We have seen broad adoption of crypto over the last few years. According to Pew Research, 16% of Americans say they have invested in, traded, or used cryptocurrency. This number jumps to 43% when we look at the male cohort between the ages of 18-29. While most think of “crypto” as Bitcoin, Ethereum, NFTs, or meme tokens, such as Dogecoin, these blockchain native crypto-assets represent just one category of digital assets. 

 The White House’s recent executive order outlined an approach to regulating crypto with a stated goal of fostering innovation. This has been a driver of broader acceptance that blockchain native crypto assets are here to stay. This first step is a precursor to much larger step of how blockchain technology will impact traditional financial markets. 

 “Crypto” is not an asset class. Just like the internet was not another media “channel.” Cathie Wood of Ark Invest lays this beautifully in the graphic below.

 The perception of crypto today is similar to how the market was perceiving the internet in the early days. Most business leaders in the late ’90s and early 2000s looked at the internet as another media “channel.” Just like they may have had a newspaper strategy, a radio strategy, or a TV strategy, the internet would represent another medium through which marketers and advertisers could capture eyeballs and spread brand awareness. This view was a miscalculation as the internet has been integrated and/or swallowed all the other channels.

Where we differ with Cathie Wood is that we will say in a much stronger voice, not only could this transform, this will transform Tradfi, or the Traditional Wall Street firms.

There are many features that blockchain technology offers for financial markets - making it a valuable technology rail for trading/exchange, transfer/settlement, asset management, data provenance, and asset custody. We are now maturing as a sector where we are no longer selling technology, but solutions. Oracle is not selling SQL, but business solutions.

Digital Assets vs. Traditional Assets

Smart contracts paired with legacy systems are driving down costs and creating a more efficient user experience for customers accessing financial products and services. This real time solution set enable the automation of complex tasks.

Settlement

 Transactions recorded using blockchain technology are peer-to-peer, settle almost instantly, and with finality. In some use cases a transaction can be reversed with an annotated ledger where this subsequent transaction reverses the previous trade, however, the initial trade itself cannot be undone. Furthermore, users can watch their transactions settle in real-time with full transparency. This will eventually be the case for all traditional assets. 

 Below is a view into the Ethereum blockchain explorer, Etherscan, to show what this type of transparency looks like:

We can see the:

• status of the transaction in real-time,
• amount transferred,
• address of where it came from and where it went,
• gas fees, and
• the Ether price at the time of the transaction. 

Ethereum serves as an immutable record of data. We can observe similar records of data on any public blockchain (Distributed Ledger Technology, or DLT) with no permissioned access needed, or in a Local Area Network (LAN) version of this on permissioned chains such as R3 Corda or Hyper-ledger Fabric. 

Comparing Settlement to Traditional Asset Transactions

If this were a transaction from a brokerage account, we would not be able to see these details. Furthermore, the user would not be able to control the asset being transferred. This would be handled by the broker in conjunction with market makers. The transaction would settle in a few days' time, and likely get recorded at the Depository Trust and Clearing Corporation. 

A user having direct access and control over the asset makes things pretty interesting. The need to satisfy regulatory obligations still exists but self-custody, or third-party custody of digital assets/keys makes all of this more interesting. This is where new Defi opportunities come into play, in some cases making legacy function faster and better, in other cases making markets function faster and better while automating legacy functions, and finally, in some cases making creating new market function. Users have control over digital instruments, and they can stake them to earn a yield and use them as collateral for loans. We see this today in DeFi. Using legacy systems you can request margin on your brokerage account, but the ability to utilize that in an open architecture is extremely limited (restrictions go away with UHNW market). The ability to begin with an open architecture which plugs into legacy systems as needed for compliance and risk management is where partnering with folks like Accumulate, BlockPortal, and Tokeny make DeFi a possibility for legacy banks using Inveniam today.

Global, 24/7 Trading

The value of Bitcoin and the trading in BTC is enormous, but the often undervalued part of this market is that the market trades 24/7/365. This decentralized set of nodes scattered all over the world provide infrastructure for the market, and this infrastructure of other blockchains creates opportunity for private market assets trading digitally and eventually all digital assets. Global, peer-to-peer trading, 24/7, 365 days per year for private market assets is not far off and eventually this will be what public markets will migrate towards.

Rehypothecation and Systemic Risk

The phrase “Too Big to Fail,” is commonly used and the understanding of why they are too big to fail is both the consequence and the role they play in the market. The President of the Kansas City Fed Thomas Hoenig was prescient in his criticism post ’08-09. The 2010 New York Times article on his testimony makes clear the benefit for larger institutions, and the burden on smaller institutions that Too Big to Fail banks play. His remarks at NYU in June of 2011 re-iterate that SIFI (systemically important financial institutions) put the US market at risk that we are seeing today,

“So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril,” Hoenig said at an event hosted by the Pew Financial Reform Project and New York University Stern School of Business

What this really means is that when the excrement hits the oscillator, we have no way of providing market pricing on large or complex holdings at scale. The solution for this was that Government steps in and back stops the market so that the institutional lack of trust is backed by the US Government for these Systemically Important Financial Institutions (Too Big to Fail). In the late 1800’s during the run on the market for 1893 and then later in 1907 JP Morgan stepped in and back stopped the market, in the case of 1907 if that had not been sufficient for the European markets, he could have lost everything. The Markets turned and he literally set the bottom, for years populist democrats suggested he had planned that, not understanding the risk he took and the role he played in creating the trust for the European counterparties to stay in the market. 

