When Sam Bankman-Fried’s FTX crypto exchange collapsed in November 2022, bitcoin looked set to follow him into the discredited fringes of financial history. Yet just over two years later, the Securities and Exchange Commission has reluctantly approved exchange-traded funds in spot bitcoin to be listed and traded under the rules of the world’s biggest financial markets.
Excitement at the pending decision has helped lift the price from $US16,000 when FTX crashed to nearly $US46,000 ($68,600). A bitcoin-linked ETF listed on the ASX is expected in months. It paves the way to mainstreaming Bitcoin for the masses, though in ways that its mysterious creators and libertarian fanboy promoters would hate. They saw it as a way of bypassing governments, financial markets, and people like the SEC with a disruptive private currency.
The SEC is right to bring Bitcoin under the regulatory umbrella without playing down the exposure to speculative storms it has brought investors in the past. It might even help decide the point of this essential but embryonic digital currency.
The ETFs will track the price of Bitcoin without retail investors needing to hold this complicated digital asset themselves. That risk will be carried for a fee by the world’s most prominent fund managers, such as Blackrock, Fidelity, Templeton, and VanEyk, and retail investors will get the consumer protections the big players offer regarding product disclosure and custody of the assets. It has created a safer way for investors to buy into risky investments.
It’s not taking the risk out of the price
It’s not taking the risk out of the price, of course. Caveat emptor still applies. SEC chairman Gary Gensler is more than at pains not to endorse the product. He says that Bitcoin is a “speculative, volatile asset” used by criminals. Those who offer ETFs must produce “full, fair, and truthful disclosure.” They must use registered exchanges where there is confidence that the underlying price isn’t manipulated. Mr Gensler’s Australian counterpart, ASIC chairman Joe Longo, shares the concerns. He says that despite the aim of crypto purists to create a peer-to-peer private money system that doesn’t need trust, it requires faith in many people and requires strong regulation and effective enforcement.
Creating the proper disclosures and protections for investors and consumers should provide a more robust framework for letting the market decide the price – much as Australians have long bought into penny mining exploration stocks. Mainstreaming Bitcoin and perhaps other cryptocurrencies should preserve the scope for financial innovation. It may help resolve whether it is fundamentally just a means of exchange using new technology such as blockchain. Or is it a speculative store of value in limited supply? Will providing more regulated protection for buyers make it more popular? If so, will that make it more stable and improve its use as a means of exchange?
Many investors want in. They and their advisers have long enjoyed some small or manageable investments in this new asset class but have been wary of having to hold their digital keys and wallets. Until now, investors have often been limited to unregulated, decentralized exchanges such as FTX, whose former owner, Bankman-Fried, awaits sentencing after his fraud conviction. SEC approval means that investors can buy from a financial giant with custody rules so they know where the investment is. Some of the surge in demand is likely to be existing Bitcoin investment flowing into the newly listed funds, which are safer.
Top economists and bankers still consider Bitcoin worthless and applicable only to criminals. But the underworld likes cash, too. And governments have encouraged the whole libertarian crypto caper by overprinting more traditional forms of “money.” Ultimately, financial assets are worth what people think they are worth – a test that applies to gold or other conventional ways of storing wealth and hedging against inflation and other risks. Blackrock’s Larry Fink, another earlier skeptic, now calls it “digitized gold.” Whether he is correct or not depends on Bitcoin investments building a track record of reliability. The regulators have just given it the opportunity, at least.