Less than 0.001 percent of global venture technology funding went to African startups in 2016. It is no secret that entrepreneurs in emerging markets have a harder time coming by capital funding than do their counterparts in developed markets. Among the many reasons for this are inefficient capital market systems that create obstacles for entrepreneurs in emerging markets, who face barriers to cautious investors.
The ‘leapfrogging’ phenomenon
Thankfully, tokenized equity and initial coin offering (ICOs) strategies can redefine capital markets and how startups issue securities and create corporate structures in emerging markets. Entrepreneurs and governments can leapfrog inflexible capital market systems created by developed market economies and instead create entirely new tokenized, flexible and accessible capital markets.
From virtually no access to a flexible capital markets system, entrepreneurs in emerging markets can benefit from a new generation of democratized and tokenized investments in private companies, and this could be made possible by the implementation of ICO strategies.
Tokenized capital markets in emerging markets can accelerate a leapfrog effect for growing startup ecosystems by placing young entrepreneurs and their businesses at the center of their countries’ growth. He notes that despite the potential, ICOs still have their training wheels on and need to find a meeting ground between existing conventional equity/debt systems and new and innovative tokenized ones.
There are two major ways that ICOs can transform capital markets and leapfrog economic growth in emerging markets.
Digital incorporations
Digital Blockchain-enabled capital markets will bring a wave of necessary innovation around private company incorporation and management. It is expensive, slow and inefficient to incorporate and manage a corporate structure in most emerging markets. In Nigeria, it can take $19,400 and two months to incorporate a private company. Whereas in Canada, it costs CAD$200 and takes 24 hours. After incorporation, the company management, fees and reporting requirements are all paper-based and can balloon administrative costs, time and filing requirements.
By creating digital corporate incorporation and management software that rely on Blockchain technology and smart contracts one can securely create, manage and track a startup activity. Digital corporate structures are a natural precursor to digitized tokenized securities and could significantly lower the barrier to entry for entrepreneurs in emerging markets. This could save resources and securely store intellectual property in corporate structures. Digital incorporations could transform the ease of doing business in emerging markets. As a real-life example, the Republic of Georgia recently made top 10 in the ease of doing business ranking thanks to its recent innovations, including a more efficient land titles system.
Imagine if Nigeria created a similar corporate registry system, where companies could be incorporated in a few minutes, at the click of a button and for little cost? This is the leapfrog effect: a sudden opportunity to lower barriers to entry into the economic system.
Tokenized securities
According to Savills Global Research Report “Trends in Global Real Estate Market in 2016,” the total market cap of global real estate is approximately worth $217 tln. This roughly equals 2.7 times of global GDP, 36 times of global gold mining worth (six tln) and accounts for 60 percent of global main assets, hence rendering real estate the top saving and investment choice for countries, corporations and individuals.
Smart contract and distributed accounting technology enable the connection of assets and financial institutions effectively. This technology allows a system where large assets can be split and distributed to multiple financial institutions through the smart contract, enabling users, through these financial institutions to invest in smaller fractions of real estate. This technology ensures the non-tampering of processes once they are initiated.
A more versatile system
Traditional transactions are a series of corporate steps, well-drafted contract templates and tons of paper. As such, they are rigid and create illiquid capital structures for investors and entrepreneurs. Tokenized securities represent an evolution to a flexible securities system, where share issuances can happen with the click of a button.
Blockchain and tokens know no borders, and tokenized securities could form the backbone of a decentralized global stock market. This is an especially added benefit to emerging market entrepreneurs, where local angel and venture capital groups are more scarce. Tokens empower entrepreneurs with access to backers from around the world, democratizing access to finance for their products.
True financial inclusion
Financial inclusion is about more than bank accounts and stores of value. Capital markets and the ability to easily incorporate and manage a company can ease barriers to entry for entrepreneurs and make it easier for them to build their businesses. Blockchain technology and tools like smart contracts, decentralized oracles and tokens create the possibility to create a new kind of capital markets system throughout emerging market countries.
The article is written by Marvin Hichem Coleby, a tech lawyer and Bahamian entrepreneur.