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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Learn how digital asset technologies can be applied to the regulated, traditional finance industry for improved performance and returns
In From Hoodies to Suits: Innovating Digital Assets for Traditional Finance, leading finance innovator Annelise Osborne bridges the gap between the “hoodies” who invented the technology behind digital assets and the “suits” who run traditional financial markets, in an entertaining and insightful guide for implementing digital assets in an institutional environment.
You’ll discover the possibilities unlocked by new technological advancements, including alternative investments, new marketplaces, interoperability between counterparties, and even improved forms of diversification. You’ll also find:
- Discussions of why the adoption of digital assets is so critical for the future of finance and the ways the industry’s largest players are implementing its technologies and concepts now
- Explorations of what we can learn from some of the crypto industry’s most infamous and well-known wins and losses, including the collapse of FTX
- Strategies for implementing institutional digital assets to realize opportunities in private markets, funds, debt, repo, alternative assets and back office transactions in this evolving and dynamic financial environment
A fascinating new take on the future of finance, From Hoodies to Suits is a must-read guide for aspiring and practicing finance professionals, technology developers, fintech participants, and anyone else with an interest in the intersection of finance and technology.
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Seitenzahl: 397
Veröffentlichungsjahr: 2024
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Dedication
Acknowledgments
Disclaimer
Introduction
What I Found in the Boardroom
Now Is the Time for Digital Assets and Web3
Notes
1
Blockchain Is Not Bitcoin
When Bitcoin Stole Blockchain's Thunder
What Is Blockchain?
What Are Digital Assets?
Enter Ethereum
Consensus and Technical Terms
What Is Blockchain to Finance?
Public, Private, and Permissioned Blockchains
What Does This Have to Do with Finance?
Avoiding Kodak Moments
Notes
2
The House That Crypto Built
What Are Cryptocurrencies (and Why Should You Care?)
A Stable Crypto
Crypto Exchanges: From a Single Peer-to-Peer Trade to the NYSE
What's in Your Wallet?
Isn't Crypto Really Just for Embezzling?
The Birth and Growth of Decentralized Finance
DeFi Is the Future of Finance
Plenty of Interest: CeFi/DeFi Lending and Staking
Crypto Incentives
DeFi Derivatives
Notes
3
Crypto as a Proof of Concept for Traditional Finance's Capital Markets
What Traditional Finance Can Learn from Crypto
Changing How Payments Are Made
Shifts in Funding
Expanding the World of Lending
Non-Fungible Tokens
Security and Bond Registration
Improved Governance Rights
Accessible Royalty Payments
Novel Utility Benefits
Notes
4
What FTX, Hubris, and Crypto's Other Mistakes Can Teach Traditional Finance
LUNA/Terra: “LUNAtic” Millionaires Lose It All
Crypto Wasn't the Start of Algorithmic Disaster
Libra/Diem: Facebook's Stablecoin Fail Sheds Light on Regulation
Dogecoin: A Billionaire's Hubris Draws Hot Water
Hacking Shouldn't Be the Headline (Yet It Is)
Wormhole's Security Flaw Highlights Problems with Bridges
Three Arrows Capital: Setting off a Contagion
What to Learn from Crypto's Initial Blunders
Notes
5
Institutional Digital Assets: Securities, Only Better
Institutional Digital Assets Matter Now More Than Ever
Key Benefits to Institutional Digital Assets
Smart Securities: Programmable and Self-Executing
Built-In Security
Faster, Less Expensive Settlements
Lower Counterparty Risk
Potential Liquidity and Transferability
Standards in Digital Assets
Tokenization
Impediments to Tokenization Adoption
Prepare for the Upgrade
Notes
6
Incremental Wins in Wall Street's Pre-Season
The New Age of Digital Assets
Institutional Building Blocks
’40 Act Funds
Tokenizing Private Equity
Fixed Income
Repo and Securities Lending
Stablecoins
Custody
Foreign Exchange
Carbon Credit Market
Other Active Players
Notes
7
How Tomorrow's Investors Will Expect Change
Why Do Generational Shifts Matter to Finance?
The Great Wealth Transfer Will Change Finance
The New Pig in the Python
Millennials
Generation Z
Generation Alpha
How the New Workforce Affects the Economy
The Evolution of Finance Continues into the 21st Century
Generational Shifts in Financial Information
Notes
8
The Building Blocks of Securities
What Is a Security?
What Is a Commodity?
What about Debt Instruments: Loans?
What about Bonds?
What Does This Mean for Tokenized Products?
Notes
9
Here Come the Regulators
Setting the Stage
A Word from the Experts
Notes
10
Don't Be Afraid of Change
Digital Assets Are Here to Stay
The Age of Disruption
Notes
11
Finance's Imminent Upgrade
Where Finance Stands Today
Finance of Tomorrow: Emerging Trends
Eight Emerging Trends of Financial Markets
Five Business Shifts from Emerging Trends
Notes
Afterword
Index
End User License Agreement
List of Illustrations
Chapter 1
Figure 1.1 How Blockchain Works
Chapter 2
Figure 2.1 Crypto Fear and Greed Index
Chapter 3
Figure 3.1 Private Asset AUM Is Currently Highly Concentrated in Institution...
