Crypto may have set out to rethink Wall Street, but a decade into the experiment, advisor Jill Carlson isn’t convinced the industry has it right.
I first seriously heard about cryptocurrency while I was working on Wall Street.
This was in 2013. I was trading Argentine credit. One of my local brokers in Buenos Aires wanted to know if I had knew anything about bitcoin. Argentina, at the time, had been locked out of capital markets for over a decade. The peso, ostensibly pegged to the US dollar, traded at a discount on the ground, leaving locals hungry for other stores of value. Capital controls meant that getting money offshore often involved suitcases and ferries to Uruguay. The country was on the brink of another default.
The promise of bitcoin, in this context, was a store of value that would not be captive to the ineptitude or harm of a single, central authority.
As I dug further into bitcoin, more promises of an alternative, improved financial system presented themselves. The European debt crisis, and specifically the asset seizures in Cyprus, highlighted the significance of a digital store of value that could be owned directly – that could not be compromised by an external actor.
Here was an asset that did not demand an intermediary. Sitting on a trading desk at the time, the removal of rent-seeking middlemen from the system was particularly compelling. This technology could allow counterparties to interact directly, without having to disclose the details of their transactions or identities to third parties.
This was also an asset that was programmable. As a derivatives trader, I spent a lot of time thinking about counterparty exposure, collateral and capital requirements. Could smart contracts provide an automatically enforceable means of accounting for this sort of systemic risk?
It had not taken me long to grow disillusioned with the old financial system. Insider trading went on at scale. Reckless risk-taking was often rewarded. Market manipulation, under the guise of many different names, remained rampant.
Cryptocurrency promised an alternative to this system.
For many, 2017 will be the year that they first seriously heard about bitcoin. As I consider the state of cryptocurrency today, however, I don’t see many fulfilled promises.
Instead, we have constructed around crypto a warped version of the legacy financial system, with all the familiar players: issuers, broker dealers, exchanges and custodians. Along with these players come the legacy problems of centralized control, intermediation, systemic risk, market malpractice and – importantly – short-term greed.
We may think that we are down the crypto rabbit hole, but really we are through the Wall Street looking glass.