How Latin American Fintechs are Transforming the Banking Industry

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Photo by Joao Tzanno on Unsplash

What once was unthinkable, it is just inevitable now.

When Nubank was just starting, most people were amazed by its boldness to dare to compete with the banks in Brazil but quite skeptical of its potential success. Not due to the product or the quality of the team behind it but instead they were simply acknowledging how powerful the Brazilian bank oligopoly was and how hard it would be to break into this closed group. It would be David versus not one but five Goliaths!

For the ones that aren’t familiar with the Brazilian banking market, the 5 big banks (Itaú, Santander, BB, Caixa Economica, Bradesco) held together more than 87.8% of all AUM of the largest economy in the region, even though it has 131 banks. Due to this situation, Brazil has some of the most profitable banks in the world. (if you want to know more about the banking market in Latin America, check my Banking and Fintech Market in Latin America 2019 report)

To put into perspective, while Brazil was going through its worst modern recession in 2015 and 2016, its GDP lost 7% in total, however, Itaú (Brazilian largest bank) was able to achieve a Net Profit of around US$ 5.9 billion (2015) and US$ 6.7 billion (2016). 

The Brazilian banking market has an environment that limits competition due to banks’ influence in the government and very high regulatory barriers. It is so hard to compete in the Brazilian market that even leading global banks such as Citibank and HSBC tried to enter the retail market there and failed miserably, selling their retail operations to Itaú, in 2017, and Bradesco, in 2016, respectively. Only Santander (after acquiring the local bank Banco Real) was able to compete and get to the top 5 banks by AUM, in the 5th position behind the main local banks. 

With that scenario, it was normal to think that a small startup in a market that didn’t have yet a structured VC ecosystem wouldn’t be able to break into this oligopoly. Regardless, what once was unthinkable, it just became inevitable. 

Nubank had a perfect timing, entering the market when local VCs were starting to get more structured and the region was attracting more attention from global VCs. Just seven years after its start, Nubanks reached 20M customers and is now one of the most valuable fintechs in the world. This isn’t a story of a single startup that against all odds was successful, rather, this is the story of how Nubank and so many other fintechs are transforming the banking market in the region.

The Zeitgeist 

The Zeitgeist, in German “spirit of the times”, meaning an invisible agent or force dominating the characteristics of a given epoch. Something inevitable that drives a whole generation. This is exactly what I’m seeing in Latin America now, fintech is now the most relevant startup segment in the region, attracting most of the venture capital investments.

The success story of Nubank, Stone, PagSeguro, Mercado Pago, and others inspired many more fintechs to unbundle and re-bundle some of the most relevant financial services of the banks. Those fintechs are providing financial access to the ones that didn’t have it and improving the user experience for the ones that did have.  

This is already having a considerable impact in the region, reducing acquiring fees, consumer and business interest rates, and providing access to credit to people and businesses that were excluded from the formal financial system!

How Fintechs Will Impact the Region? 

As Winston Churchill said once: “It is always wise to look ahead, but difficult to look further than you can see“. I don’t intend to predict the future as I know any effort on my part will just be a roll of dice. Instead, I would like to focus on the most relevant trends that are shaping the banking market in the region and let you take your own conclusions.

Regulatory changes: The governments in the region have been slowly moving forward with regulations that are enabling more competition and uses of new technologies. Some examples are the Mexican Fintech Law and the Brazilian fintech credit new licenses and with other countries such as Chile and Colombia actively discussing new fintech regulations. Also, open banking regulations can have a disproportionate impact on shaping the banking landscape as they could improve the competitive environment in the region. Mexico and Brazil are already taking the first steps to establish their open banking regulations, probably in 2021. 

Venture Capital Funding: The region has been increasingly attracting venture capital investments, going from a little over US$ 14 million, in 2011, to more than US$ 4 billion, in 2019, achieving an average compound growth rate of around 150% annually. And fintech is the leading sector getting close to 50% of all the last year’s venture capital investments in the region. The impact of Covid-19 is still unsure but local funds such as Monashees, Redpoint, Kaszek, and Allvp have recently raised funds that will still need to be deployed in the region. 

