COVID-19 wreaked havoc on practically every economy, worldwide. Countries have seen dramatic GDP declines, leaving their businesses with turnover and margin erosion and in desperate need of streamlined access to capital. This situation is being tackled by generous cash injections from central banks, which are largely allocating money “printed out” for this very occasion.

In this century, central banks have ubiquitously resorted to this method, as a universal economic problem cure-all, yet it can hardly be considered a viable long term solution. In fact, numerous examples in history demonstrated that similar approaches can lead to a lack of trust in the national currency and the eventual rise of inflation which at times turned into hyperinflation.

Many companies were struggling to access capital even pre-COVID-19 despite interest rates being at historically record lows globally, meaning that this problem wasn’t triggered, but only exacerbated by the pandemic.

One of the main hurdles standing between companies and investors is their inability to access capital available via public offerings and listing on stock exchanges due to incredibly high listing and maintenance fees, which only the largest enterprises can currently afford.

At the same time, institutional investors who prefer liquid assets to private equity or retail investors who could provide the capital needed by companies, are having a hard time diversifying into alternative assets, which for the most part remain within the purview of high net worth investors and funds. 

Also Read: How blockchain enabled startups to raise capital

Regulatory stalemate

The described stalemate is largely caused by regulators who forbid certain assets to be sold to retail or less sophisticated investors unless very stringent compliance requirements and prospectus filings are met. Nonetheless, while their intentions are good, they don’t prevent many of the frauds which manage to pass these hurdles such as backdoor listing scams of accounting scandals, as they are typically conducted by well-funded players.

Also, adhering to the stringent requirements consumes substantial amounts of time as well as capital and is partially responsible for the high fees of going public, stifling economic activity. Most companies naturally prefer dealing with institutional and professional investors, which is a cheaper route and a less time-consuming option for them.

The dilemma here might resemble the COVID-19 situation – if the spread is exponential, do lockdowns that harm business, and their owners, as well as employee livelihoods, outweigh doing nothing?

Meanwhile, retail investors are eager to generate passive income through investing which is evident in their growing participation in very risky assets such as options, and especially unhedged options. Not content with large stock volatility, many trade leveraged derivatives that can move in one day more than more traditional assets move in a year, which per current regulatory framework is allowed, yet it’s near impossible for them to participate in smaller company investments.

This kind of dissonance is tough to rationalise if investor protection is the desired outcome.

Inevitable change

One of the main inefficiencies of the current regulatory landscape imposed on stock exchanges is a need to settle trades via Central Securities Depositories (CSD). Presently, there are only 23 CSDs across the whole of EEA, with many of them being country-specific.

This oligopolistic and in some markets monopolistic situation in the market creates fertile ground for extreme inefficiency, human error, and legacy systems with old APIs in the exchanges post-trade process resulting in outrageous settlement and custody fees, which exchanges typically pass onto the issuers. 

Luckily, some regulators seem to be getting up to speed with the latest technological advancements and are working to build an environment where streamlined capital market infrastructures can thrive. The US SEC recently allowed Alternative Trading Systems (ATS) to take part in the settlement process, European Commission proposed a regulation where Multilateral Trading Facilities (MTF) can fully take over the CSD role, and in Singapore, the regulator now allows for blockchain settlement without a clearing license. 

Also Read: How data can help the global fight against COVID-19

Capital markets in less than five years

History has taught us that crisis accelerates progress and innovation and we think that this time is no different, the current situation is likely to fast-track what are currently outdated practices in an important global industry. We believe that in less than five years’ time, we could witness a completely reinvented capital markets process and infrastructure.

Should the recent trend continue, the future will feature democratised capital markets with many more exchanges run by banks/startups that will trade currently illiquid and opaque assets that now trade over the counter (OTC) or don’t trade at all. Such systems will mainly benefit SMEs and individual investors, as opposed to a plethora of brokers and middlemen of today charging high fees for inefficiency and little added value. 

With all of this in mind, our team built a platform embodying the upcoming change. It was designed to onboard customers globally and allows them to trade via an intuitive widget-based user interface, while also enabling institutional access via APIs.  We aim to democratise capital markets because with our improved exchange, OPEX is reduced by 90-95 per cent and these fees can be passed on to a whole greenfield of new potential issuers.

Even though our tech has been fully ready to launch for some time, we have faced and are still struggling with significant challenges on the regulatory front. Despite the considerable investment banking and hedge fund experience of our core team members, we don’t have an extensive board of directors, and former colleague staffers regulators are used to from current licensees, as we are still a startup.

This said we hope that we will soon overcome these challenges, as our lean operation, together with our world-leading tech, brings a much-needed industry shift that can completely change the way investors think about investing and companies raise funds.

–

Editor’s note: e27 aims to foster thought leadership by publishing contributions from the community. Become a thought leader in the community and share your opinions or ideas and earn a byline by submitting a post.

Join our e27 Telegram group, or like the e27 Facebook page

The post Paving the way for capital markets in the post-COVID-19 era appeared first on e27.