A money market for bitcoin?

Bringing repo to crypto

In the world of cryptocurrency, lending and borrowing of digital assets does exist. There is also a booming market in cryptocurrency derivatives. But there is not yet anything like a readily traded interest-rate market: Bitcoin deliberately has no central bank, and without something like a repo market, there is no mechanism to create something like a low-risk money market. Spreads on loans are determined bilaterally and vary wildly.
“An OTC broker now pays anywhere from 7% to 15% for borrowing an overcollateralized loan in the crypto space,” said Mark Lamb, CoinFLEX’s co-founder and CEO in Hong Kong. “That’s insane. There’s lots of demand, but there’s nothing like a money market, and bank capital doesn’t exist. So we’ve been thinking about how to build a market for interest rates.”

Sudhu Arumugam, co-founder and chief risk officer, says CoinFLEX contracts require physical delivery of the underlying, be it dollars or bitcoin or another cryptocurrency. Other derivative exchanges ultimately settle in dollars, but CoinFLEX allows settlement in bitcoin or other digital assets.
“With most exchanges, physical delivery is hard,” he said. “With us, it’s the opposite: not delivering [in bitcoin] is hard.”

What is the hard part about delivery?

Ultimately the exchange will hold the hot wallets, it is the only efficient method to run a automated deposit and loan facility.   If there is no hot wallet then everything stops while the parties locate and submit their signatures.

But if you have hot wallet, then just run interest rate swaps between loans and deposits. The physical reimbursment happens when any party withdraws a portion of their deposits. The difference is the exchange needs to run a pit boss and carry some minimal risk. But keep the risk minimal, charge an entry and exit fee. There is no problem except inability to conceptualize.

Reduce all these exchanges down to the minimum and they reveal a counterfeit problem.  Even the bitcoin ledger needs to be monitored to prevent double spending.  So the counterfeit problem is there, why not bite the bullet and then run a standard bitcoin repo market on line.  Even the overnight is not necessary, that is an artifact. What you need is asynchronous interest rate swaps in the exchange hot wallet.