Tokenization Might Replace Securitization
Finding a growth model: ABS, tokens, BTC-USD dependence
Challenges and Impacts
Financial modeling has replaced a spontaneity in business systems. Rapid scaling has become a tactical task, not a long-term goal. Limiting time of decision-making does not protect somebody from mistakes that would be foresighted otherwise if the industries were sluggish. One of the life truths is that to create a debt is much easier and faster than to create a property object. If you do create a debt, you should form new trillion-dollar markets. That is not possible without a paradigm shift, changing a shape of things and creating new level infrastructure projects. It is about revolutionary changes.
The Unhealthy Heritage
Before “The Great Recession” (1), world economies were supported by the consumption fever, financed primarily by loans and supported by the real estate market bubble. Citizens could live beyond their means, believing that property prices will always grow. Now no one thinks so. The growth model came to the end, and there is nothing on the horizon that would replace it (2). Saying with a deep sadness, people have lost their mind in finding rapid and comprehensive models for a blitz-enrichment. After the securitization model collapse, it seemed that it was possible to use debt steroids, but music had not lasted long. Global debt has set a new record high of USD217 trillion (over 327% of GDP) in early 2017 (3). The world economy faces a new level unemployment (up to 13% amid young) and other challenges (4). There is a frustration everywhere that generates more and more passivity.
There Is a Ghost Called Tokenization
They say tokenize, tokenize, tokenize everything! It has been well-known that asset-backed securitization is the transformation of an illiquid asset into a security. A security is tradable, and therefore more liquid than the underlying loan or receivables. Securitization of assets can lower risk, add liquidity, and improve economic efficiency. The bank or firm sells or assigns certain assets, such as consumer receivables, to a special purpose vehicle. The SPV issues debt, dividing up the benefits (and risks) among investors (5). In 1985, the long-term securitization market was established in the US when $1.2 billion in ABS were issued. Since that time, the ABS market in the US has grown dramatically. Securitization is the process by which assets with generally predictable cash flows and similar features are packaged into interest-bearing securities with marketable investment characteristics (6). After mortgage-backed obligations collapsed, not surprisingly then, the mortgage market experienced the most aggressive regulatory response to the crisis of any asset class. Mortgages were by far the largest consumer debt instrument, with close to $10 trillion outstanding.
The next largest markets are student loan debt and automobile debt, at $1.2 trillion and just under $1 trillion, respectively (7). With that about a third of the risky car loans that are bundled into bonds are considered “deep subprime,” a level that has surged since 2010 and is translating to higher delinquencies on the loans, according to Morgan Stanley. The percentage of subprime auto-loan securitizations considered deep subprime has risen to 32.5 percent from 5.1 percent since 2010, Morgan Stanley said. The researchers define deep subprime as lenders with consumer credit grades known as FICO scores below 550. […] Analysts from firms such as Wells Fargo & Co. […], to credit-grader S&P Global Ratings have noted the increasing riskiness of loans that get securitized (8).
The market capitalization of listed American companies was $64.854 trillion dollars in 2016 (9). […] The value of all the equities in the Wilshire 5000 Total Market Full Cap Index (a proxy for the entire domestic market) stands at $26 trillion. That’s 135% of U.S. gross domestic product (GDP), according to figures tracked on a quarterly basis by the Federal Reserve Bank of St. Louis. By this measure (10), stocks are frothier than they’ve ever been — even in the months leading up to the 2000 dot-com crash […] Or it is about 141% of GDP for Nov 30 2017, according to YCharts data. This is higher than the long term average of 80.22% (11). The hedge-funds yield is about to decrease.
There are lots of signs that there is a probability of world tokenization wave. On the one hand, it is all about the cryptocurrency acceptance. As Christine Lagarde said (12), “Instead of adopting the currency of another country — such as the U.S. dollar — some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.” On the other hand, there is something in the air that pushes the global rally using bitcoin, other currencies, and digital tokens. Moas spoke with CoinDesk about his forecast for the cryptomarket and predicted that all cryptocurrencies would be worth $2 trillion in the next 10 years (13). The swaggering macro manager, Novogratz, who flamed out at Fortress Investment Group LLC is starting a $500 million hedge fund to invest in cryptocurrencies, initial coin offerings, and related companies. He will put up $150 million of his own money and plans to raise $350 million more by January, mainly from family offices, wealthy individuals and so on (14).
Global IPO markets in Q1 2017 saw the highest first quarter by global number of IPOs since 2007. The outlook for accelerated growth in 2017 is optimistic. With global equity markets at record highs and volatility low, global IPO activity got off to a brisk start in Q1 2017, with 369 IPOs raising US$33.7b, a 92% year-on-year increase in number of IPOs and a 146% increase in proceeds. Q1 2017 was the most active first quarter by global number of IPOs since Q1 2007, when 399 IPOs raised US$47.5b altogether (15). Blackmoon Crypto offers a vision for a new standard for tokenized investment vehicles that will bridge the gap between the fiat and crypto universes. Meanwhile, the Blackmoon Crypto Platform focuses on all the aspects of tokenized investment vehicles, from technology and infrastructure to legal compliance and corporate structuring (16).
It is possible to issue tokens with a price that is dependent upon or derived from one or more underlying assets. Like asset-backed securitization (ABS), asset-backed tokenization (AST) is possible to provide: stock, obligation, real estate, commodity, intellectual property. At the same time, a token can function as a credit default swap (CDS), which provides monthly insurance payments using smart contracts. It can be issued to hedge risks: a) a market collapse by Δ%, b) a price collapse of an instrument Δ%, c) mining policies changing. To remind, most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes (17).
Bitcoin Futures: Is It a Way Towards… Derivatization?
It has been publicly announced that CME Group is implementing and going to trade Bitcoin futures this December (18). Nasdaq will introduce the products as early as the second quarter, and the contracts will trade on its NFX market (19). As of 2013, the notional amount of outstanding contracts totalled $710 trillion at end-2013, up from $693 trillion at end-June 2013 and $633 trillion at end-2012. The notional amount of outstanding OTC derivatives contracts rebounded to $542 trillion at end-June 2017. Notional amounts rose from $482 trillion at end-December 2016 to $542 trillion at end-June 2017, close to their level of a year earlier. In contrast, their gross market value, which provides a more meaningful measure of market and counterparty credit risk, declined further in the first half of 2017, from $15 trillion to less than $13 trillion (20). So, should we upscale it with tokens?
One of bitcoin key problems is its free exchange into existing reserve currencies, including USD, on a free-floating base. The absence of demand-backed commodities, denominated in bitcoin, which is in constant demand, does not allow maintaining the stability of value and its scaling. In the economic sense, anature of the existing cryptocurrencies is dualistic. On the one hand, they are a beneficial form of private money, which were historically common in individual jurisdictions. On the other hand, cryptocurrencies represent another dollar-denominated derivative, the underlying asset of which is a computing power. There are no legally binding price scopes for bitcoin miners: a decentralized issuer is not required to maintain the exchange rate, but structural changes of a computing power are all about non-linear price consequences. Bitcoin futures is not only about the opportunities but is also about the new level BTC-USD dependence. It actually legitimates short sales against the BTC-USD pair on the CME that, in an absence of sustainable store acceptance, might pump down the whole market without much effort — it is the challenge (19).