5 vital characteristics of the single market ecosystem of the future.
In my previous articles, we identified the super trends shaping the SME (small-to-medium enterprises) financial markets and the challenges that arise from harmonizing these trends. Although today’s large banks and stock exchanges are seemingly incapable of overcoming these challenges, a single market ecosystem can be realized by players outside of the traditional finance space.
At its core, such an ecosystem would need to exhibit certain characteristics vital to its success, as many different elements, both technical and otherwise, would need to be incorporated.
Here are 5 characteristics a single market ecosystem needs to exhibit if it wants to overcome the challenges of clashing trends in the SME financial market.
Characteristic #1: Respecting National Markets
A single market ecosystem in Europe would inherently mean extensive harmonization of the regulatory framework. Regardless of how harmonized the European regulatory framework becomes, national heterogeneity will remain. Whether it be due to the presence of target markets, local production capabilities, workforce availability, and so on, countries under such a framework would still retain diversity.
The majority of the diverse SMEs under this framework will require some form of advice to navigate the financial markets. To develop SMEs as a serious institutional asset class, we will need service providers to help extract and standardize key information from a diverse roster of companies.
In a single market ecosystem, this is where technology can play an important role. A blockchain can serve to capture a company’s history from the day it was founded, and report on every share that was traded all the way up to the present day. By collectively working on a shared SME securities ledger, we retain the value that is added locally and nationally, whilst leveraging the benefits of an open financial market.
Characteristic #2: Possessing A Common Backbone
Retaining diversity is not only possible in a single market ecosystem, it’s beneficial. However, there are elements that can be significantly streamlined through new standards.
To reduce gatekeeping and cross-border capital flow, it will become imperative for such standards to arise. Standardizing every single process would be nearly impossible, as there will be many local ‘flavors’ concerning issuance and management. The technological implementation of security issuance and transfer, however, can be homogenized.
A library of templates and parameters that clearly define the behavior and allowances of the predominant asset types (bonds, shares, funds, etc.) will allow all EU jurisdictions to interact with homogenous asset classes. Meanwhile, system logics that restrict and grant privileges according to financial regulations such as MIFID II, SRD2, and MiCAR, can create a clear standard for financial instruments that freely flow cross-border. All the while leaving plenty of room for local integration standards and respective commercial productization.
Essentially, by creating smart contracts that collect and capture European regulations, we can create a common template used for assets across the Eurozone.
Characteristic #3: Reaping Interconnectivity Benefits Without Interconnectivity Disadvantages
A single market ecosystem using a digital ledger as a building block comes with additional benefits beyond smart contract-facilitated standards. Since all securities will be digitized, there is a clear provenance from incorporation until the present day, where each trade and ownership chain can be deduced back to genesis. This single source of immutable truth will be invaluable in digital merger, acquisition, investment, and divestment activities.
Such transparency is one of the major boons of blockchain technology, but its capabilities to act as a ‘common backbone’ for a single market ecosystem extend much further. It enables an open ecosystem that anyone can access, with no financial barriers for entry, nor any undesired intermediary costs. As the common backbone anyone can access, blockchain would allow every type of asset, service provider, or institution to build their own applications and offerings on top of it. Subsequently, this ecosystem can then be accessed by all eligible parties.
An ecosystem as described here would only realize its full potential if the ‘common backbone’ is designed impartially, and for the public good. After all, no existing player would buy into a shared market approach if there was a risk of benefiting potential competitors.
Characteristic #4: Promoting Decentralized Access
Once the benefits of a single market ecosystem become more widely promoted, the initial solution adoption will be significant. However, to promote the openness of the network and foster further adoption, it will become imperative to evangelize the benefits of open collaboration.
Parts of the network should be developed according to the open-source software methodology. This means including a toolkit for application building and common software development.
Blockchain naturally enjoys a community that is used to collaborating on code libraries and large releases. The benefit, beyond creating and leveraging a large community, also lies in the fact that an open-source image will further promote the level playing field culture: one where no single party owns and decides on key network decisions with a certain bias
Characteristic #5: Adhering To Confidentiality And Governance
A system with the characteristics mentioned above would be a significant departure from the status quo. The first question on many lips would be: who owns such a system? Well, nobody does. But tell me, who owns the internet? This system would serve all relevant parties in the sector, and the system can be served by them in turn.
Innovations in technology are met with innovations in governance. In a single market ecosystem, a strong governance body can ensure EU regulations continue to be enforced on a legal and technological level. This keeps the ‘rules’ of the system compliant and fit for use.
The technological side of a single digital market solution would enable the level of privacy and confidentiality, as well as direct settlement and transparency directives, required by the governing body. Shared smart contract templates for common use cases, such as voting, dividend payments, and share & bond issuance, could be built collectively to maximize the return of investing into a joint ecosystem; a new system that reaps major benefits for all parties while remaining within the regulatory bounds currently in place.
The Trends; The Challenges; Our Solution.
After identifying the trends in the SME market, the challenging dichotomies traditional players are unable to overcome, and the necessary characteristics of the new single market ecosystem, we can begin to paint a vivid picture of what the future financial ecosystem would look like.
- A viable single market ecosystem needs to consist of a common backbone that leverages the benefits of global scale with the affordability and care of a local ecosystem.
- By creating a public infrastructure that anyone can use for their private commercial purposes, we ensure scalability across the Eurozone, and beyond, without converging to a monopoly platform.
- A viable system that grows alongside its users. This means offering basic services and features upon its incorporation and expansive ones as the SMEs mature towards the capital markets.
The requirements for this are plentiful, and not easily tackled. Knowing what you need is half the battle. The other half is building such a network. And we’ve been doing just that.
Over the past two years, Dusk Network has been building a digital ledger technology that serves all the European regulatory frameworks (whether it be GDPR or MIFID II) in such a way that nobody can claim ownership of the network for their individual purposes. The Dusk Network is both an open-source operating system and an app store for the European financial markets.
To arrive at a system that is technologically, commercially, and ideologically sound, we’ve examined the requirements, challenges, and solutions thoroughly. But what are the concrete uses and benefits that will stem from this network?
The next article in this series will take a detailed look at which use-cases arise in such an ecosystem, how they differ from their traditional counterparts, and how we can shift our thinking to embrace the future of finance.
Jelle Pol,
Business director Dusk Network
