The Future of Money: The 3 New Ideas You Need to Know this Week (Issue 43 - 16 May 2021)

Dear Friends, 

Welcome back to my weekly newsletter where I share some of the major developments on the future of money that you need to know about!

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1. The Bitcoin Perpetual Swap Was Born 5 Years Ago This Week

In May 2016, a relatively new crypto exchange called BitMEX announced the launch of a new product called the perpetual swap.

This innovative product, invented 5 years ago this week, would end up playing an outsized role in the development of crypto markets. 

The XBTUSD leveraged swap (XBT is similar to BTC) product allowed traders to trade on the Bitcoin/USD exchange rate with up to 100x leverage with no expiration. 

The perpetual swap was quite an innovative development and was a new type of financial derivative. 

Source: BitMEX

The logic behind this was that if crypto markets operate 24/7, 365 days a week, then why should crypto derivatives operate in outdated traditional futures products with expiration dates that are tradeable only during business hours? 

Or to put it differently, in a market that never stops, why should a crypto futures product need to expire?

Whilst the perpetual swap offered many of the traditional benefits of derivatives, like leverage or the ability to trade without the need to hold the underlying asset, its real innovation came from how it dealt with the basis risk.

For example, unlike futures contracts where the price can sometimes deviate from the spot underlying price (commonly referred to as basis), perpetual swaps had to be closely pegged to the underlying assets they track. 

This was addressed by introducing something called a “funding rate mechanism,” which you can think of as either a fee or a rebate for traders to hold their positions. 

This is where the “perpetual” in “perpetual swap” comes into play.

To ensure that the contract matches the price of Bitcoin, holders either pay or receive funds every 8 hours depending on the position they took (long or short) and whether the swap price is higher or lower than the price of Bitcoin. 

Before long, other exchanges took notice and began their own copycat models with Bybit, OKEx, Binance, FTX, Huobi and many others following BitMEX’s lead and releasing their own perpetual swap products between 2016 and 2020.

The perpetual swap has been quite a success with over $3 trillion traded on the BitMEX platform alone. 

However, despite its innovative features, there has been a lot of backlash as well. The BitMEX exchange has been involved in numerous regulatory investigations and legal proceedings in recent months, with its founders about to face trial in the coming months. 

In addition, many regulators, from the UK to Hong Kong, have explicitly banned retail investors from trading such instruments due to the risks they may present. 

The crypto derivatives space has grown a lot since this first BitMEX announcement 5 years ago. 

Today, there are over $2 trillion of Bitcoin futures alone traded each month. And other players like Binance or Huobi (that have ironically copied the original perpetual swap product) have volumes that are far higher than BitMEX. 

Source: The Block

But this is an area to watch as the crypto derivatives space will clearly grow over the coming years as more and more institutional investors and funds enter the crypto space. 

Source: Henri Arslanian GIF page

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2. How Are Tether Assets Backed?

The wildly popular stablecoin Tether, which we have discussed previously in this newsletter, recently disclosed the composition of its reserves backing its USDT stable coin as it tries to demonstrate that its consolidated assets exceed its consolidated liabilities.

Considering the dominant role that Tether’s USDT plays in the $90 billion plus stablecoin supply, this is an area of focus for many.

The most interesting part of the report though is on the composition of Tether’s reserves.

For example, 75.85% of Tether’s reserves are cash or cash equivalents. 

But 65.39% of those cash or cash equivalent reserves are commercial paper, on which there is no information.

Source: Tether

This new attempt at compliance and transparency comes in the wake of a settlement agreed to with the New York Attorney General in the aftermath of an investigation that alleged that Tether’s partner crypto exchange Bitfinex may covered up around $800 million in losses.

But the reality is that getting granular data is difficult and none of the regulated peers of Tether offer any additional information. 

For example, regulated exchange Gemini publishes an independent report by its accountants in which very basic information is provided.

The same goes for Tether’s rival USDC, which publishes a monthly reserve account.

All in all, it will be very interesting to see how these reporting and monitoring practices evolve, especially as stablecoins become more mainstream in the broader economy in addition to the quasi systemic role they already play in the crypto ecosystem. 

Lets not forget that he total stablecoin supply was only around US$5 billion in January 2020. It is now over US$90 billion and growing very fast!

