It will soon be possible to buy shares anonymously and securely anywhere in the world via cryptocurrency. And for smaller investors, shares of shares will be available, all for almost no transaction fees. TechCrunch Shanghai exhibitor, Russian startup Zeus Exchange, has registered in Singapore and become licensed in Cyprus to trade shares using the smart asset blockchain—the world’s first—developed by Singapore-based foundation, NEM. The not-for-profit foundation is developing its systems in China. The framework that Zeus Exchange will use could be particularly successful in China due to it allowing access to exchanges all around the world via Cyprus. Plus anonymously, and at small scale.
China is the only country in the world where individuals investors far exceed institutional traders: their trades make up 80% of the country’s $7.6 trillion market. They are the most active traders in the world and skeptical of funds as managers in the past have been known to engage in unethical manipulation of the market.
The process behind Zeus is somewhat complicated. An institutional investor that is holding a share of a company for the long term can effectively rent it out for a fee for a fixed term. The broker then uses this real share as the basis for creating a crypto asset which can be bought by clients of the broker via NEM’s blockchain ledger system and cryptocurrencies such as BTC, ETH, ZEM. When the exchange becomes fully functional in March 2018, it will effectively be able to decentralize a stock exchange.
“It had to be NEM because they’re the only ones offering an asset blockchain. We did consider Ethereum until we realized that wasn’t even possible and Bitcoin obviously has already had break-ins,” said portfolio manager Olga Duka, referring to the fact that Bitcoin has been stolen. This should not be possible with the multi-signature security required by NEM’s system.
The buyer using Zeus Exchange can opt to buy the real share asset at the end of the term, though for this they will have to go through an identification process with Zeus and open broker-dealer accounts.
Using blockchain as an interface with stock exchanges provides many possibilities and ones which could be particularly apt for China. ICOs have been banned, but blockchain is in favor conceptually. Chinese people cannot easily invest abroad but they can open accounts in Cyprus. The Cyprus broker can then, in turn, open sub-accounts in exchanges around the world on behalf of clients.
“We’ve been trying hard to make sure it’s legal,” said co-founder Alexander Tsyhlin.
Cyprus is the first country to allow this bridging of crypto and classic assets. The Zeus Exchange team themselves spent over 9 months on the legal aspects of the license all round the world. They expect other countries to follow suit fast, with Gibraltar the closest to licensing a framework that allows crypto trading. Switzerland, Lithuania and the US are also looking into the concept.
The system allows much lower entry costs and minimum spends for users. Trades start from the equivalent of $10 with almost non-existent fees (NEM’s blockchain is a harvest rather than mining blockchain and so fees are set at ¢2-10). Zeus Exchange is considering a monthly fee of around $2 for around 100 trades. Some exchanges require minimum share buys of 100 shares which can be prohibitively expensive. As more cryptocurrency enters the market and liquidity increases, Zeus expects to be able to offer half shares, then a tenth or even one percent of a share.
However, China’s retail traders are old and prefer to pay much higher commissions to physical brokers rather than low-cost transactions on mobile and other trading platforms. This might suggest a lack of keenness in switching to a whole new concept. Yet again, the recent ICO frenzy which the authorities ultimately banned suggest there may well be an appetite and that unless China licenses the bridging of crypto and classic assets, perhaps the only dampening of demand will be Chinese people’s annual limit equivalent to $50,000 that they can take out of the country.