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In the fifth episode of Block Stars, David Schwartz interviews Breanne Madigan, the Vice President and Head of Global Institutional Markets at Ripple. As stated in the podcast summary, they talk about “the future of institutional investment in digital assets, including why security token offerings may be the key entry point for traditional finance and whether we’ll eventually tokenize everything from real estate to racehorses.”

Here is the episode summary, and my thoughts on it!

Episode Summary

Prior to working at Ripple, Breanne Madigan has worked in more traditional financial markets, including time at Goldman Sachs. As such, she sees similarities between those and digital assets in areas such as speculation and yield-based products that produce more money from what already exists. She sees differences as well, including how the two markets developed in basically opposite ways. Namely, traditional markets were more institutional before becoming retail (speculative) while crypto markets seem to be the opposite of that.

This may be because cryptocurrency was born out of an almost anarchist, anti-government mindset, due to the government's ability to infinitely print (and thus infinitely devalue) fiat currency. With COVID-19 and the global shutdown in place, people today are realizing even more the importance of assets that can be used as hedges against inflation. In this way, people who are becoming familiar with crypto are realizing the importance of being able to manage and control their own finances without the need for federal institutions.

But this is also valuable for financial institutions. Crypto provides an opportunity for those in these more traditional areas to save on time, fees, and even taxes that are associate with moving physical money around. For example, banks that transfer funds globally normally use antiquated, multi-step processes, including funding and refunding large volume nostro/vostro accounts, which take a lot of time, energy, and money. Crypto allows us to send value across the world the same fast and nearly free way an email is sent around the world. This is, of course, Ripple's bread and butter.

This all has to do with liquidity, which Madigan defines as:

The ease with which you can move an asset and convert it into ready cash without affecting its market price.

From this, she sees that liquidity has four primary attributes.

First is Tightness, which is basically how low transaction costs as measured by bid-ask spreads and fees are on an exchange. The second is Resiliency, which is the speed in which an imbalance can be corrected (for example, how big the daily range is on a trade). The third is Breadth, which relates to the number of trading pairs (e.g. XRP/BTC, XRP/USD, XRP/ETH, etc.) as well as the number of tools you can use to move money around within those pairs. As you increase the number of tools and pairs, the breadth gets larger. The last key attribute is Depth, which she measures by looking at order book volumes of that specific asset. When thinking about the liquidity of an asset, these four attributes help inform on whether the asset has good or bad liquidity, and thus, whether investors may or may not want to risk getting into the asset in the first place.

Of course, since Madigan works at Ripple, this is exactly what their suite of applications under the On-Demand Liquidity (ODL) label is designed to solve for institutional investors. By leveraging the cryptocurrency XRP, they can bypass the need for nostro/vostro accounts as well as high friction and transaction costs of sending payments globally, and almost instantaneously, as long as corridors which allow XRP-to-fiat transactions exist in those various countries. Later, when Madigan once again talks about the uniqueness of XRP, she mentions the events of Black Thursday, and how many investors actually turned towards XRP to transact, due to its extraordinarily quick ledger speed in comparison to Bitcoin and Ethereum.

David Schwartz switches the conversation at this point towards whether cryptocurrencies are safe-haven assets (i.e. can be counted on to retain value when markets are volatile). Madigan doesn't see a definitive answer to this. Today, it seems crypto is still mostly regarded as risky, with the market having correlated with multiple different arenas, including gold, equities, and even emerging markets, depending on the frame of time you were looking at them. Bitcoin may be the closest, since its value has gone up nearly 40% year-to-date even while gold only increased 13% (at the time of recording). With its halvening having happened recently, many expect that its historic precedents of price inflation will continue, which bodes well for the entire crypto market in general. As per Coinbase, many previously Bitcoin-only investors are beginning to move into alt-coins (non-Bitcoin cryptocurrencies) now in order to diversify their crypto portfolio.

