Hive Fixed Income Market: BlockFi Settlement Shows The Dire Need
The Securities and Exchange Commission won another one. For those who were not paying attention, BlockFi settled with the SEC and 32 states for $100 million. This stemmed from the company offering Interest Accounts that paid based upon people staking their cryptocurrency.
It is a concept similar to the Hive Backed Dollar (HBD) saving program. This offers 12% return on any tokens that are placed into savings.
Centralized Point of Vulnerability
By now, most who are involved with cryptocurrency realize that centralization means there is a point of vulnerability. With the BlockFi case, the fact that it is a corporation that offered its services via an application made it susceptible to action.
The SEC claimed that BlockFi, by offering these interest bearing accounts, was providing a security. At issue is the fact that BlockFi was not authorized to offer securities, thus running afoul of the Securities Law. The particular piece of legislation they were hit with dates back to 1940.
Naturally this is not about protecting investors by government control.
“Crypto lending platforms offering securities like [BlockFi’s Interest Accounts] should take immediate notice of today’s resolution and come into compliance with the federal securities laws,” said the SEC’s director of compliance, Gurbir Grewal.
Here we see a dire warning to crypto lending platforms. It is likely all of them are vulnerable meaning the SEC along with individual states could some knocking on their door.
So what does this mean for this section of the industry? Ultimately, if not worked around, it is probable that Wall Street and the banking industry take over. They are the ones suited to deal with regulation as well as having the money to stay in compliance.
This is the crux of any battles that are taking place. The SEC is involved in the hijacking of the cryptocurrency industry.
Base Layer Fixed Income Market
Hive is in a unique position. There is the potential to develop an entire fixed income market at the base layer that will be out of the reach of the regulators. This is something that will become more important as time goes by.
We already see the process with the Hive Backed Dollar (HBD) saving program. Unlike the BlockFi situation where one is actually trusting a third party with his or her cryptocurrency, this allows one to operate at the base layer. There is no application required.
All activity is on-chain. This means the point of vulnerability is moved to the blockchain level. Is Hive vulnerable to an action such as BlockFi faced?
The answer is probably not. We saw the upset by Hive Blockchain Technologies Ltd over the name "Hive". The end result was nothing could be done since there is no foundation or centralized company that is in control of or behind Hive. At the same time, no single entity has the majority of the token distribution.
Here is where we see a tremendous opportunity to build out a fixed income market that is secured by the code and outside the reach of the regulators. This will prevent moves such as what took place with BlockFi.
In the past, we saw the idea of Hive Bonds put forth. As a step in the process, we can start to offer Hive Certificates of Deposit. We won't delve into the specifics at this time since the two linked articles cover it.
However, the main premise is to utilize the time lock capabilities of Hive to offer fixed income accounts. The Hive Certificate of Deposit is taking the existing savings program idea and extending it out. This would mean different levels of time commitments in exchange for higher rates of return. For example, the present saving program is 12% for a 3.5% return. The first Hive Certificate of Deposit could offer 20% for a 12 month lock up.
The Hive Bonds goes one step further in providing a token that can be traded for each HBD placed into one of these accounts. The idea is to create a typical bond tree. These can go up to 30 years. Obviously, people will not want to lock up their HBD for that long. That is why another token is created to represent what is placed into the account. This can be traded just like Treasury bonds are.
A further advantage of this, due to the transparency, if the market is liquid, we suddenly have pristine collateral that was generated. Since Hive Bonds are backed by HBD that is locked up based upon blockchain coding, everyone is well aware of what the asset is worth when it is collateralized. This addresses one of the major deficiencies in our financial system at the moment.
Hundreds of Trillions Of Dollars
The global bond market alone is estimated to be worth about $120 trillion. It is also estimated that near 1/3 of that is operating under negative interest rates.
What is appealing about establishing a fixed income market on Hive is we can offer much greater returns. The reason for this is simply due to the fact that we need a lot of Hive Backed Dollars to be created. We are dealing with a level that is inadequate to keep a peg, let alone serve as a strong stablecoin.
Of course, this brings up the other piece of the puzzle. Stablecoins are also under attack by the regulators. Here we also see where the governments have a way in. Behind most of the stablecoins is a company that can be targeted.
Once again, since the Hive Backed Dollar operates at the base layer, there is nothing to target. It is an algorithmic token that operates solely based upon the code. Expansion or contraction of the money supply is driven by the free market, with the community deciding through their actions.
Cryptocurrency is going to need a fixed income market since speculation does not suit the majority of investors. Even those who engage in trading are apt to move their profits into less risky, revenue generating funds. Bonds and other fixed income assets are crucial to the process. It is also why the markets are so large.
The challenge is going to be getting rid of the middlemen. Wall Street is drooling over this potential. Since the SEC is making it very clear that the old rules apply, we can also deduce that many of the old players are going to be involved. This is the exact opposite of what cryptocurrency needs.
Hive has the ability to stand out in this regard. Everyone is drawn to the "mooning" aspect of cryptocurrency. This is where a lot of money can be made. However, true wealth generation entails having a strong fixed income market for people to reduce risk while still garnering a strong return. A major problem with the present system is people are pushed into riskier assets to find yield. The fixed income market globally was most destroyed yet global bonds along top $100 trillion.
BlockFi is one of the companies trying to solve this problem. Herein is the issue: a company trying to do it. This is where the vulnerability comes in. With Hive, we can have a blockchain that can address the problem. That is the key difference.
And if the SEC wants to coming knocking, let them try to find the door.
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