Why cryptocurrencies are starting to resemble Wall Street

For the first time, I seriously heard about cryptocurrency when I was working on Wall Street.

It was the year 2013. I worked with Argentine credit. One of my local brokers in Buenos Aires wanted to know if I knew something about bitcoins. At that time, Argentina was cut off from financial markets for more than ten years. The peso, allegedly pegged to the US dollar, actually bargained below the declared value, and the locals were actively looking for other money storage options. Control over the movement of capital meant that withdrawing money meant luggage and ferries to Uruguay. The country was on the verge of another default .

In such a situation, the Bitcoins promised the possibility of storing savings, not subject to stupidity or malicious intent of any single central authority.

The deeper I burrowed into this topic, the more I found promises of an alternative, improved financial system. The European debt crisis , especially the withdrawal of savings in Cyprus , emphasized the importance of having a digital storage system that could be owned directly and would not be compromised by external power.

And these were assets that did not require intermediaries. When you sit at the trading terminal, the disappearance of the middleman, who takes his interest, was a particularly tempting offer. Such technology could allow the parties to interact directly, without disclosing details of transactions or their identities to third parties.

In addition, this asset was programmable. As a derivatives trader, I spent a lot of time thinking about the vulnerability of the parties when making a deal, the requirements for availability of capital and related guarantees. Can smart contracts automatically enforce rules to help deal with such risks?

I quickly became disillusioned with the old financial system. The scale of insider trading operations is constantly growing. Irresponsible risks were often rewarded. Manipulations of the market, disguised by various names, were outraged. Cryptocurrency promised an alternative to this system.

For many people, 2017 was the first year when they seriously heard about bitcoins for the first time. But, considering the current state of cryptocurrency, I do not think that it has fulfilled many promises. Instead, we built around the crypt a distorted version of the legacy of the financial system with all the familiar players: issuers, brokers, exchanges and trustees. And along with them, the problems of centralized control, intermediaries, systemic risks, market manipulations, and — importantly — greed in the short term were inherited.

We can assume that we jumped into the rabbit hole, but in fact we went through the mirror of Wall Street.


Cryptocurrencies are often praised for not having to trust anyone to use them. In fact, the need for trust in a single center of power is changing to the need for trust in an entire network of decentralized participants. However, many of the tokens issued over the past year were issued by small teams of entrepreneurs who have to believe that their project would take off. Due to the focus of the cryptocurrency community on open-year development, work in the latter stages often takes place more decentralized. However, investors and consumers must come to terms with the discrepancies between the promises of decentralization and the reality of how these projects actually work.

The paradox of creating a centralized cryptocurrency, perhaps most clearly manifested in Venezuela. The President of Venezuela, Nicolas Maduro, a few weeks ago announced his intention to issue cryptocurrency, possibly with the aim of circumventing the sanctions. This is unlikely to work, moreover, he completely misunderstood the essence of the matter. Bitcoin promises to be a system of storage of savings, not subject to the central government. A new Venezuelan cryptocurrency, if released by Maduro, is likely to be managed just as badly as a bolivar.

Others also follow this example. Tether is an example of tokens that are incorrectly managed centrally. The system claims full provision of funds and support for the dollar. And the fact that it is not refundable, together with the non-transparent work of issuers and their suspicious financial reports, makes it as suspicious as all other Wall Street projects, if not worse.

Decentralization is a concept that transforms finance and technology. But if the source of the value of these products still depends on the central issuer, how do they differ from financial products that have been developed on Wall Street for decades?


Cryptocurrency is also advertised as a means of getting rid of intermediaries. A peer-to-peer blockchain-based asset system is perhaps their most interesting feature. But the reality of how these assets are usually transferred and stored is extremely dependent on intermediaries.

The professionalization of the issuing process is an example of how crypt markets copy the old system. Investment bank services in stock markets are now repackaged and sold to teams of entrepreneurs looking for ways to sell tokens.

These services include investor appraisal, portfolio replenishment, legal compliance of activities, and ensuring legality of work. On the one hand, this will be an important initiative in the growing market. On the other hand, this is a re-creation of the Wall Street system around a new asset class.

Platforms that simplify the purchase and sale of cryptocurrencies and tokens fall into this category. The development of over-the-counter cryptocurrency trading tools seems to me particularly ironic, given that for the first time I realized the value of the promises of bitcoins when managing the trading platform. These platforms and exchanges undoubtedly played critical roles in ensuring market liquidity, but in many ways they reproduce the known parameters of the old system.

