Blockchain is going to change equities trading for good

It allows for faster and safer settlement than the current monopolistic clearing houses

Gillian Tett 

      © Efi Chalikopoulou

Credit Suisse and Nomura have lately grabbed headlines for all the wrong reasons. 

But amid their multibillion-dollar losses in the Archegos debacle, nestled a snippet of very different news that may hold more profound implications for the future of finance.

This week Credit Suisse cut some US equities trades with the Nomura-owned broker Instinet, using blockchain. 

This technology has been used before to verify other kinds of transactions. 

But these trades were a “first” because settlement occurred in hours and not the two days needed with America’s Depository Trust and Clearing Corporation, the industry-owned utility that normally settles stock trades.

Think of it, if you will, as a financial version of moving from the snail mail of post to zippy emails. 

Wall Street currently uses a third party, the DTCC, to transfer assets, net off balances and collect margin to protect against losses. 

But now Credit Suisse and Instinet have dealt directly with each other by recording the trades on a shared digital ledger, and much faster, too.

Is this revolutionary? 

Not yet. 

The transactions were a small pilot and only took place because the Securities and Exchange Commission granted to blockchain specialist Paxos a temporary “no action” letter, meaning the innovation was tolerated but not formally approved.

Paxos is now applying for a permanent SEC licence to compete with the DTCC. 

It is unclear whether the SEC will agree, or if Paxos could even scale up to snip at the heels of the DTCC behemoth, which handled $2,150tn worth of trades last year. 

As Emmanuel Aidoo, digital markets head at Credit Suisse, observes tactfully: “Innovation in blockchain technology is [still] incremental.”

Even so, investors should take note. 

For one, the deal is a reminder that there is more to blockchain than the cryptocurrencies such as bitcoin that also use the technology. 

While obvious to crypto insiders, this point needs to be proclaimed loudly given how bitcoin grabs so much public and political attention.

I’d bet hefty sums, in any currency, that non-bitcoin innovations will eventually matter far more. 

In fact, Piper Sandler, an investment bank, guesstimates there are already around 4,000 financial assets and processes operating on blockchain technology.

Second, if the settlement process does embrace blockchain, it may have wide implications. 

Regulators have granted the DTCC an effective monopoly for four decades. 

A main reason for this is safety: to ensure trades do not fall apart and undermine confidence in markets.

That is fair enough. 

But the status quo looks increasingly anachronistic. 

Settlement takes days instead of hours. 

It also requires large back-offices to process deals, and enables financial groups to skim off fees. 

It injects other risks: while settlement is under way, precise ownership of the collateral is in limbo.

The two-day delay can also leave financial players subject to shifting margin calls, as happened during the meme stock trading dramas this year. 

In fact, Vlad Tenev, head of Robinhood trading platform, and Ken Griffin, founder of Citadel Securities, were so outraged that they are pushing to break the DTCC’s monopoly.

“This is an incredibly inefficient way to operate,” Charles Cascarilla, Paxos’s chief executive tells me, pointing out that $15bn to $30bn of industry capital and twice as much liquidity are tied up in DTCC systems.

Using blockchain, by contrast, may reduce the need to post the collateral required to protect against risks while the trades settle. 

Fees should fall, too.

A third point is that if this experiment takes off, it may result in co-operation rather than confrontation. 

Paxos likes to present itself as a plucky financial David challenging Goliath. 

But Cascarilla tells me that Paxos has a depository account at the DTCC for regulatory reasons, and that the DTCC is now conducting internal experiments with blockchain itself.

Moreover, the DTCC has recently issued a thoughtful white paper that proposes to use existing technology to cut settlement times to one day by 2023, if all its members approve.

Silicon Valley entrepreneurs may scoff that this is still too timid — especially as the DTCC now admits it can shrink settlement times if it wants. 

Crypto-enthusiasts also carp that incumbents have little incentive to innovate rapidly, given they can reap fat fees. 

