This week in Crypto April 15th

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Well, happy Friday, everyone. This is Dave Weisberger, the CEO of Coin Routes. And it’s time for another this Week in crypto. Well, I could talk about the market, except for the market for bitcoin and other cryptos has been what most commentators would call quite dull. I look at it with a much longer time preferences as I’ve often stated. But the fact is, we’re still in the middle of a trading range that has been carved out from the low 30s to the mid 40s and we now sit towards the middle of the range in a battle, as it were, for 40,000. The truth of the matter is there are more long term buyers and not a lot of speculators. And every time the market rallies on some news it fades and comes back to the waiting hands of those long term buyers. And we see this with the onchain statistics that indicate an increase in that. But what’s interesting in crypto over the last week actually is something that, well, frankly makes me mad.

So this is going to be a bit of a rant and I apologize for those of you who don’t want to see me get up on my soapbox. But the truth is, the announcement by Celsius that they’re only going to be able to offer their earning products, their interest earning product to accredited investors in the United States is yet another indication of just how anti-investor this SEC, led by Gary Gensler, is. The fact of the matter is the accredited investor rules are last refuge for the SEC where they’re essentially protecting investors. The rule basically says right now that if you have less than a million dollars of net assets, of liquid assets, that you are not accredited and therefore you’re not allowed to buy private or unregistered securities. BlockFi first then what happened with Earn, the earned process, that was good that Coinbase was looking for, and now at Celsius, all our interest-bearing accounts, that because they’re using crypto and the mechanism of crypto that they’re using is deemed a security by the SEC.

Now that mechanism needs to be understood. Essentially what’s happening is, crypto assets are in demand by short sellers for selling and therefore, they’re willing to borrow those assets and those borrowings of those assets can get paid back to the owner of the assets as interest. And that is very, very different than what happens in other asset classes. In equities for example, if you hold IBM in your Charles Schwab account, it is highly unlikely that you see a penny from that IBM, even if a speculator wants to borrow it to cover a short position or hedge some esoteric derivatives that they’re dealing with. This turns out to be extremely important in terms of the amount of money.

In fact, most people would estimate that prime brokerage, which prime brokers make their money by lending out securities to hedge funds and by financing short positions at those funds. That activity is a multibillion dollar profit activity. But almost all of those profits go directly to the banks that control it, and it’s a very short list of those banks. The individual investors get very little. The pension funds who have some negotiating leverage get something. But once again, nothing close to what would happen in a purely competitive market. Now look at crypto where Blockfi and Celsius and others tried to establish a market where the consumer, where the actual investor got the lion’s share of the benefit from lending out their assets. That, unfortunately, according to the SEC, is something that just can’t happen. So this particular event where Celsius said it’s only for accredited investors in the US. is quite sad.

It’s sad because it’s obviously anticompetitive. But worse, it gets me up talking about the absolute nonsense of the accredited investor rule. So this rule is meant to protect investors and it’s based on two false premises. False premise number one, that rich investors are more knowledgeable than poor investors. Absolutely garbage. The fact is, when it comes to crypto, the average accredited investor knows far less than the average under 30 year old or informed at any age that has been researching and looking into crypto, understands what onchain versus off chain is. And given the number of conversations I’ve had with people in traditional finance, many of which are accredited who knew nothing, and the vast number of conversations I had just last week at Bitcoin 2022 with hundreds of non-credited investors who understand this space, it is a completely fallacious assumption. Fallacious assumption number two has to do with does it actually protect investors? Is it a protection at all? And that is also completely wrong.

Look at it this way. By looking at wealth, you’re essentially saying the absolute number is what matters. But it doesn’t. What matters is investor circumstance and relative sides. For example, if a retiree put 100% of their money in a private security and that security goes bankrupt, that retiree is screwed for the rest of their life. On the other hand, if a 22 year old put their small nest egg, it’s much smaller. But they put that into something, a private investment that went bankrupt, they would live and learn. It would be an investing lesson to them and they would get on with their life. Or if you take an average 45 year old who puts 10% of their small, not accredited but small net worth into a private investment and lose that, that’s not nearly as bad as someone losing everything that was significantly wealthier. So the numbers should not be relative to wealth. That should never have been the case. But the fact of the matter is it is based on wealth. And that is problematic. It is also problematic because the assumption that that rule makes is that being a security and being handled by the SEC with their information makes it absolutely safer. Once again, that is highly questionable.

I would ask all of my viewers to ask themselves a question when was the last time they read a prospectus or in fact read anything that was official, that came out, that was SEC approved about inequity? The reality is nobody reads those things, or very, very few, except for perhaps analysts. But if you compare crypto to OTC equities, most of which have no analyst coverage, don’t get talked about, and the information on them is really scarce. And you compare that to large cap cryptos, which are today considered private assets, it’s not even close. Those crypto assets and those lending programs are far better analyzed, have far more information than you can source on the Internet.

The short story here is, and I posted this on LinkedIn earlier this week, is that the SEC’s rules were designed before computers exist, much less the Internet, much less crowdsourcing information, reviews, and all the things that we all use to make choices in our daily lives. None of that has been taken into account by the SEC. So where does this leave us? This leaves us with the fact that the accredited investor rule should become a political issue. Now, there have been multiple people, representative Tom Emmers has been the one that I’ve seen on Twitter talking about how that should be something that should be bipartisan gotten rid of. It accentuates the wealth gap. It is based on nonsense. It’s paternalism at its worst. It’s paternalism based on technology that didn’t exist. So rant over.

We’ll wait. Look forward to next week and when we talk about events of what will happen again. And hopefully we’ll have more interesting things to talk about in the market. Thank you.

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