Therefore, stock exchange decentralization is one of the most tempting areas of research. Instead of rebuilding the old stock exchanges, decentralized exchanges are trying to create a new way to make transfers, more in line with the promises of the new technology.

Wallets, like exchanges, played an important role in the promotion of cryptocurrency, their discussion and use. Interaction with private keys remains a challenge for users. Although many people decide to keep their own cryptocurrency on their own, and this possibility itself is one of the most important features of this class of assets, we are still waiting for the emergence of a product that allows you to safely and inexpensively store private keys without relying on third parties.

Instead, the industry is re-creating copies of the old system: professional storage systems that use everything from deposit safes to Swiss bank vaults.

These are distorted copies of the Wall Street services. Not only do they not accurately (or immaturely) resemble the old financial infrastructure on which they are based, but they also distort and spoil the original purpose of the product. Cryptocurrency created more intermediaries than eliminated.

The intention was to give people direct control over their funds, free from the fact that they could be arrested by banks and governments. Instead, people give this control to a new class of third parties — who are often even less responsible than their old counterparts.


The question of the responsibility of organizations directly echoes the other promise of cryptocurrency. A programmable crypt can enforce financial contracts. This can solve the problems of working with collateral and guarantee the adherence to contracts. The 2008 financial crisis escalated, in particular, due to a lack of clarity about the risks of the parties involved. The ability to conduct an audit and the legal force inherent in cryptocurrencies should help reduce, or at least expose, systemic risks of this type. However, third parties created in the world of cryptocurrency, have the same risks that they threatened banks, stock exchanges and trustees in 2008.

Mixing funds of different clients in wallets and exchanges, non-transparent financial activities, cross-exchange risks and incomprehensible requirements for a guarantee margin are just a few sources of organizational risks. A relatively small number of standards in the world of cryptocurrencies means that these risks are poorly studied and poorly understood. Full disclosure of these topics has not yet become as frequent as necessary.

The infrastructure around the cryptocurrency reflects organizations on Wall Street. Not surprisingly, the same risks are inherent in it.


The parallels between the old and the new do not end with issuers, infrastructure, and organizations. They also penetrate the integrity of the players of the system. Market manipulation, insider trading, shilling [ eng. shilling - did not find a description of the fraud with a similar name / approx. trans. ] spoofing , " pamp-i-dump ", conflicts of interests - this stuff is enough for cryptocurrency markets. This is not surprising for everyone who has ever worked at a trading terminal on Wall Street, especially considering the relative immaturity of cryptorna markets.

When I was a trader, I fully believed that Wall Street could be the center of all of this, but somewhere there - on the other side of Bloomberg screens, brokers, dealers, trustees, clearing houses, asset managers, mutual represented funds - were individuals, their pensions and academic savings. The same begins to happen with cryptocurrencies, when they connect to retail customers.

In the industry, initiatives and standards are beginning to emerge. Like so many other crypts in the world, they mainly reflect the lessons learned on Wall Street. Disclosures by journalists, experts and fund managers are becoming more frequent. Messari , an EDGAR open source database, offers openness to depositors of new tokens. The Brooklyn project, launched by Consensys, focuses on protecting customers and setting standards for tokens, encouraging self-regulation of their issuers. Even a Coinbase investigation into insider trading among employees shows that such transactions occupy their market share.

As Wall Street learned, accountability is an important practice for the market. This is important not only to protect consumers, but also for the growth and longevity of the entire market.

Long-term greed

If all the hype in 2016 was due to the fact that the blockchain technology replaces the infrastructure of Wall Street, then the hype of 2017 was related to the reconstruction of the Wall Street infrastructure around the crypt. This has led us astray from many of the original promises of cryptocurrency: about the role of issuers, about intermediaries, about organizations. The integrity and purity of the market, unfortunately, also reflect the properties of the old system, exacerbated by the immaturity of the market and the lack of agreed standards.

“Long-term greed” is a concept that cryptocurrency should adopt from Wall Street for its own good. The idea is that a certain pattern of behavior, even if it brings you less in the short run, will pay off well in the long run. This includes the “hard hand” style in volatile markets, something investors in the crypt are familiar with. More importantly, this pattern of behavior implies respect for other market participants.

I think that in 2018 we will see continued growth in markets and self-regulation of cryptocurrencies. This year will teach us that long-term greed is not just restraint, it is also the preservation of honesty. Finally, the 2018th can return us to some of the original goals of cryptocurrency, when the market wakes up and remembers that their true value lies not in the looking glass, but in the initial promises of decentralization and the elimination of intermediaries.

Source: https://habr.com/ru/post/409499/

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