On June 15, BlackRock announced it had filed an SEC application for a bitcoin spot ETF, which was followed shortly by a filing from Fidelity. Both firms’ submissions include the use of crytpo exchanges for market surveillance. Bloomberg estimates that there have been 30 filings to date for bitcoin spot ETFs, and with Blackrock’s win loss record of 575-1 on ETF submissions, the suspense is killing folks more than a Netflix thriller.
EDX Markets, a new crypto exchange which is backed by Fidelity Digital Assets, Charles Schwab, and Citadel Securities, launched in the U.S. last week after building out its technology for the past nine months. U.S. Federal Reserve Chair Powell remarked last week that cryptocurrencies, like bitcoin, have “staying power,” a timely statement, as bitcoin again demonstrates it is popular with the market as a hedge against uncertainty, and hits the $30,000 mark first achieved in January 2021.
On May 9, Goldman Sachs, BNP Paribas, Deloitte and more than 30 firms announced the Canton Network, a new global blockchain network of networks for financial market participants and institutional assets. The Network is the financial services sector’s first privacy-enabled interoperable blockchain network of networks designed for institutions focused on the tokenization of real world assets using Digital Asset’s DAML, a network member and the technology provider for the network.
The big financial institutions are coming, and with the West Coast in tatters following the sensational blowup of Silicon Valley Bank on the heels of the sensational blowup of FTX, both resulting in a surge of company failures, the big financial institutions appear to be coming at speed.
SMBs: Optimism Low
The Small Business Optimism Index hit a 10-year low in April as recession looms and the this is helping to drive technology solutions to help power this grass roots segment of the economy.
Small and midsize businesses (SMBs) represent a massive segment of the U.S. economy contributing to 44 percent of GDP and half of the roughly $370 billion in overall tech spending. SMBs are businesses with fewer than 1,000 full-time-equivalent employees and make up almost half the employment in the U.S.
SMBs face a new and serious generational challenge of finding funding, with the U.S. Federal Reserve raising interest rates consistently for over a year now. Rates reached a 16-year high in May crossing 5 percent for the first time since 2007, and are expected to rise another 25 basis points this month as part of the Fed’s fight to curb raging inflation and the effect of ‘fiscal stimulus’ or excessive money printing during COVID-19.
The U.S. economy has been modeled around near-zero interest rates for a generation. Cheap money has also been the fuel for rampant early stage digital startups, and higher inflation is making digital innovation a game for those with much deeper pockets. High inflation is threatening SMBs with some reporting that small business bankruptcies are on the rise, victims of the credit crunch.
Regulatory uncertainty in crypto markets is adding to the cost of doing business in the U.S. as the SEC continues with litigation of major players, including Coinbase and Binance. Europe, Dubai, and Hong Kong have all launched new cryptoasset regulations, and the U.K. has legislated a historic and epic Financial Services & Markets Bill with provisions for cryptoassets.
Crypto and digital assets markets outside of the U.S. are moving swiftly onto the next chapter from innovation theater to economic growth engine. During this turmoil, there are a couple of areas in the crypto and digital assets markets it would be wise for SMBs to do their homework on: the increasingly maturing crypto payments space, and the emerging tokenized funding space.
SMBs: Crypto And Payments
Payments on blockchain are a good place to start since smaller firms often bear disproportionately high fees and operational costs. The increasing credit card ‘swipe’ fees, represent the third-highest expense for SMBs and alongside rising interest rates and credit costs, this puts smaller firms in a vicious cycle.
In 2020, PayPal launched a service to allow users and merchants to make crypto transactions at a low cost. Recently, the company filed its quarterly report to the SEC, disclosing its crypto holdings. The Fintech giant had cryptocurrencies and related assets worth $943 million in Q1 2023, marking a 56 percent increase in the company’s holdings since Q4 2022 when it had $604 million.
Stablecoins like Circle’s USDC provide a way for businesses to avoid the market-driven volatility of cryptocurrencies. Converting from stablecoins to fiat is also straightforward nowadays since platforms like Coinbase offer free USDC-USD offboarding services.
Layer-2 platforms, like Polygon, are further enhancing participation by enabling faster transactions with low processing time. This is a key feature for financial firms like Franklin Templeton and Hamilton Lane, who joined the network recently. Likewise, other Web3 solutions like Uniswap’s Permit2 are minimizing gas fee for end-users. Together, faster transactions and lower fees provide the scalability that SMB projects need.
Emerging solutions are also enriching the onboarding experience for smaller firms which pose challenges due to prohibitive costs and complicated KYC procedures. Robinhood, the popular trading platform with 23 million funded accounts and 15.9 million active users, recently launched Connect. It enables existing customers to convert fiat to crypto at minimal cost and without additional or fresh KYC.
“By educating and onboarding small businesses to use blockchain technology, we can help improve operations and the way they interact with consumers and their communities. We hope blockchain tech can help SMBs reduce costs, increase efficiency, and improve security. As more and more small businesses adopt blockchain technology, it will become increasingly important to offer tools that have easy and familiar user experiences,” says, Moira Noiseux, CEO of CornerMarket, a Web3 app focused on working with small businesses to introduce the many benefits of blockchain technology.
Metis, a Layer-2 solution, aims to help startups and smaller businesses adopt blockchain. It offers a user-friendly, no-code environment for SMBs to achieve uninterrupted security, unlimited scalability, and unbound profitability. Moreover, platforms like Metis and CornerMarket support diverse assets, including stablecoins, which provides smaller firms a viable alternative as mainstream cryptos, like Bitcoin, see high transaction costs due to network congestion.
SMBs: Tokenization, Funding, And Beyond
BlackRock’s Larry Fink has come out strongly supporting tokenization as “the next generation for markets.” BlackRock estimates that tokenization of private market assets will open markets worth $290 trillion. Boston Consulting Group predicts that some $16 trillion worth of assets, most of which are illiquid, will be tokenized by 2030.
SMBs are a big focus area as markets look to tokenize direct investments, secondaries, real assets, credit, and venture / growth segments, bringing private market companies to digital platforms which offer greater transparency for price discovery, underwriting, trading, and funding. Ultimately, SMBs get better, cheaper, and faster access to liquidity, and investors get (better) access to a whole new world of investments.
tZERO, Securitize, and Polymath are market leaders in this space, to name a few. These platforms transform private market securities through the use of smart contracts on the blockchain and create digital shares that can be traded on Alternative Trading Systems (ATSs). In April, INX launched Greenbriar’s token, becoming the latest platform to convert a public company’s traditional stocks into fully-regulated tokenized securities.
Apple’s GarageBand gave musicians a platform to record their music without the need of studio, producer, engineer, entourage, or the intermediaries and costs of the music industry. Whether the musician’s end product is good enough or has fidelity for the market is left to the arbiter of discretion, the consumer. A lot of great bands and albums came out of garages. A lot of great businesses came out of garages, notably Apple and Amazon.
The promise of blockchain and decentralized technologies, whether it is through payments, capital raising, improving supply chains, or improving decisions through enhanced data, is that it is designed to put control into the hands of the user, in this case the SMB, and reduce the reliance on traditional intermediaries and friction points while reducing costs through greater digital efficiency – this is at the heart of the Web3 vision.
If SMBs can be activated with real crypto and blockchain use cases we will have started the 21st century economic transformation of Main Street – and Wall Street.
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