Chapter 5
Figure 5.1 Tokenization Total Addressable Market in Trillions of Dollars
Figure 5.2 The Functioning of a Smart Contract in a Transaction between Two ...
Figure 5.3 Potential Benefits from Tokenization
Figure 5.4 Estimated Global Alternatives AUM by Investor Type
Figure 5.5 Investor Portfolio Allocations across Asset Classes
Figure 5.6 Investor Portfolio Allocations
Figure 5.7 Simplified Digital Bond Issuance Process
Chapter 6
Figure 6.1 Tokenization Total Addressable Market
Chapter 7
Figure 7.1 Share of Household Wealth by Generation
Figure 7.2 Share of US Population by Generation
Figure 7.3 Millennials Are Better Educated Than Prior Generations
Figure 7.4 Top Sites Gen Z Investors Use to Learn about Financial Topics and...
Chapter 8
Figure 8.1 Gold's Price over One Hundred Years, Adjusted for Inflation...
Chapter 9
Figure 9.1 ICO Funds Raised
Chapter 10
Figure 10.1 Adoption Curve of Web 3.0 versus the Internet
Chapter 11
Figure 11.1 Citi AD
Guide
Cover
Table of Contents
Title Page
Copyright
Dedication
Acknowledgments
Disclaimer
Introduction
Begin Reading
Afterword
Index
End User License Agreement
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Praise for From Hoodies to Suits
From Hoodies to Suits provides a front row seat to understanding the significant changes about to happen in financial services infrastructure and the applications that will reshape how value is transferred, settled, and stored. Tokenization of financial assets will increase efficiencies and reduce costs across an asset's life cycle, improve the efficient allocation of capital, optimize global supply chains, catalyze a new generation of software-as-a-service companies, and ultimately drive mainstream adoption. Benefits will be widespread, but ultimately result in more transparency and lower costs for borrowers and investors.
—Anthony Moro, CEO Provenance Blockchain Foundation
From Hoodies to Suits takes a novel approach detailing the benefits and innovation of blockchain technology applied to the world of finance and investment.
—Mike Cagney, Co-Founder and CEO of Figure Technologies; Co-Founder and former CEO of SOFI.
In this groundbreaking book, Annelise Osborne takes us on a journey from the tech-savvy world of “Hoodies” to the boardrooms of “Suits,” illuminating the remarkable transformation of the digital asset industry. As blockchain technology emerged as a disruptor, challenging traditional finance, Osborne provides a comprehensive guide to the intersection of innovation and established financial markets.
—Perianne Boring, Founder and CEO, Chamber of Digital Commerce
Now more than ever, books like From Hoodies to Suits are needed to educate readers on the promise of blockchain and crypto. It's an insightful, digestible, entertaining read.
—Katherine Kirkpatrick, Chief Legal Officer, CBOE Digital
From Hoodies to Suits is an indispensable guide to blockchain technology and the finance industry. Annelise Osborne offers practical insights beyond Bitcoin to the burgeoning world of tokenization and institutional DeFi. With a critical examination of high-profile failures in the crypto space, she delineates key lessons for traditional finance, discusses the regulatory landscape, and underscores the generational shifts set to transform the industry. It's an essential read for anyone seeking to understand the future of finance and the disruptive influence of digital assets and blockchain innovation.
—Richard Walker, Senior Partner, Bain & Company
A must-read for all financial market participants, ranging from the crypto skeptics to those who understand something is happening in markets related to blockchain and crypto, but don't know quite where to start. Annelise Osborne removes the jargon and provides a common sense and understandable framework of the transformation already underway in complex markets through complex technologies. With tangible examples and a clever sense of humor, she ties the past, present, and future of market functioning driven by blockchain technology.
—Charles Mount, Chief DeFi Officer, S&P Global
Annelise Osborne succeeds brilliantly at the difficult task of explaining the complex origins and use cases of crypto finance while creating a captivating, fun to read book. This book breathes life into personalities and palpable excitement of the formation of a new industry. Bravo.
—Edward A. Glickman, Executive Chairman USA, AIP Asset Management
From Hoodies to Suits skillfully bridges the gap between traditional finance and the power of blockchain technology. Annelise Osborne presents a compelling narrative, demystifying digital assets and their transformative role in the future of financial markets. An essential read for anyone in finance.
—Jennifer Warren, Former Head of Markets Digital Strategy, Barclays
The author brilliantly traces the evolution of blockchain from its origins to its pivotal role in reshaping traditional finance. What sets this book apart is its ability to connect the dots seamlessly, skillfully illuminating the digital tipping points that traditional finance is approaching, providing readers with a roadmap to navigate the changing landscape. Whether you're a finance professional or technical architect, this must-read provides a clear understanding of how digital assets are transforming the traditional financial landscape, inspiring a vision for the future where innovation drives true value creation.
—Lora Lindsey, Principal, Value Innovation and GTM Strategy, Amazon Web Services (AWS), and former Goldman Sachs investment banker (both a hoodie and a suit)
An entertaining guide through the inevitable tech upgrade advancing the world of finance.
