Put the Money Fund on the Blockchain

Blockchain blockchain blockchain

Uh … so … Franklin Templeton Investments … is … launching a stablecoin? Here’s the preliminary prospectus. If I were designing a stablecoin for Franklin Templeton, I would call it the “Benjamin,” but they went in a different direction. They are calling it the Franklin Blockchain Enabled U.S. Government Money Fund, which is not a name that is going to draw in a lot of crypto enthusiasts, or enthusiasts of any kind really. It is a government money-market fund, though, which means that it should have a stable value: It will invest “at least 99.5% of its total assets in Government securities, cash and repurchase agreements collateralized fully by Government securities or cash.” So if you put in a dollar, it will be worth a dollar, and maybe you’ll get a tiny bit of interest on it.

So far that describes a money-market fund, not a stablecoin. But this is not like other money-market funds in one key way. You can probably guess what it is. The word “blockchain” is in the name. It is a money-market fund on the blockchain. Well, sort of. It’s a little bit on the blockchain. It’s this much on the blockchain:

Blockchain-based shares; no investment in cryptocurrencies. Although the Fund’s transfer agent will maintain the official record of share ownership in book-entry form, the ownership of the Fund’s shares will also be recorded on the Stellar network, an electronic distributed LEDGER that is secured using cryptography (referred to as a “blockchain”). ...

Transactions on the blockchain are verified and authenticated by computers on the network (referred to as “nodes” or “network validators”) that receive, propagate, verify, and execute transactions.  The process of authenticating a transaction before it is recorded ensures that only valid and authorized transactions are permanently recorded on the blockchain. However, in the event of a conflict between the blockchain record and the record held by the transfer agent, the transfer agent’s record will be determinative. 

Franklin Templeton’s transfer agent will keep a list of who owns shares in the fund, just like every other mutual fund does, and that list will be binding for all purposes. But the blockchain will keep a list, which will be binding for … no … purposes ... but which have a certain entertainment value? It will allow the fund to use the word “blockchain” in the name, which should not be underestimated. It’s a start. It seems like Franklin Templeton’s is to one day hand the whole thing over to the blockchain:

In the future, the ownership of the Fund’s shares may be maintained and recorded solely on the Stellar network, although there is no guarantee that this will occur. …

And there’s more. Once the thing lives on the blockchain, why not let it on the blockchain? Why not let people send Benjamins to each other directly, without involving a middleman? 1  Again, not yet, but a mutual-fund complex can dream:

At this time, investors may only purchase or redeem shares of the Fund directly through the App, which is available for download through the Apple App Store and Google Play, and shares are not currently available for purchase, sale or transfer from one shareholder to another shareholder (or potential shareholder) (“peer-to-peer”) on the blockchain or in any secondary trading market (such as an electronic trading platform that is registered with the SEC as an alternative trading system).  The Fund’s investment manager believes that blockchain-based shares will provide increased transparency to Fund shareholders and may, in the future, permit reduced settlement times and provide other benefits to Fund shareholders.

(Emphasis added.) So I mean right now it is a preliminary prospectus for a regular old money-market fund that hasn’t launched yet, but it also gestures in the direction of one day being:

1. A fixed-value instrument worth a dollar and backed by short-term U.S. government obligations;
2. That is recorded on a blockchain; and
3. That can be transferred freely from anyone to anyone else without an intermediary.

That’s a stablecoin, right? It is a blockchain-native cryptocurrency that is worth a dollar because it is fully backed by dollars. Maybe you can’t it, but then again, maybe one day you can. Franklin Templeton’s emailed statement about the fund says that “Franklin Templeton believes that blockchain technologies have the possibility to knit traditional asset management products and services closer to transactional payments.” And:

We believe a registered money market fund that is backed by hard assets and registered with the SEC under the Investment Company Act of 1940, with its shares existing as native digital assets on a blockchain and held in a digital wallet, can be an ideal stable digital asset to be used in the new economy.  This product will be an extension of our current suite of money funds serving a different and unique customer base. 

I don’t know! Franklin Templeton is not an obvious candidate to rebuild the payments system, and there’s not much, or any, user base for the Benjamin yet, and they will have to do something about the name. (They will have to name it the Benjamin.)

At the same time, why not? There is a widespread belief—I’m not sure it’s based on anything, but it sure is widespread—that the future of payments will involve some sort of cryptocurrency. Who will be in charge of that cryptocurrency? One obvious answer would be “no one,” or “whoever is in charge of Bitcoin,” that sort of thing, the anarcho-technocrat vision of a lot of cryptocurrency enthusiasts, but that does not seem to sit well with national regulators. You at least want the world’s currency to be run by the sort of entity that has a CEO who can be called to testify before Congress, and who’ll show up when you call her.