As Dan Schulman, PayPal’s chief executive, told me: “Across the world, the financials’ take rate [on payments] has been 2.8 per cent for 10 years in a row, which is ridiculous.” 

So the Credit Suisse-Instinet deal is notable. It does not mean finance will move to any speedy blockchain nirvana soon, as libertarians hope. 

There are still huge regulatory and technology challenges to overcome. 

Nor would everyone even want an accelerated world: if instant settlement occurred, financial players could no longer net off trades, forcing them to fund deals in advance.

Even so, the deal is another example of how societal ideas about what looks “normal” in a digitised world have been questioned during the pandemic, and so can change. 

The two-day settlement system is one such shibboleth.

The prospect of that process changing is something we can all applaud. 

It shows how competition, or just the threat of it, can introduce greater efficiency and hopefully less risk too.

Behind Bitcoin’s Recent Slide: Imploding Bets and Forced Liquidations

Dramatic crash underscores fragility of cryptocurrency’s recent gains and vulnerability of individual investors

By Alexander Osipovich and Paul Vigna


A sudden recent drop in the price of bitcoin suggests the digital currency’s yearlong rally might finally be running out of steam.

Bitcoin fell as much as 17% on Saturday to $52,149, with about half the decline occurring in about 20 minutes late in the evening Eastern Time. 

Although it recovered some of those losses by Monday morning, the price has steadily declined this week. It was trading at $49,334 early Friday.

Bitcoin topped out at $64,829 on April 14, the same day Coinbase Global Inc., COIN -5.92% the biggest U.S. cryptocurrency exchange, went public in a highly anticipated offering. 

The two events marked the pinnacle of a heady rally for cryptocurrencies that began last year. 

Bitcoin’s price more than tripled in 2020 and doubled to start 2021 before slipping.

Yet that momentum lately has been showing signs of flagging, said Michael Oliver of the research firm Momentum Structural Analysis. 

Since bitcoin crossed $60,000 in March for the first time, its pace of gains has slowed and it has traded in a relatively narrow range. 

That was a sign, he said, that the rally could falter, as it finally did over the weekend.

“We think bitcoin’s broken for the time being,” he said, pointing to technical trend lines.

The dramatic weekend crash underscored the fragility of bitcoin’s recent advance. 

It is unclear what triggered the selloff, which according to the data provider CoinMarketCap wiped out nearly $220 billion of value in cryptocurrencies in an hour

Some traders pointed to a rumor on Twitter that the Treasury Department was preparing to charge several financial institutions for allegedly using cryptocurrencies to launder money, which was picked up by some media outlets. 

A department spokeswoman declined to comment.

Whatever sparked the initial bout of selling, traders agree that it accelerated because of the implosion of enormous amounts of leveraged bets that investors had placed on overseas, lightly regulated cryptocurrency-derivatives exchanges.

In all, traders lost $10.1 billion on Sunday to liquidations by crypto exchanges, according to the data provider Bybt. 

More than 90% of the funds liquidated that day came from bullish bets on bitcoin or other digital currencies, Bybt data show, and nearly $5 billion of the liquidations took place on one exchange, Binance, the world’s biggest crypto exchange by trading volume.

As the price of bitcoin tumbled, many of those bets were automatically liquidated, adding more downward pressure on the price and leading to a vicious cycle of further liquidations.

Some crypto traders were wiped out with little warning.

Jasim, an engineer in Kuwait who declined to give his last name, said he was awakened by an alert on his phone at about 5 a.m. local time Sunday. 

He watched anxiously as Binance liquidated some of his trades, and then he closed out others with steep losses. In all, he said he lost about $9,000.

It wasn’t a new experience for Jasim, whose positions have been liquidated several times since he got into crypto in 2017. 

“Being greedy is the problem,” he said. Jasim has resumed trading but plans to be more careful about risk management in the future.

Exchanges such as Binance let individual investors deposit a relatively small amount of money upfront to place an outsize bet. 

For instance, suppose a trader buys futures that pay off if bitcoin rises against the U.S. dollar. 

