Synthetic stocks and why you can’t ban new technologies

SEC Commissioner Gary Gensler issued a warning last week regarding synthetic stocks, which are essentially crypto tokens that mirror the price of real-world stocks. When I see comments like this or other people or news outlets calling to ban emerging technologies, I can’t help but shake my head. Technology is not on their side.

When you own a synthetic stock, you do not own any legal claim or equity to the company. Instead, you just own something that tracks the price. For instance, Synthetic Apple on the exchange Kwenta (not an endorsement) mirrors the price of actual Apple stock. This kind of thing is only technologically possible in a way that can’t be shut down with the advent of distributed crypto networks.

You – a financially privileged person in the US – might be wondering why you would own a crypto-version of a stock.

There are billions of people around the world, literally, that have no access to US stocks. They simply have no means to access Apple stock if they want to. With the advent of things like synthetic stocks, anyone worldwide with a mobile phone can gain exposure to the financial assets that have previously been restricted to us, the financially privileged.

Here is the other side of the proverbial coin, however…  

What if you are in the US and you get some juicy insider trading information? You don’t want to make trades on any of the typical US brokerages because you know that you’ll eventually get found out. So instead, you hop on a synthetic exchange and profit from your insider knowledge, able to skirt the US law.

Pretty interesting right? There are some real questions about how technologies like this will lead to good and bad outcomes for the status quo.  

Most people don’t want to have nuanced conversations, however. Usually what they resort to is ‘let’s ban it’. What these people don’t realize is that the power balance of technology itself is shifting.

Before, leaders and regulators were able to gatekeep access to many financial tools and technologies. If you wanted to use them, there was no other alternative. Now, as technology is progressing, anybody with an internet connection can do things using distributed, censorship-resistant networks that did not previously exist.

Before, you could prevent certain people from even partaking in many technologies and financial tools. Now, the balance of power is swinging, and you can only hope to catch them after the fact.

There are genuine, nuanced conversations to be had about the emergence of distributed networks that may replace the centralized and regulated financial products that currently exist. Defaulting to banning these tools shows that you aren’t ready to have those conversations. They’re here, and they’re not going away.

This is why I’m not really willing to engage with any ‘ban it’ folks these days. Sure, you can still make things illegal and threaten to throw people in jail, but you aren’t really accomplishing anything by doing so. You aren’t stopping people who want to access these tools from doing so, because the technology is on their side. The playing field has changed.
 

Technology is evolving in a way that is shifting the balance of power from the people looking to enforce controls to the people looking to circumvent them. Personally, I think that’s a good thing.

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