Money Markets meet Crypto – Part III

Telegram chats and excel spreadsheets 

The crypto lending industry today functions like the banking sector in the 1960ties. Lending and borrowing were happening in a rather messy, scattered way. Lender and borrowers found themselves calling each other up and agreeing on the terms via telephone or fax machines. Back then, there was no institutionalized money market for banks and other entities to go to.  

The same is the case for crypto with voice brokering being today’s norm. Crypto businesses that either want to lend or borrow don’t have a consolidated marketplace in the form of an electronic trading system to either get or grand short-term loans. They find themselves constrained to use either Bloomberg terminal or Telegram to connect to and settle a deal with a potential counterparty. Trades are carried out through voice calls, using instant messengers or emails. Besides not having organized communication channels, there is also no unified reporting. Right now, each company must keep track of its deals in a separate excel spreadsheet.  

Consequently, short-term crypto debt markets are riddled with unpredictable risks, market opaqueness, and inefficiencies that lead to low liquidity flows. Serious crypto entities that have no other choice than jump in at the deep end feel anxiety every time they engage in crypto borrowing or lending services.  And more traditional institutional lenders and borrowers don’t even feel like tipping their toes in. 

CLST: The first professional money market for crypto 

These circumstances call for improvement. At CLST, we are establishing a network of lenders and borrowers to become the institutional gateway for uncollateralized lending. In order words, CLST is building the necessary new money markets for this newly emerging money.  

Through an all-in-one platform, CLST strives to get rid of handling individual excel spreadsheets. By becoming the center hub of crypto lending and borrowing institutions have a consolidated venue that directly connects lenders and borrowers – be it crypto banks, investment firms, market makers, hedge funds, trading firms, asset managers, fiduciary lending firms, crypto mining companies or treasuries. 

One of CLST’s key achievements is standardization and professionalization. An easy-to-handle interface lets counterparties seamlessly find one another. Terms and conditions regarding either lending or borrowing can be pre-defined and set for all platform users to see. Thanks to automated requests for quotes (RFQs), counterparties can directly place quotes with each other and then accept if an agreement is reached. CLST’s platform also allows users to connect their wallets for peer-to-peer settlement and be a custodial and non-custodial wallet. This means that counterparties cannot only lend and borrow their crypto assets are customized terms but also have them settled in an automated fashion.  

CLST’s platform keeps track of all the crypto lending and borrowing deals that its users have ever performed. This way, credit histories exist and can be consulted by individual counterparties to better assess each other. And the in-built chat function helps counterparties to seamlessly communicate. Both features build trust and foster long-term engagement. Because of more effective communication and reporting that occurs in one place only, excel spreadsheets are no longer needed. This seriously reduces opaqueness. 

Mitigate Risks 

The automation of bilateral price negotiation and settlement on a consolidated platform also helps diminish credit and counterparty risks. The safekeeping and the provision of insurance through established triparty collateral management systems between borrowers and lenders is paramount to traditional money markets. Such triparty solutions are not present with crypto assets yet. CLST however is providing a one-stop-shop platform that allows borrowers and lenders to conduct their credit risk assessment and choose their counterparties carefully.   

This marks a crucial difference to decentralized finance. DeFi protocols offer a wide array of lending and borrowing possibilities. Contemporarily though, they are more of a retail phenomenon. They neither provide the trust nor the regulatory requirements that would make them deployable in a wider institutional context. For one thing, smart contract lending and borrowing protocols have technical risks that are difficult to calculate. For another thing, they lack transparency into counterparties. Since DeFi protocols gather funds from various unknown entities, an institution cannot reliably know, who it is interacting with. Such realities make borrowing or lending through decentralized finance projects commonly inaccessible for most institutions at present. 

Therefore, CLST is working towards the institutionalization of crypto money markets. With promissory notes provided by FQX, counterparty risk in uncollateralized lending is reduced through a legal framework represented on-chain. Because risks are mitigated, and trust is established, already a reasonable amount of institutional entities – crypto-native as well as traditional – are using CLST’s all-in-one platform. Through the ever-growing number of users on CLST’s platform, better pricing for crypto lending and borrowing ensues as more liquidity leads to better price quotes. The dawn of professional crypto money markets is upon us.  

Money Markets meet Crypto – Part II

Crypto needs a money market 

By now, the crucial importance of money markets should be obvious. And just as today’s traditional world of finance is dependent on money markets, the newly emerging asset class around crypto assets will need one too. After all, within the crypto industry, as institutions of all sorts are maturing, they are developing the same set of sophisticated market financing needs that traditional companies have had for decades.   

