Breaking Free of Our (Block)Chains
Kaidi Ruusalepp, founder and CEO of Funderbeam
Funderbeam has announced that it will no longer record trading transactions on the Bitcoin blockchain that we have used since launching the platform in 2016.
This has been a long-coming decision, and we have not taken it lightly. Funderbeam was among the first (if not the first) in the world to start trading shares in real-world assets using blockchain technology, and we still believe in the massive potential of distributed ledger technologies (DLTs).
However, having experimented with trading real-world assets on blockchains for the last three years, we have come to the conclusion that there are both regulatory, practical and early adoption limitations to using blockchains for our vision of trading growth ventures globally.
Regulatory restrictions
The true use of blockchains, private or public, would be full P2P without central counterparties. But with some universal rules around the investment world, service providers like Funderbeam need to know the beneficial owners of investments at every single point in time. Meaning — there can be no pseudonymous investors and all investors should have gone through proper KYC (Know Your Customer). Funderbeam, as a central service provider, carries full responsibility and as a result, we decided to onboard customers (in the beginning manage bitcoin wallets) ourselves. This immediately led to centralisation.
Beyond recording data, using Bitcoin or even Ethereum blockchain would in theory enable transactions using cryptocurrency among other payment methods. It would enable underserved markets/clients to get access to the global early-stage investment space. This is where we see the global financial markets are going and both large tech companies (Facebook and Libra) and countries (China) start to introduce their own “digital money”. But having “all in” under one license ad 2017–2019 (the period of our licensing process) was too much even for the most liberal regulators. And getting us back to point one — know your customer.
These were the first of many regulatory restrictions limiting the full use of blockchain capacity.
Practical limitations
More acutely, we have had some practical limitations to our implementation of blockchain. It’s important to keep in mind that, when we first started building this platform, the number of DLTs was extremely limited.
As a result, we set out to build our trading platform on top of the Bitcoin blockchain, using a technology called colored coins. At the time, bitcoin was the only technology that was tested at any kind of scale, and more flexible options like Ethereum were still in the early stages of development.
Down the line, this led to some quite practical problems. For instance, during the “crypto-mania” of late 2018, there was so much demand for hashing transactions that the time for us to execute trades jumped from around one hour to one to two days. As a result, we had to pay significant amounts of fees to make the trades faster or simply wait for hours. Can you imagine trade in the stock market waiting for 30 hours to be admitted like we did before our first change in 2017?
Funderbeam has always operated a full investing and trading service on our own database and proprietary technology, but has recorded transactions to Bitcoin blockchain when applicable. As Funderbeam introduced a wider variety of investment structures, the technology in its limitation does not support all of them.
We also studied if there were any other public blockchains that could satisfy our needs. The need for fast transactions and capacity to handle growing volumes. There is none. If anyone tells you they run full stock or any volume and speed demanding to trade on public blockchains, you should go and ask if they really know what they are talking about.
Private blockchains (we get a new name sent to us all the time) would make us dependent on a single service provider. So far, no private blockchain is mature/mainstream enough for us to feel safe to build our trading platform on it. At the end of the day, we realised that we only need the simple chain of hashes and that is what we are working on.
The price of pioneering
Lastly, we have experienced throughout the lifetime of our company that we are somewhat caught between two different types of worlds.
On the one side, you have the crypto-enthusiasts. The “future” as they say, sometimes referred to as “maximalists”, who believe in truly distributed and autonomous initiatives, like the famous DAO (even though it failed, it opened our minds to the future), Aragon project, Filecoin etc.
This world doesn’t want the technology to be controlled by a central entity, with regulatory oversight. For them, decentralisation, intermediation, smart contracts and the power of the community is the way forward. We’ve been there, but we realised it’s too early for the business like us.
On the other side, you have the traditional world, that is looking for traditional investment in either growing companies or in yield-giving business. In opposition to the crypto-enthusiasts, these investors are focused on investing in real-world assets (almost like tangible assets), and feeling safe the way investment platforms and stock exchanges are managed today. Because this is how things have been from the beginning.
Funderbeam falls between. We do engage and test new technologies and implement new business models. After all — we have disintermediated equity investing and trading quite a bit as there is no need for brokers and clearing and settlement providers. Most of this is done in house. We have also tested blockchain technology to see if we could give to our service even deeper technological kick. But, as said before — too early. So we implemented a new business model on how to fund and trade private companies globally but as of now, we do it on our own proprietary technology. Until it’s time to switch into something that will be the future.
Funderbeam is moving ahead stronger than ever before, and with dual licences in both the UK and Singapore, we are truly a global platform for investing and trading private companies.