Talent: When I started working in the startup world in 2010, I was the peculiar one from my friends. Most of them were working for big banks, consulting firms, or multinationals. It seems that the tide has reversed since then, now it is not only “cool” but it is paying well to work with startups. With increasing funding availability, startups can pay better salaries and attract better talent; recent exits are also proving that it is possible to be successful betting on an early-stage startup. Almost every day, I receive a message of someone with a career in a financial institution looking to move into a fintech. Even foreigners are now moving to Latin America to work for fintechs they have never heard before to take a shot in the region. 

MSMEs: According to the OECD Latin American Economic Outlook, MSMEs correspond to 99.5% of all companies, accounting for 61% of all formal employment (considering informality, this number would probably be even higher). Even so, they are usually neglected by the banks due to high costs to serve them and low profitability. Now, fintechs are providing financial products adjusted to their realities leveraging technology for that. Empowering MSMEs will definitely have a stunning repercussion on the economy of these countries.

Banks response: Banks have been attacked by multiple fronts; however, they won’t let themselves be cornered so easily. Most big banks are already aware of the threat and are taking some measures to be able to compete properly. 

The most relevant ones are pushing hard on the digitalization of their services. They are following challenger banks’ path and creating digital onboarding processes, improving the mobile experience, and creating services focusing on millennials. Some banks are starting to open their doors to fintechs as tech providers to improve their operations and reduce time to launch new digital products. Innovation is the name of the game and trying to collaborate with startups is a key element for the banks. However, most banks don’t know how to properly innovate and work with startups, those ones will have a harder time to stay competitive in this new environment. 

Government Digitalization: Governments are moving more and more toward digital processes and information, and fintechs are eager for that. Many countries in the region are implementing electronic invoices, and digitalizing citizens’ and companies’ information.

Fintechs are following this movement closely, finding new ways to use this available data to simplify the onboarding process, to improve credit assessment, and much more.

Not only that, but governments are also improving their banking infrastructures; as an example, Brazil is launching an instantaneous payment system while Mexico launched CoDi as an initiative to foster QR code payments adoption. 

Looking Forward

If you went to Ipanema beach in Rio de Janeiro before the Covid-19, you won’t only be amazed by the breathtaking landscape but you will also be surprised by how many street vendors are selling goods accepting debit and credit cards in PagSeguro’s “maquininha” (mobile POS) from the traditional matte, a Brazilian tea, to the refreshing açaí.

Nubank’s success story inspired many new-born fintechs to rise to compete with the banks’ oligopolies across the region. We’re just starting to see the impact that fintech has on the Latin Americans’ lives, and I’m quite sure this will surprise us on how much it will impact the regional economy.

Due to the Covid-19, it is all but impossible to predict what will happen with the fintechs in the short term in the region or even globally. Nonetheless, I’m convinced that the trends that had been shaping Latin America until now won’t change significantly after this pandemic is suppressed, making me believe that we have ahead of ourselves a major shift in the banking market in the region.

The emergence of super apps in Latin America

The super apps WeChat and Alipay became an integral part of the Chinese mobile ecosystem, growing to more than 1 billion monthly active users (MAU) and 1 billion annual active users (AAU), respectively. They both offer services from food delivery and bike-sharing to a full suite of financial services such as payment, insurance, and investments.

Now, companies from around the world are trying to replicate the successful Chinese model in their region. And Latin America is an especially compelling region for the emergence of super apps, due to its vast population, almost 650 million, distributed in more or less similar countries regarding language, culture, and religion. It also has a mobile-first population with 62% of smartphone penetration, according to GSMA data.

The expansion of the super apps model

After the incredible success of WeChat and Alipay, many companies around the world decided to replicate their model in different regions. Due to the proximity to China and its influence and money, Southeast Asia was one of the first regions in which super apps started to appear. The Singaporean ride-hailing Grab and the Indonesian Go-Jek both raised billions of dollars to not only successfully block the expansion of Uber in the region but also to expand their portfolio of services provided beyond ride-hailing to food delivery, payments, and other services.

Note that not all super apps are the same.

In India, payTM is expanding beyond its core service and positioning itself to be the leading player in the country, especially after Tapzo was acquired by Amazon last year and closed.

