How technology is transforming online capital formation?

Technology in capital formation and its synonyms are topics that are receiving a lot of attention in these days. Not only because the technical advances and features transformed (and still transforming) the ways companies get capital to fund their business. Let’s talk more about it.

What is the role of technology in capital formation?

It is no trade secret that technology has played a pivotal role in transforming everything – from business operations to consumer behavior. And capital formation is no exception to this rule. Capital formation is the net capital accumulation for an entity over an accounting period.

When you think of how technology supports the discovery or improvement of products and services or the process of creating the same, it becomes evident that it has close linkages with capital formation too. The correlation is that technology offers capital formation a boost.

On the other hand, economic progress also creates favorable conditions for the growth and consolidation of technology. As such, they form a win-win relationship that promotes overall development.

Technology’s impact on capital formation

Taking this into consideration, let’s delve into how technology is revolutionizing the process of raising capital online.

In the next topics, we will explore a practical framework regarding the different details that involve this subject.

On that note, here is a look at how technology is transforming online capital formation.

Artificial Intelligence

Artificial Intelligence, or AI, is a major catalyst in transforming online capital formation.  For starters, AI-powered engines can crunch high volumes of data to perform a 360-degree analysis of potential investment opportunities and personalize the results based on the investor’s goals.  Such AI-based data analysts can work with structured and unstructured data or identify patterns that human analysts could miss out on!

Similarly, AI frameworks can predict the estimated cost of capital and the corresponding revenue with nearly 100% accuracy. These predictions remain reliable as every variable is accounted for.

Automation

Just like AI, automation is disrupting online capital formation in more ways than one. In manufacturing, automation is the secret ingredient that injects efficiency into processes and increases production value.

For investors, it is the medium for seamless onboarding and document management. Pair it with deductive technology like AI/ML, and you will have a self-sustaining, automated platform to track and manage capital in real-time.

There’s just so much potential here.  By adopting automation the entire sector can operate with the assurance it is compliant with securities regulators and transparent with the entire ecosystem supporting online capital formation.

Digital securities

Digital securities or security tokens are blockchain-based financial instruments. They are the digitized form of traditional securities like stocks or bonds and are issued and traded on blockchain networks.

Despite such similarities, digital securities possess greater advantages than their traditional counterparts. They are far more transparent, efficient, and secure. At the same time, they also offer greater liquidity as they can be traded 24/7/365 on the global markets with great ease.

Digital Securities is important to have vibrant private capital markets.  Digital Securities allow the opportunity to instantly settle and validate where this process would take weeks and months.  

Digital Securities do need to be 100% compliant with the securities regulators if not then there is no value in placing any of the securities on a blockchain technology with the expectation that the investor will be able to transact.

Online Capital Formation Platforms

Online capital formation platforms are offering entrepreneurs the opportunity to connect with the global investor base. As such, it comes as no surprise that crowdfunding platforms have become insanely popular of late, especially since the entrepreneurial drive is currently at its peak.

 

In addition to granting entrepreneurs access to a larger pool of potential investors, crowdfunding platforms are also emerging as the medium for entrepreneurs to connect with experts. Thus, it is gradually eliminating any barriers for an excellent idea to gain wings.

Digital identity verification

Online capital formation hinges on digital identity verification to ensure that only credible investors gain access to the capital market. At the same time, it also helps establish the accreditation of investment opportunities.

As such, it can make use of specific identity markers to securely and reliably verify details.  There are millions of potential investors and if they do not have a passport that is fully compliant and verified by a regulated stakeholder, the friction these investors face will be the major barrier for online investing.

In conclusion

Within the sphere of online capital formation, technology stands as the essential backbone, seamlessly integrating transparency, security, efficiency, and accessibility.

Looking ahead, technology is poised to revolutionize online capital markets, democratizing access and reshaping the financial landscape. The synergy between innovation and online capital formation promises an interesting future. Where technology continues to empower investors, foster growth, and redefine financial possibilities.

 

The Relationship Between Cryptocurrency and Blockchain

The relationship between blockchain and cryptocurrency has been an area of increasing interest over the past few years. For those looking to use cryptocurrency or blockchain technology to transfer, store, and track data, understanding the differences between the two technologies is essential. Though they are related in many ways, blockchain and cryptocurrency should not be confused with one another as they are different. Knowing how to leverage each technology can help individuals make better use of these assets while avoiding pitfalls associated with a lack of knowledge. Those looking to invest in cryptocurrency or leverage blockchain should take the time to learn and understand the nuances of both technologies so that they can make informed decisions when it comes to utilizing these digital assets.

