tl;dr
The US charges forward with preparations for the adoption of trading tokenised stocks 24/7. The UK is belligerent towards the potential of tokenising simple retail deposits. We know who the losers are – those of us who are UK citizens.
Market Snap
Market Wrap
Higher than expected US PPI inflation data at 5.4% for August accompanied by oil passing $105 pb led to a sell-off in the long end. The Fed’s $6bn buyback of 30-year bonds couldn’t reverse that trend likely meaning a bigger bazooka will be deployed in the future.
Trump’s clumsy promise – one that may face legal obstacles – of a $5k cheque to all adult US citizens if the Republicans retain both houses in the mid-terms is a clear indication that the current administration has no problem with experimenting with a variety of QE type measures.
Occasional Series – 25 years
Wow.
Curious Cryptos’ Commentary – BTC
My agentic compliance officer is not going to be happy with this, but whatever. If something is true, you just gotta go with it.
h/t The Milk Road.
Curious Cryptos’ Commentary – Stock tokenisation
The SEC is hosting a roundtable of industry participants, including representatives from BlackRock, UBS, Robinhood, Nasdaq, Citadel Securities, and NYSE, amongst others, with the objective of preparing the groundwork to allow stocks to trade 24 hours a day rather than simply during normal exchange hours, including the possibility of extending to weekends and bank holidays. About time too, I hear you shout, and I agree with that sentiment. But let’s not be too harsh on Paul Atkins, Chair of the SEC, for when he took on the job the SEC was steeped in total antagonism towards cryptos. He has made great strides changing the destructive culture he inherited from his predecessor, who shall remain nameless from here on in. The meeting will be broadcast live here – I am sure you will want to tune in.
The SEC has also released a proposal that you might think is a touch on the arcane side, but it addresses an issue which sits at the heart of trading 24-7 – transfer agent rules. If you are unfamiliar with this topic, you won’t be the only one. I will let the SEC explain:
“Transfer agents are a key component of the national clearance and settlement system. Transfer agents now perform a more diverse array of functions and services that may not be adequately addressed by the Commission’s transfer agent rules, which have not been substantively updated since the first rules were adopted in the late 1970s and early 1980s. The rule proposal would modernize the federal transfer agent rules, while continuing to facilitate the safe and efficient functioning of the U.S. securities markets and the national clearance and settlement system.”
One of the key responsibilities of transfer agents is to keep track of changes in the ownership of securities such as stocks. Every time you buy or sell a stock using your online broker app, those centralised records are updated with those details. Back in the 1970s, that would have been a mostly manual process, but even today using straight-through-processing allied with archaic database technology, there is still a plethora of reconciliation problems to resolve.
What is extraordinary is that despite the wholesale adoption of IT since the rules were introduced, they have “not been substantively updated” – they cannot be fit for purpose. In a statement, Paul said that the new rules propose "including the use of electronic communications and blockchain technology in connection with securities offerings and the transfer of shares”. And suddenly, just like that, if adopted, 24/7 trading of tokenised stocks using public permissionless blockchain technology removes at a stroke much of the administrative burden of recording stock transfers and all its attendant costs, not least in the headcount of back-office staff required to maintain the current system.
The benefits of trading 24/7 using blockchain technology, thus improving price discovery and lowering the cost of capital for all businesses, will be a powerful force as the world adopts tokenisation of all financial assets.
The SEC, under Paul’s inspired leadership, is being proactive in driving forward the crypto revolution. If only other regulators took note.
Curious Cryptos’ Commentary – Deposit tokenisation
I can name one that behaves as the antithesis of the SEC. You won’t be surprised to hear that it is the FCA, the UK’s financial regulator, which will likely never recover from the destruction wrought upon its own culture by the hapless Andrew Bailey, now Governor of the Bank of England, during his tenure as its boss.
Monument Bank has announced tokenising interest-bearing retail deposits on Midnight’s public blockchain. Investors will be able to redeem one-for-one for sterling fiat at will. Monument says that the UK’s Financial Services Compensation Scheme of up to £120,000 per eligible depositor in the event of bank failure will continue to apply to the tokenised deposits.
Midnight is a privacy focussed blockchain that makes use of one of the wonders of the world – zero-knowledge proofs (ZKP). In essence, ZKP allows someone to prove something is true to a third-party “… without conveying to the verifier any information beyond the mere fact of that statement's truth”. It’s an extraordinary concept which I still struggle to get my head around.
It’s applicability to tokenised deposits is clear – using ZKP clients’ information is kept private, but Monument can prove compliance with all the regulatory rules. The administrative costs of providing interest-bearing retail deposits are dramatically reduced, which will be reflected in more competitive deposit rates, attracting more clients and encouraging other banks to follow suit.
Monument Bank founder Mintoo Bhandari has become a little frustrated with the FCA’s approach to this innovation:
"I thought it would have been two months ago that we would have rolled out the first tokenized deposits in the world, but it'll probably be two months more from now.”
The problem for Monument Bank has been finding an FCA-approved custodian that operates in this space. The penpushers that inhabit the FCA would prefer that Monument doesn’t even try.