Cryptocurrency investors are anticipating a bitcoin exchange-traded fund (ETF) that could see new big money stepping into the market as early as 2019.
It’s speculated that, if approved, it could catalyse an unprecedented bull-run and add billions of dollars to the cryptocurrency market from institutional investors.
But is the Securities and Exchange Commission ready to approve a Bitcoin ETF amid the criminal probes into wash trading, spoofing and other forms of price manipulation? And what are the payoffs – and most importantly, the risks, of an approval in the current climate?
What the SEC will conclude from the most recent filings is really anyone’s guess.
There are some compelling arguments on both sides for an ETF approval.
You could argue, for instance, that Bitcoin has sufficiently evolved into a regulated asset class, thus making an ETF the logical next step towards legitimizing it as a financial instrument.
Indeed, exchanges have made some moves to make Bitcoin both more accessible to investors and compliant with Federal regulations.
Coinbase Custody, for example, has applied with the SEC to become a registered broker-dealer that will protect virtual currencies in a similar manner to traditional securities. The custodial service could go a long way to restore institutional confidence in Bitcoin amid the ravagement of exchange hacks and theft of virtual assets.
Another factor working in favour of an ETF approval is the regulatory clarity that now surrounds Bitcoin and other cryptocurrencies. In June, the SEC’s Director of Corporate Finance, William Hinman alluded that cryptocurrencies were not securities, while Bitcoin Futures have traded on the CBOE since December 2017.
What all of this means, according to ETF supporters, is that the market has matured and that we’re now in a different situation compared with the ETF filings that were rejected in previous years.
Presumably, Bitcoin is ready to change hands on an unprecedented scale that could inject billions of dollars into the cryptocurrency market. It would be a historic moment in Bitcoin’s history; its consequences, unknown.
Can we ever regulate bitcoin?
The failure of ETF filings, it seems, are intrinsic to Bitcoin’s design.
Owners of the Gemini exchange – known as the Winklevoss twins, had their proposal stamped out last year when the SEC claimed that it did not comply with surveillance sharing agreements and other sections of the Exchange Act.
The twin’s most recent filing was also rejected on July 26th, with the SEC dismissing their claim that crypto markets are “uniquely resistant to manipulation.” The SEC’s ruling could illustrate a misgiven reality: that Bitcoin is unprepared – and perhaps even incompatible with institutional investment under present laws.
By ethos, Bitcoin is a pseudo-anonymous currency that’s heavily resistant to surveillance and centralized authority, thus making it impractical – and a great compromise – to shoehorn it into regulations that were developed for traditional securities. And even if we could transmute Bitcoin into a traceable asset, how do we monitor it when it’s traded in unregulated primary markets outside of the United States?
Asia is the hub of the cryptocurrency market where cryptocurrencies are unregulated. 65 percent of the market’s $4.50b trade volume is conducted on three exchanges: Binance, Bitfinex, and Huobi that operate in Hong Kong and Singapore.
Comparatively, Coinbase, the largest exchange in the United States, has only a 6 percent market share, which is less than half of Huobi’s and a fifth of Binance’s 31 percent.
Bitcoin’s anonymous nature and unregulated primary markets were the prime reasons for the Winklevoss twin’s ETF rejection last year, as explained by the SEC:
“First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated,” it explained.
So, on both accounts, Winklevoss lucked out. And nothing much has changed since then. Markets are still unregulated and Bitcoin is still a nebulous asset when it comes to tracing its movements between people and addresses – let alone between primary markets that the SEC appears to require.
Deeper problems could lay ahead
But these are peripheral issues that merely point a finger at a deeper, systemic problem in the cryptocurrency market.
They beguile a fact that the SEC is aware of but so far has been unable to prove. And as time passes and criminal probes continue, we may discover that an ETF would only exacerbate a deep conspiracy that’s suspected between certain exchanges and cryptocurrencies; acts of fraud and market manipulation so severe that it could subvert all market confidence and send prices to inescapable lows.
There have been numerous investigations into price manipulation by the government authorities, independent researchers, and whistle-blowers. And while their reports made headlines, little has been done to curb the malpractices that are clearly evident in the market.
On a minor scale, pumps and dumps and scam ICOs have almost become a meme – or at least a peripheral expectation for anyone involved in crypto. Yet the market’s biggest problems that move the most amount of artificial value have endured and even expanded their corruption.
