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1/ GREAT ARTICLE abt how financial mkt plumbing really works, incl the real reason why Lehman failed & why the same probs still mostly exist: #rehypothecation + a shortage (!) of collateral despite frenzy of new govt debt issued. @JeffSnider_AIP @RaoulGMI https://www.realclearmarkets.com/articles/2020/12/11/a_nonsensical_jumble_of_misused_words_requires_discussion_652824.html
2/ But lemme connect 3 dots abt how it relates to #crypto
* There's a SHORTAGE of collateral (T-bills, etc)--the stuff big dealer banks NEED in order to fund themselves. Facebook Libra/Diem could worsen that shortage a lot, so you can see why central bankers view it as a threat.
* There's a SHORTAGE of collateral (T-bills, etc)--the stuff big dealer banks NEED in order to fund themselves. Facebook Libra/Diem could worsen that shortage a lot, so you can see why central bankers view it as a threat.
3/ The #repo mkt periodically has disruptions caused by collateral shortages/undercapitalization of the big dealer banks. @JeffSnider_AIP looks at March 2020 in this piece but many other examples exist, eg Lehman in 2008. When repo mkt seizes up, the probs ripple across fin mkts.
4/ So, it's a big problem when pools of T-bills & other #HQLA become squirreled away outside the banking system PLUS outside the reach of the #repo mkt. (I got to interview expert Dr. Singh of the IMF abt this on @RealVision.) For #crypto now, the issue is Facebook Libra/Diem,...
5/ ...but generally stablecoins issued by non-banks other than Facebook will eventually pose the same problem. These are small now but they've quadrupled since March & are still growing at that rate. Beware--big #stablecoin collateral silos would pose big probs!
Next point..
Next point..
6/ * Earlier this yr I noted it was significant that a G-SIB moved the head of its #repo desk to run digital asset desk--in LONDON!
@JeffSnider_AIP's article should connect the dot about London:
"Regulatory arbitrage in the presence of non-harmonised #rehypothecation regimes."
@JeffSnider_AIP's article should connect the dot about London:"Regulatory arbitrage in the presence of non-harmonised #rehypothecation regimes."
7/ Jeff's article explains it well (London doesn't limit #rehypothecation while US does--was true at time of Lehman & still true.) So...connecting dots...there's a collateral shortage, and #Bitcoin 
is pristine collateral,...and London allows unlimited rehypothecation...
is pristine collateral,...and London allows unlimited rehypothecation...
8/ As Gretzky said, you gotta skate to where the puck is gonna be, not where it is. It seems at least one G-SIB is indeed doing that. This isn't just abt #bitcoin --bc #stablecoins issued by banks (NOT non-banks) are coming to #repo mkts too. #Wyoming figured this out 2 yrs ago..
--bc #stablecoins issued by banks (NOT non-banks) are coming to #repo mkts too. #Wyoming figured this out 2 yrs ago..
9/ ...and that's one reason why #Wyoming set up a special, non-lending type of bank charter ( #SPDI) designed to bridge #crypto & traditional mkts responsibly. The US needs that. Why? It connects to my last point:
* BEWARE: #crypto & leverage don't mix.
* BEWARE: #crypto & leverage don't mix.
10/ ... @JeffSnider_AIP's piece gives background--there's big leverage in #repo mkts + the length of collateral chains isn't clear. So why can't this mix w/ #crypto? Bc there's no lender of last resort in #crypto + crypto trades settle in minutes w/ irreversibility. So different!
11/ IMHO there's ONLY ONE way to mix #bitcoin & leverage in a compatible way that doesn't pose financial stability risk: set up special-purpose, ring-fenced, non-leveraged banks w/ a collateral chain limited to 1x (ie, no #rehypothecation). In other words...
& leverage in a compatible way that doesn't pose financial stability risk: set up special-purpose, ring-fenced, non-leveraged banks w/ a collateral chain limited to 1x (ie, no #rehypothecation). In other words...
12/ ... #rehypothecation & #bitcoin don't mix!
(Rehypothecation + bitcoin + leveraged G-SIBs ESPECIALLY don't mix!!)
Mixing bitcoin & leverage is hi risk (both hi loss probability + hi loss severity)--no LOLR, fast settlement w/ finality.
As G-SIBs enter #crypto they will..
don't mix! (Rehypothecation + bitcoin + leveraged G-SIBs ESPECIALLY don't mix!!
)Mixing bitcoin & leverage is hi risk (both hi loss probability + hi loss severity)--no LOLR, fast settlement w/ finality.
As G-SIBs enter #crypto they will..
13/ ...want to use these new assets to alleviate #repo mkt's collateral shortage. I've been thinking abt how to marry #crypto & trad financial systems for yrs & I think only #Wyoming has legal & regulatory regime to do it in right way so far. And that includes #custody.
14/ ...Others will catch up, I'm sure. And that will be good for everyone. There's too much at stake to get this wrong!!
PS--here's my interview w/ Dr Manmohan Singh on @RealVision abt collateral re-use. We don't always agree but he has taught me a lot!
https://www.realvision.com/caitlin-long-and-dr-manmohan-singh-the-real-mechanics-of-monetary-policy-and-the-plumbing-of-the-financial-system?utm_source=contributor&utm_medium=referral&utm_campaign=20201214_MSCL_LM_CONT_W1_LINK
PS--here's my interview w/ Dr Manmohan Singh on @RealVision abt collateral re-use. We don't always agree but he has taught me a lot!
https://www.realvision.com/caitlin-long-and-dr-manmohan-singh-the-real-mechanics-of-monetary-policy-and-the-plumbing-of-the-financial-system?utm_source=contributor&utm_medium=referral&utm_campaign=20201214_MSCL_LM_CONT_W1_LINK
