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The race to fix Wall Street: incumbents vs. cryptocurrencies Photo credit: Shutterstock
This is the third in a three-part series that explores the building rivalry between cryptocurrencies and Wall Street.The first two parts are here and here and a provisional post on the ICE news is here .
A ten-ton gorilla has just entered the room and has sent everyone to remix: ICE (NYSE: ICE), parent company of the New York Stock Exchange, is entering the bitcoin / criptovaluta business, both institutionally and for retail payments, intercultural industry and the incumbents of Wall Street the same way. So what? And what does this imply on Wall Street corporate blockchain projects now that a giant infrastructure player has adopted cryptocurrencies for trading, clearing and settlement of transactions?
In [19659011] Part 2 of this series I had predicted that Wall Street would try to co-opt the cryptocurrencies in the only possible way, that is to finance them by creating layers of off-debt claims based on debt, and two days after that happened. [19659010]
The killer app for blockchain on Wall Street was to always migrate to blockchain natively digital resources and away from indirectly owned assets (currently, the DTC owns almost all titles in omnibus accounts and what is in our accounts intermediaries are IOUs due to a chain of indebted financial institutions, not real stocks and bonds). Furthermore, the Wall Street registry systems are not synchronized. This is how situations like Dole Food happen where the Wall Street registers created 33% more shares than they actually existed. There are no excuses for this, ever. The solution is to eliminate the old structure and use natively digital assets that are issued, exchanged and stored on a blockchain.
ICE broke the seal. The natively digital blockchain assets are coming to Wall Street. This is a big problem.
ICE's move renders many of Wall Street's corporate blockchain projects obsolete because most (though not all) of these projects are trying to make financial instruments concrete already issued. The ICE has bypassed the tokenization and went directly to the digital-native. A natively digital blockchain resource is emitted at the time of its genesis on a blockchain and, consequently, it would never need to be tokenized. In addition, most corporate blockchains use unsafe base levels ("blockchain-inspired systems"). The ICE is now embracing the real thing: a secure base layer, a real blockchain. You can not create protected applications on an unsafe base level, but you can create secure (or unsafe) applications on a secure foundation level. The ICE has chosen just embracing the real blockchain.
But, oh my God, ICE's move is a double-edged sword.
We are going to see for the first time "mass confidential bitcoin" – other statements on bitcoin paper (created outside the chain) that there are real bitcoins in-chain and these statements on paper will compensate in part the scarcity natural bitcoin, thereby suppressing the price of bitcoin. In fact, this could be the reason why the price of bitcoin fell after the announcement of ICE Friday
In addition to suppressing the price of bitcoins by increasing the supply through the bitcoin substitutes out of the chain , there is another risk for reserved confidential bitcoin.
substantial credit risk – and the transmission of credit risk to all customers exposed to bitcoin confidentially, as well as to existing customers whose guarantee is commistled in the ICE clearing house.
Why? It is essential to understand the implications of the credit risk of the counterparty of cryptocurrencies out of the chain, reserved fractionally, both for the issuers of these instruments and for the investors exposed to them. Again, bitcoins with fractional reserve are bitcoin credits created off-chain that are not 100% digitally assigned with real chain bitcoins. As explained in detail in Part 2 bitcoin is an equity-based asset that Wall Street can not control directly: bitcoin has no lenders of last resort, hence the severity of losses for cryptocurrency reserved cryptocurrencies ( or alternatives to cryptocurrency) being much higher than normal in run-on-the-bank stress scenarios. Chain bitcoin holders would benefit from a short compression in such scenarios, but anyone exposed to reserved and fractional off-chain bitcoins would incur a serious loss.
Still, the announcement of ICE is a double-edged sword. There's a lot that's fine, and a lot more.
