Innovating markets: The benefits of a decentralised marketplace and trading platform

By Graham Jarvis, Freelance Business and Technology Journalist 

The financial services industry has often been criticised for being slow to innovate.

However, new non-banking and fintech entrants, such as technology start-ups have, over the last few years, begun to shake up the market.

Furthermore, the rise of cryptocurrencies and blockchain has inspired a vision amongst many free market protagonists of being able to conduct business, without the need for central banks and regulators. To them, this marketplace decentralisation is a good thing. For example, it can allow new and non-traditional entrants, including ordinary individuals, to become venture capitalists. However, cryptocurrencies and blockchain also come with their own critics.

Fruitful innovation

Anton Abashkin, Chief Operating Officer of VNX Venture Exchange, offers his view on the past and current trends in banking and financial services: “I think the last 5-10 years have been quite fruitful in terms of innovation and the whole notion of the digitalisation of banks and financial services has come along quite substantially. They have gone from a position where they completely disregarded and ignored innovation and digital, to embracing it and really trying to jump on this bandwagon.”

“In practical means we have seen banks using the internet purely as a communication platform to putting substantial resources into implementing and experimenting with digital banks, digital products and services, peer-to-peer lending and platforms. This is to allow the entire service to be completely provided online and in a self-service mode.”

“Then there has been a shift towards using artificial intelligence (AI) to better understand through big data what the customers are trying to do, and to reduce the frictions and the barriers to adopt banking products worldwide, and that really has become mainstream. We have seen a lot of financial institutions; banks and insurance companies adopting different innovation and digitalisation strategies, while setting up innovation labs, incubators, accelerators and corporate venture funds.”

Venture capital growth 

He believes that corporate venture capital can grow from single digit percentages to as much as 20%. Part of this growth includes companies – particularly the large financial institutions – have adopted innovation, investing in new technologies. This includes blockchain solutions, which he describes as an attempt to solve the problems of the banking and financial services sector following the 2008 financial crisis, which tarnished the reputation of the industry.

To regain the trust of its customers, it has had to innovate in the face of increasing regulation to ensure that businesses can remain liquid whenever any similar crisis occurs, and to restore trust the industry has largely embraced regulatory compliance. However, some people have seen it as an opportunity to move away from the regulators, the central banks and from other traditional regulatory institutions to embrace cryptocurrencies, blockchain and distributed ledger technologies.

He nevertheless says that every financial institution in the world is piloting blockchain-related projects. This raises the hopes of many people within the marketplace, but he thinks that everything really is at a stage where there is hope more than results. Even so, he believes that the traction and the momentum is already there for these technologies. “You can read in the news stories, such as the Commonwealth Bank of Australia selling bonds via blockchain”, he says before stating that it was part of a “World Bank initiative to implement blockchain in global banking.”

Decentralisation versus centralisation

As for the question about complete decentralisation versus centralisation, Abashkin considers the former strategy of decentralisation, to be nothing but a Utopian dream. He thinks this is because blockchain and cryptocurrencies are struggling to find their niche. He therefore predicts that full decentralisation will only work in a limited number of cases. So, when it comes to using blockchain technologies, which are either being used, implemented or explored by many industries, he advises that there is a need to compromise and find a balance between a centralised and decentralised system, because it’s about trust.

This means that any decentralisation must be compliant with any existing regulatory frameworks. “You have to think about the value that they bring to your business, and so it’s about making sure everything is done from a business perspective in an appropriate manner to decide whether blockchain can address certain issues”, he explains.

“Decentralisation was invented as a way to address the potential risks around fraud, away from a centralised authority that could misbehave, destroy value or inappropriately use resources”, he adds. He comments that this in itself also creates risks, as shown by certain initial coin offerings (ICOs) and by some cryptocurrencies which have been used to scam people. He therefore emphasises that it’s crucial to maintain some checks and balances to prevent fraud, and he advises that this can be done by involving law firms and the regulators involved to balance the different interests of the players within the ecosystem.

