Category: Banks

JP Morgan: The Big Bank in the Metaverse!

On By mehranmuslimiblogIn Banks, DeFi, MetaverseLeave a comment

It is slightly ironic that the bank whose CEO made so many derisory remarks about cryptocurrencies should be the first to stake its place in the Metaverse. I am of course talking about America’s largest bank, JP Morgan and its CEO Jamie Dimon. Yet here we are: JP Morgan has opened a lounge called Onyx in Decentraland, a virtual world based on blockchain technology. By the way, Onyx lounge refers to the bank’s suite of permissioned Ethereum-based services.

At the same time as making this announcement, it released a paper titled Opportunities in the Metaverse, which it claims will help businesses “navigate the hype vs. reality.” It is certainly worth a read, and makes clear for many the differences between Web 2.0 and Web 3.0. If you ever need to explain the difference, the table on page 4 is the equivalent of exam pass notes and will save you hours of trying to come up with your own answers.

Clients are interested

Christine Moy, JPMorgan’s head of crypto and the metaverse told Coindesk, “”There is a lot of client interest to learn more about the metaverse. We put together our white paper to help clients cut through the noise and highlight what the current reality is, and what needs to be built next in technology, commercial infrastructure, privacy/identity and workforce, in order to maximize the full potential of our lives in the metaverse.”

As the JP Morgan paper points out, Decentraland is attracting big brand names. Samsung opened a ‘metaverse’’ version of its New York store there, and Barbados set up a metaverse embassy as well. Much of this activity is thanks to the acceleration of interest in non-fungible tokens (NFTs), as well what is described as “a breathless advance into the metaverse, a catch-all for immersive gaming, world-building and entertainment, fueled by integrated commerce applications.”

Metanomics

Metanomics, or the economics of the Metaverse, are firmly in JP Morgan’s sights. Its paper points out that the average price of a parcel of virtual land doubled in the latter half of 2021, jumping from $6,000 in June to $12,000 by December across the four main Web 3 metaverse sites: Decentraland, The Sandbox, Somnium Space and Cryptovoxels. It added, “In time, the virtual real estate market could start seeing services much like in the physical world, including credit, mortgages and rental agreements.” Furthermore, JPM believes that DeFi collateral management could well come into play, and that this could be done by decentralized autonomous organizations (DAO), rather than traditional finance companies.

Money to be made

JPM sees the Metaverse as a money maker. There will be entertainment, virtual fashion designers (Nike has shoes covered for now) and there is going to be a massive amount of advertising spend, with the bank citing a prediction that in-game ad spending is set to reach $18.41 billion by 2027.

Of course, as the title of the paper suggests, JPM wants to avoid the hype and be clear about the reality. So, it does have criticisms of the Metaverse in its current form. For example, it says the overall user experience and performance of avatars, as well as commercial infrastructure need improvement.

And why is JP Morgan well placed to offer advice about the Metaverse? The report makes the case, saying, “We believe the existing virtual gaming landscape (each virtual world with its own population, GDP, in-game currency and digital assets) has elements that parallel the existing global economy. This is where our long-standing core competencies in cross-border payments, foreign exchange, financial assets creation, trading and safekeeping, in addition to our at-scale consumer foothold, can play a major role in the metaverse.”

Crypto threatens financial stability says BoE banker

On By mehranmuslimiblogIn Banks, Bitcoin, crypto, RegulationsLeave a comment

Jon Cunliffe, the Bank of England’s deputy governor for financial stability has recently given a speech where he tackled the question of whether or not, “the world of ‘crypto finance’ poses risks to financial stability.” Why and how does it do that?

Cunliffe pointed out that cryptoassets have grown by roughly 200% in 2021 ($2.3 tn), and from $16 billion just five years ago. The global financial system is worth $250 trillion, to give some context. He also mentioned that the sub-prime debt market was worth around $1.2 trillion in 2008, just before the financial crisis.

His point in using this comparison was that because the crypto industry is growing rapidly and beginning to connect to the traditional financial system, and there are leveraged players emerging in a mostly unregulated space, systemic risks, while limited now, could grow very quickly.

Referring back to 2008, he reminded his audience that in the case of the sub-prime market, “the knock-on effects of a price collapse in a relatively small market was amplified and reverberated through an un-resilient financial system causing huge and persistent economic damage.” We all remember the effects.

He called for financial stability regulators to take notice, to think very carefully about what could happen and whether they, or other regulatory authorities, needed to act. However, he cautioned against over-reaction. As he said, “We should not classify new approaches as ‘dangerous’ simply because they are different.”

Indeed, he said that innovation and technology, plus new players, could tackle longstanding frictions and inefficiencies and reduce barriers to entry, and that in the past they have been key to driving improvement and to increasing resilience in financial services.

Then, what started as a speech that may have sounded gloomy to the crypto markets, Cunliffe made an important and positive statement. He said, “Crypto technologies offer a prospect of radical improvements in financial services.” But he did add a caveat, “However, while the financial stability risks are still limited, their current applications are now a financial stability concern for a number of reasons.”

He then analysed the crypto market, breaking it down into unbacked cryptoassets used primarily as speculative investments and backed cryptoassets intended for use as a means of payment, pointing out that unbacked assets make up 95% of the market, and includes Bitcoin. His concern is that the main use of unbacked cryptoassets is for speculative investment and that fewer holders now say they see them as a gamble and more see them as an alternative or complement to mainstream investment. His greatest fear appears to be that while he doesn’t believe a collapse in the crypto retail investor sector would bring about instability, the large financial institutions with exposure to crypto are another matter, such as the many crypto hedge funds. He described one scenario: “For example, a severe fall in the value of cryptoassets could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.”

