Is crypto threatening established structures of financial markets and institutions?
With great interest, I've been following Sam Bankman-Fried's (SBF) (the founder of FTX and Alameda Research) ongoing interactions with the TradFi derivatives regulators in the US.
This is one of the first strong signs that the crypto world and TradFi are starting to converge and that innovation in the crypto space is threatening the established structures of financial markets and institutions.
Having built arguably the most powerful position in crypto, SBF is now taking the battle into TradFi. In addition to his recent investment in Robinhood, and FTX intending to offer its customers US stock trading soon, he is looking to dramatically change options trading in markets beyond crypto.
The core of his proposal is using algorithms rather than brokers to help clear trades. As SBF argues, this would ensure that options traders don't fall into debt and make the industry more cost-efficient by removing the layer of brokers. So all good on the surface?
However, there are a few other possible implications: (1) In what would be effectively a shift to 24/7 trading, commodity producers might be at a disadvantage, as they might not have enough room to manoeuvre during periods of volatility. They might end up with positions liquidated, and losses realised. (2) Traders executing their strategies might not get enough time to post more collateral, so their positions will be liquidated at the mercy of the exchange. (3) Fertile conditions for future market meltdowns similar to what we have just seen, where mass liquidations amplify downward market movements. (4) Further concentration of financial power (and risk) within exchanges, particularly with FTX.
The spirit of crypto has been in the decentralization of finance. However, it is quickly evolving towards a Centralized Finance (CeFI) model rather than DeFi. With the regulations coming, CeFi models will be much easier to regulate. Still, I think we need to be careful not to end up with a small number of (new) players wielding excess control over the new merged (Digital & TradFi) finance. The design of algorithms applied to markets beyond crypto needs to be stress tested under various market scenarios. Their logic is examined not just from the position of financial traders and speculators.
I'm very excited about the opportunity to rebuild finance into a more cost-efficient and inclusive system. Therefore it should not repeat the path of highly concentrated TradFi.
More to learn on this subject in this article from the FT:
https://www.ft.com/content/dd4db197-cb9b-4f29-b923-9bd94e1e3aed