Cryptocurrencies are often criticized by governments for their lack of clarity and absence of strict regulation.
You might find it surprising, but the world's largest marketplace isn't in government bonds or forex trading. It's the arena of Over-The-Counter derivatives, a segment that operates with minimal regulatory intervention.
Does anyone recall the financial turmoil that swept the globe in 2008?
Known to many as Mortgage Backed Securities (MBSs), these were essentially complex versions of derivatives, where the so-called 'mortgage bonds' created by Wall Street and others drew their worth from residential mortgages.
Financiers employed intricate calculations and questionable practices to devise these loan bundles, which seemed like bonds, with compliant rating agencies tagging along.
The demand for such MBSs was international, mainly held by significant players, leaving most retail investors shut out, as the intricate derivatives space isn’t accessible to them.
Today, what's truly critical isn't the financial crisis of 2008 but the current state of derivatives markets.
Thoughts on Modern Financial Regulation
As of this morning, the entire crypto sector's valuation is under $2.5 trillion USD. Like stocks, crypto assets are straightforward to appraise — numerous online resources provide real-time values.
Unlike other financial arenas, the derivatives market's actual worth is elusive, with its value at the end of last year estimated by BIS to be close to $670 trillion. striking figure .
You'd expect such a massive marketplace to be under strict supervision, but that's not the case.
Transactions involving OTC derivatives among banks face limited scrutiny. Reporting standards exist, but comprehensive risk analysis is quite challenging. This is a game for global money giants, operating with little restraint.
On-Chain Transparency
In recent years, decentralized blockchains have enabled a level of global transparency that was unimaginable two decades ago, offering open access to the public.
Curious about diving into Ethereum's transactional history? It's yours to explore, without barriers.
Dr. Yener Coskun advocates for using blockchain technologies, like Ethereum, to tackle transparency issues within the derivatives domain.
\"The Limitations of Transparency Policy in OTC Markets and Derivatives Trading\" suggests that the trustless nature of a decentralized ledger enhances market operations and risk management. his Though Bitcoin's framework might be cumbersome for a global derivatives system, platforms like ETH, XRP, SOL, ADA, among others, could fit the bill. However, banks resist such transparency, much as they commodify tokens instead of treating them as currency.
Reflect on that staggering $670 trillion derivatives figure.
Let’s Talk Risk…
Measuring global money is a peculiar endeavor, especially since major investors lean toward bonds, viewing governmental assurance as a safer bet.
There simply isn’t that much money in the world If numbers interest you, estimates put liquid cash and equivalents at roughly $20 trillion, though interpretations vary.
Ultimately, regardless of how money is measured, the heap of derivatives dwarfs it all.
End-of-2023 projections pinned derivatives around $115 trillion, showcasing their explosive growth.
The World Bank estimated Global GDP Risk lingers, particularly if unforeseen adverse events push banks to make good on their derivative commitments.
The idea that banks resist regulation is somewhat true—knowing how, shows why cryptocurrencies endure such scrutiny, and how the derivative sector eludes control.
Why Aren’t Derivatives Regulated?
Banks favor rules that exclude smaller entities, which explains why in a populous nation like the USA, only a handful of major banks dominate. Powerhouses capitalize on market monopoly.
Yet, when banks dictate business terms, they desire minimal interference, setting a scene where established players have free rein.
Regulatory bodies like the European Union's financial division made attempts to reign in the industry.
Their initiatives faltered, hardly a shocker. derivatives issue Despite numerous regulatory efforts worldwide over decades, tangible success remains elusive. considering We live in a realm skewed in favor of the affluent, fraught with peril.
Derivatives aren't mere debts, more akin to insurance contracts. As global instability waxes and wanes, the derivatives market’s sheer proportion to the world's economy is unprecedented.
But Wait – It Gets Worse
Derivatives span a multitude of assets, predominantly in forex, bonds, and stocks. The potential risk points are vast—should any spark an event, economic fallout would ensue.
Consider a theoretical scenario: a Middle Eastern conflict escalates, destabilizing global currencies, with unpredictable outcomes on forex, equities, and government bonds.
Such events would reverberate through the derivatives landscape, with potential financial liabilities that could dwarf bank assets.
While blockchains could mitigate derivative market risks, banks maintain different priorities, choosing control over decentralized stability.
The Blockchain Panopticon
Instead of enabling decentralized stability, blockchain might be adapted into a system of purchase tracking and consumer restrictions.
Stablecoins, heralded as today’s innovations, might be tomorrow’s tools for surveillance. China leads with nascent social credit scores and a pioneering CBDC system, adaptable globally.
Politics of crisis often steer towards societal control, and the vast implications can't be ignored. CBDC debacle in Nigeria demonstrates.
The permutations that a CBDC control grid Although the derivatives market’s presence looms large, much of its workings remain obscured from public scrutiny.
A Part of The Next Problem
Predominantly traded off-exchange, OTC deals evade rigorous oversight, with their clandestine nature convoluting visibility of financial exposures.
Now you know why.
While public blockchains could offer some transparency to derivative deals, entrenched banking interests oppose such openness.
Welcome to a digital age where a new feudal system thrives.
Nicholas Say, native of Ann Arbor, Michigan, has journeyed across continents, residing in Uruguay for years, and now resides in Asia. His writings are prominent online, primarily focusing on genuine progress and futuristic tech.
