 | | for the week ending September 22, 2019 | Coindesk Weekly is sponsored by  | | |
 | Fed move a boon for BTC?
A recent move by the Fed spurs talk of a boon for bitcoin -- but what does it all mean? Read more in THE TAKEAWAY below. | | |
 TOP TRENDS ON COINDESK | | |
Here are some of the biggest stories this week on CoinDesk.com...
OPTIONS, OPTIONS: Chicago-based derivatives marketplace CME Group has announced that it will offer options on its bitcoin futures contracts starting in the first quarter of next year. CME hopes to provide clients with “additional tools for precision hedging and trading,” though it needs to win regulatory approval first. The company has offered crypto futures trading since December 2017. Full story
AVOIDING THE ISSUE: Ripple has filed motion to dismiss a lawsuit claiming it violated U.S. securities laws by selling XRP. In a new filing Friday, attorneys for Ripple pushed back against XRP purchasers suing the company, its subsidiaries and executives, claiming that the plaintiff, Bradley Sostack, does not have standing to file a complaint. Notably absent from the motion to dismiss is a full-fledged argument over why Ripple believes XRP is not a security. Indeed, the filing only addresses the question in a footnote, which states that XRP is not a security “because it is not an ‘investment contract.'” Full story
OVERSTOCK DUMP: Patrick Byrne, the former CEO of Overstock who resigned abruptly in August, has sold his 13 percent stake in the e-commerce company he founded 20 years ago. In a blog post Thursday, Byrne said that, by the end of the week, he will have reinvested all of the proceeds into “investments that are counter-cyclical to the economy. … Gold, silver and two flavors of crypto.” In an attack on his perceived enemies in government, he added: “The other thing accomplished by the investment moves I described above is that my ammunition gets moved outside acts of retaliation from the Deep State.” Full story
EOS TROUBLES: The world’s seventh-largest blockchain by market cap, EOS, has had a value topping $3 billion since February. But the project has long been plagued by fears that its structure was too centralized, and now the lion’s share of entities that govern the chain are in China, prompting fears of state intervention. Further, EOS contributors devoted to building decentralized apps (dapps) and development tools for the blockchain are losing clout – and making little or no money from contributing to the ecosystem. One of them even publicly disavowed the blockchain earlier this month, citing the excessive power of the largest EOS token holders. Full story
EXTORTION ARREST: U.S. law enforcement has charged Steven Nerayoff, an early supporter of the ethereum project and a former paid advisor to Overstock’s tZero, with extortion. Nerayoff, an attorney and founder of blockchain consulting firm Alchemist, was arrested Wednesday by the FBI and was scheduled to face charges before a federal court in Brooklyn. The FBI also arrested Michael Hlady, an Alchemist associate. The pair face up to 20 years in prison if convicted of the alleged scheme, described by the FBI as “an old-fashioned shakedown” by the Attorney Office’s for the Eastern District of New York and “an age-old extortion scheme … with a modern-day twist.” Full story
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 QUOTE OF THE WEEK | |  | My customers always leave me with a balance of zero. No matter how much I buy, they always demand more."– Rami Mohammad Ali, a bitcoin miner and trader, speaking to the demand for bitcoin purchases among Palestinians. | | |
The Takeaway |  | | |
Last week, the Federal Reserve injected $278 billion into the securities repurchase, or “repo,” market over four days, all so that banks could meet their liquidity needs. It was the first time the Fed had intervened in this vital interbank market, where banks’ pawn financial assets to fund overnight cash needs, since the financial crisis of 2008.
Fed officials and bankers dismissed the rare liquidity breakdown as a hiccup stemming from a series of coincidental factors in bond markets and corporate tax payments. It wasn’t a very comforting explanation, not when other economic warning signs are flashing too: $17 trillion in bonds worldwide showing negative yields; a worsening U.S.-China trade war; and manufacturing indicators signaling an impending global recession.
Predictably, certain crypto types have viewed this alarming scenario with glee. More than few HODLing tweeters responded to the repo story with two words of advice: “buy bitcoin.”
But it’s actually hard to predict what all this means for crypto markets, at least in the short- to medium-term. If and when a 2008-like financial panic takes hold, will bitcoin rally as a new kind of uncorrelated “safe haven” or will it decline in a broad-based “risk-off” dumping of all things speculative? (Notwithstanding a sharp dip and rebound midway through last week, bitcoin has proven quite stable of late, at least by its own volatile standards.)
Other questions: do these vulnerabilities in traditional credit markets highlight the promise of new blockchain-based ideas? For example, would wider use of security tokens allow speedier settlement and, by extension, reduced counterparty risks and greater market confidence? Or, far more radically, would MakerDAO’s on-chain #DeFi lending markets enable a more reliable clearing mechanism, with collateral calls locked in by a decentralized protocol? Or might these underdeveloped ideas simply be recipes for systemic risk, a single hack or software glitch away from setting off a vicious spiral of collateral calls and bankruptcies?
The jury is out on all this untested stuff. Still, if nothing else, the many signs of stress in the traditional financial system offer a valuable framework for thinking about how the world could be different and the role blockchain technology might play in enabling that new world.
