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“That’s as good as money, sir. Those are IOUs.”
Dummy-proofing DeFi
The first stock I ever owned was a gift from my dad: one share of the Boston Celtics Limited Partnership.
I was a Knicks fan, but, you know, it’s the thought that counts. (I guess.)
It was a physical certificate, green, with a picture of a couple of old-timey, short-shorts basketball players. It’s probably still buried in my mom’s attic somewhere. (Mom: If you find it, I’ll split the proceeds 50/50.)
What’s it worth? No idea. But I expect I’d have half a chance to trade it for an oligarch’s yacht at the moment.
Because if said yacht is docked in unfriendly waters, it’s now worth nothing to the “owner.”
Yacht owners have learned a lot about bearer assets this past week. And about the importance of keeping those assets in the right places.
There are lessons for the rest of us, too.
I wouldn’t recommend keeping all of your assets in your mom’s attic. But, to some, it might be looking like the least-worst option at the moment.
Contingent Property Rights
Among other things, we’ve learned from the war in Ukraine that US property rights are contingent on good behavior.
For the most part, it’s not difficult to comply. Just don’t, like, invade any sovereign countries.
But even being in the circle of someone who has done so may put your assets at risk, as the oligarchs having their yachts impounded now know.
And that circle of acquaintances might turn out to be surprisingly big: Many regular Russians have lost their savings, Boeing has stopped servicing planes they’ve sold to Russia and the Twitterati has been lobbying Elon Musk to deactivate every Tesla registered in the country.
That last suggestion seems a bit fanciful, but it illustrates that as the world gets more dependent upon technology, our lives become more dependent on staying in the good graces of others.
Reducing your dependence on others is the use case for bearer assets.
And it’s not just oligarchs and the Russian central bank that are becoming more appreciative of that use case.
US retail has been given a few lessons in this, as well.
Holders of Russia ETFs should now understand they are multiple steps removed from having an ownership claim on a Russian company.
The ETFs have been suspended from trading by the CBOE, the ETF issuers may choose to dissolve the funds, the custodian banks may choose to no longer custody the depository receipts, SWIFT may refuse to process dividend payments, or Russia may bar companies from paying them.
For similar reasons, London-listed Gazprom depository receipts are down 95% year-to-date.
The company Gazprom is not worth 95% less than it was before last week, however. (You could argue it’s worth MORE given the surging price of oil and gas.)
What is now nearly worthless, however, is holding a London-listed depository receipt with a TradFi broker. Because that no longer acts as a claim on Gazprom’s profits.
Owning Russian equities is a niche activity, but how about US-listed China shares?
Buying the US listing of, say, Alibaba, does not give you an ownership stake in Alibaba. It gives you a claim on a “variable interest entity,” which is nothing more than some paperwork filed in the Cayman Islands.
Or owning futures-based ETFs, which are a long way removed from the underlying instrument you’re wanting to invest in.
The value of all of these types of things needs rethinking in the light of what we’ve learned over the past week or so.
So what other options are there?
The Crypto Option
Crypto is a censorship-resistant bearer asset (which cannot be taken away from you), with a disinflationary standard-bearer (the value of which cannot be inflated away) and high-yielding stablecoins (which may be your best bet to keep up with inflation).
In other words, this should be crypto’s moment — but it doesn’t really feel that way, does it?
The problem, I think, is simply that putting assets on a blockchain is still pretty scary.
Writing down seed phrases in triplicate is a pain; hardware wallets are confusing and far from foolproof; there’s every chance I will send something to an address I’m not supposed to; and there is no chance I’m going to carefully investigate every signature request that pops up.
Decentralized finance is a minefield of expensive mistakes waiting to happen.
But maybe not for too much longer, because there seems to be an increasing effort to make things both easier and safer.
Here are a few recent finds that are making me feel like more of my money should be on blockchains.
We have a long way to go: Moving a significant amount of money around on digital wallets still gives me the heebie-jeebies.
But these are helpful steps in the direction of mainstreaming decentralized finance.
I think it’s inevitable that DeFi will remake the finance industry.
And that process may accelerate as people rethink the nature of property rights in light of the current weaponization of finance.
But unless DeFi gets radically easier and safer to use, it will most likely develop into an invisible application layer in service of the current banking system — which is not the revolution any of us is hoping for.
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