RealBlocks’ COO Describes Alts Trading Liquidity Issues And Barriers, Using Blockchain Technology As A Solution
While cryptocurrency as a store of value captures the interest of many investors, for those who see no need to go beyond traditional currency to store value, the question remains – what is the value proposition of cryptocurrency? The answer from cryptoasset experts is often that there’s value in the blockchain technology itself or in decentralized finance.
While many of those value propositions are in testing or development, wealthtech firm RealBlocks has moved forward with an innovation based on blockchain technology that’s changing the way alternative investments are traded.
RealBlocks, which provides a platform for advisors and investors to connect with alternative investment managers, developed a secondary trading “bulletin board” to execute transactions in alternative investments on a blockchain, reducing transaction costs and enhancing liquidity.
We asked the firm’s COO, Scott Brooks, about the need for liquidity in alts markets, challenges to liquidity and the firm’s blockchain solution.
WSR: What is the current state of liquidity for alts? How has it evolved? Is more liquidity in alts helpful to the market?
Brooks: Currently investors can seek liquidity through the fund sponsor (if offered), over the counter or through auction.
The ability to digitize securities through blockchain technology, however, creates a liquidity overlay, providing investors with the freedom of choice and optionality to enter and exit positions regardless of illiquidity associated with the underlying fund.
Liquidity in the alts market has the potential to be especially enticing for the retail market as they are often not equipped to deal with lengthy lock-up periods of up to 10 years. As a result, liquidity can serve as an “escape hatch” for investors that need to move their capital around should the situation present itself.
WSR: What barriers exist to liquidity in alts? What causes these barriers?
Brooks: As mentioned, lengthy lock-up periods are the norm for alts liquidity. It is common for investors to sell their holdings at steep discounts in order to successfully obtain liquidity. There are multiple parties, legal reviews, approvals and fees involved that extend the process longer than it needs to be – which often cause barriers.
The blockchain, however, provides a seamless process for the transfer of ownership between multiple parties, granting more immediate and enhanced liquidity options for investors. This ultimately provides investors with greater control over how, when and what they invest in.
WSR: Your firm has created a secondary trading mechanism for alts that uses blockchain technology. Tell us how it works and what problems it solves.
Brooks: We have implemented a bulletin board-like system, powered by the blockchain, for facilitating secure and private liquidity discovery and secondary trading. Functionally, an investor can post an intent to buy or sell and other investors on the platform are able to execute transactions peer-to-peer in a dark-pool trading environment.
This effectively allows an investor to sell its share or interest in a fund if there is an interested party, rather than waiting for a predetermined liquidity event through the fund sponsor.
Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at firstname.lastname@example.org