Consequently, the crypto lending market has grown significantly. According to a research report from Arcane, from Q3 2019 to Q4 2020, the total active collateral in the crypto lending market grew by 1170 percent3. And the most recent numbers from Q4 2021 show that one of the biggest crypto lending providers Genesis saw its loan originations reach $50 billion, an increase of 565% year-on-year comparison4.  

Genesis is only one of many companies that have emerged in the crypto lending space. Others are BlockFi, Unchained Capital, Ledn, Nexo, Celsius, Coinloan, or Salt Lending. There are also entities like Binance or other exchanges that act as lenders and borrowers of crypto assets. And even traditional players like Fidelity or Silvergate have ventured into crypto lending.  

Lending services play a crucial role in today’s crypto asset trading ecosystem. They are providing essential access to liquidity for various actors. Among them are firms with crypto-denominated liquidity requirements, actors that are looking for leverage, proprietary trading firms, or arbitrage funds. One of the biggest demanders of crypto lending services is market makers that make use of these crypto lending facilities as they borrow different cryptocurrencies and stablecoins for liquidity provision elsewhere. And even exchanges that do crypto lending themselves can act as borrowers if – for example – they don’t want to deplete cold storage funds to honor withdrawal requests. The same goes for miners that have Bitcoin-denominated cash flows and don’t want to sell their Bitcoin but borrow them to cover their operational costs. Last but not least, there are ever more companies that hold Bitcoin and other cryptocurrencies on their balance sheet. But instead of just keeping them idle, these companies want their Bitcoin to work for them. Hence, they lend them out for interest. This is a natural development as crypto gets bigger and bigger.

Crypto lending is highly tailored to the mechanics of money markets. Because Bitcoin is a fundamentally deflationary asset, not many businesses are interested in acquiring longer-term liabilities denominated in Bitcoin. Therefore, crypto lending has more in common with short-term securities lending and is thus a good match for money market operations. But there is just one problem today: No money market exists for crypto assets yet.  

Money Markets meet Crypto – Part I

Humans almost universally love to have money and interact on markets virtually every day. The money markets though – a place where money is being borrowed and lent continuously – are hardly known. If it were not for the global financial crisis of 2008, this part of our financial system wouldn’t even be known to wider circles within the financial industry itself.  

However, money markets are not just any part of today’s vastly complex financial system. Total money market funds make up $4.51 trillion1 in assets with a daily turnover of about $1.5 to 2 trillion. In terms of volume, this puts worldwide money markets just behind the global foreign exchange market, which is said2 to do up to almost $7 trillion in volume per day.  

This enormous size begs the question: What are money markets? They represent an essential component of financial markets as they allow for short-term financing. This means that money on money markets is usually lent and borrowed for up to two years in duration. On average though, the length of a money market trade is about one week to one month. Furthermore, money market trades can either be unsecured or collateralized with the latter commonly being referred to as repurchase or repo agreements. And in terms of assets, the most important ones within money markets are government bills, commercial papers, deposits, federal funds as well as short-lived mortgage- and asset-backed securities. Especially for short-term papers, it is due to money markets that short-term securities were commoditized and became an integral financing tool within financial markets.   

Functions of the money markets 

The borrowers and lenders on money markets are entities that have access to such wholesale markets. It’s institutions like banks, big corporate treasuries, or public authorities. Money markets today serve three main functions: 

  • Financing trade 
  • Financing industry
  • Financing banks  

Financing trade is one of the most important roles money markets play today and this is also how they emerged a long time ago. It already started with companies like the Dutch East India Company that needed to raise money for ships, so merchants and tradesmen could sail to foreign continents hunting for spices and other types of commodities. With ships financed through credit, these commodities were transferred back to Europe and sold for profits that would pay for the principal and interest. Up to this day, money markets still play a vital role in financing domestic as well as international trade.

Another important function of the money markets is to serve as a place for all sorts of industry actors to finance themselves. Through money markets, companies can secure short-term loans to meet their working capital requirements. Additionally, borrowing and lending conditions on money markets also influence conditions as well as the interest of long-term loans that are typically provided by the capital markets.  

The third pillar is the financing of commercial banks. Be it a regional bank or an international bank, they all tap into the money markets to finance or refinance themselves. This way, they can keep their liquidity levels at the required legal levels. When it comes to banks acting in the money markets, it usually boils down to one bank lending to another bank.  

