Lately, there is a big boom in so-called stablecoins, which are supposedly guaranteed by their backers to maintain their value. Ironically, the boom was spurred by cryptocurrencies' most knowledgeable and forceful 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 on the sidelines. Gensler used his authority to block cryptocurrencies 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 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 being overturned in court, voted with the SEC's two Republican commissioners to allow Grayscale and other financial companies to offer exchange-traded funds backed by stablecoins. prompting a scathing dissent from Democratic Commissioner Caroline Crenshaw. This was a big mistake. If the SEC had issued revised rules, courts may or may not have allowed them. At the very least, it would have prevented the stampede.
Instead, with the blessing of the SEC, the stablecoin market has boomed. Last week, the The Chicago Mercantile Exchange leaked plans to host operations in exchange-traded spot crypto products. All of Wall Street's big investment firms, led by BlackRock, have launched their own exchange-traded funds. At the end of April, BlackRock, Fidelity and others had received around 54 billion dollars for their funds.
Please note that these funds do not add anything of value and in fact reduce net worth as the funds charge fees or 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 crypto products like Bitcoin are priced very high 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 to 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 fooled investors in Sam Bankman-Fried's FTX scam They got all their money back and then some.in bankruptcy proceedings.
Stablecoins, let us remember, do not perform any useful function in the economy. Its main function has been to finance other crypto transactions and pure speculation. Its other main beneficiaries have been scammers, drug traffickers, money launderers and others who want to hide their identity. In 2022, North Korea stole around $1.7 billion in cryptocurrencies.
Common cryptocurrency speculators 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 spot on. In fact, the larger this market becomes, the greater the risk it represents.
Gensler has a chance to partially redeem himself this week. The SEC has until Thursday to rule on a request for enable the listing and trading of exchange-traded products with spot ether. Allowing that would compound the damage.
At its best, Wall Street fulfills its classic role of connecting investors with real entrepreneurs and businesses. At worst, Wall Street simply adds risk, eliminates fees, and can profit from inside information. These funds represent the worst of Wall Street. And because of the absurd way cryptocurrencies are โminedโ โ using huge amounts of computing power and electricity โ they are also toxic to climate goals.
Cryptocurrency scammers also corrupt politics. Three super PACs backed by the crypto industry plan to spend at least $78 million on the 2024 elections. They have already achieved it Getting dozens of Democrats in the House and Senate to support a Republican-sponsored bill. that would roll back the SEC's authority to limit bank holdings of cryptocurrencies. The bill is headed for final approval in the House..
Cryptocurrencies represent the worst side of financial capitalism together with everything incomplete about fintech. There is no shortage of scammers, fools and corrupt politicians in our economy. At the very least, Democrats should resist this latest ploy, and if Congress passes it, President Biden should veto it.
