GameStop story exposes regulatory paternalism and the true value of DeFi

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While seemingly out of nowhere for many, the themes behind GameStop’s Reddit-fueled r / Wallstreetbets pump seem familiar. Watching it unfold, I tried to understand why it had caught my interest to such a degree, and for me it was an overflow into mainstream markets of some ubiquitous themes driving crypto.

Despite some competition in the narrative, I consider the motivating force – and by that I mean the social media-fueled message spread that sparked enough interest widespread to impact the market – behind the GME pump. as analog to what, at one point, was an impetus behind Bitcoin (BTC). It is a driver for (depending on your level of cynicism) the crypto markets more broadly and the decentralized financial movement – a desire for “democratization of finance”. Behind this movement is the idea that finance and financial products must be open source, accessible to everyone, rather than depending on whether you are an accredited (read: high-net-worth) or an institutional actor.

Related: Time to shine? Crypto Should Have A Chance After GameStop Drama

The rules for accredited investors, long the subject of criticism, were recently expanded in 2020. Far from being a revolution, the amendment allowed additional categories of investors with certain financial credentials, such as a Series 7 and employees aware of PE funds, to meet the definition among other changes that were not significant. See the Securities and Exchange Commission press release describing recent changes to the definition.

There was a folk element to the tale, sort of a David and Goliath tale, where the common man managed to pull off a stunt by inspiring a major crowdfunding movement in the market. Yet while it did evoke a degree of euphoria, the episode also brings to the fore some of the underlying tensions latent in American society, including a strong sense of paternalism towards the poor, in this case. the retail investor, and growing generational tensions.

Related: GameStop saga reveals legacy finance is rigged and DeFi is the answer

Regulatory paternalism

In the United States, as a somewhat toxic offshoot of self-determination, there is an underlying prejudice or presupposition that those who are wealthy have become wealthy because of their personal attributes and, likewise, those who are. poor will remain poor because of some personal fault on their part. Outside of academia, retail politics have not reflected much exploration of the social and economic factors that allow people to accumulate wealth and the feeling that “the game is rigged” by obstacles. increasing mobility in the United States.

This manifests itself in regulatory paternalism, with the government imposing limits on who it deems capable of affording to make investments or has access to certain financial products. More visibly, this has left those who are not accredited without access to start-up investments. Many have argued that the wealth test routinely denies the right to vote all investors who can understand risk despite their income level, making an argument I agree with that “being rich is not a substitute for financial sophistication ”.

But at the same time, it allows access to casinos and lottery tickets, payday loans, and other predatory financial instruments, such as reverse mortgages, presumably when a competing interest, such as budget deficits. government or effective lobbying by industry won. .

You end up with a system that seems designed to reinforce class barriers – where the rich can shape the law and dictate the narrative as well. This is most clearly demonstrated by the likeable content from Melvin Capital aired on CNBC depicting hedge funds as the protagonists, taking advantage of the network-wide dogmatic belief system that somehow Melvin’s actions were good for society and universally just.

This was juxtaposed with a characterization of the Redditors as the clustered and unwashed masses who, through chaos and destruction, set off like lemmings on the path to personal financial ruin and created a situation where there was a sort of systemic risk created by touting a low random volume stock. It shouldn’t be overemphasized, but while the rich have lost money here, among other things, it’s not exactly the financial apocalypse that has been described.

For me, setting aside the endless joy of having mainstream financial posts citing Reddit netizens like u / DadBod39 and prompting untold memes around Robinhood to change its name to Prince John’s Trading or RobingtheHood, this episode on the The stock market caught my eye by highlighting the above-described tension, as well as a generational shift towards social media-based messaging, where the internet can be widely harnessed to produce decentralized market forces.

A paradigm shift

Fueled by decentralized (semi) -anonymous actors, this episode highlights one of my main fascinations for cryptography: the prospect of a paradigm shift that challenges existing regulations. Much like the regulatory challenges applicable to decentralized finance, how do you approach a movement of the masses when the law presupposes that there is a central figure more culpable than Keith Gill, to whom you can attach responsibility? How to remedy this poses a conundrum, as regulators are increasingly faced with removing hydra heads with the prospect of greater regrowth.

Most recently, the House Committee on Financial Services held a post-mortem hearing on GameStop and the market volatility around it, and while I always go with the lowest expectations, I go out every time with a feeling of renewed nihilism and despair. While the recent House hearing on February 18, 2021 provided an opportunity to rehash the r / Wallstreetbets pump from those who had a frontline view of the events that occurred and gave lawmakers the opportunity to slash and signal virtue to their respective constituents, there was no clear sign of a way forward.

Related: Twitter, GameStop… that’s enough! The world needs real decentralization

There was a brief discussion on the advantages of reducing settlement time (and yes, blockchain), the disadvantages of relying on high-growth fintech startups to provide market infrastructure-like services, and the balance, as Sean Casten said, of trying to democratize finance while not being “a conduit to feed sharks fish”.

It was also an opportunity for lawmakers to play “who may be the most deaf to the underlying market incentives” that fuel the current economy of ad technology and surveillance, wondering if it was much of a free service to consumers – in this case retail investors (the latest news is not) while still being a for-profit institution. A House member asked whether Robinhood would end the practice of generating revenue by allowing Citadel Securities to “pay for the order flow” and allowing institutional players to lead retail, noting that The practices in which Robinhood engages are legal, disclosable, and certainly not unique, and are used by Fidelity, E-Trade, Charles Schwab and TD Ameritrade, among others, in accordance with SEC Rule 606 disclosures. The answer was clearly and universally no, or, as Casten, quoted above, put it: “There is a tension in [Robinhood’s] business model. ”

This is the same legislature that stopped in an attempt to prevent the buying and selling of consumer data as a business model, thus realizing high-level hypocrisy in the triple threat of: (1 ) allow monetization of privacy breaches and sort of both; (2) blame the free market players for making money through legal acts; and (3) also sometimes suggesting that regulation was the cause of the damage that was done.

In a particularly depressing segment of the hearing, Robinhood was suddenly vilified for not providing the committee with publicly available disclosure forms; for not having foreseen a tenfold peak in the capital that he would need; and for taking emergency measures to meet capital requirements, which involved a certain degree of discretion in dealing, but not as much as House members suggested.

Others suggested that Robinhood should be responsible for the relative gains in its users’ wallets, and still others decried that there were capital requirements for Robinhood in the first place, suggesting regulations were the cause. first of the capital crisis. Overall, the hearing left no discernible path except that we should expect more hearings.

Overall, the fallout continues, with some indications that there is definitely more to come. Maxine Waters said regulators will be present to testify at additional House Financial Services Committee hearings, and class actions have been filed against Keith Gill.

I consider this to be probably a start rather than a one-time event, where we can expect additional skirmishes with increasing frequency as well as corresponding pressure on regulators to address them. While I do not hope that there will be more movement in the definition of accredited investor, perhaps this is an opportunity for market regulators to reconsider the underlying regulatory bias, as this has put highlight the need to create new opportunities for the younger generations to create wealth. .

This article does not contain any investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research before making a decision.

The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Sarah H. Brennan is Advisor and Practice Leader of Digital Assets and Disruptive Technologies at Harter Secrest & Emery LLP. Sarah has extensive experience in corporate and transactional affairs. She primarily focuses on corporate and securities law, representing public and private companies, venture capital and private equity firms, investors and clients at every stage of the business lifecycle.

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