Noelle Acheson is a 10-year veteran of company analysis and the author of CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to CoinDesk subscribers.
In this opinion piece, Acheson discussion a recent DLT tech trial spearheaded by the London Stock Exchange, using history's lessons as a way to foretell the project's possible future.
Over 20 years ago, with little fanfare and much skepticism, the London Stock Exchange (LSE) took a bold step that ended up changing company finance.
Eager to open up the market and diversify its income, the LSE launched a new type of stock exchange aimed at smaller high-growth companies unable to meet the broader exchange’s requirements. The Alternative Investment Market, or Aim, was born.
Aside from the occasional hiccup, the venture can be called a success.
From a modest launch with 10 companies, the new exchange grew to almost 1,700 at its peak in 2017. And while many of the listed businesses are tiny, some have market capitalizations that rival those on bigger exchanges.
On a loop
Now, history could be about to repeat itself.
CoinDesk reported earlier this week that a subsidiary of the LSE Group is testing a blockchain platform to store private company records. Developed by Borsa Italia and IBM, the goal is to digitize shareholding structures, facilitate cap table management and bolster investor confidence.
Again, the group is choosing a cautious approach, but with grand goals.
While the initial project is focusing only on investment records, the group recognizes that this is a first step toward being able to digitize the actual shares, as well as future debt.
The impact on company financing could be huge. Creating shares on a distributed ledger would lower both overheads and barriers, enabling small, private companies to enjoy a greater shareholding flexibility and liquidity. Investors would be more interested in investing in private businesses knowing they could exit relatively easily, which would further facilitate access to financing. And the exchanges themselves would enjoy lower administration costs and more transparent oversight, which would make compliance with ever-stricter rules less onerous.
Apart from the boost to investment and efficiency, a broader financing market would solve another issue. In spite of jittery institutions that were burned by previous growth market flameouts, the EU has indicated an interest in encouraging the creation of more junior exchanges such as Aim. Its goal is to not only support entrepreneurship, but also redress a systemic imbalance: the Euro area market capitalization as a percentage of GDP is approximately half that of the US.
The LSE Group’s initiative appears to be a positive step forward, for both market activity and blockchain development.
However, we do need to be aware of its possible impact on financial stability.
More liquidity also means more risk. In private equity, investors are generally there for the long term. Since exits are complicated, backers tend to use longer-term criteria when evaluating an opportunity, and often help out when things go wrong. Companies with tradeable securities don’t enjoy that benefit, and the result could be a slide in management quality.
Even if investors are focused on long-term fundamentals, easy exits can make the temptation to use them harder to resist. And as we have seen, in times of market turmoil common sense is usually in short supply. A stampede out the door, either because of negative rumors or a sharp change in general market sentiment, could wipe out both business and investors.
On the whole, the short-term effect of this and other initiatives is likely to be positive. Further trials leading to live projects could boost entrepreneurship and investment, which will in turn impact employment and economic growth. It is important, however, to remember that many of the barriers to investment are there for a reason.
The LSE’s strategy of approaching bold moves with caution – 22 years ago and today – will enable innovation to gradually find its place in a fast-changing field, and from there build a new type of system… step by careful step.
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