Are Cryptocurrencies Experiencing “Deja vu All Over Again”
Goldman Sachs has joined the chorus of those declaring that the market for Bitcoin, Ethereum and other cryptocurrencies as “too important to ignore.” The article does not present a comprehensive analysis of the burgeoning asset class but does provide some tidbits about the Bitcoin, Ether, and the ICO boom. One point made by their strategist, is that the crypto world is in “full hype cycle” which seems accurate. It is, however, important to make two points on this.
First, even though the “dot com” bubble burst and many people were wiped out by unrealistic valuations and the expectations it would continue, several of todays most important companies were born in that era and its aftermath. Yes, there were more “Pet.Com” companies than Amazon, but the underlying idea of the internet revolutionizing the economy was accurate. In much the same way, many (most?) blockchain fueled investments may well be this decades version of the “sock puppet” but just as likely is the value in the concepts being created from this technology.
Second, the market for cryptocurrencies is even more unregulated and prone to abuse than the internet stock craze of the late 90s. Instead of “Tokyo Joe” using message boards to pump up his “favorite” penny stocks, we have “whitepapers” fueling ICOs that raise huge amounts of money for companies and concepts with limited prospects. Instead of listening to taxi drivers for stock tips and dentists spending more time day trading then filling cavities, we have multiple unconnected “exchanges” trading instruments that move more in a day than the equity market has moved in the past year; all accessible by smartphone. From my perspective, it is time for intelligent regulation, in order to protect both investors and the genuine innovators who are leveraging the technology.
Lest we forget, Exchanges are REGULATORS
There have been many stories recently that are impacted by the Self Regulatory Organization (SRO) structure of the U.S. capital markets, but none more so than the Chicago Stock Exchange ownership saga. The SEC decided to delay the decision, after their staff recommended in favor of the deal, likely due to the politicization of the decision. As Bloomberg noted in a recent article the selling point of the investment is the potential for attracting both listings of Chinese companies and new investment dollars into the market. The Bloomberg article also examines the politics of the proposed sale, security concerns, and, at the end, the regulatory risk. What is not discussed, however, is that, in our current structure, that all exchanges (including Chicago) have essentially been “deputized” as regulators of their own business.
It is easy to see how this gets forgotten, since stock exchanges have all become “for profit” corporations, but it is a vital consideration. In particular, foreign ownership raises the specter of potential “regulatory arbitrage” if the exchange, under new ownership, becomes more lax about enforcing listing standards. Note that while the SEC approves the actual standards, the enforcement of those rules starts with the SRO itself. Thus, it is incumbent upon the SEC to determine if foreign ownership poses an increased risk, and if they have the internal budget to perform heightened oversight if they believe it does.
In general, under the SRO structure, the business conduct of exchanges should be held to a much higher standard than other financial market participants. This is true regardless of where the owners are domiciled, and is one of the reasons that I have been so critical of one exchange’s marketing policy. That behavior, which alternates between sermonizing the industry about practices they dislike and the publication of misleading propaganda pieces to “prove” their own value, would be a serious problem if they were a “boiler room” broker. As an exchange, however, it is far, far worse…