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Crypto / legacy hybrid financial products are the latest trend in the cross between blockchain and Wall Street. (Photo by Getty)Getty
Note: this post is not an investment advice and is for educational purposes only. Caveat emptor!
"Not cross the flows. It would be bad. " -Dr. Egon Spengler, Ghostbusters
Cryptographic / legacy hybrid financial instruments, particularly those that combine cryptocurrencies with legacy financial products, are the latest trend in the crossover between blockchain and Wall Street. Regulated versions of these hybrid products are rapidly entering the market, including sttecoin and ETFs, futures, swaps and deposit receipts with bitcoins. There is a lot of excitement around this trend – with good reasons, in one case – but everyone should be warned that there are also unknown and potentially large risks for "crossing flows" between the legacy and crypto settlement systems.
Misalignments are inevitable. The accidents will happen. Nobody should be surprised when they do it.
Even so, the demand for these hybrids will probably be significant.
In part 1 of this two-part series, I will illustrate the differences between legacy and crypto systems and explain why the hybrid category "encrypted around legacy" involves less operational risks than the category of "legacy enclosed around crypto" "Hybrids In part 2, I will explain what these differences in settlement system mean for owners of hybrid products.
definitions
"Crypto wrapped around the inheritance"Hybrids include tokenised stablecoins and gold bars.In this hybrid category, the owner buys a cryptoasset designed to track the price of the legacy asset while keeping the legacy resource in a separate account, in other words, legacy resources. (such as dollars, securities, commodities or real estate) guarantee the cryptoasset These hybrids are issued, traded and settled on a blockchain, but the underlying assets (eg cash, gold) that support this category of hybrids are issued, traded and regulated in the legacy financial system.
"Legacy wrapped around encryption"Hybrids include ETFs, futures, swaps, certificates of deposit and any other derivatives supported by any cryptoasset.In this hybrid category, the owner purchases a traditional financial instrument designed to track the price of the cryptoasset by holding down the actual cryptoasset in an account In other words, the criptoassets guarantee the traditional financial instrument.These hybrids are issued, exchanged and deposited in the legacy system, but the underlying sub-chapters (eg bitcoin, ether) that support this category of hybrids are issued, exchanged and deposited. on a blockchain.
An important distinction
Neither the security tokens nor & nbsp;cash settled bitcoin derivatives (eg ETFs or futures) are crypto / legacy hybrids as defined here. Why? Because they settle entirely within their own colonization system (cryptography and legacy, respectively) and do not cross flows with the other system.
I draw a fundamental distinction between security tokens and tokenized securities. A security token is native to a blockchain: it is issued, exchanged and deposited on a blockchain and is not a hybrid. A token security is a hybrid that fits into the "encrypted around the legacy" category: it is a cryptoasset supported by a share of Apple shares, for example, for which the cryptoasset is placed on a blockchain but the Apple quota settles in the system of previous regulation.
The encrypted cash-settled derivatives are deposited entirely in cash within the legacy system and never touch the underlying criptoasset. As a result, they do not introduce the risk of crossing flows between settlement systems. They certainly involve price risk, but they do not involve the risks of exogenous regulation that their "physical" brothers do.
How the Legacy and Crypto Settlement systems differ
Why are these distinctions important? Because crypto and legacy regulation systems differ at basic and fundamental levels. In my experience, few Wall Street professionals even include the spaghetti labyrinth of the legacy settlement system – most end their long career without ever needing to interact extensively with it since culture encourages deep specialization and it's hard to get out from small lanes. When problems arise there is always someone else in the "back office" who will solve it. Only when I was forced to dig deep into the settlement system, structuring pension transfers from companies to insurance companies, I had to learn it, because each transaction involved a significant and unique settlement complexity for both assets and liabilities. We had to choreograph and put into practice the procedures until the last minute, literally, because the costs of any small failure of the settlement would have been important. That experience made me realize that the criptoasset regulation system (on a blockchain) is far superior to the previous settlement system. Here because.
Cryptoassets are carrier digital tools designed to regulate peer-to-peer, on a rough basis, almost in real time and in "physical" form (that is, in the actual cryptoasset). When cryptocurrencies are exchanged, the buyer and the seller simultaneously exchange value by value ("gross").
In contrast, the legacy financial system uses a deferred settlement system involving layers of intermediaries. The keywords are late, net and intermediaries.
