Uber-Style Attack on the US$60-trillion Global Securities Industry
Disruption to the cozy investment bankers’ in the cards
A few years ago, Arifa Khan, a former investment banker with Credit Suisse and UBS, realized that she had found the power to do to investment banking what Uber has done to the private taxi industry.
The current investment banking model, the London-based Khan believes, with a good deal of justification, is inherently rigged against the clients because the banks play on both sides of the game, often meaning bankers are not necessarily working to get the best deal for their clients. Oftentimes, there is moral hazard in processes such as issuance and public listing of securities. That has been provcn dramatically time and again by bankers pushing IPOs with no chance of financial success in order to draw down lucrative fees.
Khan’s brainchild, the Decentralized Global Capital Markets Platform, or DGCAMP, aims to turn the investment banking industry on its head by taking the power of capital-raising from bankers and handing it back to the clients via blockchain, an electronic platform under which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.
The fintech boom has already helped to attract billions of dollars of investments from venture capital firms into the blockchain industry as well as through the issuance of digital tokens also known as initial coin offerings, or ICOs, whose rapid growth, which have so far raised nearly US$2 billion for blockchain-based startups this year, shows the growing public acceptance of this new form of capital raising and one that it is already going mainstream, she says.
Khan will be on her Asia tour from the first week of September, during which she is expected to visit Singapore, Hong Kong, Shanghai and Beijing, where she would be meeting the Bitcoin and Blockchain community, potential investors and market participants. Already, there is traction, with people joining as volunteers for the pre-ICO project wherever she is giving talks explaining the grand vision.
DGCAMP is expected to launch its ICO before the end of this year with an initial fund-raising target of US$50 million. She expects her platform, a two-sides marketplace which promises to be by far one of the biggest real-world applications of blockchain in finance, to go live sometime in 2018.
At the top of Khan’s agenda is an attack on what she calls “the opacity of the capital markets” that adds fat to the industry and hinders the efficient allocation of global capital.
The blockchain-based platform, an initiative of Himalaya Labs, would allow startups to bypass both the investment banks and the stock exchanges as well as the plethora of intermediaries that currently constitute the US$60-trillion global securities industry and go for capital raising in the bitcoin world.
This means that innovators anywhere globally can access capital and a diverse range of investors without having to pay fees to intermediaries. The current mammoth capital markets industry, she believes, has outgrown its usefulness, is obese, and thus is ripe for disruption.
“It is riddled with too much duplication of intermediaries and unnecessary complexity that has no place in today’s technology-driven world,” said Khan, who studied finance at Wharton after graduating from Indian Institute of Technology, Madras.
Such a radical new model would bring enormous benefits to the clients (or issuers of securities) by making fundraising simpler, more efficient and cheaper. It would also resolve the conflict -of-interest that is part and parcel of the traditional securities markets dominated by big banks.
“The entire system as it stands today disadvantages the client, from a game theory point of view,” says Khan, who advises the Indian government on infrastructure project financing.
Moreover, in the existing model, clients have little opportunity for direct interaction with their investors, let alone in deciding who gets to invest in them.
“This is a great foregone opportunity to build relationships with investors, one of their significant moments – when they have decided to become your shareholder,” she says.
Her new platform is made possible by the revolutionary developments in blockchain, the technology behind cryptocurrency Bitcoin. It envisions a whole new decentralized world where everything from underwriting to issuance to trading to settlement to clearing would be automated on a blockchain, where stocks, bonds, and syndicated loans can be issued and traded without middlemen.
Beneficiaries and potential users of DGCAMP would be startups, corporates of any size, governments, non-profit foundations, charities, any entity or individual that is raising capital of any form – be it equity or debt or even some form of hybrid.
While this might seem like a whole new world, Blockchain is rapidly being adopted not just in finance but across all industries from shipping to real estate to search and media, thanks to its ability to process complex transactions involving multiple parties without a central verifying authority.
In banking, it has spawned a whole new fintech eco-system.
In fact, stock exchanges, Khan says, were to the first to wake up to the disruptive potential of the new technology and even invest in it, with all the major bourses such as Nasdaq, Australian Stock Exchange, and the Hong Kong Stock Exchange experimenting with blockchain, albeit on a limited scale or curtailed vision which doesn’t fully unlock the power of decentralization, putting the power in the hands of the people.
The incumbents have reasons to be concerned about its impact on business continuity, and are either disillusioned about status quo, or not yet ready to fully embrace it.
“What would be truly disruptive is if exchanges reinvent themselves, and see where blockchain can re-architect the whole system, which is what DGCAMP attempts to achieve,” she says. And she doesn’t see the intermediaries rendering themselves redundant anytime soon. There is simply too much at stake, for any incumbent to attempt to shake the system.
Investment banks themselves are also experimenting with blockchain with massive investments being ploughed into the technology by firms such as Goldman Sachs, JP Morgan and UBS. Yet the big incumbents lack the speed and the sprightliness of ventures like DGCAMP which are seeking to precisely upend the business model of the bigger rivals still stuck in the old ways of doing business, and with well-earned smugness, backed by too much wealth.
And technology is not likely to wait for too long. Seeing the promise of the new technology in benefiting consumers, regulators around the world are quickly rolling out new regulations or revising and clarifying the existing rules to ensure that the innovation is not being throttled by lack of, or excessive regulations.
For instance, the US state of Delaware has already passed a law that allows corporations to issue shares and put their shareholder information on blockchain.
Blockchain as a technology is also maturing and making rapid strides thanks to innovators like Vitalik, and soon it is expected to reach a stage where it will be able to match the speed and throughput of the current centralized exchanges, she says.
Once the technology platform is built, DGCAMP will seek regulatory licenses in multiple jurisdictions, so that her vision of a multi-national decentralized securities exchange becomes a reality.
“There will be resistance and opposition from large entrenched incumbents, and many unforeseen hurdles on our way, but nothing is going to stop me,” she says.