Insights and analysis for the professional investor Was this newsletter forwarded to you? Sign up here. |
|
|
Welcome to Crypto Long & Short! This week, Colton Dillion and Sonya Mann of Hedgehog Technologies explain why exchanges and other major players in crypto need to expand their horizons.
Then, Kim Greenberg of CoinDesk Indices finds a lesson for crypto in LEGO. As always, get the latest crypto news and data from CoinDeskMarkets.com. – Nick Baker |
|
|
Investment as a Service: Table Stakes for the Next Crypto Cycle |
Bear markets are for building. The firms that manage to survive this protracted drawdown will position themselves to take advantage of the next bull run, whenever it may come. Through this process of competitive preparation, features that were cutting-edge in the last cycle become table stakes for the next one. It's no longer enough for crypto exchanges to simply facilitate buying and selling cryptocurrency. Exchanges cannot remain mere asset marketplaces, especially considering the rise of decentralized finance, or DeFi. Instead, they will construct portals to an entire financial universe. The opportunity is enormous as Gen Z comes of age with crypto familiarity and eagerness to put their funds to work. In May, the FINRA Foundation and the CFA Institute released a survey that found 44% of Gen Z investors got their start in investing by purchasing crypto; only 32% started with stocks and 21% with mutual funds. Furthermore, 65% of Gen Z investors use financial apps, and pay heed to their guidance: "Of those who have received suggestions from an app, 67% said the suggestions influenced them to make a particular investment, trade or purchase." |
"Investment as a service" crypto platforms that take cues from the curated experiences offered by TradFi giants like Vanguard will be able to welcome the next generation to a home base for wealth development. Sandy Kaul of Franklin Templeton recently summarized this vision: Cash could become spread across a set of central bank digital currencies (CBDCs), cryptocurrencies and stablecoins. Investments could be comprised of tokenized securities, funds and assets. Liabilities could be represented as tokenized obligations, and assets, valuables and collectibles represented as non-fungible tokens (NFTs) with contractual documents such as the title or insurance policy embedded within the token itself. Unfortunately, early forays into this arena have been stymied by Uncle Sam's giant wagging finger. U.S. crypto exchanges can no longer offer debt-based yield services like the erstwhile Gemini Earn program or retail-friendly staking services like Kraken's verboten one or Coinbase's beleaguered equivalent. There is, however, a compliant path forward. One that involves proactively playing nice with the Securities and Exchange Commission and relying on robust custody partnerships, including tools like separately managed accounts. Commingling customer funds in large digital asset baskets is a non-starter, as it securitizes the underlying assets. But intelligent and automated direct indexing products, employed by an internet adviser registration, have made inroads with regulators. These direct indexing platforms are the next step to wide adoption of long-tail digital assets beyond bitcoin (BTC) and Ethereum's ETH. I agree with the leadership of Methodic Capital Management: "Indexes allow for efficient asset allocation, risk management, product development and performance measurement. Without indexes, crypto cannot evolve into an institutional financial market." Advisers will play a pivotal role in simplifying Web3, managing client inventory and maximizing yield with the inevitable proliferation of on-chain protocols, products and decentralized apps. Again Methodic Capital Management is on the money when they note: "What is missing in the U.S. is regulatory support and index adoption that captures the more nuanced and differentiating aspects of crypto markets, such as proof-of-stake reward rates." We certainly hope U.S. regulators will help us out and make clear guidelines above and beyond a simple spot ETF, but the innovation is going to happen with or without them. |
|
|
The Death of Compromise, and a Way Forward for Crypto |
Two of my children were playing the other day, building a bridge with LEGO. Happy and feeling accomplished, they were just about to complete their creation when my other child ran over and kicked it down. Pleased with the destruction, he ran away, leaving both of his siblings crying. Isn't this the story of life? Some people build bridges. Others destroy them. And even more are just an audience, like me, who observed the situation while trying to get other things done – interfering only at the end with discipline to the destructor and aid to the builders. This scenario has been haunting me. Engaging in linear thinking and failing to engage in compromise rarely conjures collective goals. Within the digital asset landscape, the biggest call for action and compromise today is regulation. In March 2022, Jerome Powell, chair of the U.S. Federal Reserve, said Russia's invasion of Ukraine emphasized the need for Congress to take "action on digital finance, including cryptocurrencies." Powell referred to the possibility that terrorists or other malicious actors would use crypto as a reason why additional regulation was needed. In October 2022, a federal panel responsible for monitoring financial system risks sounded a warning about crypto markets, saying that the widespread adoption of digital assets poses risks if the market continued to grow without better oversight and enforcement. Most recently, Israeli authorities seized around 190 Binance accounts with alleged ties to terrorist groups. And there have been multiple reports of how Hamas militants behind the attack on Israel raised millions of dollars worth of crypto – bolstering the case for regulation.