If bitcoin climbs, the trader’s profit could be many times greater than what could have been made simply by buying bitcoin.

But if bitcoin falls, the trader can be on the hook for big losses, and must quickly top off the account with fresh funds, or else the exchange will automatically liquidate the trader’s holdings.

“You have potential for a series of cascading liquidations, happening back to back to back,” said Chris Zuehlke, global head of Cumberland, the crypto-trading unit of Chicago-based DRW Holdings LLC.

Adding to the weekend’s chaos, some exchanges, including Binance, reported glitches in the midst of heavy trading volumes. 

Traders said their inability to access exchanges dried up liquidity—which was already thin over the weekend—and exacerbated price moves. 

A Binance spokesman said, “In instances where we may have experienced outages, we aim to learn from them to prevent further occurrence.”

Offshore crypto-derivatives exchanges offer individual investors high degrees of leverage. 

At Binance, for instance, investors can get leverage of 125 to 1 for some futures contracts, meaning they can deposit just 80 cents to amass the equivalent of $100 of bitcoin. 

By comparison, an investor trading bitcoin futures on CME Group Inc., a regulated U.S. exchange, would need to deposit at least $38 and would likely be required to post more margin by their brokerage.

The listing of Coinbase, the largest bitcoin exchange in the U.S., introduces a new way to invest in cryptocurrencies. 

The Binance spokesman said that the exchange recently reduced the amount of leverage it offers on many products and that only a few users were using 125-to-1 leverage.

Still, traders said the swiftness of the weekend selloff underscores the role of heavily leveraged bets—many of them by individual investors—in fueling this year’s cryptocurrency rally.

“At its core, bitcoin is still heavily driven by retail, who choose to use a lot of leverage,” said Rich Rosenblum, president of the crypto-trading firm GSR.

Among other signs of bitcoin’s flagging momentum: signs of waning demand among institutional investors and the tepid performance of Coinbase since its debut last week.

The number of large bitcoin transactions, which are typically made by professional money managers, dropped slightly in the first quarter from the fourth quarter, according to a report from the crypto exchange OKEx. 

And assets held under management by the industry’s fund providers fell 4.5% to $56 billion in April from March, according to the research firm CryptoCompare.

While Coinbase’s debut was a flag-planting event for the industry, it might have also been a cue for investors to take some profits. 

The company was the first major crypto firm to test public markets in the U.S. and fetched a monster valuation of $85 billion on its first day of trading. 

But its shares have fallen in six of its seven sessions as a public company, closing Thursday at $293.45, down from its opening price of $381 on April 14.

Bitcoin peaked the same day.

—Caitlin Ostroff contributed to this article. 

The Improbable Dream of the Chinese Property Tax

The dynamics of the country’s housing market may simply make a tax too costly, whatever its merits

By Mike Bird

    Nowhere to go but up—or else./ PHOTO: QILAI SHEN/BLOOMBERG NEWS

China’s Ministry of Finance is working on legislation for a direct property tax, according to comments Wednesday by the ministry’s head of tax policy. 

But the idea has been in the works for more than a decade—China’s equivalent of a New Year’s resolution that never quite materializes.

A property tax has merit as a way to wean the nation off its housing addiction. 

But the overheated real-estate market has become an essential crutch for fiscal revenue. 

And despite a recent capital market overhaul, there is still no clear alternative destination for the bulk of China’s enormous household savings. 

That suggests any actual implementation is likely to be limited.

The country’s experiments with property taxes have been lackluster. 

Pilot schemes in Shanghai and Chongqing in 2011 differed greatly in their details but had in common that they covered hardly more than a sliver of the local market, and generated income to match: 0.5% of Shanghai’s total revenue, 0.3% of Chongqing’s.

Two overwhelming factors govern China’s real-estate market. 

There’s the push from local governments, which need ever-greater sums from land sales thanks to a fiscal system that gives Beijing a tight grip on tax revenue but requires local governments to cover the bulk of spending. 