The importance of money markets 

It cannot be understated: Money markets provide the necessary liquidity for the global financial system including capital markets. They make the world go round. Through a chain of agreements domestic banks – and almost any bank for that matter – are connected to the big money markets in the world. While they could theoretically tap into global money markets directly, in practice these so-called tier-2 banks go through other international tier-1 banks. The latter are globally spread out and have a direct connection to different money markets all over the world. As systemically relevant banks, these big banks generally act as liquidity providers for smaller banks, domestic corporates, and local public authorities.  

One can say that if money markets break down, the entire world would come to a standstill as liquidity would freeze up rather quickly. This has been particularly obvious with the great financial crisis of 2008 when central banks had to step in and backstop money markets because borrowing and lending among different banks – due to trust issues – dried up. The money markets truly are the cardiovascular system of finance and if they stop, blood circulation in this cardiovascular system stops with detrimental consequences.  

Amber Group executes the world’s first crypto borrow transaction on CLST Markets

CLST Markets, an institutional-only lending and borrowing venue for stablecoins and crypto assets, has successfully facilitated an uncollateralized multi-million USDC stablecoin loan executed by Amber Group for the first time today. The fixed-term transaction was executed in the form of the first electronic promissory note for a stablecoin issued on the Algorand Blockchain.

Swiss-based FinTech company CLST led the successful transaction between Amber Group and an undisclosed counterparty. The underlying asset, a USDC stablecoin issued on the Algorand Blockchain (commonly referred to USDCa), was settled Peer-to-Peer and is based on an electronic promissory note (eNote), a technology provided by FQX which is seamlessly integrated into CLST. The multi-million USDC stablecoin loan was borrowed by Amber Group at a Fixed Term and with a contract duration of less than a year.

An eNoteTM is an unconditional promise to pay a specific sum to another party at a specific future date and can be modularly structured to fit any financing purpose. The eNoteTM is based on blockchain technology and can be easily transferred to any third party (i.e. an investor). When compared to other financing tools, eNotesTM excel through their modularity and global transferability, based on a standardized legal framework. Single eNotesTM are stored as NFTs on a blockchain. By issuing multiple eNotesTM, an issuer can obtain financing in a way comparable to commercial papers.

The uncollateralized transaction marks a significant milestone in institutional crypto asset lending by solving the problem of over-collateralization. Borrowers are routinely forced to pledge an amount of collateral that exceeds the value of the loan to mitigate the risk of cryptocurrency price fluctuations. This impediment is holding back the development of borrowing and lending in the crypto asset industry.

Overcoming this obstacle, whilst keeping risk at manageable levels, will finally allow institutions to unlock the full potential of a maturing short-term debt market as TradFi and DeFi converge.

Counterparty risk is mitigated by the innovative use of electronic promissory notes, a tried and tested method of providing lenders with a globally enforceable legal provision in the event of loan defaults.

Lack of institutional-grade infrastructure in lending and borrowing

“Currently, the institutional short-term debt market for stablecoins and crypto assets is heavily underserved due to a lack of large-scale lending and borrowing infrastructure that reduces counterparty and DeFi protocol risks. We are doubling down on the vision to connect every institution, from market makers, to treasuries, foundations, family offices or hedge funds, through a single communications venue,” says Michael Guzik, Founder and CEO of CLST.

“As a leading digital asset platform, Amber Group helps its clients to access liquidity, earn yield, and manage risk across crypto assets. As an institution with a global footprint, access to broad networks of lenders and borrowers, are therefore essential to Amber’s trading activities and liquidity management. Michael and the team behind CLST will make uncollateralized lending and borrowing

more efficient through the aggregation of deal flow and we are excited to be part of this global network at the very beginning of a new future for crypto assets in the market,” says Francesco Adiliberti, Managing Director for Europe at Amber Group.

About CLST

CLST is the institutional communications venue to lend or borrow stablecoins and crypto assets, automating multi-dealer price negotiation and price matching for institutional traders. CLST Markets integrates next generation products such as “Request-for Quote” (RFQ), “Fixed Term”, “Call Money”, institutional DeFi protocols, blockchain-based electronic promissory notes and wallet connectivity for automated settlements. CLST aims to resolve market uncertainties and scaling issues in uncollateralized and collateralized lending and borrowing of stablecoins and crypto assets. For more information, please visit www.clst.com

*Disclaimer: CLST borrowing and lending capabilities and products of stablecoins and crypto assets are not yet available in the United States

