number of listed companies on other exchanges.

3. Secondary market listing threshold

The reduction in the listing threshold will greatly increase the number of companies listed. The best case in this regard is the NASDAQ exchange during the Internet era. Because the listing standards of the Nasdaq exchange are much lower than the standards of the mainstream NYSE at the time, Internet companies have listed on the Nasdaq. Although the lives of many listed Internet companies are short-lived, there are also a variety of well-known Internet companies. These companies also created Nasdaq. In the current blockchain era, the further reduction of the listing threshold of the new digital stock exchange will definitely attract listed companies to these new digital stock exchanges. The source of the traditional stock exchange project will therefore gradually dry up. In this regard, the impact of the Nasdaq exchange on the NYSE during the Internet period is likely to reappear. But now, Nasdaq has become the party that was hit.

4. Investor scope

In terms of trading users of the exchange, due to the characteristics of digital securities themselves. The range of trading users is much larger than the geographical scope of the users of the current exchange. If regulatory rules further relax the criteria for trading users, such as allowing brokers in cooperative jurisdictions to provide customers to new digital stock exchanges, then global transaction flows will be further aggregated to these new digital stock exchanges. In fact, I think it is very likely that based on the blockchain technical support, a coalition of such national compliance brokers will be created (see my article, the next blockchain-based cross-border financial alliance ). The resulting exchange will also be much larger than the Nasdaq (see my article, a hundred times the Nasdaq exchange )

5. Application in blockchain technology trading market

In the underlying technology of the exchange, the application of blockchain technology to post-trade clearing has long been a consensus in the industry. This application has significant advantages over current centralized clearing models in terms of cost, efficiency and risk control. So as early as 2016, there was a high-profile company that focused on providing liquidation solutions with this technology. It is Digital Asset Holdings in the US and SETL in Europe. Now these two newly established digital stock exchanges have explicitly adopted blockchain technology as their underlying technology foundation. But in terms of specific technology applications, the two companies have adopted completely different strategies. Templum uses a proprietary license chain, while tZERO uses a public chain based on Ethereum. In terms of the combination of trading and clearing, tZERO will support two modes. Rob Christensen, vice president of product development at tZERO, said: "We have developed technology to support centralized (chained) and distributed (chain-to-chain transactions). But at the moment, we use centralization. Exchange mode". Regardless of the blockchain technology used by the two companies, their advantages over the centralized clearing system are obvious. The benefits of applying this technology will naturally be passed on to traders, which will naturally attract more trading traffic to these new digital stock exchanges.

In the process of applying blockchain technology to the financial sector, a debate has focused on the performance of blockchain technology. Specifically in the field of securities, opponents' view is that the current blockchain technology is too slow to be applied to the stock exchange market. But this view is biased. In different application scenarios, the processing speed is not so critical. For example, in the post-trade clearing field, the current settlement system of the securities market is T+1. That is, the transaction day after the transaction user completes the transaction, can realize the delivery of currency and securities between the trading accounts. In existing securities transactions, if the block-chain technology is based on a transaction-to-delivery model, it can take only a few minutes to complete the process. What really affects the speed of liquidation and delivery is the existing institutional arrangements, not the technology itself. In addition, blockchain technology has the same gradual improvement as any previous technology (such as relational databases and Java). Its own various technical indicators will gradually meet the requirements of the market. For the application organization, it is more important to do the top-level design of the technology, so that the system can smoothly accept the lower-level framework of the blockchain with better performance (see my article, the top-level design of the blockchain era ). tZERO has given full consideration in this regard, Rob Christensen said: "We designed our platform as 'blockchain neutral', which means we can conduct securities-based certification on multiple distributed networks. Issue, distribute, trade, settle and report.".

I think that one of the factors that currently limits the blockchain technology to the greatest benefit in the trading market is the existing regulatory policy (see my article, The Application of Blockchain Technology in the Securities Trading Market ). For example, clearing based on blockchain technology can directly achieve direct liquidation between trading users, but according to the current market structure, it is still necessary to clear the member's liquidation level through the brokerage. Rob Christensen said: "At present, (tZERO's liquidation) is only through clearing members who are FINRA members." Therefore, this cannot fully exploit the value of blockchain technology in de-intermediation. But regulators do have their difficulties. In this regard, the market is asking it to regulate a market that is growing rapidly. Until the impact of blockchain and encrypted digital assets on all aspects of the securities industry is not fully understood, it is virtually impossible to develop a sound regulatory policy (see my article, the SEC's regulatory flaws ).

But the current state is also an opportunity, and regulation can work with the market to lay a solid market foundation for the emerging securities market based on blockchain technology and encrypted digital assets. In 1973, when the US options market was just established, only CBOE had its own clearing house. Several other options trading companies are also appearing. Every exchange must set up its own clearing house. This is very inefficient for the entire market. Therefore, the SEC requires several exchanges to use only one clearing company. This clearing company is common to exchanges and is not-for-profit, providing fair services to individual exchanges. The clearing company became the later Options Clearing Corporation (OCC). Thus the US options trading market is much more efficient in terms of market structure. This is actually more beneficial to all parties involved in the market. In today's blockchain era, the SEC has the opportunity to work closely with the market to build a more efficient market structure.

6, the application of stable currency

A new tool that can help global users trade on these new digital stock exchanges is the recent emergence of legal currency-based digital stable coins. Stabilizing coins will make it easier for users around the world to participate in the transaction. Prior to this, when people could only use Bitcoin and Ether to trade in the secondary market, we saw their contribution to the trading market traffic. Now if these stable coins based on legal currency are used in the market, the trading efficiency of the securities market will be higher, and the trading volume of the exchange will be very significant. In addition, when the delivery of digital securities transactions is required, the delivery can be made directly with stable currency, without the need for legal currency delivery through the bank. This in turn is a reduction in the cost of the transaction process.

Another role of Stabilizing Coins is to combine currently separated securities trading and retail payment applications.

7. The impact of the integration of payment and transaction

Perhaps the biggest difference between these new digital stock exchanges and traditional stock exchanges is the convergence of trading and payment applications. In my previous series of articles ( unified exchanges and banking ecology , the structure of digital financial network ecology, and the two compliant roads from legal currency to digital currency migration ), I propose that the future digital asset world must be a digital finance. Network ecology. Digital assets are generated, stored and distributed in the chain. In this ecology, stable currency will be used. In this ecology, the boundaries between payments and transactions are blurred. Users can use a client to manage their digital stable currency and digital assets for daily payment and trading of digital assets. This means that the digital stock exchange will be more closely integrated with the user's daily payment scenario. This means that any customer who uses digital currency for payment can easily open accounts and trade securities on these exchanges.

This convergence of payments and transactions is now beginning to emerge. Coinbase and Visa jointly launched a cash card. Users can pay directly at some retail outlets with their encrypted digital currency in their Coinbase account. For Coinbase, this cooperation is certainly not a unilateral benefit. This cooperation on the one hand increases the stickiness of Coinbase to its users, and on the other hand makes it easier for users to convert their legal currency into encrypted digital assets and trade them in Coinbase. This is also why Bakkt strives to work with Starbucks (see my article, is Bakkt's pursuit of Starbucks worthwhile? )

From the above various development trends, blockchain and encrypted digital assets are fundamentally changing the existing securities market. If existing stock exchanges do not grasp this trend in time and respond accordingly, they are likely to start to decline.

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