There Ain’t No Party Like a Bitcoin Party

It’s a similar conversation that most of us have probably had over the past few years with associates who know that we’re either tangentially (in my case) or directly (probably in yours) involved with finance, and are therefore privy to some sort of arcane knowledge about cryptocurrencies. These days people won’t be dissuaded, no matter how hard you try.

Years ago, it was people asking which stocks they should pick, or if you knew any companies that were on the up and worth investing in. Back then, it was a simple case of saying “don’t invest in the stock market fool,” or gently explaining the intricacies of insider-trading laws until they fell asleep.

But bitcoin has a lascivious allure to it, a sheen of aggrandizement that seems to home in on something in the American (or human, really) psyche and knows exactly which string to pluck to harmonize with a part of the brain that still, somewhere in its recesses, believes there is such a thing as a free lunch out there.

It’s not hard to see why. The value of bitcoin—which is clearly a speculative digital commodity now, and not a currency or a store of value—has exploded. If you were lucky enough to get in on the ground floor when it cost a few hundred bucks, congratulations. You’ve probably made some decent money.

But as Adam Ludwin, CEO of Chain, said yesterday in a hearing on digital currencies and distributed ledger at the Securities and Exchange Commission (SEC), this early success breeds a perverse investing mentality, where people seem to accept risk because of jealousy, because of resentment at missing out on the previous big thing because they didn’t understand it. Therefore, that perverse logic suggests, maybe all these initial coin offerings and token sales, which you understand even less, are the place to be.

This, and I cannot stress this enough, is how people lose their shirts. At the same hearing, Damon Silvers, director of policy and special counsel for AFL-CIO, and a member of the SEC’s Investor Advisory Committee, said that his bubble alarm was at “Defcon 5,” and proceeded to ask a series of blunt questions about the legal recourse that people have in terms of digital commodities like bitcoin.

None of the experts, including a Yale law research scholar, could even give a satisfactory answer as to whether the purchase of bitcoin or a token sale constituted an investment contract in a legal sense, and Ludwin spoiled an otherwise decent testimony with an attempt to use a parable to describe the intricacies of securities law, as well as a weird metaphor about whether you have a contract with the Earth if you mine gold.

The point is that bitcoin is clearly a bubble, blockchain has some promise but is hardly going to revolutionize commerce in the same way that the invention of ledgers or the ATM did, and despite the hype, there’s too much uncertainty in this sector for it to be allowed to continue as is without some stiff regulatory intervention. That is already happening, but I would expect it to accelerate.

If nothing else, too, the bluntness of Silvers’ rebuke to Ludwin, in which he said “you haven’t said a single thing that is legally relevant,” may well go down as one of the most demonstrative examples of how much obfuscation exists, how much work there still is to do before bitcoin’s Tulip Mania ends. Worryingly, it might also prove to be an epitaph when it comes tumbling down, and people start screaming about losing their money after they bought in without considering whether the appropriate safeguards are in place.

Frankly, they’re not.

This Week on Buy-Side Technology:

• BNP Paribas is closing in on a big acquisition in the hedge fund administration space, with a 40 Act franchise. It’s also going live with an internal blockchain system for corporate actions. Read this great scoop by US editor Anthony Malakian here.
• The regulators have tooled up, and they’re not messing around anymore. That’s the message from compliance chiefs at this year’s North American Buy-Side Technology Summit, and they say that without a renewed focus on technology, things might go a bit Pete Tong.
• Millennials now pose a threat to cybersecurity, as well as the fraying nerves of despairing parents, my out-and-proud millennial colleague Emilia David reports.
• Trading Technologies is making a surveillance play with its acquisition of Neurensic, an AI-powered fintech, and it says that nobody else is doing what it’s doing with this. Which I’m not sure is 100 percent accurate, but there we go.