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Crypto, Clearing and Credit

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Crypto, Clearing and Credit

Bloomberg,

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Crypto aims to do away with the human inputs critical to finance.

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9

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Crypto is calling into question some basic relationships in finance and credit. A mathematical and statistically driven process, trading in the decentralized and disintermediated crypto space would suggest unbiased treatment for all participants, yet margin lending and the extension of credit (a word derived from the Latin for “trust”) rely to some degree on human judgment. In this enlightening analysis, financial columnist Matt Levine parses the proposed changes that impersonal crypto trading would bring to conventional securities finance.

Summary

The fundamentals of cryptocurrency and traditional trading differ substantially.

Conventional stock trading entails counterparty risk between the time that a buyer and seller agree to a transaction and the time that the trade settles through a clearinghouse; in the United States, that settlement period is two business days (T+2). An extension of credit protects the parties against the possibility that one of them cannot make good on the obligation during T+2.

Crypto, by contrast, disintermediates the process. Trade and settlement take place on the blockchain with immediate effect; there is no counterparty risk, no T+2. Each party has a digital wallet that interacts with other wallets anonymously. No counterparty ...

About the Author

Matt Levine writes on matters of finance at Bloomberg Opinion.

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