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VOC: The First Publicly Traded Security & The Rise of Global Markets
(Part 2 of 4: The Past, The First Tradeable Agreements & Their Ledgers)
How the Dutch East India Company Changed Finance and Trade Forever
Continued from Part One Securities Tokens Background & Differences from Cryptocurrency
Let’s get back to one key type of digital asset: securities, specifically stocks. The first publicly tradeable joint stock company was the Dutch East India Company, aka VOC in 1602.
In the early 1600s the Dutch faced heavy competition from Britain, Spain, France and Portugal. Shipping expeditions were typically financed one by one, for the equivalent of roughly $300,000 in today’s dollars. Investors teamed with ship operators one at a time. If your ship sunk or was robbed by pirates you lost your money.
This invention of shares which could trade after funding spread investment in a more logical way and enabled people to pool resources and share risk like never before.
How Did it Work?
From a financial perspective, the results were interesting. 1100+ people contributed about $300k each in today’s dollars. This spread risk in a way which had never been done before and VOC used this capital to do things no one had done before. This caused rapid growth leading VOC to dominate global commerce for over a century. VOC had armies and at times engaged in evil and imperialist acts but its economic impact is worth study.
Dutch East India Company made its fortune in trade of goods like pepper and nutmeg. For centuries pepper was a store of value and show of wealth and valuable commodity at a level of surpassing many modern currencies. As such a large company, VOC had its hand in many industries including the tulip trade which would come and go a few decades after the first stock offering.
Eventually VOC became larger (in today’s value) than several of the world’s largest companies combined. A new form of sharing risk and trading that risk / (tradeable agreements) forever changed the way capital and business worked.
The idea of spreading risk among more than one investor was revolutionary. Thousands of companies followed the model of VOC. It seems normal now, but it was an amazing innovation and remains a fundamental part of global economics. Even small startups now rely on funding methods similar to what was first created in 1602.
With a proliferation of stocks and other securities came markets — many are still in existence today.
Markets are essentially the places, people, organizations and systems used to facilitate trade of these agreements such as shares. What started as a few people and a book grew to hundreds then thousands by 1635. Thousands became multiplied as other exchanges were created globally. Today millions of organizations participate in the capital markets — however it remains siloed and bound by existing systems in many ways.
Historically markets have used whatever tech has been available. Generally when better tech comes along capacity and volume increases.
For most of their history, markets have been run by pen and paper. Inventions like the ticker tape increased efficiency of trading and inventions of clearing firms, transfer agents and 3rd party ledgers like DTCC increased efficiency of custody and settlement.
Looking at securities through the lens of a startup it seems like a simple matter to manage the ledger: you have a cap table, a list of shareholders, and you record transactions. In the real world it is much more complex than this. In modern markets you have the market demand for 24 /7, (or 9am-4pm) trading and the need to account for many very transactions using proprietary ledgers of each firm and counterparty involved. These parties do not necessarily trust each other with that data. This requires the use of trusted third parties which will be covered more in the next article.
Here are traders at the Baghdad stock exchange after the US invasion. If you are a stockbroker and have customers and stocks and your whole world is on fire — what do you do? You make trades & discover prices — even by whiteboard. Shares have value and that value wants to be unlocked and discovered. Markets don’t stop for anyone. Ever.
What distributed ledger technology can do is make things trade in a way that they couldn’t trade before. Right now it’s simply not practical for a small business to become publicly traded, it’s not practical or sensible for them to run the ledger and major publicly traded exchanges of the world don’t run the ledger either.
In today’s world it’s also difficult to transact globally — it’s trivially easy to move crypto across borders — but still very difficult to move stocks across borders.
Technology can change this. There will certainly be regulatory issues surrounding this and it’s going to be a very interesting area probably with a lot of change in turmoil unlike markets have seen in decades — not necessarily in a bad way — but in a new and innovative way. Markets have gone through major changes before — the creation of the stock markets themselves and the modern market systems and US regulations 85 years ago was a long time ago but significant changes occurred then and have occurred since then. The world will find a way and things can move much faster than they ever have before. The future is going to be exciting.
First, lets explore how the ledgers and systems work today. Part 3: How Do You Know You Own Your Stocks? You Dont. Who has the ledger?
This article and video series is educational and does not serve as an offering of securities or investment advice.