Apr. 24, 2022
Dear SEC,
This is an addendum to my previous letter (
https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-280089.htm ) AGAINST
the conversion of the Greyscale GBTC fund to a bitcoin ETF. (A copy of that letter is
included below, hopefully made more legible by removing the spurious line breaks of the
original.)
OPENING THE FLOODGATES
There is another practical reason why a bitcoin spot ETF should never be authorized by
the SEC.
Besides Bitcoin, there are thousands of other active cryptocurrencies out there; and
many of their investors and promoters have enough resources to prepare a filing for the
corresponding cryptocurrency ETFs. Those people will have the same strong motives that
Grayscale has: namely, make their coins seem legitimate investments ("approved by the
SEC, traded on NYSE"), and make it possible for common people, especially pensioners, to
put their IRA and 401k savings into those Ponzi schemes.
Therefore, if the SEC approves the Grayscale spot ETF, it can expect a flood of
hundreds, if not thousands, of similar requests for other cryptocurrencies. Even if the
SEC can find differences that justify denying most of those requests, processing them --
and answering the inevitable lawsuits that will follow any rejection -- will be a huge
waste of public money and a huge diversion of the SEC's scarce resources.
Sincerely,
Jorge Stolfi
Ph. D. in Computer Science, Stanford University, 1988
Full Professor, Computer Science Institute of the
State University of Campinas (UNICAMP), Brazil
------------------------------------------------- copy of previous letter, for reference ---
Subject: File No. SR-NYSEArca-2021-90
Date: Apr. 18, 2022
From: Jorge Stolfi
Dear SEC,
Please DO NOT authorize the Grayscale bitcoin ETF. The reasons why you rejected previous
ETF proposals are still valid and should be sufficient to deny this one (and any future
ones) as well.
But if you need any other reasons:
1. BITCOIN IS A TOOL OF CRIME
Bitcoin's only significant use as money and payment system is as a money laundering tool
for criminals. It alone created the epidemic of ransomware, a virtually unknown form of
attack that has now become the major form of cybercrime, globally and in the US:
From this article
https://protect2.fireeye.com/v1/url?k=31323334-50bba2bf-3132d782-4544474f5631-bba5b163833610c7&q=1&e=8e5decd8-9266-4e33-b669-5413e803f644&u=https%3A%2F%2Fcybersecurityventures.com%2Fglobal-ransomware-damage-costs-predicted-to-reach-250-billion-usd-by-2031%2F:
"A 2017 report from Cybersecurity Ventures predicted ransomware damages would cost the
world $5 billion (USD) in 2017, up from $325 million in 2015 - a 15X increase in just
two years. The damages for 2018 were predicted to reach $8 billion, for 2019 the
figure was $11.5 billion, and in 2021 it's $20 billion - which is 57x more than it was
in 2015."
Bitcoin has also allowed the existence and flourishing of the the so-called "dark
markets", notably the drugs-by-mail sector, which has caused thousands of excess deaths
by fentanyl and fentanyl-laced heroin overdoses among teenagers.
From this recent article
https://rollcall.com/2019/10/29/cryptocurrencies-complicate-effort-to-stop-opioid-dealers/
"Two-thirds of the approximately 70,000 overdose deaths in the U.S. in 2017 involved
an opioid, according to the U.S. Centers for Disease Control and Prevention. Overdose
deaths involving the drugs have increased almost sixfold during the past two decades.
... The DEA official said estimates of illicit transactions, including for drugs,
conducted in bitcoin reach $76 billion annually ... 'Now, it's more prevalent than
before. [said police Sgt. Joshua Lee of the Mesa, Arizona] Bad guys are realizing
they're less likely to get caught if they move stuff to the dark web.'"
In these roles, bitcoin has taken the place of the defunct internet "criminal bank"
Liberty Reserve, for the same reason: it is the only available internet payment system
that totally ignores KYC/AML laws. For this same reason, thousands of other commercial
and investment frauds have chosen to use bitcoin as the payment method. While some law
enforcement agencies may have grown fond of Bitcoin, because they got tracing tools that
let them catch small criminals with little effort, the vast majority of the perpetrators
of Bitcoin-enabled crimes go unsolved and unpunished.
In contrast, Bitcoin has failed to gain any acceptance as a currency or payment system
for legal commerce or other legal economic activity, in spite of 10 years of intense
promotion towards that goal. That is not surprising once one learns that it is
absolutely awful at those roles, in all aspects. Its value is way too volatile to use as
money, often varying by more than 10% in a matter of minutes. Its network is
*inherently* expensive to operate, currently consuming more than 50 USD of electricity
per transaction processed. The time for the network to confirm validity and execution of
a payment ranges from 10 *minutes* to several weeks, depending on load (whereas credit
cards confirm in about 10 *seconds*). And many more.