—Gregg Bell, Head of Growth, Binance.us
From Hoodies to Suits is an important, fascinating and fun read for everyone involved with the financial markets. It is a digestible dive into how this innovative technology provides opportunities to develop new asset classes and market infrastructure. Annelise Osborne does a wonderful job of providing unique insight and helpful guidance for those interested in how blockchain tech can evolve finance and institutional investing.
—Kari Larsen, Partner and Co-Head of the Digital Works Group at Willkie Farr & Gallagher LLP
Annelise brings her years of first-hand experience to this effort and the end result is a must-read for both those not familiar with blockchain as well as those with experience and looking to dive deeper into understanding the benefits of fintech.
—Rayne Steinberg, CEO, Co-Founder Arca; former Co-Founder, WisdomTree Asset Management
Annelise Osborne is able to explain a complex topic making it understandable to all, with entertaining stories weaved in. I highly recommend this book for anyone working in traditional finance to grasp the potential of the technological upgrade taking place.
—Marcus Grubb, ex SVP State Street Digital, Banker, Fintech and Gold Entrepreneur
A must-read for every head of trading or investment in a language they will understand and written by someone they can relate to. Look for other copies on the morning train.
—James Godfrey, Managing Partner, Secure Digital Markets
From Hoodies to Suits demonstrates the exact transition the digital assets industry is seeing in near real-time. The compelling storytelling coupled with key and lesser-known events that have gotten the market to where it is today makes this a staple for financial professionals as tokenization compounds and positions itself as the next major technological overhaul to the capital markets. Annelise does a splendid job covering all angles through her unique lens as both a TradFi player and digital assets pioneer.
—Peter Gaffney, Head of Research Security Token Advisors.
On the eve of the US's financial announcement approving a spot ETF, we are on the precipice of a cultural shift that will significantly impact finance. This shift characterized by fringe technological wizards has now moved mainstream into traditional financial institutions with their risk profiles and business know-how. Annelise Osborne has captured this tectonic shift in her entertaining and impactful book From Hoodies to Suits. A must-read for the neophyte to the professional—you won't be disappointed. I couldn't put it down!
—Lynne Maylor, Co-Founder, Women in Digital Assets Forum (WIDAF); Ambassador, GBBC; Chair, Boston Blockchain Association
For finance and technology executives, this book is not just recommended; it is essential reading. Osborne accelerates the perspective of the landscape, empowering decision-makers to make intelligent and well-informed choices. From Hoodies to Suits transcends being a mere book; it becomes a strategic tool for those steering the helm of finance and technology, equipping them with the knowledge to navigate the dynamic shifts in the industry.
—Nitin Gaur, Global Head Digital Assets, State Street
FROM HOODIES TO SUITS
Innovating Digital Assets for Traditional Finance
ANNELISE OSBORNE
Copyright © 2024 by Annelise Osborne. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
Trademarks: Wiley and the Wiley logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc. is not associated with any product or vendor mentioned in this book.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Cover image(s): © BLACKDAY / SHUTTERSTOCK; POSTERIORI / GETTY IMAGESCover design: PAUL McCARTHY
To my amazing sons: Rory, Jamie, and Nate
May you stay curious.
Acknowledgments
I would like to acknowledge that it takes a village. First, thank you, Mom and family, for your unwavering support. Thank you to Bill Falloon for taking a chance on a first-time author and to Richard Samson for fine-tuning. Thank you, Jen Singer, for accepting the challenge and for weekly calls to turn the book into a story. Thank you, Nikesh Dalal, for your Hoodies input and to Kari Larsen, Jason Allegrante, and Tiffany Smith for your regulatory comments. Thank you, Chris Giancarlo and Jake Ryan, for steering me through the publishing process. Thank you, Leanne Mair, for the inspiration to write my book.
Thank you to the many people that helped shape my views on digital assets and crypto over the years including Bea O'Carroll, Rebecca Rettig, Cathy Yoon, Sandy Kaul, June Ou, Mike Cagney, Christine Moy, Nitin Gaur, Jerald David, Cynthia Jackson, Jennifer Warren, Blue Macellari, Adina Fischer, Nisa Amoils, Victor Jung, Hannah Baker, Carlos Domingo, Ryan Rugg, Kate Walters, Morgan McKenney, Anthony Moro, Georges Archibald, Pat O'Meara, Frank Walczak, James Godfrey, Emmanuel Aidoo, Blair Bingham, Rayne Steinberg, Hassan Bassiri, Patrick Martinez, Marcus Grubb, Ekene Uzoma, Dave Hendricks, Kim Diamond, Gabe Benincasa, Brian Berman, Ioana Niculcea, Mark Smith, Todd Lippiatt, Alina Fisch, Michael Oved, Sam Tabar, Maggie Hsu, Braeden Andreson, Tyler Hinton, Someera Khokhar, Elsie Brown, Deborah Bussiere, Yordanka Ilieva, Kelsey Weaver, Leanne Bassett, Ronit Walney, Peter Gaffney, Ginnette Harvey, Fabian Astic, Chuck Mounts, Charles Jansen, Jerry Tang, Gabriella Kusz, Amanda Wick, Elaine Asher, Angus O'Callaghan, Jeremy Fox-Green, Tim O'Regan, and Chris King.
