Bits and stuff: reports, rejections and restructuring – July 29th, 2018

This is why I didn’t post anything last week:

IMG_4780

Also, much less pleasant, this:

IMG_4815

Almost done.

I re-read Dalia Blass’s letter to representatives of the asset management community. The head of the SEC’s Division of Investment Management spelled out, in easy-to-understand detail, why ETF approval was unlikely to happen any time soon.

To summarize:

  • Valuation – how can we be sure that the price reflected on the exchanges is accurate, given the often wide discrepancy between venues? How will forks and air drops be accounted for?
  • Custody – how do cryptoassets fit into the 1940 Custody Act, which requires that investment advisors and funds use “qualified custodians” for “securities and cash”, or submit to random inspections in the event of “self custody”?
  • Liquidity – do cryptocurrencies meet the new fund liquidity rule, which says that “illiquid” assets cannot account for more than 15% of a mutual fund or ETF portfolio?
  • Manipulation risk – how can cryptocurrency markets address the issue of investor protection?

While the sector is making progress on all of the above fronts, it’s a slow process and it doesn’t look like we’re anywhere near answers with the level of confidence and clarity that would make the SEC comfortable.

This week the bitcoin price started to rally on rumours that a bitcoin ETF was about to be proved by the SEC. Given the above, that conclusion seemed like a long shot, because the underlying issues have not been addressed, and it is unlikely that the SEC would backtrack on its requirements.

And sure enough, on Thursday the SEC ruled against the rule modification that would allow the listing of the Winklevoss Bitcoin Trust, for reasons very similar to its first rejection.

But one of the commissioners published a strongly-worded dissent, urging the SEC to “let the markets decide” (I paraphrase, but that was the gist). The letter accused the SEC of being:

1) inconsistent (other approved commodity funds had as little market transparency and risk of market manipulation),

2) anti-innovation (by insisting on waiting for market maturation, it is delaying that very market maturation), and

3) overstepping its remit (the SEC should not be deciding on the validity or suitability of the underlying markets, investors should be able to do that).

While it’s exciting to see such a liberal (and public) dissent, on re-reading, some things start to niggle.

Peirce accuses the SEC of making a call on the underlying market. This may be partially true, but not in the way it is implied – the “worth” of bitcoin is not under scrutiny. What the SEC objects to is the opacity of exchanges and the vulnerability to manipulation (which even the crypto community suspects).

We are told that other commodity-based ETFs have been approved without liquid or manipulation-free markets, yet we are not told how big those ETFs were, how systemic the markets are and what other regulation is in play.

Peirce’s dissent should not be a surprise – before being appointed to the SEC by President Trump, she was a Senior Research Fellow and Director of the Financial Markets Working Group at the libertarian-leaning Mercatus Center, where she often spoke out against excessive financial regulation.

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Bloomberg ran an article profiling a US government official’s stance that Congress needs to bump cryptocurrency regulation up the list of priorities.

It cointained what is definitely my favourite quote of the week:

“Everyone’s trying to figure out whether it’s fish or fowl,” he said. “It turns out it might be a platypus.”

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Edan Yago published a powerful op-ed on CoinDesk, in which he asks if the cost of KYC/AML regulation – which goes beyond the monetary expense of compliance to include the lost potential in abandoned (= unprofitable for banks due to the onerous requirements) markets.

“Perhaps they do frustrate the odd terrorist or oligarch (though apparently not very much). However, the question that is never asked is, at what cost?

Is it worth the more inconvenient, more expensive service we are all subjected to? Is it worth the exclusion of poor or marginalized people? Is it worth the entrenchment of the banking system?

Is it worth the massive troves of private information collected by every financial company and frequently stolen by hackers? Is it worth the creation of a massive, semi-privatized, global surveillance system?

It had better be. Otherwise, what a tragic, heart-breaking waste.”

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This deep and thought-provoking report by research boutique Autonomous Next is definitely worth going through. A cornucopia of interesting titbits and observations, backed up by empirical data that highlights intriguing trends.

 

Some of my favourite slides:

Slide 6:

autonomous next 6

Slide 18 – token technology is evolving:

autonomous next 18

Slide 21 – an unusual taxonomy:

autonomous next 21

Slide 30 – my favourite part, the philosophy:

autonomous next 30

I could go on, because there is just so much in this report to digest… but that would take up too much space.

You can download the report here.

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CoinDesk’s State of Blockchain Q2 was also released this past week. It contained some gems such as slide 22:

SOB slide 22

You can view the whole report here.

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Mind-bending. And all sorts of other bending as well. (By Vladimir Tomin, via Colossal.)

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