The US dollar has some problems

plus: a stablecoin update, institutions are cautious, so are markets

“Do not go where the path may lead, go instead where there is no path and leave a trail.” –Ralph Waldo Emerson ||

Hi everyone, and - finally - happy Friday! I know conferences and events are a great way to connect, but I have to confess I’m happiest when I’m at my desk, reading and typing and tackling the ever-present backlog. If I owe you an email, I apologize; notifications weren’t working as I expected, I’ll be fixing that.

Today’s newsletter is especially long I know – I’ll compensate with some shorter ones next week. Depending on events, of course.

IN THIS NEWSLETTER:

• Institutions are cautious

• The US dollar has some problems

• Stablecoin updates: institutional moves

• Macro-Crypto bits: markets

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WHAT I’M WATCHING:

Institutions are cautious

One of the events I was at this week was The Network Forum, an annual gathering of traditional market infrastructure providers, mainly post-trade. For years it has featured a few panels and round tables on digital assets (that’s why I get invited), and provides a useful glimpse at what traditional institutions are actually thinking, not what crypto proponents want you to think they’re thinking. There are usually a couple of crypto firms present who are selling an idea, but it’s an invite-only event and the mood is generally low on hype.

Below are some scattered thoughts taken from panels and conversations – Chatham House rules, which means I can talk about what was said without naming names.

• Less disinterest than in previous years – almost everyone I met told me “of course we’re looking into it”, and by that they usually meant more than reading some articles, they meant setting up trials, proofs-of-concept and often actual client-facing services. I heard from one traditional market infrastructure service provider representative that there was “no structural reason to stay out”.

• But there seemed to be a deeper degree of scepticism that the hype is justified, that processes can be totally rewritten, and that these are broken enough to warrant the considerable cost.

• The main area of interest has to be custody – most of the people I spoke to were either working on custody solutions or identified it as a key concern of clients. This reminds me very much of a few years ago: around 2018, a lack of institutional custody solutions was the main barrier for traditional investment. Then that got solved with high-level crypto-native services, usually built by people from the institutional side. Now, traditional custodians are responding to clients who want to participate in the new technology, but with familiar names. Full circle? Not really, the service providers may end up being the same, but the landscape is different, much more diverse in terms of participants.

• For tokenization, the main barrier now is lack of adoption. There’s very little mainstream demand for tokenized assets, little justification for the investment in figuring out a new process – most of the surge in market cap from onchain “real-world” assets comes from crypto-natives and institutions that are “kicking the tires”.

• But that doesn’t mean the stage isn’t being set: a few people I spoke to said that the work they were doing in tokenized assets wasn’t about “appetite” but about “agenda”. There’s a recognition that digital assets will be a meaningful part of capital markets going forward, even if the tipping point is still far off, and that “organizational knowledge” takes time to build.

• It’s not clear to all that the missing link is onchain money, either stablecoins or a central bank digital currency (CBDC). One of the payment solutions in the recent round of ECB digital asset trials was a link between a distributed ledger and fiat payment – that seemed satisfactory to most. But, several did mention the frustrating lack of a widely accepted “cash leg”. In Europe, for large securities transactions, that will most likely need to be a wholesale CBDC.

• Some mentioned that a key appeal of stablecoins for institutions is the ability to more efficiently “surveil” money. And at least one large financial infrastructure component mentioned inbound enquiries as to how to handle onchain assets while complying with sanctions.

The US dollar has some problems

I still often hear investor sentiment along the lines of “never fade the US!”. And there is logic and precedent behind that: the deepest capital markets, the most entrepreneurial culture, the official support for innovation, the talent pool, and I could go on.

But the dollar is not feeling it. Rather, it is demonstrating what looks to be a lasting sentiment shift. It is not reacting as you would expect given both geopolitics and relative rate moves – which suggests there’s another narrative in play.

Of course, both could be true: a weaker dollar can co-exist with strong US markets. But for foreign investors, currency outlooks matter.

Here are just some of the things I’ve noticed recently: