Edward W. Mandel
Apr 27, 2019

At BQT, we don’t think in terms of competition. At this stage of the game, all us distributed exchanges have more to gain by cooperating with each other than from going at each others’ throats. Maybe that time will come — or maybe not — but for right now we better serve ourselves and our traders by agreeing to protocols for interoperability and, thus, improved liquidity across all platforms.

We’re not even in competition with the centralized exchanges. There will always be use cases for established platforms that adhere to the same rigorous — if sometimes arbitrary — regulatory compliance standards as their legacy analogs.

By the way, we’re not competing with the legacy analogs either. Sure, we intend to disrupt them but, to the degree that they adapt to the new reality of frictionless, trustless, disintermediated transfers of value, we see them as potential partners. At some point — and it could come within the year — they might need our technology just as we seek the depth of their investor base.

So, in the interest of keeping collateral damage to a minimum during this paradigm shift over how value is transferred, we acknowledge how far the legacy securities exchanges have come over the past year or so.

The reinvention of Nasdaq

It’s not surprising that, of all the legacy exchanges, Nasdaq would be the one that most fully embraced blockchain. When it debuted on February 8, 1971, it became the first wholly electronic exchange, essentially using technology to make trading more efficient and, as a result, lowering the bid-ask spread — much to the consternation of all those middlemen who made their living on the spread. A quarter century later, it was poised to become the go-to IPO market for the dot-com boom.

Fast-forward to today — or rather, to 2017, the most recent year for which this particular statistic is available: number of U. S. patents filed. As you might expect, of all the American exchanges it was Coinbase that led the pack with 13. Nasdaq came in an admittedly distant second with five, but a medal is a medal.

Where the magic happens. Credit: Italia all’ONU — Minister of Environment Galletti

We can safely assume that Nasdaq acquired more than five more patents in 2018 and — I’m guessing here so tell me if you think I’m wrong — it has more than five already at this point in 2019. Even so, whatever the exchange is spending on distributed ledger R&D is probably a drop in the shark tank compared to what it’s prepared to spend to acquire blockchain companies. It pretty much states that in its 2018 strategy document and practically begs blockchain startup founders to let Nasdaq buy them out.

“While Nasdaq has recognized many opportunities for blockchain projects internally, we continue to identify more opportunities through Nasdaq Ventures. The program is a global venture investing platform focused on cultivating talent and technology advancement within financial services and spurring innovation that ensures Nasdaq’s technology and services are at the forefront of the industry,” the document notes, before zeroing in for the kill: “Blockchain continues to be a focus for the group and applications are encouraged within this space.”

It’s not just talk. Nasdaq recently led a $20 million Series B raise for Symbiont, a company developing smart contracts into smart securities. I’m in no position to know what the folks at Nasdaq Ventures were thinking but, as a blockchain entrepreneur myself, I know exactly what was going through the mind of Symbiont’s Mark Smith: “My company is worth way more than 20 mil!”

So why did he settle for such a lowball number? Because he’s going to make it up at the back end. Nasdaq didn’t just become one of his biggest shareholders, it became by far his biggest customer. If it was still just a single electronic exchange in the U. S., it might not be such a great deal. But Nasdaq owns 26 other bourses trading stocks, bonds and all manner of derivatives across a broad swath of the Northern Hemisphere. I have no idea how much of an economic stake Smith still has in the company in terms of restricted stocks and options, but it’s bound to be substantial for any individual. From now on, anytime he shows up in a conference room to sign a deal, he’ll be riding away in a limo.

In the meantime, Nasdaq is growing its cryptocurrency-based offerings. In February, it began offering real-time spot market information on BTC and ETH. I’m not sure that’s exactly what the crypto space needs right now — any decent programmer could develop an algorithm that compares bids and asks on the leading centralized exchanges and I’d much rather have the ability to trade utility tokens in the U. S. or have an international futures and options market to improve liquidity — but it’s a nice-to-have. You can’t fault Nasdaq for not doing the things that its regulators don’t want it to do.

Miracle on ICE?

The New York Stock Exchange hasn’t been standing still either, even if it isn’t moving quite as fast as Nasdaq when it comes to blockchain adoption.

Like Nasdaq, the NYSE is no longer a single bourse. Even if it were, though, it would be huge. The aggregate market cap of all companies listed on the Big Board exceeds $30 trillion, and any given trading day sees around $200 billion in volume. Still NYSE is only the jewel in the crown of Intercontinental Exchange. In fact, it accounts for barely 13% of ICE’s annual revenues. Most of the parent company’s business comes from futures and options that have nothing to do with equities — mainly energy, agricultural products and metals. It also owns half a dozen clearinghouses around the world as well as a relatively modest data analytics operation.

Add to that portfolio Bakkt, founded in August 2018 to trade bitcoin futures. Notice I wrote “founded,” not “launched”. That date has been postponed more often than Brexit’s, and I wouldn’t place bets on which happens first. Brexit is currently set for October 31 and Bakkt, according to Coindesk, “is unlikely to launch before May.” While I consider that an optimistic assessment, ICE has went ahead in March and added a top-shelf executive, Tom Noonan late of IBM and Cisco, to serve as Bakkt’s board chair. So this international trading behemoth isn’t shy about backing a cryptocurrency play. If anything, it’s doubling down.

Not only that, it has potential competition. A consortium of white-shoe financial institutions — many of which are also investing heavily in filing blockchain patents — are trying to get a new, independent(-ish) stock exchange, MEMX, off the ground. One of its first offerings is likely to go head-to-head with the kind of instruments Bakkt will be trading.

