With a certain ring of predictability, perhaps the heaviest-hitting US financial market regulator has rained on crypto’s parade.
True believers in the transformative power of cryptocurrencies, and in their ability to usurp the existing financial system, have long clung to the conviction that Gary Gensler, chair of the Securities and Exchange Commission, would come to their aid and somehow bless their mission.
That is because in addition to his previous roles in policy and banking, Gensler taught a course from 2018 at Massachusetts Institute of Technology on “Blockchain and Money”. Lectures from the smiling Professor Gensler are still available online.
But teaching a course in something and adopting it as a world view are two different things. Rare is the lecturer on Shakespeare who pops to the supermarket wearing a ruff and a codpiece.
In a speech on August 3, Gensler echoed a point he has previously made in his lectures when, based on a show of hands, he figured that about 45 per cent of his students had ever bought a cryptocurrency. “If you want to invest in a digital, scarce, speculative store of value, that’s fine,” he said this week. “Good-faith actors have been speculating on the value of gold and silver for thousands of years.”
Nonetheless, his job is, at least in part, to think about investor protection. And the crypto industry is providing plenty for him to think about.
“Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West,” he said. “This asset class is rife with fraud, scams, and abuse . . . In many cases, investors aren’t able to get rigorous, balanced, and complete information. If we don’t address these issues, I worry a lot of people will be hurt.”
Concerns include tokens that function largely as securities, but without the right documentation, approval or disclosures. In his lectures, Gensler referred to the “duck test”. “Basically, if it quacks like a duck and it walks like a duck, it’s a duck,” he said then. Similarly, a lot of tokens and related products are, essentially, securities. Other worries centred on skirting bans on reaching US consumers, “sidestepping” tax and sanctions, and even national security.
“We have taken and will continue to take our authorities as far as they go,” he said, calling for extra back-up from Congress.
To be fair, it is hard to pick out the crypto industry as the Wild West when the heavily regulated US stock market has its moments too. Just take a look at the more than 80 per cent rally in newly listed Robinhood shares this week.
Still, a step-up in regulation is widely considered to be the most pressing threat to the crypto industry. So why has the price of crypto held steady around $37,000 in face of Gensler’s remarks? Changpeng “CZ” Zhao, chief executive of crypto exchange Binance, might reply that “1 bitcoin = 1 bitcoin”, a gnomic point he made this week. “It’s everything else that’s volatile,” he said in a tweet.
He is not necessarily wrong, in the sense that bitcoin has lost about 50 per cent of its value from the highest point of this year, whereas Robinhood stocks gained 80 per cent in their first hour of trading on Wednesday. But then, Robinhood has no ambition to make its stocks a worldwide unit of exchange.
In a paper last month, the Bank for International Settlements shed some interesting light on what makes cryptocurrency buyers tick, going some way to explaining their resilience in the face of what appear to be existential threats to their pet project.
The BIS said that, counter to common assumptions, cryptocurrencies are not sought after as “an alternative to fiat currencies or regulated finance in the US”. Buyers are not particularly preoccupied with security and anonymity — supposed benefits of a blockchain-based currency divorced from governments or central banks. Generally, they do not “distrust” the existing financial system.
Instead, “a majority of cryptocurrency investors are aware of the inherent risks” and they are generally more educated than the average population. In other words, these guys (and they are typically men — under 1 per cent of the female population owned crypto in 2019, compared with about 3 per cent of men), know what they are doing.
Despite the wild utopian vision that some of the noisy hardline crypto crowd espouse, most buyers are not trying to change the world. They are just looking for a way to make some money, generally over the long term. “A clarifying regulatory and supervisory framework for cryptocurrency markets may be beneficial for the industry,” the BIS paper said.
What is more, buyers are loyal. Holding on to cryptocurrencies, even when the price falls — a practice known as “hodling” — is “pervasive”, the BIS noted.
Gensler noted that the crypto asset class is purportedly worth about $1.6tn. Despite the toughening up in his tone, still nothing he has said has been enough to convince those holders to part with their stash and put it back in the established financial system. To them, the “regulate, don’t obliterate” stance from the US authorities so far is a validation.
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