Koine featured in City AM - March 2020
As the global marketplace attempts to come to terms with what impact this will have, Phil Mochan, Co-Founder and Head of Strategy and Corporate Development at Koine, a provider of digital asset post-trade services that meet conventional market norms, talks about what this means for the future of digital finance and blockchain technologies
As featured in City AM on 31 March 2020.
Proven resilience; finding a new future
The COVID-19 pandemic continues to send shockwaves around the world. The world is, quite literally, in a state of flux. The stock market has responded to the COVID-19 pandemic with unpredictable levels of volatility, and the true economic cost, whilst unknown, will undoubtedly be huge (we predict 10%+ of global GDP).
The unprecedented response by governments and central banks to ensure that the pandemic shock does not become a substantive permanent loss of wealth, has led to implementation of formerly controvertible policies which might not have occurred in a decade or more (such as UBI and helicopter money). This enforced policy innovation reframes the strategic opportunity in digital finance and blockchain technologies in a potentially very positive manner.
Bitcoin, as well as other cryptocurrencies, has proven resilience in the current market. If you only read the headlines on digital currencies, you’ll read of wild price swings and severe price volatility. However, if you had held Bitcoin, rather than US equities (S&P500) over last 12 months, you would be up 51.1%, rather than down 9.6% [16 Mar 2019 – 16 Mar 2020].
This continued proven resilience in a crisis will surely make it an increasing component of every portfolio, particularly when the market infrastructure model is normalised as we expect this year.
With the notable exception perhaps of popular stock-trading broker Robinhood in USA, it would seem that the majority of the existing market systems and post-trade infrastructures did work well, including the use of circuit breakers to dampen excess volatility.
Whilst it doesn’t yet conform to the conventional model, the digital assets market has demonstrated its ability to deal with high volatility and dramatic trading volume increases. Therefore, it makes sense that traditional capital markets are likely to shift to the emerging digital market infrastructure on an accelerated basis once it follows normal market models.
Crypto is risk-offset
We are now in a situation where helicopter money is flowing out of Central Banks to keep our economies going. We know that this is devaluing fiat currencies. The fixed known supply of the majority of crypto-currencies such as Bitcoin will likely prove positive as a hedge against this massive depreciation.
Accessing safe haven assets
In a crisis situation, there is a flight to so called safe haven assets such as US Treasuries and reserve currencies. But they’re not straightforward to access for everyone in the world and transaction costs can be high.
We can therefore predict that digitalised US treasuries and regulated digital fiat currencies will, through the new digital distribution models, be accessible to greater numbers of individuals and organisations globally who do not have access to the historic capital markets infrastructure with its high relative costs and the exclusionary principals built into its “club rules”.
We foresee increased demand for new safe haven assets, such as digital versions of World Parity Unity (a basket of 12 currencies), meeting the demand for non-USD denominated safe havens to augment the current role of CHF. These new assets will serve multiple communities of interest, including family offices, corporates and commodity traders, not just as a store of value but also as a medium of exchange, and will grow substantially larger than the existing crypto-currency market within a couple of years.
Recovery led by financial services innovation
In the last week or so, statistics show that 3.28 million people filed for unemployment insurance in the US, and there were 477,000 new UK benefit claims. These record breaking shock numbers are likely to continue for several weeks. What will the recovery look like?
Some like Bill Ackman, the US hedge fund manager who made $2.6bn betting on COVID-19, believe the recovery will be a swift V-shaped model. Others are sceptical. Yes, the potential is there for a V-shape recovery if governments enact policies which keep businesses alive, but effective policies are hard to conduct at scale and permanent capacity will undoubtedly be lost.
In our view the initial pandemic crisis will lead to an economic and policy crisis creating the agenda for more rapid innovation, and the financial services industry and blockchain technologies could be significant beneficiaries.
In the short term, opportunities to manage the delivery of credit into the economy have exploded for digital innovators, whether through challenger banks, digital credit providers or crypto-asset lending platforms. Giving people access to cash is the pre-eminent initial opportunity.
In medium term, we foresee that the shifting capital flows in recovery phase will create opportunities in three areas: accelerated investment in blockchain and digital finance businesses, particularly infrastructure; an accelerated shift into cryptocurrencies as part of a balanced investment portfolio; and the opportunities arising from improved regulatory flexibility in facilitating change.
Whilst some are happy to bet on rising equity markets, it may be reasonable to see that accelerated inheritances and transformed risk attitudes may align more capital towards value preservation and diversification. This will undoubtedly be one of the drivers to the acceptance of digitalised alternative assets, including real estate and closed end funds.
Given the critical importance of emerging fintech and blockchain businesses for the world-leading UK, it is imperative that the existing businesses be given the cash support they need whilst the venture markets are closed to new finance. The current CBLIS initiative in UK is inadequate to achieve this.
Financial services innovation is likely to be a major competitive advantage for nations in the new post COVID-19 world, and therefore it behoves governments to protect their fragile innovators at this time of crisis so that they can be major drivers of the economic recovery.