Another obvious answer would be “that Libra consortium that Facebook was bragging about a few months ago, the one consisting of big international e-commerce companies and credit-card networks and payment processors and Facebook.” That’s a plausible answer! But Libra seems stalled, and governments seem to hate it frankly even more than they hate Bitcoin. Part of that is due to the grandiosity and vagueness of Facebook’s plan, and part of it is just Facebook, but part of it is probably due to the regulatory uncertainty. What Libra? (Or, well, it’s nothing, but what Libra be, if it existed?) It was launched so vaguely that it might be anything, which means that everyone who regulates anything thinks that they should regulate Libra.

“Banks” would be a pretty plausible answer, though in a sense they are the incumbent that this stuff is supposed to overthrow. But yes, banks sure are working on their transactional stablecoins

“Mutual fund companies” is not an obvious answer. But aren’t you a little impressed by Franklin Templeton’s move here? For one thing, it is the opposite of Facebook’s approach: There is no white paper, not even a press release, just a bland regulatory filing. Regulators got all mad at Facebook for going public with no regulatory structure, so Franklin Templeton is going to regulators first. But more important, Franklin Templeton’s thing fits entirely within existing categories. It’s not a “stablecoin,” it’s not “money,” it’s not an effort to revolutionize payments or the financial system or anything else, it’s just a government money-market fund, the most boring thing that there is. It contains the seed of a stablecoin, in a bland and innocuous package.

To make a useful stablecoin you have to build an instrument that people can trust to be worth a dollar, 2  and put it on the blockchain, and build the transactional plumbing and commercial ecosystem that allows people to spend and transfer it. Franklin Templeton is starting at the making-it-worth-a-dollar end, which frankly seems like the easier part, but it’s what mutual fund companies are good at. Maybe the making-it-spendable stuff will come eventually, maybe it won’t. (Maybe making it useful as a transactional currency for institutional financial transactions—hedge funds trading Benjamins for derivatives, etc.—would be easier, and enough.) But Facebook seems to be starting at the other end, and that doesn’t look like much fun either.

By the way: This is rough on Facebook! Not just that Franklin Templeton is setting up a (weird sort of) competitor stablecoin, but that it has filed with the U.S. Securities and Exchange Commission declaring that stablecoin as a mutual fund. I happen to think that backed stablecoins like Libra are not securities (or mutual funds) and should not really be subject to SEC regulation, but that view is controversial and I suspect that the SEC disagrees. “Libra is just a money-market fund and should be regulated like one” is a thing that people have been saying since Libra was announced, but you could take another view. But once Franklin Templeton sets up a money-market fund to be its stablecoin, that makes the “stablecoins are money-market funds” argument a lot easier and clearer. If the precedent is to register this sort of thing with the SEC as a money-market fund, who is Facebook to disagree?

Eh Goldman I mean it’s fine whatever

Here’s Marty Chavez, the former chief financial officer of Goldman Sachs Group Inc., on priorities

“I tell people if your top priority is your career on Wall Street, I think that’s interesting and I support you and I don’t want to hang out with you,” Mr. Chavez said in an interview. “My top priority is peace of mind. No 2. is my kids. No. 3 was Goldman Sachs.”

Look: fine! Healthy! Disclosure, I used to work at Goldman, and I liked it and have mostly good things to say about it, but on a good day it probably was not even my No. 3 priority. But I wasn’t the CFO. (Or co-head of trading, as Chavez currently is.) When you are a top executive at Goldman, you spend a lot of time around people who are pretty focused on their careers on Wall Street. It is a nice sort of humblebrag to say that you aren’t—“oh I don’t really care much about this stuff, weird that they keep promoting me”—and might even be true, but, really, if you don’t want to hang out with the people who care a lot about their financial careers, the management committee of Goldman Sachs might not be the right place for you? “Ugh, why are we spending so much time talking about finance,” you ask at the management committee meeting, and people give you weird looks.

Chavez is fixing his mistake now; he has announced his retirement, and he gave a pretty fun exit interview to Liz Hoffman of the Wall Street Journal. For one thing, Chavez—who came up as a technologist on the trading side—would never have made it as an investment banker; here is how he thinks project codenames work:

Weary of the New York winter, the Goldman Sachs Group Inc. trading executive retreated to his vacation home in the Berkshires, bought a white board at Target and sketched out his next chapter, named in order of his priorities: Operation Kids, Freedom & Sunshine.