Around the world

But let’s face it: As far as crypto is concerned, America is a backwater. It’s a backwater that sits on top of an ocean of money, but a backwater nonetheless because of regulatory constraints. It’s interesting to note what blockchain-y stuff is happening at stock exchanges worldwide:

  • The Australian Securities Exchange is endeavoring to replace its CHESS clearinghouse infrastructure with a blockchain architecture.
  • Although Bursa Malaysia remains insulated from blockchain technology, its regulator launched Project Castor to use distributed ledgers to streamline the trade of over-the-counter stocks.
  • Spain’s BME has completed tests of a blockchain-based process to eliminate physical certificates for collateral pledges. The system is expected to go live this year.
  • Chinese leaders don’t like anything they can’t control, so they haven’t cottoned to crypto. But in a case of if-you-can’t-beat-‘em-join-‘em, there’s talk of recasting their renminbi as a digital asset. If that happens, then every trade on the Shanghai and Shenzhen exchanges will be denominated in crypto. Meantime, Beijing’s securities regulator published a research paper about a year ago calling for blockchain technology to smooth out its current processes.

This isn’t a complete list, but you get the idea.

Futures’ future

One of the weird things about the U. S. regulatory environment — and there are certainly more than one — is that the equities and futures exchanges are overseen by entirely different federal boards. While stock markets answer to the Securities and Exchange Commission, the futures markets answer to the Commodity Futures Trading Commission.

Let’s just say there are a few rays of daylight between what each finds acceptable practice.

The SEC policymakers have been, frankly, bastards.

My friend William Freedman is on the governing board of the New York Financial Writers’ Association and, in that capacity, he had an opportunity to meet Commissioner Robert Jackson. They had a long and public discussion — though not for quoting — about how the SEC has, in its zeal to prosecute fraudsters, moved America to the back of the line in terms of innovation. Nobody’s opinion changed. Still, Freedman tells me that Jackson could articulate the difference between security tokens, utility tokens and cryptocurrencies, even though the policies he has one of the five votes cast make no distinctions.

So the SEC knows what it’s doing, understands it’s overkill and is plowing ahead with doing it anyway.

The CFTC is a different breed of cat. Although the CFTC is the regulator that’s been pulling the rug out from under Bakkt all this time, it isn’t philosophically opposed to trading crypto futures. The issue is custody, which we discussed in an earlier post. Bakkt didn’t have those ducks lined up, so CFTC Chairman Christopher Giancarlo — who earned the nickname “Crypto Dad” for his full-throated support of the digital asset space — had to say no. But now Bakkt is applying for a custody license in New York State which, once granted, should finally pave the way.

In the U. S., then, the problem for crypto futures traders isn’t regulatory. It’s good, old-fashioned supply-and-demand. Of the two, it’s demand that’s an issue. The Cboe Futures Exchange and the CME Group both started trading bitcoin futures in late 2017 but volumes haven’t been as frothy as expected. (Then again, nothing about crypto has been as frothy as expected in late 2017.) While it’s still possible to trade bitcoin futures already on the Cboe, the commodity exchange isn’t issuing any new ones, at least for now.

So you might ask why, if the CFTC has been allowing Cboe and CME to trade bitcoin futures in Chicago for going on two years, it’s still forbidding ICE from trading them in New York. It’s all in the settlement terms. The Chicago exchanges settle in cash and Bakkt would settle in physical deliveries of bitcoin. Of course, there’s no such thing as a physical bitcoin but, for regulatory purposes, all those ones and zeroes would be transferred to a trader’s bitcoin wallet. Oh and also for regulatory purposes, bitcoin isn’t cash. It’s treated instead as a security and, as such, requires that additional layer of custody.

Good to be a dex

So now you have an idea why the BQT team doesn’t feel intimidated by all these short-term regulatory snags. BQTX Exchange will have all features of traditional book-order exchanges and obviously will be careful with regulatory compliance but we are set to develop tools for P2P hedge contracts as Binance and other players are looking into this fast growing trend. As long as there’s a demand for trading crypocurrencies or cryptocurrency futures, the regulators will eventually catch up. Maybe they’ll decide that security tokens — which is the space where most the intentional fraud and inadvertent stupidity took place — is too risky and limit participation to sophisticated investors. Maybe they’ll figure out that utility tokens are just airline miles and butt out entirely. And maybe they’ll treat cryptocurrency trading the same way they treat foreign exchange. But they will eventually get this sorted.

Slightly more troublesome is the perceived lack of demand at Cboe’s bitcoin futures desk. My sense, though, is that expectations were set in a raging bull market and now the valuation has come back down to earth and is trading in a stable range. It’s hard to make money in either the spot or futures markets trading any currency at the moment, so it’s to be expected that the Cboe would start backpedaling.

It’s my expectation, perhaps my naïve hope, that once Bakkt is up and running and Fidelity Digital Assets starts moving money through it as well as the cash-settled exchanges, things will be different.

But it’ll take them a while to find out that there’s more to crypto than bitcoin and, as I reported here, the different currencies have diverged and no longer trade in lockstep.

To take advantage of all the digital assets that you could possibly trade, you’d need to get off the legacy exchanges and get on a crypto exchange.

Edward is an Ernst and Young Entrepreneur of the Year Finalist, Blockchain Enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful Blockchain technology and ICO projects and recently launched his own BQT.IO P2P exchange helping traders connect with each other to leverage their crypto assets.

BQT.IO has been in development since March 2017 and its ICO launched September 18. The information can be found online at BQT.IO, on Telegram @BQTCommunity and on Twitter as @bqt_ico.