Wall Street Veteran Warns of ICE Bringing Bad Banking Practices to Crypto
22 years of experience including running Morgan Stanley’s pension solutions business, Caitlin Long is a Wall Street professional. CCN had gotten Long to speak with them on the financialization in crypto.
Long tells them,
“In the good context, liquidity is improving because an asset’s investor base is growing—new investors are coming in, especially institutional investors.”
Leverage financialization also improves liquidity, but it does so artificially.
“In the negative context, it means liquidity is improving but it’s coming from the bad kind of leverage—paper claims to an asset that aren’t backed by the asset itself, or “circulation credit” as economist Ludwig von Mises calls it,” says Long.
She further adds, “The problem is that there’s really no theoretical limit on how much “paper bitcoin” can be created, and paper bitcoin can offset bitcoin’s scarcity—we’ve watched that happen in commodities markets and credit derivatives markets, where paper versions of the asset can suppress the underlying asset’s price by offsetting the real-world scarcity of the asset, such as gold and silver.”
“Bitcoin’s biggest defence is that most bitcoins are stored off the Internet, which will make it hard for Wall Street to source the actual bitcoins and consequently keep a practical lid on how much leverage-based financialization can happen to bitcoin,” she states.
“Exhibit A is what happened with Hong Kong-based OKEx this week, where a large futures contract (worth more than $400 million) ended up with such a big loss that it threatened the exchange’s solvency because the loss consumed all of OKEx’s guarantee fund, so the exchange haircut its other customers’ gains in order to stay in business (a “bail-in”),” she said.
“It’s clear that OKEx was creating unbacked claims to bitcoin, or this could not have happened. A financial institution would only ever need a guarantee fund if it’s creating fractionally-reserved assets. In other words, a financial institution that is fully collateralized—fully backed by the asset against which it creates a paper claim—would never need a guarantee fund. Interestingly, ICE’s press release noted that Bakkt would be starting a guarantee fund as well. So there it is, in plain sight.”
The Wall Street exec went on to point out that, “Fractional reserve banking doesn’t only occur where the Federal Reserve creates money from nothing, explaining how most of the credit created since the 1980s has been created in securities markets, not in the traditional banking system. Securities market credit is in the form of paper to assets, usually piled on top of other paper claims to assets, just as banking system credit is.”