February 7, 2024

Insights and analysis for the professional investor

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Welcome to Crypto Long & Short!

This week, Allan Gulley, of Index Coop, explains how the tokenization of financial assets is just beginning.

Then, Scott Sunshine, of Blue Dot Advisors, explores the next generation of stablecoins beyond tether (USDT) and USDC.

As always, get the latest crypto news and data from CoinDeskMarkets.com.

– Benjamin Schiller, head of opinion and features at CoinDesk

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From the Analyst

Forget ETFs, Let's Work on Tokenizing the Whole Value Chain

The last six months in crypto markets have been dominated by two main narratives: the prospect of Bitcoin ETFs (which were finally approved by the SEC in January) and so-called real world assets (RWAs). Interestingly enough, these themes represent two sides of the same coin: Bitcoin ETFs take digitally-native assets off-chain, while RWAs bring traditional assets on-chain.

Both traditional and decentralized finance experts have hailed these related innovations. BlackRock CEO Larry Fink, for example, told CNBC, "ETFs are step one in the technological revolution in the financial markets. Step two is going to be the tokenization of every financial asset."

So, what about Step Three?

I would argue that bringing the entire value chain, not just the end product, on-chain should be the final objective for all financial assets. That includes equities, fixed income, cash equivalents, alternative investments, and the many structured products that build on top of them.

Making digital assets available off-chain may have advantages. Bringing traditional assets on-chain might too. But this hardly scratches the surface of what blockchain can do for capital markets. Unparalleled efficiency, transparency, and programmability can be enabled from origination and issuance to settlement and custody. Bringing traditional assets on-chain is one thing; building them entirely on-chain is another.

This is already happening in small ways today. When users buy structured products that are natively built on-chain, they can issue, redeem, swap, and self-custody products permissionlessly, without dependencies on intermediaries. On-chain automation also enables rebalancing and reweighting for products to be self-sustaining. Anyone can independently verify the technology stack underpinning each product, minimizing trust and maximizing transparency. These capabilities can extend to all asset classes, not just the ones on-chain today.

Traditional financial firms like WisdomTree are already pushing past simple token wrappers and embracing broader blockchain capabilities for capabilities like settlement, record-keeping, and exchange infrastructure. J.P. Morgan Onyx is also exploring on-chain settlement and rebalance execution for alternative assets and broader portfolio management as well.

Blockchain-native organizations like Goldfinch and Maple are also bringing credit markets on-chain with lending facilities and secured collateral. Other asset classes like real estate (RealT), private equity (Tokeny), and carbon credits (Toucan) are coming on-chain too.

Granted, there is regulation to consider and technology to develop, but the collective opportunity to move beyond Bitcoin ETFs and tokenized RWAs is immense. In a future where all assets are built, managed, and distributed on-chain, investors, asset managers, and even regulators will benefit from the transparency, efficiency, and disintermediation that results. Lower costs, global distribution, and more efficient markets await on the other side.

– Allan Gulley, Head of Product at Index Coop

Institutional Outlook

Diversifying Stability: Stablecoins Finding Home Beyond the Greenback

Stablecoins, the backbone of the cryptocurrency market, with their $135 billion market cap, have traditionally been pegged to fiat currencies like the U.S. dollar, offering stability and liquidity in a somewhat volatile ecosystem.

Now, the landscape of stablecoins is evolving, with innovative projects emerging that look beyond conventional USD pegs. These new stablecoins are tethered to alternative assets like commodities, real estate, or even diversified baskets of cryptocurrencies, introducing a fresh perspective on stability and risk management within the digital asset domain.

While USD-pegged stablecoins like tether (USDT) and USDC dominate the market, they are subject to the fluctuations and vulnerabilities of the U.S. dollar. In contrast, stablecoins tied to alternative assets offer diversification benefits and reduced exposure to currency risk. Commodity-backed stablecoins, for example, are pegged to the value of underlying commodities such as gold, silver, or oil, providing intrinsic value and hedging against inflationary pressures.

