One thing is clear: the view that cryptocurrencies have yet to produce any noteworthy innovations is a thing of the past.
In the eyes of conservative figures on Wall Street, the 'application' of cryptocurrencies is often discussed with a tone of ridicule. Veterans have seen it all. Digital assets come and go, often in a blaze of glory, exciting those investors who are keen on memecoins and NFTs. Beyond being used as tools for speculation and financial crime, their other uses are frequently found to be flawed and inadequate.
However, the latest wave of enthusiasm is different.
On July 18, President Trump signed the (Stablecoin Act) (GENIUS Act), providing long-desired regulatory certainty for stablecoins (cryptographic tokens backed by traditional assets, usually dollars). The industry is in a period of rapid growth; Wall Street is now racing to get involved. 'Tokenization' is also on the rise: on-chain asset trading volumes are rapidly growing, including stocks, money market funds, and even private equity and debt.
Like any revolution, the revolutionaries are ecstatic while the conservatives are worried.
Vlad Tenev, CEO of digital asset broker Robinhood, stated that this new technology can 'lay the foundation for cryptocurrencies to become a pillar of the global financial system.' European Central Bank President Christine Lagarde has a slightly different view. She is concerned that the emergence of stablecoins amounts to 'the privatization of money.'
Both sides are aware of the scale of the impending changes. Currently, mainstream markets could face a more disruptive transformation than the early speculation in cryptocurrencies. Bitcoin and other cryptocurrencies promise to become digital gold, while tokens are merely wrappers or vehicles representing other assets. This may not sound remarkable, but some of the most transformative innovations in modern finance have indeed changed the way assets are packaged, sliced, and restructured—such as exchange-traded funds (ETFs), Eurodollars, and securitized debt.
Source: The Economist
Currently, the value of circulating stablecoins is $263 billion, growing by about 60% from a year ago. Standard Chartered forecasts that the market value will reach $2 trillion in three years.
Last month, JPMorgan, the largest bank in the U.S., announced plans to launch a stablecoin-like product called JPMorgan Deposit Token (JPMD), despite CEO Jamie Dimon's long-standing skepticism about cryptocurrencies.
The market value of tokenized assets is only $25 billion but has more than doubled in the past year. On June 30, Robinhood launched over 200 new tokens for European investors, allowing them to trade U.S. stocks and ETFs outside of normal trading hours.
Stablecoins make transactions cheap and quick because ownership is immediately recorded on a digital ledger, eliminating the need for intermediaries that operate traditional payment channels. This is particularly valuable for currently costly and slow cross-border transactions.
Although stablecoins currently account for less than 1% of global financial transactions, the (GENIUS Act) will provide a boost for them. The act confirms that stablecoins are not securities and requires that stablecoins must be fully backed by safe, liquid assets.
Reportedly, retail giants including Amazon and Walmart are considering launching their own stablecoins. For consumers, these stablecoins could be similar to gift cards, providing a balance for spending at retailers and potentially at lower prices. This could eliminate companies like Mastercard and Visa, which have profit margins of about 2% on sales facilitated in the U.S.
Tokenized assets are digital copies of other assets, whether funds, company shares, or a bundle of commodities. Like stablecoins, they can make financial transactions faster and easier, especially those involving illiquid assets. Some products are merely gimmicks. Why tokenize stocks? Doing so might allow for 24-hour trading since the exchanges where stocks are listed do not need to be open, but the benefits of this are questionable. Furthermore, for many retail investors, the marginal trading costs are already low or even zero.
Efforts to tokenize
However, many products are not that fancy.
Take money market funds, for example; they invest in Treasury bills. The tokenized version can also serve as a means of payment. These tokens, like stablecoins, are backed by safe assets and can be seamlessly exchanged on a blockchain. They are also an investment that outperforms bank interest rates. The average interest rate on U.S. savings accounts is less than 0.6%; many money market funds offer yields as high as 4%. The largest tokenized money market fund under BlackRock is currently valued at over $2 billion.
'I expect that one day, the tokenized foundation will be as familiar to investors as ETFs,' said the company's CEO Larry Fink in a recent letter to investors.
This will have a disruptive impact on existing financial institutions.
Banks may be trying to get into the new digital packaging industry, but part of their motivation is the realization that tokens pose a threat. The combination of stablecoins and tokenized money market funds could ultimately reduce the attractiveness of bank deposits.
The American Bankers Association noted that if banks lose about 10% of their $19 trillion retail deposits (the cheapest source of funding), their average funding cost will rise from 2.03% to 2.27%. While the total deposits, including commercial accounts, will not decrease, bank profit margins will be squeezed.
These new assets could also have a disruptive impact on the broader financial system.
For example, holders of Robinhood's new stock tokens do not actually own the underlying shares. Technically, they own a derivative financial product that tracks the value of the asset (including any dividends paid by the company), rather than the stock itself. Therefore, they cannot obtain the voting rights typically granted by stock ownership. If the token issuer goes bankrupt, holders will find themselves in a predicament, needing to compete with other creditors of the bankrupt company for ownership of the underlying assets. The fintech startup Linqto, which filed for bankruptcy earlier this month, faced a similar situation. The company had issued shares of private companies through special purpose vehicles. Buyers are now unclear whether they own the assets they believe they own.
Source: The Economist
This is one of the biggest opportunities for tokenization, but it also poses the greatest challenges for regulators. Pairing illiquid private assets with easily tradable tokens opens a closed market to millions of retail investors, who collectively have trillions of dollars to allocate. They can purchase shares in the most exciting private companies that were previously out of reach.
This raises a question.
Institutions such as the SEC have far greater influence over publicly traded companies than over private ones, which is why the former are more suitable for retail investors. Tokens representing private shares would transform once-private equity into assets that can be traded as easily as ETFs. However, ETF issuers promise to provide intraday liquidity by trading the underlying assets, while token providers do not. At a sufficient scale, tokens would effectively turn private companies into public ones without the usual disclosure requirements.
Even regulators supportive of cryptocurrencies want to draw a line.
SEC Commissioner Hester Peirce, known for her friendly attitude toward digital currencies, is referred to as 'Crypto Mom.' In a statement on July 9, she emphasized that tokens should not be used to evade securities laws. 'Tokenized securities are still securities,' she wrote. Therefore, regardless of whether the securities take on new cryptographic packaging, companies issuing securities must comply with information disclosure rules. While this is theoretically reasonable, the large number of new assets with novel structures means regulators will be in a perpetual game of catch-up in practice.
Thus, a paradox exists.
If stablecoins are indeed useful, they will also be truly disruptive. The greater the attraction of tokenized assets for brokers, clients, investors, merchants, and other financial companies, the more they can change finance, a change that is both exciting and concerning. Regardless of the balance between the two, one thing is clear: the view that cryptocurrencies have yet to produce any noteworthy innovations is a thing of the past.
This article is republished with permission from: (Deep Tide TechFlow)
Original title: (Crypto’s big bang will revolutionise finance)
Original author: The Economist
Translation: Centreless
'Is the argument that cryptocurrencies are useless a thing of the past? The Economist: If stablecoins are useful, what will they bring?' This article was first published in 'Crypto City.'