The CT crypto crowd: Richard Walker, Jim Knox, Pat LaVecchia, Bob Yopstille, Keith Strycula, Gregg Bell, Elizabeth Menke, Wendi Carver, Emily Goodman, Rhonda Eldridge, Keith Coyne, Jarvis Cromwell, Trip Stocker, Charlie Moore, Lynne Morton, Michael Forstl, Chris Perkins, Sebastian Bae, Jasmine Burgess, Simon Zais, Michelle Noyes, Justin Schmidt, Bruce Morris, Anthony Bassili, and Ken Chapman.
Thank you to the TradFi crowd: Chris Patterson, Swati Sharma, Billy Jacobs, Andy Feytko, Bill O'Conner, Arvind Bajaj, Jason Hull, Charlie Manna, Nelson Braff, Ed Glickman, Mark Green, Dan Olsen, Mary Rottler, Julie Agnew, Maneesh Sagar, Mark Ripka, Chris Jones, and the many, many, many others. Thank you, Columbia Business School and William & Mary.
I am lucky to live in a collaborative and cooperative environment working to build the next interaction of finance. Thank you to the ecosystem for the many dinners, conversations, and predictions about what we will achieve.
To my lifetime of mentors, mentees, and sponsors, thank you for believing in and continuing to challenge me every day.
Disclaimer
The information provided in this book is for informational purposes only and is not intended to be construed as a source of advice. The information contained in this book does not constitute professional, legal, tax, or financial advice and should never be used without first consulting with a financial or other professional to determine what may be best for your individual needs.
This book is in no way a solicitation, endorsement, recommendation, or offer of any investment. Past performance doesn’t guarantee future results. Any forward-looking statements are only general in nature and the opinion of the author.
Although the author has made every effort to ensure that the information included in this book was correct at press time and while this publication is written to provide accurate information, the author assumes no responsibility for errors, inaccuracies, omissions, or any other inconsistencies herein and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
The author does not make any guarantee or other promise as to any results that may be obtained from using the content of this book. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. To the maximum extent permitted by law, the author disclaims any and all liability in the event any information, commentary, analysis, opinions, or advice contained in this book prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.
Introduction
When Facebook's Mark Zuckerberg testified before Congress in 2018, he did something remarkable: He wore a suit. A navy blue suit with a matching solid blue tie and a crisp white shirt. It was a noteworthy shift for the hoodie-wearing CEO of the tech giant that would eventually rename itself Meta, as in “metaverse.” As one journalist put it at the time, “When men want to look like adults, they suit up.”
The New York Times called it his “I'm Sorry Suit,” a strategically effective symbolic gesture that he was going to accept responsibility and defer to the rules set by people who wear suits to work every day.1
Disgraced FTX CEO Sam Bankman-Fried, too, wore a suit, at his 2023 federal trial for what's been called “one of the largest financial frauds in history,” even though he'd once insisted that T-shirts were crucial to his “brand.”2 His lawyers argued that he was just a young guy who got in over his head3 – while he allegedly misappropriated billions of dollars of his clients' money through his trading firm and cryptocurrency exchange, both of which had attracted plenty of grown-ups to the investment table.
Even Ethereum founder, wunderkind Vitalik Buterin, has occasionally ditched his T-shirts depicting unicorns and even a “bufficorn” (buffalo plus unicorn) costume he wore to a conference to throw on a collared dress shirt and appear on stage. This from a (very) young man who reportedly launched what would become the second most popular cryptocurrency4 after a change in the video game World of Warcraft made him cry himself to sleep.5
Shifting from hoodies to suits is exactly where the digital assets industry is right now. While blockchain was originally created as an alternative to banking and traditional finance by tech start-ups filled with hoodie-wearing entrepreneurs, it can actually enhance the established financial industry by bringing additional efficiency, transparency, and liquidity to capital markets. To make that shift, a different skill set is required – a skill set that the innovators of blockchain and cryptocurrencies don't have. The “Suits” of Wall Street and Main Street can build on what the “Hoodies” of tech start-ups created when they come to understand how to innovate using digital assets in traditional financial markets. That's when Hoodies and Suits can combine their talents and expertise to create the next generation of finance together.
What I Found in the Boardroom
Just before Zuckerberg was knotting his tie for Congress, I left my corporate life in traditional finance at Moody's. I was invited to join the board of a regulatory task force focused on cryptocurrencies and blockchain. Only, I knew nearly nothing about crypto, blockchain, or the initial coin offerings (ICOs), when blockchain based “coins” are sold to raise funds for a cryptocurrency project. It needed regulation. I told them, “You're talking to the wrong person. This isn't my expertise.” But they were young, persistent, idealistic attorneys.
