The worlds of traditional finance and cryptocurrency/blockchain are still far apart. But we should keep our eyes open for signs of a longer-term convergence between legacy and decentralised finance, says Chris Thomas, an entrepreneur and former investment banker and asset manager.
Blockchain can easily replicate some key functions of investment banks and asset managers at a much lower cost, says Thomas, who is our guest in the latest episode of the New Money Review podcast, ‘the future of money in thirty minutes’.
Here are some highlights from the recording:
“If you own bitcoin, you can lend it out and earn 6, 7 or 8 percent interest”
“Crypto markets are still too small for the investment banks and the larger institutions. There are still opportunities for small local traders who have the technology to arbitrage between the exchanges.”
“What prompted Fidelity to get involved in blockchain? The rising revenues from the bull market were being outpaced by the rise in costs.”
“The whole financial services industry has got deep, legacy IT challenges. Some of the platforms that underlie their IT systems are 25-30 years old and you can’t just strip them out.”
“The decentralised finance space is still fairly early in its development. There are only a few coins and lending platforms that can be used. Track records are limited, and the market is not yet big enough for institutions to come in.”
“In blockchain and distributed ledger technology, asset managers are behind the curve when compared to the banks. But over the next 10-15 years blockchain offers asset managers the opportunity to cut lots of middle and back office costs.”
“In two years’ time I expect the prime brokerage market to have lots of crypto offerings. Already, if you own bitcoin, you can lend out your holdings and earn 6, 7 or 8 percent interest a year. We also have the Maker Dao protocol, where you can stake your coins, and the Cosmos and Tezos blockchains, which offer something similar. There are lots of opportunities for blockchain technology to replicate the traditional prime brokerage business.”
“At the moment, secured loans using crypto collateral are overcollateralised by 40-50 percent. But over time you’d expect this level of overcollateralization to come down.”
“If I had to pick two key things to follow in crypto over the next year, I’d say the Maker Dao protocol, and the halving of bitcoin’s block reward that’s due to happen in May next year. If that leads to a run-up in bitcoin prices, it could open up arbitrage opportunities between exchanges again.”
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