MirrorIf you really love blockchains, one thing you might want is to buy Tesla Inc. stock on the blockchain. (People who love blockchains also tend to love Tesla stock.) How could you do that? You might imagine the following naive approach: - Set up, like, Tesla Blockchain Trust.
- Tesla Blockchain Trust issues a bunch of TBT tokens for cash on your preferred blockchain, selling one TBT token for roughly the current price of a share of Tesla stock.
- Tesla Blockchain Trust uses the TBT token sale proceeds to buy Tesla stock and keep it in a pool.
- You set up some redemption/creation mechanism whereby people can give Tesla Blockchain Trust one share of Tesla stock and get back one TBT token, or can give the Trust one TBT token and get back one share of Tesla stock.
- The TBT tokens should trade like a share of Tesla stock, except on the blockchain.
This seems okay. Basically the Tesla Blockchain Trust is like an exchange-traded fund or American Depositary Receipt, but on the blockchain. Obviously it has regulatory problems; if you did this in the U.S. and sold the thing to U.S. citizens without registering it with the Securities and Exchange Commission you would get in bad trouble. But that's true of almost everything in crypto so never mind. It also has trust problems: If you love blockchains because you like trustless permissionless innovation and don't want to rely on some central counterparty, you will look skeptically at Tesla Bitcoin Trust. (Also if you are skeptical of crypto because crypto projects are constantly stealing their investors' money — particularly crypto projects that are set up outside of more regulated jurisdictions like the U.S. — this doesn't look great.) This is a thing. I wrote about it in 2019. I described it as "blockchain depositary receipts." It is a way to wrap the regular financial system in blockchain, which is good if you plan to live a lot of your financial life on the blockchain. Why not. You could imagine a different approach. For instance, in traditional finance, a popular alternative to owning stock is owning a "cash-settled swap." A cash-settled swap is just a bet in which you pay me $1 for every dollar that Tesla stock goes up, and I pay you $1 for every dollar that Tesla stock goes down. We can say that I own Tesla "synthetically," and you are short Tesla synthetically. This is a very popular product for investors who, for whatever reason, do not want to actually own stock. Archegos Capital Management is a famous recent example of a big investor that bought very concentrated positions in a lot of stock on swap. Part of the reason for this was probably that Archegos wanted to avoid the disclosure obligations that come with owning U.S. stocks directly. Another big part of the reason for it was definitely that Archegos wanted a lot of leverage, and in traditional finance swaps are a way to get leverage. If Tesla is trading at $680 and I buy the stock, I have to pay $680, or maybe less ($340?) if I get a margin loan from my broker. If I do a swap, though, I am not buying anything, just making a forward-looking bet. In practice brokers will demand that I put some money down to collateralize my bet, but it might not be that much; Archegos seems to have gotten about eight times leverage. Perhaps I deposit $80 with my broker to get a bet on one share of Tesla stock; that's a lot more efficient than putting up $680 to buy the stock. You might try to repurpose this for blockchain-Tesla. Build a smart contract that lets people just bet on the price of Tesla stock, just do a cash-settled swap. The smart contract provides that you pay me $1 for every dollar that Tesla stock goes up, and I pay you $1 for every dollar it goes down. Or we could denominate it in Ether or Bitcoin, why not, but let's use dollars. Of course by "$1" I mean "one blockchain-based stablecoin that is pegged to the U.S. dollar." You could do this on a levered basis like most traditional-finance swaps. I put up $80, you put up $80, if the price moves against me you get some of my stake and I have to add more to the stake; if I fail to add more then the position is closed out and you get as much as all of my $80. Or you could do it on an unlevered basis to try to eliminate credit risk and make the whole thing run more trustlessly: I put up $680, locked into