Navigating the Complexities of Stablecoins: Payment or Asset Management?

Today, I delve into an intriguing aspect of the digital finance realm: the business model of stablecoins. These digital currencies, such as Tether and USDC, are reshaping how we think about payments and assets in the digital era. With their ability to enable digital payments across various sectors, from cryptocurrency transactions to automated machine payments and tokenization, stablecoins stand at the forefront of financial innovation.

A fundamental aspect of stablecoins is their pegging to fiat currencies at a 1:1 ratio, which ostensibly offers stability and reliability. However, beneath this surface of stability, lies a complex web of risks and challenges. The most significant of these is the risk of a "run" on stablecoins, where all holders simultaneously seek to redeem their digital currency for fiat money. This scenario tests the resilience of the underlying assets, often termed as "high quality liquid assets," which, despite their name, are not without liquidation risks.

The seemingly straightforward solution of holding all fiat reserves in cash opens up a Pandora's box of logistical and financial quandaries. Where should this cash be stored? Banks, the traditional custodians of money, come with their own set of credit risks. Large withdrawals could also precipitate liquidity crises at these institutions.

An alternative that emerges is storing these reserves with central banks. Simple, right? But this leads us to another critical question: Should central banks pay interest on the reserves of stablecoin issuers? The precedent set by the Bank of England is illuminating. In their approach to handling stablecoin reserves, they demand these be held in accounts at the bank but do not offer any interest on them. This stance is not unique; the European Central Bank (ECB) follows a similar policy, not paying interest on the required minimum reserves of banks.

This leads us to an important crossroads in the stablecoin narrative. The role of central banks is pivotal, not just as custodians of cash reserves but also as enablers of payment technology, while the stablecoin issuers execute this technology. If central banks, like the ECB, are not inclined to pay interest on cash reserves held by stablecoin issuers, it raises fundamental questions about the sustainability and profitability of the stablecoin business model.

This situation brings us back to our original question: Are stablecoins primarily a payment mechanism or an asset under management business? As we continue to observe and participate in the evolution of digital finance, it's crucial to consider these underlying dynamics, which will undoubtedly shape the future of stablecoins and their role in our digital economy.

#Stablecoins #DigitalFinance #CentralBanking #CryptoEconomy #FinancialInnovation

Looking forward to your thoughts and insights on this complex yet fascinating topic!

worked with OpenAI ChatGPT 4

OpenAI. (2023). ChatGPT [Large language model]. https://chat.openai.com

Stablecoins are cryptocurrencies that are designed to maintain a stable price over time. They are often pegged to a fiat currency, such as the Euro, and backed by collateral, which could be any asset of value but should ideally be cash or short-term bonds. It is to create no trouble but just a helpful tool. Stablecoins created based on algorithms or pegged by exotic assets are another part of the story, but let’s keep it simple and look at fully fiat-pegged stablecoins. Are they necessary in Europe?

Indeed, the debate on the necessity of stablecoins in Europe continues to rage. As such, some enthusiasts may argue that stablecoins are the bridge between the traditional financial sector and the new digital one. However, looking closely at the situation in Europe, it becomes pretty clear that stablecoins are entirely unnecessary. And we do not even talk about CBDCs some politicians want to prohibit.

The truth is, the Euro, the British pound (“Is this still Europe?”, just a question to all British people, please advise), and the Swiss franc, among others, provide a solid foundation for economic activities within the continent. These well-established currencies have been reliable for decades and offer stability for businesses and individuals alike. They are backed by robust economies and regulatory systems that have proven to weather the storms of time.

So stablecoins are utterly unnecessary in Europe. I mean, who needs a digital currency that’s stable and reliable? Shall Crypto Exchanges adopt stablecoins as a store of value instead of having fiat on their omnibus accounts? Crypto exchanges manage all the risks better on their own. Why segregate assets? Crypto exchanges may have no transparency about their banking partners, but why bother as investors? Everything will be okay. Time lags on transfers to and from exchanges are a natural thing. Quality banking partners and asset managers in stablecoin projects are not required. Let’s use the traditional rails, maybe returning to the suitable old fiat currencies backed by gold. Ok, just 180,000 tonnes are there, but dig gold from meteorites and other planets to make it work. Everybody will be happy.