Cryptocurrency: Definition and Use Cases

Cryptocurrency refers to a type of digital asset designed to be used as a medium of exchange, a store of value, and a unit of measure. It is usually underpinned by blockchain technology, the use of advanced cryptography techniques for securing online transactions, and can exist either as a centralized token (one with a centralized issuer such as Bitcoin or Ether) or decentralized tokens (without a single issuer such as Libra or Ripple).

Cryptocurrency is gaining traction around the world, with its use cases ranging from being used to buy goods and services to savings and investments, to trading and speculation. Cryptocurrency is also being utilized in areas of financial inclusion, such as providing access to banking services and other financial products to those who lack traditional banking accounts.

Blockchain Technology: Definition and Use Cases

Blockchain is the underlying technology powering cryptocurrency transactions. It is a secure, tamper-proof, decentralized ledger system that allows for peer-to-peer transactions without the need for a middleman. It is also highly secure, as blockchain technology doesn’t rely on a single central authority or server to control and monitor its operations. Instead, it relies on a distributed network of computers to verify and validate the transactions that take place.

This technology is finding its use cases in many industries outside of cryptocurrency, such as healthcare, supply chain management, and real estate. For example, blockchain can help increase transparency and trust in these sectors by providing immutable records of all transactions securely stored across multiple nodes in a network. Such records can then be used to trace the source of a product, helping to ensure that it is authentic and untampered with.

Still, the relationship between blockchain and cryptocurrency does not end there. Cryptocurrency is actually one of the earliest use cases for blockchain, with Bitcoin being the first digital asset to take advantage of this technology in 2009. To this day, blockchain remains a key technology underlying most cryptocurrency transactions, allowing them to be securely transferred while avoiding double-spending and other fraudulent activities.

The Relationship Between Cryptocurrency and Blockchain: Similarities and Differences

While the two are not the same, blockchain and cryptocurrency do share some similarities. Both are digital assets, designed to be used as mediums of exchange and units of measure. They also both use cryptography for secure online transactions. However, there are notable differences such as blockchain being a distributed ledger system that is used to securely store and transfer data, while cryptocurrency is a digital asset designed to be used as a medium of exchange.

The relationship between blockchain and cryptocurrency is not always easy to understand. Though they share some similarities, they are two distinct technologies with different use cases. Blockchain is the underlying technology that supports cryptocurrency transactions, while cryptocurrency itself is a digital asset designed to be used as a medium of exchange and unit of measure. By understanding their differences, businesses and individuals can make more informed decisions when it comes to utilizing these digital assets.

The Origins of Blockchain

It’s been a little over a decade since Blockchain technology was first introduced, but it’s already revolutionizing the way we do business. By eliminating the need for a central authority in transactions, Blockchain enables secure and tamper-proof data exchanges between parties. This has allowed companies to improve productivity, reduce costs, and ensure accuracy in payments or copyright verification. Let’s explore how the Blockchain came to be.

A Brief History

  • 1979: Ralph Merkle, a computer scientist and Stanford University Ph.D. student, described a public key distribution and digital signatures in his doctoral thesis, an idea he eventually patented. This came to be known as the Merkle tree.
  • 1982: David Chaum, a Ph.D. student at the Univerity of California, Berkeley, described a system for maintaining and trusting computer systems.
  • 1991: Stuart Haber and W. Scott Stornetta proposed a cryptographically secured chain of blocks that would enable timestamping of documents, then proceeded to upgrade their system the following year to incorporate Merkle trees for more efficient document collection.
  • 2008: Someone under the pseudonym Satoshi Nakamoto conceptualized the first Blockchain, from which the technology has evolved and found its way into many applications, from cryptocurrencies to others.
  • 2009: Satoshi Nakamoto released the first whitepaper about Blockchain technology and Bitcoin, detailing how it was well equipped to enhance digital trust due to its decentralization aspect.
  • 2009: The first Bitcoin block was mined by Nakamoto, validating the blockchain concept.
  • 2011: Litecoin is released, becoming the second-ever cryptocurrency to be based on Blockchain technology.
  • 2013: Ethereum launches, introducing a whole new concept of smart contracts and dApps, ushering in the era of Blockchain 2.0.
  • 2015: The world’s first Blockchain-based stock exchange is launched in Estonia.
  • 2016: Hyperledger project begins to take shape with IBM leading the charge for private enterprises to adopt Blockchain technology for internal use.
  • 2017: Bitcoin experiences a monumental rise in price as the cryptocurrency market cap surpasses $100 billion.
  • 2022: KoreChain first to be qualified by the SEC for the issuance of a private offering under RegA+ (JOBS Act) Regulation