So, I watched YouTube videos about bitcoin and blockchain to understand what they were about and why the lawyers were so passionate. When I understood the basics of the technology, I recognized that the potential upgrades to traditional finance were mind-blowing. But back then, the tech-savvy Hoodies were attempting to upgrade finance without finance experience, leading to false starts and bad publicity.
When you're dealing with traditional finance, you're dealing with securities, structure, and regulation – and possible jail time for any violations. After all, finance is one of the oldest professions in the world, dating back to Mesopotamian bankers offering credit contracts. And if it's not broken, why fix it? But it can run more efficiently, and blockchain and digital assets are paving the way. It's going to take recognized structures and “responsible innovation” regulation to make them mainstream.
I had made the assumption that the industry was already deep into the process of applying the Hoodies' technologies to traditional finance, but I was wrong. Hoodies couldn't do it alone, because they lacked the experience and understanding of the intricacies of the industry, and Suits didn't understand the technology.
So, I found a partner and together we worked to create digital assets – discoverable digital representations of value that establish ownership – as smart securities, eliminating frictions and developing a more automated process, while using his broker-dealer. Together with a great team, we focused on efficiencies and programmable securities and worked to create tokenized real-world assets before the term RWA was cool. We even created securities offering to pay interest in stablecoin, a cryptocurrency that provides a stable price by being pegged to a currency or commodity, which was a first. We structured non-fungible tokens (NFTs), unique tokenized assets on the blockchain that can't be replicated, for investments in land plots, before NFTs became known for art.
I understood that digital assets would become important because the next generation of investors, who grew up with supercomputers in their pockets, will demand a different way of handling their finances and identifying their investments. For them, the speed, efficiency, transparency, and potential interoperability of the systems built by Hoodies won't be a nice-to-have. They will be a must-have. But in my first venture, we were too early for real adoption. So much had yet to be built and integrated and still does.
I recognized that it would take people with finance experience to apply the technology in a practical and usable way, and I wanted to be a part of it. I had a clear vision of what could be built. I had been that kid who wondered why I had to take cash for babysitting when I wanted my clients to transfer the money right into my bank account. This was back when ATMs were finally becoming ubiquitous at bank branches nationwide, and my mother still used checks – and checks aren't real money. They're just access. Even as a teenager, I saw the value in a cashless economy.
Recently, at a farmer's market in rural Alaska, I noticed that the vendors all took credit cards on mobile readers attached to their iPhones. Imagine if that had been an option for my babysitting job. Technology is changing finance. We must change with it.
Today, the market is ripe for blockchain technology in traditional finance, on Wall Street, and in corporate America. There are a lot of frictions that digital assets and blockchain can solve. The market is ready for the Suits to work with the Hoodies to make it happen, but they need to first catch up on understanding the technology and its potential applications.
We also have to create the current regulatory and interoperability landscapes. Too many banks operate on old systems written in COBOL that cannot talk to one another. There's a reason for that: There are regulations that require financial institutions to keep records, and it takes a long time to upgrade systems. So, they just kept building on old technologies, and by the time they upgrade it, it becomes irrelevant.
While the Suits tried to put Band-Aids on their antiquated systems, the Hoodies continued to build new advances in technology. They began launching ICOs in 2017, introducing more crypto coins similar to bitcoin. Their investors, located across the globe, were passionate about crypto, but they weren't accredited investors. It was what US Securities and Exchange Chairman Gary Gensler would later call “the Wild West,” with unregulated exchanges, possible insider trading, and companies with obvious conflicts of interest.
In the early days, one of my attorney colleagues wrote a white paper on crypto regulation and it went viral – and nothing ever goes viral in finance. Usually, if people know your name in finance, you've done something wrong to end up in headlines of the Wall Street Journal. That's exactly what's happened in recent years to some of the founders of crypto. Left unchecked by the regulations that govern traditional finance, some of them went rogue and defrauded investors. Unfortunately, that's typically much of what the Suits know about digital assets. But blockchain is not bitcoin, and the technology is sound.
Today there are over one thousand blockchains worldwide, and a lot of digital assets may be unregistered securities. While it took a long time for bitcoin to take off – as of this writing, it's trading at $47,000 – it laid the foundation for the changing face of finance today. Some very large players in traditional finance have launched their own blockchains and digital assets, and investors continue to demand changes that bring traditional finance closer to instant settlement, known as T+0.
Now Is the Time for Digital Assets and Web3
Now more than ever, finance professionals, traders, asset managers, investment bankers, and corporate treasurers must understand how to apply digital assets to today's financial markets. Only then will the traditional finance industry be able to innovate and adapt to the inevitable technological changes of the near future, when Web3, which is phase three of the internet marked by decentralization, provides a world of blockchain known as the “internet of value.”
While the development of cryptocurrencies and decentralized finance paved the way for upgrades to traditional finance and institutional digital assets, the Hoodies have left behind integration challenges for the Suits to address. Among them are regulatory issues. While the SEC sorts out which digital assets are securities and how this innovative technology should be regulated, Suits can prepare for traditional finance's imminent upgrade to blockchain and digital assets. These advances will bring liquidity, speed, improved operations, transparency, and much more. In fact, they already are.