the smart contract, just as though I was buying a share of Tesla stock, and if the stock falls I am good for my bet no matter what. What you put up is more complicated — in theory you could owe me an infinite amount of money if Tesla goes up a lot — but we could just make it $680 (100% of the spot price of Tesla) and not worry about it too much. And then rather than making this a bilateral smart contract we could make it into a token protocol where (1) the long side of the swap is just a token that anyone can buy, call it Tesla Blockchain Synthetic Token (TBST) and (2) the short side of the swap comes from someone depositing stablecoin collateral (say 100% of the spot price of Tesla) into the smart contract to mint one TBST, which they can then sell on the blockchain to any interested buyer. And then instead of making it a literally cash-pay contract, you try to make the price work via arbitrage, minting and burning. If Tesla trades down to $660 and TBST stays at $680, then someone can sell a Tesla share for $660, deposit $660 worth of collateral in the smart contract, get back one new TBST, and sell it for $680, driving down the price. If Tesla trades up to $700 and TBST stays at $680, then the smart contract can spend some of its stablecoin collateral to buy back TBST, pushing up the price. Think of blockchain Tesla as sort of a stablecoin denominated in Tesla. One way to make a stablecoin is to collateralize it with the underlying thing: If you issue 100 blockchain dollar tokens, you back them with $100; if you issue 100 blockchain Tesla tokens, you back them with 100 shares of Tesla. Another way to make a stablecoin is with an algorithmic method that relies on bootstrapping value from some sort of share token, which often ends in tears. But a third way is to collateralize the stablecoin with some other valuable thing, here, dollars (or dollar stablecoins), and use the collateral to try to keep the stablecoin's price in line with the underlying thing. I should say that the TBST idea (collateralized synthetic cash-settled blockchain swaps on Tesla) is not especially any more legal than the TBT idea (blockchain-based ownership in a pool of Tesla shares). It's a "security-based swap," it's totally regulated in the U.S., people have gotten in trouble for doing things like this, nothing here is legal advice, etc. Much of DeFi — crypto decentralized finance — begins with a sort of willing suspension of disbelief about securities regulation. Anyway here's a fun story from Bloomberg's Michael Regan about how " Fake Tesla, Apple Stocks Have Started Trading on Blockchains": For years, the powers that be on Wall Street have toyed with questions about whether it would be feasible to move the stock market onto a blockchain, the underlying technology behind cryptocurrencies. The innovators in the fast-moving world of decentralized finance -- or DeFi -- aren't waiting around to see how those discussions unfold. Instead, they've built synthetic versions of equities that track some of the world's biggest companies. In essence, the anti-establishment ethos of the crypto world is being applied to a rough facsimile of the stock market. Fake versions of Tesla Inc., Apple Inc., Amazon.com Inc. and other big stocks, as well as a few popular exchange-traded funds, have been created by the projects Mirror Protocol and Synthetix over the past year. The tokens, and the programming that allows them to trade, are engineered to reflect the prices of the securities they track without any actual purchases or sales of the real stocks and ETFs involved. So far, volumes are just a tiny fraction of those on regulated exchanges. But for crypto enthusiasts, the potential upside is huge. … To oversimplify, under the Mirror Protocol, the idea is to keep prices of the synthetic -- or "mirrored" -- equities in the ballpark of the real thing by offering incentives for traders to arbitrage price discrepancies and manage the actual supply of tokens. Users can create, or "mint," new tokens when prices are too high by posting collateral, and destroy, or "burn," tokens when prices are too low, driving the price up or down. Through these incentives, the "synths closely track the price of the real-world asset," Kwon said. "But they're still only tokens on a blockchain providing explicit price exposure."
