On the opening day of Messari Mainnet 2021, the long-awaited first crypto conference in New York City since the beginning of COVID-19, reports came in via a viral tweet that the US Securities and Exchange Commission had delivered a subpoena to an event attendee on top of an escalator in broad daylight. While it’s not entirely clear who was served (or why), this isn’t the first time the SEC has stepped into the crypto industry in front of the public. Let’s go back just two months.
On July 20, 2021, SEC Chairman Gary Gensler released his remarks outlining the SEC’s jurisdiction over cryptocurrency:
“It doesn’t matter whether it’s a stock token, a securities backed value token, or any other virtual product that offers synthetic exposure to underlying securities. These platforms – whether in the decentralized or centralized financial sector – are subject to securities laws and must function within our securities system. “
Just like the SEC’s brave arrival on the mainnet, Gensler’s remarks definitely didn’t come out of the blue. They came about because Gensler – together with his regulatory environment – finally came to the frightening realization that the tokenized, synthetic stocks of the cryptocurrency are just like stocks, but better.
Related: Powers On … Don’t worry, the Bitcoin rollout won’t stop
So what are synthetics?
Synthetic assets are artificial representations of existing assets, the prices of which are linked in real time to the value of the assets they represent. For example, a synthetic share in the renewable energy giant Tesla can be bought and sold at exactly the same price as a real Tesla share at a certain point in time.
Consider the average stock trader who prioritizes profit margins, accessibility, and privacy. For them, the -parent “authenticity” of TSLA acquired from a broker-dealer won’t stand alongside the many synthetic renditions of the crypto-verse that can be acquired at a fraction of the cost on a Sunday evening at 8:00 PM. In addition, it is only a matter of time before merchants can use synthetic TSLA in a decentralized financial protocol to earn interest or take out a secured loan.
Related: Synthetic crypto assets, explained
The role of plastics
Decentralized platforms built on blockchain and legacy financial systems are on the verge of clashing in one of the most tumultuous battles in economic history, and Gensler’s remarks are just a shot in the bow. Make no mistake: decentralized finance (DeFi) and traditional finance (TradFi) have already drawn their battle lines. You will remind powerful incumbents and newcomers alike that contrary to what contemporary wisdom suggests, exchange systems add value to assets, not the other way around. The effects should not be underestimated: synthetic assets create a level playing field on which centralized and decentralized systems can compete for users and c -ital – a free market for markets.
Typically, digital marketplaces support a range of assets that compete with one another by being exchanged for one another. But when the asset side is frozen – that is, when identical assets exist on multiple platforms – it is the marketplaces that compete for the largest portion of the daily trading volume of each asset. Ultimately, traders settle the score and determine where assets should live and which systems should die.
While Bitcoin (BTC) competes indirectly with fiat currencies as a unique form of money that is transacted over a decentralized network, it is the emerging stablecoins tied to fiat currencies that pose the most damaging and immediate threat to national governments and theirs Directors in the central bank. In contrast to Bitcoin, which often turns out to be too volatile and exotic for outsiders, fiat-backed stablecoins reduce the complicated tradeoffs and keep the simple things: 24/7 access, inexpensive international transfers, great interest rates and 1 : 1 redemption in Fiat.
Related: Stablecoins pose new dilemmas for regulators as mass adoption emerges
Stablecoins are a strong bargain even for skeptics, and the U.S. Congress has tabled its own mark of -preciation in its December 2020 legislative proposal for the STABLE Act, which would require stablecoin issuers to have the same banking rights as their centralized counterparts at Chase. Wells Fargo and so on.
The established institutions have a long history of searching, acquiring, and sometimes even sabotaging their competition. It’s not difficult to see where the old banks’ aversion to plastics comes from. As decentralized platforms become more user-friendly and further enter the mainstream, significant buy-side demand will shift from legacy platforms and their once exclusive assets to digitally native synthetic products.
Robinhood Saga: The Remix
Imagine what would have h -pened if Robinhood users had access to synthetic stocks from GME and AMC on January 28, 2021.
If even a small minority of buy-side demand for these stocks – say 10% – migrated from Robinhood to Mirror Protocol synthetic stocks, it would have effectively inflated the supply of outstanding stocks and, consequently, depressed the stock price. In return, GameStop’s C-level executives would have had a really tough call on the board.
Related: GameStop inadvertently paves the way for decentralized finance
And then, consider the ramifications when investors use their synthetic GME and AMC in DeFi protocols to get mortgage and small business loans at drastically reduced interest rates, putting banks and other incumbents out of the equation for good.
In such a scenario, GameStop and AMC would have to migrate a fraction of their stake to blockchain-based platforms in order to restore robust pricing mechanisms. Meanwhile, retail investors who are just looking for a superior user experience and the benefits of interoperability with DeFi protocols would ultimately win – something that is not heard too often in modern financial markets.
From stocks to commodities, real estate instruments, bonds and more, the emergence of synthetic assets will disrupt pricing mechanisms, catalyze unprecedented turmoil in financial markets, and create unprecedented arbitrage opportunities like the world has never seen before. While the consequences of such a dramatic shift are unpredictable, centralized incumbents will not voluntarily cannibalize their business models – free markets must be entrusted to selected winners.
The future of plastics
As the demand for synthetic assets reaches and exceeds that of their supposedly regulated TradFi counterparts, the world’s c -italists and investors will be forced to ponder what actually makes an asset “real” and will ultimately not just determine the direction of free markets but their very constitution.
In the heat of an existential crisis, financial institutions and governments will no doubt get their hands on deck: the SEC will fight to eradicate synthetic stocks, Congress will pledge to discourage stablecoin issuers from breaking the international banking elite, the Commodity Futures Trading Commission (CFTC .) to challenge).
Related: The new episode of crypto regulation: The Empire Strikes Back
Tough days lie ahead – and it is already too late to turn back the hands of innovation. Compound’s cTokens, Synthetix’s synths, and Mirror Protocol’s mAssets have already opened Pandora’s box, while Offshift’s all-private zk assets are slated to hit the market in January 2022, finally dismantled, and a new age of financial freedom will dawn.
May the best systems win.
This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegr -h.
Alex Shipp is a professional digital asset writer and strategist with a background in traditional finance and economics as well as the emerging fields of decentralized system architecture, tokenomics, blockchain and digital assets. Alex has been working in digital assets since 2017 and currently works as a strategist at Offshift, as a writer, editor and strategist for the Elastos Foundation and is an ecosystem representative at DAO Cyber Republic.