The ability to see real time source data using composable data at the edge delivers exactly what we need. The problem is that data was 3-9 months old on assets when the spot checks were needed. The guys shorting the housing market, saw the data real time and new that the data the market was relying on was old, and/or manipulated. Read the Big Short, if you must also watch the movie, it is entertaining but not wholly accurate.

Real time access to data at its place of rest (where it was created) will drive the ability to remove these questions. The right comp, the right multiples, etc. will still be up for debate, but we can remove the underlying asset performance data question. This is possible in one of two ways; 1) building the world’s largest data base, or 2) making data composable at the edge.

The transparency of blockchains can commute trust in the data and its origins over the life cycle of the underlying data artifact. Market risk will still occur, but regulators will be able to monitor the build-up of systemic risk due to the transparent nature of public blockchains in both Public and Private Markets. 

Velocity & Instant Settlement

Because transactions settle almost instantly on blockchains with finality, the velocity of transactions is astronomical when compared to traditional assets (which take 2 days to settle). For example, we have observed stablecoin velocity at 1,000x the velocity of traditional bank money. Caitlin Long from Custodia Bank (formerly Avanti Financial Group) has done some fantastic work in this area. You can listen to this interview she did on RealVision to learn more. 

Due to the instant settlement of trades using blockchain technology, the requirement to hold collateral against an unsettled trade is not needed. This means we do not need leverage to satisfy market demand for collateral. Leverage can build up in the traditional finance system as there is no way to settle trades in real-time. As a result, collateral is pledged, and re-pledged to allow trading due to the lack of real-time settlement. Time is money. And all of this rehypothecation often does not get reconciled until it’s too late. And so we put our hand in the air and declare that some institutions are "too big to fail.” 

Instant settlement combined with transparency, should lead to a more stable financial system. 

Triple Entry Accounting & Efficiency

Blockchains introduce triple entry accounting. This is due to the fact that the ledger of transactions is held on a decentralized set of computer servers all over the world. Each server updates in sync with all other servers on the network in real-time. This serves as an automatic audit function. Furthermore, all market participants can have full transparency into the ledger. Not only is the ledger shared, decentralized, and permissionless, but it is immutable. 

This setup is also driving down costs. In traditional finance, we use an intermediary (like a bank) to maintain a single ledger to record the debits and credits. But on a blockchain, we don’t need an intermediary. Instead, the decentralized network of computer servers takes that job. Good technology reduces costs and creates efficiencies - that is exactly what is happening here. 

To further illustrate the efficiency of blockchains, we can look at decentralized finance (DeFi). In DeFi, the middle functions exist but, in many cases, may be automated.  The fiduciary roles may continue to exist, as will roles that demand judgement and an evolved from third party, agent, manager, or trustees. Smart contracts will be able to perform many of the middle functions. Below we can see the revenue generated by various DeFi applications compared to their traditional counterparts. Uniswap, a decentralized exchange leveraging the Ethereum blockchain, is doing about $40 million per employee compared to its traditional finance counterpart, the NYSE, which is doing about $300k/employee in revenue.

We can see the:

• status of the transaction in real-time,
• amount transferred,
• address of where it came from and where it went,
• gas fees, and
• the Ether price at the time of the transaction. 

Ethereum serves as an immutable record of data. We can observe similar records of data on any public blockchain (Distributed Ledger Technology, or DLT) with no permissioned access needed, or in a Local Area Network (LAN) version of this on permissioned chains such as R3 Corda or Hyper-ledger Fabric. 

Comparing Settlement to Traditional Asset Transactions

If this were a transaction from a brokerage account, we would not be able to see these details. Furthermore, the user would not be able to control the asset being transferred. This would be handled by the broker in conjunction with market makers. The transaction would settle in a few days' time, and likely get recorded at the Depository Trust and Clearing Corporation. 

A user having direct access and control over the asset makes things pretty interesting. The need to satisfy regulatory obligations still exists but self-custody, or third-party custody of digital assets/keys makes all of this more interesting. This is where new Defi opportunities come into play, in some cases making legacy function faster and better, in other cases making markets function faster and better while automating legacy functions, and finally, in some cases making creating new market function. Users have control over digital instruments, and they can stake them to earn a yield and use them as collateral for loans. We see this today in DeFi. Using legacy systems you can request margin on your brokerage account, but the ability to utilize that in an open architecture is extremely limited (restrictions go away with UHNW market). The ability to begin with an open architecture which plugs into legacy systems as needed for compliance and risk management is where partnering with folks like Accumulate, BlockPortal, and Tokeny make DeFi a possibility for legacy banks using Inveniam today.