The Suits who will benefit are the ones who understand the technology that the Hoodies have built and apply it to traditional finance. From Hoodies to Suits: Innovating Digital Assets for Traditional Finance is your guide to understanding and adopting the technologies that are revolutionizing finance.
Notes
1
. Friedman, Vanessa. “Mark Zuckerberg's I'm Sorry Suit.”
New York Times
, April 10, 2018.
https://www.nytimes.com/2018/04/10/fashion/mark-zuckerberg-suit-congress.html
.
2
. Bellafante, Ginia. “Sam Bankman-Fried Was a Grown up Criminal, Not an Impulsive Man-Child.”
New York Times
, November 3, 2023.
https://www.nytimes.com/2023/11/03/nyregion/sam-bankman-fried-ftx-trial-cryptocurrency.html
.
3
. Gura, David. “Criminal Mastermind or Hapless Dude? A Look into Sam Bankman-Fried's Trial so Far.” NPR, October 14, 2023.
https://www.npr.org/2023/10/14/1205737325/criminal-mastermind-hapless-dude-sam-bankman-fried-trial-ftx
.
4
. Rodeck, David. “What Is Ethereum? How Does It Work?”
Forbes
, February 16, 2023.
https://www.forbes.com/advisor/investing/cryptocurrency/what-is-ethereum-ether/
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5
. Dailey, Natasha. “Vitalik Buterin Says He Created Ethereum after His Beloved World of Warcraft Character Was Hobbled by the Developers, Awakening Him to the ‘Horrors Centralized Services Can Bring.'”
Business Insider
, 2021.
https://markets.businessinsider.com/news/currencies/vitalik-buterin-created-ethereum-following-world-of-warcraft-debacle-2021-10
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1Blockchain Is Not Bitcoin
“Innovation distinguishes between a leader and a follower.”
– Steve Jobs
In January 2023, JPMorgan Chase Chairman and CEO Jamie Dimon appeared on CNBC's Davos outdoor set of Squawk Box wearing a blue parka and a smirk. Host Andrew Ross Sorkin had asked him about cryptocurrency, and Dimon cut him off.
“I think all that's been a waste of time, and why you guys waste any breath on this is totally beyond me,”1 he delivered rapid fire.
For a moment, Sorkin was speechless. Then he asked, “Because you think the whole thing is going to zero and it's fake?”
“Bitcoin itself is a hyped-up fraud,” Dimon replied. “It's a pet rock.” But then Sorkin began to ask about firms like BlackRock investing in infrastructure to support cryptocurrencies, and Dimon began to soften.
“No, no, that's different,” he said, extending his hand. “Blockchain is a technology ledger system that we use to move information… . We've used it to move money.”
In short, blockchain is not bitcoin, and blockchain is the future of finance.
For Dimon, his disdain for crypto buzz was nothing new. He had testified in 2022 before Congress's House Financial Services Committee that unregulated cryptocurrencies like bitcoin were nothing more than a “decentralized Ponzi scheme” that make it easier for criminals to engage in illegal activities like money laundering and sex trafficking.
For all of Dimon's disdain for cryptocurrencies, he had a vision for the system it was built on.2 Long before Dimon appeared on CNBC that day, JPMorgan had already been investing in building a private blockchain. The firm's Onyx digital assets tokenization platform made JPMorgan the first global bank to offer blockchain-based wholesale payment transactions. They also introduced JPM Coin, an internal digital token of depository receipts representing $1 USD that uses blockchain technology, allowing bank clients to transfer payments between internal accounts seamlessly. The company asserted that blockchain technology would free up liquidity, offer better customer experiences, and reduce friction and risk.3 Under pressure from clients, the firm even quietly opened up access to a half-dozen crypto funds. This, despite headlines identifying Dimon as a “crypto skeptic.”
Then in late 2023, JPMorgan announced a collaboration with Apollo Global Management under Project Guardian with the Monetary Authority of Singapore, which was designed to “revolutionize the asset and wealth management industry” through tokenization and smart contracts.4 Their white paper called the launch a “critical moment at the intersection between traditional finance and blockchain technology.”
The Suits had pinched blockchain from the Hoodies, marking the beginning of built-out blockchain applications working to create the future of traditional finance. Crypto had served as a proof of concept for traditional finance in the decade that bitcoin took to get traction. Yet even today, many people aren't able to distinguish the difference between bitcoin and blockchain, thinking they are one in the same, and that bitcoin is a fraud. Then they make the leap that blockchain must, too, be a fraud. But blockchain is not bitcoin. It's technology with multiple applications for the financial world today and in the future.
When Bitcoin Stole Blockchain's Thunder
On Halloween 2008, an eight-page document that would begin to change the face of money described a digital currency for peer-to-peer electronic payments worldwide. It was released under a mysterious pseudonym, Satoshi Nakamoto, whose identity has never been revealed. The white paper, entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System,” has widely been touted as the birth of bitcoin, considered the world's first cryptocurrency. It also introduced the concept of blockchain technology, a decentralized digital ledger of transactions that would provide the foundation for the cryptocurrency market.
