The Week: Roubini and Hayes Tangle in Taipei and Binance lists Doge

Over the past week, crypto sceptic Nouriel Roubini went head to head with BitMex founder Arthur Hayes in a debate that left no love lost between the two, US regulators gave a cease and desist request to Facebook over Libra, Cambridge University estimated that the Bitcoin network energy consumption is on par with Switzerland and Binance listed everyone’s favourite crypto memecoin, DOGE.

UK’s financial watchdog proposes derivatives ban

The FCA, the UK’s regulatory body for financial companies and markets, has proposed a ban on derivatives trading for retail customers. Derivatives are typically seen as a more sophisticated, and often riskier, financial instrument. Due to crypto’s inherent volatility, the body believes they present the risk of substantial harm to retail investors.

CME Bitcoin Futures hits new highs in June

Institutional involvement in crypto has become somewhat of a meme in recent years, but new data from the CME, the world’s largest derivatives trading venue, suggests there is some substance behind the optimism. In the month of June, new account openings for its Bitcoin Futures trading product grew by 30% and open interest hit a new high.

Regulatory fightback against Libra begins

A congressional subcommittee in the US has requested that Facebook ceases its proposed venture into cryptocurrency. In a letter to Mark Zuckerberg, signed by Rep. Maxine Walters, Chairwoman of the Committee on Financial Services, the committee says that Libra “raises serious privacy, trading, national security, and monetary policy concerns for not only Facebook’s over 2 billion users, but also for investors, consumers, and the broader global economy.”

The long take

Are exchanges doing enough to protect retail investors?

Among the many platitudes that exist in the crypto space, one of the most prominent is the idea of ‘democratising’ the investment landscape. Conventionally, in major economies like the US and UK, rules have been in place to limit who can invest in early-stage companies. Proponents would argue that these rules exist to protect retail investors from putting their money into poor quality or even scam projects. Objectors would argue that these rules reinforce power structures where institutions get early access to high potential businesses and reap the rewards, while retail only ‘gets in’ when the company goes public.

Back in 2017, crypto was often positioned as the ‘great leveller’. The ICO boom gave regular investors from all over the world the ability to buy into emerging projects (often so ‘emerging’ that they had little more than a whitepaper to show) and then gain near-instant liquidity to sell on exchange at profit. Fast forward to 2019, and the crypto investing landscape has clearly matured. The inevitable implosion of the ICO bubble, and creeping actions from the SEC against the most egregious of the projects raising in 2017, has led the space more towards an institutional model with greater emphasis on private sales for funding. 

For the projects, this offers greater assurance that they are selling to accredited investors, and so are less likely to face sanctions from the regulators. For the institutions, it means that they’re getting their slice of the pie before Joe Public does – just as they like it. It’s a benefit to the exchanges too. The exclusivity that the private sale brings creates exactly the sort of FOMO the exchanges love…and can profit on.

So, is this new arrangement win-win for everyone? Not quite. Let’s not forget about the little guy – the retail investor seeking to reap the rewards of democratised finance. Over recent weeks we’ve seen several cases that show the potential negatives. Most notably Algorand, a long-anticipated project and the brainchild of respected cryptographer Silvio Micali. The token has been gaining attention for its innovative Pure Proof of Stake (PPoS) consensus model. It also gained attention for its Dutch Auction funding mechanism – a monthly funding round the project will conduct among accredited investors via CoinList – the first of which sold at $2.40 a token, giving the project an implied market cap of $24 billion (nearly equivalent to the Ethereum network). 

The coin gained instant liquidity, listing on Binance on 22 June at around $3.40, before dropping within the same day to $1.80. This brought delight to retail investors, who were able to get in on the action at a cheaper price than the private investors. Though not quite…what Binance didn’t mention in its announcement (nor within its accompanying research report) was that the private sale involved what was in essence a ‘put’ option, giving private buyers who purchased for $2.40 the option of selling and buying back at as low as 10% of its value risk-free (“downside protection”). This arrangement gives greater context to the dump that immediately followed. The value of the coin has continued to slide (currently at around $1), likely ‘rekt-ing’ retail buyers who thought they were getting in at a desirable price.

This trend of asymmetric access to information and investment opportunities is not new in the crypto space and will likely be replicated time and time again. Just this week, for example, the long awaited Telegram token TON, listed on Asian-based exchange Liquid for 3-4X the price private buyers paid, likely capitalising on hype of Facebook’s Libra.

These examples bring us back to the core issue: do exchanges have a responsibility to protect their users? Those users want access to the latest, most exciting projects, but should they be more aware of the risks? Crypto network valuations are inextricably linked to incentives, and in this situation everyone with decision making capabilities is incentivised to let the natural forces of the market, with its inherent asymmetries, take hold.

Even if it crushes the little guy.

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