Is this a contradiction from the usual view of blockchain technologies, and maybe even of cryptocurrencies? He responds by arguing that no contradiction exists: “It is important to involve the regulators to help define the rules: that’s what we’re doing in Luxembourg to identify how you make this new marketplace compliant to the existing regulations, and for the customers and partners, to ensure that everybody follows the rules. This is the right way to do it.”

Cyber-security

He also stresses that cyber-security is essential because decentralised systems are prone to cyber-attacks. However, the key weakness is often us as human beings. “With blockchain you have to be clear whether there is a weakness in the system that has bad actors, and there is often a lack of prudent behaviour that makes people vulnerable to cyber-security threats, such as the storage of passwords”, he elaborates. This can emerge because he finds that there is often a lack of rules to protect people. For example, when your credit card information is stolen, it’s often not the bank’s fault and so the question about who’s culpable and liable is not always black and white.

Faster transactions

Moving on to discuss trading platforms, Abashkin points out that transactional speeds, and the simplicity of the transfer of assets from one person or institution to another are vital. However, with traditional clearing systems the process could often be slowed down. Blockchain and tokens eliminate these intermediaries though, and so he claims that this makes the whole process more transparent, efficient and streamlined to make transactions both faster and cheaper to complete.

Abashkin, therefore, reveals: “NYSE, Goldman Sachs, and other large institutions are exploring blockchain to make transactional processes more efficient and streamlined, because trades can currently take 3 days. VNX is therefore using blockchain to make the process much faster to achieve a payments settlement within minutes. It can also improve the cost-efficiency of the trades, and you can use smart contracts to allow you to maintain the lifecycle of financial instrument or of stock.”

Smart contracts

“In our case, it’s our duty to police what happens on our exchange, and this is why we are creating a regulated marketplace to ensure that we have someone to check that we’re doing everything right,” he says, before tackling the issue of smart contract security. He admits that anyone can write a smart contract, and that there are some occasions where it will be a case of tough luck. He rightly comments that you can’t have people doing whatever they like, and so checks and balances are needed to ensure that the rules are implemented and written.

He adds: “The ones operating in those markets are responsible for operating within the rules. This is down to the operator of the platform and the regulator to ensure that what happens in the smart contract is regulatory reviewed. The smart contract is a template created by the issuing authority to establish the specific parameters of the token placement.”

He states that there is an array of additional benefits of a Smart Contract, such as maintaining the lifecycle of, for example, stock or the tokenised asset that is being traded on the platform; another is that there can be restrictions of the token transfer from 1 platform to another, which can be embedded into the contract.

Abashkin does, however, state that: “Many of the problems with existing ICOs is that the smart contracts have often been written without much thought, and they are impossible to change. The smart contracts are therefore exposed to weaknesses, and this can lead to money being stolen.”

When questioning how industry players will be reviewed, Abashkin highlights that there has to be some central authority overlooking the contracts being issued, appropriately monitoring and reviewing their content, as well as a company carrying out their own reviewing process.

Market predictions

He predicts that over the next 5 years, there will be a need to make a revolution to change how the markets operate. This revolution involves taking and existing asset class to open up the market to new players. He claims this can add liquidity and multiply the market impact. Subsequently, more companies will gain more access to venture capital. So, whereas the traditional venture capital model is often about exclusivity, the keyword here is inclusivity to unlock the doors of what is traditionally a tightly-closed venture capital club.

“Silicon Valley controls more than 40% of the market, but more people would get involved if they had greater access to capital and liquidity”, Abashkin believes. This is why his company is offering a decentralised, blockchain-based trading platform to allow people to trade their tokens to create more liquidity. He concludes: “Through innovation and the automation of onboarding, making data to the market, there is an opportunity to create more transparency and growth within the marketplace.” Time will tell if the market is ready to make the most of these benefits, allowing anyone to be a venture capitalist.