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The 6 ‘Frictional Fusions’ Driving the Development of New Markets

At this year’s virtual Technology of the Future (ToF) conference, Johan Toll, Head of Digital Assets @Nasdaq, described how these new marketplaces are being created and the emerging market practices that are driving the rapid development.

More investable assets are arising as markets that go beyond the traditional capital markets gain traction. At this year’s virtual Technology of the Future (ToF) conference, Johan Toll, Head of Digital Assets at Nasdaq, described how these new marketplaces are being created and the emerging market practices that are driving the rapid development.

The rise of new markets comes as more industries are moving into a digitalized world. With this digitalization, Nasdaq is exploring how it’s technology can enable new assets for trading and open them up to easier investment opportunities.

“The digitalization of economies and markets have a huge impact on how value chains, supply and demand, and the communication between us and the participants will become more and more efficient,” said Toll, noting that the shipping industry is looking into how to digitalize their value chains.

Many new marketplaces are geared toward digital assets, token assets and cryptocurrencies. Toll noted that the force behind the initial innovation came from outside the traditional capital markets infrastructure. But as these assets have developed and matured over the past couple of years, Toll has seen a “a fusion between existing and new” that is accelerating the creation of new marketplaces.

Toll outlined this “frictional fusion” at ToF, identifying six critical trends:

1. Institutional vs. Retail

Since the launch of Bitcoin a decade ago, retail investors have been the primary driver behind crypto assets, pushing “everything moved into peer-to-peer environment” as retail participants could send bitcoin directly to others, Toll said.

“But at the same time, we can see now how the involvement of institutional parties is necessary for this ecosystem to grow,” Toll said. “It also became very apparent for us all how peer-to-peer trading could [pose] a much higher risk to all the involved parties, so we really need to have a safer and a more robust way to have those assets traded. And that's exactly what institutions are now bringing to the table and demanding.”

2. Established vs. New Payment Systems

To support both retail and institutional investors, new payment systems are needed, Toll emphasized.

In recent years, there has been a rapid development of payment systems in the retail space, such as Stripe and others, providing them with “24/7 solution to manage payments,” noted Toll.

From an institutional perspective, Toll said that commercial banks are highly engaged in how they can better serve their clients in a fully digitalized environment. Even central banks are “looking to see how they can jump on the digital asset bandwagon,” with more than 40 central banks working on digital currency initiatives, according to Toll.

“There's a lot of discussions [about] how we should work with established payment systems versus the new payment systems being built, and how we can potentially find a hybrid model between the two to support both retail and institutional side of things,” Toll said.

3. Intermediaries vs. Peer to Peer

In working toward a hybrid payment system that balances the needs of both retail and institutional investors, Toll suggested that some intermediaries might have to be pulled from the equation.

“It's clear with the blockchain technology that we can have more peer-to-peer communication. But, it's also quite a dramatic risk yet,” Toll said.

He noted that the initial coin offerings that took place a few years ago were truly a peer-to-peer model, in which a person could issue shares directly on a system and allow anyone to invest, which could potentially put the investor at risk.

“I don't think it's about doing peer-to-peer, [and] it's not about keeping all the layers of intermediaries, so a few intermediaries might [no longer] be relevant anymore in the ecosystem,” Toll said.

4. Private vs. Public

In creating new markets, there is also “a lot of debate between private versus public,” said Toll, who noted that many new market participants are looking for all of the work to be done on public networks.

Still, Toll believes that “we're going to get a fusion between those two models—semi-private.”

5. Technology vs. Business Innovation

In the early stages of building new markets, Toll said there was significant innovation from a technology point of view, leveraging the cloud, machine intelligence, blockchain, smart contracts, and more, to create new types of systems.

“I think there are better interest, understanding and involvement from the business side now,” Toll said. “We now see a marriage between the innovation people and the business people to support each other and come up with new models and new ways to trade more efficiently across the value chain.”

6. Centralized vs. Decentralized

The final fusion occurs between centralized and decentralized networks as well as governance. Presently, Toll said the trend is leaning more toward decentralized networks where solutions and products are available via open source.

“In the end, when it comes to centralized and decentralized, it boils down to trust. Where do I have the most trust in the ecosystem?” Toll said. “A way to increase that trust is to be more transparent about the activities going on in the central database.”

Continuous Evolution

Toll noted that these fusions are constantly evolving, and are forming the future of new markets. To better serve this rapidly developing area with institutional-grade technology and insights, Nasdaq launched the Marketplace Services Platform, providing a complete, end-to-end service-based platform to operate marketplaces in an optimized way in a cloud environment. The platform, which commercial real estate securities marketplace LEX leveraged to revolutionize real estate securities trading, comes with two pre-packaged suites: the Universal Marketplace Suite and the Digital Assets Suite. The former is geared towards exchanges set to trade new types of assets, providing services such as listing, matching, risk management and market surveillance. The latter supports the full digital assets lifecycle, using blockchain technology, from issuance through trading, settlement and custody of digital assets. The Marketplace Services Platform combines “all the experience we have of building marketplaces – in how to create markets in an efficient way, how to manage the price discovery process and how to manage the asset delivery and the settlement of assets,” Toll said.

If you are a Market Technology customer, you can request access to Toll’s full presentation and learn more about the Nasdaq Marketplace Services Platform by clicking here.

ToF 2020 Johan Toll


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