market selloff headline

market selloff headline

Thursday, March 13, 2014

Some say bitcoin is a “Ponzi,” FINRA issues an alert, but CTFC chief hints it may regulate the newest “currency”

The regulator that completely missed the MF Global implosion (which I commented on for CNN, ABC News, Law 360, and Progressive Farmer News, among other places) is now mulling a new bitcoin regulatory regime.  Acting Commodity Futures Trading Commission chairman, Mark Wetjen, informed reporters this week, "We are looking into that." 

The brainchild of Satoshi Nakamoto, bitcoins are simply solutions to math problems–really, really complex math problems–turned into an electronic chit.  People can “mine” for bitcoins by using computers to answer complex equations generated by the bitcoin network.  As more bitcoins are produced, the network generates increasingly complex problems, which require even more computer power to resolve, theoretically limiting the total number of bitcoins that can be created over a given time period.  At least in the abstract, bitcoin value is determined by supply and demand, although hacking has represented a new demand that has clearly crimped its value.

Favored by denizens of the shadowy Silk Road network (well, at least until it wasn’t) because of its anonymity and borderless exchange capacity, bitcoin has a legion of libertarian loyalists as well as dozens of detractors.  Squarely among the latter is Nouriel Roubini, the NYU economics professor dubbed “Doctor Doom” for his pessimistic prognostications at various points during the economic collapse.  The dour doctor went on a tweet spate from near Kuwait a few days ago, making the case that the innovation is merely a “Ponzi game” [sic] and cannot possibly be considered a currency.  Dr. Roubini crystallized his contention within 140 characters, stating somewhat persuasively from this perch that bitcoin is “not a unit of account or a means of payments or store of value.”

Meanwhile, FINRA (which was the only SRO to signal a timely warning about MF Global’s imminent collapse in the fall of 2011) issued an Investor Alert this week with the pithy title “Bitcoin: More than a Bit Risky” with a telling URL that includes the phrasing “ProtectYourself/InvestorAlerts/FraudsAndScams.”  The broker-dealer SRO’s cautionary tale includes references to SEC enforcement activity and trading halts, as well as a laundry list of risks, and even likens the peer-to-peer network to “pump and dump” schemes (to be fair, nascent bitcoins traded as low as $0.01 in 2009 and approached $1K each just a couple weeks ago; closed at $642 yesterday).  Adding to the e.lucre lore, the Winklevii invested many of their collective Zuckerbucks in bitcoin near the ground floor and were early B-list b-coin evangelists, even booking a trip to outer space with it and maybe even shopping @ the O with some of their nouveau chic geek dough.

One U.S. regulator strongly suggests it’s a scheme, while another’s imprimatur may be in the offing as a tradable currency.  One got MF Global right while the other missed the mark famously.

So which is it this time?