Robinhood reiterates costs of centralization – DeFi offers a different path
One of the main features of cryptocurrencies is largely unauthorized access, unlike what happens with trading platforms like Robinhood.
Anzio Ancelotti immediately noticed nothing abnormal. It was subtle things at first. Maybe a credit card transaction that would take longer than everyone else to pay off, or a bank loan that wouldn’t get approved.
Then his paychecks would bounce back to his bank, but be clear on reissue. In the end, the bank closed his account and denied him banking services outright.
And then one day, as he walked home from work, an unmarked pickup truck pulled up and two barrel-chested men gruffly stuffed his back.
Panicked, Ancelotti tried to scream, but a gloved hand tightly wrapped around his mouth meant he could barely breathe.
“Now, Mr. Ancelotti, there is no need for drama. Now I am going to calmly take my hand out of your mouth and if you try to be smart I guarantee you will regret it.
The man in the hood withdrew his hand,
“Do you know why you are here, Mr. Ancelotti?”
In shock, Ancelotti shook her head in concern.
“No worries, let me talk then. You see Mr. Ancelotti, you’ve had a good life, haven’t you? Although calm. You take care of your little herb garden, your daughter Misha is a handful, isn’t she, and your beloved wife.
“It would be a shame if something happened to them, you don’t think so.”
“What have you done to them!” Who are you? ”Ancelotti replied angrily.
“Now, now, Mr. Ancelotti. You are not in a position to ask the questions, ”the man was now tapping the inside of his jacket where the butt of a pistol could clearly be seen.
“It would be better if you just listened. “
“Now you are not an opinionated man, I know that. But you have an alter ego. Now this alter ego is very opinionated.
“I don’t know what you’re talking about,” Ancelotti struggled in the back of the van, which was speeding through the city streets.
“Now you and I both know what we’re talking about. Your blog posts as your alter ego on our president have generated some interest and we believe we have ways to change your perspective on our beloved leader.
“You will find that we have ways of making our point of view available to you. It would be a shame if your paychecks kept bouncing, right? How could your lovely wife and Misha afford the beautiful things they have now? “
“Oh, you can of course try with another bank, but you will find that it would be a futile exercise. “
“What do you want from me?” Ancelotti, his eyes lit with rage and his back stiffening, felt defiant.
“Nothing more than to consider a different point of view. Until then, you may find that your money is not as useful as you thought it was. “
And with that the van suddenly stopped and Ancelotti was thrown onto the sidewalk, before the van’s sliding door closed, the man shouted,
“We will be watching Mr. Ancelotti. Think about it. “
In the weeks that followed, Ancelotti was unable to cash any of his paychecks because no bank would open an account for him, nor was he able to cash out the shares he had in his trading account.
Despite all his veneer of commercial freedom, Ancelotti realized that he was still living very well in an economic dictatorship.
Locked out of his country’s financial system, Ancelotti couldn’t do much but comply.
And while Ancelotti’s circumstances may seem extreme, the recent controversy surrounding GameStop stocks and retail app Robinhood’s decision to restrict trading in those stocks reiterates the dangers of centralizing the financial system.
If the financial markets are meant to serve everyone (like the Hard Rock Café), then they have arguably failed in their role.
But maybe that was never their goal in the first place.
Democracy for a few, dictatorship for all others
Because when a host of retail traders who organized themselves on Reddit, a popular bulletin board, bought call options and raised the price of GameStop stock, punishing hedge funds that bet against the company, their channel for carrying out these transactions was abruptly cut off.
Just as retail investors were causing the spike in pain on Wall Street, Robinhood and some of its retail-focused brokerage peers have banned users from buying more GameStop shares because the clearinghouses – which guarantee that cash and securities change hands in an orderly fashion – the brokerages demanded. deposit more funds as collateral.
The outcry from Redditors was almost instantaneous, even from lawmakers such as Democratic Congresswoman Alexandria Ocasio-Cortez and Republican Senator Ted Cruz carrying the torch and alleging it demonstrates fundamental injustice in the markets.
Retail investors have screamed scandal, alleging Wall Street insiders were protecting each other by preventing “outsiders” – read “retail investors” – from “bullying” hedge funds that were short-selling GameStop .
But was it really the case?
Go ahead, do my bargain
Maybe not. Market makers want to encourage business activity because that’s how they make money.
In 2008, an average of only 10.9 billion shares changed hands on any US stock exchange each day, while at the height of the GameStop frenzy, 24 billion shares were traded in a single day – the never recorded again.
But Robinhood’s success meant it had to abide by the same rules as the biggest brokerage firms and grow (rapidly in this case) to comply with post-financial crisis rules that aim to make the financial system more secure.
As retail investors raised the Robinhood share price, the brokerage had to rush to find liquidity to ensure it had enough collateral to deposit to clear these trades.
And when volatility increases, that liquidity can come at a higher cost, as retail-centric brokerages have discovered the hard way.
But whatever the reason, whether conspiratorial (to protect hedge funds) or collateral (due to lack of liquidity), the Robinhood-GameStop episode revealed how market access can be arbitrarily withdrawn. to a segment of the investor population.
Retail investors who found they had tremendous power to move the markets suddenly found themselves crippled when their brokerage firms halted their flows.
But could the same be happening in arguably more decentralized markets such as cryptocurrencies?
While increased institutional interest and adoption of cryptocurrencies was welcome, with this participation came a risk of increased regulatory burdens and, again, rent custodians.
Right now, there’s nothing stopping anyone from creating a cash pool to trade any digital asset on one of the many decentralized exchanges.
There is no clearing house, there is no brokerage, and an automated market maker (software) helps match buy and sell orders.
Even loans are facilitated on a stand-alone basis.
Part of a new suite of services that started to gain popularity in the summer of 2020 known as Decentralized Finance, or DeFi, the Robinhood-GameStop episode should invite a closer look at this model of emerging market.
Whether one subscribes to the view that Robinhood acted to protect powerful hedge funds against further losses or that the company lacked collateral to put in place to support retail trading, the fact is that a retail brokerage unilaterally and arbitrarily stopped its users from shopping.
In the same way that a store can refuse a buy and refuse a restore service, brokerage houses, as retail investors will soon find out, can refuse execution of orders.
And that puts enormous power in the hands of a few, in the same way that social media giants can ban certain users from accessing their platforms.
This is where the dangers of centralization lie when it comes to democratizing market access.
If the objective of the market is an economic good intended to serve the greatest number, then it can be argued that Wall Street has done a bad job in this regard.
Maybe DeFi can pick up where the markets left off.