It's been a long time coming, but 2019 will finally see the cryptocurrency market make its mark on traditional finance in a tangible way.
While some will immediately point to Bitcoin futures contracts as evidence that it's already happened -- such as those offered by the CME and CBOE -- these are a simple half-measure designed to let some accredited investors and hedge funds get exposure to crypto volatility.
The real crypto market has been cut out of this equation. Cash settled futures, which represent how Bitcoin is traded on these enormous centralized exchanges, put no pressure on supply or demand for the cryptocurrency itself because at no point during the trade is any real Bitcoin changing hands.
The Jan. 7 launch of a new Nasdaq-powered crypto DX.Exchange is the biggest signifier yet that the status quo is shifting. It's not that institutional finance suddenly cares about including the cryptocurrency community, but that it has realized that cryptocurrency can aid its long-term goals for inclusive, cost-effective and cross-border asset exchange. DX.Exchange will soon offer tokenized stocks on the blockchain in a way that brings these two disparate markets together harmoniously for the first time.
Two Sides of the Same Coin
Cryptocurrency and stocks have been circling each other for years. Take the ICO fundraising model, for instance, which mimics how an IPO issues shares representing equity ownership in a public company. However, tokenholders aren't the same as shareholders and often don't enjoy the same voting rights or accountability, and regulators have already cracked down on the practice.
Additionally, during the cryptocurrency bull market of 2017, many publicly-traded stocks incorporated blockchain into their operations and even their company names, trying to capture some of the mania pushing crypto prices higher.
These are both unsustainable ideas, but not surprising considering that a two-way bridge between the crypto and equity markets is one of the last remaining hurdles for blockchain. Attempts by either market to adopt traits of or circumvent the other are equally untenable. Also, not only has cryptocurrency been shunned by the derivative crypto assets traded today, the financial industry itself now feels isolated from the great things happening in crypto.
Seeing these trends play out, some of the biggest names in traditional finance such as Bloomberg, NASDAQ and MPS Marketplace Securities have put their heads together to offer a solution.
It's coalesced in NASDAQ partner DX.Exchange, which already offers peer-to-peer trading of cryptocurrencies, but in conjunction with these venerable institutions will now be able to issue blockchain tokens that mirror the live share prices of publicly-traded companies. Not only this, but the tokens are physically-backed 1:1 by the shares they represent, so when you send Bitcoin to your DX wallet and exchange it for Facebook Token or Apple Token, for example, you've just diversified your crypto portfolio with real shares in actual companies.
How Does It Work?
An innovative stack of utility supports this simple idea and is maintained by several of the world's biggest financial firms. When a person with Bitcoin or Ethereum wishes to buy tokenized shares of stock, they can simply log in to DX.Exchange and place a buy order for the chosen shares. Simultaneously, MPS MarketPlace Securities purchases and holds the physical shares (not cash-settled futures), while issuing the appropriate number of ERC20 tokens representing the physical shares.
Following this step, tokens are handed to the buyer through DX.Exchange to fill the trade. MPS also stores these shares and adjusts its holdings based on live DX demand. The exchange of crypto-to-stocks is handled by NASDAQ's FIX (Financial Information Exchange) system, a sophisticated messaging protocol used to send and confirm transactions between parties while preventing manipulation.
A Beneficial Blending of Markets
The fact that tokens are physically backed by stocks means that demand from the crypto market for these assets will impact share prices, just as a (potentially) upcoming ETF settled in BTC would provide demand for Bitcoin and impact its price. It also means more liquidity and volume for the stock market, and the chance to trade stocks on a 24/7 basis rather than being shut out at the close.
For cryptocurrency investors and traders, it also represents an opportunity to diversify their crypto-heavy portfolios without transferring in and out of fiat, as well as store their stocks on ERC20 wallets like the Trezor or Ledger Nano S. They can also invest in stocks cross-market, meaning the ability to buy shares of companies in Tokyo as well as those in the U.S. without going through multiple difficult (and for some, impossible) permissions processes.
By far the most important concept is compliance, however. Besides working alongside NASDAQ and partnering with the Bloomberg Crypto Center, DX is also regulated by the Estonian Financial Intelligence Unit (FIU), which opens DX to EU customers who demand a regulated and fully-compliant trading experience.
We're slowly entering into an era where the internet of value is being liberated, and strangely enough, it's at the behest of those who once saw blockchain as a harbinger of evolution. As financial institutions and blockchain ideas increasingly find common ground, retail investors will find new opportunities to enjoy the emerging age of democratized finance.
The author holds stock in investment holding company, Leucadia, and is a partner in an emerging technology marketing firm, Notability Partners. He holds no positions in cryptocurrencies nor in any companies that invest in them.