Here's Mirror's FAQ. It's roughly the tokenized, minting-burning-and-arbitrage-based version of cash-settled swaps that I laid out above. (Except that to be short — to mint the token — you post collateral that might not equal 100% of the spot price; in the FAQ the example is 150%.) Two more things. One is that Mirror is explicitly "oracle"-based: Mirror learns the price of Tesla stock (or whatever) by consulting the price on the traditional stock exchange where it is listed. That's how it knows the right price of Tesla stock, to figure out the right collateral to mint new mirror-Tesla tokens or to figure out when the protocol should buy back mirror-Tesla tokens. You are not trading a claim on Tesla stock on an independent market; there is no claim on Tesla stock. You are trading a cash-settled bet on Tesla stock; the bet's payoff is tied to the price of Tesla stock on its normal market. The other thing is, here's a fun little arbitrage discrepancy from the FAQ: How are corporate actions and dividends handled? Corporate actions are handled through an asset migration process discussed here. Given that Mirrored assets do not confer any rights of the underlying asset, Mirrored assets do not give dividends.
Traditional finance swaps pass along dividends. Tesla doesn't pay dividends, but Apple does a little bit; you could imagine a trade of getting long Apple stock, getting short mirrored Apple, and keeping the dividends. Apple's 0.62% dividend yield doesn't really compare to the yields advertised everywhere on crypto projects, but in the long run this seems like a weird discrepancy. DidiThe way Chinese capitalism works is that if a big company threatens the government's control of China's economy and society, the government will act forcefully to rein in that company and eliminate the threat. The way American capitalism works is that if a company's stock goes down it gets sued for securities fraud. You do the math on this one: Weeks before Didi Global Inc. went public in the U.S., China's cybersecurity watchdog suggested the Chinese ride-hailing giant delay its initial public offering and urged it to conduct a thorough self-examination of its network security, according to people with knowledge of the matter. But for Didi, waiting would be problematic. In the absence of an outright order to halt the IPO, it went ahead. The company, facing investor pressure to list after raising billions of dollars from prominent venture capitalists, wrapped up its pre-offering "roadshow" in a matter of days in June—much shorter than typical investor pitches made by Chinese firms. The listing on the New York Stock Exchange raised about $4.4 billion, making it the biggest stock sale for a Chinese company since Alibaba Group Holding Ltd.'s IPO in 2014. Didi's American depositary shares began trading in New York on Wednesday, just a day before the ruling Communist Party celebrated its centenary. The Cyberspace Administration waited a day after the major political event to deliver a one-two punch to the company. On Friday, it started its own cybersecurity review into Didi and blocked the company's app from accepting new users; and on Sunday, it ordered mobile app stores to pull Didi from circulation.
That has not gone well for the stock this morning: American depositary shares of the Beijing-based ride-hailing giant fell as much as 25% to $11.58, wiping out about $22 billion of market value and taking the stock below its $14 IPO price. They traded at $11.99 as of 9:35 a.m. in New York.
When I Googled "Didi shareholder lawsuit" this morning I found announcements from the Schall Law Firm and the Rosen Law Firm hunting up clients to sue Didi over this, but I am sure that there will be more soon. This one writes itself! - A bad thing happened.
- The stock went down.
- Didi arguably knew about the bad thing before it happened and failed to warn investors.
- In an IPO! With an abbreviated roadshow! Arguably to get out ahead of this news!