It is interesting to note that not all super apps are the same. Alipay came from e-commerce Alibaba and is more focused on financial services, while WeChat started as a messenger app, expanding not only to financial services but also to daily services such as e-commerce, gaming, travel, and many others. In Southeast Asia, Go-Jek and Grab started as ride-hailing, expanding to delivery before going to financial services, and payTM started as a prepaid recharge mobile platform and then moved to offer a range of financial and daily services.

So, what to expect in Latin America?

Latin American super apps should develop themselves in their own particular way, as the environment in the region is quite different from the one in China.

The internet ecosystem in the region is highly influenced by European and American tech companies that dominate segments such as communication, music, search and many others. It is quite hard for a local startup to compete in those markets. However, there are a few battlegrounds that are not as easy to dominate from abroad, such as ride-hailing, food delivery, and finance. Those are on-the-ground or highly regulated industries that are very hard to scale, especially across different countries. Those are precisely the industries in which we have seen the emergence of some super apps candidates, fueled by an unprecedented amount of venture capital investment in the region.

The most prominent candidate to super app in the region is the Colombian on-demand delivery Rappi. It is one of the most funded startups in Latin America, backed by titans such as Sequoia, Andreessen Horowitz and SoftBank, which have poured US$ 1.4 billion in investments so far. Although it started offering just food delivery, it now provides services such as e-scooter, payments, P2P transfer, movie theater tickets, and a debit card. It also operates in the most relevant countries in the region: Brazil, Mexico, Colombia, Argentina, Chile, Uruguay, and Peru.

Another strong candidate is the financial side of the e-commerce behemoth Mercado Libre (MELI), Mercado Pago. It started as a way to enable payment between users in the marketplace; however, it grew to offer a diverse portfolio of financial services such as online and offline payment, bill payments and, more recently, investment (through its Mercado Fondo). Thanks to its parent company, it’s pretty much all over Latin America and processes around 400 million transactions annually.

The Brazilian Movile is also positioning itself as a strong competitor. The company already has a diverse portfolio of services, from delivering food to event tickets, courier and even a kids Netflix, operating in Brazil, Mexico, Colombia, and Argentina. Not only did it raise a total of US$395 million investment, but also one of its companies, iFood, raised a total of US$592 million.

Latin America is an especially compelling region for the emergence of super apps.

The Spanish Cabify is another company trying to position itself as a super app. It recently started to offer e-scooters and bike service, as well as financial services through its own fintech company, Lana. Even though it raised US$477 million in funding, it will be hard for Cabify to become a super app, as the ride-hailing competition is getting quite intense in the region. Its competitors Uber and Didi are also adding more services and trying to position themselves.

An interesting potential competitor would be Nubank, the Brazilian decacorn (private companies with more than US$10 billion of valuation). It already has more than 8 million customers in Brazil and is starting to expand in the region to Mexico, Argentina and Colombia. Although Nubank still only offers traditional financial services, it has Tencent as a significant investor and has raised US$1.1 billion, so far. Therefore, it would be no surprise if it decides to follow a similar path as WeChat.

Also, in Brazil, Banco Inter (BIDI11) recently launched a marketplace to expand the offer to its customers beyond financial services to e-commerce, travel and more. The challenger bank is already a public company with around US$7 billion valuation, but it is now backed by SoftBank after its latest share offer.

Those are the most well-positioned candidates to be super apps in Latin America. Even so, other players could surprise, such as Magazine Luiza, leading retail and e-commerce in Brazil. Its CEO is transforming the company from a brick-and-mortar retail to a technology company and already showed its ambition to transform MagaLu (its app) into a super app offering many other services. Although it could compete in the Brazilian market, it would be doubtful that it becomes a regional player, as its primary business operates only in Brazil.

Super apps in Latin America will not be the same as in China

We are starting to see the rise of the super apps in Latin America, but they will not follow the Chinese path as the markets are very different. A better comparison could be with the Southeast Asian players as the markets are more similar; however, Latin American’s super apps will probably be the result of the unique environment in the region.

As more companies are looking into the Chinese success stories, we will probably see even more players competing to become the Latin American super app. The venture capitalists are already placing their bets on who will become the leading players in Latin America. One thing is certain: It will be exhilarating to see how the market unfolds in the region — the customers will be the true winners in this battle.

