Beyond the hype
Trillion dollar applications take root
Welcome to our 47 new subscribers across global financial markets.
The Gartner hype cycle is a powerful tool to understand the modern world.
In 2017-18, blockchain was poised to transform financial markets. Then… it didn’t.
Skepticism took hold, particularly in media and traditional finance, and it remains entrenched.
Yet now, blockchain—more formally, distributed ledger technology (DLT)—is quietly gaining traction among the world’s most sophisticated market participants.
Look no further than this new Citi report or any publication covering securities lending, post-trade, derivatives or foreign exchange.
You’ll find practical blockchain applications taking root across trillion-dollar markets.
And here’s where the Gartner Hype Cycle comes back into focus: we’ve moved beyond the ‘Trough of Disillusionment’ and are entering the ‘Slope of Enlightenment.’
There’s never been a more exciting time in financial infrastructure.
On with the clips! This week’s 9 most important stories in the rise of digital-native markets around the world:
NextFi covers the rise of digital-native finance, with a focus on the seismic change underway at the level of global financial market infrastructure.
It is produced a once or twice a week by me, Marc Andrew.
1. New York | Two years ago, a behind-the-scenes giant in U.S. financial markets went live with one of Wall Street’s biggest and most ambitious blockchain initiatives.
Known as Project Ion, the effort aimed to use blockchain to revolutionize settlement of stock trades, when buyers fork over the cash and get share certificates. Firms ranging from big banks like JPMorgan Chase to trading app Robinhood got involved. But it didn’t catch on, a person familiar with the project said, and the firm at the center of the effort, the Depository Trust and Clearing Corp., quietly ended the effort late last year.
Now, instead of replacing existing systems with blockchain for settlement, DTCC is exploring other ways to make use of blockchain technology in financial markets. But it’s starting with a more targeted approach than overhauling settlement in the massive U.S. stock market all in one go.
It’s focusing on a lower-volume process known as collateral management, which involves buyers and sellers posting cash or other assets to protect against a default. This week, DTCC announced a pilot in which firms used U.S. Treasuries as collateral on a blockchain, showing that counterparties in trades could take legal possession of collateral instantly if the other side of a trade defaulted.
Tokenized collateral “might really be the killer app for blockchain,” said Caroline Pham, a commissioner of the Commodity Futures Trading Commission, at the Digital Asset Compliance and Market Integrity Summit in New York on Wednesday…
Read the rest in The Information
more detail:
2. New York | Digital Asset and the Depository Trust and Clearing Corporation (DTCC) have completed a pilot to test collateral and margin optimisation through tokenisation.
The US Treasury Collateral Network Pilot focused on using distributed ledger technology (DLT) applications to support market connectivity across the collateral management lifecycle, and to enhance the mobility, liquidity, and transactional efficiency of tokenised assets.
Nadine Chakar, global head of DTCC Digital Assets, says: “This pilot successfully demonstrated the power of tokenisation and its potential to enhance collateral mobility and unlock liquidity.”
In the pilot, Digital Asset — along with four investors, four banks, two central counterparties, three custodians/collateral agents, and a central securities depository — operated 14 Canton nodes, connecting four types of cross-application transactions through 10 distributed applications, using DTCC’s LedgerScan solution to support tracking and governance of the assets.
Read the full story in Asset Servicing Times
3. London | Companies from Robinhood to Revolut are considering launching stablecoins, betting that stricter regulations in Europe and elsewhere will finally loosen Tether Holdings Ltd.’s grip on the rapidly expanding $170 billion digital-asset sector.
Robinhood and Revolut, two of world’s the most valuable fintechs, have both been kicking the tires on issuing their own stablecoins, but the firms could still opt not to proceed, said people with knowledge of the matter. They asked not to be identified discussing confidential information.
Upstarts have tried to compete with Tether’s USDT for years, with most having little to show for it. Circulation of the stablecoin — a type of token designed to maintain a constant value — has swelled to almost $120 billion, accounting for more than two-thirds of the market by that measure. Runner-up USDC stands at $36 billion, according to CoinGecko data, and other stablecoins are far smaller.
But with the European Union poised to fully adopt wide-ranging crypto rules at the end of this year, Tether faces heightened uncertainty. Under regulations known as MiCA, crypto exchanges operating in the EU may be forced to delist stablecoins from issuers like Tether who don’t have the appropriate permits.
Read more in Bloomberg
4. Beijing | Chinese markets have given a short-term welcome to an “unprecedented” toolbox promised by Beijing to stabilise capital markets and revive animal spirits, but the bigger concern is whether the measures will be enough to stimulate the faltering real economy. The People’s Bank of China on Tuesday unveiled an Rmb800bn ($114bn) war chest to boost the stock market by lending to asset managers, insurers and brokers to buy equities, and to listed companies to buy back their stock.
This was the first time the PBoC had “innovated” and used these types of monetary policy tools to support capital markets, central bank governor Pan Gongsheng said at a briefing flanked by financial regulators. The funds allocated could be doubled or tripled if the schemes work. Policymakers also floated an idea for a “stock stabilisation fund”, though few details were given.
