Prelude the the Question
I suspect that the Biden administration will make a big push to REGULATE crypto. The administration will argue that, FOR THE GOOD OF THE PEOPLE, crypto must be held under the boot print of big banks and rich donors to the DNC.
I suspect that the administration will start by taking down crypto firms with the charge that they created securities without a brokerage license. Ripple was the first target. Regulators likely want to turn that ripple into a rogue wave.
I've noticed many news outlets are attacking the Reddit group that engineered the GameStop short squeeze. People on Reddit manipulated a stock. They must be stopped!
An interesting aspect of the short squeeze is that Robinhood brokerage firm--used by folks engaged in the short squeeze--intervened on the behalf of the Wall Street hedge funds.
As events unfolded the world learned that the RobbinHood app was created by Wall Street insiders. The brokerage firm was created by money from huge private equity firms that RobinHood action's favored.
Specifically, during the short squeeze, RobinHood prevented users from buying GameStop. The actions of the brokerage firm benefited the insiders.
Administration actions in response to the short squeeze shows that the administration favors the big banks.
But back to my post. It is likely that the administration will start attacking crypto traders for "creating securities without a brokerage license." We also see that this thing called a brokerage firm sided with the big banks. This brings up the first question:
What is a Brokerage Firm?
Brokerage firms are a relic from the days when communications were difficult.
Imagine that it was 1810. You lived in Edinburgh and wanted to transact a stock trade on the London stock exchange. The stock transaction is likely to involve a person riding a horse between the two cities. Executing this contract would involve complex contracts to comply with laws in both locations and to handle any eventualities that occurred during this prolonged transaction.
The contract would need to involve a bucket of oats to feed the horse.
A stock brokerage is a firm that sits between investors and the stock exchange. Brokerage houses are necessary when there is a large physical separation between investors and the exchange.
In the transaction I described, the transaction made in Edinburgh is a contract made with a brokerage firm to execute a trade a later day. The transaction involves a difficult ride to London and back.
Please, stop looking at the horse. The horse is just in in for the hay.
What do Brokerages Do?
A brokerage is an agent that sits between investors and the exchange. Brokerages engage in activities that made sense before the invention of advanced communication systems.
Lets jump forward two centuries ... Here is the point I wanted to make: When you buy GameStop on RobinHood, you are not directly buying stock.
The brokerage firms are simply recording transactions in a ledger that they will execute at a later date. The brokerage firms periodically take all of the recorded transactions to clearing houses on Wall Street to reconcile the ledgers.
The brokerage firms have a duty to have enough funds to cover all of the transactions sent to the clearing houses. Brokerage firms that cannot cover the transactions could wreak havoc in the financial system. Because of this, brokerage firms have strict capital requirements and are tightly regulated.
In the case of GameStop, Robinhood claims that the reason that they had a regulatory duty to stop the GameStop trades was to assure they had the capital requirements to fulfill the trades when the trades hit the clearing houses.
Robinhood cried: "The regulators made me do it!"
A few years ago, Patrick Byrne started a project called Deep Capture claiming that brokerage firms and Wall Street clearing houses engage in a number of misdeeds in the clearing house process. These misdeeds tend to favor the big banks over the retail investors.
Deep Capture implied that the whole brokerage industry (including the regulators) had been captured by bad actors.
I can now get to the question in the title of this post.
Do We Still Need Brokerage Houses?
The brokerage industry was designed for a market where people had to ride a friggin' horse between cities to execute trades.
Things have changed since 1801. Do we still need this relic from the past?
CryptoCurrencies and BlockChain Technology has proven that it is possible run extremely complex transactions in the virtual world.
Crypto traders are likely to be accused of creating securities without a brokerage license. Instead of pointing to some obscur loophole in security laws to say crypto is not a security. I personally think that crypto investors should take the bolder approach and question the legitimacy of antiquated brokerage systems.
If crypto traders are able to run secure exchanges in virtual space; then crypto has proven that brokerages are relics of the past.
Yes, the carriage used by the brokerage firm to move securities between Edinburgh and London in 1810 had a truly fine buggy whip. The buggy had a wonderful horse and there was a wonderful network of stables to feed and care for the horses.
Brokerage firms require onerous regulations. And yes, the state needs to license people in that trade.
The buggy whips, the horse, the stables and clearing houses created by the brokerage industry is a marvel. But it is also antiquated.
The retort that we need regulations to fit the crypto world into the brokerage model should be countered with the question:
In this age of advanced communications, do we even need brokerages?
PS: We do need CPAs, lawyers and accountants. My question is about the brokerage firms. I contend that it would be easy to do all security trades on crypto style exchanges. Such exchanges would end the corruption that favors insiders to retail investors.
END NOTE: No horses were harmed in the writing of this LEO post.
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The Biden admin is already going to tightly regulate cryptocurrency. Trump simply wanted to make it more difficult to commit crimes with (which I agreed with), but Biden actually wants to hyper-regulate it, to the point where many will not feel comfortable using it.
One of the things that got me into crypto is that Trump was stripped of his platform on Stripe, a payment platform. With crypto, that would not have been possible, and Tucker Carlson even mentioned getting crypto as a way to donate to these people that PayPal, Stripe, and other companies could not regulate. Then Biden started to hyper-regulate.
Some valid points. Crypto is too powerful for the government to ignore but they will continue to devise new ways to stop it. I don't live in America and I don't know what Biden's stands on crypto are but whatever the case may be several countries are embracing it.
About the need for brokerage or middle man, we can see how irrelevant they are in this space. The technology is self-sufficient. In a decentralized world, middle-men are irrelevant
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I probably should have skipped the bit about Biden. Unfortunately, his administration might lead a huge push against crypto.
Biden's Secretary of Treasury is Janet Yellen. She is tied in closely with the US Federal Reserve and with Hedge Funds on Wall Street.
Yellen is launching investigations into GameStop short squeeze. These investigations are framing the Reddit group that engineered the short squeeze as a dangerous radical group.
The law that they are most likely to use in the US is the charge that crypto is "Trading securities without a brokerage license."
The above charge is a US law. US Law was influenced by British and European laws. Regulatory laws tend to mirror each other.
Defenders of the blockchain tend to issue the rebuttal that "Crypto is not a security."
I think the better approach is to challenge the brokerage industry itself. Crypto has proven that we can have solid trading platforms in cyberspace which makes the brokerage industry itself redundant.
If the world does not need brokerages, then why should we have antiquated laws that require businesses to have brokerage licenses to engage in trade?
I started with the blurb on Biden because Secretary of Treasury Janet Yellen is starting hearings on this matter. This is the most likely source for a push to regulate crypto.
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