This post was first published at TechCrunch: Link

Fintech snapshot: August 2019

After two incredible months with mega-rounds from Nubank and Creditas (check out what happened in July in this post), August was a more relaxed month with fewer and smaller capital raising deals for Latin American fintechs. Three fintechs raised equity and one raised debt – while on the other side, three acquisitions were announced.

In August, fintechs in the region raised $43.1 million in disclosed equity deals. Mexico led with 97% of the capital, thanks to Credijusto’s Series B. On the debt side, there was just one deal raised by Rebel, a Brazilian lending fintech, for $43.4 million.

With these deals, so far this year we have seen an astonishing $1.66 billion fundraised by fintechs in Latin America (including the $332 million raised by Banco Inter from Softbank).

 

 

 

 

 

 

 

As we can see on the chart, $1.413 (85.2%) billion has been in equity rounds and $ 245.2 million (14.8%)  was in the form of debt.

In the M&A market, some players announced deals in August. Two Mexican fintechs (Weex – a mobile virtual network operator and digital wallet, and Konsigue – an online factoring platform) and one Chilean (QVO – payment gateway) have been acquired.

I would expect to see more acquisitions in the following months. Creditas and Nubank, for example, are well capitalized and looking to expand regionally as well as their product offerings. Creditas has already made one acquisition, of Creditoo, last month.

Let’s jump into the relevant fintech deals and news of August, and stay tuned for the September Fintech Snapshot!

Main Investments

 

M&A

Regulations

There weren’t any relevant updates on the regulatory environment in the region;

 

Partnerships:

 

Relevant Moves

 

This post was first published at Iupana: Link

Fintech Snapshot: July 2019

After a record-breaking June  – when Latin American fintech attracted US$ 237 million in equity investments– the region broke that record again in July with fewer, but larger, investments. Nubank announced a mega-round of US$ 400 million lead by the growth equity firm TCV, increasing its valuation from US$ 4 billion to US$ 10.4 billion. Now, Nubank is one of the world’s largest unicorns – and top 3 in the fintech industry.

Although there were some rumors that Softbank would participate in this new Nubank round, in the end, it decided to bet on another digital bank – although not exactly a fintech: Banco Inter, which IPO’d last year. Softbank bought most of the US$ 341 million follow-on offering, which left Banco Inter’s valuation at US$ 6.6 billion.

Besides these massive investments, we saw three other smaller deals from leading fintechs from Brazil and Mexico. One highlight was Nexoos raising a US$ 6.5 million in debentures to increase its lending power.

In total, Latin American fintechs raised US$ 400.3 million in equity investment this month – not counting the capital raised by Banco Inter – in three deals and US$ 6.5 million in a debt round. In this month, Brazil raised 100% of the disclosed rounds, asserting its leadership in the region.

At the same time, the battle between the two largest ride-hailing companies intensified in Latin America and started to enter the financial services: both companies started to offer debit cards to their drivers.

If you enjoy these columns, don’t miss my newly-launched Fintech LatAm Report 1H2019, for a complete picture of LatAm investment trends so far this year. The report summarizes and analyzes the data of the first 6 months of the year: Read it here

Well, let’s jump into the relevant fintech deals and news of July, and stay tuned for the next Fintech Snapshot next month!

 

Main Investments

M&A

Regulations

Relevant Moves and Partnerships

 

This post was first published at Iupana: http://iupana.com/opinion_post/fintech-snapshot-july-2019/?lang=en

LatAm Fintech Snapshot: June 2019

June was a record-breaking month for fintech investments in 2019, with LatAm fintechs raising a total of US$ 237 million in eight equity deals. This was more than twice the amount raised in May, previously the busiest month for LatAm fintech deals.

Creditas, a Brazilian lending platform, raised an impressive US$ 200million from the Japanese behemoth, Softbank. This investment brought Creditas close to becoming a unicorn, with a US$ 700million valuation. Softbank isn’t losing any time after announcing in March its US$ 5 billion fund focused in the region, putting to work already more than half a billion dollars.

Also another relevant deal was the US$ 12.5 M investment in Colombia’s ADDI, with none less than Andreessen Horowitz leading the round. Previous investors Monashees, Village Global, and Sinai VC also participated. This is the first fintech investment by Andreessen Horowitz in Latin America. ADDI is a point-of-sale lending platform similar to the American startup Affirm, which Andreessen Horowitz also invested in.