The Benefits of Blockchain

Blockchain technology has a lot to offer from scalability and cost savings. Here’s how it’s been adopted in various sectors over the last decade:

Decentralization: A significant benefit of Blockchain technology is its ability to remove the need for a third-party authority. This means that transactions can be carried out securely with much faster processing times and lower costs. Utilizing Blockchain technology for payments and data storage ensures that the exchange of information is accurate, secure, and immutable.

Energy: Blockchain is being used to create decentralized energy systems that enable users to buy and sell electricity directly with each other without relying on any central authority. This helps reduce costs while providing more transparent financial transactions.

Finance: Banks, payment companies, and other financial institutions are embracing Blockchain technology to reduce costs while increasing the speed of transactions. Blockchain is also being used to enhance security in stock exchanges by providing an immutable ledger to track ownership of stocks and bonds.

Media & Entertainment: Companies like Spotify and Facebook are leveraging blockchain technology to explore emerging trends like NFTs.

Supply Chain Management: By eliminating intermediaries, Blockchain technology makes it easier to track shipments and trace products in the supply chain. This not only enhances transparency but also reduces costs while improving customer service.

Healthcare: Blockchain technology can play a significant role in streamlining the healthcare industry by providing an immutable ledger to store and share patient records. This will help reduce costs and improve security as sensitive health data is securely stored on the Blockchain.

Blockchain technology has come a long way since its introduction over 10 years ago. What started as a revolutionary concept for cryptocurrency has now been widely adopted across various industries. The possibilities are endless and the future looks bright for Blockchain technology.  With its scalability, cost savings, transparency, and security advancements, Blockchain is set to revolutionize many aspects of our lives in the years ahead.

What Does “Clarity” in the Financial Markets Mean

First we had Chaos

The collapse of FTX has revealed the inherent chaos in the financial and capital markets. In the weeks and months to come, we will have better clarity on what really happened at FTX.  However, regardless of the actual details, one thing remains clear: the financial markets are subject to various types of uncertainties: economic, demand shifts, competitive pressures, global events, and acts of nature. The one type of uncertainty that is in our control is the integrity and credibility of its participants. Emerging details of the shenanigans of FTX reinforce the idea that incompetence and unethical behavior is frequently hidden in the complex organizational structures and revenue-share arrangements between the underlying entities.

Innovations in the cryptocurrencies and various digital assets emphasize the need for clarity. These innovations have introduced radical new business models. They have promised frictionless transactions without intermediaries. However, such promises require clear-headed analysis, since it is generally very difficult to disintermediate risk. Since the crypto space has been plagued by scandals involving hacking and fraud, it is difficult to differentiate between genuine mistakes and deliberate criminal activity.

The foundational philosophy of the cryptocurrency markets is privacy and anonymity. While this is laudable from one perspective, it also creates lack of transparency. Much of the regulation in the financial markets exists to promote separation of concerns, mitigate risk, and provide safeguards. By seeking to eliminate such regulation by claiming that it is onerous and intrusive, the crypto world eliminates all of the advantages of regulation. This lack of clarity and lack of regulatory oversight has encouraged bad actors to engage in fraudulent activities, from theft, front-running trades, collusion, Ponzi schemes, insider trading, and market manipulation. FTX is only one, though the largest, of highly questionable models that includes a Byzantine mess of relationships, organizational structures, and rapid and complex transactions, apparently with a view to dazzling any cautious investor from unraveling the truth.

Since the private capital markets are private, it is all the more important to be more transparent than ever. Without this clarity, investors find it hard to understand what they are investing in,  to monitor the continuing prospects of the company, and the nature of the risks they are taking. This is especially true of private markets since the very nature of private markets results in complex financial structures that are not subject to the same level of due diligence, analysis, and public disclosure as the public markets.