And there’s the pull from high-saving households with little else to invest in: Many financial products are notoriously unreliable, and capital controls bar most individuals from less-speculative investments overseas.

It’s quite possible that a far more aggressive property tax would pull the rug from under that framework, by revealing that prices are held up only by speculative demand. 

In 100 of China’s largest cities, gross rental yields average barely above 2% according to data service Wind—and the real figure could be even lower, given the limited rental markets in much of the country.

And a tax on values could knock consumption for China’s heavily indebted homeowners: Researchers at Rhodium Group estimated that household debt sat at 128% of income at the end of 2019, above U.S. levels, after a decade of near-constant increase.

Replacing lost revenue from land sales with property-tax revenue would therefore be a high stakes balancing act—and could end in a debilitating tumble. 

Land-sales revenue is driven by developer demand, driven in turn by precariously high property prices. 

If a property tax reduces prices, revenues from land sales could fall and the actual revenue from the new tax could end up insufficient.

When an idea has spent a decade bubbling away without moving off the back burner, it’s often a sign of an insurmountable barrier, no matter how worthy the principle. 

In the case of a Chinese property tax, the dynamics of the housing market may simply make the costs too high.

The Myth of a Rules-Based World

Thoughts in and around geopolitics.

By: George Friedman

Two concepts have been constantly used in discussions of international relations of late. 

One is a liberal international order and the second is a rules-based system. 

In the former, the term “liberal” does not have much to do with what Americans call liberalism. 

Rather, it describes an international system that is committed to human rights, free trade and related principles. 

The second is the idea that there is an agreed-upon system of rules governing the relationship between nations. 

Together, these notions are thought to create predictability and decency in the way nations interact with each other.

This issue came up during the administration of former President Donald Trump, who was accused of undermining these principles by, for example, imposing tariffs on China and questioning the value of NATO. 

The question is emerging again because the Biden administration, having come to power criticizing the policies of its predecessor, has made it clear that it intends to return to these principles.

The most important question is whether there ever was a rules-based international order or whether it was an illusion. 

There has long been a vision that the relationship between nations should not be a war of everyone against each other, but rather harmonious cooperation between states. 

Philosophers and theologians have dreamt of bringing this vision to life, and at various times attempts were made to institutionalize it.

In the 20th century, two attempts were made to create a rules-based, liberal system of international governance. 

The first was the League of Nations, which was founded after World War I and became defunct well before World War II broke out. 

It had rules, but no way to enforce them, both because the very nations violating its rules were members and, more important, because there were no means of enforcement. 

Adolf Hitler was not created by the liberal and rules-based order, but neither was he in any way inconvenienced by it.

The second attempt was the United Nations, which was created to be a more forceful League of Nations. 

The major powers that won World War II were recognized to be a special class of nations and given special powers on the Security Council. 

The problem with the Security Council was that both the United States and Soviet Union were permanent members, and the Soviet Union demanded that permanent members be allowed to veto actions that they opposed. 

As the world was then divided between the United States and the Soviet Union, opposed to each other in every way possible, the result was that nothing could get done. 

The United Nations was unable to enforce rules and sank into a complex bureaucracy of humanitarian actions designed to mitigate the pain caused by its failure to fulfill its mission. 

That mitigation was not trivial, but it did not constitute a rules-based system.

The Cold War was a chaotic mixture of subversion, civil wars, interventions and threats of nuclear exchange. 

The world was hardly liberal, with Eastern Europe, the Soviet Union and China living under communist rules, and the Third World, freeing itself from European imperialism, caught between U.S. and Soviet manipulation.

It is difficult to understand what rules-based liberal system we are expected to return to. 

After the fall of the Soviet Union, there was a momentary thrill that we were seeing the age of Aquarius rising. 

But it was the same illusion that followed the Napoleonic wars, World War I and World War II. 

The Congress of Vienna, the League of Nations and the United Nations all had rules but few of them were followed. 

The Maastricht Treaty was signed as the Soviet Union collapsed, and it did bring the rule of law to what had been one of the most lawless places in the world: Europe. 

