Crypto Project Category: Start-Ups
The Blockchain Revolution at Risk
The emergence of cryptocurrencies and blockchain tokens promises to fundamentally remake the private capital market. In 2017, the total value of tokens grew to USD$37.7 billion, a nearly 19,000% increase over the prior year.
1 Companies and investors raised USD$5.4 billion last year through initial coin offerings.
2 At its current rate, ICO capital raises will hit USD$12 billion this year.
3 To appreciate the rapid growth of token sales, consider that U.S. startups (i.e., seed and Series A) in 2017 raised an estimated USD$8 billion using traditional private placement.
4 But two fundamental problems threatened the further expansion of the blockchain enabled capital market. First, many crypto trading platforms around the world struggle to generate enough liquidity to serve their local markets. Apart from the most frequently traded currencies and tokens, many exchanges have insufficient buy and/or sell side demand on their platforms to support an active market. This makes pricing discovery on any single exchange inefficient. Prices across platforms can vary significantly, creating arbitrage opportunities that undermine the efficiency and integrity of the market.
Second, regulators in the United States and other key jurisdictions view tokens as securities and are regulating them as such. For example, the agencies require investors to trade security tokens only on regulated trading systems and exchanges. Existing trading platforms, most of which lack licenses in any jurisdiction, face a significant dilemma. If the platforms wish to trade tokens that regulators deem securities, they can either:
(a) register as a broker-dealer in each country where they have a material numbers of users,
(b) choose not to register, but risk regulatory enforcement and other legal action, or (c) shut down token trades in those
Each choice presents material problems for the platforms.
The SharesPost Solution
The SharesPost Global Liquidity and Settlement System (“GLASS”) will be a decentralized network that enables crypto platforms to pool liquidity and settle compliant cross-border token trades Exchanges could boost trading volumes without materially slowing transaction processing speeds by connecting with counterparties on other exchanges. The platforms can market to and serve customers even if regulators deem those tokens as securities in that jurisdiction.
To increase transaction volume, token trading platforms will submit buy and sell orders for some or all of their tokens to the network. The network will connect buyers and sellers from different exchanges, pooling the collective liquidity of participating exchanges. The system could inspire confidence among exchange clients that they are getting the best available price for their purchase or sale. SharesPost’s escrow technology could eliminate counterparty risk between exchanges. The combined liquidity will generate network effects for GLASS and the participating exchanges. As more platforms join the network, GLASS could accumulate even more liquidity compared to non-participating platforms, thus giving them a stronger incentive to sign up.
The network could also eliminate the need for exchanges to determine whether tokens are securities in a particular jurisdiction. Each jurisdiction/country will feature one or more licensed entities (e.g., broker-dealer, Alternative Trading System, etc.) on the network to settle trades in that jurisdiction. Regulators should not penalize participating exchanges because a local regulated entity will make sure each trade complies with local securities laws. The distinction between utility tokens and security tokens will become largely irrelevant because entities licensed for securities transactions will settle the trades. As a result, exchanges can move to acquire customers in the United States and other jurisdictions now actively regulating securities tokens.
SharesPost is ideally positioned to build, launch and maintain GLASS. Launched in 2009, SharesPost pioneered the online trading of shares of private growth companies and has since matched thousands of buyers and sellers in more than $4 billion worth of transactions in the shares of more than 200 leading private companies, including Facebook, Tesla, Twitter, LinkedIn, Alibaba, etc. SharesPost’s U.S. trading platform (housed in New York and San Francisco) is already licensed by the U.S. Securities Exchange Commission (the “SEC”) as an Alternative Trading System (“ATS”) and by the Financial Industry Regulatory Authority (“FINRA”) as a clearing broker-dealer. SharesPost also operates a business development subsidiary in Hong Kong and subsidiaries in Singapore and Dubai that are currently registrating with regulators. The company anticipates the launch of licensed broker-dealer subsidiaries in London and Berlin.
SharesPost’s registered entities will be among the first settlement providers on GLASS, providing the network with immediate coverage in key financial centers. To earn settlement and network fees, other licensed platforms will join the network as settlement providers. SharesPost’s proven legal and compliance teams will be initially oversee the regulatory review of settlement providers and ensure that each operates in compliance with the laws of its jurisdiction. Ultimately, the community of settlement providers and trading platforms will govern itself.
In addition to GLASS, SharesPost will also operate a marketplace for investors to interact with security and utility token issuers. SharesPost will provide access to ICOs, secondary trading as well as data and research for investors to make informed investment decisions. The system will link trades with SharesPost’s brokerage accounts, which can securely store and manage fiat and cryptocurrencies and digital and traditional securities.
More than 150,000 investors are registered with SharesPost, including more than 50,000 institutions and accredited investors. They represent the first wave of investors in the United States seeking liquidity on GLASS.
In summary, SharesPost will launch a decentralized liquidity and settlement network. Participating exchanges will deepen their liquidity, drive incremental transaction volume and settle compliant transactions in all jurisdictions even if regulators deem tokens are securities.