I must be psychic, or at least recognize that regulators do what they do: shut down what they cannot understand or control. The Bitcoin risk is becoming real. First, The Reserve Bank of India issued a warning to people dealing in Bitcoin about the risks involved in dealing in Bitcoin. Were they just being helpful?
The warning did not explictly say that dealing in Bitcoin was illegal, but it offered this bit of foreshadowing:
“The Reserve Bank has also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.”
A couple of days later, Indian authorities raided a Bitcoin trading platform, buysellbit.com.in. The Enforcement Directorate conducted the raid since the central bank does not provide permission to indulge in such transactions [Ed.: We assume something was lost in translation here, but you get the idea.]
“’We are gathering the data of the transactions, name of the people who have transacted in the virtual currency from Gupta’s server that is hired in the US. At present, we believe that this is a violation of foreign exchange regulations of the country. If we are able to establish money laundering aspect then he can be arrested,’ said a top ED official.”
John Carney at CNBC posted an interesting article posing the question about whether insider trading should be a crime. In light of Michael Steinberg’s conviction for securities fraud due to his activities at SAC Capital, Carney asks who were the victims and what was the harm?
In Steinberg’s case, part of the facts involved trading on early access to Dell’s earnings. Why is this a big deal?
But it’s hard to see how Steinberg’s acquisition of Dell’s earnings a day early hurt the company in any way. His trading may or may not have moved the stock price a bit but the actual release of the earnings moved it more.
Does Dell have an intellectual property right in its earnings? We don’t really recognize all corporate secrets or corporate information as protected intellectual property, much less property whose unauthorized use gives rise to criminal sanctions. There are certain categories—trade secrets, trademarks, copyrights—that are protected. But earnings aren’t trade secrets. Dell released them the very next day.
It is important to remember that Steinberg’s trading did not involve face-to-face arm’s length transactions with the counterparties. They were nameless and faceless people who never met Steinberg, knew Steinberg was in the market to buy or sell Dell shares or placed their orders with any knowledge of Steinberg and what he may have known or not known, disclosed or not disclosed. As Carney points out, regardless of what Steinberg did, each one of them would have acted in the exact same way.
What about the people who bought the shares of Dell on the day Steinberg was selling? Again, they would have been in exactly the same position regardless of whether Steinberg traded or not. Arguably, they were able to buy at a slightly better price because Steinberg’s trades would have pushed the stock slightly in the direction the stock actually moved when the earnings became public.
You’ll sometimes hear it said that the people on the other side of Steinberg’s trades were harmed because they wouldn’t have bought the shares if they had the same information he had. But that’s precisely the wrong test. The question isn’t what would they have done if they also had inside information. It’s what would they have done if Steinberg hadn’t had his information? The answer is: exactly what they did anyway. Steinberg’s possession of inside information didn’t affect them one bit.
Carney comes to a similar conclusion that I have always believed. This type of insider trading is not about protecting people. It is about (1) punishing success and profit [Ed. This is more me than Carney], and (2) a gut reaction that this behavior is wrong and should be punished. It is about addressing moral qualms, not about stopping harm.
In this respect, Carney compares this type of insider trading to blue laws.
In other words, our ban on insider trading isn’t really about protecting investors or making markets function better. It’s about expressing a moral view, much like we do with Blue Laws that ban the sale of alcohol on Sundays.
There’s nothing necessarily wrong with encoding morality into securities laws.
Yes, there is. We see it everyday in garbage like the ridiculous executive compensation disclosure now imposed on companies. We see it in required environmental disclosure, cybersecurity disclosure and blood minerals disclosure that probably don’t apply to most companies.
We see it every time some activist jumps up to demand that the SEC impose disclosure requirements on all companies that comport with the activists’ agenda, regardless of whether it furthers the mission of the disclosure regime for SEC reporting companies: Do investors have the information they need to make an informed investment decision? End of story.
If those issues are material to the disclosing company, they will have to be discussed. If not, this is nothing more than an extra tax (by way of time and money spent to assess and produce this nonsense) on reporting companies to pay for the whims of some vocal activists, be they outside agitators or Congressmen (who were (and probably still are) able to trade on inside information illegally in a way that would send you or I to prison).
Bitcoin seems to moving away from its seedy reputation as a digital currency for the underworld.
Coinbase, a San Francisco based startup founded in June 2012. It provides a Bitcoin “wallet and platform where merchants and consumers can transact with the new digital currency bitcoin.” If you look at their ‘About‘ page, their kitchen looks spiffy.
Coinbase announced a $25 million funding round led by Andreessen Horowitz and including Union Square Ventures and Ribbit Capital, both existing investors. This brings their funding to $31 million, including the $6 million they announce on their website. Representatives of Andreessen Horowitz and Union Square will join Coinbase’s board.
Much of the trepidation around Bitcoin stems from the regulatory issues. Basically, many people (me included) expect the U.S. federal government to view Bitcoin with hostility, despite recent noises that they are okay with it. To that end, Coinbase says that they will be spending a lot of money for licenses with state regulators.