Global, 24/7 Trading

The value of Bitcoin and the trading in BTC is enormous, but the often undervalued part of this market is that the market trades 24/7/365. This decentralized set of nodes scattered all over the world provide infrastructure for the market, and this infrastructure of other blockchains creates opportunity for private market assets trading digitally and eventually all digital assets. Global, peer-to-peer trading, 24/7, 365 days per year for private market assets is not far off and eventually this will be what public markets will migrate towards.

Rehypothecation and Systemic Risk

The phrase “Too Big to Fail,” is commonly used and the understanding of why they are too big to fail is both the consequence and the role they play in the market. The President of the Kansas City Fed Thomas Hoenig was prescient in his criticism post ’08-09. The 2010 New York Times article on his testimony makes clear the benefit for larger institutions, and the burden on smaller institutions that Too Big to Fail banks play. His remarks at NYU in June of 2011 re-iterate that SIFI (systemically important financial institutions) put the US market at risk that we are seeing today,

“So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril,” Hoenig said at an event hosted by the Pew Financial Reform Project and New York University Stern School of Business

What this really means is that when the excrement hits the oscillator, we have no way of providing market pricing on large or complex holdings at scale. The solution for this was that Government steps in and back stops the market so that the institutional lack of trust is backed by the US Government for these Systemically Important Financial Institutions (Too Big to Fail). In the late 1800’s during the run on the market for 1893 and then later in 1907 JP Morgan stepped in and back stopped the market, in the case of 1907 if that had not been sufficient for the European markets, he could have lost everything. The Markets turned and he literally set the bottom, for years populist democrats suggested he had planned that, not understanding the risk he took and the role he played in creating the trust for the European counterparties to stay in the market. 

The ability to see real time source data using composable data at the edge delivers exactly what we need. The problem is that data was 3-9 months old on assets when the spot checks were needed. The guys shorting the housing market, saw the data real time and new that the data the market was relying on was old, and/or manipulated. Read the Big Short, if you must also watch the movie, it is entertaining but not wholly accurate.

Real time access to data at its place of rest (where it was created) will drive the ability to remove these questions. The right comp, the right multiples, etc. will still be up for debate, but we can remove the underlying asset performance data question. This is possible in one of two ways; 1) building the world’s largest data base, or 2) making data composable at the edge.

The transparency of blockchains can commute trust in the data and its origins over the life cycle of the underlying data artifact. Market risk will still occur, but regulators will be able to monitor the build-up of systemic risk due to the transparent nature of public blockchains in both Public and Private Markets. 

Velocity & Instant Settlement

Because transactions settle almost instantly on blockchains with finality, the velocity of transactions is astronomical when compared to traditional assets (which take 2 days to settle). For example, we have observed stablecoin velocity at 1,000x the velocity of traditional bank money. Caitlin Long from Custodia Bank (formerly Avanti Financial Group) has done some fantastic work in this area. You can listen to this interview she did on RealVision to learn more. 

Due to the instant settlement of trades using blockchain technology, the requirement to hold collateral against an unsettled trade is not needed. This means we do not need leverage to satisfy market demand for collateral. Leverage can build up in the traditional finance system as there is no way to settle trades in real-time. As a result, collateral is pledged, and re-pledged to allow trading due to the lack of real-time settlement. Time is money. And all of this rehypothecation often does not get reconciled until it’s too late. And so we put our hand in the air and declare that some institutions are "too big to fail.” 

Instant settlement combined with transparency, should lead to a more stable financial system. 

Triple Entry Accounting & Efficiency

Blockchains introduce triple entry accounting. This is due to the fact that the ledger of transactions is held on a decentralized set of computer servers all over the world. Each server updates in sync with all other servers on the network in real-time. This serves as an automatic audit function. Furthermore, all market participants can have full transparency into the ledger. Not only is the ledger shared, decentralized, and permission less, but it is immutable. 

This setup is also driving down costs. In traditional finance, we use an intermediary (like a bank) to maintain a single ledger to record the debits and credits. But on a blockchain, we don’t need an intermediary. Instead, the decentralized network of computer servers takes that job. Good technology reduces costs and creates efficiencies - that is exactly what is happening here. 

To further illustrate the efficiency of blockchains, we can look at decentralized finance (DeFi). In DeFi, the middle functions exist but, in many cases, may be automated.  The fiduciary roles may continue to exist, as will roles that demand judgement and an evolved from third party, agent, manager, or trustees. Smart contracts will be able to perform many of the middle functions. Below we can see the revenue generated by various DeFi applications compared to their traditional counterparts. Uniswap, a decentralized exchange leveraging the Ethereum blockchain, is doing about $40 million per employee compared to its traditional finance counterpart, the NYSE, which is doing about $300k/employee in revenue.

At InvestaX, we offer the leading Singapore Licensed Tokenization Service-as-a-Software (SaaS) platform for Real World Asset Tokens (RWA) and Security Token Offerings (STO). We provide a one stop shop for tokenized assets for global investors, including real estate, private equity, venture, ESG, startup, private credit/debt and more. We also provide IX Swap, the first legal and compliant Automated Market Maker (AMM) for RWA and STO.

If you are interested to learn more about how you can build your business on top of our infrastructure and what we can offer you as your tokenization partner, then contact us here. Thank you.