Anyone who is a crypto enthusiast – any winning investor in the space (and there are fewer of them every day), all the losers in the crypto game, and anybody who knows anything about cryptocurrencies – knows the come-on under the hype is that blockchain, the heart of all cryptos, is the real deal and the future.

For everyone else, I’m here to tell you blockchain’s true promise hasn’t even begun to be realized, while the bastards of blockchain – cryptos with no intrinsic value – have been leveraged in the name of the future and greed into fraudulent schemes with their own ecosystems, clever-cryptic lexicon, billionaire (not anymore) cheerleaders, and a host of corvine regulators watching and waiting.

To understand and wager smartly on the future of cryptocurrencies and blockchain, everyone should be watching what U.S. and international regulators do to separate legitimate blockchain from Ponzi-chains.

Because make no mistake – regulation is coming, one way or another, from one corner of the world or the other, and the whole game is going to change, not to the benefit of fraudsters or dyed-in-the-wool hucksters and speculators.

With that in mind, it’s time to make a new bet on the direction of cryptos.

Here, then, is everything you need to know: how regulators may end up battling each other, what the battle is about, and most importantly, how you can play this game and profit from it.

A Quick Primer on Blockchain
At its core, blockchain is a digital ledger, as in the kind of ledger an accountant or bookkeeper uses.

Only this new digital ledger starts off as an immutable block of something from which transactions emanate via a chain, where all the information on the ledger is distributed to everyone with digital access to that blockchain, which supposedly allows the information to be recorded and distributed transparently, but not edited.

For example, in the future auto manufacturers could generate an information block that has all the pertinent data about cars rolling off their assembly lines, including the information that generates titles. That information could exist digitally on a distributable ledger or blockchain. Every time that car is sold, however many times, the chain of title transfers would be recorded for everyone to see. That way there would, theoretically, be no question about who rightfully owns title to the auto.

A cryptocurrency based on blockchain, works in a similar way, only the original block may be some amount of a newly minted fiat currency that someone makes up. I could declare, for example, that there are now 1 million ShahBucks on a blockchain I’ve created. Or in the case of Bitcoin, there’s a block of “coins” that have to be digitally mined.

“Mining” means you have to solve a digital proof using computers. If you solve it and others on the blockchain verify you solved it, it yields you a coin, kind of like a miner mines gold.

The fascination with Bitcoin, the first blockchain cryptocurrency (“crypto” as in cryptography, the practice and study of techniques for secure communication in the presence of adversarial behavior, and “coin,” as in money) is that Bitcoin isn’t a government issued or controlled currency. No one supposedly controls it, it can’t be recalled, and the supply will be limited to the set amount that can be mined.

It’s a new currency that exists for a new world. The value of a Bitcoin, however, still depends on what someone is willing to pay for one, in terms of a real currency, like dollars or euros or yen.

As Bitcoin became more talked about and its price rose, more people saw the potential of cryptocurrencies, even though most people who play in the cryptocurrency space have no idea what they are, who’s behind them, how they’re manipulated, or how fraudulent some can be, and are.

Just because Bitcoin isn’t like other cryptos doesn’t mean it can’t be or isn’t manipulated. It is. It’s manipulated the same way as any asset, no matter how big (or in Bitcoin’s case how relatively small) it is.

As far as most of the other cryptocurrencies that speculators bet on, they’re suspect at best and frauds and Ponzi schemes at worst.

The problem for regulators is that all the manipulation, scheming and fraud throughout the crypto space is not just impacting public investors. It’s impacting banking systems, payment systems, and financial systems, and it will ultimately undermine taxing authorities and governments.

The Crypto Battle Regulators Are Facing
Today, for example, Silvergate Bank, a La Jolla, California community-sized institution that started in 1988 as a local lender and started getting into crypto in 2013, was shut down by bank regulators.

Whatever you hear about Silvergate, the truth is:

  • They took in billions of dollars in deposits from some 1620 digital-asset customers, identified by the bank as mostly institutional investors, which included 100 customers that were digital-asset exchanges.
  • Then, they parlayed deposits from those crypto customers into “assets” valued by the bank at $16 billion in 2021.
  • And then, they sunk when fraud, theft, and losses experienced by their digital-asset customers, some of whom probably caused those issues, resulted in massive withdrawals from the bank, to the point where they fell below capital reserve requirements.

Silvergate essentially filled a hole in the U.S. banking system that was empty for a reason. Their Silvergate Exchange Network, SEN, facilitated transfer of all kinds of cryptos into and out of US dollars, mostly using “stablecoins” as their basis for transfer. More heavily regulated banks weren’t going anywhere near that space fearing Federal Reserve and more stringent regulatory pushback.

