Bye Bye Brokers, Hello Blockchain Technology

Citadel is conflicted. Based on public evidence, they favored their bottom line over RH clients.

With the GME/RH situation in mind, let’s consider the GME episode in a tokenized realm. Short interest in GME exceeded 100%, meaning more shares were held by investors than existed. Under the current system, a broker can lend its clients’ shares without the client knowing. When such occurs, two investors own the shares, and one investor is short the shares. The transactions net out but they introduce risk if the broker fails.

With tokenized shares, the risks and rewards of lending securities are only taken by those willing and wanting to accept the risk. They are also paid for taking the risk. Further, trade settlements happen immediately, eliminating counterparty risk.  Lastly, retail investors do not have to depend on a conflicted intermediary or insolvent broker.

Had the problem escalated, there is little doubt the Federal Reserve would have bailed out Citadel and RH, at the public’s expense.

Summary

Monetary incentives explain why capitalism is effective. It certainly has flaws, but history attests that no other system has improved the standard of living for the masses to the extent capitalism has.

The more freely and uninhibited money can flow throughout an economic system, the more the economy benefits all of its people. Intermediaries, by definition, present an impediment to the flow of money.  The purposes they serve comes at a cost to society. Before blockchain, one could argue the benefits outweighed the costs. Today that is not true.

As market participants and citizens, we can only hope the self-interests of a few do not impede on the benefits to all of us. 

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