Mar 14, 2017
Why the SEC doesn’t like Bitcoin
And why we shouldn’t care in the slightest
This article makes two observations regarding the Security and Exchange Commission (SEC)’s rejection of the Bitcoin ETF proposal. Firstly, that if the SEC had approved this recent ETF proposal, or if they do in the future — the venture would be bad for Bitcoin stakeholders in the long run, especially those directly invested in those fund(s). Secondly and far more importantly, that Bitcoin is, by design and fundamentally at odds with the current financial ecosystem & its regulatory structure at a deeper semantic level.
ETF’s suck — especially for gold and bitcoins.
It’s important to understand the structure and attributes of ETF ownership and what that represents to investors — do your own digging. They only confer advantages to investors within the rules and structure of the current system where no better alternatives are possible, but we don’t need a plugin to access world markets through the regulatory membrane — we need to remove that barrier because Bitcoin supersedes the requirement to have a conventional regulator or sit inside the capital markets as they exist today.
A very easy case can be made against ownership of anything via ETFs because they suck worse than a granddad on a trampoline. The case is especially easy to make for precious metals and Bitcoin because of the unique motivations one might have to own these assets as opposed to others in the ETF universe.
Ownership dilemma
First, most and always is the rule that “if you can’t hold it — you don’t own it” and ETFs epitomise the distinction between actual ownership and perceived ownership. If you have the only private key to a bitcoin wallet containing bitcoins, or a gold coin in your pocket you can be said to be the owner of those marvellous items without any requirement for trust or a third party relationship. If you have units of a centralised, government endorsed fund with “Gold” or “Bitcoin” on the top — you certainly cannot be said to own either.
Since a large motivation to purchase either of these materials for many investors is to hedge forms of systematic tail risk that are meant to protect against belligerent third parties, “owning” assets with no counterparty risk in a wrapper that creates counterparty risk is putting ketchup on your steak. You don’t own the keys to the bitcoin in the fund — you’re paying a fund manager to hold them for you and that fund is subject to regulatory law that may change on the turn of a dime. History teaches us that our rights and laws are there until we need them. Confiscation and capital controls are now problems you have to account for that didn’t have to be considered in a direct ownership scenario.
Exposure through an ETF is even more absurd in the case of Bitcoin than for gold because Bitcoin has properties in excess of the ones that bitcoins and gold share. Distributed Ledger Technology (DLT) not only provides an excellent store of value, it has the ability to rewrite and decentralise the existing legal and regulatory system, and therefore does not fall under the remit of the existing regulatory framework.
Putting the cart before the horse.
We need to step back and refresh our perspective from time to time. Why now, in 2017 is a seemingly unpopular/misunderstood, technically opaque protocol with no government assistance or endorsement (and in fact, an unsuccessful MSM FUD campaign, passive aggression and disdain), that was born inconspicuously in a rather niche cryptography forum, now trading on self-built infrastructure in a $1000-$1300 trading range with record transaction volume AFTER a US regulatory body has turned down a major proposal for an attempt at assimilation into broader areas of current investment liquidity? Answer: it’s because the features that give this coin its value are independent of that unfriendly environment. Bitcoins flourish in spite of these hostile conditions and technical barriers. Bitcoin is resistant to conventional methods of control or coercion by design. Better technology wills out.
Why then, a few yards down the road of broader adoption, do we see early attempts to squeeze Bitcoin et al into a structure that it is capable of completely replacing? Wrapping a new technology in a cloak of old technology returns your product to the net utility of the old technology. Putting an engine in a horse drawn carriage, but keeping the horse as a regulatory requirement of the cart confers none of the advantages of the engine.
This is classic recency bias where people try to rationalise new information into a framework of something they already understand. It shows a failure to grasp the full utility of the new invention. It may also show an early attempt by incumbent entities to under-define a phenomenon that undoubtedly poses a threat to the dominant position of governments and banks.
Seizing the public narrative through MSM is a shrewd way to subvert the message of something new. Normally the first thing people hear is what they believe, but the jury is out in my mind as to how aware the establishment is to its own precarious position and how proactive they are capable of being. The situation is dynamic and the truth is probably struck somewhere between utter ineptitude/ignorance and something more nuanced and deliberate.
Bitcoin and it’s underlying technology will not fall under the current societal umbrella, nor will it augment the current financial structure, it’s going to replace it. Lock stock and barrel. It’s missed out on a regulatory knighthood, but is capable of toppling the financial monarchy.
