Matrixport introduces "U.S. Treasury Bond Token" to institutions? Ethan Yang discusses the dilemma of the crypto market: risk-free interest rates

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Ethan Yang, head of the Taiwan division of Matrixport, discusses the core issues of the crypto market, stablecoins, and risk-free interest rates through Matrixport's recent product, STBT.

Ethan Yang, head of the Taiwan division of Matrixport, comes from a traditional finance background and has spent a long time in the trading rooms of Societe Generale, Deutsche Bank, and Merrill Lynch, responsible for cross-asset investments or hedging product sales for institutional users such as life insurance companies, banks, and securities firms.

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Matrixport's asset management platform, Matrixdock, recently launched the "Short-term Treasury Bill Token" (STBT). The introduction of STBT was very low-key, with almost no publicity, as it is a product designed for qualified investors, and regular investors cannot participate. I proactively contacted Ethan to obtain information on STBT.

I believe the launch of STBT explains the issues with stablecoins and the crypto market's urgent need for "risk-free interest rates."

The issuers of stablecoins rely on investing everyone's dollars in Treasury bills to earn returns. Taking Binance as an example, it holds (or helps users hold) many stablecoins, continuously earning hundreds of millions of dollars through BUSD, which can be entrusted to third parties to hold Treasury bills to solve hacking problems. Besides CeFi, DeFi's MakerDAO also invests in RWA (Real World Assets), essentially seeking profitable ways to activate assets lying in warehouses and introduce real-world interest rates.

So how does STBT achieve this?

Interest-Bearing Stablecoin

According to the STBT whitepaper, the reserve behind STBT consists of U.S. short-term treasuries (maturing within 6 months) and repurchase agreements collateralized by U.S. treasuries. At issuance, 1 STBT is traded at a price of 1 USDC, allowing investors to enjoy the low-risk U.S. treasuries yield.

Based on FED data, the current overnight repurchase agreement (ON RRP)¹ rate is 4.55%, gradually increasing with the U.S. interest rate hike.

[Note 1]: A repurchase agreement (O/N PPR) is when money market funds deposit dollars with the Fed in exchange for U.S. treasuries, and receive interest paid by the Fed.

In simple terms, STBT can be understood as tokenized U.S. short-term treasuries, but I prefer Ethan's description of STBT:

Interest Rate Arbitrage and Idle Assets

How chaotic are the interest rates in the crypto market? Let's go back to the crazy summer of 2020.

The DeFi Summer of 2020 saw the rise of DeFi lending protocols, with stablecoin lending rates (above 8%) attracting traditional capital into the crypto market. The influx of hot money led to an oversupply in the lending market, quickly driving down DeFi rates. Simultaneously, the inflow of hot money accelerated new DeFi trends, like liquidity mining, triggering subsequent trends such as food memes and the NFT craze. But that's a story for another time.

Looking at the current highest AUM lending rate of Aava, it was a meager 1.6% annual rate at the time of writing. Compared to the traditional finance's "risk-free rate" of 4.5%, this is a gap of nearly 2.8%. In theory, this would attract crypto investors to arbitrage in traditional finance; however, the interest rate spread between the crypto market and traditional finance has long existed, indicating a problem somewhere.

The Problem Arises: Why Can't Arbitrage Happen?

For smaller investors, transferring funds back to traditional finance is not difficult, but larger institutions or companies may encounter issues.

Ethan suggested that if transferring funds out is difficult, then importing Web2 interest rates into the crypto market would suffice.

The concept of importing interest rates is not hard to understand. However, many crypto startups face two challenges in achieving this:

The cost or time involved in moving funds out of the crypto market to earn interest and then returning the funds back to the crypto market is too high.

Many crypto startups encounter difficulties when opening bank or securities trading accounts.

Using Taiwan's crypto startups as an example, if they want to convert large amounts of funds back to fiat, they encounter many withdrawal issues due to regulatory scrutiny on exchanges or crypto companies like Circle regarding wire transfers. Additionally, many crypto companies are offshore entities, making it impossible to open securities trading accounts, and even opening a bank account could take several months.

From here, one can understand the dilemmas faced by crypto startups. Therefore, Matrixport's pain point to address is clear – enabling these companies to obtain risk-free U.S. dollar interest rates in the crypto market at extremely low transaction costs.

How to Introduce Traditional Finance's Risk-Free Interest Rate?

The design concept of STBT, besides reducing credit risk, also creates interest for holders. How is this achieved?

