Thanks to SEC Chairman Gary Gensler, Bitcoin, a speculative currency backed by absolutely nothing, has been brought back from near death. In November 2021, at the height of the cryptocurrency fever, the value of bitcoins reached a peak value of $64,400. Then, after several cryptocurrency scandals, Bitcoin's value fell below $35,000 for most of 2023. Today, Bitcoin is back trading at more than $63,000, near its all-time highs.
In January, in a 3-2 vote, Gensler sided with Republican commissioners on the Securities and Exchange Commission to allow 11 large financial companies to offer “exchange-traded products” (ETPs), tradable funds backed by bitcoin. For a Democratic president to vote against his fellow Democrats and side with Republican commissioners is almost unprecedented.
This new money adds nothing of value. Any investor who wants to buy a Bitcoin can simply go out and buy one. But they create the impression that bitcoins are a safe investment, because the money is sponsored by reputable companies like Fidelity, and implicitly blessed by the Securities and Exchange Commission.
More from Robert Kutner
Why did Gensler, a regulator who spent most of his recent career as an MIT professor and then as SEC chairman warning about cryptocurrency abuses, change course? The long and short of it is that Gensler is overly afraid of being overruled in court.
Last August, the D.C. Circuit Court of Appeals sided with Grayscale, whose application to create a fund based on the spot value of bitcoin was rejected by the SEC. The court noted that the SEC approved the funds based on the value of bitcoins in the futures markets, so why not in the spot markets? The committee said that the two markets are very different.
The court did not ask the SEC to grant Grayscale's request; It merely remanded the case to the SEC for further consideration. Gensler feared he would be overruled again.
In strong opposition to Gensler's ruling that approved the requests, Carolyn Crenshaw, one of the other Democratic commissioners, reviewed all the ways in which Bitcoin trading is characterized by fraud and manipulation, concluding: “I am concerned that these products will flood the markets and deposit them directly into… Retirement accounts for American households who are least able to afford to lose their savings to fraud and manipulation…I am concerned that today's actions will create Commission approval and oversight of the underlying spot markets when no such oversight truly exists.”
It would have been much better for the SEC to reject these requests, clarify the distinction between these proposed products and others it has approved, and seize its opportunity in court. At the very least, this could have slowed down Bitcoin's recent gold rush.
The January ruling opens the floodgates to other exchange-traded products proposed by several other investment firms, including those backed by Ethereum, a cryptocurrency product with a shakier track record than Bitcoin. The Securities and Exchange Commission has until late May to decide on these requests.
Why have major investment firms like BlackRock, which were skeptical of innovations like Bitcoin, reversed course and become supporters of Bitcoin-backed funds? Fees, of course. BlackRock's fund reached $10 billion in record time.
On March 6, the SEC also relaxed its proposed regulations requiring publicly traded companies to disclose material risks related to climate change. Once again, this concern was overruled in court.
There's a charming symmetry between the SEC's capitulation on Bitcoin and the climate, that mining Bitcoin and other cryptocurrencies uses massive, energy-guzzling server farms for a completely false purpose. As for appeasing the courts, the Fifth Circuit Court of Appeals ruled yesterday that even the SEC's weak climate rules were excessive, and ordered them temporarily halted.
It's better to stick to your principles, keep fighting, and let the chips fall.
