December 8, 2017 / 8:23 PM / 8 months ago

Breakingviews - Crude-backed crypto-coin is mostly snake oil

DALLAS (Reuters Breakingviews) - Bart Chilton wants to marry digital dreams with regulated reality. The former commissioner of the U.S. Commodity Futures Trading Commission is teaming with a group including a former TPG executive to launch a crypto-currency backed by oil. His promise of stable value sits oddly against bitcoin’s wild ride. While the vehicle offers a tax edge over oil-backed exchange-traded funds, it’s hard to imagine this coin existing if not for the wider craze.

Photo illustration of Bitfinex cryptocurrency exchange website taken September 27, 2017. Picture taken September 27, 2017. REUTERS/Dado Ruvic/Illustration

Chilton was a self-proclaimed hardliner on enforcement, and wrote in September that if he were still at the agency, he would have pushed for an investigation into this year’s huge price swings in bitcoin. Now he wants to bring respectability to the digital realm by making an initial coin offering of OilCoin, a virtual token backed by the physical commodity. The group says it will comply with U.S. regulatory requirements, and use the proceeds to buy oil futures and other oil-related products. The goal is to keep the price of each OilCoin trading close to the price of crude.

It’s not as if investors need new ways of playing the volatile oil market. Futures contracts and ETFs backed by oil are widely available and heavily traded, as are shares in companies like Exxon Mobil and BP. But the new coin does offer a tax advantage. Because it’s considered property, investors pay capital gains tax only when they sell, as opposed to annual taxes like other investment funds.

Backers say OilCoin will be more stable than other crypto-currencies because it is backed by hard assets rather than digital faith. But in a week when bitcoin surged nearly $6,000 then gave up a third of those gains, it’s not clear that investors are in this market for stability.

The idea that it will be a usable currency is even more of a stretch. The surging price of bitcoin has effectively made it a pure speculative vehicle. Even bitcoin cash, a breakaway intended to be used for transactions, has climbed sharply. The arrival next week of U.S. bitcoin futures, after a green light from the CFTC, could generate even more volatility.  And there’s no end to crypto-currencies flooding the market.

News of the new coin comes just days after Venezuelan President Nicolas Maduro said the economically prostrate country would launch an oil-backed currency, the petro. Chilton and his partners have more respectable pedigrees. But what they’re peddling relies more on crypto-hype than genuine utility. It’s virtually snake oil.

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