So, what are the next? Here are some thoughts:
- Institutional investors "real funds" – pension funds, mutual funds, foundations and insurance companies – in some cases, will quickly begin to revise the investment guidelines to allow asset managers to buy cryptocurrencies, guided through trial by their investment advisers who are coming to the speed of light,
- Corporate issuers will target the capital markets of cryptocurrency significantly, as a means to raise cheap capital (without preferences and without alliances , as discussed in Part 1 ), and this will probably happen first in the bond markets
- The ICE will likely become the dominant place of listing and trading of these corporate currencies (also called security tokens or utility token). First of all, the migration will take place in the bond markets, and this is perfectly linked to the leadership of ICE in the "electronifying" bond markets. I expect that the release of a digitally digital blockchain will take place as soon as the end of the year. Over time, corporate currencies could become the most profitable business of ICE as corporate bonds migrate to emission in the form of a digital blockchain, which is favorable to the issuer and favorable to investors (as discussed in Part 1 ). ICE has a huge advantage in the first move
- Investment banks are already scrambling to hire cryptocurrency teams. Ironically, almost all investment banks have pushed their cryptocurrency experts out and are all behind the curve (except Goldman Sachs ). Their competitors on the capital market – companies specialized in consulting, structuring and encryption research – will increase relatively in capital markets, as investment banks are not well positioned to structure and build technology for coin offerings
- The shortage of first-order developers with the skills of Bitcoin and Ethereum will become even more acute as the institutions will rush to hire them;
- Risk officers will likely reopen counterparty and cyber security risk reviews of ICE Compensating the United States which is guaranteeing all future operations on physically resolved bitcoins, concerned that ICE Clearing US can become the biggest "honeypot" for cryptocurrency hackers. ICE describes this entity as its "central counterparty for all future forex trades approved by ICE". In other words, ICE is not creating a separate clearinghouse for cryptocurrencies and is instead mixing it with other asset types in ICE Clearing US, which is one of the ICE small existing clearing houses (see Bakkt here )
- Investment trustees and their advisors will quickly become experts in custody risk, not only in the risk of custody of cryptocurrency, but in all custody risks. The patronates are pleased with the risk of reliance for years, but the custody of cryptocurrency is a different animal and they will learn a lot by digging into it – and they will begin to apply that knowledge also to the titles (that is, what actually happens to the titles mixed in the omnibus accounts, what is the real economy of equity lending, and how many times the collateral is actually reimposed by central counterparties). Customers will end up tightening the terms of the custody agreement accordingly, and this is a very good thing.
- Customers of cryptocurrency custodians will clarify in advance how the custodian will manage cryptocurrency forks, launches and the like. These are similar to coin dividends and vaguely analogous to stock splits or stock dividends, except they may come out of nowhere, so if a pension fund is storing coins in a custodian's omnibus account, its auditors may not be able to to trace many new coins to which the fund was entitled. This is one of the many reasons why omnibus accounts make little sense for the institutional assignment of cryptocurrencies;
- Along these lines, investment trustees and their advisers should ask potential cryptocurrency custodians for multi-sig, HD portfolios, time locks, skilled custody and cold storage protections that I suspect institutional investors may not even know how to ask. , but that all trustees should explore as best practice in the crypto housing.
Here are some thoughts on the impacts of regulation.
- The biggest loser of ICE's announcement is the state of Delaware, which is the dominant state for corporate records, along with its registered agents and corporate law firms. Because? As the announcement of the ICE clarifies that Wall Street is moving towards natively digital activities as the preferred tool for raising capital. Delaware had a big advantage and squandered it – the state was moving towards recording the natively digital resources under its previous governor, Jack Markell, from 2016 until the end of 2017, but, under the pressure of incumbents, Delaware slowed down the Delaware Blockchain Initiative after the change of administration, and its Secretary of State is not yet integrated with some blockchain about two and a half years later. Like investment banks, the state of Delaware is behind. The market of ICO shows that companies can increase capital by institutional size by issuing asset-backed tokens regardless of where the company is registered, which makes the benefits typically of disputable Delaware. Companies can now register wherever it is cheaper to do so and issue activity-guaranteed tokens from any home;
- For the SEC, ICE will probably become the first "qualified custodian" of cryptocurrency assets. According to the custody rule of the SEC in general, investment advisors who take responsibility for the client's assets must separate them using an independent "qualified custodian". As with some other SEC rules, blockchain technology has moved the posts because it is so different from traditional technology. For example, natively digital assets never leave a blockchain – their property simply changes hands – so there is no need to safeguard assets by separating them (and in fact they can not be separated, as only their private keys can be segregated). Regulators, auditors and portfolio managers can easily monitor resources on a blockchain without exposing the owners' private keys. But requiring a third party to hold the private keys of the owners introduces the risk of cybersecurity where otherwise it would not exist. Cryptocurrencies are assets to the digital bearer and those who control private keys own the resource. Because of this, it is critical to update US securities laws to broaden the definition of "qualified custodian" to include a blockchain itself.
- Failing this, the SEC and the CFTC should pay attention to the increased risks by allowing clearinghouses, custodians and warehouses to hold cryptocurrencies in omnibus accounts. They instantly become "honeypots" for hackers. The cryptocurrencies are bearer instruments and involve much greater cyber security risks than other types of assets held in omnibus accounts, so there is a greater reason to request the segregation of customers for protect the solvency regulation of the institution.
