Hello and welcome to the FT Cryptofinance newsletter. This week we’re taking a look at tokenisation and markets.
Is Larry Fink the new Sun King of crypto, able to bring things to life simply by putting in an appearance?
Increasingly the US asset manager he heads is the star around which the digital assets solar system orbits. BlackRock has been the main beneficiary of the era of US spot bitcoin exchange traded funds — a move its presence helped to bring about — and has attracted nearly $19bn assets under management, according to Bloomberg data.
To less fanfare last month it embarked on another, far more ambitious project: to bring crypto’s underlying technology into financial markets by tokenising assets.
“Tokenisation can be seen as the next evolution of financial markets, similar to the ETF wave of the last two decades,” Gautam Chhugani, an analyst at Bernstein, wrote last month.
It involves turning assets such as stocks and bonds, property, mutual funds or even data into a digital token recorded on a blockchain.
That token can then be used as an alternative form of payment to cash, settled in minutes and tracked when a transaction is made. In essence, one could use part of a fund to pay for something else, such as a bond, or even meet a margin call.
Right now, it’s hot. “Tokens related to this subject have experienced considerable upside, the ‘fear of missing out’ is kicking in and speculation is rampant,” wrote Manuel Villegas, digital assets analyst at Julius Baer, this week.
Few have drawn more interest than BlackRock’s first fund to be tokenised on a blockchain, the BlackRock USD Institutional Digital Liquidity Fund (Buidl). Launched last month, it is already creating a minor buzz among professional traders.
The idea isn’t new. Two years ago Franklin Templeton launched a tokenised fund but had attracted only $360mn in assets by the end of March. Yet Buidl has already drawn in $288mn from just 10 holders, according to data from Etherscan. Again, BlackRock’s heft is regarded as crucial to its success.
“This would act as the first major test case for institutional holders to experience 24/7 instant settlement benefits of the blockchain with increased transparency and improved capital efficiency, at reduced operating costs,” Chhugani wrote.
That’s in part because Buidl brings together experienced market players and crypto native firms and is sat outside a big centralised market entity, such as a securities depository.
The fund is tokenised on the ethereum blockchain and Securitize acts as the transfer agent, tokenisation platform and placement agent. Investors can custody their tokens at places such as Coinbase and Anchorage while BNY Mellon custodies the T-bills.
The main issue these tokenised funds solve is making digital cash behave more like real cash. In the real world, if you lend $1,000 you can expect to receive interest. In crypto the nearest equivalent to cash, a stablecoin, is an asset and does not generate any yield, unless it’s part of a repo transaction.
If you put $1,000 into a stablecoin, the operator should invest it in an asset such as Treasuries but it, not you, will pocket the yield. BlackRock’s promise that it will offer a stable value of $1 per token and invest in repo and Treasuries means that you get the yield, although the daily accrued dividends are paid monthly as new tokens. Buidl looks like a stablecoin, but it acts like a security.
There is also greater reassurance that investors may not be inadvertently selling a tokenised share to “bad actors”. The offering is limited to qualified investors. Unlike some stablecoins, which redeem all requests for tokens, the fund has the authority to halt redemptions to comply with laws.
So from an institutional point of view, it comes with many advantages. However, like real cash, eventually it must be put to use.
Franklin Templeton’s experience suggests few investors are bothered about seeing their ownership of a mutual fund on a blockchain. Another possibility, announced this week, is to exchange the shares in return for USDC, the stablecoin. But beyond shifting it from one form to another?
In a white paper last month a UK working group led by the Investment Association laid out two possible uses for tokenised funds: investing in tokenised securities and using it as collateral for bilateral, over-the-counter trades.
So far there are precious few opportunities or reasons to invest in tokenised securities but an efficient market for trading is one of the biggest problems in crypto.
Like hedge funds in the Treasury market, many professional bitcoin traders target the basis trade — selling futures while buying the underlying spot and extracting gains from the small gap between the two using borrowed money.
The problem is that crypto deals have to be pre-funded, meaning investors need to put up the total amount of the trade before entering a transaction.
Market makers and brokers need capital and credit to cover the gross sum of their risks so they need to borrow money and have something of quality as collateral.
Buidl’s yield and BlackRock’s backing make it far higher quality collateral than a stablecoin issued by an unregulated far-off company. That would mean the haircut — the difference between an asset’s original market value and the price paid for it — would be narrower. Banks would also be able to apply a lower capital charge for holding it as Buidl would almost certainly be regarded as a security token. Already FalconX, one of the world’s largest crypto prime brokers, has said it will let clients post Buidl as collateral.
In time, Buidl and others may lead to more efficient and exciting new ways to buy and sell shares, or bring a new level of respectability to public blockchains such as Ethereum. But its first use case may be to feed into the perpetual motion machine that is crypto trading.
What’s your take? Email me at philip.stafford@ft.com
Join me and fellow colleagues at FT’s flagship Crypto and Digital Asset Summit on May 8-9 in London. Hear from some of the leading players in the industry including Julia Hoggett, chief executive of the London Stock Exchange, Bim Afolami, economic secretary to the Treasury and City minister, Michael Sonnenshein, chief of Grayscale Investments, and many more. Secure your seat now at crypto.live.ft.com.
Weekly highlights
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A big week in the world of decentralised finance, the corner of the crypto market that doesn’t rely on a centralised entity like an exchange. Uniswap, which runs the world’s largest decentralised trading network, said it was on notice from the Securities and Exchange Commission that it could soon receive a lawsuit from the regulator. Uniswap said it was confident its products were legal. “We’re ready to fight,” it said.
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The trial of Avraham Eisenberg, a cryptocurrency trader accused of attempting to steal more than $100mn from the Mango Markets exchange by artificially inflating futures prices linked to Mango’s own token, began in New York. The trial continues. The indefatigable Matthew Russell Lee, at @innercitypress, has been tweeting every move.
Soundbite of the week: At the double
Next week is the latest of bitcoin’s quadrennial “halving” event and my inbox is awash with predictions about where bitcoin will go once the incentives for miners to verify new blocks of transactions are cut in half, to 3.125 bitcoin.
Brad Garlinghouse, chief executive of blockchain company Ripple, said more regulatory clarity and investor inflows through exchange traded funds meant all market prices could surge again, even though crypto’s overall market capitalisation has doubled to $3tn in the past 12 months.
“I’ve been around this industry for a long time, and I’ve seen these trends come and go,” he told CNBC. “The overall market cap of the crypto industry . . . is easily predicted to double by the end of this year.”
Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click here.
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