Its introduction coincided with a radical shakeup in traditional finance. The subprime mortgage crisis was in full swing, and people were losing their homes. Lending practices in the early 2000s had become so relaxed, it seemed that anybody without assets, income, or employment could get a mortgage, many of which had adjustable rates. So, when the Great Recession hit and interest rates began to rise, defaults ballooned.
As the housing market plummeted, Wall Street began to melt down, and banks suddenly had loan losses on their balance sheets and foreclosures they couldn't unload. The government stepped in with a bank bailout called the Troubled Asset Relief Program (TARP), but not before Lehman Brothers closed its doors after more than a century-and-a-half on Wall Street. The average citizen saw a crumbling financial system that had been ruled by Suits who profited while people lost homes, money, and hope.
In 2008, bitcoin was revolutionary and blockchain was transformational, with applications for traditional finance that had been built and refined over thousands of years, while along the way, becoming more efficient. For the Hoodies, the timing was ripe for addressing concerns about banks and bank control. Bitcoin allowed crypto enthusiasts to take their money outside of banks, keeping them in a decentralized system with no central body oversight or outside control over their funds. For the Suits, what blockchain offered traditional finance was a foundation for the first iteration of digital assets.
The white paper revealed a new global electronic cash system that didn't need a third-party intermediary, such as banks, to function. The process of transferring bitcoin from one party to another involves what's known as bitcoin mining, where a network of energy-consuming computers work to solve challenging puzzle-like computations to create new blocks in the blockchain, confirming and recording the change of ownership. The first computer or miner to solve the computation received transaction fees, plus the reward of new bitcoins.
Yet bitcoin's white paper and concept were largely met with skepticism by jaded Hoodies who had already experienced empty promises and grand schemes when it came to the concept of cryptocurrencies. A series of decentralized digital assets had been introduced in the 1980s and 1990s, but they were subject to hacking and often lacked scalability.
Yet in January 2009, the software for the blockchain described in the white paper was launched and soon, perceptions began to change. The first person to run the Bitcoin software was Nakamoto, who sent 10 bitcoins (BTC) to a computer scientist named Hal Finney.5 With it, Bitcoin v1.0 was released for a maximum circulation of 21 million coins.
A new monetary asset without reliance on a formal bank was appealing to many. Nakamoto wrote in the white paper, “The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”6
The value of bitcoin, $0 USD at launch, slowly increased to reach $0.09 by 2010. Then in 2021, it hit a peak of nearly $70,0007,8 after a volatile trading history marked by peaks and troughs in confidence with many users eager for a big payoff. Bitcoin's price, and therefore, its market value, is reflected by what one party is willing to pay for it. What makes bitcoin and other cryptocurrencies unique is that they aren't tied to the full faith and credit of any country, fiscal policy, or federal reserves. Though many countries are considering a digital form of central bank money called a central bank digital currency (CBDC), bitcoin's volatile nature and lack of reserve backing leads many to label the currency as a fraud. Its value lies in its functionality, digital decentralized nature, absence of third-party control, and instantaneous money transfers.
Though bitcoin, the cryptocurrency, has received much of the press over the years, it's really the Bitcoin blockchain and the introduction of its capabilities that matter most to traditional finance executives and investors, because the blockchain laid the groundwork for a more efficient system for securities, private markets, debt instruments, payments, and back-office functions using financial structures that are in place today.
For the first time, it allowed for peer-to-peer payments with international applications, before Venmo and Zelle made it easier to transfer fiat money. Venmo and Zelle are still more restrictive than bitcoin, with a wait time for settlement, often days with limits on how much can be transferred. Bitcoin offered faster transaction timelines, quicker settlement, decreased costs, increased potential liquidity, and control over accounts, called wallets. It also offered equal access to information and the ability to verify data across the chain, eliminated user error, decreased the need for intermediaries, left money in everybody's pockets, and allowed for a digital wallet instead of hiding dollars under the mattress.
The Suits can take what the Hoodies built and make it more efficient and usable in the regulated financial markets. No longer will banks be able to hold up clients' money for five days just to cash a check or transfer funds. Blockchain isn't a replacement system for today's financial markets. It's a building block for a better way of doing business.
What Is Blockchain?
Simply put, blockchain is a system of recording information that is virtually impossible to change or hack. It is a shared immutable ledger. It is technically a large, shared database, but for simplicity's sake, think of it like a large, shared Excel sheet or Google Sheets spreadsheet that records each input into a cell. When the cell is updated, the new information is recorded in that cell, or block, as verified. The blockchain records the continuing growing list of what happens in that cell or block. Everyone on the blockchain has access to the same information, and they don't have to discern which is the latest iteration.
A good example of how blockchain could work is in title insurance, a form of indemnity insurance for real property titles. New homeowners or commercial property owners are required to pay for title insurance, which ensures the property title is clean, the property belongs to the seller, and that there are no liens that could lead to a change in ownership. If the title for each property was recorded on the blockchain as a single source of truth, then the title insurance company wouldn't be needed. The blockchain would be updated with each change, and any liens could easily be tracked back from the construction of the house or the first input of data. This is a $58 million industry with a compound annual growth rate of 7.8 percent9 that's ripe for disruption. Blockchain could put money back in the pockets of the property owners by eliminating the added expensive and slow process of title insurance.
