A trillion dollar cryptocurrency exchange?
A brief history of exchanges, why we need them and where they’re going.
“For thousands of years, philosophers, thinkers and prophets have besmirched money and called it the root of all evil. Be that as it may, money is also the apogee of human tolerance. Money is more open-minded than language, state laws, cultural codes, religious beliefs and social habits. Money is the only trust system created by humans that can bridge almost any cultural gap, and that does not discriminate on the basis of religion, gender, race age or sexual orientation.
Thanks to money, even people who don’t know each other and don’t trust each other can nevertheless cooperate effectively”
-Yuval Noah Harari. Sapiens, A Brief History of Humankind
A cryptocurrency exchange is designed to help human beings who don’t know or trust each other cooperate effectively.
They continue a long tradition of developing places for trade and price discovery that has been 1000 years in the making.
From the trading of agricultural debt in 1100 BC France to the bourses of Bruges and Antwerp in the 1400s and 1500s, exchanges have been a fundamental part of our economic life.
Over the last 500 years, small groups of merchants, brokers and financiers had gathered to make agreements to trade various assets.
Through war, changes in economic conditions and governments, these exchanges have grown to represent trillions of dollars in listings. Much of this growth has been in the last 30 years.
Exchanges are a critical part of the capital formation process while providing secondary markets for transfer and liquidity.
They provide transparent price discovery for all trade in every asset across the world. Exchanges also offer a venue for participants to assume, hedge or transfer risks; and to make future commitments with agreed upon contract standards.
Cryptocurrency exchanges like Bitvo represent the development of the marketplaces of the future using new technology for frontier financial innovations.
In essence, cryptocurrency exchanges are the next iteration of our financial and economic vision.
The changes today are rapid and, as we will see, what took a hundred or hundreds of years previously can be accomplished in mere decades.
By looking at the past, we get some insights into the path to the trillion dollar cryptocurrency exchange of the future.
The joint-stock model
Looking back at the history of exchanges, we see a development born of necessity. As trade in goods across the expanding world increased, so too did the need for a variety of trading innovations.
The first joint-stock company was the East India Company that created the limited liability partnership in 1600. The model was designed to share the risks of sea born voyages with high failure rates.
The East India Company is considered to be the first issued stock.
The first “stock” exchanges appear to be found in Belgium, and it was the influence of the exchanges in Bruges and Antwerp that lead to one important legacy exchange.
In the 1560s, Thomas Gresham, a wealthy financier and merchant, began what officially became the Royal Exchange in 1571, by decree of the Queen.
The original exchange was a place for the trade of various goods, and it had a surrounding area for other kinds of commerce.
This exchanges’ storied history included being burned down and rebuilt in both 1666 and again in the 1838.
However what is significant about this exchange is that it is considered the birthplace of both the London Metals Exchange and the London Stock Exchange.
Coffee and trading
The Royal Exchange was rebuilt in 1669 and over the next several decades trading expanded. Stock trading in London is said to have grown to around 100 companies by 1690.
Now, the other trading venue in London was the coffee houses, most notably Jonathon’s Coffee House founded in 1680. Here and in Garraway’s Coffee House, stock and commodities trading also took place. But this grew in 1698 when stockbrokers were expelled from the Royal Exchange for bad behaviour (and the implication of some members in a plot against the King in 1696) and returned to the coffee houses.
At the coffee houses, traders could get posted prices on stocks and various commodities. They could also get news, rumours and touts coming directly from the docks close by. Financial lists of prices and news were posted starting in 1698.
The shop burned down in 1748 and was rebuilt, and in 1801 a group of 150 brokers got together and founded the London Stock Exchange.
There was however one problem.
No stock traded in 1801 or any year from 1720 until 1825, because it was illegal.
The Legacy of a Bubble
The South Sea Bubble had been such a financial debacle that in 1720, the British parliament enacted the Bubble Act banning joint-stock trading without a Royal Charter. The ban was lifted in 1825.
So there was no stock trading on the LSE for the first couple of decades. However, as a result of difficult economic conditions, parliament allowed joint-stock trading to begin again in 1826 with the specific stipulation that all joint-stock companies would have unlimited liability.
After the Banking Acts of 1826, the British government enacted several reforms from 1833 to 1860, allowing for limited liability structures and several other financial reforms. These were designed for the benefit of industries like banking and insurance.
The exchange grew with the economy and rapid industrialization. The LSE provided crucial capital formation and the growth of the modern capital model used across the world today.
The LSE became part of the London Stock Exchange Group with the Italian Boursa in 2007. The Group today provides a wide range of trading, data, settlement and clearing services.
As of 2018, this stock exchange that started with 150 stockbrokers and no stock trading, has expanded to a market cap for all listed issues of $3.76 trillion.
Copper and tin for the empire
On the commodities side, the second child of the Royal Exchange, the London Metals Exchange, started in 1877. It was founded to meet growing metals demands of industrializing England and the growing trade across the British Empire.
Initially, trade was focused on copper and tin, but over its history has evolved to trade a wide range of metals.
The LME was acquired by Hong Kong Clearing and Exchanges Limited in 2012.
In 2018 the LME traded 185 million lots valued at $15.7 trillion. According to the LME, trading on the exchange exceeds world metal production by a factor of 40.
London was also important for Canada before the development of our capital markets. All capital formation for Upper and Lower Canada was conducted in London during Canada’s early pre- confederation years. But that was about to change.
Montreal was first, but the Big Smoke won
Although the Montreal Stock Exchange was officially the first Canadian exchange, it was Toronto that would eventually dominate.
The Toronto Stock Exchange was unofficially started by a small group of businessmen in 1852. It became official in 1861 with a framework for trading and 18 listed financial and real estate securities. An Act of the Ontario Legislature recognized the exchange in 1878.