Below is the mechanism of STBT:

• Investors provide USDC or USDT to the issuer, and the issuer mints the corresponding STBT through smart contracts.
• The STBT issuer exchanges USDC for fiat currency through Circle.
• The fiat currency is placed in third-party custody, and the third-party custody purchases short-term treasuries maturing within six months or enters the overnight repurchase market of the Federal Reserve through traditional financial institutions.
• After minting, STBT holders can transfer STBT back to their wallet addresses, such as cold wallets or third-party custody platforms.
• The STBT smart contract will automatically distribute the interest from bonds or repurchase agreements to your holding address on a daily basis in STBT units through a rebase mechanism.

From the image below, it can be seen that the reserve of STBT is U.S. government short-term treasuries (orange).

From the issuance mechanism, it is known that STBT is a stablecoin fully collateralized by U.S. government short-term treasuries, with user funds completely isolated outside of Matrixport, without any platform mixing of user funds.

It is worth noting that the STBT issuer is a special purpose vehicle (SPV) established by Matrixport. The SPV pledges the held U.S. treasuries and cash to STBT holders, who have the first priority claim on the physical asset pool. Even in the most extreme scenarios, such as Matrixport's bankruptcy, the value of STBT is secured by the asset pool, and after the liquidation of these securities, the corresponding assets can still be redeemed.

Additionally, STBT can be purchased or redeemed daily without lock-ups, can be withdrawn to other whitelisted addresses, earns interest daily, and thus does not carry the liquidity risk that most investment tools have or the credit risk of custody platforms.

Ethan's View on the Stablecoin Market

"The interest rate market in the crypto market is somewhat abnormal," Ethan Yang said.

Before delving into this topic, it is essential to understand the role of stablecoin issuers in the crypto market.

Ethan believes that the most significant difference between the crypto market and traditional financial markets lies in "interest rates." Many people mistakenly think that stablecoin issuers in the crypto market act as central banks, but in reality, stablecoin issuers are merely printing presses: they issue stablecoins based on the fiat currency they hold.

In traditional finance, central banks adjust rates through tools such as interest rates or money market operations to ensure that funds do not become too abundant, preventing inflation from getting out of control while developing the economy. Stablecoin issuers lack such mechanisms.

The absence of interest rate operations by stablecoin issuers has led to chaotic interest rates in the crypto market. Ethan explained that earning interest in the crypto market usually comes with considerable credit risk, and given the high volatility of cryptocurrencies, this results in high rates during bull markets and significantly lower rates than traditional finance during bear markets.

"There is a risk for stablecoin holders to earn interest. If you're lucky, nothing happens when you put your funds in Matrixport, but you might face problems if you use FTX. This is why STBT aims to create a stablecoin that provides 'fully collateralized and nearly risk-free interest,' generating applications among institutions. Of course, these applications are among institutions or professional investors."

Ethan provided two examples: exchanges and crypto startups.

Exchanges hold user assets, including various fiat and stablecoins. If the regulations permit, exchanges can convert fiat and stablecoins into STBT. As STBT is backed by sufficient U.S. treasuries, this not only realizes asset activation but also does not affect the exchange's Proof of Reserve.

Another example is crypto startups.

Ethan pointed out that many crypto startups have already completed some funding rounds. If these funds are used to purchase STBT, they can use the interest to pay for operational costs. For instance, if a startup purchases $50 million worth of STBT and calculates the interest rate of 4.5% after deducting losses (fees and costs), they would generate approximately an extra $2.25 million in operational funds annually.

"Just as U.S. treasuries generate interest, STBT is better than fiat and stablecoins."

Generally, it takes two to three business days for STBT to be purchased or redeemed. However, we all know that liquidity is crucial. Therefore, Matrixport has set up a fund pool on Curve Finance, allowing "qualified high-net-worth clients or institutional investors" to convert STBT back to stablecoins or enabling institutional investors to earn liquidity rewards.

During the previous bull market, many asset management platforms emerged, including Celsius and BlockFi. At that time, with a good market and abundant hot money, many people rushed to borrow money, with good liquidity and low credit risk. However, as central banks withdrew liquidity and poorly managed companies closed down, surviving crypto asset management platforms faced new challenges.

Ethan explained that although crypto asset management platforms operate similar to banks, there are still differences.

Most of the loans made by commercial banks are "secured loans." They have credit reports, judicial credit information, and mandatory repayment tools for customers. Moreover, central banks withdraw excess funds, enabling banks to scale their deposit businesses and maintain stable interest rates.

Comparatively, running a crypto asset management platform is much more challenging than traditional banks. The crypto market lacks high-quality collateral or credit tools, so crypto asset management platforms need strict risk control, including managing the total amount of user funds, controlling platform interest rates, monitoring counterparty risks, and more.

Therefore, Matrixport is now targeting institutions or high-net-worth users, transitioning in response to the bear market, aiming to introduce traditional finance's interest rates, reduce user and platform credit risks, while also activating assets for high-net-worth users, creating a win-win situation.