February 2014 - That's Not Market

Bitcoin Ban – U.S. Senator Demands Regulators Ban Bitcoin

Bitcoin ban urged by Sen. Manchin, previously best known for a compaign commercial where he used a shotgun to shoot a copy of the Cap and Trade bill.

Senator Joe Manchin (D-WV) sent a letter to federal regulators demanding a ban on Bitcoin.

Should we be surprised? Well, as one particularly brilliant commentator stated:

“There has been a lot of news lately about the efforts of a variety of U.S. regulators to understand Bitcoin, and these regulators are not in the business of exempting financial products that compete with government issued currencies or act outside of the established financial regulatory environment. . .

As a result of all of the above, there is substantial expense and risk in using and accepting Bitcoins, as there should be a risk premium attached due to the very real possibility that the U.S. and other governments could shut them down.”

Other countries, such as China, India, Japan and Russia have either moved to ban or restrict Bitcoin or have threatened to do so.

In addition, Bitcoin has been under review in the U.S. as well.

And now, we have a U.S. Senator urging an outright ban because Bitcoin is unregulated (which is arguable, but for reasons we don’t need to get into here).

As Sen. You-Kids-Get-Off-My-Lawn said, Bitcoin is:

“highly unstable and disruptive to our economy. For the reasons outlined below, I urge regulators to take appropriate action to limit the abilities of this highly unstable currency.”

He is also using the criminal use of Bitcoin as an excuse. He discussed the “deflationary nature” of Bitcoin, technical problems around Mt. Gox (which I cannot believe he understands in the least) and volatility as other reasons to ban it. He even trotted out the Consumer Price Index!

He also had to include a softball to “hard-working Americans” in his letter in his final hit:

“The clear ends of Bitcoin for either transacting in illegal goods and services or speculative gambling make me weary of its use. The Senate Homeland Security and Governmental Affairs Committee issued a report just this month stating, “There is widespread concern about the Bitcoin system’s possible impact on national currencies, its potential for criminal misuse, and the implications of its use for taxation.” Before the U.S. gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.”

If the “clear ends of Bitcoin” are for illicit activities, why not put the risk of deflationary pressures and volatility on the persons engaging in such activities? Whatever.

Bitcoin’s pricing will smooth out once there is greater acceptance in the marketplace. It should not surprise anyone that a relatively new currency experiences volatility or that a new technology experiences some bugs. The early adopters will absorb the early losses, and changes addressing the early problems may generate the trust that allows for widespread usage.

However, as I have said from the beginning, the risk of Bitcoin lies not with technology or the vagaries of market pricing. The risk of Bitcoin lies with regulation. The U.S. government is not in the business of allowing non-government sanctioned currencies or payment channels to exist.

Sen. Marlboro Man gets tough with a pile of paper.

SEC Due Diligence Alert Released For Investment Advisers

SEC due diligence alert regarding processes for selecting alternative investments is released.

Link: SEC Risk Alert – Investment Advisor Due Diligence Processes for Selecting Alternative Investment and their Respective Managers

The SEC has been reviewing due diligence processes for investment advisers for alternative investments and is getting concerned. After all, assets under management, or “AUM” in industry talk, reached $6.5 trillion for alternative investments. The SEC issued an alert reminding advisers to perform due dilience to determine whether the investment:

Meets the clients’ investment needs; and
Is consistent with disclosed investment strategies.

According to the SEC, “alternative investments” include hedge funds, private equity, venture capital, real estate and funds of private funds.

The SEC conducted examinations of registered advisers and noted the following trends in alternative investment due diligence to identify risk indicators:

Advisers are seekeing more information directly from alternative investment managers
Advisers are using third parties to supplement their analyses and verify data
Advisers are performing additional quantitative analysis of performance returns and risk measures
Advisers are expanding their due diligence processes and focus areas

The SEC then used the alert to remind advisers about their obligations to adopt and review their compliance programs and codes of ethics.

: SEC Office of Compliance Inspections and Examinations issues risk alert for due diligence processes by investment advisers

First Public Bitcoin Company, An Ecommerce Reseller Of Consumer Products, Goes Public Using A Reverse Merger

First Bitcoin public company (sort of) went public through reverse merger.

Charles Allen, CEO and CFO, of Bitcoin Shop recently went on CNBC to discuss why a reverse merger was the best choice for his company to go public. His reasons included:

Publicity from being public
Transparency
Time to market, merger done in three weeks
They wanted to be the first public Bitcoin company
Ability to raise funds

For this post, let’s overlook my opinion that reverse mergers are generally a terrible idea. You never know what you are getting into, such as Bitcoin Shop’s recent extensive revisions of two years worth of financial disclosures following the notice of nonreliance on previously issued financial statements and audit reports.

Bitcoin Shop goes public through a reverse merger transaction.

There are private companies that not only can navigate the process, but have the systems set up to successfully transition to being a public company. However, they are few and far between. In addition, the fundraising seldom materializes. To Bitcoin Shop’s credit, they did raise about $1.8 million in a private placement related to the reverse merger.

As to Bitcoin Shop’s Bitcoin-related business, as Mr. Allen described on CNBC, it basically is an affiliate seller of products for other sites. It lists products and permits payment by Bitcoin. It has a goal to be a leading virtual currencly marektplace, but it is not a “Bitcoin” company. It markets stuff sold by others and processes payment and takes fees. It currently has a single vendor, but it plans more.

Bitcoin Shop may be able to earn revenue through markups on products and processing fees and undercut credit and debit card processing fees. Time will tell if this is a viable strategy. But, for all of the technical discussion in its investor presentation and SEC filing discussion the transition, Bitcoin Shop is an ecommerce company that lists products for sale by another vendor and processes payment denominated in Bitcoin.

There is nothing wrong with that, and I would not be surprised to see many more follow suit. However, I am reminded of seemingly hundreds of companies with little relationship to technology slap a “.com” at the end of their name back in the 1990’s. Is history repeating itself?

Microcap Fraud Crackdown Continues At SEC

SEC’s efforts to combat microcap fraud continue as it suspends trading in dormant shell companies. Commence Operation Shell-Expel!

One favorite technique of microcap fraud operators is to use shell companies as vehicles for pump-and-dump schemes. The SEC has tried over the years to clamp down on operators who take advantage of unsuspecting investors through these types of companies. For example, the SEC recently announced a microcap fraud task force to deal with fraud involving microcap securities.

Securities and Exchange Commission cracks down on Microcap Fraud.

In this regard, the SEC has also announced that it has taken a proactive step in its shell company enforcement. It has suspended trading in 255 dormant shell companies of the type it describes as “ripe for abuse in the over-the-counter market.”

“A frequent element in pump-and-dump schemes has been the use of dormant shells,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells.”

Operation Shell-Expel has been in effect since 2012. The SEC has been scrutinizing penny stocks and looking for inactive companies. Trading is then suspended until updated financials are provided. Since this is generally unlikely, the trading suspension ends the value of the dormant company to scammers.

Due to the number and low profile of dormant companies, enforcement this sector can be a challenge.

“Policing this sector of the markets can be a challenge,” said Margaret Cain, a microcap specialist in the Office of Market Intelligence. “There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors. The approach we take with Operation Shell-Expel is both economical and efficient as the SEC continues its commitment to preventing microcap fraud.”