The Case for the Global Equity Market
The Problem(s)
Recently, I have come to terms with the fact that I will be able to legally bet on sports before I can legally bet on startups. If this seems backward to you, it should.
Gambling is a zero-sum game, it’s just a transfer of wealth from the arrogant to the lucky (or the house). Don’t get me wrong, I think gambling should be legalized. Our country should not prohibit us from wagering on the Sunday night game. But the scary part of the comparison comes from this: startups, unlike gambling, are positive-sum. They create novel value. Investors give a company capital in hopes that one day, their good or service creates wealth that did not exist previously. New jobs are formed. Entire industries are born.
And yet, states are slowly legalizing people throwing their net worths into slot machines, and regulators refuse to allow regular people to invest in private American companies.
One would think that the incentives are well aligned, the public has the capital to contribute, innovators are craving financing to fuel their dreams, and the two can come together to at best bring value to society, and at worst lose the capital they were willing to risk.
For an individual to directly invest in a private company in the United States, they must be an “accredited” investor. How do you get accreditation you ask? Have a net worth of over $1 million or make $200,000 for the last two years.
There are a few exceptions, like a “modernizing” update this year from the SEC that allows people who have passed FINRA tests like the Series 7 to qualify. But after filtering for all of the exceptions and exemptions, you are still left with about 94% of the United States population that the SEC believes cannot manage their own finances and invest in private American businesses.
Discriminating based on wealth is a poor way to distinguish investors from each other. A major factor in the upward mobility of a population is whether or not that population has access to markets where they can grow their wealth. The financial system should be open to anyone, not geared towards helping incumbents stay at the top.
Now it should be obvious that these regulations were not made to intentionally disclude the vast majority of Americans from these markets. The prime directive of the SEC is to protect investors, and at the time these regulations were written, they believed that investors would suffer from rampant fraud in these unregulated markets.
Protecting unknowing investors might seem like a compelling reason for investor accreditation if it were not for the fraud that continues to happen in plain sight in the public markets. Enron, WorldCom, Madoff, Wirecard, ok you get the point. Public investors were exposed to all of these fraudulent companies, and regulators had little to do except retroactively punish the behavior.
So fraudsters still have the means to steal funds from the public, and the public lacks the ability to invest and support promising young companies. This seems like a lose-lose outcome.
Global Markets
It’s also important to note how financial systems have developed with the proliferation of the internet. Stock exchanges began as local venues in economic hubs where brokers could come together and consolidate their trading practices. These exchanges formed all over the world, and thrived as the trading of stocks began to centralize in their locales. These exchanges serve the same purpose, giving their region a single, convenient venue for investments. But, like chess, finance is a game that is played all over the world, and it has a consistent set of pieces, so it does not matter where you play!
When stocks were physical certificates, it made sense to have separate exchanges in New York, London, Shanghai, and Singapore, etc. Today, all the trading for these exchanges is done electronically, and stocks exist as numbers on computer screens. Why then do our markets still have a regional mentality? Foreign companies find it difficult to reach American investors, the largest pool of capital in the world. In turn, American investors find it difficult to reach foreign markets, and aside from institutions, little American capital can reach emerging markets across the globe.
Having all the equities in the world trading on the internet while still abiding by regional practices is only a temporary convention. It is actually an inefficiency for financial capital to be constrained along these lines, and it is worth the time and effort to unbound these markets. It is worth noting that it is not purely regulatory concerns that hold these markets in their old ways, it is over a century of traditional financial practices that made cities like New York and London the epicenters of international finance. But even now, stock exchanges are exploring new location options, as their home bases begin to draft hurtful policy, clearly showing that the physical location of the exchange no longer matters. If you want to trade shares of Apple, it makes no difference whether the NASDAQ is in New York, Dallas, or Timbuktu; the trade settlement happens digitally, and end-users do not care where the servers are located. (That’s all stock exchanges are these days, servers.)
So if they are already on board with moving their location, it’s a testament to the basic premise I mentioned earlier, that finance is an international game, and the internet and related technology has made the physical location of a financial company all but irrelevant. This in addition to the explosion of remote work in 2020 has all signs pointing towards fewer physical centers of industry and more industries that find their home base in the cloud. Stock exchanges are already just data centers, so they can be some of the first to go!
