Stablecoins and Yield - Olaf Ransome

Why is this an important topic?

Simples. Three reasons I think stablecoins are a topic worthy of a small investment of time to understand more about right now: they are being used more widely, the range of offerings is increasing with insturments now available in more than USD and there is some regulation, such as MiCA to pay attention too.

Up until now, I have always portrayed stablecoins as a way for crypto investors to step away from the marketplace for a short period. The avilability of Tether and Circle meant that you could take a break, without defunding or off-ramping to fiat, and get right back in the action as soon as you were ready to trade crytpo again. Like an ice hockey player keeping his skates on when he comes off the ice for a breather. But holding those coins paid no interest, so they have been good for very short periods but they are not a source of yield.

Now, remember that one promise of all this digital asset innovation is that tomorrow’s world will be more efficient and offer us new possibilities; some combination of “better, faster, cheaper”. When I read about a new “Stablecoin Yield Product” from the folks at OpenTrade, my interest was piqued; stabelcoines and yield.

I decided to speak to their CEO David Sutter and find out more.  Dave was generous with his time and attention. Here’s my take on what’s new and what it tells us.

What’s new?

In the old Tech or TradFi world, institutions typically sweep excess funds into a Money Market Fund (MMF) at the end of the day. There are two drivers for this: credit risk and yield. Banks would typically pay “benchmark” less 200 basis points on overnight long cash balances. And, never mind the interest, any large balances did not look good on the clients’ balance sheets. Cash balances at a bank over and above any insured minimum are, in accounting terms, “unsecured receivables”, eating in to credit risk limits and requiring capital. Money market funds bring some yield and less risk; investors have a collective claim on the funds assets. So a sweep is normally a good thing.

The OpenTrade offering is built on the foundation of something they call “the Vault”. This is where FinTech meets old “old Tech”. The Vault is essentially an investment manager using discrete Cayman-based funds aka SPVs to manage the invested funds. The Vault is blockcahin based and uses a smart contract construction. The Cayman part is good too; jurisidiction is clear and you know which judge to go see if something happens to go wrong. This really matters; in a typical AMM aka automated market maker construct there is no clear jurisdiction.

OpenTrade’s initial set-up offers two flavours: fixed term and variable term. For the near leg, the cash investment always settles now, with the far leg aka maturity varying; fixed terms investments always unwind at 1800 UK time on a Thursday. Variable term offerings can be unwound for instant settlement. The legal paperwork uses an existing standard, a GMSLA or Global Master Securities Lending Agreement.

Why might this new thing matter?

Today, if you use an overnight investment in an MMF as part of your Treasury operations, you don’t know exactly when you will receive the fiat funds in your Nostro. If you make an open investment and then decide to sell, the same uncertainty is part of the picture. What this means is that you are still dependent on your Nostro for intraday credit to make your payments.

The promise of new solutions such as the OpernTrade one, is that you will be able to exchange what you have now for what you need now and without taking settlement risk. Two important ingredients contribute to a new, better world with this digitial asset product: “now” and “no settlement risk”. We do already have a means to avoid settlement risk. It’s called DvP aka Delivery versus Payment; an atomic exchange where either both things happen or neother happens. What we cannot readily do today is the “now” part; we don’t have instant settlement intraday. The new technology enables new ways of coordinating both trading and settlement; better, faster and ultimately cheaper. Interoperability is the key capability – there is a link to more on that below.

And, if the MMFs are digital, they will be more readily usable as collateral. This means there is optionality; if you can’t readily use a securities or mutual fund holidng as collateral, then if you need cash you have to sell. If you are selling into a downwards spiralling market, as some of the UK pension funds were in late 2022, then you are pouring oil on a fire.

Which gets us to

Product offerings which offer stablecoin holders the ability to earn some yield are good. Ones like OpenTrade is offering are cleverly applying what works in the TradFi world so that the new products feel familiar to investors.

Product offerings which offer instant settlement offer new possibiities for intraday cash management, for example repo of digital MMFs. They might be used in new marketplaces such as the one being created by Finteum.

The prospect of being able to exchange what you have now for what you need now has really huge potential in wholesale banking. Today the intraday liquidity buffer requirements are heavily influenced by the reliance on intraday credit from Nostros. Take Barclays in the UK,. No surprisem they do business in CAD, Canadian Dollars. They rely on a local commercial bank as their Nostro. So, they end up with some not insubstantial buffers in CAD. If there was a intraday liquidity marketplace where they could swap GBP, which they naturally have a lot of, for CAD instantly, there would be little, if any, justification for being forced to hold buffers in CAD. That would really help both Barclays and their Nostro.

There may also be something better in it for the retail investor. Today, investements and cash aka current aka chequing accounts are two discrete things. And they shall not meet; today we need to keep some money in some form of cash account to pay bills. You can’t pay a bill with your Apple or Nvdia shares, or your mutual funds. But what if you could? What if you had the optionality to make an investment, like an MMF and then to use a very small sliver of that to pay a bil? Now maybe not for the FT at the kiosk, but say your flight tickets for that next holiday or the kids’ school fees.

We only need a few ingredients to cook up a recipe which will work:

1) Those offering the MMF investment offer instant settlement. Tick, see OpenTrade, or there are new marketplaces enabling both trading and settlement. Tick, see Finteum.

2) There were a means to connect your holdings of that investment, which will be in some form of Web 3.0 wallet, to merchants. Tick, that is what my friends at YodlPay are working on.

A construct of this kinds gives us something new which is better and cheaper; the optonality to use an investment as a means of payment and more yield (which is a form of cheaper as the opportunity cost of holding the means of payment is lower)

In conclusion

A couple of thoughts to ponder here. One is that tomorrow could well be better. Second, to help us get from here to there, we need to find the MAYA pathway, most advanced yet acceptable. Looking at what the folks at OpenTrade are doing, they are taking some sensible steps on this path.

Thanks for reading. Please do let me know what you think of these notes. Feedback via the comments would be great.

Please feel free to get in contact via LiquidityFinder here.

Author

Olaf Ransome is a liquidity and financial services expert. He is the founder of 3C Advisory  You can message Olaf directly here.