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The Road to Digital Finance: How Did We Get Here?

Jun 2, 2021

Today, many of us consider the financial institutions we interact with to be, or at least to offer, fully-digital services. The truth is, very few of them are actually fully digital. The majority of our financial system still relies on some aspect of manual human interaction; but thanks to the demand for more digital processes, things are quickly changing for the better.

Digitalization for the financial markets has been born out of need and opportunity, like with many other industries; and like those other industries, the road to digitalization has not been a fast one. So how did this all begin? Let’s take a look at where it all started and the path we took to get here.

The earliest days of finance started hundreds of years ago when we began keeping records for things like government finances and taxes, using the first physical financial technology: money. But much didn’t change until the New York Stock Exchange was founded in 1792, where brokers were now able to trade stocks at the optimal price as buyers and sellers of public securities.


The laying of the first transatlantic telegraph cable, which connected North America to western Europe, marked a pioneering step in FinTech since it enabled instantaneous communication between the major financial markets of London and New York, and later extended to other financial centers in Europe and Asia.


During The Great Depression in 1933, the United States gave up on the gold standard, which allowed the government to pump money into the economy and lower interest rates. We often take for granted how the U.S. dollar, a liquid asset, can now be traded freely on global exchanges and adjusted to interest rates to help combat inflation and deflation.


At this time, Wall Street depended on messengers that would deliver paper stock certificates by hand. The NYSE was forced to close trading on Wednesdays so that firms could courier the immense amount of paper certificates around the city to be processed. Another major era of modern FinTech began with the digitization of analogue systems into digital environments. It was around this time that we saw the momentum of progressive development in financial technologies pick up, with innovations such as the Automated Teller Machine (ATM), which drastically changed the relationship between people with money and their financial institutions in the years to come.


During this period, the world’s first digital stock exchange -- the National Association of Securities Dealers (NASDAQ) -- was created. This allowed for more efficient, compliant and accurate trading to take place electronically, marking the beginning of a new era in financial markets where automation without continuous human interaction would start to become a norm.


With this new wave of automation and online services taking center stage in the U.S. securities industry, we also began to see a rapid rise in the volume of transactions which put immense pressures on the human-heavy processes needed to take place behind the scenes in order to settle transactions. This, in turn, just added to the lack of security as stock certificates were left piled on filing cabinets and tables for weeks at a time and even mailed to the wrong addresses. In response to this crisis, the Depository Trust Company (DTC) was created as a centralized location where all stock certificates and securities would be kept electronically and overseen through all securities transactions.


The early ‘80s brought big changes to the world of finance for retail investors when a physicist and inventor developed a company known as E*TRADE, which made it possible for retail investors to place trades online by themselves. In 1982, the first online transaction was sent to an exchange, which paves the way for all main street investors to control their own investments online, without the need for a human broker.


In part, with the thinking that online volumes of securities trading increase significantly, there became a bigger need for security. There was a desire to create a system to timestamp documents, one that could not be tampered with. Two Bellcore researchers by the names of Stuart Haber and W. Scott Stornetta started work on the first cryptographically secured chain -- a concept we have come to know as blockchain. But it wasn’t until years later that it would be used in practice.


With the dot-com bubble and crash in 2000 came the survival of internet giants like Amazon, Google and Paypal, which significantly redefined the way people transact and transfer money. During this same time, personal technology was also evolving from basic handheld devices to rich internet ready handheld devices, such as the iPhone that allowed consumers to navigate and transact digitally from wherever they were.


After the Global Financial Crisis in 2008, new regulations were put into place to avoid another financial crisis, yet there was still a lot of distrust in the financial institutions. In 2009, we entered into a new phase of FinTech with the birth of the Bitcoin blockchain and cryptocurrency, which created yet another shift in the FinTech space where the concept of traditional Fiat currencies was slowly taken over by a new wave of digital tokens working on a transparent system.


Hurricane Sandy made it abundantly clear that digitalization was necessary after the storm flooded a vault at the DTCC, Wall Street’s clearing and settlement servicer, ruining trillions of dollars of stock certificates. This spearheaded the DTCC’s effort to encourage electronic-only share and bond issuance and “dematerialization,” where certificates are converted to electronic format. Fortunately, digital securities keep track of all data input and transactions, so the information is always accurate and easily accessible.


Ethereum was launched, and with it came smart contracts, or tools that can automatically execute transactions if certain conditions are met without requiring the help of an intermediary company or entity. During this same period of time, there was increased desire from individual investors for transparency and control, which brought the emergence of robo-advisors, or digital platforms that provide automated, algorithm-based financial planning with little to no human supervision.

Until this point, private companies could only crowdfund from accredited investors, the wealthiest two percent of Americans. In June 2015, Regulation A+ went into effect, allowing private growth-stage companies to raise money from all Americans for the first time in history.


While working on the concept of tokenizing his fund for SpiceVC, Carlos Domingo realized that there wasn’t a solution that fully met his needs. At the time, he envisioned a tokenized VC fund that would provide automation and liquidity to the fund’s LP interests, which traditionally have been illiquid assets. Carlos partnered with Jamie Finn in 2017 to build their own platform that would tokenize SPiCE VC, and that platform ended up becoming Securitize, which today is one of the leading primary issuance and compliance platforms for security tokens.


Although everything seemed digital by this point, the antiquated back office procedures hit a tipping point when popular investing app Robinhood halted trades for GameStop after traders frantically bought the company's stock. The clearinghouse deposit requirements, coupled with unnecessarily long settlement cycles introduced new risks and consequences for investors. This has, in turn, prompted the clearinghouse to propose shortened settlement periods, which will bring settlement from T+2 to T+1, which is still far from fully-digital.


Companies like Securitize who leverage blockchain technology have created fully-digital end-to-end financial services that enable the potential for T+0 settlement. As adoption continues to grow, and more and more of our everyday services leverage blockchain technology, we will see improved speed, transparency and potential cost reduction prevailing in the financial markets.

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