Author: Kent Moors, Ph.D.
Over the past several weeks the renewed discussion of US governmental regulatory oversight (and the inevitable accompanying tax consequences) in the crypto currency world has offset an otherwise upward trend in sector pricing pressures.
Now, at the outset, I should note that my personal belief holds the extension of digital currency into mainstream financial transactions will take place. We see the writing on the wall in more national central banks moving into the sector with plans for their own issuances, major banks and hedge funds establishing expanding crypto trading desks even while bad mouthing the coins (take JPMorgan Chase, for example) and a widening interest in the daily posting of prices for leading crypto coins, even dogecoin, a coin initially developed as a joke.
But this will hardly happen quickly or without occasional impediments. Leading the list here is the absolutely essential requirement that it becomes a reliable instrument. That cannot happen without regulation, whether digital purists prefer to hear that or not.
All of this is unfolding against a backdrop of increasing institutional interest in crypto accounts and the prospects of exchange traded funds (ETFs, traded based on an underlying index) in the digital space. This latter development is occurring more quickly in Europe than in the US, but the pressure is rising for an ETF or ETN (exchange traded note, based on paper cut on an underlying index) in the American market as well.
Before any of this happens, however, the regulatory environment needs to be worked out. The current argument by some that crypto is to be preferred because it exists in a world outside of governmental central control is self-defeating. This is not wampum and no serious practitioner wants to operate in an environment where the blockchain itself (something a very small minority of market participants either understand or, in some cases, even want to think about) determines your retirement prospects.
Crypto has portrayed itself as being a preferrable store of value (over traditional fiat currency) since it provides a documented blockchain proof of transmission. However, it has also become a conduit of choice for several criminal transfers (ransom payments, illicit drug and other illegal transfers) and the shell game of insulating assets from taxation.
Both fiat and crypto currencies are (or can be made to function as) a physical commodity. That means fraud such as counterfeiting or fake accounts can be ignored from our consideration on this occasion. They can be applied to both. Yes, the apparent security of a blockchain lineage documented by a decentralized network of computers makes it virtually impossible to counterfeit or double spend the more available crypto coins. Nonetheless, what those coins are used for, what accounts they are apparently held within, and who controls them are another matter altogether.
Much of the ability to oversee traditional fiat currencies arises from the interchange among their uses. In the broadest view, there are six – as a measure of value; a medium of exchange, a store of value (usually transferred into some calculation of purchasing power); a unit of account; a base for the determination of credit; and a standard for postponed payment (in other words, a common yardstick for the valuation of debt).
Several of these flow from the position of fiat money in a broad range of direct, collateral, and savings transactions. Here, with the exception of the “paper value” of digital coins held in out-of-market accounts, crypto does not provide an equivalent medium of exchange.
To date, the two methods of exercising currency uses are not interchangeable. And that leads to a number of possible abuses.
Among the various matters addressed, there are three recurring problems I find most likely to occasion the need for regulatory oversight: an exchange mechanism that still relies too much on limited coin usage; the inability to determine genuine asset valuations for an increasing number of alternative coins (altcoins), some thinly traded; and a rise in pump and dump moves.
The first plays into the view that crypto needs to be regulated because its primary advantage lies in a deliberate insulation from the main exchange market. Those who praise crypto as a way of financially living “off the grid” and, thereby, outside governmental control, merely play into this distrust. An alternative currency will not be accepted if it seems based on some grand conspiracy theory.
If the main reason for digital coins is to hoodwink Uncle Sam, then it becomes suspect as a conduit for activities considered illegal on their own.
The second involves the danger of inbred valuation, as a myriad of new minor coins are created with no way to ascertain a genuine independent value apart from what they may extract from the more established coins. Despite what adherents would have you believe, there is not enough game to go around.
Once again, the seminal example of dogecoin is illustrative. That those who created a coin as a parody of the crypto sector now find their joke being considered serious, and even being accepted in some very limited circumstances, is a disconcerting statement on the space as a whole.
Both of these considerations oblige oversight.
But it is the third that commands the greatest concern.
Currently, crypto user angst is over who the government may consider to be a broker in transactions. That is, who is subject to the same regulations as those conducting sales of traditional stocks and bonds?
Frankly, this would seem to have a rather straightforward solution. Whoever effects a transaction in which an asset changes hands, should be subject to oversight. Otherwise, that transfer is being structured to evade view and deserves to be held suspect.
The far more serious situation involves the classic pump and dump. There have been an increasing number of examples in which parties have pushed positive valuations of digital coins (both the major examples of bitcoin and ethereum or competing altcoins) only to then sell holdings to gain an artificial profit.
This irritation is complicated by well-known figures hyping crypto and then retreating, creating a rage among those foolish enough to have followed them. Elon Musk needs to stay with his cars or somebody in authority needs to sit on his crypto pronouncements and hold him responsible for the damage he does every time his mouth opens on the subject.
However, the problem goes beyond Musk.
Conservative estimates have put the loss to crypto currency investors at billions (in fiat dollars) over the past year from pump and dump strategies. There is also analysis emerging that the problem will accentuate via activity focused on alt coins in general and dogecoin in particular.
This is happening for one simple reason. While pump and dump is illegal with securities like stocks, it is not illegal in the world of crypto. And it is not illegal because that world is not regulated.
To date, the only impediment is a general caution of caveat emptor. Yet how can the buyer beware when the playing field is controlled by the manipulator with no referee to intervene?
Dr. Kent Moors
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).
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