The financial landscape is profoundly influenced by the ebb and flow of interest rates. As financial tremors disrupt global liquidity, even the burgeoning digital asset ecosystem is feeling the tremors.
Cryptocurrencies, traditionally considered a high-risk venture in the financial playbook, have seen their reputation further tarnished. A series of bankruptcies and the fallout from FTX have left the crypto industry grappling with an acute trust deficit.
In such unpredictable market conditions, the quest for investment avenues yielding attractive risk-adjusted returns can resemble a daunting odyssey. Cryptocurrency, once an enticing asset class, is now overshadowed by treasury yields that outperform returns in decentralised finance (DeFi). This leaves investors questioning their next move.
The safe harbour search
As the tide turns towards less risky ventures, attention is focusing on risk-free rates, with US Treasury Bills or T-bills at the centre of the conversation.
However, the “risk-free” tag of T-bills is somewhat misleading. Holders of these financial instruments are exposed to duration risk, as evidenced by the downfall of Silicon Valley Bank. This risk reflects potential price fluctuations before the T-bill reaches maturity.
That said, the appeal of short-term T-bills has grown with recent interest rate hikes. They now promise nearly 5% yields without credit risk. Reverse repos collateralized with US government securities present the most direct route to this genuine risk-free rate.
While native staking on Ethereum offers a similar risk-free rate in the digital asset world, it comes with its own set of challenges, primarily the absence of backing by physical assets.
So, where might the optimum balance lie? The answer could be in the tokenisation of real-world assets, the elusive ‘holy grail’ of risk-free returns.
Charting the course
Digital tokens representing stocks and mortgages are far from a new concept. However, the fall of FTX has rekindled interest in blockchain-secured, tokenised real-world assets. This approach could significantly enhance the economics of finance and broaden the spectrum of collateralizable assets.
Tokenising real estate could increase liquidity and invite new investors. Tokenising insurance policies could create industry stability through risk transfer and lower consumer costs. Coupling real-world asset tokenisation with DeFi could offer diversified portfolios and investment returns at lower risk.
One promising strategy involves the union of T-bills and stablecoins. Tokenising T-bills allows investors to diversify their stablecoin portfolios, leveraging the attractive yields offered by T-bills via smart contracts.
In the future, 24/7 token swapping and prime collateral for DeFi lending protocols could be made possible through tokenised T-bills. This would enable investors to delve deeper into the DeFi ecosystem and earn returns beyond T-bill yields.
Plotting the course forward
Even as the concept of asset tokenisation gains momentum, its journey to mainstream adoption is challenged by regulatory and compliance hurdles.
The recent crypto volatility has seen regulators mount a resistance against the industry’s tokenisation endeavours. This resistance likely stems from fears that the systemic risks of tokenisation could exacerbate financial system vulnerabilities.
To counter this, asset managers and investors need to ensure they engage with reliable counterparties and keep abreast of regulatory and compliance issues. Some progress has been made in this regard, notably by Asia-based DeFi solutions that have secured regulatory approvals and compliance protection.
The adventure awaits
As the 2022 bear market dampened enthusiasm for high-risk crypto investments, asset tokenisation has emerged as a beacon, offering the promise of “risk-free” returns. The proposition? Enjoy continuous on-chain liquidity while tapping into the favourable yields of traditional finance in these challenging times.
Today, many stablecoins are backed by treasuries, a benefit that currently goes exclusively to the issuer. Regulatory considerations aside, the evolution of this ‘golden goose’ investment could initiate a novel financial era. A time where traditional finance and DeFi coalesce to form a financial ecosystem that embraces both permissioned and permissionless assets harmoniously.
There’s no shortage of potential applications for tokenising real-world assets. For instance, tokenising T-Bills alone, with over 130 billion dollars worth of stablecoins in circulation and a 4.2% annual risk-free interest, could unlock a yield bounty upwards of 5.5 billion dollars.
Indeed, tokenising real-world assets offers DeFi a gateway into some of the largest financial markets, making conventional capital markets and DeFi protocols more accessible to all. This process yields tangible benefits, including increased capital efficiency and the ability to trade formerly illiquid assets, all securely and transparently thanks to blockchain technology.
It’s important to recognise, however, that asset tokenisation’s path to mainstream acceptance may be long and arduous, with regulatory and compliance concerns being the primary roadblocks.
As we’ve seen, there’s been pushback from regulators due to the instability in the crypto markets and concerns over the systemic risks of tokenisation. However, progress is being made, especially in regions like Asia that have embraced DeFi solutions and successfully navigated the regulatory landscape.
That said, acceptance will be a gradual process, especially in more ‘DeFi-cautious’ jurisdictions like the US. To overcome this, asset managers and investors need to ensure they’re working with reputable counterparties and are well-versed in regulatory and compliance issues.
The future of finance is upon us, and we are on an exciting trajectory. Asset tokenisation and its enticing promise of “risk-free” returns are drawing investors back into the fray. As we venture into this new era, one where traditional finance and DeFi are interwoven more seamlessly, we can look forward to a financial ecosystem that supports and embraces a diverse range of assets.
Indeed, the adventure is just beginning.
Matrixport is one of the world’s largest and most trusted digital assets ecosystem providing one-stop crypto financial services to meet the emerging needs of generating long term wealth in digital assets. It forges strategic collaborations with early stage Web3 innovators, helping them build, grow and scale and the company’s services include Cactus Custody™, spot OTC, fixed income, investment products, lending as well as asset management.
With USD4B in actively managed digital assets, Matrixport achieved pre-money unicorn valuation in 2021 and was named by CB Insights as the 50 most promising blockchain companies in the world in 2022. Its digital prime brokerage business, Matrixport Institutional, serves over 800 institutions across the US, Europe and Asia, offering best-in-class access, leverage, capital Introduction and custody services. Headquartered in Singapore, the company holds a Hong Kong Trust Company License and a Swiss FINMA SRO-VQF Membership. For more information, visit https://www.matrixport.com/.