Reminiscences of a Coin Operator

One of my favorite books on markets & trading is "Reminiscences of a Stock Operator".  It chronicles the ups and downs of Jesse Livermore's life as a trader in an era where bucketshops were the norm for ordinary folk and only very few had access to major exchanges and actual price discovery.

A lot has obviously changed since those times but, to me, the key take-away is how little of that change has really benefited the retail market participant. I would even argue that what has been gained in increased market efficiency and market access has been more than offset by the regulatory and administrative overhead of the financial services system as a whole, whether that be in trading, lending, custody, clearing, or ancillary fields such as accounting, rating, administration, etc.

Where software and automation have transformed most industries, in TradFi the change has been mainly on the front end (the user interface) as opposed to at the very foundation, at the settlement layer if you will. Users can pay for stuff and ape into their favorite meme securities using convenient apps such as Robinhood right from their smartphone, but the settlement of these transactions is still a legacy system (FedWire, centralized clearing houses, COBOL mainframe databases, and CUSIP numbers). And in many cases, the big institutions are the ones profiting the most from these apps, as they just as Jesse Livermore did, discovered that being a market maker for the average joes is where the real money is at.

Similarly, bank intermediation of credit creation results in unequal access to credit between those credits that suit the bank's capital adequacy ratios and regulatory preferences, and those that do not. The relationship between the yield on the resulting credit portfolio to interest rates on savings/deposits remains opaque at best and that's before you factor in the leverage that the average bank uses to boost the returns on that lending book... Most of which is spoken for by regulatory & compliance costs, bankers' remuneration, and dividends to shareholders.

Today stablecoins offer a largely dollar-denominated base asset for the crypto ecosystem. Stablecoins in other currencies (EUR, JPY, GBP & CHF) are being experimented with, but their liquidity remains relatively low for a multitude of reasons. We believe stablecoins are one of the most useful innovations the Digital Asset Ecosystem (DAE) has produced to date, and that as an asset class, they will be a major contributor to the next wave of crypto adoption. Why would you have your money in a savings account if you can get higher interest in a sustainable and transparent manner that is not dependent on prime brokerage-type lending but backed by real-world credit assets, whether that be government bonds or actual real-world lending activities. All of which can be done directly on a stablecoin with the denomination of your choosing, with the eventual goal that the stablecoin can become adopted and useable for payments and other real-world activities.

Stablecoins will thus revolutionize the savings landscape.  As competition forces stablecoin issuers to share the yield on the underlying asset portfolios and they find innovative and transparent (no-fractional reserve dependent) ways to generate and share such yields with their respective stablecoin holders, their economic attractiveness as savings assets will increase, which in turn will drive adoption. We can see this starting to arise as DAI begins to explore sharing the interest from their RWA activities with DAI holders, once the trend changes the competitive nature of the industry will force the others to follow suit and try out-compete each other.

Indeed it is the yield on the assets backing the stablecoins that will set them apart from CBDCs (if they ever come).  CBDCs will have to choose between being un-backed, akin to food stamps, so they are useable & transferable but without inherent value or yield outside of a specific purpose, or linked/backed in an algorithmic manner to government debt securities thus curtailing endless QE going forward. The latter could compete with stablecoins as transferable and composable money-market instruments but my guess is they will fail to put a hard algorithmic cap on QE which will make CBDCs inferior as stores of wealth.

The composability of stablecoins lets their owners be their own bank in making their own decisions on how to use their stablecoin balances to generate additional yield (over and above the underlying yield on the assets backing it) through liquidity mining, providing leverage to others via lending protocols or other onchain activities.  What's more, as there is no fractional reserve in a stablecoin issuer like Circle or Tether and the liability side of the balance sheet is fully on-chain, there remains only the asset side of the balance sheet that needs monitoring/regulating. When you hear Jamie Dimon reeling against cryptocurrencies (coping), just know that he understands what a game-changer this would be in terms of ending regulatory capture and the banks' hegemony.

Lending protocols will perform the function of banks in a fully automated and transparent fashion with minimal rent-seeking or overhead and real-world assets whether already securitized or private will be brought on-chain through intermediaries such as Florence Finance, GoldFinch, TrueFi, Maple, and many others, thus decentralizing the actual creation of credit.

Lastly a word on regulation. The on-chain world was expressly built to be "permissionless" and it is imperative it remains so (shout-out to Erik Voorhees and his thinking on this topic).  I believe "permissionless" is often misunderstood as "without rules" or "ungovernable" but in fact, it is quite the opposite. It poses no limit on setting "rules of engagement" as long as they are the same for all and enshrined in code as opposed to arbitrarily determined by centralized institutions and regulators.  What is important, is that people are treated equally and free to come and go as they please, whereby the ability to leave (i.e. opt-out without permission) is as important as the ability to join and participate.

It should be very apparent that the ability to monitor and regulate is obviously vastly improved through most blockchain technology.  Rather than this being directly dystopian, I believe the permissionless aspect will force a more nuanced discussion as to the balance between the "art of the possible" and what is necessary/desirable from a regulatory oversight perspective.  Indeed it will also force a re-evaluation as to who is responsible for such regulatory oversight (self-custody vs. custodial services).  This ongoing journey of discovery that is the DAE today and the ability to implement/experiment with it incrementally and transparently will be a vast improvement over banks and government regulators debating these matters behind closed doors in the absence of either the tools for implementation and the public's ability to opt-out to keep them honest.

The future is bright, the future is on-chain!