The Global Equity Market (GEM?)
So how does region locking finance continue in the future? The answer is that it doesn't. We can already observe borderless finance in action with the cryptocurrency revolution. As of writing, crypto just became a trillion-dollar market cap asset class. If you compare this to a chart of countries’ GDP figures, the crypto economy is 16th in the world. This global, permissionless, and open-to-anyone financial system is larger than the economy of Indonesia, a country with almost 300 million people.
So a financial system bigger than most countries is running on the internet right now. As this space continues to grow, it becomes the natural home for us to fix our capital inefficiency problem. Region locking quite simply does not hold up in the crypto economy. This global equity market (GEM) lives not in the financial district in some major cities of the world but on-chain. This is the most accessible location for anyone in the world with an internet connection. No place is more convenient for the people of the world to invest their money.
I propose a universal investment layer, native to the internet, and open to everyone in the world. By handling global markets on the same platform, financial inefficiencies that stem from region-locked markets are cut out, global finance becomes public-facing and is accountable to its users, entrepreneurs have access to a global pool of capital to finance their work, and anyone can invest in the world around them.
The GEM cuts investing inefficiencies to as close to zero as it can go. Everyone in the entire world can vote with their wallet and fund projects they believe in. The GEM will not follow the current exchange structure and charge companies millions of dollars to list their shares. This is not about building a better, slightly improved New York Stock Exchange on a blockchain, it's about giving the world a single universal investment destination. With a global market, inefficiencies have to be cut out root and stem or consensus will fail to get behind one single marketplace. So barriers to entry for investors and companies must be kept to an absolute minimum. But the GEM is not just an improvement for investors and companies.
Regulatory Advantages
Importantly, this on-chain location is better for regulators too! Every transaction on the network is public, the ownership of every asset on the network is public, everything on the network is public.
This is a stark contrast to the current financial system. In the present, it is often what regulators cannot see that can cause the most damage. The “unseen” threat is entirely removed on a public blockchain like Ethereum, where even in a security breach or hack anyone can track the flow of funds. Every single share of every company listed on the GEM can be queried and tracked to an exact owner and location.
Another benefit from the transparency of the GEM is the heavy scrutiny that falls on insider trading. It will not be difficult to find the wallet address of the CEO of a firm and observe whether or not they are buying or selling shares of the company. Insiders currently have to report the sale of stock within two days of the transaction but on the GEM the entire world can see the second when executives sell shares of their company.
The GEM gives regulatory bodies a full vision of the field. There are no shadows to hide in, so any market manipulation, laundering, or any general criminal activity has to happen in broad daylight. With this full vision, it naturally follows that regulating the GEM is easier than regulating traditional markets, where bad actors actually have a place to hide.
Where is this GEM?
I hope that I have made a good case for why the GEM will exist soon. Our lives are growing ever more digital, so it only makes sense that our financial lives follow.
A public blockchain like Ethereum is the means to the ends of a global investment layer. That’s why last summer I co-founded a protocol on Ethereum with the ultimate goal of building the GEM.
Rubicon is a decentralized open order book exchange for on-chain digital assets. Our protocol is purpose-built for all digital assets on the blockchain, whether it be existing crypto assets, tokenized securities, on-chain currencies, etc. Our current developmental outlook is for the team to focus on the core exchange architecture and associated tech, while also planning out and pursuing our regulatory approach.
From our perspective, companies who want to IPO on-chain will want to do so on a proven exchange that resembles the current stock exchanges like the NASDAQ and NYSE. So it is our job to build a decentralized exchange that can compete directly with these traditional venues. This will not happen overnight, but we are comfortable knowing that we have the power of superior underlying technology, as well as the fact that we are proudly on the side of a better, open financial system. Eventually, blockchains will eat the financial industry, and we hope that Rubicon is the point of no return for the world’s financial system being ported on-chain.
If you want to learn more about Rubicon and follow along with our development, follow us on Twitter, join our Discord community to talk with the team, and subscribe to our newsletter, Crossing the Rubicon. To learn more about our protocol at a technical level, read our docs or check out the protocol on our Github. You can always reach us at contact@rubicon.finance
Thank you for reading! Let’s go build a global equity market.
