Crypto's new hero: TradFi
Paper currency first emerged in Europe when receipts issued by London goldsmiths for the gold held in their vaults began to circulate as money.
Legend has it that fractional reserve banking began shortly thereafter, when goldsmiths began to issue receipts in excess of the gold they actually held.
The first bank run must have come as a shock to 17th-century Londoners who learned the paper money they held was no longer a receipt for their gold deposits, but instead an IOU from their goldsmith.
Hard-money types think IOUs make fractional reserve banking a smoke-and-mirrors scam.
But it should have been clear from the start that deposited gold had not been alchemically turned into paper — the gold remained in the goldsmiths' vaults, as property of the goldsmith.
We may need a refresher on this history of banking as much of the current talk around tokenization seems to assume that real-world assets will be alchemically transformed into on-chain crypto.
They won't be.
Like the gold in those London vaults, the on-chain version of real-world assets will simply be receipts for the stocks, bonds, and real estate that remain stubbornly off-chain.
I'd argue, for example, that USDC are not tokenized dollars, but tokenized IOUs from their issuer, Circle.
This does not make them any less useful — Circle is far safer than the national currency of many large countries, much more accessible than eurodollars, and often easier to move around than dollars deposited in banks.
But seeing as "tokenization" has become an increasingly hot topic in crypto, we should probably all agree on what exactly it means.
Larry Fink, crypto's new champion, says that "the next generation for markets, the next generation for securities, will be tokenization." What he really means is tokenized receipts.
That may sound less exciting than tokenized real-world assets, but receipts are important!
Goldsmith receipts revolutionized finance and tokenized receipts could revolutionize it again.
Real-world risk
The BIS defines tokenization as "the process of recording claims on financial or real assets that exist on a traditional ledger and putting them on a programmable platform."
The actual assets remain on traditional ledgers, but putting claims (i.e., receipts) for those assets on a blockchain introduces two potentially transformative things to finance. First, it creates a single record of who owns what, and second, it makes those assets programmable.
Creating a single record of ownership "dispenses with messaging," according to the BIS.
This in itself could be revolutionary because finance is nothing but back-and-forth messaging as everyone instructs each other on how to update their siloed databases — it's a messy, expensive, and glacially slow process.
More dramatically, programmable assets enable the "contingent performance of actions" — logical statements like if, then, or else.
That enables all-new things like smart escrow contracts, automatic insurance payouts, contingent borrowing and lending, and all manner of use cases yet to be thought up.
These two innovations are why TradFi — despite the long crypto winter — has grown increasingly excited about crypto finance. Dispensing with messaging would save banks many billions of dollars annually and programmable assets would generate many billions of dollars in fees from new financial products.
Crypto people are getting increasingly excited about RWAs, too — but they should know these tokenized assets will be KYC'd and subject to all of the same legal risks as fully off-chain assets.
While MakerDAO, for example, is said to be tokenizing Treasury yields, the Treasuries are not being brought on-chain — they remain in the traditional financial system.
What they are bringing on-chain is real-world risks. Maker's Treasury bonds and other real-world assets are subject to sanction and seizure by real-world authorities.
You might argue, then, that RWAs make Maker's stablecoin, DAI, more like traditional dollars than it makes Treasuries more like digital assets.
This, of course, was not the original intent of crypto — just the opposite.
The original intent was to create natively on-chain value, free from real-world risk.
That is happening, too, first and foremost with the tokens native to crypto's permissionless layer-one blockchains, like Bitcoin, Ethereum, and Solana.
But crypto's composable technology allows for permissioned systems to be built on top of those permissionless ones — and the ecosystem of permissioned assets may have more upside than that of the permissionless ones.
Oxymoronic DeFi
Native and non-native value will coexist uneasily on-chain (see, for example, the recent debate around creating KYC'd pools on Uniswap).
Is KYC'd DeFi still DeFi?
Crypto purists will think not. Crypto pragmatists, however, will say it's close enough.
I think the pragmatists will build a lot of good things in crypto. But those good things will be uncomfortably close to the bad things crypto was created to avoid.
I imagine it will take a lot of uncomfortably TradFi-looking things for the crypto industry to get where it wants to go — like Blackrock's ETF, for starters — but I think that can work out for the best.
Larry Fink may not be the hero we deserve, but he may be the hero we need.
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