Markets
Crypto: back from the dead
Lately there has been a huge boom in so-called stablecoins such as Bitcoin, whose sponsors are supposed to guarantee the preservation of their value. Ironically, the boom was spurred by crypto’s most knowledgeable and forceful critic, SEC Chairman Gary Gensler.
Until this year, the big Wall Street investment banks (who have many of their own sins to atone for) were dismissive of the crypto market and stayed out of it. Gensler used his authority to isolate crypto and prevent it from infecting the banking system.
But last August, in a lawsuit filed by Grayscale Investments, the DC circuit has asked the SEC to justify its decision to allow a financial company to offer an exchange-traded crypto product based on futures markets, but not spot markets. This opened the floodgates to other applications.
Gensler, fearing rejection by the court, voted with the SEC’s two Republican commissioners to allow Grayscale and other financial firms to offer exchange-traded funds backed by stablecoins, sparking a scathing dissent from Democratic Commissioner Caroline Crenshaw. It was a huge mistake. Had the SEC issued revised rules, they may or may not have been allowed by the courts. At least that would have avoided the stampede.
Instead, with the blessing of the SEC, the stablecoin market exploded. Last week, the The Chicago Mercantile Exchange has disclosed plans to host exchanges in exchange-traded spot crypto products. All the major Wall Street investment firms, led by BlackRock, have launched their own exchange-traded funds. At the end of April, BlackRock, Fidelity and others had collected approximately $54 billion for their funds.
Note that these funds do not add anything of value and actually reduce net worth because they charge fees or commissions. They are an abstraction on top of an abstraction. If a speculator wants to buy a stablecoin, they can simply buy it. These investment funds attract buyers mainly because stablecoins like Bitcoin have a very high price even for a single “coin,” while investors in a fund can start with much less.
All of this has driven up the market value of stablecoins. Bitcoin is now trading at around $67,000, up from its low of around $16,000 in early 2023, and not far from its high of $72,000 last March. Bitcoin has regained much of its value that misled investors in Sam Bankman-Fried’s FTX scam they got all their money back, and then somein the context of 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 are fraudsters, drug dealers, money launderers and others wishing to hide their identities. In 2022, North Korea stole around $1.7 billion worth of cryptocurrencies.
Ordinary crypto speculators bet on the market value of stablecoins, which is a function of the bets of other speculators. Unlike stocks or bonds, they have no intrinsic value and have nothing to do with the real economy. No government backs crypto coins with taxes, deposit insurance, inspection and certification, or anything else.
All of Gensler’s warnings regarding crypto remain relevant. Indeed, the larger this market becomes, the more risky it is.
Gensler has a chance to partially redeem himself this week. The SEC has until Thursday to rule on a request to enable the listing and trading of products traded on spot exchanges. Allowing this to happen would make the damage worse.
At best, Wall Street fulfills its classic role of connecting investors with real entrepreneurs and businesses. In the worst case, Wall Street just adds risks, removes fees, and can profit from inside information. These funds represent the worst on Wall Street. And because of the absurd way cryptocurrencies are “mined,” using enormous amounts of computing capacity and electricity, they are also toxic to climate goals.
Cryptocurrency scammers are also corrupting politics. Three super PACs backed by the crypto industry plan to spend at least $78 million in the 2024 elections. They’ve already succeeded get dozens of Democrats in the House and Senate to support a Republican-sponsored bill This would reduce the SEC’s power to limit bank holdings of cryptocurrencies. The bill is on the verge of final passage by the House.
Cryptocurrencies represent the worst face of financial capitalism, combined with everything vague about fintech. In our economy, there is no shortage of scammers, idiots, and corrupt politicians. At the very least, Democrats should resist this latest ploy, and if it passes Congress, President Biden should veto it.