I really like The Economist and I really like podcasts, which means that the Money Talks podcast from The Economist is usually a solid ear bud fit for me. But most recently they irked me in the summary of their most recent two part pod on ‘the future of crypto’.
The presenters asked themselves to summarise how they feel about the future of crypto. They casually threw around references to casinos, lack of meaningful use cases, the regulatory stance that had ‘made its mind up’ to not allow crypto, and that the idea of crypto being the new internet was now a thing of the past.
“It’s fairly safe to say at this stage that crypto is not going to be the next internet. I don’t think it’s going to be economically meaningful or transformative technology if it can’t shake this reputational taint that it’s always had.”
…then comments about Bankman Fried being a criminal which means crypto has no value etc etc (which is akin to saying investing is a waste of time because Bernie Madoff set up a Ponzi scheme).
Quite frankly, this is sloppy journalism.
What do they mean by “crypto”. Do they mean bitcoin, which for all intents and purposes is a digital commodity with little use but as a store of value? Are we talking about Elon Musk’s (useless) pet project, Doge Coin? Are we talking about crypto currencies that are a consequence of layer 1 blockchains, which themselves create an immutable, transparent, accessible distributed ledger for data world wide? Tokens? To say that crypto is not going to be the next internet is like saying food will make you fat… I honestly think it’s that stupid…
Let’s take tokenisation for example. This is the process of issuing a digital representation of an asset on a blockchain. It’s not so important to know exactly how that works, and to be honest, many lawyers and regulators are still trying to work out the fine detail of what it means to have a digital, tradable version of a real world physical asset. It’s not straight forward, but a lot of progress has been made.
In effect, the token gives its holder a claim over the real-world asset. So if you have the token in your wallet, then you in effect have the legal rights over the thing that the token is representing. But, it’s the right hand part of the diagram that’s important, and is best explained with an example.
Imagine signing a piece of paper that says that anyone that has that piece of paper in their hands can drive or sell your car. In effect, that piece of paper gives ownership rights over the car, because you’ve signed it and you own the car. Now - you’ve had a great idea to start buying up loads of lemons from your surrounding neighbours and making them into the most delicious lemonade. But you don’t have the cash to buy the lemons nor the juice making machine. So you take a long train journey to Scotland with your piece of paper in your hand to visit your cash rich friend, who agrees to lend you £500 in return for you giving him the bit of paper about your car, because your friend thinks the car is worth £1000. If you don’t get the money back to him in 1 month, he gets the car. Not bad.
You head home, use the cash to buy what you need, make the lemonade, it sells really well, you make a ton of profit, go back to Scotland, give your mate back his £500 plus a bit of interest for his troubles, take back your piece of paper, and wend your merry way back home.
Now that’s a super simple (sorry!) example, but there are two KEY points. 1) the value of the car has been used to create further value, when otherwise it was just sitting in your drive doing nothing. And 2) you got some money from Scotland… a long way away… and the car didn’t move. In effect, you transferred the value of the car half way across the country, without it actually going anywhere.
This is basically what blockchain tokenisation is doing. Except that the value of what I use in my example as the £1000 car is estimated to be about $1 trillion globally - in other words, that’s the value of assets that are just sitting around doing nothing. And with tokenisation, instead of transferring that value up to Scotland, you can do it globally…. and it doesn’t require a train journey, it will happen instantly. Plus you don’t need a rich friend, you can transact with anyone else in the world, and you can know that they are a trustworthy person via what’s called verified credentials.
This month the blockchain industry reached a milestone with tokenisation. BlackRock, which is the world’s largest asset manager, tokenised one of its money market funds using JP Morgan’s blockchain business, called Onyx. A money market fund is just a massive pool of investment capital that has cash flows associated from fees. In effect, think of it like an interest bearing asset. It has value, but you can’t really buy and sell the fund - it just sort of sits there in BlackRock. JP Morgan were able to create a tokenised representation of the fund, which was passed on to Barclays, who used the tokens as collateral in order to lend BlackRock money (I’m simplifying, but that’s in essence what happened). So BlackRock went from having an illiquid (valuable) asset to having cash that they could use in the financial system to generate value.
The implications of this technology are vast. Whilst in the short term this is likely to be used by big financial institutions for dealing with one another (the technology they use at the moment was built in 1973, which is why it can take a few days for cross border transactions to go through), it will eventually trickle down to the consumer. Its essence is to make finance more efficient. Projections on the size of the tokenisation opportunity vary hugely, but estimates range from Citigroup’s $5tn to Boston Consulting Group’s $16tn by 2030. Money talks… so maybe the podcast should reassess their assertion that “crypto” is not going to be an economically transformational technology. Tokenisation seems like just that to me.