You don’t … the codename doesn’t have to be a complete description, you know? “How was your weekend?” “Oh pretty good, I executed Operation Sleep Late, Go Out to Brunch & Watch ‘Succession.’”

Chavez also “never quite fit” as CFO, and here he is on his time in that job:

“I’m sure it was amazing preparation for something,” Mr. Chavez said Tuesday. “One day I’ll figure out what that is.”

It was preparation for being really rich and not having to work anymore! But, no, he’s gotta go do some venture capital stuff:

Mr. Chavez, who is close to former Google CEO Eric Schmidt and investor Jim Breyer, said he will teach a course at Stanford on “how software ate finance” and is weighing jobs in venture capital. He said he is interested in whether the same digitization that shook up finance can be applied to health care.

“The transformation of finance through software is about making money programmable,” he said. “The next frontier is making life—genes, cells, organs—programmable.”

Operation Kids, Freedom, Sunshine & Also Making All Life on Earth Programmable, sounds relaxing.

I tease because I love, of course, and to be clear I fully support both quitting Goldman because you have enough money and don’t need the aggravation, and also being amusingly blase about it in the press. But Goldman Kremlinologists will note that Chavez was an ally of former Goldman Chief Executive Officer Lloyd Blankfein, and his departure allows current CEO David Solomon to consolidate a bit more power. Blankfein famously grew up in sales and trading, and Solomon in investment banking, and the popular view is that Blankfein favored traders and Solomon is purging them to center the firm on investment banking. Here’s the memo on Chavez’s replacement as co-head of trading, Marc Nachmann, who is currently co-head of investment banking:

“Marc will bring his experience in investment banking, including as head of the global financing group, as we execute our strategy to grow our securities franchise with more of our corporate clients and expand our financing capabilities more broadly,” Solomon, President John Waldron and Chief Financial Officer Stephen Scherr wrote in a staff memo.

Obviously one purpose of a sales and trading business is to help provide financing to corporate clients, and another purpose is to sell derivatives to those clients, but there are other purposes. 3 Like lots of people in the sales and trading division mostly do trades with hedge funds and asset managers, and traditionally that has been a good business that brings in a lot of money and creates a lot of successful careers. And here Solomon is, pretty much saying that putting an investment banker in charge of trading will help make trading a tool of investment banking. It is not subtle.

Efficient markets

Accountants will charge you less to audit your company’s books if you look trustworthy, says science, in the form of a paper called “Seeing Is Believing? Executives’ Facial Trustworthiness, Auditor Tenure and Audit Fees” by Tien-Shih Hsieh, Jeong-Bon Kim, Ray Wang and Zhihong Wang:

Our study examines whether auditors’ perceptions of client executives’ facial trustworthiness are associated with their audit fee decisions. We employ a machine-learning-based face-detection algorithm to measure executives’ facial trustworthiness. We find that auditors charge 5.6% less audit fee to firms with trustworthy-looking CFOs than to those with untrustworthy-looking CFOs in initial audit engagements. Auditor tenure weakens the negative association between CFOs’ facial trustworthiness and audit fee. Further evidence shows that CFO’s facial trustworthiness is associated with neither financial reporting quality nor litigation risk.

I have some reservations. (Are audit fees really the best measure of how much the auditors trust the company? Do you really need “a machine-learning-based face-detection algorithm to measure executives’ facial trustworthiness,” or could you just poll 20 undergrads?) But if the takeaway from this paper is “auditors trust trustworthy-looking CFOs, but trustworthy-looking CFOs are not especially trustworthy,” then, I mean, yeah, that makes sense. Anyway here are some sentences (citations omitted):

Using the latest machine-learning-based facial-feature-point detection technique, we construct a proprietary facial-trustworthiness database for CEOs and CFOs of U.S. listed companies. First, we develop a computer algorithm to collect CEO and CFO pictures from Google Images, based on the full name of each executive and his/her affiliated firm during the sample period of 2001–2014. Second, following the neuroscience and psychology literature, we use a face detector to identify the facial features in the CEO and CFO pictures, thereby calculating a rich set of facial-trustworthiness measures, comprising: (i) angle of inner eyebrow ridge; (ii) face roundness; (iii) chin width; and (iv) nose-to-lip distance. We then construct a composite facial-trustworthiness index for each executive. Our analysis focuses mainly on this composite index, though it also considers individual facial features separately.

