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Cryptocurrency: Back from the Dead
Lately, there is a huge boom in so-called stablecoins like Bitcoin, which are supposedly guaranteed by their sponsors to maintain their value. Ironically, the boom was spurred by cryptocurrencies’ most experienced and vocal critic, SEC Chairman Gary Gensler.
Until this year, Wall Street’s major investment banks (which have many sins to atone for) were disdainful of the cryptocurrency market and stayed out of it. Gensler used his authority to isolate cryptocurrencies and prevent them from infecting the banking system.
But last August, in a lawsuit filed by Grayscale Investments, the DC circuit asked the SEC to justify its decision to allow a financial firm to offer an exchange-traded crypto product based on futures markets, but not spot markets. This opened the door to other applications.
Gensler, fearing rejection in court, voted with the SEC’s two Republican commissioners to allow Grayscale and other financial firms to offer exchange-traded funds backed by stablecoins, prompting fierce dissent from Democratic Commissioner Caroline Crenshaw. This was a huge mistake. If the SEC had issued revised rules, they may or may not have been cleared by the courts. At the very least, he would have avoided the hasty escape.
Instead, with the blessing of the SEC, the stablecoin market has grown. Last week, the The Chicago Mercantile Exchange has leaked plans to host the trading in exchange-traded spot crypto products. All of Wall Street’s large traditional investment firms, led by BlackRock, have launched their own exchange-traded funds. Since the end of April, BlackRock, Fidelity and others they had taken in about $54 billion for their funds.
Keep in mind that these funds add nothing of value and actually reduce your net value, as the funds accept commissions. They are an abstraction on top of an abstraction. If a speculator wants to buy a stablecoin, he can simply buy it. These investment funds attract buyers mainly because stablecoins like Bitcoin are priced very high for even a single “coin,” while investors in a fund can start with much less.
All this has increased the market value of stablecoins. Bitcoin is now on the market at around $67,000, up from a low of around $16,000 in early 2023, and not far from the peak of $72,000 last March. Bitcoin has recovered so much of its value that it fooled investors in Sam Bankman-Fried’s FTX scam they got all their money back, and then somein bankruptcy proceedings.
Stablecoins, remember, do not perform any useful function in the economy. Their main function has been to finance other crypto transactions and pure speculation. Their other main beneficiaries have been scammers, drug dealers, money launderers and others who want to hide their identities. In 2022, North Korea stole approximately $1.7 billion in cryptocurrencies.
Ordinary speculators in the cryptocurrency industry bet on the market value of stablecoins, which is a function of other speculators’ bets. Unlike stocks or bonds, they have no intrinsic value and have nothing to do with the real economy. No government guarantees cryptocurrencies with taxes, deposit insurance, inspection and certification, or anything else.
All of Gensler’s warnings about cryptocurrencies remain appropriate. Indeed, the larger this market becomes, the greater the risk.
Gensler has a chance to partially redeem himself this week. The SEC has until Thursday to rule on a request enable the listing and trading of spot exchange-traded products. Allowing it would exacerbate the damage.
At its best, Wall Street plays its textbook role in connecting investors with real entrepreneurs and businesses. At worst, Wall Street simply adds risk, reduces fees, and is able to profit from inside information. These funds represent the worst side of Wall Street. And because of the absurd way cryptocurrencies are “mined,” using massive amounts of computing capacity and electricity, they are also toxic to climate goals.
Cryptocurrency scammers also corrupt politics. Three cryptocurrency industry-backed super PACs plan to spend at least $78 million in the 2024 elections. They have already succeeded convince dozens of Democrats in the House and Senate to support a Republican-sponsored bill this would withdraw the SEC’s authority to limit bank holdings of cryptocurrencies. The bill is destined for final approval in the House.
Cryptocurrencies represent the worst side of financial capitalism, combined with everything that is sketchy about fintech. There is no shortage of crooks, idiots and corrupt politicians in our economy. At the very least, Democrats should resist this latest ploy, and if it passes Congress, President Biden should veto it.