Fear of the unknown: A story of the SEC’s campaign against synthetics

DeFi, a blockchain-based financial system, and legacy financial systems are on the brink of colliding in one of the most turbulent battles in economic history.
The opening day of Messari Mainnet 2021 in New York City, New York City’s long-awaited crypto conference, was dominated by a viral tweet claiming 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 was served or why, this isn’t the first time that the SEC has invaded the crypto industry. Let’s look back just two months. On July 20, 2021, SEC Chair Gary Gensler made his remarks outlining the SEC’s authority on cryptocurrency. “It doesn’t matter if it’s a stock token or a stable value token backed with securities or any other virtual product providing synthetic exposure to underlying securities. These platforms, whether they are in the decentralized and centralized finance space, are subject to the securities laws. They must operate within our securities regime. Gensler’s comments were not made out of thin air. Gensler’s comments were not made out of the blue, just as the bold arrival of the SEC at Mainnet. A synthetic share of Tesla, the renewable energy giant, can be bought and sold at the exact same price as a real one at any given time. This is because average stock traders are concerned with profit margins, 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 evening. What’s more, it’s only a matter of time before traders will be able to stake synthetic TSLA in a decentralized finance protocol to earn interest or take out a collateralized loan.Related: Crypto synthetic assets, explainedThe role of syntheticsDecentralized 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 merely constitute a shot across the bow. It is clear that traditional finance (TradFi), and decentralized finance (DeFi), have already drawn their battle lines. They will remind both powerful incumbents and new entrants that exchange systems infuse assets with value, not the reverse, contrary to popular belief. The implications are immense. Synthetic assets create a level playing ground where centralized and decentralized systems compete for capital and users — a free market in markets. When the asset side is fixed, that is, identical assets are available across multiple platforms, it is the marketplaces who compete for the largest percentage of each asset’s daily trade volume. The final decision is made by traders, who decide where assets should live and which should die. Bitcoin (BTC), a unique form if money transacted over a decentralized network and can compete with fiat currencies, but it is the emerging fiat currency-pegged stablecoins, which pose the greatest threat to national governments as well as their central bank directors. Fiat-backed stablecoins are simpler than Bitcoin. They allow for easy access, low-cost international transfers and one-to-one redemption into fiat. Similar: Stablecoins present new challenges for regulators as mass adoption looms. Even to skeptics stablecoins drive a strong bargain. The U.S. Congress proposed the STABLE Act in December 2020, which would require stablecoin issuesrs to acquire the same bank charters at Chase, Wells Fargo, and others. Incumbent institutions have a long history sabotaging and seeking out their competition. It is easy to see why legacy banking is so opposed to synthetics. It’s easy to see why legacy banking is so resistant to synthetics. GameStop’s top executives would have had a tough time calling the board. Investors on the retail side, who are only interested in superior user experiences and the benefits of interoperability using DeFi protocols, will ultimately win. This is something you don’t hear very often in modern financial markets. Although these changes are unforeseeable, centralized incumbents won’t voluntarily cannibalize the business models of their customers. It is too late to stop innovation from happening. Compound’s Synthetix’s Synths, Mirror Protocol’s Synths, and Compound’s own cTokens have already opened Pandora’s box. Offshift’s private zkAssets will launch in January 2022. This article does not contain any investment advice or recommendations. The risks involved in any investment or trading move are real. Readers should do their own research before making a decision. Alex Shipp is a professional writer and strategist working in the digital asset space. He has a background in traditional finance, economics, and the emerging fields decentralized system architecture tokenomics, blockchain, and digital assets. Alex is a professional in the digital asset space and is currently a strategist at Offshift. He is also an editor, strategist, and writer for the Elastos Foundation and an ecosystem representative at DAO Cyber Republic.

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