One of the most exciting crypto innovations goes by the scary name of “homomorphic encrypted orders” (HEOs). Instead of sending an order anyone can read to your broker or an exchange, you first encrypt it so no one — not even the recipient — can know what it says. A computer algorithm can match up transactions without knowing what those transactions are, nor who made them. From your point of view, a smart contract changes what you sold into what you bought and no one—not the exchange, not anyone who intercepted any messages, not the person on the other side of the trade—can know what you did. Only aggregated transactions are made public, giving price information to the market.

While this obviously raises money-laundering and insider-trading concerns — which can be addressed — it has enormous potential advantages. People are incented to reveal their entire interests since that information will never be known to anyone else. There’s no value to games like spoofing, manipulating or high-frequency trading. No one can front-run, because no one sees the trade even after it executes.

Some of these innovations have been tried on small scales with traditional assets. But only in crypto are we getting full-scale tests of these and other innovations. After a period of evolution, I have no doubt that some of them will prove so useful that all financial markets will move to them.

See:  Brookings: The Future of Crypto Regulation (On Demand and Transcript)

This is a much more promising solution to ancient problems of exchanges than a few more SEC regulations on top of what we already have. Gensler’s determination to force crypto exchanges to look like the NYSE is in no one’s interest.