Real estate-backed stablecoins leverage the stability and appreciation potential of tangible assets, allowing investors to access fractional ownership in properties worldwide. These stablecoins are backed by real estate portfolios, offering liquidity and diversification in an asset class traditionally characterized by illiquidity and high barriers to entry.

Another groundbreaking approach is stablecoins tied to a basket of cryptocurrencies, like DAI and wrapped bitcoin, offer stability while capturing the potential upside of the digital asset market. These diversified stablecoins mitigate single-currency risk and provide exposure to a broader spectrum of cryptocurrencies, reducing volatility and enhancing portfolio resilience.

The emergence of stablecoins beyond USD pegs reflects a maturing market and growing investor demand for stability, transparency, and diversification in digital assets. These alternative stablecoins offer a compelling value proposition for investors seeking to preserve capital and navigate the dynamic cryptocurrency landscape with confidence.

In emerging markets, for example, with unstable local currencies, stablecoins provide a reliable alternative to traditional dollars, facilitating cross-border transactions and financial inclusion.

Not all stablecoins, however, deliver on their promise of stability and liquidity. In mid-2022, TerraUSD was de-pegged, losing its value, simultaneously crashing the price of its sister coin, Luna. In a matter of days, both coins quickly became worthless, wiping billions of dollars off the cryptocurrency markets.

Despite their potential benefits, alternative stablecoins face regulatory scrutiny, liquidity challenges, and valuation complexities. Regulatory frameworks governing commodity-backed stablecoins and real estate-backed stablecoins vary across jurisdictions, requiring robust compliance measures and legal frameworks to ensure investor protection and compliance.

Moreover, the liquidity of alternative stablecoins may be limited compared to USD-pegged stablecoins, posing challenges for trading and market adoption. Valuation methodologies for alternative assets can also be complex and opaque, requiring transparency and independent audits to instill investor trust and confidence.

In conclusion, stablecoin innovations beyond USD pegs represent a significant paradigm shift in the cryptocurrency market, offering investors new avenues for stability, diversification, and risk management. While challenges remain, the growing adoption and maturation of alternative stablecoins signal a transformative shift toward a more resilient and inclusive digital asset ecosystem.

– Scott Sunshine, Managing Partner of Blue Dot Advisors

Takeaways

From CoinDesk Deputy Editor-in-Chief Nick Baker, here is some news worth reading:

MINERS VS ETFS: It shouldn't surprise us that bitcoin ETFs haven't lived up to the hype, at least in terms of matching dreamers' dreams that BTC would surge to crazy high prices in the aftermath. Maybe bitcoin's price will see a long-term benefit from these ETFs, but so far it has mostly fallen. Something more tangible may be at work, though, explaining why BTC has come under pressure over the past month or so: Miners have been selling, Bitfinex analysts argued this week. Miners may be selling to raise capital "for upgrading machinery and mining facilities," they wrote. With the halving coming up in April – an event that will cut in half the reward miners get for creating new BTC – miners need to worry about profit margins. Raising cash following a huge BTC rally to fund purchases of more-efficient equipment makes sense. As has been argued before, too, the halving could kick off industry M&A. That won't be free.
AN FTX MYSTERY SOLVED: For a defunct exchange, FTX still generates news. Last week, it said it expects to fully repay customers through its bankruptcy reorganization – a notable thing given, you know, that thing where billions of dollars worth of customer assets were stolen or were locked up after the company collapsed. FTX also said it no longer plans to relaunch. And, finally, it appears the U.S. government thinks it's solved one of the weirdest moments of that weird November 2022 week when Sam Bankman-Fried's exchange blew up. Hours after FTX filed for bankruptcy, hundreds of millions of dollars were stolen through a hack. A few days ago, the feds charged a trio for hacks, including one roughly matching the FTX incident; Bloomberg reported it was the FTX hack.

Want more? For the latest news affecting the crypto markets, listen to CoinDesk's Markets Daily podcast.

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