The Weekly Axis - Dec. 2, 2023

Not too much news this week, but we did get some movement in regulation in the UK, and we gave the associated Deep Dive on tokenized public funds.

We’ll also talk about the correlation, or lack thereof, of crypto with traditional markets.

We’ll hit a couple of these here, with more explanations, analysis, and discussion on the site

If you’re in the Denver area, or know someone who is, we’re hosting a crypto education session.

• December 5, 2023

• 9 - 1 Mountain Time

• 4 hours on:

  • Bitcoin and Blockchain

  • Ethereum and Smart Contracts

  • Investment Theses

  • Custody

• 4 hours CE/CPE toward CFP, CPA, CIMA

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Fund Tokenization: The UK's Blueprint for Implementation

Over here in the States, we’ve been waiting for regulatory guidance and clarity. In the UK, they’re moving forward with it, this time in regard to tokenization of funds.

Well, let's break it down. Fund tokenization involves taking traditional funds and transforming them into digital tokens on a public blockchain. This process offers numerous benefits, such as increased efficiency and transparency. It's not about creating volatile crypto assets like Bitcoin or ETH, but rather leveraging the advantages of blockchain technology.

Now, here's where it gets interesting for you as financial professionals. The UK government, along with industry experts, has come together to create a blueprint for implementing fund tokenization. They're addressing crucial aspects like KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations, all while exploring how to make investing in tokenized funds more accessible.

So, what does this mean for you? Well, it means that in the near future, your clients will likely have the opportunity to invest in tokenized funds. These funds will be denoted and denominated on public blockchains, offering increased transparency and efficiency. As their advisor, you'll need to understand how wallets and custody work in this new landscape, ensuring your clients' assets remain safe and secure.

Additionally, the implementation of tokenized funds opens up possibilities for instant settlement using stablecoins. Imagine being able to pay for these funds with stablecoins directly from your wallet. It's a game-changer that could revolutionize the way transactions are conducted.

Now, this development isn't limited to the UK. It's a global trend that we expect to see replicated in other countries. As financial professionals, it's crucial for you to stay ahead of the curve and understand the implications of this evolution. Embracing the transparency, efficiency, and potential liquidity that tokenized funds offer will position you as a trusted advisor in this new era.

Fund tokenization is on the horizon, and it's time to get ready for the changes it will bring to the financial industry. Stay informed, adapt, and continue providing the best guidance to your clients.

The Correlation of Crypto and the Inflation Hedge Narrative

Now, when we talk about crypto, we often think of Bitcoin, as it tends to set the tone for other crypto assets. But what does this correlation mean for you?

Well, let's start with the investment thesis around Bitcoin as an inflation hedge or a store of value. You may have noticed that when inflation hit in recent times, the price of Bitcoin initially went down. Some skeptics pointed to this as evidence that Bitcoin isn't a reliable hedge against inflation. However, there's more to the story.

You see, Bitcoin experienced a massive price surge driven by retail investors who were simply jumping on the bandwagon. They weren't necessarily investing based on the store of value narrative. It was more of a FOMO situation. So, when inflation hit and people had less disposable income, they naturally had less to invest in Bitcoin, causing the price to dip.

But here's the thing: the initial surge in Bitcoin's price was likely inflated and not truly reflective of its value. When you consider the price trajectory from pre-COVID until now and compare it to inflation, it actually aligns quite well. Sure, there were some bumps along the way, like regulatory issues and market pullbacks, but overall, Bitcoin has shown potential as a store of value during inflationary periods.

Now, let's talk about the correlation between crypto assets and traditional markets like NASDAQ and the S&P. During the height of the pandemic, we saw a strong correlation between these markets and crypto. People were at home, receiving stimulus checks, and looking for investment opportunities. They were investing in everything from stocks to crypto, causing a synchronized movement.

However, in recent times, we've witnessed a break in this correlation. Why? Well, financial professionals like you have started to recognize the unique factors that drive crypto markets. Factors like the potential for ETFs, the need for an inflation hedge, and geopolitical tensions have led investors to seek assets like Bitcoin and gold. This shift doesn't necessarily align with what's happening in traditional markets based on company earnings.

So, what does all this mean for you as a financial professional? It means that while short-term correlations may exist, the long-term investment theses for crypto assets like Bitcoin, Ethereum, and Solana are not necessarily tied to traditional markets. As the market matures, investors will make choices based on the merits of each asset. And that's where your expertise comes in – helping your clients navigate this evolving landscape and make informed investment decisions.

Remember, the crypto market is dynamic, and occasional correlations or deviations from investment theses are part of the journey.

Bringing Public Companies Onchain: The Future of Trading and Ownership

With the above news about the tokenization of funds, we wanted to do our deep dive about bringing public companies onchain.

Now, you might be wondering why we need to do this when we already have a system in place for public companies. Well, let me tell you, there are some exciting implications for you in the financial industry.

Currently, when you trade or hold shares of public companies, you rely on custodians like Fidelity or Schwab. They hold the actual shares, and you have what's called beneficial ownership. It's convenient, but it comes with its limitations. Settlement can take a couple of days, and there's a lack of transparency.

But imagine a world where public companies are represented by tokens on a blockchain. These tokens, let's say an Apple token, would be just like a share of Apple stock. The beauty of this is that it brings immediate settlement and transparency to the table. No more waiting for T plus 2 settlement. You can see the value of your assets in real-time, and you have custody of your own assets.

Now, let's talk about how this affects you as a financial professional. First off, it opens up new possibilities for collateralization. Just like you can use your home as collateral for a mortgage, you can now collateralize your Apple tokens or other assets on-chain. This gives you more options for loans and potentially lower interest rates. Plus, you don't have to rely on traditional custodians for permission or access to credit.

Additionally, the ability to vote and influence company decisions becomes more streamlined. Instead of going through the traditional voting process, you can use your tokens to vote directly on the blockchain. This empowers you as a shareholder and gives you a voice in the company's direction.

Of course, this shift to on-chain public companies might disrupt the current custodian model and challenge the status quo. But it also brings efficiency, transparency, and self-custody to the forefront. As a financial professional, embracing this change can enhance your ability to serve clients, access liquidity, and navigate the evolving landscape of the financial industry.

Have a great weekend, and we’ll chat again next week.

— Adam