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True revolutions shake up the social order. The disenfranchised often end up at the top of the post-disruption pecking order, as happened with both the French revolution and the Russian revolution. Tech disruptions are also similar. Old industries get up-ended overnight, taken out to the backyard, and often shot en masse with all their ecosystem family members. Video killed the radio star, CDs put paid to VCRs, and digital downloads to CDs/DVDs. Ditto in transportation, in digital consumption, in technology, in cameras. New entrants reign supreme in the new paradigm.

Except, of course, in crypto finance.

While we (some of us, at least) await a crypto singularity, the intersection of crypto and finance is looking more and more like traditional finance.

Look at the projected market for STOs (securitized token offerings), which are among the lowest hanging fruits to go after in the crypto opportunity space.

Source: CB Insights

Coinbase and a few others aside, most of the big names in crypto finance will likely be the big banks and exchanges and custodians that are the biggest names in traditional finance, especially as crypto M&A picks up and crypto startups exit through the M&A route. In the post-crash ICO market, an increasing allocation of the pre-sale rounds are now going to established VCs, as a number of the trigger-happy crypto investors that adopted spray-and-pray strategies in 2017 and Q1 2018 are now forced to sit on the sidelines and ‘manage and support’ existing investments.

This is at the heart of the problem that a lot of maximalists have with the current marriage of crypto and finance. Crypto does finance significantly better in many ways, especially once the pesky issues around regulation have been addressed. What is not to like about security tokens, about blockchains in trade finance, or about ICOs. However, it does seem a bit like old wine in new bottle. There is no foundational, from-the-bottom-up, re-architecting of the financial ecosystem. This is not necessarily a bad thing, and this is what Wall Street and main street would probably like, a managed transition with some elements of clear continuity. However, this is not really the way of the Valley (or its spiritual cousins around the world), the ethos and the derring-do that drives disruption. And this is at the heart of the debate between the folks that swear by security tokens and those who swear at them.

Either ways, there are some exciting companies that are pushing ahead with re-architecting traditional finance. Compound (that raised a round led by Bain Capital, among others), is recreating the traditional money markets, allowing crypto holders to receive interest for their crypto holdings while enabling investors and traders such as hedge funds to borrow exposure without necessarily buying coins. DyDX is a protocol that enables margin trading in a decentralized, p2p, trustless fashion. Genesis and SALT are focused on the crypto lending space. Figure (ex-SoFi founder) is a startup that wants to use the blockchain to disrupt the home-financing and securitization market.

Which leads us to a thought experiment; When will we see the type of sophisticated structuring that changed the face of modern finance, the first Crypto credit default swaps or even Crypto CDOs? After all if crypto-synthetic repo markets are here, can synthetic crypto CDOs be far behind. How would one construct a crypto CDO? One potential way this could work is as follows

  • Have a reference portfolio, that literally references price movements around an event, say the prospect of ETH going below $100 or say some protocol just collapsing and its value imploding
  • Get investors to put money into a pot. Investors are now one side of the trade, let us say they are writing crypto-swaps on the event above, say ETH going below $100 (they could do this on DyDX btw, with some associated borrowing to offset positions on the aforementioned Compound)
  • For assuming credit risk, the investors will demand a premium. This will have to come from the insurance buyer (the CDS buyer). Let us say this is a large fund that has a huge position in ETH
  • As ETH stays above $100, investors continue to collect premiums from the buyer investors get gains. When ETH falls below $100, the pot will make whole the CDS buyer for the amount of protection they have purchased
  • In a centralized paradigm, the ‘sponsor’ of the structure, presumably new-age crypto bank, or equally likely Goldman/JPM/Credit Suisse, make a small ‘house fee’ either ways. In a decentralized paradigm, the whole thing would be automated and traded on DyDX or some similar derivatives platform, in which case the fees would accrue to protocol sponsor

The above structure could be made more interesting by constructing a basket of tokens on which one side buys protection and the other side sells.

Meanwhile in Meanwhile in Crypto Wonderland….

“Spain Drafts New Crypto Laws” Spanish cryptocurrency investors could face mandatory reporting of their holdings for tax purposes under a new draft law the government approved late last week. María Jesús Montero, Spain’s finance minister unveiled the measures at a press conference recently. She mentioned the government’s intent to identify and make holders of cryptoassets declare them regardless of whether they are in Spain or offshore.

“Bakkt Might Go Live in December” ICE’s upcoming cryptocurrency trading platform Bakkt could officially launch on December 12 if approved by the Commodity Futures Trading Commission (CFTC). ICE announced that Bakkt could begin offering physically settled bitcoin futures contracts marking the first crypto-related offering provided through the new platform. The futures contracts will be backed by Bakkt bitcoins held in the ICE Digital Asset Warehouse.

“SEC Suspends Trading in Simex” The SEC has suspended securities trading of American Retail Group, a Nevada-based firm for making false claims that its cryptocurrency trading activities were approved by the SEC. According to the SEC, American Retail Group, also known as Simex, had published two press releases stating that the company had partnered with a custodian qualified with the SEC, however the SEC does not endorse or qualify custodians for cryptocurrency.

“Russian Equity on Blockchains” The Russian State Duma is planning to allow owners of privately held companies to create and sell so-called “digital financial assets (DFA)” that act as digitized equity for the company through a new edition of a draft bill. DFA data will reportedly be verified by the Russian Central Bank and stored via blockchain.

“North Korea Behind Recent Hacks?” According to the cybersecurity firm Group-IB, a North Korea-sponsored hacker group that calls itself “Lazarus” has stolen $571 million worth of crypto since the start of 2017. That’s about 65% of the $882 million in crypto stolen over the last 22 months. Lazarus is also linked to the massive hack on Japan’s cryptocurrency exchange Coincheck, which happened back in January and led to the loss of about $532 million worth of NEM.

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