I don't know what to tell you; this one is sort of too easy? We talk sometimes around here about arcane complicated theories that can transmute every bad thing at a company into securities fraud, but this one is … just … I mean … if your all-powerful regulator tells you to delay your IPO over network security issues, and instead you rush your IPO, and then four days later the regulator shuts down your growth over network security issues and the stock plunges, you are going to get sued a whole ton and what on earth are you going to say? "Didi said in response to questions that it doesn't comment on speculation and had no knowledge before the IPO of the regulator's decisions to put the company under cybersecurity review and to ban new downloads of its ride-hailing app." Working from homeI mean the basic situation in investment banking is that if you are a junior analyst and you are in the office fewer than like 80 hours a week, you will be in trouble, while if you are a senior managing director and you're in the office more than like 20 hours a week you will be in trouble. Analysts are expected to show up by 10ish, look busy and be available for eight hours, order dinner, and then settle in for a long night of building models and turning pitchbooks. If you're not around and available all day, and cranking on Excel all night, you are not doing your job. MDs, meanwhile, are expected to get on planes and go meet with clients to win new business. Of course sometimes they need to be in the office to supervise and motivate their underlings, to tell them what pages they want in the pitchbook, etc. Other times they will do client meetings by telephone or videoconference; it happens. But in general if you are sitting around your office all day, instead of your clients' offices, you are not doing the highest-value-add part of your job. Obviously this was upended by the pandemic. But in different ways. Analysts lost a lot of learning and mentorship and social opportunities: Instead of hanging out with other 23-year-olds and learning Excel shortcuts and financial-modeling techniques and where to find the good pitchbook pages, they had to muddle through their work on their own, which took longer and was less satisfying. Instead of sitting in the MD's office to listen to client calls, with the MD occasionally muting her line to explain what was going on, they churned out pitchbooks alone at home. Instead of ordering dinner to the office and joking around with their friends, they ate dinner at home while working quietly and sadly. Sure they didn't have to commute, but their commute from Murray Hill wasn't that long anyway, and their apartments aren't that nice. Perhaps they have moved back in with their parents, which is a decidedly mixed bag. Meanwhile the MDs, freed from the need to commute to the office, can work from their much nicer Hamptons houses. They don't need to get on planes four times a week to meet with clients; they can just do everything from home and then go to the beach. Perhaps they are learning less from the serendipity and in-person interactions of being in the office, but they were pretty far up the learning curve already. Also, remember, they just weren't in the office that much to begin with; they were always on planes to meet with clients so the serendipity was limited. Now the pandemic measures are ending and banks are going back to work. If you are a junior banker that's mostly good; you can see your friends and learn stuff and not work out of your bedroom. If you are a senior banker that means getting back on planes and going to see clients, which is exhausting, but also frankly if you've made it to a senior job at an investment bank that — the social aspects of the job, meeting with potential clients and trying to befriend them and understand their business in person — is probably something you enjoy. But when you get back from a client trip late Tuesday night, and you've got another trip planned Thursday morning, and the bank wants you back in the office on Wednesday to sit at your desk — that feels unnecessary now, doesn't it? If you've got a day between trips to catch up on emails and phone calls, you'd rather spend it at your Hamptons house than schlepping into the office. Anyway: There is a growing divide on Wall Street: firms calling employees back and firms telling people they can work from home. Titans like Goldman Sachs Group Inc. and JPMorgan Chase & Co. are taking a hard-line approach, beefing up in-person staff five days a week in New York even though it might mean losing talent. Rivals including Citigroup Inc. are touting flexibility, betting that a softer approach will help them poach top traders and deal makers. … Culture is at the heart of the debate. Some say the trading floor is the last bastion of Wall Street, where interns and young employees learn by osmosis. Others think record results in a remote-work year prove that the trading floor and the office alike have lost their relevance.
My model is that, in the short term, more work-from-home is probably the good trade: "Record results in a remote-work year" do prove that you can do it successfully for a time, using primarily bankers and traders whom you've already trained and acculturated in the office.[2] And senior bankers and traders will prefer to work from their Hamptons houses, so you can keep your senior bankers and poach your competitors' if you're more flexible. But in the long run you want your junior bankers and traders to be trained, at the office, by the senior bankers and traders, and it's hard to do that if all of the senior people are at home all the time. Rule 29We talked in 2019 about a criminal case that U.S. federal prosecutors brought against former Barclays Plc foreign-exchange trader Robert Bogucki. Bogucki's team did a big FX options trade and then unwound it, and they pre-positioned for the unwind (selling options for their own account before unwinding options for the customer), and they sent a few intemperate chat messages about how they would "bash the sh-t out of the market," and the prosecutors decided that was fraud. But a federal judge decided it was not fraud: Barclays had no obligation to stay out of the market ahead of its client, there was no expectation that this wouldn't happen, etc. So the judge acquitted Bogucki on a "Rule 29 motion," a reference to the federal rule of criminal procedure that allows a judge to throw out a case if the government hasn't presented sufficient evidence of a crime. The judge's reasoning seemed pretty right to me but I am not going to discuss it again here; you can read my 2019 post if you want more about the substance. Instead I want to talk about this Wall Street Journal article about Bogucki's prosecution, and in particular this part: Mr. Bogucki filed claims against Barclays related to his suspension and lost earnings, which the bank settled for an undisclosed sum last May. He bought a new boat and named it "Rule 29."
