SEC's Gensler Likes Futures-Based Bitcoin ETFs

The biggest crypto news and ideas of the day

Sept. 30, 2021

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Today's must-reads

Top Shelf

REGULATORY EYE: U.S. Securities and Exchange Commission Chair Gary Gensler reiterated his support Wednesday for a narrow class of bitcoin exchange-traded funds (ETFs) that would invest in futures contracts instead of crypto directly. The agency is currently considering some two dozen BTC, ETH and crypto ETF applications. Separately, pro-bitcoin U.S. Sen. Cynthia Lummis said Wednesday stablecoins should be audited and "must be 100% backed by cash."

TAKING ACTION: The U.S. Commodity Futures Trading Commission charged 14 crypto companies for failing to comply with registration requirements. That is as Andreessen Horowitz general partner Katie Haun said the crypto industry isn't opposed to regulation but needs "even application" by government agencies. Finally, venture capital player Multicoin has hired its first general counsel as Binance adds two former IRS investigators to its ranks, amid tightening regulatory pressure.

WHAT BROKE? DeFi money market Compound erroneously paid out millions in liquidity mining rewards following an update to one of its smart contracts. In one transaction, $27 million was claimed. Separately, Kraken's security team found several software and hardware vulnerabilities in a commonly used model of bitcoin ATMs. Lastly, trading data shows that volume and prices for some layer 1 tokens show signs of possible insider trading.

CROSS-CHAIN GANG: The Terra blockchain has completed Columbus-5, a hotly anticipated upgrade that is expected to make the system work more seamlessly with other cryptocurrency networks. LUNA, the native asset of the Terra blockchain, has surged in value in 2021 and is currently the 12th-largest cryptocurrency by market cap. Separately, Visa has proposed a platform to enable interoperability between central bank digital currencies (CBDCs) and other stablecoins called the "universal payments channel."

BIG LEAGUE INVESTMENTS: KKR & Co., the investment giant with a $429 billion book, has made its first blockchain-related investment with a stake in ParaFi Capital's DeFi-related fund. Next at bat, New York Mets baseball team owner Steven Cohen led a $35 million investment into Zero Hash, which plans to expand its DeFi product offerings, through his venture firm. Finally, the Latin America region saw some $6.5 billion in VC investments in the first six months of 2021, with much accruing to crypto.

FREE INTERNET: San Jose, Calif., which is sometimes called the "Capital of Silicon Valley," plans to fund internet access for low-income families through HNT tokens mined on the Helium network, according to a city press release published on Thursday. The pilot program aims to give 1,300 participating households a one-time payment of $120 they can use to pay for low-cost internet for one year.

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Overheard on CoinDesk TV...

Sound Bites

"We have to make sure that not only do we support innovative technologies like Bitcoin but that financial literacy is taught in school."

–Congressional Candidate for CA 30th District Aarika Rhodes, on CoinDesk TV's "First Mover."

What others are writing...

Off-Chain Signals

Washington Post covers MiamiCoin, asks if its $7 million in city funding is a game changer for "revenue collection" (paywalled)
A New York court is yet to fully dismiss class action claims of market manipulation, conspiracy and fraud against Tether and Bitfinex (Protos)
MassMutual-owned fintech Flourish launches a service to connect financial advisory clients with bitcoin (Michael McSweeney/The Block)
Chamath Palihapitiya thinks bitcoin has "effectively replaced gold" (Scott Wapner/CNBC)
Why Anett Rolikova of Ethereum Magicians Doesn't Like EIP-1559 (Jeff Benson/Decrypt)
SEC Won't Confirm Nor Deny It Served Anyone at Mainnet 2021 (Sam Reynolds/Blockworks)

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Putting the news in perspective

The Takeaway

The 'Pure Capitalism' of Crypto

Gary Gensler, from up high on his regulatory perch at the U.S. Securities and Exchange Commission, is arguing for greater oversight of crypto. He calls the sector the "Wild West," inviting comparisons to the outlaw days of frontier capitalism.

It's a nice metaphor. Is it apt? Crypto is indisputably tied up in the greater financial system. And some may argue that because of loose monetary policy and an overabundance of cheap cash, crypto does sit at the fringes of some portfolios of those investors looking to outperform the market.

But if crypto is on the map at all, it's because the market has made it so. With yields on cash near zero, the "risk curve" has shifted – stocks are the new savings accounts, memes the new stocks and crypto the new bet for venture capital. People gotta get paid to save.

