03 September Can tokenization unlock market inclusion in Latin America?
With Bitfinex Securities
Author: Jesse Knutson, Bitfinex Securities, Head of Operations
This article was originally posted finextra
I have been fortunate to have been able to visit Latin America frequently in recent years. And every time I leave, it energised its vibrant, dynamic culture, and the pure sense of entrepreneurial energy and optimism among the people I met.
But what I experienced on earth has always been in stark contrast to the harsh reality of economic data. Today, there are unicorn companies with fewer than 50 people born from Latin America, covering 20 countries and 600 million people. By comparing it, its neighbors are over 1,200 startups, over $1 billion, with the US having just 40% of Latam’s population.
It is undoubtedly true that Latin America has a wealth of resources. But for some reason, the entrepreneur and investment potential is still not truly fulfilled.
This has led to a detailed study of eight Latin American countries to better understand what is hindering the region and what fuel growth can do. In particular, we investigated the role that tokenization can unlock capital and give regions greater participation in global markets. The Latin American Market Inclusion Report spoke to regional experts, including market analysts, lawyers, stockbrokers and others involved in the regional capital markets, to understand the experiences they face when trying to raise between $30 million and $50 million in capital in the local public market.
Our analysis identifies the phenomenon of “liquidity delay” in the region. This refers to the obstacles and inefficiencies of the traditional Ratum capital market that slowed capital flows and hindered investment. In particular, I found out:
Centralized Bank: Over the past five years, it controlled 70% of bank accounts in major Latin American markets before alternative and non-banked financial services (FinTechs) companies emerged.
High price: Such monopolies contribute to the world’s highest banking fees (approximately 17%), and naturally, it curtails both innovation and capital flows.
Bulletin and regulatory hurdles: Many major Latin American economies are ranked step by step in the ease of the World Bank’s business index and have a reputation for the bureaucratic and regulatory complexities that hinder listings and investments.
Limited capital market depth: The region is struggling with a severe funding shortage of entrepreneurship and a deep pool of capital looking for these opportunities.
High startup costs: Raising between $30 million and $50 million means that the average cost is 7%, but often comes with a dollar-excluded advisory service and considerable problematic costs. This added a hurdle combined with regulatory complexity and low liquidity, and strongly blocked new issuances.
Undeveloped Investor Ecosystem: Many in Latin America are not or unable to engage in financial investment opportunities. For example, less than 2% of Colombia’s population are active stock market investors, while 68% of Latinos lack for formal financial education. Also, Peruvian retail investors can pay three times more in fees than institutional investors in the same stock.
Latin American markets have traditionally been “exclusive” in nature and practice. The right to participate was reserved for a minority of privilege. Barriers range from economy (costs) to social (connections), access (particularly international investors), and regulations (intractable and often arcane). The social costs of this situation exceed the economy. These include the continued underestimation of a particular group or region in the formal economy of a region, and sidelings of inadequate communities and demographics, hampering the ability to participate or share in the growth of a region.
It is almost surprising, therefore, that liquidity delays affect entrepreneurship and reduce opportunities for business creators and those who want to invest in them.
However, we are beginning to see significant changes as tokenization grows, which I believe will help us launch the growth potential of Ratum.
Tokenization provides issuers with cost-effective access to global liquidity for businesses of all sizes and circumstances. Additionally, investors can have much more flexibility and freedom of use thanks to the ability of real-time payments, 24/7 trading and the ability to support independent assets. In effect, there is zero barrier for entries on both sides of the transaction: fundraiser and investor.
By reducing issuance costs by up to 50%, increasing 2-4% of capital, reducing listing times by 60-90 days, and enabling fractional ownership, blockchain-based securities can make investments dramatically more comprehensive and efficient.
Of course, it is still in the early days that it fulfills the potential for tokenization, but it is not an exaggeration to say that the financial changes it represents have given the region a wider range of socioeconomic opportunities to overcome historical barriers and promote growth.
Tokenization represents the first true opportunity for a generation that has rethinked finances. It reduces costs, accelerates access and creates more direct connections between issuers and investors. Tokenization represents a practical and available solution. Reduce barriers to business creators and investors’ entry, expanding the role and profits of the market into all sections of society. This is the meaning and aspiration for market inclusion that is no more relevant or urgent for Latin America.
Author: Jesse Knutson, Bitfinex Securities, Head of Operations
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