The delays are aimed at the legacy system, usually measured in days, and allow financial intermediaries to settle with each other on a net basis. Compensation is a practice that favors intermediaries at the expense of customers, since the compensation reduces to a minimum the liquidity and the capital intermediaries to be maintained. Netting means that buyer and seller do not simultaneously exchange value by value in each trade, rather, their intermediaries are not satisfied and simply accumulate debts and unregulated credits for a defined time, and are content to exchange only the difference at the time established. Compensation is the reason why the securities industry mixes "street name" titles into omnibus accounts rather than segregating them for each individual customer. For example, brokers only exchange the network of all purchase and sales orders of all their customers for Apple shares every day. They do not send each Apple sharing to each other. Instead they settle on a net basis, usually once a day after the markets close.
The combination of compensation, delays and intermediary layers – the practice of allowing the risk of non-contractual counterparty (1) counterpart and (2) records of inaccurate property are simply made of life in the legacy financial system. Counterparty risk is the risk that your broker will fail after taking your money, but before handing over your Apple shares, in the example above. Records of inaccurate properties enable situations such as Dole Food arise (where the Wall Street accounting systems have created 33% more valid applications for Dole Food than Dole Food's) and proxy inaccuracies are unavoidable (an important Delaware lawyer said that you can check the real winner of a competition by proxy) closer to 55-45%). The legacy regulation system, in my experience, is why the financial system is unstable and unjust for regular investors.
On the contrary, in the cryptographic system, the counterparty risk does not exist intrinsically, since it is a peer-to-peer system that simultaneously provides the asset and the payment to buyers and sellers, respectively. It is inherently a system of delivery against payment. As a settlement system, it is inherently stable and fair for all users.
There are also other important differences and are summarized here:
Author
I will preview part 2 by sharing the punch line. Here is how I would generally classify the risk of settlement by category. Again, this is not an investment advice and each tool will have unique risks! But since cryptographic systems have objectively a lower regulation risk than legacy systems, we can make the following generalization on the risk of settlement by category:
Resolution risk from minimum to maximum: & nbsp; & Nbsp; & Nbsp; & nbsp;
Lower resolution risk: & nbsp; (1) Cryptoassets (activities originally issued, traded and settled on a blockchain)
The next lowest risk: & nbsp; (2) Crypto wrapped around legacy hybrids (eg, stablecoins)
The next lowest risk: & nbsp; (3) Legacy activities (eg The status quo–activities are issued, negotiated and arranged in legacy systems)
Maximum risk: & nbsp; (4) Legacy wrapped around crypto-hybrids – most "incident-prone" subjects because of their "cross the flows." Worst of both worlds.
In part 2, I will explore the main differences in settlement systems for buyers of crypto / legacy hybrids.
& Nbsp;
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Crypto / legacy hybrid financial products are the latest trend in the cross between blockchain and Wall Street. (Photo by Getty)Getty
Note: this post is not an investment advice and is for educational purposes only. Caveat emptor!
"Do not cross the flows, it would be bad." -Dr. Egon Spengler, Ghostbusters
Cryptographic / legacy hybrid financial instruments, particularly those that combine cryptocurrencies with legacy financial products, are the latest trend in the crossover between blockchain and Wall Street. Regulated versions of these hybrid products are rapidly entering the market, including sttecoin and ETFs, futures, swaps and deposit receipts with bitcoins. There is a lot of excitement around this trend – with good reasons, in one case – but everyone should be warned that there are also unknown and potentially large risks for "crossing flows" between the legacy and crypto settlement systems.
Misalignments are inevitable. The accidents will happen. Nobody should be surprised when they do it.
Even so, the demand for these hybrids will probably be significant.
In part 1 of this two-part series, I will illustrate the differences between legacy and crypto systems and explain why the hybrid category "encrypted around legacy" involves less operational risks than the category of "legacy enclosed around crypto" "Hybrids In part 2, I will explain what these differences in settlement system mean for owners of hybrid products.
definitions
"Crypto wrapped around the inheritance"Hybrids include tokenised stablecoins and gold bars.In this hybrid category, the owner buys a cryptoasset designed to track the price of the legacy asset while keeping the legacy resource in a separate account, in other words, legacy resources. (such as dollars, securities, commodities or real estate) guarantee the cryptoasset These hybrids are issued, traded and settled on a blockchain, but the underlying assets (eg cash, gold) that support this category of hybrids are issued, traded and regulated in the legacy financial system.
"Legacy wrapped around encryption"Hybrids include ETFs, futures, swaps, certificates of deposit and any other derivatives supported by any cryptoasset.In this hybrid category, the owner purchases a traditional financial instrument designed to track the price of the cryptoasset by holding down the actual cryptoasset in an account In other words, the criptoassets guarantee the traditional financial instrument.These hybrids are issued, exchanged and deposited in the legacy system, but the underlying sub-chapters (eg bitcoin, ether) that support this category of hybrids are issued, exchanged and deposited. on a blockchain.