We’ve got the good old Euro, the pound, and the Swiss franc — what more could we possibly need? Plus, why would anyone want to invest in a cryptocurrency backed by something tangible, like the Euro or gold? That’s just too secure and trustworthy for my taste.

Moreover, Europe enjoys a highly efficient, advanced banking system, where cross-border payments are a breeze, thanks to innovations such as the Single Euro Payments Area (SEPA) and Instant SEPA. These systems allow for instant and cheap money transfers across Europe, making the benefits of stablecoins, in this regard, redundant.

Who cares if stablecoins could make cross-border payments faster and cheaper or help people in countries with unstable currencies protect their savings? Sepa is the holy grail. Whoever wants to transfer money out of Europe? Not the people from Northern Africa or Turkey or? Or all these Internet of Things applications, maybe even edge computing, who wants to use it? Not forgetting that Europe is highly advanced in terms of technology adoption. The old fax machine is still humming in German offices, and their numbers are on many business cards.
Contrary to popular belief, the fax machine in German offices symbolises efficiency and reliability rather than technophobia. Europeans are not averse to adopting innovative technology but prefer practical, tested solutions over uncertain ones. That’s not our problem, is it? Let’s stick to the traditional financial system that’s been so well for centuries. It’s not like we need to innovate or adapt to changing times.

And let’s not forget the potential risks of stablecoins. Sure, they might offer more privacy and decentralisation than traditional payment methods and maybe even division of work to gain efficiency. That means they’re also perfect for illegal activities like money laundering and terrorism financing. Well, it seems cash is even better for it, and the track record of money laundering in the traditional finance system is impressive. Who cares about financial inclusion and empowering individuals to control their own money? Oligopolistic banking systems make so much money, so why bother even for financial education? Let’s keep things the way they are, shall we?

Considering these factors, the conclusion is that stablecoins might be more of a problem than a solution in Europe. Rather than embracing an unnecessary technology that poses significant risks, Europe could focus on further improving and refining its current financial system.

Let’s go even further and ban stablecoins altogether. We don’t need more options and flexibility in our financial system. We need more regulations and restrictions to keep things nice and predictable. Who wants to deal with the hassle of learning about new technologies and financial instruments? Learning about and adapting to new technologies and financial instruments could be seen as a hassle, mainly when the existing systems function well. That’s just too much effort for us simple Europeans. The good old times when bartering was a thing should come back. It would be so adventurous to barter financial advice against eggs or seven days in Ibiza against school education for the kids. We have made our life too easy already.

So, to sum up: stablecoins are utterly unnecessary in Europe. Let’s stick to the status quo and ignore new technology's fit and risks. Who needs innovation and progress when we can keep doing things as they’ve always been?

#Finance #Fax Machine #Education #Digital Transformation #Crypto

Just read the great Bitmex blog “All Aboard!” from its founder Arthur Hayes. As an arbitrage trader by heart (well, it was my first professional trading job as well), it just opens the eyes to a sea of opportunities.

You own 100,000 EUR, but you are unhappy with the banks charging you a negative interest rate?

Do you want to earn interest rates as high as inflation rates at least? Or even better a lot more?

Let’s do it. Currently, you may earn 5.26% for 100,000 USD with ETH staked at Blockfi in a year. However, you have the price risk of ETH.

But this is not what you want! You want

• no crypto risk

• 100,000 EUR invested

• a decent return

You wonder how some of these companies can pay you so much on staking BTC or ETH. It may be just arbitrage. I discussed a few weeks ago the arbitrage of GBTC and BTC, here we have a look at the arbitrage opportunities with ETH.

What you have to do is

• sell 100,000 EUR, buy USD for it

• trade a EURUSD forward until years end (protects your exchange rate)

• buy ETH with the USD

• sell ETH-Futures to years end (no delta risk on your crypto)

What does it give you?

