Evaluating Market Structure for the Marketplaces of the Future
February 15, 2021
The world is moving towards an era of multi-asset digital marketplaces, which will require a rethink of market structure and regulation.
Traditional marketplaces had different venues for different assets or items. We saw this both for financial assets, with stocks trading on stock exchanges and commodity futures trading on different, specialized exchanges, as well as when we walked around shopping in our local town or city with clothing stores, electronics stores, leather goods stores and individual stores for everything else.
This paradigm changed a bit over time in the physical world with the advent of supermarkets that consolidated all types of foods plus other household goods in a single space. Then came shopping malls that brought together all kinds of specialty stores. The culmination was “superstores” that sold nearly everything. While this evolution took time to happen in the physical world, online retailers like Amazon, eBay and Etsy realized that they could stock and sell most anything on one website. These websites become the superstores and shopping malls of online shopping. The shopping experience was perhaps not quite as pleasant as wandering around being able to touch everything and take it home with you, but it made up for this limitation with convenience and a seemingly endless number of choices for everything.
Meanwhile, when it comes to financial assets there is still a much more traditional arrangement. Stock exchanges and commodity exchanges still exist. They are linked together by the intermediaries who facilitate trading but you cannot go to one venue to trade a stock for a commodity future.
The financial world is on the brink of the next evolution in trading venues. In the fully-realized digital age, the linkages that the internet creates along with digital asset representations on blockchain mean that a single marketplace can trade the tokenized form of anything and everything. There is no physical need for distinct trading venues, and the exchange of one asset for another can take place directly (a literal swapping of items). We are already seeing the early stages of this evolution with so-called DeFi trading platforms like the decentralized exchanges (“DEx”). There is no distinct asset type that trades on a DEx; any token can be exchanged for any other token, regardless of their features and functions. Market structure is changing right before our eyes!
Policymakers and regulators need to understand this shift and work to re-envision market structure regulation. This will be difficult because everyone is used to regulating solely by asset type rather than in markets where assets intermingle. The best way to start thinking about the design of such regulations is from first principles. Some core concepts include: (1) protecting sellers and purchasers from fraud and false information, (2) requiring appropriate disclosures from all participants, (3) fostering market integrity through transparency about how the trading venue functions, (4) market data standards, and (5) requirements on intermediaries.
These innovations in marketplaces will change the way we think about buying, selling and trading assets. By establishing principles early, policymakers will lay the foundations for innovations and advancements that improve commerce, simplify access and provide greater economic and financial opportunities for the broadest community possible: the whole world.
About the Author
Lee A. Schneider is the General Counsel of Block.one, with responsibility for its various policy initiatives. He is a long-time financial services and technology lawyer with extensive experience in blockchain. Lee co-hosts the Appetite for Disruption podcast with Troy Paredes and is the contributing editor for the Chambers and Partners Fintech Practice Guide.
Block.one is a global software company specializing in high performance blockchain software. In 2018, it published EOSIO, a free, open-source protocol designed to bring speed, scalability, and ease of use to the secure and transparent fundamentals of distributed databases. Block.one’s venture capital arm, EOS VC, invests in companies, projects, and developers around the world leveraging EOSIO technology.
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