- NOTICE: Previously, I covered the potential for serious loss for anyone exposed to bitcoins out of the reserve, fractionally reserved during a "run-on-the-bank" scenario, but there is an even greater risk for the CFTC and SEC to be considered. Anyone who is exposed to fractional reserved bitcoins – again, these are bitcoin off-chain substitutes that are not 100% digitally covered by real bitcoins on a chain – are at greater risk for a chain fork. In this scenario, any party that re-engages, stripped bare, or has any other type of liability not covered (for example in margin loans or ETFs) is vulnerable to bankruptcy. Because? Because a company of this type should still take responsibility but have little patrimonial value, since the value of the assets would migrate to the forked currency and no off-chain substitute would receive one of the bifurcated coins. Holders of long-term securities of Bitcoin ("HODLer") already have great incentives to keep the bitcoin "difficult to borrow". But, since the price of bitcoin is increasingly suppressed by the creation of more and more bitcoins out of the chain and reserved to reserve, the network the participants in the node have an ever greater incentive to forge the chain and force a short compression – permanent – that it could cause the exposed institutions to fail.
Conclusion
Just as bitcoins have changed the conversation about money – the phrase "fiat money" is now mainstream: the entrance of ICE into criptovalute changes the conversation on how Wall Street really work. Shedding light on the reality that Wall Street earns a lot of money by creating paper credits on assets in amounts that exceed the underlying assets (e.g.
Dole Food Case
Yes, it would be great for mom and lover. Pop investors. So they would use natively digital blockchain goods instead of the indirect property mess we have now. Both would have helped to solve Wall Street, making it stable and loyal to everyone, finally!
(Disclosure-I & # 39; m is a shareholder of Symbiont, which was the state of Delaware's original partner for the registration of natively digital resources, and I was president and president from 2016 to 2017. I also own cryptocurrencies and I worked on Wall Street from 1994-2016, dealing recently with Morgan Stanley's pension solutions.
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The race to fix Wall Street: incumbents vs. cryptocurrencies Photo credit: Shutterstock
This is the third in a three-part series that explores the rivalry between cryptocurrencies and Wall Street.The first two parts are here and here and a provisional post on the ICE news is here .
A ten-ton gorilla has just entered the room and has sent everyone to hatch ICE (NYSE: ICE), parent of New York Stock Exchange, enters the bitcoin / criptovalute bot-business h institutionally and for retail payments. The ICE move throws a curved ball to the encrypted industry and to the incumbents on Wall Street. And now? And what does this imply on Wall Street blockchain projects, now that a giant infrastructure player has embraced cryptocurrencies for trading, clearing and settlement of transactions?
In Part 2 of this series I predicted that Wall Street would try to co-opt the cryptocurrencies in the only possible way, that is to finance them by creating layers of off-demand claims based on debt, and two days later this happened.
The killer app for blockchain on Wall Street was to always migrate to blockchain natively digital resources and away from indirectly owned assets (currently, the DTC owns almost all titles in omnibus accounts and what is in our accounts of intermediation are the IOUs due to us by a chain of leveraged financial institutions, not real stocks and bonds). Furthermore, the Wall Street registry systems are not synchronized. This is how situations like Dole Food happen in which the Wall Street registers created 33% more shares than they actually existed. There are no excuses for this, ever. The solution is to eliminate the old structure and use natively digital assets that are issued, exchanged and stored on a blockchain.
ICE broke the seal. The natively digital blockchain assets are coming to Wall Street. This is a big problem.
ICE's move makes many of Wall Street's corporate blockchain projects obsolete because most (though not all) of these projects are trying to make concrete the financial instruments already issued. The ICE has bypassed the tokenization and went directly to the digital-native. A natively digital blockchain resource is emitted at the time of its genesis on a blockchain and, consequently, it would never need to be tokenized. In addition, most corporate blockchains use unsafe base levels ("blockchain-inspired systems"). The ICE is now embracing the real thing: a secure base layer, a real blockchain. You can not create protected applications on an unsafe base level, but you can create secure (or unsafe) applications on a secure foundation level. The ICE has chosen just embracing the real blockchain.
But, oh my God, ICE's move is a double-edged sword.
We are going to see for the first time "reserved confidential bitcoin" en masse – further statements on bitcoin paper (created outside the chain) that there are real bitcoins in-chain and these statements on paper will compensate in part the scarcity natural bitcoin, thereby suppressing the price of bitcoin. In fact, this could be the reason why the price of bitcoin fell after the announcement of ICE Friday
In addition to suppressing the price of bitcoins by increasing the supply through the bitcoin substitutes out of the chain , there is another risk for reserved confidential bitcoin.
substantial credit risk and credit risk passing to all customers exposed to fractionally classified bitcoins, as well as to existing customers whose security is confused in the ICE clearing house.
