Tuesday, Sept 17, 2024

EU blockchain trials: the what, how and why

“The modern world is a crowd of very rapid racing cars all brought to a standstill and stuck in a block of traffic.” – G. K. Chesterton ||

Hi everyone, I hope you’re doing well!

Today’s kinda long email takes a break from market commentary (we’re in the waiting period, after all). Rather, I share a deep dive into Europe’s tokenization trials – what they’re focusing on, how each is different, where they’re at, and what they imply about Europe’s attitude toward the digital asset opportunity.

Last night I had a fun chat with Maggie Lake on her new live show Talking Markets, you can see the video here.

QUESTION: Would y’all be interested in subscriber chats or threads? I’m thinking it would be fun to have more open communication with you, answer questions, learn more about what you’re interested in.

IN THIS NEWSLETTER:

• Europe’s tokenization trials: window dressing, for now

If you’re not a premium subscriber, I hope you’ll consider becoming one! It’s the price of a couple of New York coffees a month, and you get ~daily commentary on how macro moods are influencing crypto markets, and also on how crypto is impacting the macro economy.

WHAT I’M WATCHING:

Europe’s tokenization trials: window dressing, for now

You’ve probably heard the saying attributed to Bill Gates:

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”

The observation aptly describes the excitement around tokenization, even today. Although, mercifully, the buzz has evolved from the “blockchain will change everything!” mantra of 2017 to the more realistic “capital markets will eventually move on-chain” conviction of the recent cycle.

That hype evolution reflects a deeper understanding of just how complex the introduction of a new market structure into large liquidity pools, intricate financial plumbing and convoluted regulatory webs will be. In turn, that understanding has led to a growing number of small-scale product launches and big-name trials which together are painting an outline of what the transformation could look like. Many of these are greeted with excited headlines and imbued with more significance than they perhaps warrant, and I myself have probably been guilty of that on occasion. Nevertheless, huge respect is due to the widening pool of determined people who press ahead despite numerous obstacles – they know that it’s always the hard work in the early, frustrating days that enables the future gains.

In the spirit of separating hype from substance, I took a closer look at the European approach to markets evolution, which I had been holding up as an example of how the EU, unexpectedly, is leading the way in large-scale multi-participant distributed ledger (DLT) testing. The European Union took the idea of a national sandbox and applied it to 27 countries, while also kicking the wheels on a range of settlement mechanisms. The European Union, I thought, was taking this potential market step-change seriously and wanted to use it to boost its influence as well as its capital raising potential. The European Union, I thought, was setting an example for others to follow.

Hmmm. Maybe not.

Looking closer, the ongoing trials are consolidating a knowledge base and sketching out what the eventual network could look like. But, for now, they’re limited, and yet another testament to the colossal problems of not just technological design but also coordination, incentives and legal support. The EU may be leading in terms of distributed ledger trial scope and size – but it looks like the results will still be too limited for practical application. This is frustrating.

Let’s dive in by catching up on the two main ongoing programs: the EU DLT Pilot Regime and the ECB wholesale DLT trials.  

Write new rules: the DLT Pilot Regime