Investment banking goes crypto
In the month when Jamie Dimon dismissed cryptocurrency as a fraud, there was a string of new breakthroughs in banking on blockchain and Euromoney caught first sight of a crypto investment bank.
A contact in the fintech world gets in touch to point me at BankEx, describing the New York-headquartered outfit as the world’s first crypto investment bank. It’s sad sometimes how easy it is for people in this industry to identify and press one’s buttons. I doubt this claim instinctively, partly because I am more familiar with Argon Group, a California based firm staffed with ex investment bankers now advising tech start ups on their initial coin offerings. But I am, of course, immediately intrigued.
It turns out that BankEx is more a systems-provider for crypto investment banks and other financial institutions, one that captures rather nicely where the banking industry is on the path to the adoption of cryptocurrencies and blockchain: still grappling with a vision of the extraordinary possibilities; still struggling to turn that into reality.
BankEx’s pitch is to use tokenization to raise capital against illiquid non-fungible assets, such as real estate, private equity, even charitable donations. It has, for example, helped a Hong Kong developer raise funding to supplement bank loans through the sale of tokens representing ownership of still unbuilt apartments. Wealthy investors can buy and hold these in the expectation they will rise in value as the building nears completion; cash them in for funding or trade them.
BankEx’s own key asset is its white paper for a proof-of-asset protocol, and it will, inevitably, soon be launching an initial coin offering (ICO) to fund its own build out. Its founder and chief executive, Igor Khmel, has the classic CV: degrees in physics and economics from Stanford; stints at McKinsey and Citadel; running the fintech lab at Sberbank.
The idea is to capture information from banks and asset owners to verify provenance of an asset, then develop an Ethereum smart contract to produce a token representing the asset that goes onto a trading market. Buyers can bid for ownership of the token, or a share of the token, which may bring a share in the cash generated by the underlying asset. Sellers are paid not in cash but in BankEx tokens, which they can spend elsewhere in the BankEx ecosystem or store and exchange in Eth wallets.
The bank is already thinking of other asset classes, working with charities for example to deliver cash to promote solar-powered water filtration technology in the form of tokens granted to end buyers who might exchange them for one litre of clean water, so guaranteeing off-take for a worthy project.
Two things immediately strike me about all this: it appears quite otherworldly; but there may well be something to it.
Nothing will come of nothing: Jamie Dimon
It is hard today ever to imagine the world’s biggest money managers trading tokens like this, even before the recent outcry against cryptocurrency by leading lights in the conventional financial world.
Jamie Dimon, channelling his inner King Lear, dismissed bitcoin as a fraud and ICOs as something created out of nothing, which to him are therefore worth nothing.
But Argon is working on a regulation D form of ICO which might appeal to conventional institutional investors. BankEx is working on tokenization for options on cryptocurrency to hedge against its lurching volatility.
Plenty of bright minds are already looking at ways to free financial and real assets from the constraints trapping them in certain accounts and locations by trading them virtually.
For example, Euromoney reported in September on how five banks – CIBC, Commerzbank, Credit Suisse, ING and UBS – are working with HQLAx and R3 to develop a digital collateral receipt market.
It uses distributed ledger technology and tokenization to ease the flow of high-quality liquid assets across the treasury departments of banks now desperate to optimize collateral required as margin in derivatives markets and in securities financing.
At a nitty-gritty level, every month brings a new prototype in blockchain technology; its use creeps up from confirmation and settlement of transactions towards handling of associated payments and ultimate deployment in the primary capital markets.
In September, KfW sold €100,000 of five-day commercial paper through Commerzbank, to MEAG, the asset manager of Munich Re and Ergo, and simultaneously replicated the transaction using the R3 Corda blockchain platform.
The security was sold and settled without a paying agent or a clearing system. Reducing the number of usual intermediaries allowed for immediate posting. That holds out the potential for speedier settlement, reduced costs and lower capital requirements if the high-volume money market transitions to distributed ledger.
Roman Schmidt, Commerzbank’s divisional board member for corporate finance, suggests that: “Transforming securities transactions into digital issues may open up enormous potential for efficiency gains.”
It will be years yet before regulators, central banks, borrowers, investors and intermediaries are convinced to switch from the long-established financial rails to blockchain. But that prospect of efficiency gains, lower costs and reduced capital in moving assets will continue to captivate the investment banking industry.