Would the SEC authorize an ETF whose portfolio is to consist exclusively of shares of a
taxi company whose services are restricted to getaway rides for bank robberies? Or of a
construction company that specializes in secret tunnels under the Rio Grande? Or of a
shipping company whose fleet is a dozen pocket submarines plying the Colombia-Florida
route?
2. BITCOIN IS A HUGE PONZI SCHEME
Bitcoin is widely and loudly promoted (even by GBTC and its founding investors) as an
investment instrument, a better alternative to stocks, bonds, and gold. However,
Bitcoins are quite unlike gold, because they have no consuming demand: no uses that
would take them out of the market in an essentially permanent basis (like jewelry and
industry do with gold). Thus they don't have the intrinsic value that gold, like any
commodity, has. Bitcoins are also quite unlike stocks, because there is no source of
revenue (like the clients of a company) that will return to the holders of Bitcoins a
single penny of their investment, in any form or by any means. And they are unlike
bonds, because there is no entity that has any obligation to redeem those coins, at any
future time and for any predefined price.
The only way for a Bitcoin investor to recover his investment, let alone make a profit
from it, is by selling the coins to another investor. Thus Bitcoin perfectly fits the
definition of Ponzi scheme, as given in dictionaries (
https://www.merriam-webster.com/dictionary/Ponzi%20scheme ) and by the SEC itself (
https://www.investor.gov/protect-your-investments/fraud/types-fraud/ponzi-scheme ):
"A Ponzi scheme is an investment fraud that pays existing investors with funds
collected from new investors."
In fact, Bitcoin is not just a zero-sum con game, as the above definition implies. The
operators of the network (the so-called "miners") are still issuing new coins, about 900
per day, which they sell to investors. Thus Bitcoin investors, as a whole, are losing
money -- about 40 million USD every day. From 2009 to the present, it is easily
calculated that all the people who ever bought any Bitcoins have spent at least 20
billion USD more buying than they received selling. Since there is no other source of
money in the game than the investors themselves, that net loss (half of which
accumulated in the past two years) cannot ever decrease. As long as Bitcoin will have a
positive market price, that loss is mathematically guaranteed to increase.
The main losers of the Bitcoin Ponzi are estimated to be several million believers,
mostly with low or no income, who keep "investing" their savings and spare money into
this "revolutionary asset", believing that they are getting richer -- when actually, as
in any Ponzi, they lost their money the moment they "invested" it. But there are a few
winners, who, having bought hundreds of thousands of coins many years ago, have now
became *really* rich -- billionaires even -- by taking the money of those victims.
Would the SEC authorize an ETF whose portfolio is defined to consist only of lottery
tickets? Or of slots in an investment pyramid? Or of franchises of an MLM fraud? Or of
shares of a penny stock that is being pumped up and sold to pensioners through email
spam?
CONCLUSION
Bitcoin does not provide any benefits for society. On the contrary, it has caused
enormous damage; and this balance cannot ever improve, because the technology is
inherently wasteful, impractical, illegal, and insecure.
By logic, the SEC should assert its regulatory authority over ALL cryptocurrencies
(since they do tick all the boxes of the Howey Test); and then ban the sale and
promotion of Bitcoin and any derivative financial instruments, and criminally prosecute
its operators, sellers, promoters, brokers, exchange operators, and all those who have
profited from it -- just as it has historically done with the participants of other
Ponzi schemes.
The US is indeed losing its lead on "blockchain technology", "decentralized finance",
and "Web 3.0" to China -- because China already banned all that toxic financial
scam-fest, while the US still did not.
I understand the operational and political obstacles that currently prevent the SEC from
taking this very necessary course of action. But, at the very least, the SEC should
clearly warn the public about the inherent Ponzi and money laundering nature of Bitcoin;
and state clearly that any proposals for securities that are in any way based on Bitcoin
will be henceforth rejected ipso facto, without further analysis or discussion.
Sincerely,
Jorge Stolfi
Ph. D. in Computer Science, Stanford University, 1988
Full Professor, Computer Science Institute of the
State University of Campinas (UNICAMP), Brazil
PS. I should note that, while I am not a citizen or resident of the US, the decisions of
the SEC will strongly affect my country, because our financial regulators generally
follow the examples and policies of their US counterparts. In particular, they are
unlikely to take any action against the cryptocurrency plague as long as the SEC
continues to ignore it. That is why I feel compelled to contribute this response to your
request for comments.
--- end of previous letter ---