The Business Times

Digital exchanges should start eating what they cook

Henry Chong: "CRYPTO'S coming-out party" was The New York Times headline when cryptocurrency exchange Coinbase had its initial public offering (IPO) about a year ago.

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Other exchanges - including Binance, the largest of them all - have since engaged with big institutional investors in private equity markets. Another, FTX, secured big-name funding from Canada's Ontario Teachers' Pension Plan (OTPP) earlier this month, following previous backing from Singapore's sovereign wealth fund, Temasek.

The logic here is that when a crypto exchange needs to raise significant capital, there is no alternative to tapping the 'TradFi' public and private equity markets.

I don't believe this is true.

It's actually very strange when digital asset players that claim to value their digitally native communities do not raise equity from them in digital asset format. Technology

and regulation both make this possible - so crypto exchanges should end the hypocrisy and start eating what they cook.

Why not offer communities the chance to own real equity in the platforms they helped build, rather than defaulting to institutions that already dominate legacy capital? If you say you believe that digital assets represent a shift towards a more decentralised, inclusive and ultimately better financial architecture, then practise what you preach. Otherwise, you're undermining all digital asset platforms in the long run.

To me, as chief executive officer of a blockchain-native company - with a firm belief in the technology's capacity to reshape investment and capital markets - the level of institutional involvement that Coinbase or FTX have courted is out of step with what they are supposed to represent.

Why invite intermediaries into the disintermediation?

The principle of democratising finance is central to the promise of digital assets. Exchanges are a necessary intermediary in this process, especially in a regulated environment, and their mission should be to increase access to capital and investment opportunities. But there is no new paradigm if exchanges, which are arguably the best business model to emerge in the digital asset world thus far, are owned by the same institutions that own the Nasdaq and a big chunk of global private equity. Most digital asset firms, mine included, would say that we want to remake the way financial infrastructures work. Platforms such as FTX offer products and services that purport to transcend the old system - a system that brought us the global financial crisis in the 2000s, the Asian currency crisis of the 1990s and other world-shaking financial disasters before that. The ethos of blockchain and decentralised finance is to replace that system of relationship-driven co-dependencies, with a technological solution that is open, verifiable and secure - and, in particular, not designed for the benefit of a few institutions.

So if the same backers that brought us names such as Amazon or Facebook also turn out to be behind digital assets, then hasn't something gone awry?

Resistance intensifying

The value of Coinbase stock has been in decline since November. In part, it has simply been following crypto down - but if Coinbase's community had been able to secure a stake in the company via tokens too, not via a broker who ultimately has to hold onto a bunch of paper, then what might the difference have been?

We can see this happening with OpenSea, a popular marketplace for non-fungible tokens (NFTs). Trading NFTs on Ethereum as well as other blockchains, OpenSea's users transact with crypto too. Decentralisation is baked into the platform at every level, from its name onwards.

Andreessen Horowitz (also known as a16z) was an early OpenSea investor. This is the same venture capital (VC) firm that backed Instagram (sold to Meta Platforms), and Github (sold to Microsoft). In no way is that a slight to a16z; their venture vision is 20/20. But a VC's need for a public equity market exit does not sit well with the principles of the OpenSea community.

So when rumours of a traditional IPO for OpenSea surfaced, it triggered gripes of another "sell-out to large institutional investors". Years ago, similar complaints emerged from Instagram and Github users. They felt ownership of their related communities - which were built on their content contributions - but found themselves left out of the corporate payday. Users felt used.

For a platform based on open, decentralised protocols and content, such as NFTs, user ire could be much greater this time if they are shut out of the monetisation. When a handful of big investors (the same ones as with everything else), grab all the benefit, then that is not crypto's coming out - it's crypto selling out.

Institutional investment and IPOs might be good for founders, but it's not the digital dish they have served up to users. If digital assets are good enough to sell on your platform, then they should be a good enough way to raise equity - whether from institutional or individual investors. It is time for us all to start eating our own cooking.

The writer is CEO of Fusang Exchange.

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