What can be done to improve clarity in the private markets? It is a combination of regulatory reform and self-governance. While the SEC and FINRA are moving in the right direction, private market participants can do much more on a voluntary basis. For example, partners in the private market ecosystem should disclose revenue-share arrangements, since these may result in conflicts of interest. The participants who are directly regulated by FINRA and SEC, such as the broker-dealers and securities attorneys should adopt a more fiduciary attitude and desist from revenue-share or commission arrangements between themselves. Their fee structures should reflect their agnosticity and keep the interests of their clients foremost in their mind. The issuers, auditors, KYP providers, and other parties entrusted with the examination and communication of various risks in the investments should go the extra mile in their due dilegence. Since the private markets offer more opportunities for innovation in business models, the participants should desist from “testing the waters”, which is a euphemism for trying to sneak questionable business practices past the regulators, hoping for nothing worse than a token slap on the wrist when detected.

The participants should also subscribe to a code of ethics. This should include not only desisting from harmful practices but also self-policing each other in a constructive and proactive way. Participants should create safety nets in case of errors. They should act much more conservatively, perform greater due diligence, and adopt a stronger sense of fiduciary duty than the minimum necessary for regulatory compliance.

One way to increase clarity in the private capital markets is to implement better disclosure requirements for private equity and venture capital firms. This can include requiring firms to provide regular financial reports and disclosures, such as regular updates on the performance of the investment and any potential risks. Additionally, regulators could require private equity and venture capital firms to make certain disclosures, such as information about their investment strategies, conflicts of interest, and any related-party transactions.

Another important step in increasing clarity in the private capital markets is to improve the quality and accessibility of data. This can involve collecting and publishing data on the performance of private equity and venture capital investments, as well as data on the financial health and stability of the firms that manage these investments. This data can be used to help investors better understand the risks and opportunities involved in private capital investments.

Finally, it’s important to create a regulatory framework that promotes clarity and transparency in the private capital markets. This can include setting standards for financial reporting and disclosures, as well as implementing rules to prevent fraudulent activities. Regulators could also implement measures to ensure that private equity and venture capital firms are operating in a manner that is consistent with investor protection and market stability.

In conclusion, clarity in the private capital markets is essential to ensuring that investors are able to make informed investment decisions and to build trust in the market. The prevalence of scandals in the cryptocurrency space highlights the need for clear and transparent practices in the private markets, including improved disclosure requirements, better data, and a strong regulatory framework. By taking these steps, we can help to promote a more stable and trustworthy private capital market for all investors.

The Demise of the Public Chains for Securities

The Australian Stock Exchange (ASX) made a big splash recently announcing the cancellation of their blockchain project after spending—and writing off—$165 million. While this sounds disastrous for blockchain technology, it is actually a cautionary tale since the blockchain project of ASX is based on Ethereum.

We have been saying this for over three years: public blockchains for securities and derivatives is a bad idea. In fact, Vitalik Buterin, one of the principal developers of Ethereum, himself noted back on May 19, 2016 that “…the weaker argument, that for high-value assets the economic security margin of public blockchains is too low, is entirely correct and depending on the use case is a completely valid reason for financial institutions to explore private and consortium chains.”  He was alluding to various versions of the settlement finality problem that he describes in that blog. From the subsequent failures of the ICO and the STO initiatives, it appears that very few of those developers read Vitalik’s article or understood it.

In ASX’s case, it appears that their blockchain is based on VMWare’s DLT, which is itself built on Ethereum and apparently addresses the limitations of Ethereum. The VMWare blockchain team had to go through (and probably continue to go through) considerable engineering to extend Ethereum’s functionality to make it useful for enterprise chains. Enhancements include a privacy SDK, governance, and scalability. The amount of work necessary to make Ethereum play nicely with securities is a bit like trying to convert a Ferrari into a cruise ship. It can be done, but why not start with a decent boat instead?

There are two main reasons why public blockchains are not best suited for financial securities. The first reason stems from a massive confusion about the nature of non-payment financial instruments, such as securities, derivatives, and asset-backed digital securities (such as NFTs). These financial instruments (the securities) are not bearer instruments. Transactions involving them are subject to corporate law and securities law. While some of these laws may seem onerous, they are there for good reasons that evolved with several hundred years of experience. Mainly, these laws ensure that transactions are subject to the judicial doctrine of contract law. Entities (companies or individuals) who act as intermediaries in these transactions provide valuable services, chiefly that of assuming counterparty risk. For this reason, the participants in transactions involving non-bearer instruments are either the principals or intermediaries who have fiduciary responsibilities. To put it simply, an ostrich farmer in Kenya has no business validating a securities transaction between a seller in Kansas City, KS, and a buyer in Los Angeles, CA.

