The Future of Private Markets is Blockchain Enabled
Provenance Blockchain Foundation | 10/31/2022
A large portion of the world’s wealth is locked in illiquid assets like real estate, fine art, commodities, private equity, and others. Private markets overshadow public markets
in terms of growth and size, but they are dogged by insufficient processes. Growth of the private markets has not shown any signs of losing momentum. The Future of Alternatives 2027 report states that current global private assets under management will reach $18.3 trillion in value by 2027, nearly double the size of what it is today.
The question is what are the factors associated with further stimulating the growth of private markets. In part, it will come from the broader adoption of blockchain technology for issuing, managing, and trading private market assets. All financial assets can be tokenized, including private market assets, and all the related rights of ownership or entitlement to cash flows can be captured and stored via distributed ledger technology. It is estimated that tokenized global illiquid assets will become a
$16 trillion investment opportunity by 2030, versus the mere 0.3 trillion in 2022.
Understanding the traditional challenges of private markets
Before jumping into the benefit of blockchain and digital assets, let’s discuss the challenges facing private markets today.
- Regulatory obstacles
Historically, many private markets were out of reach for individual investors, in part
due to regulations. That has taken a shift with new regulations, particularly in the
In the United States, newer legislation and regulations like the JOBS Act have removed some of the stumbling blocks to raise funding privately. This allows private assets to be made more accessible to a wider pool of investors. With these changes, regulations are facilitating the further growth of private markets.
Compared to the public market which itself requires innovation to get beyond T+2 in the United States, the private markets lack even more of the needed infrastructure. A vast majority of trading processes involve human intervention on the backend, along with multiple intermediaries to complete a transaction. Still today, some of those processes occur via Excel spreadsheets, PDFs, and emails, all of which contribute to making private market assets inaccessible and illiquid.
High participation costs
Without a unified system and infrastructure for private markets, clients have to jump
through the many hoops of intermediaries, which include multiple layers of costs. These include, for example, fees from broker-dealers, legal fees, and bank transfer fees, which all increase the cost of private market deals.
Blockchain as a solution
Traditionally, private markets come with complex multi-party processes requiring intermediaries, human intervention, and communication between multiple central databases, making investing in private market assets an expensive and lengthy process.
Blockchain technologies, such as Provenance Blockchain which is specifically built for financial services, are particularly well suited for private markets because it can
decentralize and streamline all trading processes. The technology offers a secure infrastructure for issuing, transferring, and managing securities across private markets. Here’s how blockchain can help private markets evolve:
Information asymmetry and the lack of a unified source of truth are two current obstacles challenging the efficient growth of the private markets. In today’s private markets, each trade goes through multiple loops of checks and approvals, taking days, if not weeks. Trading securities over blockchain allows for a near-instant clearing and settlement, primarily because the trade occurs between two parties with no need for intermediaries to be involved.
Every trade is enforced through smart contracts which means a trade is only able to occur if it satisfies the pre-defined rules, such as satisfying the regulations requirements for holding periods. There’s also no need for passing paperwork between parties, it is automatically executed on-chain between the two counterparties.
Tokens allow for transferring value from one party to another in a more secure and efficient manner than is seen in traditional financial markets. The use of blockchain
allows for the seamless circulation of value while ensuring truth in place of the need
Blockchain can fully replace the current fragmented, jurisdictional and restricted market infrastructure with a global one that allows for the inclusion of a broader range of investor types. Coupled with a fully digital onboarding process, individuals who have historically not had easy access to participate can now be included.
This fully digital and global infrastructure now enables full transparency, price discovery, and trading efficiency between counterparties, in turn enabling liquidity for the private markets.
Blockchain technology also enables an opportunity to fractionalize traditionally illiquid assets to democratize the market and remove the barriers to entry by reducing the minimum investment amounts. Blockchain enables more investors to participate in private markets, and access to liquidity promotes better capital formation as well.
Programmable and immutable blockchain solutions provide a resilient infrastructure for asset creators, owners, servicers, auditors and regulators. With blockchain technology, all of the data recorded and stored on blockchains (crypto-graphic hashes or signatures) is valid and verified.
At the same time, many regulatory bodies do require certain sensitive and personally identifiable data remain private. Blockchain tools are available to help navigate these
compliance standards, for example, Provenance Blockchain offers the ability for private and sensitive data to be stored off-chain, identified by a receipt number that lives on-chain, and where only on-chain participants with authorization given by the asset originator can view the associated off-chain data.
- Removing the barriers to participation
Previously, private markers were associated with high costs and burdensome procedures, due to a paper-heavy process and the challenges of coordinating the multiple players and intermediaries involved in a trade transaction.
With smart contracts and peer-to-peer trading, investing in private market assets is easier since there is no need for any intermediaries like lawyers, notaries, and banks. With blockchain, investors don’t need to go through many loops of compliance checks and digital onboarding, everything is checked and verified just once as opposed to happening with every new app or tool they want to use for investing.
Private markets are already beginning to benefit from the advantages blockchain introduces, including significantly improved efficiency, broader investor access, improved investor experience, and better capital formation. And this all while asset creators and servicers, such as fund managers, reduce exposure to risks. Innovative large financial institutions and fintech are adopting blockchain technology, for example Provenance Blockchain supports live real-world use cases and billions of dollars of activity on-chain today.
About the Author
Provenance Blockchain is built specifically for the financial services ecosystem. Leading financial institutions and fintechs leverage Provenance Blockchain to enable the entire digital asset lifecycle to deliver material business and customer value. Provenance Blockchain is successfully transforming lending, securitization,payments and exchanges, and has supported over $10 billion in transactions.Provenance is an open-source, public blockchain built with COSMOS SDKs. The native utility token, HASH, is used to pay transaction fees and enable governance.
For more information, please visit provenance.io, Twitter @provenancefdn, and LinkedIn.