But the rule of law was for Europe, and the rules were never as clear as was the sheer power of some of its members – namely, Germany. 

It’s liberal but not liberal enough to encompass the whole of European experience. 

The European Union has rules galore and some liberalism to boot, but Europe is just an idiosyncratic fragment of a global system it once ruled.

The post-Cold War era gave rise to Islamic radicalism, endless American wars and the rise of China, which had long followed its own rules, only some of which could be considered liberal. 

Accompanying this era was a sense that what mattered was the interests of the nation-state. 

What a state needed was its primary consideration, how to get it its obsession. 

Each nation determined how much liberalism it tolerated, and when instructed by outsiders as to how they should live, they often answered with insurrections.

There can be no rule of law, as the philosopher Thomas Hobbes said, without a Leviathan, an overwhelming power imposing it and administering it. 

For a time after the Soviet collapse, there was hope that the U.S. would helm a multilateral order rather than become the Leviathan. 

The U.S. had neither the interest nor the ability to rule the world, but right or wrong, it couldn't always escape trying – dominant powers tend to act in certain ways if they want to continue to be dominant powers.

And without the rule of law, liberalism was always impossible. 

There were international agreements followed to the extent it benefited nations, and there were some international organizations that were useful to be a part of. 

But the rule of law was invoked when the law supported a nation’s position, and liberalism could not rule a world that was a vast mixture of beliefs, all passionately embraced as the only truth. 

The liberal international order, in other words, existed when it was convenient. 

In some places, it never existed at all.

The idea that we must return to a glorious age in which nations were ruled by laws and liberalism is a fantasy, a fantasy that allows us to believe that we can return to it. 

It is a nostalgia for things that never were. 

The human condition binds humans to communities large and small that think of themselves as free. 

They do not submit to rules they have not made, nor to political principles they did not craft. 

The Greeks did not accept the rules of the Persians or their political order. 

So it was then, and so it is now. 

The world doesn’t change that much, and the only place we can return to is ourselves.

A COVID Counterfactual for Europe

Understanding why the European Union will emerge from the pandemic weaker rather than stronger may prove to be a source of gloom. But recognizing what might have been could also serve as a springboard for change.

Yanis Varoufakis

ATHENS – Imagine that the coronavirus pandemic, rather than undermining confidence in the European Union, had strengthened it. Imagine that COVID-19 had persuaded EU leaders to overcome years of acrimony and fragmentation. 

Imagine that it had catalyzed the emergence this year of a stronger, more integrated bloc to which the world looked for global leadership.1

At the end of February 2020, two weeks before the World Health Organization declared a pandemic, the EU Council had already instructed the European Commission to coordinate Europe’s war against the coronavirus. 

Within days, the Commission compiled a list of essential gear in short supply across Europe, from protective equipment to intensive care units, and placed orders with manufacturers. 

It also convened Cov-Comm, a committee of top epidemiologists and representatives of EU public health systems to offer daily guidance. 

Liberated from the need to procure essential supplies and work out optimal travel and social distancing strategies, national governments concentrated on implementing the emergent EU plan.

By the time, a month later, the pandemic had shown its teeth in northern Italy, truckloads of protective gear, oxygen canisters, intensive care machinery, and even doctors and nurses began to arrive from across Europe, all coordinated by Brussels. 

While the European Parliament debated the finer points of balancing civil liberties and public health, the Commission continued to map out, in cooperation with national governments, the needs of health-care systems across the EU.

In March, Cov-Comm recommended lockdowns, with rules varying from region to region. 

The European Council backed the Commission’s plan for a quarantine rollout, to be reviewed daily. 

As Europeans entered quarantine, a network of mass testing centers was erected across the EU. 

Regular testing in every neighborhood, near every school, and at or close to every workplace would enable a coordinated, safe exit from horizontal lockdown.

April being the cruelest month, the number of casualties spiked, but at least hospitals coped well, thanks to the pooling of equipment and human resources across Europe. 

