The crypto industry needs a crypto capital market structure

The past few weeks have been interesting and have surfaced what we in the financial services industry call matters requiring attention, or MRAs. An MRA describes a practice that deviates from sound governance, internal controls and risk management principles. These matters that require attention have the potential to adversely affect the industry and increase the risk profile.

I have always focused on technology and innovation-led business models — systems and interconnected elements of blockchain-powered business networks — redefining the transaction systems that power many industries, including financial services. A growing number of naysayers have become vocal about recent events, which have revealed extensive mismanagement, ill-defined and misgoverned systems, and general misrepresentation of the industry. As a result, I want to take a systemic view of the industry to understand what led to this point, dissect the failings, and be prescriptive on how we can learn from failures and build upon successes.

Let’s first understand the market structure and what it means. That will help shed light on inefficiency in the current crypto market structure and allow me to make the case for a better-defined structure aimed at systemic fairness, robust information flow for risk profiles, and a convincing innovation narrative to revive the industry and instill confidence.

Understanding the current financial market structure

The modern financial market structure is essentially a chain of interconnected market participants that aid in accumulating capital and forming investment resources. These market participants have specific functions, such as asset custody, central bookkeeping, liquidity provisioning, clearing and settlement. Because of function, capital constraints or regulation, many of these entities are not vertically integrated, which prevents collusion or unilateral investment decisions. So, various products may be governed by different markets, but the fundamental financial primitives remain universal. For example, products such as stocks, bonds, futures, options and currencies all need to be traded, cleared and settled, and other functions such as collateralization, lending and borrowing ensue.

Financial markets work only where there is a supply of and demand for capital, and this is important. Today, the information between these interconnected participants is a function of sequential batched relay systems, and this asymmetric dissemination of information not only creates opacity but also inefficiency in terms of liquidity requirements, system trust costs in the form of fees and opportunity costs.

Blockchain and distributed ledger technology systems aim to solve these issues of time and trust with the characteristics of immutability and asymmetric dissemination of consistent information, which lends itself to trust and instant transaction processing. So, where did this go wrong? And why is the problem we were trying to solve becoming exponentially more complex and prevalent in crypto capital markets?

The current state of market (un)structure — The history of the promise of crypto

The Bitcoin (BTC) system was proposed as an experiment born out of the global financial crisis as a prescriptive approach to rethinking our financial system, a reimagined order to organize the world community and reduce dependence on a few large hegemonic economies.

This system was proposed with tenets of decentralization to distribute power and trustless protocols to ensure that no single entity had absolute control of a monetary system. It relied on participation in the global creation, acceptance and recognition of a currency, where the rules of demand and supply applied to egalitarian principles.

Bitcoin helped envision a few financial systems to address the…