We’re seeing this mentality from banks through their in-house blockchain projects for post-trade settlements and clearing. These projects are an attempt to reverse engineer parts of Satoshi’s blockchain blueprints to increase the efficiency of their current activities, while failing to realise that the technology they’re trying to use to make a faster horse, will be the same technology that replaces their mode of transport.
What use is are more efficient bank settlements procedures for dollar backed transactions when your population can use the same technology to transact without a bank, or dollars? This mentality is only possible after a prolonged position of governmental shelter and market dominance leading to total myopia and complacency.
How will all this go down?
We’re now observing established entities (governments, central banks, and large commercial banks) that represent apex predators in the economic jungle, making those initial interactions with a vastly superior animal. Their entire past experience has been one in which anything new, born in their territory can be tamed and put to use with coercion, force, or the threat of force. That animal is assimilated into their structure and made to serve and strengthen the current alpha.
However the tactics used to achieve that process are ineffective against this new, invasive species. The current apex predator is still extremely powerful since it can draw on the resources of the rest of the jungle with great effect and achieve some near term tactical advantage. As a result, it has no fear of this new intruder as fear is a redundant emotion in a perceived position of total dominance.
For a while the greater resources of the incumbent make it look like the likely winner of a contest, but this early display is misleading. Around the world, in the halls of power, in the senate hearings, initial legal cases and the private blockchain projects, the complacency, ignorance and lack of comprehension is palpable.
The period of transition is one we’ve seen at the start of every zombie movie ever made. The authorities, even in possession of great power and resources, never seem to fully recognise the danger, through hubris and misinformation are unable to mount an effective opposition, leaving the virus free to spread past the point of prevention. The existential threat is only realised after the point it is possible to destroy the virus. I think we’re reaching the end of that prevention period with Bitcoin, but we’re not yet at the stage where the establishment fully realises the danger it is in.
Bitcoin and DLT is now probably out the box for good, and there are very few ways to kill it at this point. Even if governments realise the threat it poses and then produced a coordinated effort to thwart it — the result would likely be a defeat or pyrrhic victory. There was a time earlier in its journey where Bitcoin could have been killed in the cradle, but the failure of world governments to sense the precarious position that DLT places them in will ultimately ensure the end of their current period of dominance.
A loss to a superior opponent rolls out in stages, and this will be the case during the ascent of Bitcoin. First comes the incorrect assumption that the opponent is inferior. Without a doubt this is the current accepted view in the halls and bureaus of power around the world. A dawning realisation follows next, when increasing attempts to regulate and control something that is not subject to regulation and is immune to conventional tactics (as we’re seeing most acutely in China) only leads to higher prices and greater demand. Capitulation follows but not before a vicious and bloody mess is made with the remaining strength of the outgoing ruler.
There is both a cost in losing ground and a cost in fighting to defend it. The cost of losing ground to Bitcoin comes in the form of lost tax revenue and deficit spending power of a inflationary currency that will vastly stunt the current resources of governments to mount the opposition required to win this contest. Attacking an opponent carries a cost, regardless of the effectiveness of the attack. Any attempt to use conventional force is the futile cost of trying to defend this ground with out-of-date tools and methods.
Add to this mix the fact that even in the absence of the bitcoin phenomenon — the global economic picture is a dumpster fire of debt, negative interest rates and crony capitalism. The beast was dying anyway, but a new contender has emerged regardless.
As a result — I think we’ll see a very powerful and dominant authoritarian machine slowly ebb away and die both under the weight of its own unsustainability, and as a result of a better successor. Interspersed fits of violence and economic collateral damage will colour the period of transition, following something akin to the five stages of grief. Individual casualties will be sustained on the side of the revolution because there always has to be someone first through the door. The mice will win — but the cats will be well fed.
Conclusion
These issues are what makes the ETF idea so absurd on multiple fronts. Bitcoin is not another commodity that will fall under the current regulatory framework and will work well under its rules and regulations. It has the ability to transform the way we interact with each other. It supersedes taxation, government coercion and law. Leaving that glaring semantic mis-categorisation aside — ETF’s as a product take a $1000+ bitcoin and leave you with something with almost no real utility. I for one am unconcerned with the SEC’s decision as both unimportant and irrelevant, and it seems the price agrees with me…
