(Photo credit: BTC Keychain)
The Gamestop debacle showed us a couple of things. First, intermediaries in our centralized financial system might have been cheating. The number of short positions in Gamestop suggests that funds and brokers have been practicing naked short-selling. Meaning that they haven’t been selling loaned shares, instead, they’ve been selling shares that do not exist. Arguably, they’ve created a layer of shares that are basically IOUs.
For a long time, market participants have acknowledged the possibility of a pension fund with segregated accounts facing the same risks as an individual with a retail account (omnibus account). If that’s the case, pension funds pay a premium to get the same custody security as a Robin Hood retail investor. Whether that is the reality or not, we might only get an answer when a sudden crisis puts the whole system at risk.
In this context, the Gamestop debacle is a huge red flag that should warn us that not all is well. The huge number of short positions was only possible because the current system is centralized in a handful of operators. The assumption is that these operators should be above any doubt. However, we all know that Wall Street’s history is rich in examples of the opposite.
Now, the SEC is looking into this mess. However, I doubt that they will take any action that messes with the status quo. More likely, they will take action to limit individual investors through added layers of regulation. That will likely end with small investors being pushed away from the marketplace.
Luckily, there are market forces underway that will correct that injustice for us. This episode is only reinforcing the pursuance of different paths by the retail investor community. Decentralized finance is likely to be that path. The network validating all the transaction makes it impossible to have naked short-selling. If that’s not enough, having the ability to take custody of owned assets in a cold storage unit ends all the discussion about what the brokers do with your assets when you are not looking. Costs might also trend lower removing the need to sell order books to high-frequency traders.
The following years will likely see the emergence of stock markets running on a blockchain, without the current layer of intermediaries and with total transparency. These tokens will just be another commodity like oil. The functionality, the availability, the safety of the network, and the user base will influence their value. As an example, bonds might be issued on Ethereum and with the term sheet written into the block protocol, thus making it a smart-contract. The main functionality for Bitcoin will likely be as a store of value, given its 21 million hard-cap, the security of the network (hash rate), and brand recognition. We might see smart bonds on Ethereum, backed by collateral in Bitcoins.
However, it won’t end there. Musicians will be capable of selling their music directly to consumers, or insurance holders might be capable of instantly collecting their claims. Even quantitative easing policies might be implemented by giving tokens to citizens instead of conveying credit to banks that are very reluctant to push it down. The potential is unlimited. Nevertheless, there are dangers. This blockchain stuff would be something that the Soviet Union would love to have back in the day. Centralization of this technology could be very dangerous, just like the current financial markets are today.
I truly hope that the WSB storm won’t end in more stiffness in the system, instead of what should be – power taken from the elites and given to the individuals and communities. Be as it may, the Gamestop frenzy seems like the perfect excuse to accelerate the adoption of decentralized exchanges and digital assets.
Disclosure: I have long positions in ETH and BTC.
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