About Amber Group

Amber Group is a leading digital asset platform operating globally with offices in Asia, Europe, and the Americas. The firm provides a full range of digital asset services spanning investing, financing, and trading. Amber is backed by prominent investors including Sequoia Capital, Tiger Global Management, Paradigm, and Coinbase Ventures. For more information, please visit www.ambergroup.io

About FQX

FQX is a born-global start-up headquartered in Zurich, Switzerland. FQX is building the global debt infrastructure for the future of finance using blockchain technology. FQX employs more than 20 people in Europe & Asia. FQX has garnered attention in 2021 by winning the Swiss Fintech and the Fintech Germany Awards in its respective categories. FQX is backed by notable Fintech investors, among them SIX Fintech Ventures & Earlybird VC.

For more information, please visit enotes.tech

Aleph Zero joins CLST to explore Treasury Management and liquidity provisioning

Swiss-based FinTech companies CLST and Aleph Zero have announced a partnership to enhance lending and borrowing of specific digital currencies in countries where the new financial practice is approved.

The partnership will explore optimal management of Aleph Zero Foundation’s treasuries, tap into liquidity provisioning of the protocol’s native token AZERO and facilitate the institutional adoption of stablecoins which will be issued on the Aleph Zero protocol. The companies’ founders say that the partnership will enhance liquidity management to achieve efficient price discovery.

“Through our network, Aleph Zero has been able to engage with the world’s leading liquidity providers across key geographic markets,” said Michael Guzik, the founder and CEO of Zurich-based CLST. “By supplying AZERO to tier 1 institutions in the crypto asset space, we believe this is a game-changer to match supply with demand of AZERO and deploy liquidity efficiently.”

Prior to creating CLST, Guzik was the youngest Head of blockchain at PwC, and previously held various appointments leading blockchain-based ventures with a focus on FinTech. He led Primary Markets at Lykke, advised the Swiss Stock Exchange on their “Digital Asset Exchange” infrastructure and served as a Partner at Blockchain Valley Ventures. He also founded KORE Technologies, one of the leading infrastructure providers for Digital Assets. “New Money Markets are key to institutional adoption,” Guzik declares.

Among trading and payments, institutional capital markets are the fundamental building block for the mass adoption of stablecoins and crypto assets. A particular field is short-term debt markets, commonly known as institutional lending and borrowing with short-term durations. Through CLST Markets, issuers of such assets are able to tap into an institutional market and build liquidity among the world’s biggest hedge funds, exchanges, proprietary trading firms, asset managers, crypto banks and foundations.

“CLST aims to connect lenders and borrowers directly by creating an automatic bilateral price negotiation and settlement layer for institutional users,” said Antoni Zolciak, co-founder of Aleph Zero. “Unlocking liquidity is a crucial component of building a successful ecosystem — regardless of the short-term market sentiment. We’re excited to form a relationship with CLST and have full confidence in their team’s capabilities.”

Guzik says that building highly complex blockchain-based infrastructure requires a lot of talent, time and attention. He describes driving end-user adoption “a mammoth task.”

“Liquidity and institutional adoption on token level require completely different skill sets and networks,” Guzik adds. “As an institutional lending and borrowing venue, we naturally work with the largest players to bring together all the partners necessary for token issuers to succeed.”

About ALEPH ZERO
Aleph Zero Foundation is a non-profit foundation based in Zug, Switzerland, where it oversees the development of Aleph Zero blockchain. Its novel architecture is based on Aleph BFT, a DAG-based consensus protocol that has been peer-reviewed for design correctness. Its enterprise-ready, high-performance blockchain platform presents a novel, Directed Acyclic Graph (DAG)-based consensus protocol that has been peer-reviewed and presented at an ACM conference. To date, Aleph Zero has raised $15m for continued development, integrating with the Substrate stack and expanding its team. This year Aleph Zero plans to enable privacy-enhancing features based on secure multi-party computation research and zero-knowledge proofs. For more information, please visit: 
https://alephzero.org.

About CLST
Based in Zurich, CLST is the institutional gateway to lend or borrow stablecoins and crypto assets, automating bilateral price negotiation and price matching for institutional traders. CLST Markets integrates next generation products such as “Request-for Quote” (RFQ), “Fixed Term,” “Call Money,” institutional DeFi protocols, blockchain-based electronic promissory notes and wallet connectivity for automated settlements. CLST aims to resolve market uncertainties and scaling issues in unsecured lending and borrowing of crypto assets, while facilitating institutional adoption of stablecoins and crypto assets. For more information, please visit: 
https://clst.com.