Why? It is essential to understand the implications of the credit risk of the counterparty of cryptocurrencies out of the chain, reserved fractionally, both for the issuers of these instruments and for the investors exposed to them. Again, bitcoins with fractional reserve are bitcoin credits created off-chain that are not 100% digitally assigned with real chain bitcoins. As explained in detail in Part 2 bitcoin is an asset based on equity that Wall Street can not control directly: bitcoin has no lenders of last resort, so the severity of losses for cryptocurrencies reserved fractionated (ie cryptocurrency substitutes) be much higher than normal in run-on-the-bank stress scenarios. Chain bitcoin holders would benefit from a short compression in such scenarios, but anyone exposed to reserved and fractional off-chain bitcoins would incur a serious loss.
Still, the announcement of ICE is a double-edged sword. There's a lot that's fine, and a lot more.
So, what are the next? Here are some thoughts:
- Institutional investors "real funds" – pension funds, mutual funds, foundations and insurance companies – will start, in some cases, to quickly revise the investment guidelines to allow asset managers to buy cryptocurrencies , driven through trial by their investment advisers who are coming at the speed of light,
- Corporate issuers will target the capital markets of cryptocurrency significantly, as a means to raise cheap capital (without preference and without alliances, as discussed in Part 1 ), and this will probably happen sooner in the bond markets
- The ICE will likely become the dominant place of listing and trading of these corporate currencies (also called security tokens or utility tokens). First of all, the migration will take place in the bond markets, and this is perfectly linked to the leadership of ICE in the "electronifying" bond markets. I expect that the release of a digitally digital blockchain will take place as soon as the end of the year. Over time, corporate currencies could become the most profitable business of ICE as corporate bonds migrate to emission in the form of a digitally digital blockchain, which is favorable to issuers and favorable to investors (as discussed in Part 1 ). ICE has a huge advantage in the first move
- Investment banks are already scrambling to hire cryptocurrency teams. Ironically, almost all investment banks have expelled their cryptocurrency experts and are all behind the curve (except Goldman Sachs ). Their competing capital markets – companies specialized in consulting, structuring and encryption research – will increase relatively in capital markets, as investment banks are not well positioned to structure and build technology for money offerings
- The shortage of first-order developers with the skills of Bitcoin and Ethereum will become even more acute when institutions rush to hire them;
- Risk officers have probably reopened the counterparty and cyber security risk reviews of ICE Compensating the United States which is guaranteeing all physically resolved bitcoin futures, worried that ICE Clearing US can become the biggest "honeypot" for cryptocurrency hackers. ICE describes this entity as its "central counterparty for all future forex trades approved by ICE". In other words, ICE is not creating a separate clearing house for cryptocurrencies and is instead mixing it with other types of assets in ICE Clearing US, which is one of the ICE the smallest existing clearing houses (see Bakkt's description here)
- Investment trustees and their advisors will quickly become experts in custody risk, not only in the risk of custody of cryptocurrency, but in all custody risks. The patronates are pleased with the risk of reliance for years, but the custody of cryptocurrency is a different animal and they will learn a lot by digging into it – and they will begin to apply that knowledge also to the titles (that is, what actually happens to the titles mixed in the omnibus accounts, what is the real economy of equity lending, and how many times the collateral is actually reimposed by central counterparties). Customers will end up tightening the terms of the custody agreement accordingly, and this is a very good thing.
- Customers of cryptocurrency custodians will clarify in advance how the custodian will manage cryptocurrency forks, launches and the like. These are similar to coin dividends and vaguely analogous to stock splits or stock dividends, except they may come out of nowhere, so if a pension fund is storing coins in a custodian's omnibus account, its auditors may not be able to to trace many new coins to which the fund was entitled. This is one of the many reasons why omnibus accounts make little sense for the institutional assignment of cryptocurrencies;
- Along these lines, investment trustees and their advisers should ask potential cryptocurrency custodians for multi-sig, HD portfolios, time locks, skilled custody and cold storage protections that I suspect institutional investors may not even know how to ask. , but that all trustees should explore as best practice in the crypto housing.
Here are some thoughts on the impacts of regulation.