Are there regressions of audit fees against eyebrow angle and chin width? Oh you’d better believe there are. I suppose the alpha here is, like, go short a basket of stocks with trustworthy-looking CFOs and long a basket of stocks with shifty-looking CFOs, but I don’t know, that’s not directly supported by the paper and not investment advice or anything. 

Elsewhere: “Private-equity giant Carlyle is taking a majority stake in a startup that uses AI to judge how much you smile in interviews — and it could be the future of recruiting.” But does it judge chin width?

Elsewhere in science

I dunno, here is a story about how “point and click” traders are using the latest in sports science to optimize their performance:

OSTC is equipping its traders with wearable technology that connects to its own bespoke mobile app and monitors biometric data such as cardiovascular activity. The hope is that the technology can not only deploy a more scientific approach to profiting from the market’s peaks and troughs, but that it can also help traders perform their stressful and demanding jobs with the kind of resilience exhibited by elite athletes. …

OSTC, which pays for the wearable technology, uses the Polar H10 heart-rate sensor, a popular consumer heart-rate monitor.

Polar H10 collects data, such as heart-rate variability, a measure of the time between each heartbeat, with the goal of using the information to help traders deal better with stress. According to a blog post on Polar’s website, a high HRV is related to improved health, while a lower one can be a warning sign of illness. HRV decreases during periods of mental stress, it says. (OSTC is looking at alternatives to the Polar H10 because some traders do not want to wear a strap around their chests all day.)

This just feels like an advertisement for algorithmic trading. If you replace the traders with robots, the robots won’t complain about having to wear a strap around their chests all day.

People are worried about _______ market liquidity

Here’s a pretty general-purpose liquidity-worrying article about how this August “was marked by even lower-than-normal liquidity.” (Yes, even for August.) Usually we talk about liquidity worries in terms of some specific set of structural changes that reduce liquidity in some specific asset class (bonds), but this one is just a sort of no-one-is-trading, it’s-quiet-yes-too-quiet sort of story. “The problem is plaguing everything from stocks and bonds to currencies and derivatives, potentially exaggerating big moves across markets, analysts said.”

One thing I love about liquidity-worrying stories is that the anecdotes always sound like this:

Mark Sebastian, a trader and managing partner at Option Pit, which gives courses on options, said he was recently trying to get out of a derivatives position tied to the Cboe Volatility Index, or VIX. He wasn’t able to exit from the position at the price he wanted and ended up holding on to it. He waited until the next day, when he was able to cash out, but at a less attractive price.

So he had a thing, he wanted to sell it at a high price, no one wanted to buy it at that price, so he ended up selling it at a lower price that people wanted to pay? Liquidity! Someone should go find the guy on the other side of that trade and tell story. I hope it goes like this: “He was recently trying to get into a derivatives position tied to the VIX, but he wasn’t able to get in at a price he wanted, so he waited until the next day, when he was able to buy it at a more attractive price.” 

Things happen

Bill Dudley explains himself. “In the long run, negative rates ruin the financial system.” JPMorgan Says China to Be Included in Benchmark Bond Indexes. WeWork Plans IPO Roadshow as Soon as Next Week. Goldman Sachs' push into private equity is ruffling feathers at Blackstone — and it might be a sign of big client skirmishes to come. Labour takes aim at shareholder capitalism. America’s Chicken Industry Accused of Conspiring to Keep Immigrant Wages Down. The $15 Billion of Distressed Argentine Bonds No One Talks About. How CEOs’ Experience at Buyout Targets Affects Corporate Policies. How to Major in Unicorn. Maid of honor wears T-Rex costume after being told she could wear ‘anything.’ 

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1. In this hypothetical scenario the thing will *clearly*need a better name than “shares of theFranklin Blockchain Enabled U.S. Government Money Fund,”so I have decided to rename it the “Benjamin.” Please do not email to tell me that there are like nine other cryptocurrencies with that name; there are nine cryptocurrencies with *every*name, including “Bitcoin.”

2. Or a whatever. Libra is supposed to be worth a blended basket of world currencies, which is annoying, but it has its reasons.

3. Uh, disclosure, or sort of a general comment. When I worked at Goldman it was in the financing group, the bit of investment banking that helped companies raise money and generally connected the sales-and-trading business with the investment-banking business. Nachmann all also worked there at around the time I did, though they all ran the group and I certainly did not. The standard story is that Goldman’s investment bankers are resurgent and taking over the firm, but a more specific story might be that its *financing* bankers are running the place.

To contact the author of this story:

Matt Levine[email protected]

To contact the editor responsible for this story:

Brooke Sample[email protected]