Stablecoins are a fundamental aspect of the DeFi ecosystem as they offer users the ability to transact with on-chain dollars without being exposed to the volatile nature of native cryptocurrencies, as long as they are fully backed by collateral. Nonetheless, the collateralised framework can be extended to encompass a broader array of financial assets.
For a while now, there has been talk of how blockchain, crypto, and DeFi can transform financial services. However, it has been challenging to visualize what this disruption will entail. One possible avenue is fully collateralized on-chain assets. Any entity with substantial currency reserves could create a stablecoin. The same idea applies to securities as well. If banks can tokenize deposits to issue stablecoins, why can’t securities issuers do the same?
The current market provides numerous platforms that offer asset tokenisation services. However, what’s missing is the opportunity to access public market securities through blockchains. Public blockchains can serve as a new distribution platform for these assets, making them easily accessible to investors. At present, retail investors need to go through brokers to access these securities, whether traditional brokers or fintech platforms like RobinHood.
There are two main advantages to this development.
- The first is that any assets available on public blockchains have global accessibility. The power of stablecoins like USDC has already been demonstrated in developed nations, and the same effect could be seen with securities. Making an ETF that tracks the S&P 500 available to anyone worldwide greatly democratizes financial product accessibility.
- The second advantage is the programmable nature of blockchain assets, which will open up a host of innovative opportunities. Developers can now create self-managing portfolios of equities or ETFs that are entirely managed via smart contracts, introducing a new level of automation and efficiency to the investment process.
Just like how major brands and artists have adopted NFTs to engage with their fans and customers, the financial services industry can leverage the opportunity of issuing fully collateralized assets on public blockchains. This creates a new avenue to interact with clients and customers, just like how NFTs have transformed the way brands connect with their fans.
Currently, Circle and Backed are positioning themselves to bring various financial assets onto blockchain. Assuming regulatory hurdles are not a concern, there’s no reason why exchanges couldn’t potentially offer these products to retail investors.
Considering the success of stablecoins in DeFi, it’s reasonable to expect a similar emergence for securities. The assets that gain significant traction will likely bridge the old and new financial worlds, acknowledging that the traditional system isn’t entirely broken but instead finding ways to link it with the new.
Users benefit from this development as the trust and relationships that have already been established can be utilized to bring new users onto blockchain-enabled assets, instead of merely disregarding the existing system as outdated. We must reduce the entry barriers for certain financial products, and established entities like banks and exchanges are well-equipped to do so.
Parallels between the Blockchain World and the Early World Wide Web
The current developments in the blockchain world have parallels with what we witnessed during the early days of the world wide web. At its inception, the web primarily served as a repository for information, with little room for monetization. However, as more users joined the platform and browser tools became more accessible, companies started establishing their online presence, using the web as another channel to reach their customers.
Smartphones and app stores further boosted this trend, leading to a shift from offline to online services. In a similar vein, fully collateralized securities and decentralized exchanges on blockchain present issuers with the opportunity to offer assets directly to investors, bypassing traditional brokers and investment platforms. This streamlines our modern financial infrastructure significantly, just like how the internet streamlined companies’ relationships with customers.
The Role of Blockchain in Wholesale Finance
The current model offered by Circle and Backed is essentially a distribution channel for currencies and ETFs, providing financial products on blockchain without modifying the assets they represent. Although these products are not exclusively limited to retail investors, they are primarily aimed at this market segment. The assets they are underpinned by are managed in wholesale financial markets, and it remains uncertain how blockchain will impact this market.
Historically, internet technologies were mostly embraced in retail-focused financial products via websites and apps, while private networks with strict onboarding controls were used for wholesale finance. It is possible that blockchain will follow a similar trend, with wholesale networks remaining on permissioned blockchain rails, while public blockchain rails will provide retail offerings.
Trusting Public Networks for TradFi: How Blockchain Technology is Revolutionizing the Industry
The use of blockchain technology in financial markets is expanding rapidly, but the decentralization and public nature of these networks may pose challenges for larger nations to build on top of them. Instead, public blockchain networks may serve as a mutual trust layer for bridging different jurisdictions for private networks.
While the adoption of public blockchain networks by large nations remains uncertain, we can expect to see a surge in the use of these networks to provide a new channel for financial securities. This development will catapult the traditional finance (TradFi) industry into the world of web3.
The model offered by companies like Circle and Backed provides a simple distribution channel for currencies and ETFs, without modifying the assets they represent. These are financial products available on blockchains and mainly cater to retail investors. However, the impact of blockchain on wholesale financial markets remains uncertain.
Internet technologies were first embraced in wholesale finance via private networks with strict onboarding controls. Websites and apps were mainly embraced for retail-focused financial products. It is possible that blockchain technology will follow the same pattern, with wholesale networks remaining on permissioned blockchain rails, while retail offerings are made available on public blockchain rails.
In conclusion, while the use of public blockchain networks may be challenging for larger nations, it will revolutionize the TradFi industry by offering a new channel for financial securities. As the industry adopts blockchain technology, we may see a shift towards a hybrid model where public and private blockchain networks work together to provide a more efficient and streamlined financial market infrastructure.