Welcome to Chain Letter! Great to have you. On Thursdays we take a closer look at one key concept in the world of blockchains and cryptocurrencies. Feel free to suggest topics you think we should discuss in the future. | | Ready or not, Wall Street is coming for Bitcoin. Intercontinental Exchange, the owner of the New York Stock Exchange and one of the largest infrastructure providers for financial markets in the US, said recently that it plans to launch a regulated digital asset exchange. Wall Street’s adoption of Bitcoin could change Bitcoin immensely though—and depending on who you ask, perhaps not for the better.
For those who would like to see Bitcoin achieve more mainstream adoption, this is a huge development. Besides NYSE, Intercontinental Exchange owns more than 20 (PDF) exchanges, market services, and clearing houses. It is, to put it mildly, very influential in the world of finance. Its move into Bitcoin will likely entice institutional investors—hedge funds, family offices, sovereign wealth funds, and other entities looking to invest large sums of money—to follow. Many of these firms have been interested in investing in Bitcoin and other cryptocurrencies, but have been hesitant due to the lack of conventional market infrastructure.
There may be reason for Bitcoin boosters to be concerned, however. According to Caitlin Long, a longtime Wall Street veteran turned Bitcoin aficionado, the financial industry’s embrace could have negative repercussions, particularly if Wall Street firms choose to treat the currency like they do most conventional assets. The potential problems arise from the fact that Bitcoin and Wall Street operate based on “fundamentally different systems” for handling assets, says Long, who spent 22 years working for various Wall Street firms and most recently served as chairman and president of Symbiont, an enterprise blockchain company.
The difference boils down to two key aspects. First, whereas Bitcoin’s assets (bitcoins) are directly owned and controlled by individual holders of their corresponding cryptographic keys, in most cases if you buy a stock or other convention asset, you don’t own it—a centralized institution like an exchange, a custodian, or a clearing house does. What you actually “own” is an IOU from your broker or another financial institution.
Second, whereas Bitcoin’s blockchain is engineered to prevent more than one person from owning a single asset, Wall Street firms routinely use their clients’ assets to back their own transactions and trades, for example by using them as collateral in order to borrow from another firm. This type of practice is “standard operating procedure” on Wall Street, says Long, who adds that as a result, financial markets systematically “create more claims to an underlying asset than there are underlying assets.” The ledgers used to track these claims can get out of sync—shareholders in Dole Foods, for example, once went to claim their rewards after a successful class-action lawsuit against the company and found they owned 33 percent more shares than there were actual shares.
This kind of situation is “antithetical” to Bitcoin, argues Long, since it would offset the currency’s algorithmically-enforced scarcity. (New bitcoins are created at a controlled rate, via the system’s resource-intensive mining process, and the total supply will never exceed just over 21 million.) That could suppress its price, and it’s why Long is convinced that if Wall Street firms choose to treat Bitcoin as “just another asset they can trade” using their existing models for doing business, they’ll be making a big mistake. | | Loose Change Fill your pockets with these newsy tidbits. | | | Kraken, the popular US cryptocurrency exchange, is laying off 57 employees in a cost-cutting move. (Bloomberg) | | | | Goldman Sachs has shelved plans to open a desk for trading cryptocurrencies. (Business Insider $) | | | | A Chinese city has launched a blockchain-based system for tracking paroled prisoners, according to local reports. (CoinDesk) | | | | The popular cryptocurrency exchange ShapeShift will start requiring users to submit personal information, an abrupt and drastic change that has rattled many crypto enthusiasts. (Bloomberg) | | | | A state-affiliated news agency in Iran has reported that authorities have accepted cryptocurrency mining as a legal industry—just months after Iran banned the use of cryptocurrency in financial transactions. (ETHNews) | | | The Money Quote “On the legal side, it's a lot of jargon. There's no real easy way to spell it out. They issued the release to make the SEC happy.” —Jon Cappetta, a representative for the cannabis-focused publication High Times, explaining to CoinDesk why the company had recently submitted a regulatory filing that appeared to walk back a previous announcement that it would accept Bitcoin and Ether for its upcoming IPO. Cappetta clarified that High Times will be accepting crypto, it just won’t be “taking or holding” it—a third party service provider will hold it and convert it into US dollars. Far out. | | | |