That's pretty good? Like, I don't know, I guess it might be a little embarrassing to name a boat for the federal rule of criminal procedure that kept you out of prison. Getting acquitted on a Rule 29 motion is not at all "a technicality," it is the opposite of a technicality, it is a judge finding that you are innocent and the government's case is ridiculous, but still, the name does rather draw attention to that time you were charged with a crime. But mostly I think it's great. "Behind every great fortune is a crime" is I suppose a reasonable theory to have at the marina. "I'm on a boat and not in prison due to Rule 29," you can tell your neighbor at the dock; "what about you?" Anyway that article is in part about Bogucki's prosecution but also about the Justice Department's policy of prosecuting individuals for financial crimes. The basic story is that after the 2008 financial crisis a lot of banks were fined a lot of money for assorted financial misdeeds, but, like, their chief executive officers did not go to prison. (In the U.S., that is; they did in Iceland.) This was viewed as a missed opportunity, and so the Justice Department put in place various policies about trying to put bankers in prison. One particularly important one — called the "Yates Memo" — said that the banks could reduce the amounts of fines they paid for their misdeeds if they helped the government put some of their bankers in prison for those misdeeds. This created obvious incentives: If you are a bank, and you do a bad thing, you want to be extremely helpful to the government in pinning that bad thing on exactly one employee. (Or a few, but one seems most efficient.) The employee should not be too junior — nobody is going to believe you that some first-year analyst did the crimes — but it's obviously not going to be the CEO or anything; the head of a trading desk is about right. The federal prosecutors and the bank's lawyers (who are former federal prosecutors) will get together and decide who should go to prison for the bad thing, and they will shake hands on it and agree that the bank will pay a lower (or no) fine, and then they will team up to prosecute the one guy. The bank's lawyers can be very helpful to prosecutors: They have complete access to the bank's internal records, and they can interview the bank's employees in a more casual, we're-all-on-the-same-team-here way than federal prosecutors can, so they might be able to get them to talk more freely. If you are the one guy getting prosecuted you'll feel a bit hard done by. And so one trader who was criminally prosecuted and acquitted "later sued Citigroup Inc., his employer, arguing that the bank tried to limit its liability by helping prosecutors build the case against him by decoding chat-room jargon in misleading ways." Or Bogucki sued Barclays and has complained that, when he was interviewed by a bunch of Barclays's outside lawyers, he wasn't aware that they were gathering evidence for federal prosecutors. But they were. I guess that worked out for him — now he has a boat — but it does not always. Things happenAMC Rises After Abandoning Plan to Seek Approval for More Shares. Retail Investors Power the Trading Wave With Record Cash Inflows. OPEC+ Crisis Propels Oil to Six-Year High as Market Tightens. Credit Suisse's #Zoltan Warns of Trouble Ahead in Money Markets. Bitcoin Swings as China Regulators Punish Company Over Crypto. Schwab's $200 Million Charge Puts Scrutiny on Robo-Advising. JPMorgan Chase buying spree is Jamie Dimon's busiest in years. Bitcoin billionaire Mircea Popescu dead, leaving $2B fortune in limbo. Ransomware Is the IRS of Bitcoin. "In one recent online ad, Koko-chan sings 'both your heart and your principal will be protected forever.'" If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Another disadvantage is that anyone can sell your stock, including short sellers. There is a theoretical view that publicly traded stock should be worth more than private stock, because it is more liquid, but there is an argument that private stock is often actually worth more because it's harder to sell. [2] And provided that clients and competitors are also working from home. | 
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