Money Quote of the Week

“Bills travel through the mail at twice the speed of checks.”

Steven Wright

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Pic of the Week

3. What Does Warren Buffett Think of Bitcoin?

As you could imagine, the Sage of Omaha is not a big fan of this whole Bitcoin thing.

The billionaire CEO and Chairman of Berkshire Hathaway has made this clear numerous times in the past, referring to Bitcoin as “rat poison squared” and arguing that the asset has no value and only attracts “charlatans.”

Buffett came roaring right back into the crypto news sphere recently when he and his Vice Chairman, Charlie Munger, discussed Bitcoin during Berkshire Hathaway’s annual shareholders meeting. 

Munger, who is somehow even more anti-Bitcoin than Buffett, didn’t hold back during the meeting, claiming that Bitcoin is only used by “kidnappers and extortionists” while adding “I think I should say modestly that the whole damned development is disgusting and contrary to the interests of civilization.”

What’s interesting about Buffett and Munger’s comments that Bitcoin is “contrary to the interests of civilization” is that Berkshire Hathaway has had no issue at all investing heavily in arguably some of the most scandal plagued industries in the world, from fossil fuels to traditional banking.

Meanwhile, Buffett and his firm have come under direct criticism over opaque corporate governance, with critics accusing Berkshire Hathaway’s Board of a lack of independence, with many of the sitting members coincidentally happening to be longtime friends of Buffett.

This criticism has become especially pointed in recent weeks, with The Economist calling for him to step aside and make way for the next generation of leadership at Berkshire Hathaway. 

Ironically, this call for Buffett to move on came in an issue with central bank digital currencies featured prominently on the cover.

Ultimately, whilst Buffett and Munger are hardly the only outspoken critics of Bitcoin and cryptocurrencies, and have been antagonistic towards the space for a long time, their attacks this year are especially eyebrow raising, given the huge growth and mainstream adoption of the asset. 

Maybe they just feel left out?

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Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with.

Who is Henri?

Passionate and focused on the future of finance and money, Henri Arslanian is the PwC Crypto Leader and Partner, the former Chairman of the FinTech Association of Hong Kong and an Adjunct Professor at the University of Hong Kong where he teaches the first FinTech university course.

Henri advises many of the world’s leading crypto exchanges, investors, financial institutions and tech firms on their FinTech and crypto initiatives as well numerous governments, regulators and central banks on Fintech and crypto regulatory and policy matters.

With over 500,000 LinkedIn followers and 30,000 newsletter subscribers, Henri is a TEDx and global keynote speaker, a best-selling published author and is regularly featured in global media including Bloomberg, CNBC, CNN, The Wall Street Journal and the Financial Times.

Henri was named by LinkedIn as one of the global Top Voices in Economy & Finance and is the host of the FinTechCapsules? and CryptoCapsules? social media series.

Henri was recently named by Onalytica as the #1 most influential individual on Finance globally on LinkedIn out of 50k+ individuals working at the top professional services and management consulting firms in the world.

Chambers Global named Henri the “highest profile FinTech consultant in Hong Kong”, Blockchain Asset Review named him the “Most Influential Crypto and Blockchain Thought Leader in Asia”, and Asian Private Banker awarded him the “FinTech Changemaker of the Year” award.

Henri’s latest book “The Future of Finance: The Impact of FinTech, AI and Crypto on Financial Services” published by Palgrave Macmillan, was ranked as one of Amazon’s global top 10 best-sellers in financial services and was recognized as one of the “Best FinTech Books of All Time” by Bookauthority.

Before joining PwC, Henri was with a FinTech start-up and previously spent many years with UBS Investment Bank in Hong Kong. Henri started his career as a financial markets and funds lawyer in Canada and Hong Kong.

Henri speaks five languages including English, French, Armenian, Spanish and Mandarin Chinese.

He holds a Masters in Chinese Law from Tsinghua University; a joint Global Executive MBA from Columbia Business School, London Business School, and Hong Kong University; a Bachelor of Law from the University of Montreal (Dean’s List of Excellence) and a Masters in Transnational Law from the University of Sherbrooke, where he was awarded the Governor General of Canada Gold Medal for Academic Excellence for having graduated with the highest grades of the university.

 You can learn more about Henri on his website (www.henriarslanian.com) and you can reach him at [email protected]