What Are Digital Assets?
According to Investopedia, digital assets are “anything that is created and stored digitally, is identifiable and discoverable, and has or provides value.” This can include:
cryptocurrency: a digital medium of exchange, such as bitcoin, transacted with blockchain technology, including stablecoin and CBDCs.
security token: a digital token that can prove identity or ownership.
non-fungible tokens (NFTs): unique digital tokens of artwork, music, and other assets that are stored and verified on blockchain and are not interchangeable.
crypto asset: a digital asset that uses cryptography and blockchain technology for creation, ownership, and exchange. Examples include NFTs, cryptocurrency, stablecoins, and security tokens.
Enter Ethereum
In the first 12 hours after Ethereum launched their native cryptocurrency in 2014 in an Initial Coin Offering (ICO), more than 7 million ether (ETH), the ICO coin, worth over $2 million were sold.10 By the end of the sale just 42 days later, some 60 million ETH worth about $18 million had changed hands – the second largest crowdfunded project or ICO fundraised in the history of the internet at the time.11 By November 2023, Ethereum had a market cap of more than $242 billion.12
Ethereum's 22-year-old whiz kid founder, Vitalik Buterin, told Wired in 2016 that he'd expected naysayers to find flaws when he released a white paper proposing something new and more functional for finance than the Bitcoin blockchain provided, but they didn't. His new proposed blockchain allowed for programmable smart contracts and ETH, a cryptocurrency, which was a welcomed addition to the community.
“As it turned out, the core Ethereum idea was good, fundamentally, completely, sound,”13 he said.
Whereas the Bitcoin blockchain is a decentralized digital currency providing a medium of exchange, Buterin's Ethereum blockchain is a decentralized global software platform. Bitcoin was created to replace national currencies as a store of value during the 2008 financial crisis, while Ethereum was designed as a peer-to-peer network that allowed for the use of smart contracts that could securely verify and execute code, opening up a world of decentralized programmable digital transfers.
These were the early days of the ICO craze, which are a bit like an initial public offering (IPO), except ICOs are launched at the inception of a company as opposed to at a stage of profitability. They also don't generally give investors any ownership or voting rights in the company. ICO investors take a bet that the tokens they buy will increase in value or have some utility to the investor. They own nothing but the tokens.
Sometimes, that's a wise gamble. Launched in 2015, Ethereum was among the first ICOs, and by 2023, the value of ETH had increased nearly 600,000 percent.14 An ICO “whale” initial investor resurfaced that year and transferred to a dormant wallet about 8,000 ETH. Originally purchased for a reported $2,500 for a profit of $14.7 million USD.15
Make no mistake: Investing in ICOs was very risky. One problem with ICOs was that the Hoodies in charge were generally inexperienced at building and running companies, and investors weren't protected. Plus, the system lacked transparency and a consistent structure. The combination made ICOs ripe for fraud by bad actors or Hoodies who were unable to get their companies off the ground. And, the Suits wouldn't step in, because they recognized the need to work within regulation. To be honest, during the ICO boom of 2017, very few Suits followed or understood the technology.
Half of all ICOs failed to raise funds in 2017 and 2018, when CNBC reported that more than eight hundred cryptocurrencies were “dead,” worth less than a penny.16 One study found that 80 percent of ICOs with a minimum market cap of $50 million were actually scams,17 typically to either target an investor's authentication credentials or to transfer crypto to their possession.
Initial Coin Offering (ICO): Like an IPO for cryptocurrency, ICOs allow companies to raise money for a new application, coin or token, or software services. It's offered at an early inception of a company idea, like seed venture funding, only it has not been regulated and typically doesn't offer ownership or voting rights. Instead, investors receive crypto tokens issued by the company and hope they appreciate in value or provide a utility offered by the company.
Consensus and Technical Terms
Blockchains use different types of consensus mechanisms to synchronize a network for agreement within the digital ledger. It's a way to ensure that only valid transactions are recorded on the blockchain. Think of it as checking the work that is being added to the blockchain to make sure it is what it's supposed to be.
While Bitcoin's consensus mechanism is Proof of Work (PoW), which reportedly gobbles up as much energy as the entire country of the Philippines,18 Ethereum, which launched as PoW in 2015, upgraded to Proof of Stake (PoS) in 2022. Not only is Proof of Stake a greener solution, dramatically reducing energy consumption, it's a more simplified process that relies on “validators,” who check new blocks in exchange for rewards above their own staked coins which are pledged to help validate transactions on the blockchain.
Ethereum has its own programming language that runs on a blockchain, and its transaction time is seconds, compared to Bitcoin's minutes.
What's a Consensus Mechanism?
Blockchains operate under different protocols, called consensus mechanisms, for verification:
Proof of Work (PoW): A consensus mechanism to synchronize and validate date and process transactions. It requires participants (miners) to solve mathematical puzzles to create new blocks and earn rewards. The Bitcoin blockchain is built on PoW.
Proof of Stake (PoS):
