Wall Street Is Here To Stay

A theme that has emerged from the multi-billion dollar collapse of the UST stablecoin this month is blaming it on nasty Wall Street traders invading the cryptocurrency world. The answer to that from crypto executives with a background in finance: grow.

The blame game for the demise of UST and its cryptocurrency LUNA hinged on allegations that hedge fund Citadel Securities and fund manager BlackRock attacked the stablecoin as part of a coordinated short-selling strategy. , or a bet to lower the price.

Cardano blockchain founder Charles Hoskinson amplified the theory on Twitter, but later deleted the tweet. Both Citadel and BlackRock have dismissed the claims, stating that they do not trade USTs.

Lev Mazur, founder of global crypto brokerage firm Quantfury, said blaming the “bad guys on Wall Street” was a knee-jerk reaction. “I know a lot of institutions on Wall Street have been hurt because of their exposure to LUNA,” said Mazur, who has worked at banks, mutual funds and family offices as a trader.

Speaking in interviews with Forkast, Mazur is among several executives who have said that the various existing cryptocurrency projects will face financial stress tests of all kinds as the industry emerges as a new asset class. Vulnerabilities will be exposed, they said.

Whether the LUNA event was caused by market forces or a coordinated attack, both ideas “represent the reality of the risks that must be addressed for a global currency to survive,” said Max Liao, chief executive of Antalpha. Technologies, a financial services company. subsidiary of Bitmain Technologies Ltd., a Chinese manufacturer of chips used in Bitcoin mining.

Already there

Hedge funds on Wall Street are already trading cryptocurrencies, and fund managers, including mutual funds and pension funds, are looking to find a way to enter the market, the Wall Street Journal reported. earlier this month.

Crypto exchange Coinbase saw institutional customers trade $1.14 trillion worth of crypto in 2021, up from $120 billion in 2020 and more than double the $535 billion traded by retail investors, according to a February report from the Wall Street Journal.

“Crypto designers and protocol designers should operate on the premise that attackable weakness will eventually be attacked,” said Wayne Huang, CEO of Taiwan-based crypto-fiat exchange XREX.

“This has always been how financial markets work, and crypto markets are no different. Vulnerabilities will be discovered much earlier than before,” Huang said. “I don’t necessarily see it as a bad thing.”

Huang said he expects more failures because it’s an inevitable process to foster innovation.

“We expect such incidents to continue to occur to remind us of how financial markets work and the costs of maximizing capital efficiency in exchange for stability,” he said.

Risky business

Antalpha Technologies’ Liao said the collapse of LUNA will encourage more crypto startups and investors to take risk management more seriously. Andrew Sullivan, former trader and founder of Asianmarketsense.com, agreed.

“It’s likely going to lead to calls for better regulation and certainly a better understanding of exactly where the assets backing these coins are kept,” Sullivan said.

There is also a broader lesson in the demise of UST and LUNA related to contagion risk, Derek Lim, head of crypto insights at Singapore-based crypto exchange Bybit, said in a written response.

“The UST crash showed that crypto markets could absorb the shock without threatening broader financial markets,” Lim said.

As for the risk presented by short selling, it’s just “a natural part of market price discovery,” Antalpha’s Liao said.

“Even though it is sometimes considered disreputable, short selling is a tool that plays a vital role in facilitating rationality in price discovery, which is a major function of capital markets,” he said. .

Whether it’s crypto or stocks, any asset is always at risk of being overvalued, and the skepticism inherent in the short-selling process allows the market to expose and correct overvaluation, Liao added. “Ultimately, it helps freedom on the financial markets more than harming it.

Open DeFi

While many crypto and blockchain projects were created with visions of democratizing money and improving inefficiencies in traditional banks, the industry now suffers from excessive speculation, some officials say.

“Cryptocurrency itself isn’t meant to replace Wall Street, but I think it’s meant to replace Wall Street and government inefficiencies,” said Mazur of crypto brokerage Quantfury.

However, “most DeFi (decentralized finance) money is used to speculate more,” Mazur said, adding that traders are taking advantage of collateral and again using leverage to buy the same collateral. “It’s almost like an endless pyramid of exchanges.”

Amnon Samid, CEO of cybersecurity firm BitMint, said what really hurts the logic of financial freedom is a small number of investors holding an inordinate share of crypto assets.

“For example, a tiny 0.01% of Bitcoin holders control almost a third of the supply. This means short sellers can manipulate it and could have manipulated the UST,” he said.

Michael Wong, co-founder and managing partner of Hong Kong-based crypto hedge fund MaiCapital, said the nature of DeFi or blockchain projects is that “they have to be very open in terms of transactions.”

This can expose them to aggressive trading strategies, he said, noting that it illustrates the need for robust risk management. MaiCapital’s strategy was neutral before the UST crash, “meaning we weren’t in crypto long,” he said.

XREX’s Huang, however, is bullish on crypto. Despite the turmoil, “it doesn’t change the mission of crypto,” he said.

“It doesn’t change the fact that blockchain, distributed ledgers and cryptocurrency are the fastest way for us to provide financial sovereignty to every person in this world,” he said, while adding that the crypto industry needs to do better.

“And we can’t blame the guys on Wall Street.”

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Wall Street Is Here To Stay

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