The TSE merged with the Standard Stock and Mining Exchange (an unregulated junior exchange) in 1934 during the depression, but continued to grow with a growing nation.
In 2001, the TSE acquired the Venture Exchange and combined with the Montreal Exchange in 2008 to become the TMX Group. TMX was subsequently acquired by Maple Group in 2012.
The TMX Group today provides trading across equities, fixed income, derivatives and energy markets. From a modest 18 stocks in 1861, the TMX Group today ranks as a top 10 exchange internationally with a total listed stock market cap of over $2 trillion.
There were of course, some earlier exchanges in North America started by our neighbours to the south.
The Buttonwood tree
The first stock exchange in the United States was the Philadelphia Exchange in 1790. But it was the gathering of 24 brokers and merchants at the Buttonwood tree in New York that would provide the foundation for the New York Stock Exchange in 1792.
They had a mere 5 stocks at the time.
The New York Stock and Exchange Board was formed in 1817, which became officially known as the New York Stock Exchange in 1863.
The NYSE was officially registered with the newly created Securities and Exchange Commission (SEC) in 1934.
It became a publicly traded company in 2006 as the NYSE Group and merged with Euronext in 2007. The organization was taken over by the Intercontinental Exchange Group in 2013, and the Euronext portion was spun off shortly after.
Today the NYSE has 2,800 listed companies and a market cap for all listed shares of over $22 trillion.
The stock exchanges of the past grew slowly at first and then advanced rapidly with the economy. However, this long slow incubation period of exchange development started to change with advances in technology.
The exchange for innovators
The first all-electronic exchange, the NASDAQ, was started by the National Association of Securities Dealers in 1971. Benefiting from the development of the silicon chip, vast government support for innovation and the formalization of the LLC model for venture capital, the NASDAQ grew rapidly.
What had previously taken hundreds of years to achieve was accomplished in less than half a century. One could argue in the case of the NASDAQ it took only 30 years.
The NASDAQ merged with the OMX in Sweden to form the NASDAQ OMX group in 2007.
Today the NASDAQ covers a wide range of financial products including equities, futures, options and fixed income. The NASDAQ has 3,900 listed issues and a market cap for all listed shares of over $13 trillion.
From grain to butter, eggs and spin offs
On the commodities side in North America, it all starts in Chicago with the Chicago Board of Trade in 1848. By 1858, 83 merchants were trading grain on the CBOT.
The legislature of Illinois granted the exchange a charter in 1859 allowing the CBOT to establish trading and contract rules. Contract standards specified quality control, grading and inspection standards for the grain business. These standardized grain trading contracts were implemented starting in 1865.
As technology increased and financial products expanded, they added financial contracts in 1975, futures contracts in 1982, and options on futures in 1997.
But the CBOT also developed a couple of important spinoff exchanges.
The first spin off was the Chicago Butter and Egg Board in 1898 which became the Chicago Mercantile Exchange (CME) in 1919. The CME became a powerhouse in futures trading including currency futures starting in 1972 as the US left the gold standard.
The second CBOT spinoff was the Chicago Board Options Exchange (CBOE) in 1973. It was created using a licence provided by the SEC in the 1930s. Previous options trading had been haphazard with no contract standards, formal pricing mechanisms or settlement.
The CBOE standardized contracts, strike prices and expirations starting with call options on 16 stocks when it opened. Put options were added on some listings in 1977. And in 1990 the CME added long term LEAP put and call options.
The CBOE traded 2.05 billion options contracts in 2018.
The CBOT merged with the CME in 2007 to form the CME Group and today they provide a trading venue for options and futures across a range of products. In 2018, 4.844 billion contracts traded across rates, equities, currencies, commodities and alternative investment products like Bitcoin.
From a buck to 11 exchanges in 2 decades
The advancements in telephony and technology created an opening for an ambitious all-electronic futures exchange called the Intercontinental Exchange or ICE. It started with founder Jeff Sprecher buying a startup that provided electricity pricing for $1 and assumption of debt in 1997. The idea was to take advantage of the deregulation of the power industry provided by the Energy Policy Act of 1992.
The all-electronic commodities trading platform launched in 2000.
They bought the International Petroleum Exchange in London in 2001. They listed in 2005 and then bought the New York Board of Trade in 2006. They also developed a series of clearing centers across the globe for their platform that serves 70 countries.
Then ICE bought NYSE Euronext in 2012 and spun off Euronext in 2014.
Today ICE operates 11 exchanges and 6 clearinghouses across the globe.
In less than 20 years, a small group of entrepreneurs transformed a defunct startup into a global exchange and clearing business and a fortune 500 company.
What is the half-life of exchange innovation?
The cryptocurrency movement stands upon more than 500 years of innovation and experience.
The modern cryptocurrency exchange is borrowing developments from current best practices and utilizing frontier technology to advance financial dealings.
Cryptocurrency exchanges are also bridging the gap between the legacy financial system and the development of the frontier financial system.
The first exchanges took hundreds of years to fully develop into trillion dollar powerhouses. The exchanges that leveraged technology and advancements in communications networks like the NASDAQ and ICE, cut this period to less than three decades.
With distributed ledgers, advanced cryptography, decentralized networks and many other current technology trends, how long will it be until we see cryptocurrency exchanges with listed values of a trillion or more?
Bitvo is a cryptocurrency exchange founded by experienced financial entrepreneurs. Launched in 2018, Bitvo offers a state of the art trading facility, proprietary, air-gapped cold storage security, the Bitvo Cash Card and the Bitvo Same Day Guarantee. To find out more go to Bitvo.com