Robinhood becomes a case study for DeFi

Source: Jake Chervinsky, Crypto Law & Policy Newsletter, Q1 2021 in Review.

For a week in January, all anyone could talk about was the soaring price of GameStop stock ($GME) and how a group of traders on the Reddit forum r/wallstreetbets had coordinated a massive short squeeze against hedge funds shorting $GME.

Then suddenly, all anyone could talk about was how Robinhood—the favorite trading platform of r/wallstreetbets—had restricted $GME trading so that its customers could only sell the stock but not buy more of it. Robinhood’s decision triggered a backlash leading to congressional hearings and a formal apology.

DeFi supporters seized on the event as an example of how neutral, decentralized protocols could address the shortcomings of legacy markets. Robinhood was blamed for preventing customers from trading $GME, but nobody can prevent users from accessing a DeFi protocol. Robinhood was accused of caving to pressure from business partners like Citadel, but self-executing smart contracts can’t be pressured.

Perhaps most interesting, Robinhood explained that it had to restrict trading because of SEC-mandated net capital requirements, which might have forced Robinhood to deposit more capital in its clearinghouse than it had available. CEO Vlad Tenev later suggested that transitioning from T+2 to real-time settlement could fix this problem. “Technology is the answer,” he said.

Although Vlad didn’t mention DeFi specifically, it might provide exactly the solution he’s looking for—reducing the need for net capital requirements by mitigating counterparty risk through transparent, atomic settlement between buyer and seller.

Needless to say, we’re nowhere near replacing our securities settlement infrastructure with DeFi rails, but for policy purposes, it helps to have a case study as popular as this one to explain the potential benefits that DeFi can deliver to financial markets.

Read more: Jake Chervinsky, Crypto Law & Policy Newsletter, Q1 2021 in Review.

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