Interpretation of today’s cryptocurrency market: Why is it so different from Wall Street?

nRunaway Comment: At the new year approaching, many people recall that the development of cryptocurrencies over the past year has always been a tribute to it. In fact, although this market has achieved a major breakthrough in 2017, it still exposes many problems, some of which may even affect its next trend of development. Jill Carlson, a well-known consultant, elaborates on these issues through this article, pointing out that today’s cryptocurrency market is replicating the old Wall Street system, reminding people to get back to the beginning and work hard to achieve the initial vision of cryptocurrency.n
nTranslation: Inan
The first time I actually heard the term cryptocurrency or working on Wall Street.n
That was 2013, when I was trading credit in Argentina. One of my brokers in Buenos Aires wondered if I knew bitcoin. At that time, Argentina had been squeezed out of the capital markets for more than a decade. The seemingly dollar-pegged Argentine peso is traded at a discount, leaving locals long for other ways of storing value.n
In this case, the meaning of Bitcoin is exactly a value reserve that will not be dominated or destroyed by a single central agency.n
As I learn more about Bitcoin, it shows my promise of functioning as an optimized financial system. The debt crisis in Europe, especially at the time of Cyprus, underscored the importance of digital storage of value that could be directly possessed – external actors could not undermine this value storage.n
This is an asset that does not require an intermediary. Removing middlemen from the trading system is very appealing. This technology allows direct interaction between the parties to the transaction without the need to disclose the details of the transaction or identity to a third party.n
This is also a programmable asset. As a derivatives trader, I spent a lot of time considering the counterparty’s risk, guarantee and capital requirements. Can smart contracts provide an automated method of auditing this systemic risk?n
Soon I was disillusioned with the old financial system: insider trading was conducted on a large scale, reckless ventures often rewarded, and market manipulation under various pretexts was still rampant.n
Cryptocurrencies are expected to become a substitute for this system.n
For many, 2017 is the first year they’ve actually heard of bitcoin. However, many of the promises of cryptocurrencies have not been honored in retrospect of the year.n
Instead, we built another traditional financial system around cryptocurrencies, so the participants are familiar to us: issuers, brokers, exchanges, and custodians. Along with these participants are those remaining issues such as centralized control, intermediaries, systemic risk, market failure, and, most importantly, “short-term greed.”n
We may think that we have fallen into a cryptocurrency rabbit hole, but in fact we are still living on Wall Street.n
Encrypted currency is often advertised as a “trustworthy” currency, which is to say that it allows people not to trust a single central agency but to trust networks of decentralized actors.n
However, many of the tokens that appeared last year were issued by a small team of entrepreneurs and must be trusted to get the project started. As cryptocurrency communities place importance on open source development, the latter part of their work is usually done in a more decentralized way.n
Therefore, investors and consumers need to coordinate the contradictions between decentralization of the project and the actual operation of the project in the early stages.n
The example of Venezuela probably best reflects this contradiction. Venezuelan President Nicolas Maduro announced his intention to issue a cryptocurrency a few weeks ago, possibly to avoid economic sanctions. This is unlikely to happen, and he overlooks the fact that one of Bitcoin’s promises is to function as a value reserve that is not controlled by the central agency.n
Even if Maduro issued a new Venezuelan cryptocurrency, the currency could be mismanaged like Bolivar.n
Other assets also show this. Tether is a centralized mismanagement token. It claims to be a fully backed and dollar backed asset. The fact is, however, that it is non-convertible and its issuer’s auditing activities are opaque and fraught with problems that make it as suspect and even more suspicious as any financial innovation product on Wall Street.n
Decentralization is a transformative concept in finance and technology. But if the source of the value of these products still depends on central issuers, how is it different from the financial products that Wall Street has developed for decades?n
Cryptocurrency is also considered a deintermediation technique. The point-to-point nature of such blockchain-based assets may be its most interesting feature.n
However, the real trading and custody of these assets is extremely dependent on intermediaries.n
The specialization of the distribution process is an example of a traditional system of crypto-currency copying. Services provided by investment banks in equity capital markets are now being packaged for sale to start-ups who want to sell tokens.n
These services include conducting due diligence on investors, asking for purchase, handling compliance issues and following legal procedures. On the one hand, this is an important measure that marks the maturity of the market. On the other hand, it is reshaping Wall Street’s system around this new asset class.n
