Compare this to exchange-traded products. How much time is spent evaluating if the transaction itself is robust? Arguably very little or none even. There exists a robust underlying trust in the process, which we can call “process trust".
New Data - New Opportunity
Data is also driving new possibilities given that the public disclosure of private information and private transactions is being marketed much more openly than earlier. This data that is now becoming public for the first time in private transactions makes available many new possibilities than before and will undoubtedly play a significant role in establishing trusted transaction value chains.
Take the notion of distributed technology (including blockchain) with its lack of a central trusted authority. Combine that with seamless digital user experiences, an airtight audit log, and reporting. It’s easy to understand why novel new models such as Angelist’s private syndicates gather millions or tens of millions of dollars in backing. There is a discussion to be had around deal merits (let alone signaling and herding mentality), which we can save for another time. But if you compare putting together all the paperwork from scratch, chasing signatures, personal details, doing countless in-person meetings, etc., it’s simply quite convenient when a systematic process can run through the entire chain of events.
As private transactions become more and more public, we will see a convergence of ‘private’ deals and ‘public’ deals. Process trust is one dimension that will get built out – with robust infrastructure – to exemplify process trust in private transactions. Over time, the fragmented market will gravitate toward best practices and uniformity, so all the checks in the book can be completed to a T.
In addition to standardization, the public market offers liquidity. Private transactions, by nature, often lack liquidity and lock their owners in for a long time, but secondary markets for private P2P loans, for private equity crowdfunding transactions and SME loans are being implemented to offset one of the core strains of the private market. Some regulatory environments are more favorable to secondary markets, for example, the Financial Conduct Authority (FCA) in the UK; some are more hesitant, often with existing mandates as barriers.
Process trust may indeed establish credibility to deals that have long been opaque and littered with information asymmetry. The extent to which this allows the asset class to blossom in the retail market remains to be seen, but one can argue that with a retail distribution becoming more and more mainstream, an underlying process trust must be established – otherwise, the transition will not achieve anywhere near a comparable level to efficiency as the public market.
This post originally appeared in Let's Talk Payments.
Internationally awarded digital finance entrepreneur, active in pioneering new securities models worldwide. Has worked in digital finance since 2009, recruited over 100 individuals, built up a operations on six continents and been recognized as one of the top 100 thought leaders in crowdfunding. Markus has pioneered new funding models in the US and Europe, advised policy makers worldwide - including the SEC, the European Commission and Italian regulator CONSOB - for more effective markets, and worked with visionary organizations such as the World Bank and the Kauffman Foundation to improve frameworks for digital finance. Markus has studied computer science and economics (M.Sc).