Nov. 05, 2021
Dear SEC, Approving a spot Bitcoin ETF now without any strict regulation would only serve to help redistribute the wealth from the average retail investor to early holders of Bitcoin due to the rampant price manipulation / wash trading and provide them with exit liquidity. 1) Bitcoin is highly concentrated. From a recent NBER research paper (https://www.nber.org/system/files/working_papers/w29396/w29396.pdf): "We show that the Bitcoin mining capacity is highly concentrated and has been for the last five years. The top 10% of miners control 90% and just 0.1% (about 50 miners) control close to 50% of mining capacity." "In contrast, individual investors collectively control 8.5 million bitcoins, almost half the bitcoins in circulation by the end of 2020. Within individual holdings, there is significant skewness in ownership. Our results suggest that despite the significant attention that Bitcoin has received over the last few years, the Bitcoin eco-system is still dominated by large and con- centrated players, be it large miners, Bitcoin holders or exchanges. This inherent concentration makes Bitcoin susceptible to systemic risk and also implies that the ma- jority of the gains from further adoption are likely to fall disproportionately to a small set of participants" 2) Collaterized "stablecoins" such as Tether are used to purchase Bitcoin to artificially manipulate the price with wash trading. From: https://onlinelibrary.wiley.com/doi/10.1111/jofi.12903 "By mapping the blockchains of Bitcoin and Tether, we are able to establish that one large player on Bitfinex uses Tether to purchase large amounts of Bitcoin when prices are falling and following the printing of Tether. Such price supporting activities are successful as Bitcoin prices rise following the periodsof intervention. Indeed, even 1% of the times with extreme exchange of Tetherfor Bitcoin have substantial aggregate price effects. The buying of Bitcoin withTether also occurs more aggressively right below salient round-number price thresholds where the price support might be most effective. Negative EOM price pressure on Bitcoin in months with large Tether issuance points to amonth-end need for dollar reserves for Tether, consistent with partial reserve backing" "Overall, our findings provide support for the view that price manipulation can have substantial distortive effects in cryptocurrencies. Prices in thismarket reflect much more than standard supply/demand and fundamentalnews. These distortive effects, when unwound, could have a considerable negative impact on cryptocurrency prices." From the NYAG investigation: https://ag.ny.gov/press-release/2021/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal "Tethers claims that its virtual currency was fully backed by U.S. dollars at all times was a lie." From: https://ag.ny.gov/sites/default/files/2021.02.17_-_settlement_agreement_-_execution_version.b-t_signed-c2_oag_signed.pdf "And so, as of November 2, 2018, tethers were again no longer backed 1-to-1 by U.S. dollars in a Tether bank account, because a substantial portion of the backing in the Deltec account had been transferred to Bitfinex to make up for the funds taken by Crypto Capital, while the corresponding funds transferred from Bitfinexs Crypto Capital account to Tethers Crypto Capital account were impaired by Crypto Capitals actions." From: https://www.cftc.gov/PressRoom/PressReleases/8450-21 "As found in the order, Tether held sufficient fiat reserves in its accounts to back USDT tether tokens in circulation for only 27.6% of the days in a 26-month sample time period from 2016 through 2018. The order also finds that, instead of holding all USDT token reserves in U.S. dollars as represented, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves comingled reserve funds with Bitfinexs operational and customer funds and held reserves in non-fiat financial products. The order further finds that Tether and Bitfinexs combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a liquidity crisis." From: https://www.bloomberg.com/news/features/2021-10-07/crypto-mystery-where-s-the-69-billion-backing-the-stablecoin-tether "I obtained a document showing a detailed account of Tether Holdings reserves. It said they include billions of dollars of short-term loans to large Chinese companies something money-market funds avoid. I also learned that Tether had made loans worth billions of dollars to other crypto companies, with Bitcoin as collateral. One of them is Celsius Network Ltd., a giant quasi-bank for cryptocurrency investors, its founder Alex Mashinsky told me. He said he pays an interest rate of 5% to 6% on loans of about 1 billion Tethers." 3)Using the Index Price from the crypto exchanges is inherently flawed because they accept collaterized "stablecoins" as trading pairs (i.e. BTC/USDT) which obscures the true fiat value of crypto coins. Thank you.