Fear of the unknown: A tale of the SEC’s crusade against synthetics

The opening day of Messari Majornet 2021, New York City’s long-awaited crypto conference, was dominated by a viral tweet. It claimed that the United States Securities and Exchange Commission had issued a subpoena for an event panelist on top of an escalator in broad daylight. Although it is not clear who or why, this isn’t the first time that the SEC has invaded the crypto industry. Let’s look back just two months.

Gary Gensler, SEC Chair, made his remarks on July 20, 2021. He outlined the SEC’s authority in cryptocurrency.

It doesn’t matter if it’s a stock token, a stable-value token backed with securities or any other virtual product that provides synthetic exposures to underlying securities. These platforms, whether they are in the centralized or decentralized finance space, are subject to the securities laws. They must operate within our securities regime.

Gensler’s comments are not like Mainnet’s bold arrival by the SEC. These remarks were made by Gensler and his regulatory entourage when they realized that cryptocurrency’s tokenized synthetic stocks are better than stocks.

Related: Powers on… Bitcoin adoption won’t be stopped

What are synthetics, you ask?

Synthetic assets are artificially created versions of assets whose values are tied to the actual assets they represent. A synthetic share of Tesla, the renewable energy giant, can be bought and sold at exactly equal prices to a real Tesla share at any moment.

Average stock traders are those who prioritize profit margins over accessibility and privacy. The apparent “realness” of TSLA purchased from a broker-dealer won’t hold water next to the many synthetic versions that can be obtained at a fraction the price at 8:00 PM on a Sunday night. It’s also only a matter time before traders can stake synthetic TSLA through a decentralized finance protocol in order to earn interest and take out a collateralized loans.

Related: Explained Crypto-synthetic assets

Synthetics and their role

The decentralized platforms built on blockchain are poised to clash with legacy financial systems in one of the most turbulent battles in economic history. Gensler’s comments are merely a shot across a bow. It is clear that traditional and decentralized finance (DeFi), have drawn their battle lines. These will remind both powerful incumbents as well as new entrants that exchange systems infuse assets with value, not the reverse, contrary to current wisdom. It is hard to overstate the implications: Synthetic assets create a level playing ground where both centralized and decentralized systems are able to compete for capital and users — a free market.

Digital marketplaces typically support a variety of assets that can be traded against each other. When the asset side of the equation is fixed, that is when identical assets are available across multiple platforms, it is the marketplaces who compete for the highest share of each asset’s daily trading volume. The final decision is made by traders, who decide where assets should live and which should be destroyed.

While Bitcoin (BTC), a unique form money, competes with fiat currencies in indirect ways, but it is the emerging fiat currency-pegged stabilitycoins that present the greatest threat to national governments as well as their central bank directors, that poses the most immediate and pernicious threat. Fiat-backed stablecoins are simpler than Bitcoin (which can be too volatile and exotic to outsiders). They allow for 24/7 access, low-cost international transfers and kick-ass interest rates.

Similar: Stablecoins pose new problems for regulators as mass adoption is looming

Stablecoins are a bargain even to skepticals. The U.S. Congress presented its December 2020 legislative proposal, the STABLE Act. This would require stablecoin issuesrs to obtain the same bank charters that their central counterparts at Chase and Wells Fargo.

Incumbent institutions have a long history in sabotaging and acquiring their competitors. It is easy to see why legacy banking has aversion to synthetics. As decentralized platforms become more user friendly and move further into mainstream banking, large amounts of buy-side demand will shift from legacy platforms and the exclusive assets they once held to digitally native synthetics.

Robinhood: The Remix

Imagine what would have happened if Robinhood users could access synthetic shares of GME or AMC on January 28, 2021.

Even a tiny fraction of the buy-side demand — 10% — would have migrated from Robinhood’s synthetic stocks to Mirror Protocol’s synthetic stock. This would have effectively inflated shares outstanding and suppressed share prices. GameStop’s top executives would have faced a tough board meeting.

Related: GameStop accidentally opens the door to decentralized finance

Consider also the implications for investors who stake their synthetic GME or AMC in DeFi protocols to obtain small- and mortgage loans at dramatically reduced interest rates. This will eliminate banks and other incumbents.

AMC and GameStop would benefit from AMC migrating a portion of their shares to blockchain-based platforms to restore strong pricing mechanisms. Investors on the retail side would win, as they only want a better user experience and interoperability with DeFi protocols. This is something that you don’t hear very often in modern financial markets.

The emergence of synthetic assets, which include stocks, commodities, real-estate instruments, bonds and other financial assets, will cause unprecedented price volatility, create arbitrage opportunities and disrupt the pricing system. Although these changes are unforeseeable, the centralized incumbents won’t voluntarily abandon their business models. Instead, they must allow free markets to choose winners.

Future of synthetics

As synthetic assets become more popular than their TradFi-regulated counterparts, investors and capitalists around the globe will have to consider what makes an asset “real”. This will determine the direction of free markets and their constitution.

Financial institutions and governments will be compelled to do everything in their power to end synthetic stocks in the midst of an existential crisis. Congress will make a commitment to stop stablecoin-issuing banks from challenging the international banking elite. The Commodity Futures Trading Commission will also take action to ban derivatives trading platforms. Meanwhile, the Financial Crimes Enforcement Network will continue to pursue those who seek to protect user privacy.

Related: The Empire Strikes back: The latest episode of crypto regulation

It is too late to reverse the hand of innovation. There are still many difficult days ahead. Compound’s Synthetix’s Synths, Mirror Protocol’s Assets and Synthetix’s Synths have opened Pandora’s Box. Offshift’s private zkAssets will launch in January 2022. No matter what happens, the barrier that separated traditional finance from emerging decentralized platforms will forever be removed. A new age of financial freedom will emerge.

May the best systems prevail.

This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Alex Shipp is a professional strategist and writer in the digital asset sector. He has a background in traditional finance, economics and the new fields of tokenomics, decentralized system architecture and blockchain. Alex is a professional in the digital asset sector since 2017. He currently works as a strategist at Offshift and an editor and strategist for Elastos Foundation. Additionally, Alex serves as an ecosystem representative at DAO Cyber Republic.

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Jason Basler

Jason Basler– Financial Updates My Name is Jason Basler and I am also the main source from the ‘Topnewsscoop.com’ of all the exclusive and most delicate visualization of the activities in the business sector. My first step towards this journey was taken in the very early years of my life. I started with an independent financial consultant. However, I only had almost 4 years of skills and experience in this market. I have always been a free personality and like to fly one place to another, to explore more and more. Moreover, this passion and craze of traveling gave me a chance to report a section for best news associations. Last but not least, I am presently working full-time as an editor. Address: 4830 Crim Lane Dayton, OH 45402, United States of America Phone Number:  +1 937 727 7917 Email: [email protected]

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