On the opening day of Messari Mainnet 2021, New York City's long-awaited first encryption conference since the start of COVID-19, reports came in. flaming Via a viral tweet that the United States Securities and Exchange Commission had served a subpoena on a panelist from the event on top of an escalator in broad daylight. While it is still not entirely clear who was served (or why), this is not the first time the SEC has invaded the crypto industry in public view. Let's go back just two months.
On July 20, 2021, SEC Chairman Gary Gensler issued his comments outlining the SEC's scope of authority over cryptocurrencies:
“It doesn't matter if it's a stock token, a security-backed stablecoin token, or any other virtual product that provides synthetic exposure to underlying securities. These platforms, whether in the decentralized or centralized financial space, are implicated by securities laws and must function within our securities regime. "
Like the SEC's audacious arrival on the Mainnet, Gensler's remarks definitely didn't come out of nowhere. They arose because Gensler, along with his regulatory entourage, finally came to the terrifying understanding that tokenized synthetic stocks of cryptocurrencies are like stocks, but better.
Related: It Lights Up ... Don't Worry, Bitcoin Adoption Won't Stop
So what are synthetics?
Synthetic assets are artificial representations of existing assets whose prices are linked to the value of the assets they represent in real time. For example, a synthetic stock of renewable energy giant Tesla can be bought and sold at exactly the same price as a real share of Tesla at any time.
Consider average stock traders for whom profit margins, accessibility, and personal privacy take priority. For them, the apparent "reality" of TSLA acquired from a stockbroker will not stand alongside the many synthetic versions of the cryptoverse, which can be acquired at a fraction of the cost at 8:00 pm on a Sunday night. What's more, it is only a matter of time before traders can bet synthetic TSLA on a decentralized finance protocol to earn interest or take out a secured loan.
Related: Crypto Synthetic Assets, Explained
The role of synthetics
Decentralized platforms built on blockchain and legacy financial systems are about to collide in one of the most tumultuous battles in economic history, and Gensler's comments are merely a shot across the bow. Make no mistake: decentralized finance (DeFi) and traditional finance (TradFi) have already drawn their battle lines. They will remind the powerful and new entrants alike that contrary to what contemporary wisdom may suggest, trading systems infuse assets, not the other way around. The ramifications cannot be underestimated: synthetic assets establish a level playing field in which centralized and decentralized systems can compete for users and capital - a free market for markets.
Typically, digital markets support a variety of competing assets by trading with each other. But when the asset side is fixed, that is, when there are identical assets on multiple platforms, it is the markets that compete for most of the daily trading volume of each asset. Ultimately, traders adjust the score, determining where assets should live and what systems should die.
In that deal, while Bitcoin (BTC) indirectly competes with fiat currencies as a unique form of money that is traded through a decentralized network, it is the set of emerging stable currencies linked to the fiat currency that represents the most pernicious and immediate threat to national governments and their directors in central banking. Unlike Bitcoin, which is often too volatile and exotic for outsiders, fiat-backed stablecoins reduce complicated offsets and keep things simple: 24-hour access, low-cost international transfers, incredible interest rates, and 1: 1 redemption in fiat.
Related: Stablecoins Present New Dilemmas for Regulators as Mass Adoption Looms
Even for the skeptics, stablecoins generate strong trading, and the US Congress presented its own token of appreciation with its December 2020. legislative proposal of the STABLE Act, which would require stablecoin issuers to acquire the same banking charters as their centralized counterparts in Chase, Wells Fargo, etc.
Established institutions have a long history of searching, acquiring, and sometimes even sabotaging their competition. It's not hard to see where the legacy banking aversion to synthetics comes from. As decentralized platforms become easier to use and move into the mainstream, a significant demand from buyers will migrate from legacy platforms and their previously exclusive assets to digitally native synthetics.
Robinhood Saga: The Remix
Imagine what could have happened if Robinhood users had access to GME and AMC synthetic shares on January 28, 2021.
If even a small minority of the purchase demand for those shares, say 10%, migrated from Robinhood's synthetic shares to Mirror Protocol, it would have effectively inflated the supply of outstanding shares and consequently suppressed the share price. . In turn, GameStop's C-level executives would have had a really tough decision on the board.
Related: GameStop inadvertently paves the way for decentralized finance
And then also consider the implications of investors betting their synthetic GMEs and AMCs on DeFi protocols to receive home and small business loans at drastically lowered interest rates, definitively removing banks and other established operators from the equation.
Such a scenario would force GameStop and AMC to migrate a fraction of their shares to blockchain-based platforms to restore robust pricing mechanisms. Meanwhile, retail investors, looking only for a superior user experience and the benefits of interoperability with DeFi protocols, would ultimately win, something 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 generate unexpected arbitrage opportunities, the likes of which have never been seen before in the world. . Although the consequences of such a dramatic change are beyond prediction, centralized incumbents will not voluntarily cannibalize their business models; free markets must be entrusted to selected winners.
The future of synthetics
As demand for synthetic assets catches up to and exceeds that of their supposedly regulated TradFi counterparts, capitalists and investors around the world will be forced to contemplate what actually makes an asset "real" in the first place and ultimately. , will determine not only the direction. of free markets, but its own constitution.
In the heat of an existential crisis, financial institutions and governments will undoubtedly put all hands on the cover: The SEC will fight to root out synthetic stocks, Congress will pledge to subject stablecoin issuers to defying the banking elite. International Commodity Futures Trading Commission (CFTC). ) will step in to tame derivatives trading platforms and the Financial Crimes Enforcement Network (FinCEN) will continue to target those who aim to protect user privacy.
Related: The new episode of crypto regulation: The Empire Strikes Back
Tough days are ahead, and it's too late to turn back on innovation. Compound cTokens, Synthetix Synths, and Mirror Protocol mAssets have already opened Pandora's box, while Offshift's fully private zk-Assets are scheduled to launch in January 2022. Regardless of what happens, the barrier The rigid framework that separates the realm of traditional finance from that of emerging decentralized platforms will be permanently dismantled, and a new era of financial freedom will emerge.
May the best systems win.
This article does not contain investment advice or recommendations. Every trade and investment move involves risk, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Alex Shipp is a professional writer and strategist in the digital asset space with a background in traditional finance and economics, as well as the emerging fields of decentralized systems architecture, tokenomics, blockchain, and digital assets. Alex has been professionally involved in the digital asset space since 2017 and currently serves as a strategist at Offshift, a writer, editor, and strategist for the Elastos Foundation, and is an ecosystem representative at DAO Cyber Republic.
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