By Navroop Sahdev

Centre for Blockchain Technologies, University College London, UK
Centre d’Économie de l’Université Paris-Nord, France
June 2017

Table of Contents
1. Introduction
2. The Advent of Crowdfunding
3. Market design and Liquidity Considerations for CFE Trading on the
3.1. Liquidity and Price Discovery
3.2. A game of Information
3.3. Asset Servicing and Voting
3.4. Market Making versus Tokenization
3.5. The impact of Transparent Holdings
4. Concluding remarks
5. Endnotes
6. References



Blockchain, the technology behind Bitcoin, promises to be nothing less than Internet 2.0. The
financial services industry, in particular, is preparing for the disruption blockchain/distributed
ledger technology promises to cause. In the current business environment, the majority of
startups and small businesses have to look for alternative sources of funding given that ‘going
public’ is increasingly expensive. The crowdfunding space has seen tremendous growth as an
alternative way to raise capital by businesses. However, these crowdfunded shares cannot be
traded for 7 – 10 years on average on any given platform in the U.S. currently.
To build a trading platform on the blockchain which is completely P2P, immutable, fully
transparent and low-cost presents some key design issues. In particular, the issue of liquidity – and
price discovery – on the blockchain continues to be a puzzle. At the same time, the proposition of
removing middlemen from equities trading is a very attractive one, streamlining the process of
capital formation with higher market efficiency.

The current paper addresses the following key questions: How can a DLT trading platform ensure
adequate liquidity? What would be the process of price discovery? While some recent studies hail
blockchain technology as a boom for market liquidity, it is not immediately clear what the impact
of P2P trading would be on the prices of various stocks. There are no ‘solutions’ just yet. At the
same time, the lack of regulation around trading on the blockchain creates an environment of
uncertainty for all players.
In particular, the implementation of such a platform can revolutionize capital formation and build
robust markets in both developing and developed countries where crowdfunding has proven to
be a successful model. While my research is targeted at solving a very specific pain point for both
researchers and companies working on distributed ledger technology, ultimately, it would be a
significant step forward towards onboarding underserved communities across the world who
don’t have access to financial services.

List of Abbreviations

1. DLT: Distributed Ledger Technology
2. CFE: Crowdfunded Equity
3. EC: Equity Crowdfunding
4. CFP: Crowdfunding Platform
5. ECP: Equity Crowdfunding Platform
6. CETP: Crowdfunded Equity Trading Platform
7. MVP: Minimum Viable Product
8. POC: Proof of Concept
9. P2P: Peer to Peer


These days, ‘blockchain’ inspires a degree of reverence in the fintech industry. Set to become the
defining technology of the current day – Internet 2.0. – The industry is aggressively testing POCs
and figuring out which processes should be moved to a blockchain architecture in the short to the
medium term. Of course, revamping the monstrous infrastructure of the financial services industry
is no easy task and unlikely to be undertaken overnight. The way forward is to test specific use cases
and find ways to integrate these as well as integrate the new blockchain infrastructure with the
old centralized infrastructure. The shift is expected to be gradual, as is the regulatory catch-up.
And yet, the activity that blockchain – along with other vertical technologies – has inspired is
unprecedented along with the regulatory participation in co-creating this brave new world.
The story of the blockchain can have many starting points. It can be a technology-driven one,
where a foundational technology can potentially provide a more secure and robust digital
infrastructure and with the current days being the early days of the technology. Alternatively, it
can a story of demand-driven factors – where small businesses need to find ways of raising capital
along with new opportunities of financial intermediation. Or we can pick an even more interesting
story – that of a crisis-driven market – desperately in need of a breakthrough technology, that can
lower costs and provide a more robust digital infrastructure. Indeed, it’s probably no coincidence
that the Bitcoin blockchain came into existence right after the 2007-08 banking crisis. Or it can be
the familiar story, of an archaic regulatory regime, that piles up-regulation designed for securities
trading from a century ago; this is the story of fragmented markets which are an outcome of such
a regulatory structure. With the advent of any new financial activity – crowdfunding, for example
– new regulation is introduced, which only seems to add to the existing regulatory burden.
Whatever the chosen entry point, we are here now.