Towards a digital capital markets union
I recently came across an insightful keynote speech (https://bit.ly/3Yk5UAD) by Piero Cipollone, Member of the ECB's Executive Board, delivered at the Bundesbank Symposium on the Future of Payments. He discussed the state of Europe's public capital markets, emphasizing that technology is a crucial yet often overlooked factor. His observations resonated with me and inspired me to share my thoughts on leveraging technology to modernize and, most importantly, make European public capital markets competitive again.
As Mr. Cipollone noted, our current systems were designed in analog times and haven't fundamentally changed; they've merely been accelerated with modern technology, resulting in the electronic trading systems we use today. While adopting blockchain and distributed ledger technology (DLT) may enhance certain processes, they won't fundamentally resolve the problems inherent in a centuries-old architecture. Moreover, they won't make European public capital markets competitive, as these electronic systems will remain limited and lack the capabilities and efficiencies needed to leapfrog the competition.
Another often overlooked aspect is the user's perspective. Observing global trading behavior, we see that the vast majority of activity is driven by reallocation. Every day, traders globally shift approximately $350-$400 billion from one asset to another. However, electronic trading systems don't directly support this primary use case. Instead, traders must split their intent into two transactions—selling one asset for cash and then buying the target asset—resulting in paying transaction costs and spreads twice and leaving unconverted capital on the table. This inefficiency arises because electronic trading systems use incompatible units; a unit of Microsoft is not equal to a unit of NVIDIA. Yet most market participants perceive and express capital and wealth in terms of value—for example, "I own $50k worth of Tesla stock" or "I want to shift 10% of my portfolio into XYZ." People intuitively understand wealth and capital as value, not units.
Electronic systems also cause other inefficiencies. Global fragmentation and intermediation lead to brokered access and unnecessary performance losses. Value chains don't operate for free; capital markets infrastructure players extract significant amounts annually. While essential for electronic markets' functioning, their involvement adds layers of cost and complexity.
The combination of outdated architecture, fragmentation, and dependent intermediation renders the dream of a unified capital market with digital efficiencies and capabilities unattainable.
That's why we have developed a solution that addresses these issues without creating a parallel system or disconnecting from global market mechanisms and liquidity. The Digital Marks Platform unifies and extends public capital markets into a single, 24/7 market, enabling highly efficient and cost-effective direct capital reallocation between stocks, bonds, and other public asset classes.
The platform facilitates an internal market through real-time emulation based on value (not units) held within a global treasury. This means that around the clock, even when reference markets are closed, the treasury can quote prices between all assets, effectively creating an n-by-n matrix—similar to currency exchange rates.
The value of the assets inside the treasury is issued into a digital sibling called Digital Marks, the digital asset class used and held by investors and traders. So Tesla stocks become Tesla Marks, and euros become Euro Marks.
The global treasury, much like an investment banking treasury, holds all investors' assets, achieving large-scale advantages through netting effects and optimal rebalancing. The key difference is that investors directly reap the benefits through significant trading cost reductions and implicit market-making rewards. It effectively employs cooperative principles to achieve—and even surpass—the efficiencies of the largest investment banks.
This vertical integration of existing electronic trading venues, functions, processes, and assets radically changes trading and investing—not just in terms of efficiency but also by augmenting traditional assets with digital capabilities, such as hyper-personalization of investments and innovative features like paying for your coffee with your wealth.
The platform will soon be open to financial services businesses, enabling them to deliver the next generation of investment experiences and products to their retail customers. It will not only change the way we invest and pay but also radically transform operating models due to its high level of vertical integration and by providing a solution to upcoming Payment for Order Flow changes.
We look forward to bringing our technical solution to the table and doing our part to help European public capital markets become competitive again, supporting the significant transformational changes ahead.