Comment Text:
To Whom It May Concern,
I am an entrepreneur of a stealth startup that vertically integrates services traditionally provided by separate entities. This structure, which I refer to as a Vertically Integrated Market Product (VIMP), aims to increase efficiency and choice while reducing risk in capital markets.
Leveraging innovations like Bitcoin's Schnorr signatures [1], Lightning Network [2], and Nostr protocol [3], this system enables client-side issuance, custody, exchange, and settlement of digital financial instruments with minimal counterparty risk.
Clients can create and securely store asset classes like currencies, equities, and bonds in client-side wallets. This eliminates misappropriation, insolvency, and operational risks associated with centralized intermediaries holding custody of assets. The digital bearer instruments are represented on-chain as unique fingerprinted data structures embedded within Bitcoin transaction signatures. This provides transparency for regulatory purposes while maintaining user privacy. By empowering clients with sole custody of their instruments using cryptographic proofs, risks of theft, errors, and credit risks that could spread contagion are significantly reduced.
Decentralized exchange is enabled through trust-less protocols like atomic swaps[4] and the Lightning Network. This eliminates failure-to-deliver events common with centralized clearinghouses and market makers. Direct peer-to-peer settlement on the Bitcoin blockchain also provides immutable finality within approximately 10 minutes. Bypassing centralized clearing eliminates risks, delays, and conflicts of interest associated with self-regulatory organizations (SROs) and clearing members. The transparency and immutable finality of on-chain Bitcoin settlement resolves disputes in a decentralized, permission-less manner which is easily verifiable by regulators and investors.
Additionally, decentralized messaging protocols like Nostr enable open order broadcast across the entire market. This mitigates risks of preferential trade execution or manipulation on centralized exchange order books operated by a single VIMP. Allowing orders to be broadcast freely fosters competition and transparency, as investors can trade outside of any single VIMP while still accessing the entire decentralized network. Furthermore, the VIMP gains visibility to every trade on this protocol.
While this structure provides major efficiency and risk reduction benefits, appropriate regulatory oversight remains essential. I advocate for clear prohibitions on unauthorized custody of client assets, as VIMPs do not require custody to function. Strict penalties should follow any violations. If a VIMP offers opt-in custody services, they should be required to assign each client a unique public key to prevent co-mingling of funds. A public record of all keys held in custody should also be maintained and made available to the public prevent re-hypothecation as there is no personal identification information in a public key[5][6].
Additionally, VIMPs should be required to disclose details of their underlying decentralized databases. Only permission-less, public networks with sufficient decentralization and security[7] should be allowed. This reduces governance and conflict of interest risks from private or centralized blockchains. The transparency and accountability provided by public blockchains is critical for regulatory oversight.
I believe government oversight of ratings for new products in this market structure would also be prudent, to eliminate conflicts of interest. Requirements for VIMPs to support open-source, non-custodial wallets would enhance consumer protections.
This technology shows immense promise to responsibly expand access and efficiency in capital markets. I welcome further discussion on constructing appropriate guardrails as these decentralized models continue maturing. Please let me know if you have any other questions.
Sincerely,
Sudo Nym
[1] https://bitcoinops.org/en/schnorr-signatures/
[2] https://lightning.network/
[3] https://www.getnostr.org/
[4] https://coinmarketcap.com/alexandria/glossary/atomic-swaps
[5] Diffie, W., & Hellman, M. E. (1976). New directions in cryptography. IEEE transactions on Information Theory, 22(6), 644-654.
[6] Koblitz, N. (1987). Elliptic curve cryptosystems. Mathematics of computation, 48(177), 203-209.
[7] https://mempool.space/mining
