Wall Street Veteran: Bitcoin, Crypto Assets Must “Be Borrowable .. Need Financialization to Succeed”
Caitlin Long, a member of the Wyoming blockchain coalition and former managing director at Morgan Stanley, recently noted that bitcoin (BTC) and other “cryptoassets need financialization in order to succeed.”
Caitlin Long, who also served as managing director at Switzerland-based investment bank Credit
Suisse, wrote in her latest article on Forbes that proper financialization allows for efficient resource allocation. She explained that “financialization requires the development of markets for lending”, however the Bitcoin protocol “was not designed” to enable BTC lending.
Bitcoin (BTC) Lending Is Not Yet Trustless
The Harvard law school graduate also pointed out that bitcoin lending is not a trustless process.
In order to attract “major fiduciary institutional investors”, Long believes crypto markets need to be developed in a manner that is trustless and allows entrepreneurs to “borrow money to finance investment in business enterprises.”
Cryptoassets Must “Be Borrowable” To “Become Financialized”
She further noted that bitcoin and other digital assets “must be borrowable” so that they “become financialized.”
Additionally, bitcoin investors should “protect” the flagship cryptocurrency “against the tremendous incentive … to corrupt it”, Long wrote. According to the former president at Symbiont.io, a smart contract platform for financial services, lending markets can “become unanchored” from the money supply.
This, Long explains, occurs when “substitutes” for real money are created and then used as “if they’re real.” Oftentimes, these substitutes are inflated through “insidious mechanisms” so that a select few corrupt market participants can “gain something for nothing”, Long added. She thinks that the “temptation to corrupt money” is “strong”, especially if those who engage in these exploitative practices are aware that their activities will be “difficult to police.”
Bitcoin investors, who are “owners of money”, must “protect” their holdings from “bad financialization”, Long states. She explains that bad financialization in the crypto market involves “creating more claims to bitcoin (or other cryptoassets) than the quantity” of the cryptocurrency in circulation.
Off-Chain Crypto Token Issuers Must “Prove They Are 100% collateralized”
Per the 22-year Wall Street veteran’s words, “for bitcoin, responsible financialization will involve finding ways to lend bitcoin without corrupting it.” Bitcoin-related lending and financial products that conduct transactions on the cryptocurrency’s blockchain are a “good type” of financialization, Long noted.
She added that bitcoin lending or other crypto-related financial services that don’t register transactions on the digital currency’s native blockchain may be considered a “bad type of financialization.”
However, off-chain crypto transactions may still be acceptable if business owners that provide such services “prove they are 100% collateralized” and ensure they do not “artificially inflate” bitcoin’s supply.
Crypto Industry Needs “On-Chain” Settlement Of Financial Contracts
Notably, Long mentioned that currently there’s no platform or service that allows users to settle fiat currency related cryptocurrency loans on the digital asset’s blockchain. Instead, these crypto loans are registered only in “traditional banking infrastructure”, the political economy graduate from University of Wyoming explains.
She pointed out that there presently are many custodial digital asset exchanges, crypto lending services and custodians, and issuers of fiat currency related financial products that “physically” settle in cryptocurrency. These include bitcoin futures contracts, crypto exchange-traded-funds (ETFs) in some jurisdictions, and digital currency-based depositary receipts. Because these types of financial services settle transactions off-chain, they sometimes provide “cryptographic proof of reserves”, Long wrote.
“Wall Street’s” Ledgers Are “Never 100% In Sync”
According to Long’s observations, there are very few companies that are actually able to prove they have sufficient funds to back the coins or tokens they’ve issued. She thinks that it’s practically impossible for “issuers of financial products” that handle transactions through the traditional financial system to “prove that they’re 100% collateralized.”
Long argues that “Wall Street’s” account ledgers are “never 100% in sync” and that the fiat money based financial infrastructure “creates more claims to assets” than the amount of actual assets in circulation.
Although Long thinks bitcoin lending, or any other type of money lending, is “fundamentally good”, she cautions that lending the “same bitcoin” on more than one occasion is “bad” as it “creates more claims” to the cryptocurrency than the total amount that exists.
Basic Supply & Demand, Short Sellers Must Borrow First
Shorting bitcoin, according to Long, is also “fundamentally good”, however the short seller must first borrow as many bitcoins as they are short selling. But if a short seller “shorts bitcoin” or any other digital assets “before borrowing” the same amount, then that’s bad as it “creates more claims to bitcoin” than the number in circulation, Long wrote.
The international finance graduate from the Harvard Kennedy School of Government explains that bitcoin lending markets can potentially develop by “establishing legal structures” that provide guidelines for protecting investor assets. At present, this is necessary because there are no legitimate “protocol-level mechanisms” that effectively support “peer-to-peer” (P2P) cryptoasset lending, Long noted.
While Long’s recommendations might imply that a proper regulatory framework for cryptoassets should be established before lending them, she believes “even the purists” (those who do not support institutions or the traditional banking system) “would likely appreciate this, since” an individual’s rights to their assets “stem from natural law.”
Investors Need “Basic Regulatory Clarity”
As long as “trustless” or on-chain bitcoin lending is not available, Long suggests that investors must be provided “basic legal clarity” for crypto assets. This, she argues would allow for US-based digital asset lending markets to develop “free of the legal uncertainty hanging over them today.”
Having worked extensively on passing legislation in her home state of Wyoming, Long recommends “cleansing digital assets of stale liens after two years, as long as” the cryptoassets are kept with a licensed custodian.
Long’s advice to lawmakers is to develop a proper set of regulatory policies for cryptoasset custodians so that they can work towards becoming a qualified, US Securities and Exchange Commision (SEC)-approved custodian in their jurisdictions. She explains that the SEC has not yet clarified whether a digital asset’s blockchain can serve as a custodian.
Until US regulators decide to do so, cryptoassets should be held by an “unaffiliated custodian.” This is precisely what stock market mutual fund managers and investment consultants do with traditional financial assets, Long noted.
“State-By-State” Licensing Strategy Not Effective
Currently, crypto firms are “pursuing a state-by-state licensing strategy” which is very inefficient. However, Long claims Wyoming’s new bill will solve this problem. She explains that banks can operate in all 50 states which presumably would make it easier to acquire licenses with their involvement.
Elaborating on how Wyoming’s crypto bill has been designed, while suggesting that it’s how other US states should also regulate digital assets, Long wrote that investors should be given an option where they can “opt-in” for “enhanced supervision.”
For instance, the Wyoming bill recommends that cryptoasset custodians may “opt-into a higher standard” which would offer standard investor protection. This type of protection is not yet available in the crypto industry, according to Long.
Other forms of investor protection such as the 3 D’s (“define, disclose, delegate”) framework needs to be incorporated into crypto-related services, Long states. This means custodians must clearly define which “version of source code they’re running”, or in other words, specify the cryptocurrency protocol they are helping to secure. Simply stating “bitcoin is a digital asset” is not sufficient for “big institutional investors”, Long claims.
Moreover, she pointed out that “all gains from client assets [must] belong to the client, unless expressly disclosed otherwise and the client agreed.” Additionally, clients must explicitly “delegate authority” to their qualified custodian before the custodian is allowed to make any decisions on the investor’s behalf.
Long revealed that “most exchanges/custodians today aren’t set up to comply with the 3 D’s.” Before offering crypto-related financial services to the “fiduciary investment manager” market segment, crypto investors must first comply with the 3 D’s.