This brings me to stablecoins. Stablecoins are cryptocurrencies. They are “fiat” made-up coins, that are supposedly tied to a real currency, like the U.S. dollar for example. Some are supposedly tied to the dollar because the originators and backers of them say, for every coin or token they create they park one US dollar in a reserve account, hence the coins are stable relative to the price of a dollar, implying they are almost the same as a dollar.

The biggest crypto in the stablecoin space is Tether (another example of the clever lexicon of the cryptocurrency made-up universe). Only, there is no proof the creators of Tether, including a former child actor in a few Disney movies, have any reserve account anywhere, and believe me, people and regulators have asked for proof.

How or why people believe Tether is stable is beyond my understanding. It isn’t. It’s another fraud in the cryptocurrency ecosystem that underlies the whole balsa-wood infrastructure of the space.

Of course, I could go on and on about failed cryptos, failed exchanges like FTX, failed hedge funds, failures because they’re mostly Ponzi schemes in the first place or based on leveraging made-up currencies. But this is not about all that.

This is about regulators, what they haven’t done, why not, and what they’re going to be forced to do.

There are two reasons there’s no prudential regulation of cryptocurrencies in the U.S.

First, regulators let Bitcoin and other cryptos run their course because those concerned regulators, including the Federal Reserve, believed the fad would die out or fraud and crashing prices of coins would undermine confidence in the space and it would all end in an ugly crash, or a whimper.

Second, the bosses of regulators, our earnest politicians and legislators, were showered with campaign money, including coins, from crypto companies, exchanges, creators, and their advocacy groups and their lobbyists. And, if those power brokers were to push for regulation, their crypto fortunes might go up in smoke.

That’s why there’s no responsible regulation of crypto crap in the U.S.

Internationally, there was a lot of the same thing going on. In China, for example, crypto-madness took hold and got out of control in terms of the government realizing there were new currencies being created and used that they didn’t control, couldn’t tax, and could exit the country as an insidious form of capital flight. So, the CCP banned crypto mining and use.

But like most things in China, that’s not entirely true. About 20% of all crypto mining still happens out of China. It wouldn’t happen if the government didn’t let it happen. Why? So, they can keep a hand in the game.

In Hong Kong (which is part of China, if you go along with the Chinese characterization of the relationship as “One Country, Two Systems”) crypto craziness is alive and well.

In fact, Hong Kong Securities and Futures Commission (SFC) in February proposed a slew of regulations covering cryptocurrencies that are now open for commentary and likely to be put into effect in June 2023.

In Mainland China, Huang Yiping, a former monetary policy committee member at the People’s Bank of China, just suggested China “should reconsider its ban” on crypto mining and trading.

What’s really going on is China is allowing Hong Kong to set the table on regulating cryptocurrencies and will ultimately push for the kind of regulations it wants to see put in place so it can ultimately control the international regulatory framework regarding all things related to digital assets.

That’s prompting U.S. politicians to take some kind of stand against China, as general rhetoric between the two superpowers heats up, by addressing the lack of any crypto or digital asset regulatory regime in the U.S.

In remarks prepared for delivery at an Institute of International Bankers event in Washington, D.C. recently, Michael J. Hsu, Comptroller of the Currency said, “We won’t be able to know which players are trustworthy and which aren’t until a credible third party, like a consolidated home country supervisor, can meaningfully oversee them, no crypto platforms are (currently) subject to consolidated supervision. Not one.”

And, Fed Chairman Jerome Powell, in his Senate testimony earlier this week said, “Like everyone else, we’re watching what’s been happening in the crypto space, and what we see is quite a lot of turmoil.” He went on to say, “What we’ve been doing is making sure that the regulated financial institutions that we supervise and regulate are careful, are taking great care in the ways that they engage with the whole crypto space and that they give us prior notice.”

How to Prepare for Crypto’s Regulated Future
So, as I said above, regulation is coming. It might be China, or us, or some other international banking coalition. And when it does, a lot of the fraudsters and con artists are going to disappear along with their Ponzi-coins.

In addition, the value proposition driving interest in the crypto market, that it’s an uncontrolled form of wealth, is going to crumble as digital assets become more like every other currency in the world.

That could very well push a lot of people away from Bitcoin and other cryptocurrencies, and cause a sharp drop in prices across the board as the market corrects itself.

That’s why the best play here is the ProShares Short Bitcoin Strategy ETF (BITI), an inverse ETF that goes up in price when Bitcoin goes down.

— Shah Gilani

Source: Total Wealth