“There are but two powers in the world, the sword and the mind. In the long run the sword is always beaten by the mind” – Napoleon Bonaparte ||
Hi everyone, and hello September!
👀 You’re reading Crypto is Macro Now, which covers the role of crypto in the changing landscapes of finance, economics, politics, culture and markets. 👀
It seems that last week a stack of intriguing crypto-related papers dropped – it will take me a while to get through them, but I’m on it, I’m on it…
Production note: this newsletter will skip production tomorrow as I have to be away from my desk for most of the morning for medical stuff. Back on Thursday!
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A stablecoin is a claim on something, and the something varies far more than the price does. Cash and short-term treasuries at a regulated issuer. Other crypto. An algorithm and a promise. All of them sit near a dollar until the mechanism gets tested.
Allium Research explains how stablecoins differ: https://allium.so/blog/what-is-a-stablecoin-a-clear-guide-to-digital-dollars/
And get weekly onchain data and more analysis like this from the Allium Research team on Substack.
IN THIS NEWSLETTER
Can financial institutions use public blockchains?
Markets: hopeful resilience
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WHAT I’M WATCHING:
Can financial institutions use public blockchains?
The ideological battle between decentralized and centralized networks rages on. Actually, it’s not even an ideological battle in that few deny the inherent advantages in a distributed, resilient, open network – rather, the debate comes down to practicality.
I’ve often argued that financial institutions may intellectually acknowledge that public networks offer intriguing advantages, but that their inherent caution will keep them in permissioned silos.
That might soon change. A paper published last week by Rebecca Rettig, Omid Malekan and Michael Mosier lays out how financial institutions could, legally, work with public blockchains. It’s an interesting read that dispels many of the myths around decentralized risk for regulated entities. The authors are well-known and well-respected names with deep experience in both traditional market and blockchain regulation. Put differently, they are credible, neutral observers of the tussle between risk vs protection, decentralization vs control, new vs old.
Below, I’ll summarize their main points, and then bring in some of the more technical public blockchain objections laid out in a JPMorgan paper published in June.
For the purposes of this post, I’m going to assume that you’re familiar with basic public blockchain functionality (validators/nodes programmatically process blocks of transactions and maintain the network’s universal state).
I’m also going to assume that you’re clear on the difference between permissionless and permissioned blockchains (it comes down to whether or not you need to ask permission to access a network). A reasonable question is why bother with a blockchain if you are limiting participation, why not use a faster, cheaper, more flexible distributed database? The point of a blockchain is that anyone can use it and build on top of it without altering its functionality. But I digress, this is not about permissioned networks, it’s about dismantling institutional barriers to using permissionless blockchains.
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The main premise of the Rettig, Malekan and Mosier paper (“The Compatibility of Permissionless Networks and Financial Integrity A Practical Guide for Financial Institutions” – I’ll refer to this as the RMM paper from now on) is that open networks themselves are not the barrier. They are perfectly legal, and used by financial institutions around the world. The internet, for instance, is an open network upon which supervised businesses can build applications.
