If you haven’t heard the news, you probably will very soon: The U.S. Justice Department is collaborating with the Commodity Futures Trading Commission (CFTC) to launch a probe into the Bitcoin markets.
Their mission: To look for evidence of wrongdoing.
How far will they go? What actions will they take? How much enduring impact will they have on markets?
Before we address those questions, let’s take a look at the market response …
Another Excuse for Market Malaise
News of the probe has contributed to an overall negative sentiment in the crypto markets in recent days.
But as we have said repeatedly, news of any kind is rarely the true cause of a market decline. It’s just one of many scapegoats traders blame for a decline.
The “regulatory crackdown is coming!” is the outcry you hear from the crypto space — the same boy-who-cried-wolf pattern we’ve witnessed repeatedly in recent years.
In contrast, we remain steadfast in our two-point evaluation of U.S. regulators that has, so far, withstood the test of time:
Point 1. U.S. regulators are not fundamentally anti-crypto. They are fast learners. And most have already gained sufficient knowledge of this emergent technology to recognize its value.
They continue to seek a middle ground between:
(a) hands-off stances that tacitly condone bad behavior, and
(b) Draconian measures that will damage the space.
Point 2. Even if they stray from this path and seek to impose some form of ban, their efforts will either be unenforceable or will backfire, forcing them back to a middle ground.
And there is abundant evidence that the middle road remains firmly in place. For example, just read the speeches by the CFTC Chair and review the actions (or lack of actions) taken to date.
Still, even savvy traders and investors that we respect continue to pitch the scare scenario: “Crypto will obviously be banned soon,” they say. “Nothing can escape Big Brother Uncle Sam.”
Or …
“Look at what they did to the Swiss banks!” chime in our international friends. “Swiss banks used to be the venue of choice for parking capital away from prying eyes. No more! The folks from Washington and New York read them the riot act. They forced the Swiss banks to hand over their list of U.S. clients or get shut out of world financial markets. They will do something similar in the crypto space.”
We get it. And we empathize with those who cower in fear when they hear the DOJ of the USA is launching a probe into Bitcoin markets.
“Man, oh man! That’s scary!” wails the chorus of crypto investors.
But hang on a sec.
The cryptosphere isn’t a bank, a multinational or even a country. It’s a global distributed network of peers. Those peers keep a ledger they share among themselves. The ledger allows them to know who owns what. It exudes transparency. In many respects, it represents the epitome of full disclosure.
You’ve heard all about full disclosure, we presume. If not, let us explain …
Full disclosure is not the target of U.S. regulators looking for criminality.
Quite the opposite.
It’s their watchword for model behavior. It’s what they often promote more than anyone else.
Moreover, at the end of the day, Distributed Ledger Technology is not the turf of criminal masterminds, terrorist cells or rogue nations.
It’s a network with very strict rules, but no formal rulers.
It’s a space no authority or government can bend to their will.
Unlike Switzerland. Or a bank.
What about the trading? Can’t regulators kill that golden goose?
No. The crypto trading happens across a multitude of crypto exchanges.
By their very nature, the assets sitting on Distributed Ledger Technology platforms are digital and borderless. The protocols are open source.
Setting up an exchange to allow people to trade these assets is a trivial task any experienced team of programmers can accomplish.
That’s why, if regulators shut one down, 10 others can pop up in its place. Unlike the NYSE or the NASDAQ, crypto exchanges are less akin to formal institutions and more like Web apps that allow people to communicate with one another. All with very low barriers of entry.
That’s the Big Picture context. Now, let’s get back to answering the opening questions.
Likely Outcome of the Justice Department and CFTC Probe
Yes, the Justice Department and CFTC are launching a probe.
Yes, they want to investigate whether or not people are manipulating the crypto markets.
And yes, they are pretty open about it, too.
So what? What’s wrong with that?
We all know it’s common to see crypto project promoters on social media promising outsized returns to an unsuspecting public.
We all can see, with our own eyes, the many celebrities who endorse ICOs with scant understanding of what it is they’re promoting.
We also can see how illiquid the markets are; how easily a million dollars can shove prices around; how readily they can fool people into thinking there’s real demand for a coin.
Can the government truly solve this problem? Not without a market that’s allowed to grow and mature. Not without a lot of time. And certainly not by themselves.
In fact, what they can accomplish single-handedly is very limited.
We repeat: Crypto assets sit on distributed ledgers, and the exchanges are little more than a convenience — a handy way for people to trade with one another.
It’s not a network whose servers can be shut down. The hard drives and data storage facilities are not assets that can be confiscated by authorities.
Instead, every single participant owns these assets directly. Everything is encrypted, typically with state-of-the art algorithms and mathematical equations. And no one has access to the funds — not even those who “run” the network.
Bottom line: Although we applaud any honest, non-disruptive efforts to instill more sanity in these markets, the reality is that they may often prove to be futile unless two things happen:
- They are consistent with, and can be enforced by, the rules of consensus — the protocols that underlie each cryptocurrency.
- They are broadly supported by the crypto community of developers and users.
In other words: A robust industry-government partnership.
What’s the Downside If Partnership Becomes Elusive?
Even in the worst-case scenario …
Governments shut down exchanges … and they simply force trading to move to over-the-counter solutions.
Governments ban the possession or trading of crypto assets … and they simply drive investors overseas.
Government officials pop champagne bottles to celebrate their “great victories” … and the world simply moves on.
As Andreas Antonopoulos likes to say …
“You can’t regulate Bitcoin in your country. You can only regulate your country out of Bitcoin.”
Best,
Juan and Martin
