In 1998, the world’s largest telecom, AT&T, cut a series of deals with a popular startup called Excite. By distributing Excite’s content and search tools over its giant cable network, the company believed it could extend its dominance into the emerging Internet era. Google, of course, had other plans and today its market cap is 20 times larger than AT&T.
I thought about AT&T as I read the New York Stock Exchange’s announcement of a new platform for tokenized securities. The news represents a watershed moment for blockchain since not only is NYSE an iconic brand, but its parent company ICE owns other exchanges and clearing systems all over the world. A firm of that caliber embracing tokenization means blockchain technology is finally going mainstream.
Add to this the likely prospect that Congress will pass legislation to integrate crypto services into the current financial system, and the future seems clear: Equities will be tokenized; regulators will oversee a new era of blockchain based issuance and trading, and the NYSE and its peers will lead the way.
Not so fast, though. The first two of these things will almost certainly come to pass, but that doesn’t mean the third one will as well. As with AT&T and the communications industry in the late 1990’s, there is no reason the NYSE’s dominance of the current era of finance means it is in position to dominate the next one.
In fact, there are good reasons to doubt this will be the case—starting with the tone of the NYSE’s announcement, which is chockful of hype and buzzwords but contains very little in the way of details. If the exchange wanted to show it is serious about being a major player in the blockchain era of finance, it would address some obvious questions.
For starters, what blockchains and stablecoins does NYSE plan to support? Has its planned tokenized exchange decided upon programming languages, virtual machines, and token standards? This is just the beginning. The NYSE is also silent on what jurisdictions it will serve, and whether it will integrate decentralized tokens and DeFi tools. The announcement also says nothing about how NYSE itself intends to make money under a tokenized system.
The lack of details is even more curious given NYSE’s grand plans are “pending regulatory approvals.” Regulators would need answers to these questions more than anyone. When Galaxy Digital tokenized its own equity, it put out a lengthy report on the tricky particulars, and that is just one company. For a major exchange like NYSE, the considerations are far more complicated.
The details NYSE has released only increase my skepticism. Their platform is said to operate around the clock, but you don’t need tokenization for that. All you need is a database, and ironically, exchanges like the NYSE operate some of the world’s best. There is no technological reason why they can’t just run it around the clock. Ditto NYSE’s plans for using blockchain for instant settlement. It could do this using current technology but for the fact it would impair the business models of many of the exchange’s current partners.
Those who think continuous trading and instant settlement are exclusive to blockchain don’t understand what makes platforms like Ethereum special. It’s certainly not the database part—as a database Ethereum is pitiful.
Permissionless blockchains enable novel financial activity because they are built on a different architecture. Code and cryptography are a part of this, but the smaller part. More important is the existence of bearer-like assets which can be accessed by the public globally without having to go through an army of intermediaries.
The NYSE can deploy all the computer science and public-key cryptography that it wants. Unless its new platform eliminates many of its partners—some of whom are owned by the same parent company—then it won’t get far. Ironically, the preservation of intermediation is one of the few design elements that is spelled out:
The venue is designed to align with established principles for market structure, with distribution via non-discriminatory access to all qualified broker-dealers.
Note the contradiction of calling a solution that’s only available to “qualified broker dealers” as being “non-discriminatory.” It’s a classic innovator’s dilemma. Today, the NYSE’s customers are broker-dealers, HFT firms, and clearing members. It makes money by charging them fees for access, trading, colocation, and data. None of these revenue streams work in DeFi on a public blockchain.
So what’s a 200-year-old institution to do? Build an alternative platform, of course.
Excite did not make it, and AT&T is not as important as it once was. But it didn’t have to be that way, because in 1999 the co-founders of Google offered to sell it to them for just a million bucks. The deal was rejected, in part because Google search was too good—a faster search engine meant people would spend less time on the portal. Executives who came from a culture of charging per-minute for access thought that was a bad thing.
Execs at the NYSE believe something similar, otherwise they’d be scrambling to build direct integration into DeFi. Instead they are doing tokenization their way, in a fashion that serves their customers, and their business model.
They are free to try, and the attempt is a powerful signal that things are about to change. We shouldn’t treat it as anything more than that.
Omid Malekan is an adjunct professor at Columbia Business School and the author of several books on crypto and finance. The opinions expressed here are entirely his own.
