Capital Markets 3.0

The tokenization of real-world assets in Latin America has the potential to reach $550 billion by the year 2030, growing at a ~104% CAGR from $7.6 billion in 2024 to $550 billion in 2030, with a focus on mid-to-large-sized corporations and infrastructure projects. This can fuel economic growth and have the potential to uplift millions of people out of poverty.

However, several challenges need to be addressed to fully realize this potential. Many emerging economies face challenges in developing their capital markets, including limited access to finance, regulatory barriers, and underdeveloped financial infrastructure. While the fundamental elements of effective capital markets are well-known and defined, policymakers in emerging markets struggle with the challenges of implementing the required change.

Policymakers aiming to build Capital Markets 3.0 need to consider the potential of blockchain to significantly enhance transparency and security in financial transactions. Blockchain’s immutable and decentralized ledger system ensures that all transactions are recorded transparently and tamper-proof, reducing fraud risk and enhancing trust among investors and market participants. This foundational shift can lead to increased investor confidence, greater market integrity, and a more robust financial system.

Nonetheless, much of the public discussion in Latin America about crypto-currencies, especially Bitcoin, has centered on a replacement for fiat money, a speculative investment asset, or an instrument for money laundering. Also, like many industries, the crypto-asset industry has suffered from some incidents relating to cybercrime.

This framework leads many to wholesale dismiss crypto-assets as technologically flawed, unnecessary, or even subversive. However, this overlooks their potential to enable new business models, drive development in capital market infrastructure, and enhance the depth of capital markets – ultimately benefiting small and medium-sized enterprises (SMEs), which are the main drivers of innovation and employment in the economy. This forms the basis of Capital Markets 3.0.

We are creating a series of posts to explain crypto-asset capital markets and to provide insights from our interactions with market participants involved in developing new technologies and attracting investor interest, with the purpose of developing a regulatory framework that could be useful for policymakers, authorities, regulators, and industry in order to create regulatory principles on a par with those adhered for traditional securities.

We write these posts to demystify crypto-asset capital markets and draw relevant references to insights from our interactions with market participants at various stages of developing new technologies and attracting investor interest.

Distinct types of tokens are being developed in the market. Some are issued in a token sale or security or initial coin offering (ICO, STO), while others represent off-chain assets, with their value residing outside of the blockchain, for example, physical assets like a building. We will focus on the tokens that a business issues to investors and analyze the different stages of capital markets that may impact this activity.

We seek to establish a knowledge framework for capital markets based on crypto-assets. To do this, we need to discuss important topics related to token issuance, crypto-asset exchanges, and investment. Please note that we are not providing a formal legal or regulatory analysis, nor are we attempting to cover every possible legal and regulatory consideration. Instead, our focus is to bring attention to key areas where market practices may need to evolve and where regulators could concentrate their efforts on developing new policies. Our goal is to shed light on the compelling topics and issues that we believe will influence the future of crypto-asset capital markets across these themes.

The guiding principle should be technological neutrality. This means that investors should have the same level of protection whether they invest in a token-based security or a paper-based security. Regulation and judges should provide the same protection for both types of securities. There should be no distinction based on the “instrument” used to represent securities, whether it is a paper, an electronic annotation in a centralized database, or a digital annotation on a decentralized database using distributed ledger technology. Therefore, there should be no incremental risk associated with holding security tokens issued by an entity compared to equity instruments issued by that same entity. It would be contradictory to argue that the level of protection provided to investors should be lower.

We argue that, like previous revolutionary ideas, blockchain technology has the potential to enable developing countries to leapfrog more advanced economies. Leapfrogging happens when countries constructing infrastructure directly adopt the most current systems, rather than starting from the beginning and progressing incrementally. But what if we extend this concept to shape the future capital markets 3.0? In such a future, the costs of accessing capital markets are significantly diminished, much like how the internet reduced the costs of publishing and communication, leading to the proliferation of ideas that we currently attribute to the Internet. Blockchain’s potential usefulness holds a comparable promise.

It makes more sense to leapfrog the financial market infrastructure and move toward the future capital markets 3.0, rather than maintaining outdated legacy systems.