Tuesday, Jan 16, 2024

what Larry Fink was really saying, Moody's tokenization push, the end of the Ukraine war?

“Societies have always been shaped more by the nature of the media by which men communicate than by the content of the communication.” – Marshall McLuhan  ||

Hello everyone! I hope you’re all doing well… Today’s email is a bit heavy on the text, there is SO much to talk about. There are some cool charts at the end that each tell a good story and deserved more words around them, but like I said, too much text.

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IN THIS NEWSLETTER:

• It’s not necessarily about ETFs

• Going deeper on BlackRock’s tokenization narrative

• The end of the war

• Key figures

WHAT I’M WATCHING:

It’s not necessarily about ETFs

Last Friday, BlackRock CEO Larry Fink gave not one but two high-profile interviews (with CNBC and Bloomberg) in which he touted the appeal and inevitability of asset tokenization. He insists that within a few years, all stocks and bonds will be represented on a blockchain, and there will be no more financial crime. A lot of what he said just did not make sense, and since I’m allergic to baseless froth, I picked his statements apart on an X thread that triggered a fair amount of controversy. You can read the thread and comments here.

Most of the criticism of what I said was along the lines of “stop being negative!!”, which is worrying in that it suggests that speculative fever might be reigniting (this is never a good sign). One interesting debate that I enjoyed was around this extract (it feels really weird to be quoting myself here):

“‘We believe ETFs are a technology, no different than Bitcoin with the technology for asset storage.’

Whattttt???? ETFs are not a technology, they are a legal construct. And they are totally different from Bitcoin, which is a technology.”

Bloomberg analysts James Seyffart and Eric Balchunas chimed in to say that they believe ETFs are a technology, and since they know so much more about ETFs than I do, it got me probing more deeply. I mean, maybe? “No different than Bitcoin”, obviously not – Bitcoin is an entirely new way of storing and moving information, it is a base technology on which as-yet-unimagined applications can be built. Also, as a technology, it enables activities that were not previously possible… as do ETFs, which enabled new types of investment strategies. So, you can see where the distinction starts to get a bit blurry. I’m still sticking to my conviction that ETFs are a reworking of the rules rather than a new invention, but I may end up changing my mind about this – it comes down to what we mean by “technology”. What do you think?

Anyway, I digress, back to Larry Fink’s tokenization marketing.

As you can perhaps tell from the aforementioned X thread, I was especially annoyed by his statement that tokenization will stamp out financial crime. That’s unrealistic, and claims that are just simply wrong will set up tokenization expectations for disappointment. The crypto industry has already had plenty of that, we don’t need tradfi titans adding fuel to fire of broken promises.

I was also annoyed by his association of the spot crypto ETFs (plural, since ETH is probably next) with tokenization. Bitcoin has very little to do with tokenization, at least until (if?) bustling layer-2 networks emerge. Ethereum is much more relevant, hosting roughly 80% of tokenized asset market cap on public blockchains (95% if you include stablecoins), according to 21.co’s dashboard on Dune Analytics.

(chart via Dune Analytics)

BlackRock has a proposal in front of the SEC for an ETH spot ETF. I think it will get approved. It’s understandable that Larry would want to start drumming up interest.

The thing is, it’s not clear that Ethereum will gain much in tokenized asset market share once tradfi starts to get active. Of the tradfi giants experimenting on public blockchains, Franklin Templeton is using Stellar and Polygon. In October, UBS Asset Management piloted a tokenized money market fund on Ethereum as part of Project Guardian, led by the Monetary Authority of Singapore; the bank has also issued securities on Corda and permissioned Ethereum. In the end, it will come down to what the regulators are comfortable with, as well as cost – unfortunately, decentralization is unlikely to be the main priority.

However, Larry Fink is a smart individual, and understands financial market plumbing better than most. He is also a good salesman, and has actual and future crypto ETFs to sell. So, is he misunderstanding blockchain technology here? Or is there something else going on?