Also in June, Brazilian startup Nubank raised a US$ 96million debt round to expand its credit product to its customer base.

This month we saw a concentration of 92.86% of all the disclosed equity investments happening in Brazil, mostly because of the Creditas round, followed by Colombia with 5.25% and Chile with 1.26%.

Well, let’s jump into the relevant fintech deals and news of June, and stay tuned to the next Fintech Snapshot next month!

Main Investments

M&A

Regulations

Partnerships

Relevant Moves

This post was first published at Iupana: http://iupana.com/opinion_post/latam-fintech-snapshot-june-2019/?lang=en

My 2018 Book List

A couple of years ago, I started a tradition to write every end of the year about the books I have read that year. I started it as a moment to remember the books I read while sharing my book list with my close friends. As a surprise bonus, I always receive some great recommendation to my next year list (please, send me yours!).

Since a few years ago, I push myself to read 2 books per month on a total of 24 books each year. Unfortunately, not every year I achived this mark, especially as I’ve been moving around different countries lately. Also, I need to be more careful not selecting very long books if I want to keep reaching my goal! (Sometimes, I just can’t avoid them!)

Here is my book list by each quarter in 2018:

Q1

1. Extreme Ownership by Jocko Willink and Leif Babin

2. Flash Boys by Michael Lewis

3. Capital in the Twenty by Thomas Piketty and Arthur Golham

4. Peak Performance by Brad Stulberg and Steve Magness

5. The Four by Scott Galloway

6. The Art of Strategy by Barry Nalebuff and Avinash Dixit

7. Powerful: Building a Culture by Patty McCord

8. When: The Scientific by Daniel Pink

Q2

9. Moneyball by Michael Lewis

10. Principles by Ray Dalio

11. The Business Blockchain by Willian Mougayar and Vitalik Buterin

Q3

12. The Courage to be Disliked by Ichiro Kishimi and Fumitake Koga

13. Never Split the Difference by Chris Voss

14. Thinking in Bets by Annie Duke

15. How Asia Works by Joe Studwell

16. Crypto Assets by Chris Burniske and Jack Tatar

Q4

17. Adaptive Markets by Andrew Lo

18. The Coming Storm by Michael Lewis

19. Born a Crime by Trevor Noah

20. When Genius Failed by Roger Lowestein

21. The Bitcoin Standard” by Saifedean Ammous

Yeah, I know, I only reached 21 this year. Next year, I’ll make it back on track!

Also, I would like to share a quick overview of the TOP 5 books I read this year (in no specific order):

  • How Asia Works

When I arrived in Singapore, I was recommended to read this book by a friend from Startupbootcamp, Markus Gnirck, to understand how the region works. It is a very interesting book that gives you a good overview of the economic development of the region. The book explores the main economic drivers that set apart the incredible development of Japan, China, and South Korea, to the challenges faced by Indonesia, Phillipines, and Indonesia.

I lesson on how to develop a country! I wish all the politicians and economists in Latin America had read this book.

  • Principles

This was my favorite book of the year. Not only because it was interesting to dive deep into how Bridgewater Capital works but also because many of the principles ressonate with my own view.

The basic idea is that peoples and companies should have their “Principles” written, which are, in his own words,

Principles are ways of successfully dealing with reality to get what you want out of life.

I see principles as a very interesting way of make decision making not only more efficient but also scalable in a company.

  • The Art of Strategy

Game theory always drawn my interesting but I didn’t manage to study about the topic before. Understanding game theory helps you identify the decision making process of rational player (which is a flaw on the theory, similar to the assumption of the homo economicus). I find this topic fascinating! Specially because when you understand how most people will behave in some conditions, you can set proper incentives.

  • Never Split the Difference

Negotiation is definitely an art and Chris Voss is one of the best in that art. He is a former FBI negotiator turn into a study of the art of negotiation. He’s experience negotiating with deadly criminals revolutionazed the negotiation field study contradictin many of the previous concepts. A good friend, Fabricio Kury, highly recommended the book to me, and it was well worth it.

  • Adaptive Markets

An audacious book trying to replace the Efficient Market Hyphothesis. As Andrew Lo metion in the book: “It needs a theory to break a theory”. So, he present a theory, the Adaptive Markets Hyphothesis.