What is the key to stability for crypto? The way Madigan sees it, it requires both regulatory consistency as well as more institutional investors. In regulation, there is positive movement around the world. But those approaches are not necessarily consistent with each other, which leads to confusion from developers and lack of adoption from investors. The best regulatory framework, according to her, is one which allows flexibility and adaptation to new products and innovations, while protecting markets and market participants. This kind of broad-stroke regulation would allow for more consistency, and thus, more investors.

The United States, for example, hasn't been clear in giving even a framework for how crypto can function within its borders. Regulators have certainly been open to talking to people in the crypto industry. But the problem may be that different crypto products are related to different industries. Some are used like commodities, others have completely unique functions. This calls for broad regulation that is adaptable as the industry grows.

But even with the lack in clarity, institutions are moving towards crypto. Both Coinbase and Gemini are now backed by JP Morgan Chase. Big investor names like Paul Tutor Jones are beginning to back Bitcoin. Grayscale Investments, a large cryptocurrency asset manager, reported that a large portion of its portfolio is supported by institutional investors. And even they are starting to say that digital assets (especially Bitcoin) can certainly be a hedge against the mass printing of fiat from the federal reserve.

Central Bank Digital Currencies (CBDCs) are also becoming more popular (at least in rumor, if not in actual existence). But, for the most part, they are still in concept stage. There are many questions surrounding them, such as how do central banks think about CBDC liquidity, how would they use them with certain countries don't have them, or how to interoperate between different CBDCs. It's exciting to see that, even a year or two ago, many of these big institutions didn't really think much about cryptocurrencies, but now, most banks are getting more and more exposure to it. No longer do they believe the whole industry is a scam, but instead, they are slowly but surely following digital assets and companies that have clear utility within the blockchain technology space.

That being said, there are still a few hurdles that Madigan sees before full-on mainstream adoption takes place. Security, especially on exchanges, needs to be dealt with. Also, a better, perhaps more unified, infrastructure for trade, valuation, and leverage needs to be in place. But as the world buckles under the COVID-19 pandemic, institutional investors may flock even faster to crypto in order to stay afloat economically.

After all, blockchain actually offers many solutions to traditional industries that have not been really thought of before. For example, Security Token Offerings (STOs) may have solutions for stock and investment markets that allow traditional markets to get their foot in the door of blockchain technology. STO adoption may even be able to solve severely illiquid markets like Real Estate, and allow smaller investors to participate in a traditionally much more expensive market. And thus, this may lead to a future in which everything is tokenized.

To end the podcast, Schwartz asked Madigan how she sees the next few years for crypto. She felt that STOs are going to be much more significantly developed in the near future. Also, many Bitcoin-only investors will probably shift to other coins as those coins gain more and more utility. And as utility grows in the space, institutional investors will begin to circle the wagon that is crypto. And around the world, we will hopefully see more consistency in regulatory frameworks around cryptocurrency as a whole.

My Thoughts
To be honest, I was a little flustered at this episode. Perhaps it's because I've been following Ripple for a while now, and am familiar with XRP and Ripple's company goals. So a lot of the information wasn't really new. Also, there seemed to be a lot more cutting and pasting of audio bits here and there. Or at least, ones that were obvious. There were times when Breanne Madigan was cut off before finishing or starting a thought.

Regardless, here are a few tidbits that I picked up on which I wanted to discuss.

**Institutional Investors: Do we need them?
**Perhaps it's because of how Ripple as a company is targeting the enterprise and institutional markets with their products, but from how I see it, the desire for institutional investors (and regulation) seems like a red herring for most people involved in crypto, both now and in the future. Let me explain.

The idea that we need institutional investors to prop up the crypto space seems like a catch-22. There seems to be (in this interview and in previous ones) this desire for big investors to come and make mass adoption happen in the space. But regulatory clarity is needed to make institutional investors feel safe to jump in. But regulatory clarity won't come unless there is a large amount of investment already involved. It's a circular problem that isn't particularly helpful, because of the belief that institutional investors are necessary.