This is, or should be, a powerful deterrent for using unverified participants (as in a public blockchain) to validate securities-based transactions.

The second reason why public blockchains are unsuited for such financial transactions is due to technical limitations of public blockchains. Scalability, recourse, recovery, privacy, and safety become paramount. Can a public blockchain provide all that? Yes, but at what cost, when there are permissioned blockchains available for such a use case?

To put it another way, the first reason says,”Don’t let a drunk drive a Ferrari.” The second reason says, “Don’t try to modify a Ferrari into a cruise ship when there is a cruise ship readily available to use.”

At KoreChain, we come from a multi-decade background in the financial industry, as executives, entrepreneurs, and traders ourselves. We are painfully aware of the issues in the existing legacy technologies. We also realize that regulation can be onerous even when well-intentioned. Our concern was not to waste time re-engineering Ethereum or any other public chain for that matter, but instead to focus on solving the business problem. Addressing the friction in the private capital markets was more important than going on a technology goose chase and attempting to shoe-horn a public blockchain for a very different purpose.

For this reason, we built the KoreChain on a solid base of an enterprise-ready, industrial-strength permissioned blockchain. We focused on the business architecture and design of the blockchain application.

None of this is a polemic against Ethereum itself, which is an ambitious technology that brought awareness to the power of smart contracts. It’s just not the right tool for this particular job.

What are the Private Capital Markets?

What are the Private Capital Markets?

The private capital market is a vast market of investment opportunities and deals that often goes unnoticed compared to their much more visible public counterparts. While the private markets may not be as apparent to most, they offer an incredible array of opportunities for those willing and able to do the due diligence and research required to take advantage of them.

 

Growth in Private Capital Markets

The private capital markets, while seemingly more exclusive and less accessible than the public markets, are, in fact, a much larger market than their public counterparts. Private companies far outnumber publicly listed companies, with approximately 450 million private companies compared to only 100,000 publicly listed companies across the globe. This discrepancy results from fewer regulations and reporting requirements that come with private companies compared to public markets, meaning that many investors are willing to take on greater risk to gain greater returns.

In 2021, private US companies raised an estimated $3.9 trillion through private capital markets while only raising $1.2 trillion through publicly traded markets in the US. This clearly indicates the impressive potential within the private capital markets. Not to mention, the size of these markets is expected to double by 2027.

 

Who are the Participants in Private Capital Markets?

The private capital markets involve many participants and stakeholders with unique roles to play. With various regulations, laws, and rules that apply to the other participants, knowing who they are and their roles are essential when engaging in private capital markets. These include:

Broker-Dealers: Broker-dealers act as intermediaries between buyers and sellers of securities, typically on behalf of investors. They generally are licensed, regulated, and subject to oversight by governing bodies such as the Securities Exchange Commission (SEC) and FINRA.

Registered Funding Platforms: These platforms provide access to private capital markets for issuers and investors. Typically a platform registered with the SEC or other financial regulators, these platforms allow for securities transactions in the private capital markets.

Lawyers: Lawyers provide legal advice and expertise to the participants involved in the private capital markets, helping to ensure that all parties understand their rights and obligations regarding these markets.

Auditors: These are third-party accountants responsible for verifying companies’ financial statements in the private capital markets. As such, auditors provide an essential service when it comes to confidently engaging in these markets.

Transfer Agents: These companies act as intermediaries between buyers and sellers of securities while ensuring that the transfer of assets is done correctly and according to all applicable regulations.

Banks: Banks are licensed financial institutions that can hold companies’ funds while raising capital with broker-dealers or registered funding platforms.

Investors and Shareholders: These individuals or entities provide the funds for private investments in exchange for a share of the company, either through an equity stake or a debt instrument.

As the private capital markets continue to grow in importance and prominence, it is essential for those looking to participate in these markets to understand their roles, regulations, and best practices. By doing so, the market is compliant, secure, and prosperous. With increasingly accessible technology making significant advancements in allowing investors access to this market, the private capital markets are sure to only become more popular and accessible in the near future.