It is a quite interesting theory that try to fit the Efficient Market Hypothesis with the behavior economics by applying the principles of evolution into the financial markets. He explores the concepts of competition, natural selection, and adaptation to provide a better explanation of how markets work.

It’s a quite extensive book and sometimes is just stray away from the main topic, however, the adaptive markets hypothesis seems to be a better way to explain how markets behave.

I hope you enjoyed my list and gave you some ideas of good books to read!

I wish you all happy holidays!

See you next year!

The Dispute to be the NASDAQ of the Security Token Begins!

Image result for stock exchanges

While the crypto market seems to be going through a crypto-winter, it appears that the sun is shining quite well for the new security token / digital assets market. All the blockchain and crypto events that I go, it seems that everyone is declaring: “ICOs are dead, long live to STOs” (Security Token Offers).

Since I joined the security token market a couple of months ago, the market went from almost no one caring about security tokens to everyone wanting their own piece.

Although I truly believe the potential of this market, I also know that it will take some time to the market to take off and anyone in the market looking for short-term profits will be disappointed. A whole new market is being created, with many necessary pieces still under-construction and still many problems to solve.

Even though, I’m quite confident is that there is no turning back. Everything (asset or financial product) that can be tokenized, will be tokenized in just a couple of years. Luckily, I’m not the only one thinking that way, as many startups and large corporations are positioning themselves not to lose this next wave.

One of the biggest promises of the security token market is: “Freeze the investment not the investor”, implying that will create liquidity to assets with low liquidity or illiquid. However, a quick research reveals that still there isn’t any real trading of compliant security tokens in the market.

Due to that scenario, exchanges are one of the main topics right now as the kick-off of trading security tokens will propel investors in participating in STOs, which will generate more trading, creating a positive feedback loop that will accelerate this already fast-moving industry.

Using a parallel to the traditional stock market as well as the crypto one, it becomes quite clear that exchanges are not only a key player in the market but also a fantastic business opportunity. Just a few examples:

  • Nasdaq, Inc (NASDAQ Operator): Market Cap US$14.28 Billion
  • Intercontinetal Exchange, Inc (NYSE Operator): Market Cap US$ 44.96 Billion
  • Binance (largest crypto exchange): Expects to profit US$ 1 Billion in 2018
  • Coinbase (largest US crypto exchange): The last round of investment valued it at US$ 8 Billion

That been said, many players are trying to enter this market to become the next NASDAQ or Binance (or to not stop to be them).

Here follows a quick analysis of the different kinds of players entering the market:

Traditional Stock Exchanges:

As you would expect, the incumbents are not watching the disruption of the market happen standstill. Many of them understood that the market is moving toward a tokenized market; therefore, they are positioning themselves to not only try to survive but to be able to compete well in this market.

These players understand quite well how the financial market works, already have licenses to operate, and have the necessary money to invest. However, they move slow and aren’t as familiar with blockchain technology. They probably won’t lead this market due to being more afraid of damaging their main companies than to be a first mover; however, I believe they will be fast followers.

  • SIX Swiss Exchange: Announced in July 2018 that was launching a spin-off focused on digital assets, SIX Digital Exchange (link)
  • Singapore Stock Exchange (SGX): Invested in November 2018 in iStox, a digital assets exchange (link)
  • Malta Stock Exchange (MSX): Announced in September 2018 that it’s partnering with Binance to launch a security token trading platform (link).
  • Nasdaq: Invested through Nasdaq Ventures in a digital asset tradings platform (link), ErisX, and is looking into launching its own platform (link).
  • Intercontinetal Exchange, Inc (NYSE Operator): Is launching in January 2019 a digital asset exchange, Bakkt (link).

As you can see, they are exploring different forms of entering this market.

Crypto Exchanges:

With the crypto markets going down and the ICO party ending, many crypto exchanges started to become more interested in this new thing called security tokens. A few years ago, most of the crypto exchanges operated without any license under gray areas. However, many countries started to regulate crypto exchanges demanding them to be more strict with KYC/AML and obtain the necessary permits, starting a run of the big crypto exchanges to find the best regulatory environment for them to operate.

