Racing to Fix Wall Street: ICE, Cryptocurrencies and Enterprise Blockchain

Last of the 3-part series on Forbes.com is available here! The race to fix Wall St now includes ICE, parent of NYSE, which is embracing cryptocurrencies. This renders many of Wall St’s enterprise blockchain projects obsolete as ICE moves to natively-digital blockchain assets, a big positive. But investors should be wary of off-chain bitcoin substitutes, which are coming en masse. You don’t own your bitcoins if you don’t control your private keys! Lots to chew on, including:

• ICE’s move is hugely important for Wall Street–a giant of market infrastructure is embracing natively-digital blockchain assets. This is the beginning of the end of the DTC and the indirect ownership model for securities–which is wonderful news for regular investors, since the status quo is fraught with inaccuracies and causes situations like Dole Food, where Wall Street’s out-of-sync ledgers created 33% more shares than actually existed.
• “Real money” investors (pension funds, mutual funds, endowments, foundations, insurers) will now start allocating to cryptocurrencies as an asset class.
• Investment banks are woefully behind the curve.
• Corporate issuers will turn to cryptocurrency capital markets as the most attractive place to raise capital, in many cases.
• The State of Delaware is the biggest loser from ICE’s entry into natively-digital blockchain assets. Delaware had a big lead here but squandered it.
• BUT WARNING–ICE is commingling its physically-settled bitcoin futures with other instruments (and client collateral) in ICE Clearing US. Counterparty credit risk is large (and loss severity potentially near 100%) for institutions exposed to bitcoin substitutes in run-on-the-bank or chain fork situations. Bitcoin substitutes are off-chain coins (claims to the real bitcoin, but not the same thing, and usually fractionally-reserved). Any party that rehypothecated, naked shorted, or has any other type of uncovered liability (in margin loans or ETFs, for example) to real bitcoin is vulnerable to go broke in run-on-the-bank or chain fork situations. I hope ICE, its regulators (SEC, CFTC) and its counterparties understand this risk!
• Lots of discussion of the unique issues facing cryptocurrency custody.
• Again–you only own your cryptocurrencies if you control your private keys!