A synthetic asset is a financial asset, which represents and behaves like another asset, called the underlying. The synthetic asset replicates the behavior of the underlying asset (profit or loss), but adapted to a market with certain needs.
Thus synthetic tokens are assimilated to synthetic assets, but in blockchain. Currently, synthetic tokens are created to represent other assets whether they are financial (such as dollars, stocks, bonds or precious metals) or crypto (such as Bitcoin or Ethereum).
Well, now that you know what synthetic tokens consist of, let’s look at Synthetix as a paradigm of this market.
What is Synthetix (SNX)?
Synthetix is a decentralized financial protocol (DeFi) that provides on-chain exposure to a wide variety of cryptoassets and non-cryptoassets. The protocol is based on the Ethereum (ETH) blockchain and offers users access to highly liquid synthetic assets (synths). Synths track the underlying asset and provide returns without the need to own it directly.
The platform broadens the cryptocurrency space by introducing non-blockchain assets, providing access to a wider financial market. To do this, the procedure is to deposit Synthetix tokens (SNX) and in return, receive the chosen synthetic token (which is minted).
One of the characteristics of this platform is that, when creating the synthetic token, a debt is created that can be returned if you want to recover the deposited SNX token, respecting the price of the synthetic, whether profit or loss.
The crypto industry has not invented synthetic assets, but has used an old concept from traditional finance: the “bucket shop”.
In the stock market, a bucket shop is a business that allows bets to be placed based on the prices of stocks or the commodities they represent.
A 1906 U.S. Supreme Court ruling defined a bucket shop as “an establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in”. Gatewood v. North Carolina, 27 S.Ct 167, 168 (1906).
“Bucket shop” is a term defined illegal in the numerous U.S. states and criminalizing its operation. Typically, the criminal law definition refers to a transaction in which what is purported to be a derivative interest in a security or commodity future is sold to the customer, but no transaction takes place on any exchange. The bucket shop is legally considered a fiction, which the parties agree to imagine, mimicking the events that occur in a real exchange.
Regulations on the way
On July 21, in a speech by Gary Gensler, Chairman of the U.S. Securities and Exchange Commission, speaking on the derivatives and futures control agenda, he said: “…To that end, security-based swap dealers and major security-based swap participants will begin registering with the Commission by Nov. 1. We expect that 45 to 50 entities will register as security-based swap dealers — some of which will be from the same family of firms. The registration requirements include new counterparty protections, requirements for capital and margin, internal risk management, supervision and chief compliance officers, trade acknowledgement and confirmation, and recordkeeping and reporting procedures. These areas are focused on reducing risk in our markets. Further, given the global nature of the security-based swaps market, international dealers have asked the SEC for the ability to comply with rules from their home jurisdictions, while still meeting U.S. regulations.”
This message triggered alerts in the crypto industry, related to synthetic assets traded in the traditional U.S. market.
Uniswap Labs recently excluded certain tokens from access to its protocol, arguing, “To continue to innovate and provide this tool for the Uniswap community, we monitor the evolving regulatory landscape. Today, consistent with actions taken by other DeFi interfaces, we have taken the decision to restrict access to certain tokens through app.uniswap.org. These tokens have always represented a very small portion of overall volume on the Uniswap Protocol — a full list is available here.”
As you can see from the list, synthetic tokens are the ones that were excluded from access.
But these regulations are not unique to the U.S. government; around the world, too, attention has been paid to Binance’s actions for its trading of synthetic assets.
Binance, the world’s largest cryptocurrency trader, announced on July 16 that it will stop offering digital securities linked to company stocks amid pressure from regulators in several countries.
In a statement, the Hong Kong (Tokyo, Cayman Islands?) based company said it will immediately cease offering such products and shut down all trading in them next October.
The move came at a time when regulators in different countries have increased pressure on Binance and, in particular, on these tokens, considering that they may violate stock regulations.
Regulators in the United States, the United Kingdom, Canada, Japan, Italy, Thailand and the Cayman Islands have issued warnings, and even in some cases, criminal complaints against the cryptocurrency exchange. Even Poland, when its financial regulator warned citizens to exercise “special caution” when using Binance’s trading services.
In a notice dated June 25, the Financial Conduct Authority (FCA) said Binance Markets Ltd, Binance’s only regulated entity in the UK, “must not, without the prior written consent of the FCA, engage in any regulated activity, with immediate effect.”
The Commissione Nazionale per le Società e la Borsa (Consob) said in a statement that the companies of this Group are left without qualification to provide investment services and activities on Italian territory, despite the fact that sections of its website provide information in that language.
The crypto industry is very young, has a long way to go, and that involves how to meet the demands of regulators.
The challenge is to maintain the concept for which it was conceived, that of decentralized finance, with a fine balance between legality and prohibition.
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