This is also reflected in the platform for trading cryptocurrencies and tokens. The emergence of cryptocurrencies over the counter was particularly ironic for me because I was sitting right next to the trading desk when I first realized the value proposition of Bitcoin. These help desks and exchanges undoubtedly play a key role in providing liquidity to the market, but in many ways they are replicating the old systems we know about.n
As a result, decentralized exchanges are one of the most attractive areas of research in this area. Instead of rebuilding a traditional exchange, it seeks a new way of trading that more truly reflects the value proposition of the technology.n
As with exchanges, wallets also play an important role in promoting the adoption of cryptocurrencies. Interaction with private keys is still a serious user experience challenge. While many people choose to manage their cryptocurrencies on their own and do so precisely as an important feature of such assets, we have not yet seen which product is capable of achieving a secure and legitimate private key without relying on third parties custody.n
Instead, the industry once again created a mirror of the traditional system – a specialized hosting service.n
Not only is this new image not as inaccurate (or immature) as the old financial infrastructure on which they depend, it also alters and corrupts the product’s original intentions. Encrypted currency creates more intermediaries than the one it removes.n
The original purpose of such assets is to allow people to directly control their own funds, to avoid being seized by banks and the government. Nowadays, this kind of control is handed over to a new kind of actor, and these actors are often more irresponsible than in the traditional system.n
Institutional accountability issues are directly related to another commitment to encrypt money. With its programmability features, cryptocurrencies can enforce financial contracts. This will solve the issue of collateral management and ensure that capital requirements are respected. The financial crisis intensified in 2008, in part because of the lack of information on the part of the counterparty. The verifiability and enforceability of cryptocurrencies should help reduce or at least expose such systemic risks.n
However, the current situation of third parties created around cryptocurrencies is not different from what banks, exchanges and custodians faced in 2008.n
The mix of purse and exchange funding, opaque audits and ambiguous margin requirements are a few sources of institutional risk in this market. The relative lack of standards for cryptocurrencies means there is insufficient research and understanding of these risks. Users have not yet made a wide range of disclosure requirements in this regard.n
Emerging infrastructure built around cryptocurrencies is a mapping of Wall Street institutions. Therefore, it is not surprising that the same risks remain.n
The similarities between the old and new systems are not limited to issuers, infrastructure and institutions, but involve the integrity of the participants as well.n
In the cryptocurrency market, manipulation of markets, insider trading, fraud, higher shipping and conflicts of interest can be found everywhere. This is not surprising to Wall Street traders, especially given the relative immaturity of the cryptocurrency market.n
While I was still a trader, I clearly realized that on the other side of the Wall Street electronic screen was an investor who pledged a pension or college deposit to a broker, trustee, clearing house and other parties.n
As retail consumers start buying cryptocurrencies, the same goes for this emerging market.n
There have been some initiatives and standards in the industry. Like other areas of the cryptography market, these moves reflect to a large extent the lessons learned from Wall Street. For example, Messari is an open source EDGAR-like database that provides transparency to investors on newly issued tokens. The Brooklyn Project, sponsored by Consensys, focuses on consumer protection and token standards and encourages issuers to self-regulate.n
Even Coinbase’s investigation of employee internal transactions shows that it is taking its role in the market seriously and setting the standard for it.n
Through its own experience, Wall Street has also realized that accountability is an important market practice. This not only protects consumers but also ensures the growth and long-term growth of the entire market.n
“Long-term greedy”n
If the campaign for cryptocurrency in 2016 was all about replacing Wall Street’s infrastructure with blockchain technology, its propaganda in 2017 would be to replicate Wall Street’s infrastructure around cryptocurrencies.n
This led us to deviate from many of the original promises of cryptocurrency: a commitment on the part of issuers, middlemen and agencies. Unfortunately, their level of market integrity is almost the same as that of the old system, and their integrity is even lower due to the immature market and lack of consistent standards.n
“Long-term greed” is also a concept of cryptocurrency borrowing from Wall Street, which means that although some behaviors may return less in the short run, they will be good in the long run.n
These behaviors include steady growth in a stable market, which is very familiar with cryptocurrency investors. More importantly, these behaviors also need to respect other market participants.n
I think 2018 will witness the continued growth and self-regulation of the cryptocurrency market. 2018 will teach us that “long-term greed” is not only about holding, but also for maintaining integrity.n
Finally, cryptocurrency may find some way back in 2018 as the market remembers that the real value of cryptocurrencies does not lie in imitating the old system but in its initial decency and deintermediation commitments.n

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