Digital Securities – Crossing the Chasm
As we move from the innovators and early adopters of cryptocurrencies and ICOs on DLT, to a broader early majority market of digital securities,Jeffrey Sweeney, CEO at US Capital Global, points to Geoffrey Moore and Ev Rogers’s theories of technology diffusions and ‘crossing the chasm’ that impact the five-stage chronological life cycle and transition of early technology adopters. He questions the difference in views between early adopters and early majority populations in terms of their key issues related to perceived risk. Sweeney submits in this article that what is critical to the early majority category is the availability of clear High Value Assets and the Adoption of Standards.
By Jeffrey Sweeney, Chairman and CEO at US Capital Global.
What is the ultimate goal?
The ultimate goal here is not ‘technology adoption’ per se, and not just reallocating the financial pie, but money for more people. The ultimate goal is democratising access to alternative investments, creating wealth, and growth for investors, and for businesses. How do you do that?
In financial markets the early stage investors are sophisticated enough to be able to take significant risk for large rewards and wealthy enough to be able to meet high minimum investments associated with private markets. Ultimately the capital markets want to broaden the participation to other investors and institutions, to benefit smaller investors and smaller cap companies.
Won’t technology solve everything?
One view on the key aspects of ‘chasm crossing’ focuses on technology infrastructure and platforms. Technology in general, and in this specific case digital ledgers and digital securities based on smart contracts, certainly reduces transaction friction. Yes, this technology differentiation is very attractive to innovators and early adopters and technology adoption in this case, can reduce transaction friction, and cost, and allow for easier reporting and regulatory oversight.
But, while technology clearly helps facilitate the transition, it won’t solve the problem 100%. There are other key components to solving the larger problem. Remember, while the profile of innovators and early adopters is a higher risk tolerance, the characteristics of the early majority is to accept less risk for more inherent value. The early majority will ultimately be attracted by high value assets.
The other chasm – Alternative Investments.
There’s actually two revolutions going on. Of course there’s the new digital technology/ digital securities revolution, but we’re still trying to finish the transition to broader access to Alternative Investments. Alternative investments include private equity, real estate, commodities and derivatives contracts, not the public stocks and bonds of traditional investors. But, while ‘alts’ may not be as widely accepted, they offer some special advantages to the broader market, including non-correlation with the stock market and the potential for incremental improvement in returns even when focused on demonstrated high value.
Who’s already invested in alts? Already the ‘early majority’ for alts? – Institutional-type investors, large multifamily offices, asset managers, rich investment advisors, are savvy in alternative investments. And these institutional investors certainly are interested in the use of new digital technology to reduce transaction friction and to improve access to opportunities.
Early adopter success – key to chasm crossing
It is generally accepted that to ‘cross the chasm’ you need significant momentum from early adopter success, and so we’re at a point where a combination of these two groups’ interests may provide the larger accelerator. We’re talking about an intersection of early adopters successful in cryptocurrencies, seeking to expand and diversify their holdings into other asset classes, and the early adopters / early majority of alternative investors, seeking to leverage the new technology platforms for improved efficiency and opportunities.
So perhaps then this combination is the key to a tipping point for general adoption. Bring high value alternative assets up on reliable digital platforms, offer extremely easy to identify, reliable, and valuable opportunities, and this will not only attract the blockchain ‘natives’ but also bring in the asset managers and institutional investors. Then, from that base, you can launch generally into the ‘early majority’ for digital securities, the general public, the smaller asset managers, into the dual-accredited investors – people like that that will begin to participate, and then – it explodes.
There’s a logical sequence or progression for this. One of the key additional underpinnings is, besides valuable assets, is reliability and trust. You have to have reliable assets – and to have that trust you have to have regulated best practices in value assessment and things of that nature, by regulated entities, and then you need a trusted place to transact. It’s all about trust.
It’s all about standards
This brings us to an alternative theory about chasm-crossing. If it’s not purely about infrastructure platforms, then the competing concept is all about emerging standards. This is the viewpoint elaborated by Irving Wladawsky-Berger. Crossing the chasm for ‘blockchain’ is more than just ‘Apps’, it’s about the emergence of standards and governance. Whether you send a letter, or make a phone call, or travel by plane, from London to Bangkok, this is only possible because the global regulatory bodies have agreed on standards, not just technology standards, but standards of practice.
For aircraft and operations there are technical standards by IATA, the International Air Transport Association, and other regulatory bodies, and right now this ‘technical standards’ is where everybody in digital securities is concentrated on for the most part, like the smart contract terms and specification of Hyperledger and R3. But like in air travel, where beyond assembling the plane, you want to be confident that the crew is trained how to handle the aircraft. Similarly in digital securities, we need to know that the digital security technology is operated under relevant professional standards and practices.
Standards are important for sophisticated investors, but they’re even more important for the general marketplace, so that they can understand not only the basic terms of the smart contract transaction – how many shares am I getting, and how much does it cost, and how can I see it in my portfolio, but equally or more importantly – what is the assessment of the valuation of those shares, and who did that? What type of licensed professionals were involved, and how can I rely on them?
And then what about interoperability?
Not to take the air travel example too far, but what if you had to have a different airport for each different airplane manufacturer? That would severely increase costs and blunt air travel for the general public, and mean that many places wouldn’t be served by flights. So within certain technical limitations, today any airline can fly any airplane to any airport. And to truly cross the digital security chasm, I want to buy and sell digital across markets.
With digital securities at this stage, for the most part you sell them on the platform you issue on. But, if I’m an issuer of digital securities, I really want to be able to go to multiple markets. As an investor, I want be able to select the right market/broker for me that provides the right service, integrates with my existing accounting mechanism and such. I’d like to be able to pick and choose, be able to compare, and not feel like, “Well, if I only go with this guy, he can’t get me that other digital security.”
The standards are critical i.e. the collaboration amongst the professionals and amongst the emerging marketplaces are vital to be able to identify and offer high value alternative investments, to offer the issuer a broader access to multiple marketplaces, and to be able to offer investors a complete selection amongst digital securities as well as amongst dealers of traditional securities.
I would like to know that my broker/dealer, who’s been involved in my life, is also participating in evolving the standards for interoperability across digital marketplaces. It’s crucial that we in the industry, existing financial professionals, get together to perform the same kind of function that you see in FINRA. Self-regulation of the marketplace to improve the standards, visibility and reliability to issuers and investors, for what they’re participating in – are the responsibility of the professional.
In Summary
Stay focused on the goal. It’s not tokenization. Nor just technical efficiency in markets. The ultimate goal is democratising access to alternative investments, creating wealth, and growth for investors, and for businesses. More money for more people. To achieve this we in digital markets must cross the chasm from innovators and really adopters in cryptocurrencies, to the early majority of a larger private market in digital securities.
Emerging adoption of institutional investors to digital securities for high value alternative investments can not only provide the proof point of digital markets, but provide the momentum to deliver the promise of digital markets to the broader class of investors. Delivering these high value digital securities requires technology plus the trust that can only come from professional standards in an evolving private securities market place.
This article was originally published in The Fintech Times on March 30, 2019.
Jeffrey Sweeney is an investment professional and fund manager with decades of experience in direct lending and corporate finance for small to lower-middle-market businesses. He is Chairman and CEO at US Capital Global (www.uscapglobal.com) and founder of US Capital Investment Management, LLC, an innovative fund manager headquartered in San Francisco, CA.
This article does not constitute an offer to sell or a solicitation of an offer to buy any security, and may not be relied upon in connection with the purchase or sale of any security. All investing is risky, and any investor should always first consult with a competent professional adviser. Some or all invested funds can be lost.
