23rd March 2024 > > Tokenisation & leverage.

tl;dr

Tokenisation good. Leverage bad. Leveraged tokenisation is a disaster in the making.

Market Snap

Market Wrap

That is a full week of net outflows from the spot BTC ETFs. Virtually all of it was outflows from GBTC, which has happened on a daily basis since the ETFs were launched, but appears to have ramped up this week. The culprit looks to be an institutional investor. The others had reduced inflows but were all still in positive territory.

Occasional Series – The BBC

I am so disappointed.

About a week ago I received yet another of the many threatening letters from the BBC (one of the few remaining organisations that actually uses the Royal Mail) with all sorts of red and bold type suggesting I might be going to jail soon for not having a TV license, and probably have my knackers cut off at the same time.

For clarity, I do not use any service that requires a TV license. I am most careful about that.

On the upside, I was informed in that letter that an enforcement officer would visit me yesterday to discuss the situation.

Pleased about this opportunity to explain to the officer why the BBC is wasting money by sending me threatening letters that go way over the legal borderline for harassment, I wasted almost a whole day waiting outside my security gates for him/her/they to turn up (my intercom system is pretty rubbish).

What a waste of a day. I am not going to take any more notice of the BBC’s nonsense letters.

The harassment charge against the BBC is now with my lawyers. See you in court!

Curious Cryptos’ Commentary – Leverage

https://themilkroad.beehiiv.com/subscribe?ref=o5CmCFhBAK

Curious Cryptos’ Commentary – Tokenisation

Where Larry Fink goes, the world follows.

Meld, a crypto-friendly bank in Lithuania has announced an initiative to borrow against RWAs (real-world assets) that have been tokenised on the Swarm platform. Swarm currently allows tokenisation of Apple stock, Tesla stock, and two US Treasury bond ETFs. The plan is to extend the product offering to a very wide range of stocks and ETFs. Swarm is fully compliant with German regulation and is a regulated entity.

Meld itself holds a VASP (virtual asset service provider) license which passports across the EU.

Already 75,000 of Meld’s retail client base have signed up for early access.

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Tokenisation is about to revolutionise the financial services industry to the benefit of us all. But as with all technological advancements, there are downsides that we must be aware of, the risks of which should not stop the advancement, but should be mitigated against.

My concern here is encapsulated in a comment from a Swarm spokesperson:

"This could be really interesting as we go into the next bull run, where people can lend (he means borrow) against their stocks to ape more into bitcoin, for example."

Putting aside the crypto street jargon which sounds awfully out of place in this context, deliberately encouraging retail clients to leverage RWAs to buy BTC does not sound overly sensible to me.

Traditional assets that are not very volatile – houses for instance – are an efficient means of allowing leverage into the retail space. Mortgages are a prime example. But even then, there are periodic bouts of pain that suggest that the latest UK government initiative of encouraging mortgage lending with only a 5% deposit is severely misguided. As an aside, all it will do is add fuel to the rally in house prices. We have a supply side problem not a demand problem with regard to housing, but Sunak and Hunt will not address the real issues. Somebody else’s problem is their attitude, as it soon will be.

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Borrowing against financial assets to buy other financial assets can go horribly wrong, very quickly. An easy way to understand this is our recent experience of Covid.

All financial assets saw a massive V-shape in their price action. If you are not leveraged, and you do not need to sell, then these temporary aberrations do not affect you.

If you are leveraged, you will come out the other side with far, far fewer assets than you went in with. Maybe none at all, depending on how much leverage you had taken on.

I think that there may be many retail clients who don’t really understand those risks properly enough to make a sensible decision. I hope I am wrong.