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“Fake” Synthetic Equities Now Trade 24/7 On Crypto Exchanges

“Fake” Synthetic Equities Now Trade 24/7 On Crypto Exchanges

Readers of Zero Hedge know that we have been covering the developing idea of synthetic equities on various 24 hour crypto exchanges for months now. For example, months ago we wrote about 29 year old billionaire Sam Bankman-Fried whose exchange, FTX, now processes $10.7 billion in trades per day and allows people to trade equities 24 hours a day.

Now, it looks like the idea is going mainstream – and Bankman-Fried isn’t alone. Other innovators in the DeFi space have also built synthetic versions of equities like Tesla, Apple and Amazon. The tokens are set up “to reflect the prices of the securities they track without any actual purchases or sales of the real stocks and ETFs involved”, according to a new report by Bloomberg

And the people behind these projects aren’t sitting around and waiting for regulatory approval. DeFi “is so powerful in unlocking financial services for disenfranchised people around the world,” said co-founder and CEO of Terraform Labs, Do Kwon. He company uses the Mirror Protocol to trade equities on its exchange. “It’s better to move fast and break things. Waiting for fragmented regulatory frameworks to crystallize before innovating is counterintuitive.”

His protocol encourages users to arbitrage the price of the synthetic equity with the actual equity, Bloomberg notes:

Mirror Protocol, the idea is to keep prices of the synthetic — or “mirrored” — equities in the ballpark of the real thing by offering incentives for traders to arbitrage price discrepancies and manage the actual supply of tokens. Users can create, or “mint,” new tokens when prices are too high by posting collateral, and destroy, or “burn,” tokens when prices are too low, driving the price up or down.

“Synths closely track the price of the real-world asset. But they’re still only tokens on a blockchain providing explicit price exposure,” Kwon said. 

The market cap of synthetic equities hasn’t gotten big enough yet for major exchanges or regulators to worry about, and Terraform Labs doesn’t generate any fees from its protocol, but instead “profits via a cryptocurrency it created that tends to increase in value as projects like Mirror grow in popularity.”

However, that’s not to say they won’t continue to rise in popularity. DeFi exchanges allow people to trade tokens 24 hours a day, 7 days a week, from anywhere. They are not beholden to capital controls, nor do they have to deal with “know your client” rules that are imposed on broker-dealers. 

Joseph Saluzzi, the co-head of equity trading at Themis Trading said: “Since these synthetic products are not regulated and not traded on a national securities exchange, I would think that the SEC would take issue with them. According to the SEC, their mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This sounds like an investor-protection issue to me.”

Regulators may also want to turn to the DeFi space after some “stablecoins” blew up, including one owned by Dallas Mavericks owner Mark Cuban. 


“Invest in a compliance layer now or pay the piper later. If we want this ecosystem to grow we need to recognize we need to operate within the rules society sets,” Mike Novogratz said on Twitter in late June. 

Recall, as we pointed out months ago, Bankman-Fried’s FTX was the first to offer tokenized stocks, which allowed people to track the value of shares of companies like Tesla and GameStop outside of regular trading hours. 

Bankman-Fried is hopeful regulators eventually allow his products: “Nothing operates 9:30 a.m. to 4 p.m., five days a week. There’s actually a lot of room to innovate in stock exchanges.”

Skeptics point out that, not unlike crypto itself, the products are new and should be taken with a grain of salt. Lee Reiners, executive director of the Global Financial Markets Center at Duke University, said: “These are very novel and complex instruments. These things are destined to blow up at some point, and then FTX will be in the hothouse with regulators and law enforcement.”

Tyler Durden
Thu, 07/08/2021 – 05:45

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