Ultimately, Cunliffe called for faster action on regulating the market to manage risk, saying, “Although crypto finance operates in novel ways, well-designed standards and regulation could and should enable risks to be managed in the crypto world as they are managed in the world of traditional finance.”

While he sounds positive, as ever the demand is to bring crypto more in line with traditional finance, the very thing that caused the creation of crypto in the first place, due to ‘tradition’s’ failings.

The Pandora Papers expose a rotten system of privilege

On By mehranmuslimiblogIn Banks, cryptoLeave a comment

Whilst there are many good, economic reasons why cryptocurrency and blockchain have grown since 2009, there is a more emotional reason underpinning it as well, and that is that people in power cannot be trusted. Just last week, we the people were given another file of documents – The Pandora Papers – which underlines why that distrust exists, and is growing.

The Pandora Papers consist of around 12 million leaked documents from law firms and other organisations worldwide. The documents unmask the previously unknown owners of 29,000 offshore companies hiding billions of dollars in assets from taxation or oversight. A good number of these ‘unknowns’ are actually terribly well known public figures in their countries, and some are global figures, such as singer Shakira.

David Z Morris in his thoughtful opinion piece for Coindesk, labels it “aggressive tax avoidance,” adding, “in some cases hidden funds seem linked to outright corruption, much of this activity is nominally legal – but the very existence of such structures almost guarantees they’re being used for deeply harmful ends well beyond dodging taxes.”

It is also estimated that a mind-boggling $32 trillion in assets are hidden in offshore tax havens, which is a figure “roughly 15 times the total value of all cryptocurrency in existence.”  Some of that money in reality belongs to the citizens of the 200 countries named in the papers, and should have been used for public infrastructure and services.

Morris rightly suggests that the Pandora revelations make a mockery of governments’ focus on cryptocurrency as a conduit for money laundering, tax evasion and criminal activity. Yes, there are some who may argue that crypto makes it easier for the average person to ‘enjoy’ the same tax evasion benefits as the users of offshore tax havens, but Morris says, not only is this a race to the bottom for crypto, it is a “false equivalency”, because “what world leaders have accomplished through offshore entities and shady banks simply can’t be replicated by average people using crypto.”

That’s because crypto cannot match the secrecy offered by offshore entities. And that is because the use of tax havens “is part of a much larger and more complex system of shadow influence that relies on institutional political power and generational wealth.” Furthermore, they are not just used for tax avoidance, they can hide “state-sponsored drug trafficking, murder and anti-democratic violence,” Morris points out.

Ultimately, what the Pandora Papers show us is something we’ve always known, but perhaps needed to be reminded of: the global banking system provides secrecy to only the wealthiest and most powerful. Cryptocurrency may not be the complete answer to this elitism, but it does explain some of the motivation behind crypto adoption, and that is the desire to escape a system that is rotten to the core.

DeFi will disrupt banks

On By mehranmuslimiblogIn Banks, DeFiLeave a comment

Mark Cuban, the billionaire investor who is bullish on cryptocurrency and blockchain, has been telling CNBC that DeFi apps will challenge the traditional banks. Moreover, he believes that if banks weren’t so slow to embrace change, then they wouldn’t be facing this issue.

He particularly enthusiastic about the lending and borrowing aspects of DeFI. He said, “It’s a hassle to borrow money from a bank, and the foundational DeFi benefit is that it simplifies borrowing for personal purposes.” It also “allows anyone with funds to be a lender as well,” which is another plus.

As many of you will know, DeFi applications aim to recreate the traditional financial system and make it more accessible to a wider customer base. They are cryptocurrency based and the majority run on the Ethereum blockchain. Through DeFi lending, users can lend their cryptocurrency, just as a traditional bank does fiat currency, the difference being that the person lending the crypto earns interest on it.

In the traditional banking world, when a bank makes a loan, it is using the liquidity available from all the accounts it manages, yet none of the liquidity providers reap any rewards, only the bank does. DeFi changes that.

Furthermore, with DeFi, the barrier to entry is low for the borrower. The opposite is true for traditional banks. As CNBC says, “In most cases, the only requirement to take out a DeFi loan is the ability to provide collateral with other crypto assets.”

Cuban said, ″[B]usinesses, decentralized or otherwise, tend to benefit when they offer customers the path of least resistance to get what they want and/or need.” He added an important point: “DeFi is not monolithic. It’s competitive. It will evolve to meet customer needs.” Banks, it appears, are not doing that.

And yet they could have. On this subject, Cuban commented, “Banks could have simplified/automated to the point that DeFi wasn’t needed. They didn’t. They are so stuck in legacy [operations] they are disrupted by simple fintech.” 

Although banks are averse to change, DeFi will not wipe them from the face of the earth, but DeFi applications will still disrupt the traditional space.

Of course there is a downside with DeFI. For example, when you use a DeFi app, there’s no regulations or insurance in place, and “due to the volatile nature of cryptocurrency, investors would need to be comfortable with large swings in price.”

Looking ahead, Cuban predicts the “big players” in DeFi will “welcome regulation” since it will “allow the industry to grow and still have a Wild West aspect,” he said.