Such is the wackiness of the crypto world that a regulatory crackdown might actually revive investor optimism.
Earlier this week, Binance Chief Executive Changpeng Zhao pleaded guilty to money-laundering violations and agreed to pay a criminal fine of $50 million. Then, his company will pay $4.3 billion to, among other things, settle civil allegations related to sanctions evasion.
On top of this, Binance and Zhao are still under threat from a lawsuit by the Securities and Exchange Commission. The core of the case is that many U.S.-based crypto exchanges, which also include Coinbase and—as of Tuesday—Kraken, have been acting as unregistered sellers of securities.
However, Binance’s native token BNB has now rebounded by about 3% from its Tuesday lows, and bitcoin is up 6% in this same period. After a surge this past month, open interest in bitcoin options also remains skewed toward prices going up, especially around the start of next year, data by cryptocurrency exchange Deribit suggests.
Traders are motivated by the idea that the SEC is increasingly likely to green-light U.S. exchange-traded funds, or ETFs, that own bitcoins on a spot basis. Speculation about this has been rampant ever since a federal appeals court said in August that regulators must reconsider an application by Grayscale Bitcoin Trust—a closed-ended vehicle that owns the digital currency—to convert into an ETF.
Big asset managers, including BlackRock, Fidelity, Invesco and Franklin Templeton, have also filed requests to launch spot bitcoin ETFs. So far, only those that own bitcoin futures are allowed to list, but rolling over derivatives contracts is expensive.
A 2022 Nasdaq survey found that 72% of financial advisers who were considering investing in crypto would be more likely to do so if a spot ETF were available in the U.S. According to analytics firm CCData, this expectation was part of why the value of spot crypto trading on centralized exchanges jumped by 87% in October to $632 billion—the largest month-on-month increase since the crypto craze of January 2021. The discount that investors apply to GBT shares relative to the bitcoin it owns has kept narrowing, and is now below 10%.
To be sure, regulators so far refuse to oblige. This month, the SEC had a window to approve these applications and instead pushed back the decisions. Early 2024 is thought to be the next likely time frame for this to happen. Perhaps it never will and the latest regulatory strike turns out to be just what it appears on the surface: a bad omen for all of crypto.
But perhaps not. Rather than spelling the end of these exchanges, officials’ recent actions might end up subjecting them to the straitjacket of traditional financial regulations. Their sanction of Binance, for example, didn’t cripple its capacity to operate legally. And several bidders are seeking to reboot the infamous FTX exchange while complying with U.S. securities laws.
Until recently, crypto bros such as Zhao and convicted FTX founder Sam Bankman-Fried ruled over a financial Wild West. They have now officially moved “from cowboy to outright criminal,” as Andrew Carrier of London-based blockchain company Quant puts it.
This cleanup is probably bad for the crypto ecosystem at large, which thrives on unsupervised innovation. Yet it might be positive for bitcoin and ether. Neither of them are included in the list of digital tokens alleged by the SEC to be securities. Having compliant exchanges that become part of “surveillance-sharing agreements”—such as the one signed by Coinbase with Cboe Global Markets in July—should ease concerns about price manipulation, which are the main hurdle for the approval of spot ETFs.
Of course, the fact remains that bitcoin is essentially useless, its current revival as a vehicle for digital art notwithstanding. This should be a reason for most investors to avoid it. Yet uselessness isn’t necessarily an impediment to speculative value for assets that make a strong cultural impact and are easy to trade. Money managers are eager to diversify, and will pour money into vanilla crypto products once they are well supervised.
In the short term at least, crypto’s shift from world-changing unregulated technology to digital Beanie Baby could be a boon for bitcoin.
Write to Jon Sindreu at jon.sindreu@wsj.com
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