Big banks like blockchain | Financial Times

Good morning Ethan here; Rob is sick. All eyes were on JPMorgan's investor conference yesterday. In addition to raising its 2022 interest income target, it put in a much-needed good word for consumer health. Consumer credit, executives said, looks broadly strong. JPMorgan shares rose 6 percent, dragging the market higher.

Email us: robert.armstrong@ft.com and ethan.wu@ft.com.

Was it blockchain all along?

“It’s blockchain, not bitcoin” is something we used to hear a lot in the past. The idea was that Bitcoin was a mostly trivial project with an interesting technology at its heart. Enterprising companies would extract the value that blockchain has to offer and Bitcoin would become irrelevant. But as crypto expanded beyond Bitcoin, people dropped the refrain. Google searches for “Blockchain not Bitcoin” peaked in 2017.

Five years later, here's a story from the FT's Eva Szalay:

BNP Paribas has joined JPMorgan to use digital tokens for short-term trading [repo] markets. . .

JPMorgan's blockchain allows banks to lend U.S. Treasury bonds as collateral for a few hours without the bonds leaving their balance sheets.

Post-crisis regulatory requirements require banks to hold large amounts of liquid assets – which can be easily bought and sold even during times of market stress – such as: B. Treasuries as a security buffer. By tokenizing these assets, banks can temporarily convert them into collateral for a few hours, but without reducing their security buffers, which are calculated at the end of each day.

The token represents a digital version of a treasury and borrowers can exchange it for cash.

Details such as the duration of the loan and the settlement time are governed by a smart contract, which ensures that the money is in the borrower's account and that collateral tied against loans is released at the end of the deal. Such short-term loans have been issued worth over USD 300 billion. . . since December 2020.

If you are a long-time owner of (say) Ethereum, is this good news for you? It doesn't look like it. It looks like a mainstream institution is using blockchain in a way that does nothing to encourage adoption of any cryptocurrency. Unlike most popular tokens, JPMorgan’s blockchain is “permissioned,” meaning it can choose who can participate in the network. So it is not decentralized. They are Ethereum-style “smart contracts,” but that’s about it.

However, there is a theory as to how this could benefit the crypto ecosystem. The idea is that once banks start trading some assets as tokens, the efficiencies will prove so tempting that they will want to move other assets onto a blockchain. Some will go to private blockchains like JPMorgan's, but existing public chains like Ethereum may also compete for this business. Maybe public blockchains could look better than private ones.

As one proponent of this “asset tokenization” idea explained to me:

The banks will effectively disintermediate themselves. Not happy, there will be a big fight but that is ultimately the direction we are going.

However, an important difference between JPMorgan's blockchain and a public blockchain is the law. JPMorgan can sign agreements with its partners that outline what happens if there is a glitch or dispute - smart contracts backed by dumb contracts. Are smart contracts legally enforceable on the open internet? It's unclear.

The bigger point is that if decentralized cryptography – as opposed to a bank-run blockchain – is going to play a big role in the markets, it will involve dealing with some very centralized institutions.

Readers' opinions on bear markets

Yesterday's letter made it clear that a bear market is a time for greed. The long-term return prospects are improving. With signs of capitulation and indiscriminate selling, buying opportunities are also emerging.

However, a number of readers warned that we are probably still a long way from capitulation. A bladder that took more than a decade to inflate will take more than a few months to deflate. One FT commentator wrote:

I fear that when all is said and done, we will look back on these times and say, "Remember how [at] minus 20 percent we thought we were on the verge of capitulation? The adjustment was just beginning."

About 100 days since the S&P 500 peaked in January, another reader, Paul Hodges, looked back at how long it took to bottom after overvalued markets in 1928 and 1998:

We expect it to take a similar 650 to 700 days to bottom - with obviously some big rallies or “false twilights” along the way.

Brian Coleman, a former Goldman Sachs trader, argued that the usual bear market playbook may not work this time. "This doesn't feel like a traditional bear market. It's been eerily orderly," with corporate results and economic conditions not yet consistent with a recession.

It could be, he suggests, that what we are seeing is not, or not just, a deflating bubble, but rather a shift in market paradigms, with a generation of low interest rates, globalization, growth and relatively free markets coming to an end. The end of the corona pandemic with all its economic peculiarities further clouds the picture. All in all, the story may be a poor guide to what happens next. He says we need to “focus on known unknowns”:

If there is still an elephant in the room, it must be (as always) in obscure parts of the markets. And the last man standing in this regard seems to be private [private equity and debt]. We've all read about how retail investors don't want to test valuations, so they raise convertibles etc. Let's see where this goes. . .

Our friend Dec Mullarkey from SLC Management is more optimistic:

The sell-off has been broad and deep as investors and companies weigh in on the Fed's aggressiveness. . . History suggests that these monetary episodes do not end well, but stock markets are pricing in a very unpleasant outcome as an overwhelming number of industries take a beating. . . The sell-off was remarkably non-discriminatory. But markets generally need a macroeconomic reason to turn. Quickly tracking inflation would help. Therefore, the market could be sideways for a while.

To be more optimistic, what we need to see is "an indication that investors are becoming increasingly critical of value as they pore over the broad swath of inflated valuations." And on Monday, we saw such a hint as bank stocks rallied after JPMorgan raised its interest income outlook, "an indicator of a conservative quality buyer deciding dividend yield looks attractive amid solid balance sheets. Feels like an encouraging move, suggesting investors are becoming more comfortable picking areas that have been devastated."

A good read

Rana Foroohar is fed up with Davos.