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Crypto’s Bucket Shop Problem

A 19th century bucket shop in NYC
Before going any further, I must mention one of the most important updates of my life…! On May 27th, I got married to my beautiful wife: Maris Catherwood! We have been together since high-school, and on 5/27 we officially tied the knot. She simply looks too beautiful to not share these pictures:
Okay, now back to financial history!
A Wild Week for Crypto
This was a wild week for crypto and market regulators. I think these article thumbnails from Bloomberg, side by side, say it all:
As with every major development in the world of crypto – and following the FTX fiasco starting last Fall – the recent news sparked debate over whether crypto was just another investing fad that is finally unraveling, or whether there is still an important role for crypto in financial markets and society.
As it’s been a little while since we discussed cryptocurrencies, I want to revisit some of my previous articles on the topic. In particular, I’d implore everyone to read the first article in this week’s newsletter, which I wrote last summer for Bitcoin magazine. In the piece, I argued that major crypto players will face the same problem that late 19th / early 20th century stock exchanges faced in the United States.
“Ardent Bitcoin supporters would likely agree that there are rampant levels of manipulation and fraud in the broader cryptocurrencies and digital assets landscape. Bitcoin, however, should be insulated from these nefarious activities, right?
Unfortunately, Bitcoin is undeniably impacted by the bad practices elsewhere in the crypto and digital asset ecosystem because bad actors frequently use BTC at some point in their schemes (i.e., as collateral, reserves, etc.). For example, when the algorithmic stablecoin TerraUSD unraveled in May 2022, bitcoin suffered because the Luna Foundation Guard set up by Terra’s founder dumped $3.5 billion worth of bitcoin on the market in attempts to prop up TerraUSD’s price. Although Bitcoin was not involved in the issues that led to TerraUSD’s unraveling, it was still negatively affected by this speculative episode. This is the burden bitcoin bears by being the largest cryptocurrency.
During the bucket shop era, stock exchanges learned that despite their best efforts, theoretically fictitious trades in seedy bucket shops had real consequences. Similarly, Bitcoin is still subject to the manipulative and fraudulent activity perpetrated by bad actors in other areas of the digital asset landscape.
Like stock exchanges in the early 20th century, Bitcoin supporters should cautiously welcome some government regulation in crypto and digital assets because it should help prevent bitcoin’s price being affected by bad practices elsewhere in the ecosystem.
The precedent for this is found in average IPO returns before and after regulations imposed by the 1933 Securities Act were established. When there was little consequence to floating shady companies and frauds on the stock exchange, bad actors did not hesitate, and the average investor suffered. Yet, after the Securities Act, the general quality of companies going public increased dramatically because of the disclosure requirements and personal liability of parties involved.
Bitcoin is currently in the “democratization without regulation” phase of development, which history has shown to be perilous for retail investors. To ensure the average investor can feel confident about not being exploited, the basic levels of government regulation that exist for other asset classes are needed to protect investors and facilitate broader adoption.
Regulation might be a taboo word for many Bitcoin proponents but accepting some regulation may fuel the growth of Bitcoin over time.”
It seems like we may finally be moving out of the ‘democratization without regulation’ stage of crypto markets development. Regulators sure seem ready to regulate after this week!