Let’s look at some of them:
· Negative-yields . The rare phenomenon, where creditors are essentially paying issuers for the privilege of lending them money – head scratcher, right? – reflects excessive demand for “safe” assets, especially for government-issued bonds. It has historically been a strong indicator of impending recession, since it reflects an overwhelming reluctance among investors to take on risk.
Now, another way of thinking about that reluctance is to express it as a perceived shortage of good investment opportunities. That perception can be fueled by a worsening economic outlook, but it’s also dictated by the barriers to entry that make it difficult for otherwise investable businesses of offer new opportunities.
Here, certain blockchain-based credit ideas offer hope. There’s the prospect for distributed-ledger asset registries that better track collateral and enable new emerging-market lending in developing-country land, commodities and energy markets.Or there are ideas such as having exporters tokenize their receivables to tackle a major structural limit on global trade finance, where a majority of small-and-medium enterprise are denied letters of credit because bankers don’t trust their documentation.
Effective use of blockchain technology could boost trust in assets and lien registries and help bring to life the $20 trillion in “dead capital” that economist Hernando de Soto says the world’s poor are sitting on. Just as importantly, it would open a world of new alternative assets to draw in investors’ capital, giving them less of a reason to park it in low-yielding bonds.
· Global Economic Slowdown. An alarming, synchronized downturn in manufacturing indicators, most notably in purchasing manager indexes, which measure current and future business spending on inventory and equipment, flows directly from the U.S.-China trade war. In cutting off Chinese goods exporters from U.S. consumer markets and driving up costs for their U.S. importers – and vice versa for U.S. farmers selling to food distributors in China – the conflict has added a massive new burden on global economic activity.
But let’s look at the starting point for this trade battle. It lies in American companies’ mostly legitimate complaints about China’s mercantilist, centrally planned approach to supporting Chinese companies at their expense, all enabled by a system of surveillance and control over people and businesses. This where there’s a crypto angle.
Cryptocurrency and other decentralizing technologies could work against the Chinese government’s capacity to control its economy in this interventionist manner. If Chinese businesses and hundreds of millions of Chinese citizens used bitcoin to circumvent capital controls, for example, the ever-present risk of monetary flight would act as a pressure valve, compelling Beijing to pursue a more open economic model to maintain competitiveness. That would give anti-free-traders like President Trump less of an excuse to ratchet up protectionist attacks against it.
· The repo intervention. Some innovators have sought to apply blockchain technology to the back-office structural problems that periodically roil money markets, such as those now manifest in repo. They see a distributed ledger as a superior mechanism for tracking the IOUs of money and pawned securities upon which inter-institutional credit markets are based.
One was former J.P. Morgan credit market maven Blythe Masters, who founded Digital Asset Holdings in 2014 on the idea that on-chain settlement and a universally auditable ledger could improve transparency in global finance’s opaque, complex matrix of interconnected credit relationships. This way, she argued, it could mitigate the mistrust and counterparty risks that fueled the financial crisis.
The DAH model and those of others working on back-office blockchain solutions for capital markets have not come to fruition. This is at least partly due to the reluctance of incumbent financial institutions and their regulators to kill off existing functions that a blockchain would make redundant; they instead designed cumbersome hybrid distributed-ledger models that sustained vested interests but were expensive and difficult to collectively implement. Either way, a blockchain back-office fix for traditional finance isn’t coming any time soon – whether because of internal politics or the limitation of the technology.
A more important question is why we even tolerate a system that’s so vulnerable to those back-end markets’ problems at all. The only reason central banks ever intervene to support interbank credit markets is because society’s means of payment depends on avoiding cash shortfalls and maintaining confidence in fractional-reserve banking. If banks don’t have enough cash to meet short-term creditor calls, they would suffer runs on their deposits, companies wouldn’t make payroll, tenants would have to skip rent, ATMs would run out of banknotes, etc. The economy would seize up. The worst of it is that, because of this ever-present threat, banks hold our political system to ransom, knowing that they can always rely bailouts: the too-big-to-fail problem.
But what if banks just stuck to longer-term lending? What if there were no checking accounts or debit/credit cards, and we simply exchanged value with each other via cash or digital currencies that we hold ourselves? If people used bitcoin, or fiat-backed stablecoins or central bank digital currencies to exchange value instead of the IOUs of an inherently fragile fractional reserve banking system, institutional cash shortages simply wouldn’t matter as much. Banks’ biggest creditors might take a hit against their risk-adjusted positions and their stock prices would fall, but the rest of us, including the Fed, could ignore the problem.
As the journalist and commentator Heidi Moore astutely observed in a tweetstorm last week, the reason the repo market tumult is so worrying is because it speaks directly to the core problem of trust in the banking system.
If nothing else, this is where blockchain technology provides a valuable lens with which to assess the current stress in the financial system. It helps us think about how the trust problem creates vulnerabilities, power imbalances and systemic risks and how we might design a system that’s better able to resolve it.
-- Mike J Casey |
 BEYOND COINDESK... | | |
| BLOOMBERG: The agriculture arm of commodities trading giant Glencore has joined an initiative aiming to use new tech to make grain and oilseed transactions faster and more efficient, Bloomberg reports. The group, which includes Archer-Daniels-Midland, Bunge, Cargill, Louis Dreyfus and Cofco International, is working on a new platform that is likely to use blockchain and AI. The firms hope to launch in Q2 2020, pending regulatory approval. |
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The crypto-repo connection