Although crypto exchanges don’t have the experience dealing with regulation as the traditional exchanges, they were already starting to move toward a regulated environment, which might make it a little more easier for them to enter the security token market. Although regulation is their Achilles’ Heel, they move much faster and also have much more experience with blockchain and smart contracts than the incumbents. A few big players have not only the money but also a global scale, making them some good candidates to be leading players in the market.

  • Binance: As mentioned before, it is partnering with MSX to launch a security token trading platform.
  • Coinbase: The leading American crypto exchange acquired a few financial institutions to obtain the necessary licenses to start to trade security tokens (link). It is also making other moves in the market such as an investment in the security token issuance platform, Securitize, in November 2018 (link).
  • Circle: Acquired Poloniex in February (link) and SeedInvest in October (link).
  • Bithumb: The Korean exchange announced in November it was launching a security token exchange in the US (link).

New Entrants:

A new market means an opportunity for new entrants to compete for their spot under the sun. These new players are starting from day one as a security token exchange, giving them an advantage as all the systems and process are designed for this new market.

Many of them raised millions of dollars through ICOs (while it was still a thing, remember? So 2017 that…) to enable the development of their platform. Their lack of experience and track record are their biggest challenges to overcome.

  • OpenFinance: Listed SPiCE VC security token in November (link).
  • tZero: It’s a spin-off of Overstock.com and one of the first security token exchanges around.
  • Gibraltar Stock Exchange (GSX): The GSX was launched in 2014 as a stock exchange but it’s already positioning itself to be one of the leading players in this new market. In October 2017, it announced a subsidiary, the Gibraltar Blockchain Exchange (GBX), focused on utility token, later on, in July 2017, it confirmed a shift to focus to become a security token exchange (link).
  • iStox: A new digital assets exchange based in Singapore which received invest SGX and Temasek (link).

Decentralized Crypt Exchanges:

The DEX, acronym for Decentralized Exchanges, has been a hot topic in the crypto world for a while. However, if you’re not from the crypto world, you probably never heard about them. They are basically exchanges that enable peer-to-peer transactions using the blockchain and smart contracts as a settlement engine, therefore enabling a more decentralized crypto economy while reducing the transactional costs and the hacking risk, as the users hold their cryptocurrency in their own wallets instead of an exchange wallet attractive to hackers due to its high amount hold.

As security tokens require that investors pass through a KYC/AML and also comply with some other regulations (such as the lock-up period and the number of investors restriction), the trading isn’t completed decentralized as it still needs to go through this process on a centralized entity, a whitelist. I don’t think they will be competing to become the leading exchanges; however, they might have an essential role as liquidity providers to the ecosystem.

  • AirSwap: Started as crypto DEX, but it saw an opportunity to also offer security token peer-to-peer trading. In November, it did the first compliant security token transaction, however, it was a test transaction and still there isn’t trading on the platform (link).
  • Bancor: Developed its own protocol to enable peer-to-peer transactions for tokens. It started announced that in July that Alchemy would be the first listed security token in its network (link).
Private Marketplaces:
A more accessible path to create a secondary market for security tokens are the private markets. The main advantage is that licenses are much easier to get compared to exchanges. I don’t think they will compete head-on-head with the exchanges (unless they decide to become one themselves), instead, they will complement the ecosystem by providing access to more investors.

  • Templum: Supported the Aspen Digital Security Token to fundraise in August (link).
  • Sharespost: Created a Global Liquidity And Settlement System (GLASS) with OKCoin giving project access to US investors (link)
  • HighCastle: An UK-based investment platform focused on alternative assets that is entering the security token market.

*There are already quite a few players in each category, the listed companies are just a few examples of this evolving market.

Conclusion

From the Amsterdam Stock Exchange in 1602 (the first stock exchange in history) to Binance, exchanges were always the heart of all the trading markets. The security token market won’t be different, creating a massive opportunity for different players to try to become the leading ones in this new market and become the NASDAQs of tomorrow.

It’s still too early to understand how this market will evolve but, as we have seen, different types of players will be competing head-to-head, each one with its advantages and disadvantages.

Exciting times are coming and it will be interesting to watch how this market will unfold in 2019.

Who do you think will be the NASDAQs and NYSEs of tomorrow? Will crypto exchanges such as Binance and Coinbase lead the way? Or maybe a new kid on the block will surprise everyone?