An important distinction
Neither the security tokens nor cash settled bitcoin derivatives (eg ETFs or futures) are crypto / legacy hybrids as defined here. Why? Because they settle entirely within their own colonization system (cryptography and legacy, respectively) and do not cross flows with the other system.
I draw a fundamental distinction between security tokens and tokenized securities. A security token is native to a blockchain: it is issued, exchanged and deposited on a blockchain and is not a hybrid. A token security is a hybrid that fits into the "encrypted around the legacy" category: it is a cryptoasset supported by a share of Apple shares, for example, for which the cryptoasset is placed on a blockchain but the Apple quota settles in the system of previous regulation.
The encrypted cash-settled derivatives are deposited entirely in cash within the legacy system and never touch the underlying criptoasset. As a result, they do not introduce the risk of crossing flows between settlement systems. They certainly involve price risk, but they do not involve the risks of exogenous regulation that their "physical" brothers do.
How the Legacy and Crypto Settlement systems differ
Why are these distinctions important? Because crypto and legacy regulation systems differ at basic and fundamental levels. In my experience, few Wall Street professionals even include the spaghetti labyrinth of the legacy settlement system – most end their long career without ever needing to interact extensively with it since culture encourages deep specialization and it's hard to get out from small lanes. When problems arise there is always someone else in the "back office" who will solve it. Only when I was forced to dig deep into the settlement system, structuring pension transfers from companies to insurance companies, I had to learn it, because each transaction involved a significant and unique settlement complexity for both assets and liabilities. We had to choreograph and put into practice the procedures until the last minute, literally, because the costs of any small failure of the settlement would have been important. That experience made me realize that the criptoasset regulation system (on a blockchain) is far superior to the previous settlement system. Here because.
Cryptoassets are carrier digital tools designed to regulate peer-to-peer, on a rough basis, almost in real time and in "physical" form (that is, in the actual cryptoasset). When cryptocurrencies are exchanged, the buyer and the seller simultaneously exchange value by value ("gross").
In contrast, the legacy financial system uses a deferred settlement system involving layers of intermediaries. The keywords are late, net and intermediaries.
The delays are aimed at the legacy system, usually measured in days, and allow financial intermediaries to settle with each other on a net basis. Compensation is a practice that favors intermediaries at the expense of customers, since the compensation reduces to a minimum the liquidity and the capital intermediaries to be maintained. Netting means that buyer and seller do not simultaneously exchange value by value in each trade, rather, their intermediaries are not satisfied and simply accumulate debts and unregulated credits for a defined time, and are content to exchange only the difference at the time established. Compensation is the reason why the securities industry mixes "street name" titles into omnibus accounts rather than segregating them for each individual customer. For example, brokers only exchange the network of all purchase and sales orders of all their customers for Apple shares every day. They do not send each Apple sharing to each other. Instead they settle on a net basis, usually once a day after the markets close.
The combination of compensation, delays and intermediary layers – the practice of allowing the risk of non-contractual counterparty (1) counterpart and (2) records of inaccurate property are simply made of life in the legacy financial system. Counterparty risk is the risk that your broker will fail after taking your money, but before handing over your Apple shares, in the example above. Records of inaccurate properties enable situations such as Dole Food arise (where the Wall Street accounting systems have created 33% more valid applications for Dole Food than Dole Food's) and proxy inaccuracies are unavoidable (an important Delaware lawyer said that you can check the real winner of a competition by proxy) closer to 55-45%). The legacy regulation system, in my experience, is why the financial system is unstable and unjust for regular investors.
On the contrary, in the cryptographic system, the counterparty risk does not exist intrinsically, since it is a peer-to-peer system that simultaneously provides the asset and the payment to buyers and sellers, respectively. It is inherently a system of delivery against payment. As a settlement system, it is inherently stable and fair for all users.
There are also other important differences and are summarized here:
I will preview part 2 by sharing the punch line. Here is how I would generally classify the risk of settlement by category. Again, this is not an investment advice and each tool will have unique risks! But since cryptographic systems have objectively a lower regulation risk than legacy systems, we can make the following generalization on the risk of settlement by category:
Risk of resolution from minimum to maximum:
Lower resolution risk: (1) Cryptoassets (activities originally issued, traded and settled on a blockchain)
The next lowest risk: (2) Crypto wrapped around legacy hybrids (eg, stablecoins)
Next lowest risk: (3) legacy resources (eg status quo–assets are issued, traded and settled in legacy systems)
Higher risk: (4) Legacy wrapped around crypto-hybrids, most "accident-prone" operationally because they "cross the flows." Worst of both worlds.
In part 2, I will explore the main differences in settlement systems for buyers of crypto / legacy hybrids.