• around 25% annualized return

• no currency risk

• no crypto risk

Well, you encounter counterparty risk and contract risk as always. You may also encounter slippage, depends on the quality of your execution.

Is anybody interested to build a company on this? Please let me know, let’s change the financial world.

#interestrates #investing #bonds #currency #crypto #ether

When you stake BTC, you can earn interest.

One staking company is BlockFi where you earn on a deposit of 1 BTC for one year an amount of 3,047.91 USD annually, i.e. 6% with BTC at 50,719 USD.

How does BlockFi earn the interest? Maybe somebody wants to take out a credit in BTC and BlockFi charges a higher rate than 6%. Or by arbitrage?

Maybe BlockFi shorts a BTC holding entity which is fully regulated but trades at a premium to BTC. For example, Grayscale Bitcoin Trust (GBTC) was trading at 40% premium to BTC according to ycharts on the 21st December 2020.

So, BlockFi borrows GBTC shares and sells the GBTC shares at 140% of BTC. BlockFi shorts GBTC.

Simultaneously, BlockFi delivers BTC to Grayscale to convert them into GBTC (so called in-kind contribution). These newly created GBTC become unrestricted after a 6 month holding period, i.e. can be delivered to the lender of the GBTC shares.

Profit: 40% - GBTC lending fees - transaction fees

Interesting fact: BlockFi holds 36.1 million shares of Grayscale Bitcoin Trust (GBTC), currently around 1.5 billion USD.

Each GBTC holds Bitcoin per share: 0.00094680

But now, the premium disappears or you can say it collapsed. It is a discount!

And now?

#BTC #staking #GBTC #arbitrage

The success of decentralized exchanges is fascinating. Automated market makers as SushiSwap or PancakeSwap grow substantially.

The cost of gas resulted in moves between the basic chains from Ethereum to Binance Smart Chain with the consequence of impressive return rates on BNB token, but on Cake and Syrup as well.

What do you think? Still hungry?

Have a great week!

#defi #sushi #pancake #fintech #collaboration #crypto

Fair? Complicated! Broken!

Robinhood sells orders to Citadel, Citadel works in high-frequency trading as well as in dark pools. Citadel was even „Fined by Finra for Trading Ahead of Clients“ (Bloomberg, 21st July 2020).

High-frequency trading and dark pools may impact the transparency of markets.

Misconduct in darkpools was fined with more than 229 million USD in the US beween 2011 and 2018, MiFIR in Europe limits the trading in dark pools with the Double Volume Cap.

High-frequency trading uses colocations to get faster access to data. They are able to transact faster then others by this practice.

Interesting:

„Protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.“ (SEC)

Change the broken system of intransparent trading, centralized institutions, and intrinsic systemic problems.

Protect investors through transparency and with decentralized access to data!

Go for blockchains!

What is your opinion?

#decentralize #financeinnovation #crypto #Robinhood #hedgefunds #GameStop

Trading in GameStop is the story of the day, well Blackberry, AMC, Varta and some more are traded in a similar way. Hedgefunds lost a lot and complain. Have all the traders of Robinhood complained that high-frequency trading hedgefunds do use their technology to their advantage (access to central exchange servers)? Have the Robinhood traders even complained that trades from Robinhood are sent to Hedgefunds for trading and that Robinhood gets paid for it? (Robinhood gets even more for option trades).

Gamestop trading was stopped by Robinhood due to growing settlement risks, Robinhood used their credit lines and got an extra funding of 1bn USD. Robinhood as a central entry point simply restricted access.

This tells us that there is no free market anymore, trades do not get to the marketplace anymore. Also, the old settlement system looks like Atlantis, but is still running.

Let‘s learn from the cryptomarkets. Free access for everybody, decentralized trading possible, more or less immediate settlement (just depending on the time until some blocks are confirmed).

What is your opinion?

#decentralize #financeinnovation #crypto #Robinhood #hedgefunds #GameStop