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Lately, there is a huge boom in so-called stablecoins, which supposedly are guaranteed by their sponsors to hold their value. Ironically, the boom was stimulated by crypto’s most knowledgeable and forceful critic, SEC chair Gary Gensler.
Until this year, the mainstream Wall Street investment banks (which have plenty of their own sins to atone for) were disdainful of the crypto market and stayed out of it. Gensler used his authority to wall off crypto and prevent it from infecting the banking system.
But last August, in a suit brought by Grayscale Investments, the D.C. 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 on spot markets. This opened the floodgates to other applications.
Gensler, fearing being overruled in court, voted with the two Republican SEC 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 huge blunder. Had the SEC issued revised rules, they might or might not have been allowed by the courts. At the very least, it would have staved off the stampede.
Instead, with the SEC’s blessing, the stablecoin market has boomed. Last week, the Chicago Mercantile Exchange leaked plans to host trading in exchange-traded spot crypto products. All of the big mainstream Wall Street investment companies, led by BlackRock, have launched their own exchange-traded funds. As of late April, BlackRock, Fidelity, and others had taken in about $54 billion for their funds.
Note that these funds add nothing of value and actually reduce net value, since the funds take fees or commissions. They are an abstraction on top of an abstraction. If a speculator wants to buy a stablecoin, they can just buy it. These investment funds attract buyers mainly because crypto products like Bitcoin have a very high price tag for even one “coin,” while investors in a fund can start with a lot less.
All this has bid up the market value of stablecoins. Bitcoin is now trading at about $67,000, up from its low of about $16,000 in early 2023, and not far from its $72,000 peak last March. Bitcoin has gained back so much of its value that duped investors in Sam Bankman-Fried’s FTX scam got all of their money back, and then some, in a bankruptcy proceeding.
Stablecoins, let’s recall, perform no useful function in the economy. Their main function has been to finance other crypto transactions, and pure speculation. Their other prime beneficiaries have been fraudsters, drug dealers, money launderers, and others who want to hide their identity. In 2022, North Korea stole about $1.7 billion worth of cryptocurrencies.
Ordinary speculators in crypto bet on the market value of stablecoins, which is a function of bets by other speculators. Unlike stocks or bonds, they have no intrinsic value and nothing to do with the real economy. No government guarantees crypto coins with taxes, deposit insurance, inspection and certification, or anything else.
All of Gensler’s warnings about crypto remain apt. Indeed, the bigger this market gets, the more of a risk it is.
Gensler has a chance to partly redeem himself this week. The SEC has until Thursday to rule on a request to permit listing and trading in spot ether exchange-traded products. Permitting that would compound the damage.
At its best, Wall Street serves its textbook role of connecting investors with entrepreneurs and actual enterprises. At its worst, Wall Street merely adds risk, takes out fees, and is able to profit from inside information. These funds are Wall Street at its worst. And because of the preposterous way that cryptocurrencies are “mined,” using huge quantities of computer capacity and electricity, they also are toxic for climate goals.
Crypto hustlers also corrupt politics. Three super PACs backed by the crypto industry plan to spend at least $78 million in the 2024 election. They have already succeeded in getting dozens of Democrats in the House and Senate to support a Republican-sponsored bill that would roll back SEC authority to limit bank holdings in cryptocurrencies. The bill is headed for final passage the House.
Cryptocurrencies represent the worst face of financial capitalism married to all that is sketchy about fintech. In our economy, there is no shortage of hustlers, suckers, and corrupt politicians. At the very least, Democrats should resist this latest ploy, and if it does pass Congress, President Biden should veto it.
