Dear,
Two weeks ago we looked at the opportunity that Bitcoin (the most popular crypto-currency) represents for efficient management of payments .
https://www.linkedin.com/pulse/bitcoin-sap-banking-ferran-frances?trk=hp-feed-article-title
But, we know that Bitcoin is a very volatile currency which makes it unsuitable for offering other Financial Services like Loans or Deposits.
If you take a loan in Bitcoins, the Forex volatility of the Bitcoin can increase your debt or reduce your deposit value very quickly; for that reason, even merchants using Bitcoin, try to convert their Bitcoins to local currencies like USD or EUR, just after receiving their payments.
Investing and lending is a substantial component of the Financial System, and we’ll not be able of building a robust Financial System supported by crypto-currencies, till we don’t fix the volatility issue.
Additionally, volatility in the value of assets and liabilities, included crypto-currencies, increases the Value at Risk of the exposures, with its correspondent capital consumption, and this is a big issue in times of capital scarcity.
In order of tackling the crypto-currencies volatility issue, the next evolution in the world of the crypto-currencies are the "asset backed crypto-currencies".
And remember, what’s important about the crypto-currencies is not the currency itself, but the technology which makes them possible; “The Blockchain”.
Asset backed crypto-currencies are derivative contracts (forward contracts) posted and managed in the blockchain. The underline of those derivative contracts is a commonly traded asset, like Gold, US dollars, Euros or Chinese Yuan Renminbis, which gives transparency to the value of the asset backed crypto-currency and reduces its volatility.
In fact, as in any other forward contract, the value of the asset backed crypto-currency matches the value of its underline (spot price) at maturity date, building the mechanism for reducing the crypto-currency volatility value.
The underline of the derivative can be physical, but this is not necessary, as the asset backed crypto-currencies can also be built as synthetic derivatives with cash settlement, mitigating the counterparty risk by introducing higher collateral requirements.
Derivatives trade is one of the biggest opportunities for Blockchain based startups; the volume of the Over-The-Counter derivatives market is around $700 trillion negotiating in a very expensive and inefficient market, which has become even more expensive with the introduction of the new regulatory framework (Dodd-Frank in the US and
EMIR in Europe) and their increasing capital requirements.
The dominance of big banks in derivatives trade has been already threatened by new startups like trueEX, which three years after receiving authorization from the U.S. Commodity Futures Trading Commission, manages around 20% of the Interest Rate Swaps market in the U.S
https://www.trueex.com/about-us
But these startups are still subject to the ruling of the clearinghouses network.
What will be the impact of replacing them with a much more transparent and efficient network, like the blockchain?
Think about it, the financial system, as we know it, is being threatened by three major forces.
- Over-leverage and capital scarcity.
- More stringent regulation.
- A technology revolution introducing more efficient and dynamic players.
Do you think that obsolete banking technology and processes are going to survive to this revolution?
Traditional banks have to reshape, implementing best practices, and integrated systems capable of providing capital efficiency and supporting the technology revolution.
We’re working already on the integration of new technologies like blockchain in standard SAP processes; I’ll describe some of them in future posts.
Looking forward to read your opinions.
K. Regards,
Ferran.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Two weeks ago we looked at the opportunity that Bitcoin (the most popular crypto-currency) represents for efficient management of payments .
https://www.linkedin.com/pulse/bitcoin-sap-banking-ferran-frances?trk=hp-feed-article-title
But, we know that Bitcoin is a very volatile currency which makes it unsuitable for offering other Financial Services like Loans or Deposits.
If you take a loan in Bitcoins, the Forex volatility of the Bitcoin can increase your debt or reduce your deposit value very quickly; for that reason, even merchants using Bitcoin, try to convert their Bitcoins to local currencies like USD or EUR, just after receiving their payments.
Investing and lending is a substantial component of the Financial System, and we’ll not be able of building a robust Financial System supported by crypto-currencies, till we don’t fix the volatility issue.
Additionally, volatility in the value of assets and liabilities, included crypto-currencies, increases the Value at Risk of the exposures, with its correspondent capital consumption, and this is a big issue in times of capital scarcity.
In order of tackling the crypto-currencies volatility issue, the next evolution in the world of the crypto-currencies are the "asset backed crypto-currencies".
And remember, what’s important about the crypto-currencies is not the currency itself, but the technology which makes them possible; “The Blockchain”.
Asset backed crypto-currencies are derivative contracts (forward contracts) posted and managed in the blockchain. The underline of those derivative contracts is a commonly traded asset, like Gold, US dollars, Euros or Chinese Yuan Renminbis, which gives transparency to the value of the asset backed crypto-currency and reduces its volatility.
In fact, as in any other forward contract, the value of the asset backed crypto-currency matches the value of its underline (spot price) at maturity date, building the mechanism for reducing the crypto-currency volatility value.
The underline of the derivative can be physical, but this is not necessary, as the asset backed crypto-currencies can also be built as synthetic derivatives with cash settlement, mitigating the counterparty risk by introducing higher collateral requirements.
Derivatives trade is one of the biggest opportunities for Blockchain based startups; the volume of the Over-The-Counter derivatives market is around $700 trillion negotiating in a very expensive and inefficient market, which has become even more expensive with the introduction of the new regulatory framework (Dodd-Frank in the US and
EMIR in Europe) and their increasing capital requirements.
The dominance of big banks in derivatives trade has been already threatened by new startups like trueEX, which three years after receiving authorization from the U.S. Commodity Futures Trading Commission, manages around 20% of the Interest Rate Swaps market in the U.S
https://www.trueex.com/about-us
But these startups are still subject to the ruling of the clearinghouses network.
What will be the impact of replacing them with a much more transparent and efficient network, like the blockchain?
Think about it, the financial system, as we know it, is being threatened by three major forces.
- Over-leverage and capital scarcity.
- More stringent regulation.
- A technology revolution introducing more efficient and dynamic players.
Do you think that obsolete banking technology and processes are going to survive to this revolution?
Traditional banks have to reshape, implementing best practices, and integrated systems capable of providing capital efficiency and supporting the technology revolution.
We’re working already on the integration of new technologies like blockchain in standard SAP processes; I’ll describe some of them in future posts.
Looking forward to read your opinions.
K. Regards,
Ferran.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
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