A Crypto Whisperer on How Regulators Toss Retail Into the Deep End

·6-min read

The big crypto story last week was the U.S. Securities and Exchange Commission (SEC) approving a bitcoin futures ETF. For the uninitiated, ETFs are exchange-traded funds: investment vehicles that track the performance of an underlying asset. For years, crypto companies have been trying to set up a bitcoin ETF, which would allow traders exposure to crypto via non-crypto exchanges. A bitcoin futures ETF, though, comes with some caveats, one of which is the concept of “contango.” Detractors say it keeps things expensive and inaccessible to the traders it’s purportedly trying to reach.

The idea that retail investors might be getting the short end of the stick also raises questions about why the SEC – helmed by the relatively progressive, consumer protections-oriented Gary Gensler – might have approved a bitcoin futures ETF before a contangoless spot ETF.

This interview is part of a series called “Gensler for a Day,” where we ask industry leaders in a position to set or influence law about concrete policies they would implement. Check here for previous “Policy Week” coverage.

Maya Zehavi, a longtime crypto investor and consultant based in Tel Aviv, Israel, put it to me this way:

“There’s a beauty in the irony of a regulator who is trying to crack down on crypto in the name of consumer protection and financial literacy and market manipulation, while actually throwing the retail [traders] in the deep end and telling you, ‘This is kosher, this is fine and safe.’”

Zehavi is the rare crypto investor with a deep aversion to the sort of pseudo-populist rhetoric that permeates the space. She’s also an entrepreneur and executive – her latest project is still in stealth mode. Earlier this week, we spoke at length about the bitcoin futures ETF, and whether crypto can ever outgrow its lawless roots.

Our conversation, edited and condensed for clarity, is below.

What do you feel are the most pressing issues for regulators to home in on?

One, capital raising for U.S.-based projects. Meaning, finding a way where startups can actually raise money, both from private rounds and public rounds, for their tokens, without being at risk for security violations. Until that time where there is a proper safe harbor, regime or something.

The second [thing] is market manipulation. My sense is that they are a lot more focused on trying to regulate stablecoins out of fear that they might be systematic and important to financial market stability, where that framework would actually give them the purview to start or try to regulate protocols that use stablecoins. And I think that’s a big risk, both for decentralized infrastructure and for different DeFi [decentralized finance] instruments.

See also: DeFi Is Like Nothing Regulators Have Seen Before. How Should They Tackle It?

Regulators always like to say that they fear capital controls will let toxic assets or toxic risks spill over across markets. This is actually a case where overregulation might end up impeding crypto markets and innovation. But honestly, I’m just disappointed from the futures ETF. I think that is a perfect case of regulators basically not doing their duty, and in fact impeding protections and obfuscating market costs. So, instead of making it easier for consumers to get into crypto, they ended up putting a much more expensive crypto instrument in the hands of retail, where they’re up against the big dogs trading the futures, versus the spot prices.

Say more about that – you think it would’ve been better to approve a spot ETF first?

Yes, for sure. It’s just a perfect case study of how consumers say one thing, and then [regulators] act as though they have no qualms in basically accentuating the pain that they’re trying to resolve.

It’s more expensive, and they’re more prone to different market structure volatility, and they’re at the hands of whale market manipulation, just in terms of them trading on the volatility. So, you’re not protecting consumers, you’re not giving them cheap access to the asset class. You’re basically putting in more modes for them to enter the market, and requiring more sophistication for them to know what kind of exposure they have, than any other asset class.

That’s the whole story of crypto, right? Smaller fish getting screwed over by the people that know what they’re doing, because there aren’t any protections.

I think sometimes the narrative around crypto is that it disintermediates and democratizes access to finance, and yada yada, when in fact, we’re just creating a lot of other intermediaries and different transactional fees that can or can’t be competitive with traditional finance. And we’re also emulating the same kind of primitive and pretending that it’s a novelty, a lot of time.

But there’s a beauty in the irony of a regulator who is trying to crack down on crypto in the name of consumer protection and financial literacy and market manipulation, while actually throwing the retail [traders] in the deep end and telling you, “This is kosher, this is fine and safe. Like, don’t worry about it, like we’ve gone through all the due diligence.” And basically, you’re endangering retail a lot more than anything else you could have done. Which is just ironic.

You mentioned intermediaries – can government play a role in preventing crypto from replicating the problems in the existing system?

I think instead of taking the paternalistic Elizabeth Warren approach, of thinking you need to be the nanny here, it would be a lot more prudent were regulators to actually try and be the real cop on the market. They need more sticks and not more carrots. So, actually enforce for dumping on retail. Make sure market manipulation is something they’re able to – I hate the word “punish” – but try to rewrite the rules so it doesn’t happen, including on crypto exchanges. And maybe even look at market manipulation within different token sales, and actually say, “We’re willing to be the cop,” instead of, “Oh it’s a security, you’re all in the wrong.”

See also: Some NFTs Are Probably Illegal. Does the SEC Care?

What are some examples of market manipulation in this context?

Outages on Robinhood or on Coinbase or something like that, that’s market manipulation. That’s basically an exchange coming in and saying, “I’m going to stop the free flow of capital so that I’m not on the hook.” That kind of becomes a risk mitigation protocol by exchanges or by centralized intermediaries.

I think the OpenSea scandal is another one of those, the inside information. I think there’s a lot of stuff we know as an industry that we don’t always publicly call out.

Crypto has historically been a home for scammers and pump-and-dump schemes. Do you think the industry can ever escape its association with this sort of “grift economy,” and can regulation play a role there?

Yeah. You see the projects that have withstood the bear market and have managed to deliver. And I think that is almost like a badge of honor saying “this is a good actor.”

[And] I would take a really close look at the funds. If they’re signaling something that is wrong in these pump-and-dumps, if they’re signaling that they’re not going to liquidate their positions, or they’re not going to take a governance role, and they’re pumping or shilling the token or the project, then maybe the person they should be regulating are the funds, and not the project.

More from Policy Week: How Rohan Grey Would Regulate Stablecoins

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