The measures amount to one of the biggest bazookas the PBoC has aimed at China’s equity markets, which have slumped in the past four years, reflecting a lack of confidence in the country’s ailing economy.
Read the rest in the Financial Times
An aside: the remarkable growth in central bank liquidity since 2000
5. Washington | U.S. Rep. Maxine Waters (D-Calif.), the House Financial Services Committee's ranking Democrat, suggested in a Securities and Exchange Commission oversight hearing on Tuesday that she and the Republican chairman should finish a bill this year to regulate U.S. stablecoin issuers.
"I want us to strike a grand bargain on stablecoins and other long overdue bills," Waters said to the committee's chairman, Rep. Patrick McHenry (R-N.C.). "I strongly believe we can reach a deal that prioritizes strong protections for our nation's consumers and strong federal oversight."
McHenry, who is set to retire at the end of the year, responded that it's his hope "that we can come to terms on stablecoin legislation this Congress," though he noted, "the nature of how we do that is where things get a little tougher and the votes are a little tougher."
"We're running out of time to pass this," Waters said. She and McHenry had previously worked for months on a compromise bill on stablecoin regulation, but a bipartisan effort hasn't yet crossed the finish line. With the congressional session waning, the opportunity to shepherd legislation is dwindling.
Read the rest in Yahoo
6. Canberra | A three-year ‘roadmap’ for digital money-related work has been published by Australia’s Treasury and central bank.
The ‘Central Bank Digital Currency and the Future of Digital Money in Australia’ joint-paper concludes that a ‘clear public interest case’ to issue a retail CBDC has ‘yet to emerge’ in Australia. But it highlights the role that a wholesale CBDC, ‘alongside other forms of digital money and infrastructure upgrades’ could play in improving the functioning of wholesale markets.
The paper reveals plans for a concerted push – titled ‘Project Acacia’ – to explore opportunities to boost the ‘efficiency, transparency and resilience’ of wholesale financial markets through tokenisation and new settlement infrastructure.
This will get kick off next month (October) and form part of a ‘larger effort’ to ‘step up engagement with industry and other stakeholders on the question of how monetary arrangements could better support the Australian economy in the digital age’.
Read more in Global Government Fintech
7. New York | Bank of New York Mellon Corp. is moving closer to rolling out custody services for the Bitcoin and Ether held by exchange-traded product clients after a review enabled the company to avoid treating the assets as a balance-sheet liability.
The review, conducted earlier this year by the Office of the Chief Accountant at the Securities and Exchange Commission, didn’t object to BNY’s determination that the safeguarding of cryptoassets for its regulated exchange-traded product clients shouldn’t be recognized on BNY’s balance sheet, the bank said in a statement to Bloomberg News on Tuesday.
The SEC’s SAB 121 rule imposes the balance sheet requirement to provide clarity on crypto-related risks but banks argue it locks them out of custodying digital assets, a potentially lucrative business. BNY said the accountancy office’s decision is specific to the financial institution’s ETP use case.
Providers can charge as much as 10 times more for safekeeping crypto compared with traditional assets, given the heightened need for security against hacks that have cost the digital-asset industry billions of dollars. By one estimate, the crypto custody market is worth approximately $300 million now and is growing by about 30% yearly,
Read the full story in Bloomberg
8. San Francisco | PayPal Holdings announced on Wednesday it is enabling U.S. merchants to buy, hold and sell cryptocurrency from their business accounts.
Cryptocurrency has moved from being a nascent asset class towards greater market acceptance after bitcoin exchange traded funds were approved for listing by the U.S. SEC earlier in the year.
"Business owners have increasingly expressed a desire for the same cryptocurrency capabilities available to consumers," said Jose Fernandez da Ponte, Senior Vice President of Blockchain, Cryptocurrency, and Digital Currencies at PayPal.
PayPal joined the cryptocurrency market in 2020, allowing customers to buy, sell and hold bitcoin and other virtual coins using the digital payments company's online wallets.
The company became the first major financial technology firm to embrace digital currencies for payments and transfers when it launched its dollar-backed stablecoin in August 2023.
Stablecoins are crypto tokens whose monetary value is pegged to a stable asset to protect potential investors from wild swings in prices.
Read the rest in Reuters
9. Hong Kong | The Hong Kong Monetary Authority (HKMA) has announced the launch of phase two of its pilot test for the central bank digital currency (CBDC), named e-HKD.
The development is part of Hong Kong’s plan to integrate a digital currency into the local economy, in line with the global evolution towards the digitalization of money.
The second phase of the pilot program will focus on two key areas: tokenized deposits for daily payments and asset settlement options. Additionally, HKMA has selected 11 companies to actively participate in this phase, including banks, financial institutions, and management companies.
The first phase of the e-HKD pilot test allowed the HKMA to better understand the potential use of the CBDC in the economic context of Hong Kong.
Now, with the start of phase two, the focus shifts to more practical and innovative applications of digital currency. One of the main objectives of this phase is to explore the use of tokenized deposits for daily payments.