Stablecoins

Source: Crypotslate.com

The growth of stablecoins has arguably been fuelled by a progressive interest in crypto currencies, themselves now valued at over $1.4 trillion. There are notably specific drivers stimulating this growth of stablecoins, such as the advancement of the DeFi sector together with more stablecoin crypto pairs, especially involving USDT (otherwise known as Tether). Increasingly, digital exchanges are now offering crypto pairs in USDT rather than Bitcoin. But Tether, despite offering assurances that its tokens are 100% backed by US$, has never offered evidence. Back in April 2019, the New York Attorney General alleged that iFinex, the parent company operating both Bitfinex and Tether, possibly defrauded cryptocurrency investors by engaging "in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds.”

Whilst stablecoins clearly continue to attract investors it is difficult to see how they make money themselves given the current global almost zero interest rates. So why do so many different organisations offer them? Well, stablecoins have created lots of trading/ transactions for digital exchanges, as investors are able to switch from other cryptos into stablecoins rather than selling their cryptos for cash. To date, much of the focus and use cases for stablecoins has been to view them as a payment mechanism, as a way to avoid using banks and in particular avoid the high transaction fees often associated with international remittances. 

However, stablecoins can be seen to be part of the infrastructure required as we witness the ongoing digitisation of other assets and services. By observing more jurisdictions (such as Switzerland, German and Luxembourg) which have now all passed legislation to enable the issuance of securities (equities and bonds) in a digital format i.e. not using paper based systems, these new digital securities will potentially need digital currencies/stablecoins. Arguably the greater adoption of these digital assets could come from the regulators since assets which are in a digital format can allow income to be distributed based on the duration (e.g., the number of months, weeks, days or potentially hours) that an investment has been held. This is opposed to the current situation where coupons on bonds, dividends on equities and rent on property is paid on fixed dates, usually every six months. Stablecoins will enable the issuers of these digital securities to use smart contracts to make automatic payments on a much more frequent basis. 

Historically, individuals gained exposure to equity markets by investing directly into equities and it was not until 1774 that a Dutch man named Abraham van Ketwich created the first ‘mutual’ fund. This was called Eendragt Maakt Magt, meaning "unity creates strength,” and was comprised of a selection of government bonds and plantation loans in the West Indies. Foreign and Colonial Government Trust was launched in London in 1868 as an investment trust i.e. a closed-end fund, which is still traded on the London Stock Exchange. It was not until 1929 that the Wellington fund (now part of Vanguard) was launched, becoming the first mutual fund to own stocks and bonds. Indeed, it was Jack Bogle at Vanguard who invented the first ‘Index Fund’ in 1975, which was the start of the tussle to attract funds under management between passive and active fund managers.

Distribution of open-end funds globally between 2011-2020 by trading strategy

Source: Statitsia.com

The demand for index funds from investors has grown steadily as more capital has been allocated to exchange traded funds (ETFs) and passively managed funds (PMFs) globally (which now accounts for 31% funds according to data from Statista). Index funds, with their lower management fees and not being reliant on individual fund managers, are now becoming more popular for those also looking to gain exposure to cryptocurrencies. Recently, German-based MV Index solutions (MVI) and CryptoCompare announced they have over $1billion in assets with fund managers who are using their various crypto indices. MVI claims, “The demand for index services has been global with products launching in markets across America, Europe and Asia”. Also in Europe, Swiss crypto investment manager FiCAS AG launched its cryptocurrency exchange-traded product (ETP) in June 2020 and has now received permission to market its ETP (similar to an ETF) on a pan-European basis.

Interestingly, the Asian Times claims that the total assets in crypto assets to be $6billion by the end of 2020 and, given the stella returns in the crypto asset class in recent months and the almost zero interest rates on bank deposits, it is understandable why cryptos have been attracting investors’ attention.

Digital Assets which trade 24/7 are ideally suited to funds that use mathematical algorithmic models, with trading being executed by computers automatically. It is almost impossible for humans to keep up to date and efficiently trade across what is believed to be over 1,100 digital asset exchanges globally. We have even seen Vanguard using Blockchain technology to improve benchmark tracking and reduce the cost of managing some of its index funds which Vanguard.

But as well as Crypto funds there is a growing range of DeFi tokens which have very similar features to funds such as the DeFi Pulse Index token, with over $62 million of assets offering exposure to range of DeFi tokens. These DeFi tokens are a new way for investors to access asset managers and styles of trading, which historically had been the preserve of only the very wealthy. DeFi tokens trade 24/7 and are accessible on-line directly, without the need for any intermediaries, custodians, administrators and other third parties which have historically increased the ‘total expense ratio’ i.e., the total costs of managing a fund for an investor.

Expect to see a lot more DeFi token/funds and crypto funds being launched in 2021 as they offer smaller investors and institutions alike an alternative and more diversified way to get exposure to this growing asset class, as opposed to holding cryptos direct. Crypto funds also potentially offer institutions a more compliant way to have exposure without the need of worrying about who owned the actual crypto before them. 

But more on this another time…..