One can't help but wonder why we are at this critical point where, arguably, little has been accomplished on crypto regulation? Linear thinking with a single outcome in mind has left us unable to compromise. But I haven't lost hope. Over the past few months, as part of a marketing study, I interviewed early adopters of digital assets from traditional finance (TradFi) and decentralized finance (DeFi). The No. 1 theme that kept emerging in these conversations? Bridges. Yes, the desire to build bridges. While what's on each side of the bridge may vary, the concept of unifying remains. Addressing policy and regulatory framework, tensions between TradFi and DeFi, streamlining vernacular and data, and building trust through unbiased and fair viewpoints were common themes, with one solution: bridges. And the path forward the early adopters acknowledged as the solution to these percolating problems? Collective thinking, coming together as a community and finding compromise. So, how do we build bridges? First, think nonlinearly; be flexible and adaptable. Second, be open-minded. Listen to those with opposing viewpoints. Solve problems with compromise in mind. Third, be a voice … The next time my two children are building bridges and my third goes for the destruction kick, I can act. In this scenario, and why I'm writing this article, is to remind people that the majority of us want bridges. It's time to start building. |
|
|
From CoinDesk Deputy Editor-in-Chief Nick Baker, here is some news worth reading: |
- A BLACKROCK MYTH: Cointelegraph messed up this week, reporting on Monday that the SEC had approved asset management giant BlackRock's bitcoin ETF application. The regulator had not, as was quickly reported by CoinDesk and other news organizations. Bitcoin's price immediately shot up in the aftermath of the inaccurate report. Interviewed on Fox Business soon after, BlackRock CEO Larry Fink was asked about the snafu. "We're hearing from clients around the world about the need for crypto. I mean, when you think about – I think some of this rally is way beyond the rumor," he said. Fink went on to describe crypto as another haven asset for investors, similar to U.S. Treasuries or gold. "I believe crypto will play that type of role as a flight to quality," he explained. Bitcoin was partly created as a response to the 2008 financial crisis, a sign of dissatisfaction with the conventional financial system. But one of the biggest players in TradFi sure is embracing BTC.
- THAT'S A LOT: Something like $12 trillion worth of gold has been pulled out of the Earth in human history – enough to fund a few crypto startups! Given that figure, a new estimate of how big the latest blockchain buzzword could get is eye-catching. Tokenized real-world assets – taking stocks, real estate and other assets and representing them on a blockchain – could grow into a $10 trillion market as the crypto and traditional finance worlds converge, digital asset management firm 21.co argued in a report. That's their bullish forecast; their bearish one is a mere $3.5 trillion. Either way, this would be huge. The reality check here, though, is that for, say, a decade some Wall Street-types have dreamed of shifting financial back-office stuff onto crypto infrastructure, and there's very little to show for it so far. I'm not saying it won't happen. I'm just saying the burden of proof is on the dreamers.
- NOW CALIFORNIA: New York has for a while had a licensing regime for crypto businesses called the BitLicense. California is now officially going to join that game, with Governor Gavin Newsom signing into law a similar system for his state. California, famously, of course, is a hub for all manner of tech-focused businesses, some of them in crypto. So, one can't help wondering if this could be a fairly big deal in a nation lacking a clear direction on crypto regulations from the federal government. Newson's signature also stands out because crypto has become a pretty partisan issue, with the Democratic Party – Newsom's party – treating digital assets like a punching bag. Joe Biden is almost certainly going to be the party's choice in next year's presidential election, but Newsom is viewed as a long-shot backup. Is he carving out some kind of compromise on crypto to differentiate himself?
|
|
|
Hear from Key Lawmakers and Regulators at State of Crypto: Policy and Regulation |
Several lawmakers and regulators shaping the future of digital assets policy have committed to joining CoinDesk's inaugural State of Crypto: Policy and Regulation, a one-day boutique event uniting key policymakers, regulators and government officials with legal, policy and compliance executives representing the largest and most influential TradFi and DeFi leaders in asset management and financial services. The gathering provides an unprecedented opportunity to evaluate, dissect and ultimately shape crypto regulatory frameworks that support a vibrant, secure and healthy future for the digital economy. Are you a GC, CCO, CLO, COO or head of policy or government affairs evaluating or actively investing in digital assets? Join State of Crypto to help drive crypto policy forward collaboratively. Save 10% with code CLS10. Learn more and register. |
|
|
|
Gen Z Awakens