Enter Tether — the eponymous ‘Stable Coin’
Tether, a ‘stable coin’ that claims to be backed on a 1:1 ratio with US dollars, has been subject to numerous reports and a subpoena by the Commodity Futures Trading Commission (which would later deny an FOIA request) is suspected to have manipulated Bitcoin’s historic rally to close to $20,000 in December 2017, according to a recent report.
Published by John M. Griffin and Amin Shams of the University of Texas, the report concludes that Tether was “used to provide price support and manipulate cryptocurrency prices,” according to its abstract.
How Tether might influence the price of Bitcoin – and by extension – the rest of the cryptocurrency market as a dominant trading pair, is explained with the following:
“Using algorithms to analyse blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices… less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies,” the paper explains.
An earlier account of Tether’s apparent price manipulation surfaced on the site tetherreport.com in January 2018. Published anonymously, the report listed similar findings: “Tether printing moves the market appreciably; 48.8% of BTC’s price rise in the period studied occurred in the two-hour periods following the arrival of 91 different Tether grants to the Bitfinex wallet,” it read.
The conspired collusion between Tether and Bitfinex
Bitfinex is a well-known cryptocurrency exchange that was hacked in 2016 leading to an estimated 120,000 bitcoins stolen, which equated to 0.75% of all coins in circulation at the given time. Besides the hacking controversy, there’s also a suspected collusion, which has not been proven, between Bitfinex and Tether.
The heart of the suspected collusion is that Tether and Bitfinex share the same CEO, Jan Ludovicus van der Velde, and a possible conflict of interest.
Bitfinex lists Tethers as one of many different cryptocurrencies purchasable on the exchange, which are then used by traders to safeguard their profits between trades. Tethers are also used to transfer money between other exchanges that do not support fiat deposits or withdrawals, such as Binance – the world’s largest crypto exchange.
The conspiracy between Tether and Bitfinex is claimed to begin with the coin minting hundreds of millions worth of USDT (Tether) tokens into circulation, which are supposedly backed by one unit of account of USD.
As gleaned from the various reports by researchers, Tethers are only minted in bearish markets and not when Bitcoin is performing strongly. It’s then claimed that those USDT tokens – which were minted from nothing – are then sold through Bitfinex and other exchanges for Bitcoin, thus artificially inflating the currency and sometimes catalysing a bull-run similar to December. The Bitcoin then is suspected to be sold again for fiat, although we have yet to see evidence for this.
What if Tethers are worthless cryptocurrencies?
Besides the suspected price manipulation of Bitcoin, there’s also a severe counter-party risk if we discover that Tethers are not backed 1:1 to US dollars.
Traders have purchased billions of dollars in cryptocurrencies using USDT, so if the currency is not actually “pegged” to anything, how much then are USDT worth, and how much is the market itself worth if it has been pumped by worthless Tethers?
Presumably, under the light of such serious accusations both Tether and Bitfinex would want to allay such fears that their stable-coin is indeed backed by a proportionate amount of USD. But despite claiming to be “subject to frequent and professional audits,” as per the Tether website, no audit has been released by the company to date and it dismissed a relationship with its auditor Friedman LLP in January this year.
However, in June, Tether did release something that claims to prove its USD reserves – but it was not an audit, and it was not published by an accredited accounting firm. Instead, the company contracted Freeh Sporkin & Sullivan LLP (FSS), a law practice to examine its USD reserves and Tethers in circulation.
A report was issued by the company that was met with scrutiny under grounds that it was being passed off as an audit despite not using Generally Accepted Accounting Principles by Sporkin & Sullivan’s LLP own admission.
Tether is not the only case of price manipulation in the crypto market, but it is perhaps the most well-known.
So from the SEC’s perspective, in light of the on-going investigations into Tether and other acts of wash trading and market manipulation – what are the incentives and risks of approving an ETF in the current climate?
It could be argued that approving an ETF would only make the alleged market manipulation worse, and would pad the pockets of bad actors that use crypto for their personal gain. It might not be until we know for sure what these players are up to that we will see an ETF and the widespread adoption of cryptocurrencies taken seriously by regulators.
Until then, we could have a far greater problem on our hands if the allegations against Tether are true.