Crypto's relationship to unfettered capitalism is complicated. A charitable interpretation is that the industry is committed to its libertarian roots. Experimentation is welcome, and with that come outsized risks and rewards. That's why regulation is often viewed with derision or suspision, the range between saying "code is law" or "the rules need to be clearer."

"Crypto today presents itself as both the wild wild west fringe, and the inevitable future of mainstream finance. But the kind of volatility and riskiness that is tolerable at the fringe isn't necessarily tolerable at the core," says Rohan Grey, an assistant professor of law at Willamette University.

The current, dominant economic regime in the U.S. is nominally capitalist, but in practice, it is something far afield. Government actors and the unelected Federal Reserve have long been in the business of picking and choosing winners in the market – sometimes directly. Regulation is often treated as a moat for powerful incumbents. If crypto is the Wild West, then traditional finance is the protectionism, cronyism and decadence of early modern Western Europe.

By comparison, crypto is a textbook example of "free enterprise." It is a global financial architecture that anyone with internet access can use. It runs 24/7, it's liquid, and it has winners and losers determined by the rules of the game. As yet, there are few intermediaries to intermediate bad outcomes.

When liquidity crises happen, people get liquidated. Businesses go bankrupt. Exchanges go down. People lose in proportion to the risks they take. Those are market forces functioning according to the rules. People may get hurt.

"This crypto space is now certainly of a size that without those investor protections of banking, insurance[and] securities laws [and] market oversight, I do think somebody is going to get hurt," Gensler told the Financial Times Wednesday. "A lot of people are likely to get hurt."

Recently, in crypto, there have been a number of instances where bad or ambiguous actors capitalized on the misfortune of others. So-called decentralized platforms are often more centralized than advertised, leaving backdoors for knowledgable people to exploit. And hastily written code is often ridden with unintentional errors.

Take the Poly Network hacker, who stole $600 million from a decentralized lending protocol, taking advantage of poorly written code. In a strange turn of events, the hacker decided to return the stolen funds. The circumstances around that are murky, but it appears the parties involved worked out an agreeable solution.

That is happening more and more in crypto. In the Poly Network situation, the hacker may have feared being turned in to financial authorities, which seemed plausible – a point in favor of the regulatory state. But the hacker or hackers may also have been concerned about lasting reputational damage in the industry or realized that their stolen funds were blacklisted, and made unusable, by exchanges. In other words, market forces were at work.

In 2018, while teaching at the Massachusetts Institute of Technology, Gensler noted the importance of "marrying" innovative financial technologies with regulation. Recently, he's said that the majority of cryptocurrencies are likely securities, meaning vast swaths of this $2 trillion market would be under the SEC's remit.

Now I like Gary Gensler. As a professor at MIT, he cited deep cuts from Satoshi's emails. He genuinely seems concerned about financial stability and consumer protections. He's remarkably consistent: During that same lecture, he seemed miffed that the Commodity Futures Trading Commission entered "sufficiently decentralized" into the lexicon, an opaque, post-hoc qualification relating to the Ethereum initial coin offering. He fears that the standard could be unevenly applied to other crypto-based smart contract platforms in the future.

But there's a case to be made that crypto ought to and can stand independent of the current economic system. As The Economist wrote recently, the state's role in markets is to guarantee property rights. Crypto is a grand experiment with conceding that turf to blockchains. Taking ownership of your keys means taking on associated risks.

Not everyone agrees.

"Cryptocurrency proves the need for regulations because it is as profitable to be unethical as any other form of capitalism. All cops are bastards, but the only bastards a civil society should tolerate are financial police," the wonderfully chaotic blockchain builder Bryce Weiner said over Telegram.

Willamette's Grey suggested that crypto might be functioning according to its own set of rules now, but said that's because it's still a niche market. "I would probably describe it more as 'forgetting the painful lessons of history so we can learn them the hard way all over again,'" he said.

Gensler may be preparing for the day when crypto isn't just at the fringes, but at the very heart of capitalism.

"If the average person's retirement prospects were linked to the state of crypto in the way it is today to the S&P 500, then it would be quite likely that a large downturn would be seen as socially unacceptable and lead to a government intervention," Grey said.

"Pure" capitalism promises something ruthless, but sticks to its own rules. Too bad it's never been tried. Not even in the Wild West.

–Daniel Kuhn

Financial advisors are taking a cautious approach to bitcoin as client interest in the space increases and new products offer retail investors easier access to this new asset class. As trusted guides, advisors cannot risk falling behind, even if the jury is still out on bitcoin's role in a client's portfolio.

At Bitcoin for Advisors 2021 on Oct. 6, Michael Kitces and Tyrone Ross share insights from the front lines. Apply today.