- The biggest loser of ICE's announcement is the state of Delaware, which is the dominant state for corporate records, along with its registered agents and corporate law firms. Because? As the announcement of the ICE clarifies that Wall Street is moving towards natively digital activities as the preferred tool for raising capital. Delaware had a big advantage and squandered it – the state was moving towards the registration of natively digital resources under its former governor, Jack Markell, from 2016 until the end of 2017 – but, below the pressure of incumbents, Delaware slowed the Delaware Blockchain Initiative after the change of administration, and its Secretary of State is not yet integrated with some blockchain about two and a half years later. Like investment banks, the state of Delaware is behind. The market of ICO shows that companies can increase capital by institutional size by issuing asset-backed tokens regardless of where the company is registered, which makes the benefits typically of disputable Delaware. Companies can now register wherever it is cheaper to do so and issue activity-guaranteed tokens from any home;
- For the SEC, ICE will probably become the first "qualified custodian" of cryptocurrency assets. According to the custody rule of the SEC in general, investment advisors who take responsibility for the client's assets must separate them using an independent "qualified custodian". As with other SEC rules, blockchain technology has moved the posts because it is so different from traditional technology. For example, natively digital assets never leave a blockchain – their property simply changes hands – so there is no need to safeguard assets by separating them (and in fact they can not be separated, as only their private keys can be segregated). Regulators, auditors and portfolio managers can easily monitor resources on a blockchain without exposing the owners' private keys. But requiring a third party to hold the private keys of the owners introduces the risk of cybersecurity where otherwise it would not exist. Cryptocurrencies are assets to the digital bearer and those who control private keys own the resource. Because of this, it is critical to update US securities laws to broaden the definition of "qualified custodian" to include a blockchain itself.
- Failing this, the SEC and the CFTC should pay attention to the increased risks by allowing clearinghouses, custodians and warehouses to hold cryptocurrencies in omnibus accounts. They instantly become "honeypots" for hackers. Cryptocurrencies are bearer instruments and involve much greater cybersecurity risks than other types of assets held in omnibus accounts, so there is a greater reason to require customer segregation to protect creditworthiness of the regulated entity.
- AVVISO: In precedenza, ho coperto il potenziale di grave perdita per chiunque fosse esposto a bitcoin fuori dalla riserva, frazionalmente riservati durante uno scenario "run-on-the-bank", ma c'è un rischio ancora maggiore per CFTC e SEC di prendere in considerazione. Chiunque sia esposto a bitcoin riservati in modo frazionario – di nuovo, questi sono sostituti off-chain per bitcoin che non sono coperti al 100% digitalmente da veri bitcoin su catena – sono a rischio maggiore per un fork della catena. In tale scenario, qualsiasi parte che reimpegni, nuda in cortocircuito o ha qualsiasi altro tipo di responsabilità non coperta (ad esempio in prestiti a margine o ETF) è vulnerabile alla bancarotta. Because? Perché una società di questo tipo dovrebbe ancora assumersi la responsabilità ma avere poco valore patrimoniale, dal momento che il valore delle attività migrerebbe alla moneta biforcuta e nessun sostituto fuori catena riceverebbe una delle monete biforcute. I detentori di titoli a lungo termine di Bitcoin ("HODLer") hanno già grandi incentivi a mantenere il bitcoin "difficile da prendere in prestito". Ma, poiché il prezzo del bitcoin viene sempre più soppresso dalla creazione di sempre più bitcoin fuori dalla catena e riservati a riserva, la rete i partecipanti al nodo hanno un incentivo sempre più grande a forgiare la catena e forzare una breve compressione – permanente – che potrebbe far fallire le istituzioni esposte.
Conclusione
Proprio come i bitcoin hanno cambiato la conversazione sul denaro- la frase "fiat money" è ora mainstream: l'ingresso di ICE in criptovalute cambia la conversazione su come Wall Street funzioni davvero. Far luce sulla realtà che Wall Street guadagna un sacco di soldi creando crediti cartacei su attività in quantità che eccedono le attività sottostanti (ad es.
Sì, sarebbe fantastico per gli investitori di mamma e papà. Quindi utilizzerebbero beni blockchain nativamente digitali invece del pasticcio di proprietà indiretta che abbiamo ora. Entrambi avrebbero aiutato a risolvere Wall Street, rendendolo stabile e leale a tutti, finalmente!
(Disclosure-I'm è un azionista di Symbiont, che era lo stato del partner originale del Delaware per la registrazione di risorse nativamente digitali, e Sono stato presidente e presidente dal 2016 al 2017. Possiedo anche criptovalute e ho lavorato a Wall Street dal 1994-2016, occupandomi di recente delle soluzioni pensionistiche di Morgan Stanley.
