Approving bitcoin ETFs will lead investors to slaughter
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The SEC is expected to act soon to approve or reject bitcoin-based Exchange-Traded Funds (ETFs). Such ETFs would buy and hold bitcoins and provide an opportunity for U.S. investors to speculate in bitcoin.  

They are not in the public interest, and the SEC should reject them. Approving bitcoin ETFs would support a payment mechanism that has only one viable application — break the law.

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Approval by the SEC would constitute an endorsement of bitcoin that would further its use in money laundering, ransomware, tax evasion and other criminal activities.

 

In general, I believe issuers should be allowed to issue any type of security as long as they properly communicate the risks to investors. I am not in favor of merit regulation in which regulators only approve investments that the regulators think are good investments.  

Informed investors should be allowed to make their own investment decisions without interference from a nanny-state government. Furthermore, I am a big proponent of blockchain, the underlying technological breakthrough behind bitcoin.  

Blockchain has many legitimate applications, but Bitcoin 1.0 is not one of them. Further, I see nothing wrong with digital currencies, and have called upon the Federal Reserve to issue U.S. dollars in blockchain form.

Bitcoin was started in 2008 by someone or some group using the name “Satoshi Nakomoto.” No one knows for sure who Satoshi Nakomoto is.

There are people who are suspected of being Satoshi Nakomoto who deny it and others who claim to be Satoshi Nakomoto but cannot prove it. This murky background alone should give regulators pause.  

Bitcoin is an electronic payment medium that allows anyone to transfer bitcoins securely from one bitcoin address to another. Transactions are verified by a group of so-called “miners” on the internet who verify each transaction. When the miners verify that a bitcoin associated with one address has not already been spent, they add the new transaction to the public record known as the blockchain.  

Miners are paid for their activity through the issuance of newly-minted bitcoins derived from a mathematical formula that purportedly limits the total number of bitcoins that can ever be created. This is all secured through cryptography.

Bitcoin transactions are essentially anonymous. While the bitcoin blockchain records what bitcoins were sent by one address to another, it does not contain any information on the identity of those addresses. Unless someone does something to disclose their address, it is nearly impossible to figure out the identity behind an address. 

Most of the trading in bitcoin occurs in China, and most of the mining activity is controlled by Chinese firms.  This also raises serious questions about the ability of U.S. regulatory authorities to investigate and prosecute market manipulation of the bitcoin price.  

As the proposed ETFs are just plays on the underlying price of bitcoin, this inability to even investigate manipulation of bitcoin prices means that the SEC will lack the fundamental ability to protect U.S. investors from abuses in this market. Approving bitcoin ETFs will lead U.S. investors to slaughter. 

Bitcoin is a payment system ideally suited to the black market. The anonymity of bitcoin transactions makes it ideal for drug-running, terrorist funding and human trafficking. Bitcoin is the “coin of the realm” in the dark web.  

When I give a talk about bitcoin, I usually query the audience about who has actually used bitcoin. The last time I did this, exactly one hand went up. A business owner said her business was hacked, and she had to pay the ransomware in bitcoin.  

Alas, the prospect uses for the bitcoin ETFs do not clearly communicate that criminal activities are the primary use of Bitcoin 1.0. Indeed, they do not even mention ransomware, narcotics or pornography. For this reason alone the SEC should reject them based on inadequate disclosure. 

Yes, bitcoin proponents do claim that there are legitimate applications for bitcoin. However, these proposed applications are mostly theoretical and fall apart upon closer examination. These potential applications include:

Retail sales. The notion that merchants will flock to bitcoin because there are no chargebacks and lower fees has not materialized. While a few merchants now accept bitcoin, this has mostly been a novelty. Consumers have intelligently shied away from Bitcoin 1.0 because of the complete lack of consumer protection built into Bitcoin 1.0.  

Bitcoin’s “just like cash” feature makes it as dangerous as cash with the added vulnerability of a hacked wallet with no recourse. Furthermore, as it takes around 10 minutes or more to verify a block and about an hour to reach true finality, there is substantial risk to merchants that bitcoins can be double spent by fraudsters acting in concert.

Digital gold. Some hold that Bitcoin 1.0 is a digital gold because there is a theoretical limit to the number that can ever be created. This conveniently ignores the fact that the computer software behind Bitcoin 1.0 is whatever 51 percent of the miners will accept. The bitcoin protocol can and will change, as it already has. Furthermore, gold has many commercial and industrial uses that give it intrinsic value, unlike bitcoins. 

Micropayments. The mirage-like “no transactions cost” nature of bitcoin makes it look like a way to make micropayments work on the internet. Users would be able to efficiently pay a few cents here or there to read an article or listen to a song.

Alas, bitcoin trades are not free, and miners are already expecting transaction fees in order to incorporate transactions in blocks. Consumers aren’t exactly clamoring for a way to pay for content they now get for free, either.

Cross-border payments.  Cross-border remittances are very expensive, and bitcoin-based applications are one of many solutions. While bitcoins, like electrons, can be sent cheaply anywhere in the world, the problem remains with both the first and last mile: getting the remittance from one currency into bitcoin and then from bitcoin into the local currency at the other end.  

There are plenty of new entrants into the cross-border remittance space that are bringing the cost down better than bitcoin. The fact remains that the only viable application for Bitcoin 1.0 is to break the law.  

It is certainly not in the public interest for the SEC to endorse a product whose only application is criminality. The SEC would not permit a Heroin and Cocaine ETF and it should not permit a Ransomware ETF either.

 

James J. Angel, Ph.D., CFA is a finance professor at Georgetown University’s McDonough School of Business.  He is not now nor has he ever been Satoshi Nakomoto.


The views expressed by contributors are their own and not the views of The Hill.