{"text":[[{"start":6.3,"text":"Just when you think financialisation can’t go any further, it does. This week, the Senate may vote on the Clarity Act, President Donald Trump’s landmark crypto bill. There are many things not to like about Trump-related crypto “innovation” in the US economy. But one issue that hasn’t got enough attention is how the Clarity Act is part of a larger trend towards a kind of holographic distortion of US markets."}],[{"start":32.4,"text":"What I am referring to here is the growth of new financial products that reproduce the price, yield, liquidity or payment function of some existing financial instrument (like stocks) but without all the rules around ownership, disclosure, leverage, identity and other information that would be required if you were trading the underlying asset. A financial hologram, if you will, created by assets that have economic, but not necessarily institutional or regulatory, equivalence to the thing they purport to mirror."}],[{"start":61.65,"text":"We’ve seen this movie many times before. It is what the shadow banking sector is built on. Complex packaging of this sort tends to increase at the tail-end of a big bull run. Most market participants would say that is where we are now. The financial sector is, after all, about six times the size of the real economy today, as against roughly three and a half times in the run-up to the financial crisis."}],[{"start":85.3,"text":"In our brave new world of crypto, tokenisation of real-world assets and prediction markets, the opportunities to trade second or third-order financial holograms of things like, say, a contract for Tesla vehicle deliveries or election results, have reached new and more distorting levels."}],[{"start":103.65,"text":"Consider, for example, the rise of “perpetual futures”, which never expire and allow traders to speculate on an asset’s price without owning it. Day traders love them, while consumer advocates call them “the most dangerous product in crypto”. But there’s no doubt they’re burgeoning. At a Council on Foreign Relations event last week, Kalshi head of enforcement Robert DeNault said perpetual futures trading on Kalshi had reached $17.5bn since its introduction in May, and “institutional investor interest” was growing fast."}],[{"start":138.35000000000002,"text":"It is one thing for a retail punter to use a prediction market to take a small bet on the outcome of a Yankees game or the share price of Amazon. It is quite another thing for large financial institutions to get involved. But that’s clearly where things are heading — and you could drive a truck through the regulatory loopholes created by these new market holograms."}],[{"start":159.05,"text":"Consider that the Clarity draft released last week has no wording to insist Security and Exchange Commission rules will apply to the tokenisation of stocks. That opens the way for crypto firms to enable market participants to buy and sell virtual versions of stocks that could be far more lightly regulated than the real thing. The president seems to want this. Even if the bill doesn’t pass, it’s possible the SEC could still use its “innovation exemption” to circumvent parts of the regulatory framework when it comes to tokenised securities."}],[{"start":192.4,"text":"Why does this matter? Because it could well make it harder to see who owns what at any given time (not to mention the question of how to tax capital gains fairly). While the Clarity Act gives the SEC jurisdiction over tokenised products and says they must be treated like securities, it does not require all tokenised products, such as cash-settled tokenised derivatives or synthetic tokens, to count towards beneficial ownership disclosure requirements."}],[{"start":219.20000000000002,"text":"Under current SEC rules, investors holding 5 per cent or more of a company’s stock must disclose their stake. But in a tokenised world, an investor might directly own, say, 3 per cent of a company’s stock, alongside third-party tokens or perpetual futures on several crypto trading platforms. This could create exposure above the SEC threshold but not necessarily be disclosed in the same way as a traditional shareholding, allowing market participants to obscure their full positions and lever up in potentially dangerous ways."}],[{"start":255.15000000000003,"text":"Think of a crypto version of the Archegos Capital Management meltdown in 2021, when the overleveraged private investment firm was liquidated after failing to meet margin calls (lenders lost $10bn). Archegos had used total return swaps, which fell outside direct ownership disclosure rules, to lever up and borrow from multiple banks to buy concentrated positions in ways that would have been impossible had it been buying company shares directly. Banks accepted less collateral than they might have ordinarily, because they could not see who else was lending."}],[{"start":288.85,"text":"Most of the loopholes allowing for that disaster have been closed for swaps, but not for tokenised products. On July 9 last year, SEC commissioner Hester Peirce called tokenised securities “enchanting, but not magical”. She warned that while they “facilitate capital formation and enhance investors’ ability to use their assets as collateral”, they don’t “have magical abilities to transform the nature of the underlying asset”, warning that third-party contracts presented special risks. Tokenised securities are “still securities”, she said, and should be regulated as such."}],[{"start":322.40000000000003,"text":"Will they be? Not without clear legislation that mandates it. And most likely not by this administration. In Trump’s second term, regulation, like the market itself, is increasingly holographic."}],[{"start":340.6,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1785202510_8233.mp3"}