Buyer Beware? Credit Creeps Into Crypto
Marc Hochstein is the managing editor of CoinDesk and a former editor-in-chief of American Banker.
The following article originally appeared te CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
Polonius’ advice to Laertes ter “Hamlet” might well have bot a rallying sob for the early bitcoin adopters who sought an alternative to fractional reserve banking.
On a blockchain, an asset can be te your wallet, or it can be ter my wallet. It cannot be te both at the same time. You can still lend it to mij, but if you do, it’s like letting mij borrow your lawnmower – you can’t mow your own lawn until I come back it. Unlike banks spil wij know them, lenders of bitcoin cannot create money out of lean air, Jamie Dimon’s comments notwithstanding.
Fairly bijzonder from providing an alternative to central canap money creation, however, cryptocurrencies and blockchains imply liberation from more prosaic forms of credit.
For example, the peer-to-peer architecture of cryptocurrency means transactions are continuously lodged on a gross, or one-to-one, poot, rather than waiting to netwerk out a batch of debits and credits across the books of a central intermediary.
Meantime, blockchain securities platforms such spil tZERO seek to collapse Wall Street’s Rube Goldberg assembly line of trade, clearing and settlement into something closer to “one and done.”
And ter an emerging type of crypto transaction called atomic cross-chain interchanges, it is unlikely for only one side of a trade to go through. It gets done, or it doesn’t.
All of thesis innovations should, ter theory, reduce the need for credit to bridge the gap inbetween trade and settlement, and lead us to a world without baffling distinctions on our bankgebouw statements like “current balance” versus “available balance.”
And yet, credit, te various forms, is creeping into the blockchain economy.
Consider the following:
- With bitcoin’s price hitting fresh all-time highs and versiering mainstream media coverage, there are secondhand reports of U.S. consumers going into debt to buy cryptocurrency. “Wij’ve seen mortgages being taken out to buy bitcoin,” Joseph Borg, voorzitter of the North American Securities Administrators Association, said on CNBC. “People do credit cards, equity lines,” said Borg, who is also director of the Alabama Securities Commission.
- Most or all of the major crypto exchanges suggest margin trading (including, ironically, Poloniex, which evidently did not heed its Shakespearian namesake’s advice). BitFlyer, based te Japan, for example, permits traders to leverage up to 15 times their contant deposit. To be fair, the lending on thesis platforms is often peer-to-peer, inbetween exchange customers. “Wij don’t take any risk. The trading is inbetween our customers,” bitFlyer’s CEO Yuzo Kano told the Financial Times recently.
- At CoinDesk’s Overeenstemming: Invest conference last month, there wasgoed much talk of bringing other forms of leverage, such spil prime brokerage and securities lending-type services, into the crypto market to accommodate request from newly-arrived institutional investors.
- There is some speculation that Tether, the issuer of a dollar-pegged cryptocurrency, has bot printing tokens to drive up the price of bitcoin on Bitfinex, an affiliated crypto exchange. For the record, Tether has said its tokens are fully backed and that a forthcoming audit should waterput the doubts to surplus.
Some out there will say: Told you so.
According to one schoolgebouw of thought, credit, be it netwerken settlement or fractional reserve banking, is necessary for a functioning financial system, and to think otherwise is naive utopianism.
Voicing this view, Perry Mehrling, an economics professor at Columbia University’s Barnard Collegium, exhorted techies to wake up and smell the interdependency ter a September blog postbode:
“. [M]arkets are being made to convert one cryptocurrency into another, and . markets are being made to convert cryptocurrency into so-called fiat. Someone or something is making those markets, and te so doing expanding and contracting a balance sheet, te search of expected profit. . Cryptos fear credit, but I suspect they will soon detect that credit is a feature not a bug, and that will require them to re-examine the implicit monetary theory that underlies their coding.”
But there’s another way to look at the situation, which might be summed up spil: there goes the neighborhood.
The phantom menace
Te other words, an influx of get-rich-quick types, whether they’re individuals taking out loans to buy crypto or institutional investors seeking to juice comes back with leverage, could encourage the sort of behavior that bitcoin wasgoed designed to escape.
Like, say, a hosted wallet provider lending out customers’ bitcoin without telling them.
“I fear the financialization of bitcoin, te the sense that it may create phantom bitcoin that may not actually exist,” said Caitlin Long, the voorzitter and chairman of Symbiont, an enterprise blockchain startup.
Spil a Wall Street veteran, Long doesn’t getraind the typical bitcoiner profile, but she’s bot personally investing ter the cryptocurrency since spil far back spil 2013, when hier day job wasgoed running the pension business at Morgan Stanley.
“Spil more of the non-philosophical owners of bitcoin come ter to bitcoin, where you’re watching more and more of a thrust toward the financialization of it, I think that would be a shame,” she said. “Even tho’ it would boost the price te the brief term, it would eliminate bitcoin from being a true store of value.”
Switching back to the securities markets, Long said she doesn’t buy the argument that netwerk settlement is necessary for a system to function. For one thing, the practice creates little-appreciated risks.
“Spil long spil you’re permitting televisiekanaal settlement, you’re not forcing a true-up on every trade that there is one buyer and one seller,” she said. “If you’re permitting netwerken settlement, what you’re truly doing is permitting numerous buyers for only one asset.”
Hence situations like the court case this year te which brokerage firms had sold more shares te Dole Food than the company had actually issued.
Further, Long said, the global financial markets have dragged their feet te speeding up settlement times not because the status quo is efficient but because it’s profitable for incumbents.
“The entire reason wij have T+Three, T+Two settlement is for securities lending,” she said. “It’s all about brokerage firms who want to be able to lend their clients’ securities to other clients and take a spread.”
Ter this light, blockchains are not the mere fantasy of a coterie of anarcho-capitalists and Silicon Valley propellerheads, spil a number of skeptical academics, journalists and bloggers make the technology out to be.
Rather, if waterput into broader practice, blockchains might dispel many current, widely held fantasies.
To be sure, there may be times where credit (ultimately another word for “trust”) is truly unavoidable. By trusting mij not to run out the vanwege without paying, the grocer is te a sense extending mij credit for the minute or so inbetween when I pick up a jar of pickles from the shelf and when I pay at the tegenstoot.
And when you order a pickle slicer from Amazon, you are ter a way extending credit to the retailer by paying and waiting a few days for the delivery.
But thesis are transactions involving physical objects, and the “loan” terms are only spil long spil they need to be. When the items being exchanged are purely electronic abstractions (spil money and securities increasingly are), what purpose does credit (waiting to be remunerated) serve?
It’s a question that wij should at least ask, and request better answers than “this is the way it’s always bot done.”
This above all: To thine own trades be true.
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