But institutional investors will always follow where big money can be made. From precious metals to real estate to insurance and even the Internet, no matter what the regulations are or were, institutional investors have always come (whether early or late) to a place where markets thrive and can make a profit.

So the problem is profit. Or rather, can cryptocurrency and the blockchain technology behind it be profitable? It seems like the answer is yes. Early investors of almost all the top coins have made significant profit. Ripple's ODL software has been reported to reduce costs of cross-border payment, thus increasing the profits and competitive advantage of its adopters. And many who now use loan and un-banking crypto services like Celsius Network and Nexo are finding they are making more money through interest than a traditional bank could ever give them.

Most institutional investors are risk-averse. They often hang onto traditions because they are inherently less risky (for a time). But in being so, they often miss out on the early days of incredible, world-changing innovations. Like Blockbuster with Netflix. Or Microsoft and smartphones. Or even Warren Buffett and almost any Internet or tech company (until recently). But I think they will eventually and inevitably follow. The problem, I believe, isn't getting them to come, but rather to help them see how crypto can build competitive and profitable advantages now and into the future.

**Regulation
**I've talked about regulation before when commenting on this podcast, so I'll try not to repeat myself much here. But in summary, I believe that regulation isn't required for mass adoption.

I've also come to believe that blockchain is a unique technology that cannot really be regulated. It is basically Web 3.0 before the predicted Web 3.0 wave (i.e. AI-enhanced Internet) really got off the ground. To try to regulate it too much is to commit your country to suicide (i.e. North Korea, Iran, etc.). To have basically no regulations on it is to allow innovation and freedom to drive your competitive edge and keep it technologically advanced. The only exception to this rule is China, and that's because most of the less oppressive states somehow decided to allow that tyrannical government free access to steal and use their technologies.

So in a very real way, more regulation is not required. In fact, the infamous Section 230 of the Telecommunications Act of 1996 is already regulating the Internet, on which blockchain entirely depends.

In a cynical way, the only way to ensure regulations (at least, in the United States) are beneficial to blockchain is to lobby for it (which Ripple is probably already doing). If government officials can personally benefit from blockchain, they won't try to harm it.

That being said, there is one area that I believe regulation needs to come in and limit, even though I don't really know how.

**Printing Money
**As stated in the episode, and a few podcast episodes before, one of the reasons people are becoming more interested in cryptocurrency is the idea that it is a safe-haven asset that can be used as a hedge against inflation.

There are a couple problems with this line of thought, mostly to do currently with speculation, and how it's probably not utility of a coin that drives its growth in price, but the speculation surrounding it. It is also (highly) possible that current market conditions for crypto are heavily manipulated.

But a massive problem that I see has to do with the printing of money. Because in crypto, and especially in stablecoins, the printing of money is a very tangible reality.

Just look at Tether (USDT). From the beginning of the year until March, the people behind USDT have increased its volume by more than $600 million. And not a single person was there to verify that the new money had a real physical dollar to back it up. In other words, they literally made themselves almost half a billion dollars richer for nothing. If this isn't money printing, then certainly we can't blame the feds.

Furthermore, if this kind of thing keeps going, what's to stop anyone from just creating a “stablecoin”, claim it is backed by something, and issuing it out? The vast majority of the masses (including institutional investors) will have absolutely no idea the difference between all these stablecoins. So they could buy in, without knowing that such a coin could be completely worthless as soon as whatever exchange system suddenly deems it not worth its peg.

Even if that doesn't happen, the mass printing of stablecoins could result in even more increased inflation. Because stablecoins don't have to be actual representatives of physical fiat (e.g. US Dollar), but are simply pegged, this kind of inflation could get really ugly, really fast, with almost irreparable damage due to the cryptographic security of blockchain technology.

In a way, I'm not sure the world is ready for trust-less, decentralized finance. But I do hope we fix this problem soon. Because blockchain is absolutely the technology which I'm most excited about in changing the world for the better.