The sands are shifting under our feet. Decentralized finance is starting to rub up against the edges of its centralized counterpart. The lions prowling those plains are eyeing the newcomers with interest and hunger.
Goldman Sachs is in discussions to take over distressed assets from the failed centralized crypto hedge-fund, marketing itself as a decentralized deposit taking bank (Celsius). This is not Goldman’s first foray in the space, having already orchestrated collateralized loans with Bitcoin backing. In this instance, they orchestrate custody with external players, not wanting to touch any crypto themselves (yet). They might lend out at quite conservative 150-200% collateralization ratios with exorbitant interest rates in the 6-9% range. Customers might be large regulated institutions in possession of a lot of bitcoin and nowhere to monetize it without significant slippage.
DeFi can do it better and cheaper, of course, but regulated institutions need to shake off the nervousness at touching decentralized rails first. The problem is that they won’t just do it by themselves. The inertia of transacting with ’trusted’ partners who make you go through the kabuki theater of KYC and AML verification is comforting and known (and totally antithetical to the whole point of crypto).
By the way, the UNODOC estimates that the amount of money laundered globally per year is in the $800bn to $2tn range. This is multiples larger than total crypto market cap, a flow that could never be easily absorbed by existing crypto stock. Christine Lagarde very disingenuously and without evidence conflates money laundering with crypto, when she should be worrying about price stability in the Eurozone. Perhaps her attempt to distract is a worrying signal about her ability to control price stability in the Eurozone.
Goldman is discovering the potential of the first truly global settlement layer for financial products and they will not dilly-dally to nuke potential usurpers to the throne, through regulatory connections or otherwise. As they might find it interesting to egg on regulators and central banks to issue CBDCs and do away with centralized stablecoins, they might also be very curious about similar regulatory approaches to pressure decentralized lenders.
Few things are completely certain. Some things are more certain than others:
- Goldman has privileged interactions with regulators and central bankers around the world
- Goldman likes new market opportunities where it can earn excess margin over their cost of capital
This will greatly affect large decentralized players when the time comes for push to become shove. It is paramount that decentralized players reinforce their uncensorability and robustness to external attack, as well as continuity in the face of regulatory pressure from one or more countries.
But it is just as paramount that they find ways to effect change and take share while the road is still clear, lest they be too ineffectual and unimportant to ever become a relevant target. Too often we confuse dysfunction for decentralization. What results when we do is principal-agent tensions (mid-curve level grift, bloated budgets, diffusion of responsibility, etc). These tensions prevent effectiveness and bleed value. This ultimately harms the token holder the most. But it also harms all of us who could benefit from a new paradigm for financial interchange unmoored from current state-backed oligarchies.
We should do away with the idea that there is a separation between crypto and the real-world. Because this is a dangerous parochialism that closes the door on crypto’s disruptive potential permanently. It leaves the real playing field to the same breed of banks that Satoshi felt the need to opt-out of in 2009 and betrays the promise of trustless intermediation. It’s a valid ideological, perhaps even political, stance. I sympathize with it greatly and share many of the same views. But it has a very small and narrow horizon. In practical terms, it also has a tendency not just to not cut out the humans but to invite quite low-calibre ones. The worst possible outcome is for ideological purity on minimizing humans in crypto to leave crypto dysfunctional, ineffective and left to agency-compromised humans to pick off the spoils. Nobody is satisfied with this, except the spoil-pickers.
We’re on the brink of a world where tokenized US Treasuries settle permissionlessly on a truly global interchange network. This is a Death Star to the business of exchanges, for starters. I feel a great disturbance in the Force, as if millions of rent-seeking intermediaries cried out in terror and were suddenly silenced. It is going to rattle some sabers. This is the ultimate market-changing potential of decentralized finance. We should not be shy to cross the threshold.