Asked by journalists how visiting foreign doctors and nurses communicated with their Italian and Spanish colleagues inside the intensive care wards, a German anesthesiologist replied, “In the face of death, medical professionals communicate by osmosis.”

With the lockdowns pummeling both consumption and production, Europe’s economies entered the worst recession in memory. 

Unlike the euro crisis a decade earlier, the pandemic dragged down economic activity throughout Europe. 

The common foe, along with the spirit of solidarity in health care, engendered a new mood, which soon permeated official circles. 

The result was a ground-breaking resolution, approved in early May by the Eurogroup of finance ministers, and then by the European Council. 

Next Generation Europe, or NGE, was then launched immediately.

Four pillars made the NGE a prelude to Europe’s proper unification. 

There was a common mechanism to absorb the inevitable rise in public debt as states struggled to support businesses and employment. 

A central health fund would now pay for the fight against COVID-19, including vaccination procurement. 

A cash payment to every European would lift all boats at once. 

And a proper investment program would finance the Green Energy Union Europe so badly needs.

To build the NGE’s four pillars, EU leaders had to clear the hurdle that had blocked them during all previous crises by figuring out how to simulate a federal government without violating the letter of EU laws and treaties. 

The solution on which the NGE project turned was ingenious. 

At the crucial April 2020 Council meeting, Germany’s lame-duck chancellor, Angela Merkel, reportedly said: “As our only common institution with real firepower, the European Central Bank was always going to bear the burden. Let us at least put it to good use.”

European leaders did just that. To absorb the inevitable rise in public debt, all member states’ primary budget deficits (net of debt payments) since March 2020 would be financed by 30-year bonds issued by the ECB. 

The bonds’ long maturity meant that Europe’s leaders were giving themselves 30 years to form a proper federal government, complete with a common Treasury, lest the ECB be forced to print the money to repay bondholders. 

“If Europe cannot unite within three decades,” said French President Emmanuel Macron in the May European Council meeting, “maybe we do not deserve our Union.”

EU leaders had crossed the Rubicon, and now the NGE’s solutions to other problems emerged. 

For example, to fund vaccine research and development, and pay for local production under license across Europe, the ECB promised to purchase zero-coupon perpetual bonds issued by pharmaceutical companies. 

Nothing in the ECB’s charter prevents it from purchasing corporate bonds, so the EU could use this mechanism to fund a successful vaccination program as well as other basic health goods to be shared among all Europeans. 

Even better, the EU used this mechanism to procure hundreds of millions of vaccine doses for distribution to neighboring and developing countries free of charge.

Then there was the NGE’s cash injection program, the equivalent of the federal government checks that US households received during the pandemic. 

EU leaders discovered that nothing in the ECB’s charter, or in any EU treaty, prevented the ECB from crediting every European adult’s primary bank account with €2,000 ($2,350), at a total cost of no more than €750 billion. 

With every European, whether German or Greek, Dutch or Portuguese, receiving the same amount, the EU treaties’ prohibition of fiscal transfers and bailouts of one member state by another was never violated.

Lastly, the NGE directed the European Investment Bank to issue bonds roughly equivalent to 5% of Europe’s total income, also to be backed in the bond markets by the ECB. 

This funded a new European Green Works Agency to develop the EU’s Green Energy Union and, more generally, to finance Europe’s Green New Deal.

While infection rates rose and fell, by December 2020 the coordinated rollout of Europe’s vaccination program arrested the virus’s spread. 

Europeans celebrated the arrival of 2021 with tangible expectations of shared, green prosperity. 

Meanwhile, Europe’s global standing improved, including in post-Brexit Britain. Shipments of vaccines donated by the EU played a role, but not as large as Europe’s demonstration that unity and solidarity had, at last, prevailed across our continent.

All of this could have happened, but none of it did. 

Understanding why may prove to be a source of gloom or, if we choose, a springboard for change.

Yanis Varoufakis, a former finance minister of Greece, is leader of the MeRA25 party and Professor of Economics at the University of Athens