This is a free preview of MTC 27…
In this note:
1. Why regulation is a risk to institutional crypto flows.
2. Some bullish and bearish points about The Merge.
3. On-chain sports gambling!
4. A lovely ETH chart.
.
For the full MTC experience, please Sign up here
Today’s note is 1700 words (7-minute read)
Failure to regulate
It’s more fun to write about raging bullish or bearish views in MTC, but the dull fact right now is that we have downside stabilization in crypto (as described in my last two notes) but we don’t have fuel for any sort of topside acceleration. In other words, while the money has stopped rushing out of crypto… It is unlikely to flow back in anytime soon.
The recent Coinbase news could be a huge disincentive for new institutional inflows.
Regulatory uncertainty puts institutional inflows at risk as the existential risk of retroactive prosecution in lieu of clear regulation makes the calculus of investing in non-bitcoin crypto impossibly complex. Capricious, random prosecutions are on the table and with no clear definition of what tokens are, or are not securities, we may enter a bit of a deep freeze here.
What we got here is… Failure to regulate
Remember, it was only April 2021 when the SEC approved the Coinbase IPO in a tacit endorsement of Big Crypto and retail crypto trading. Now, the exchange (and every other crypto exchange, by implication) faces existential risks as nobody knows what is legal or illegal anymore. The SEC complaint asserts that nine random crypto tokens are securities, setting the stage for months or years of hand-wringing by lawyers as everyone tries to get inside the mind of regulatory tortoise.
The SEC was formed in June 1934 in a reaction to the stock market crash of 1929. The agency was meant to protect investors from shady dealings pre-1929 as unscrupulous companies issued worthless securities and then pumped them via paid promoters and dumped the overvalued paper on leveraged retail before the securities crashed.
Sound familiar?
By failing to regulate the thousands of crypto tokens and failing to communicate how crypto fits into the existing regulatory framework, the SEC has now failed to do the exact job it was set up to do. In 2017, they saw the raft of ICOs and cracked down, but the exact same story repeated in 2021 as new security-like offerings were all the rage. Insiders were handed tokens at 0.0001, they pumped them via paid promoters, and then dumped them on leveraged retail for 100X profits (or whatever) before those tokens subsequently crashed to ~0.
I covered this phenomenon in MTC 7: These charts all look like mountains. The existence of these tokens on US exchanges trading them in broad daylight provided the appearance of propriety to what the SEC has now deemed illegal.
The SEC had one job years ago. Provide regulatory clarity. There was a simple solution ex-ante: Establish a commission or committee to rule on each token, before issuance, to provide clear guidance to investors on whether or not that token was a security.
Instead, the SEC said nothing, but allowed the tokens to proliferate into what essentially became a giant multi-trillion dollar gambling ecosystem where lotto tickets could be bought and sold intraday. Normally, US lottery income goes to public works, education, police, roadwork, and the treatment of gambling addiction. In this case, the lottery proceeds were channeled to influencers, founders, and shills. Instead of funding public works, they funded yachts, parties, and private bank accounts.
I’m not saying every token was a scam, there will be tremendous innovation down the road once we sort through the rubble. But the issue is that if you set up a game where the prize is huge money, and you don’t have any rules, the baddest bad actors will win. Much as the inability to properly tax externalities is one of the biggest flaws in capitalism as it drives the worst actors to pollute, embrace moral hazard, send spam email and robocall me 20 times/day … An unregulated crypto ecosystem makes it hard for the good actors to participate fairly.
I know from conversations with multiple senior people inside the crypto industry that it is almost universally accepted that if you want to be a good actor who attempts to follow the rules, you are at a massive competitive disadvantage.
Anyway, the ship has sailed. The SEC has lurked while ponderously rubbing its chin for five years as the relentless inflows continued. Now, they are going to establish some precedent by prosecuting where they think they can win, while exchanges, investors, and crypto projects look up at the Sword of Damocles.
Keep an eye on flows going forward as my guess is that retail is tapped out and institutional inflows will slow dramatically until some clarity on regulation is achieved. The stock market crash was in 1929 and the SEC was formed in 1934. The Global Financial Crisis was in 2008 and Dodd-Frank passed in 2010. Regulation takes a long time.
The Ethereum Merge date
It’s not all bad news. The Ethereum Merge could be less than two months away. If you are not familiar with The Merge, this explainer is good. Here is a nice visual from that piece…
This has been a free preview of the latest MTC. The rest of the note covers the Ethereum Merge (upside + risks), sports gambling via crypto, and a lovely ETH chart.
To read the rest of this note (and a new note every week!) please subscribe here.
Thanks.
bd