December 17, 2021
Two articles in the last 10 days that you should pay attention to if you are in capital markets or crypto, or better, both. First is the extremely well written and thoughtful Jay Clayton piece in the WSJ today, every one please read. Second is the Bank for International Settlement (BIS) with their poorly conceived, researched, and thought through report “DeFi risks and the decentralization illusion”.
The first article by the former SEC Chairman highlights the need for US markets to stay abreast of technology and market innovation. Elon Musk has a great video talking about the need to innovate and not just incrementally improve or you get stuck designing to improve legacy systems instead of embracing the next generation of tech. Every big bank in America has a digital transformation project under way, the main role they have is to get off COBOL as a programming language and detangle legacy systems (I’m exaggerating, but just a little).
In capital markets the time for innovation around data has arrived. A decentralized data economy is coming and knowledge and proprietary data sets are power, and central information (knowledge) platforms lead to centralization of power and extraction of value (from those who give their info to central platforms) or denial of value (to those hesitant to give their info to central platforms).
In a knowledge / services economy, information is the other side of the coin (no pun intended). The discount of a triple net lease for amazon logistics center to Amazon bonds, does not price in the cost or friction of also owning a building, it prices in lack of data and liquid secondary markets. Tokenization and Inveniam solve this.
The second article by BIS, doesn’t deliver a smoking gun indictment of DeFi as the headline promises, you might find the opposite.
Here are some highlights:
“Lending in DeFi tends to be over collaterized.”
” Although transaction costs are higher in DEXs, some traders still prefer these platforms…” (A “DEX”, of course, is a decentralized exchange.) – a shocker that early days of innovation have higher rents…
“DeFi could yet play an important role in the financial system”.
So, where’s the bombshell… “The growth of DeFi poses financial stability concerns” due to leverage – Do you recall Longterm Capital, how about NINJa loans in RMBS pools, how about Archegos… The implied narrative is global banking has always done such a good job managing client over-leverage…this is good news indeed, if it were true.