The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any other regulatory authority of any State or other jurisdiction of the United States or Canada and (i) may not be offered, sold or delivered within the United States or Canada, or to, or for the account or benefit of any U.S. Person or Canadian, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons and Non-Canadians.

February 7, 2023

Algorithmic stablecoins; EIB; VISA

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments.  

Comments available on the following news items:

 

  • Hong Kong Monetary Authority warns over algorithmic stablecoins
  • EIB launches digital sterling bonds
  • Visa testing large scale Ethereum payments

 

Hong Kong sounds warning over algorithmic stablecoins

 

We’re now some time on from the collapse of the TerraUSD stablecoin, which exposed some of the major drawbacks of algorithmically-based stablecoins. But the Hong Kong Monetary Authority (HKMA) has given its views on the technology, with a warning for users.

 

Stablecoins are a really important component of the developing DeFi landscape. As a key entry point between fiat and digital assets, stablecoins provide a bridge between DeFi infrastructure and the traditional financial system.

 

The HKMA is right to caution on the use of stablecoins that aren’t fundamentally backed by anything other than their own codes, as the TerraUSD collapse made painfully apparent. The HKMA has said it intends to regulate stablecoins more closely as it looks to prevent another such collapse.

 

In our view, the best way to prevent another meltdown of the kind TerraUSD experienced is to ensure total collateral confidence in a digital asset. What does this mean in practice? It means that such tokens need real-world assets (RWAs) to provide a guarantee of redemption for investors. This can be made totally transparent through blockchain innovations to ensure these kinds of wipeouts don’t happen again.

 

Stablecoins are just the beginning of a major shift in how the financial system manages assets. The onboarding of RWAs onto blockchain technology is a major trend that will totally change the way in which users interact with DeFi and manage their assets for the better. But key risks need to be managed effectively, and this starts with collateral confidence. 

 

European Investment Bank launches digital sterling bonds

 

Major institutions are dipping their toes into digital asset issuance, and the latest from the European Investment Bank (EIB) is no exception. Partners in the effort include BNP Paribas, HSBC and RBC Capital Markets.

 

The transaction was taken care of by HSBC’s Orion platform with blockchain recording the transaction, which the EIB said was part of the institution’s goal of promoting more efficient real-time and better value bond issues, using digital technologies.

 

It might seem like a niche proposal, but transactions such as these will soon become the norm for financial markets, as the value and efficiency of digital asset ownership and markets become clear. With major TradFi institutions such as HSBC engaging, it should be clear that this is the future of financial infrastructure already beginning to bear fruit. 

 

We’ve seen the EIB foray into euro bonds already, so these test issuances continue apace. In time it won’t be newsworthy as it will become the rule rather than the exception. Digital assets are transformational and don’t have the same caveats as crypto in that they are clearly defined digital securities which have a tangible real-world value. 

 

Visa testing large value payment settlements on Ethereum

 

Payments infrastructure firm Visa has announced it has tested accepting large value payments on the Ethereum blockchain. Speaking at StarkWare Sessions 2023, Visa’s head of crypto Cuy Sheffield announced the firm had been trialling large-scale USDC transactions using the Ethereum blockchain. 

 

Payment settlements are a major background cog in the wider global financial infrastructure. Visa’s foray into blockchain’s potential for innovation in the space is a significant step in improving that infrastructure and comes at a critical moment for the sector. 

 

Much of what is good about blockchain, DeFi and crypto has been clouded by recent issues in the sector that detract from the true technological potential of innovations. Much of the world’s financial plumbing is in desperate need of modernising. 

 

Changes to the Ethereum blockchain such as The Merge, and now the upcoming Shanghai upgrade are making significant strides toward new possibilities for the blockchain, making it more accessible to institutions looking to adopt new blockchain innovations. 

 

If Visa can begin to introduce seamless settlement between stablecoins and fiat then this overcomes a significant obstacle toward greater DeFi/TradFi integration. With the advent of digital assets such as stablecoins revolutionizing the way users transact and settle payments, it makes sense for Visa to start working toward this future now.

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