I suppose that could last forever. In some sense gold is not fully integrated into the global financial system, insofar as gold is heavy and you can’t transfer it as easily as you can a stock certificate, but there are various tools (gold futures, ETFs, etc.) designed to shoehorn gold into the regular system so that a hedge fund that wants gold exposure can get it from its broker in a fairly straightforward, electronic, sitting-at-your-desk-looking-at-screens sort of way. Bitcoin—crypto generally—could be a similar niche product, hard to get your hands on, but connected to the traditional financial system by functional but somewhat kludgy interfaces.

But doesn’t that seem unlikely? Certainly crypto enthusiasts have grand plans for taking over the traditional financial system, for making stocks and bonds and interest-rate derivatives and mortgages trade on the blockchain. For that matter, the traditional financial system also tends to express a lot of enthusiasm for blockchains. It just seems implausible to me that in 10 years crypto will still be big and we’ll still be talking about how hard it is to switch between your brokerage account and the blockchain, or that there will be big lucrative businesses of “putting dollars on the blockchain” (stablecoins) or “putting Bitcoins into your brokerage account” (Bitcoin futures ETFs). Eventually crypto will take over traditional finance or traditional finance will take over crypto or everyone will just be comfortable transacting in both, and an ETF of synthetic Bitcoins will look sort of quaint.

Tether
Speaking of weird stablecoins:
Tether will pay $41 million to settle a U.S. regulator’s allegations that it lied in claiming each of its stablecoins was backed by fiat currencies. 

From at least June 2016 through February 2019, Tether misrepresented to customers and the cryptocurrency market that it maintained sufficient U.S. dollar reserves to back every token, the Commodity Futures Trading Commission said in a Friday statement. Since its 2014 launch, Tether had claimed that its coins were pegged to fiat currencies and “100% backed by corresponding” assets, the CFTC said. 

Here is the CFTC’s announcement. It is not much new if you followed the New York state case against Tether a couple of years ago, but that case was wild and if you didn’t follow it you should go ahead and read the CFTC one. We have talked recently about Tether’s reserves, which remain interesting, but overall my impression is that Tether in 2021 is a model of probity and transparency compared to Tether in 2017. From the CFTC order:

In contrast to Respondents’ statements, Respondents did not at all times hold sufficient fiat reserves in the Tether Bank Accounts to back USDt tokens in circulation for the substantial majority of the Relevant Period. Indeed, for the time period of September 2, 2016 through November 1, 2018, the aggregate amount of fiat currency held by Tether in the Tether Bank Accounts was less than the corresponding USDt tokens in circulation on 573 of 791 days, meaning that, contrary to Respondents’ representations, the Tether Reserves were “fully-backed” by fiat currency reserves held in the Tether Bank Accounts only 27.6% of the time. Instead, at various times, Tether maintained some of the Tether Reserves in bank accounts other than the Tether Bank Accounts. Tether represents that, at times, it also included receivables and non-fiat assets among its counted reserves; and further represents that Tether has not failed to satisfy a redemption request for tether tokens. ...

On June 1, 2017, there were at least 109,844,263 tether tokens in circulation; by July 1, 2017, there were at least 214,852,881 tethers in circulation; by August 1, 2017, there were at least 319,398,873 tether tokens in circulation; and, by September 15, 2017, there were at least 442,481,760 tether tokens in circulation. During this same time, the amount held in the GC Trust Account never exceeded $61.5 million.

At various times during the Relevant Period, Respondents relied upon unregulated entities and certain third-parties to hold some of their funds, including Tether Reserves, and for a period of time commingled Tether Reserves with funds belonging to Bitfinex and/or Bitfinex customers. In aggregate, during the Relevant Period Tether and Bitfinex’s assets included funds held by or received from third-parties pursuant to at least 51 different arrangements, only 22 of which were documented through loan agreements, trust agreements, or other formal contracts.

Basically in the early days of Tether (and also possibly now?), it was pretty hard for a newish stablecoin to get a smooth straightforward banking relationship with a large regulated bank, and so as cash came into Tether it was reduced to, like, finding people on the street and saying “hey could you hold onto this giant bag of cash for us?” And mostly the people do seem to have held on to the cash and given it back to Tether on request—though not quite always!—but it is not the sort of thing that looks great to a regulator.

Buying Your Way Into The Index?
Here is what looks like a careful, thoughtful empirical academic paper, “Is Stock Index Membership for Sale?” by Xin Kun Li and Shang-Jin Wei, that reaches an intuitive and amusing conclusion that I simply do not believe:

While major stock market indices are followed by large monetary investments, we document that membership decisions for the S&P 500 index have a nontrivial amount of discretion. We show that firms’ purchases of S&P ratings appear to improve their chance of entering the index (but purchases of Moody’s ratings do not). Furthermore, firms tend to purchase more S&P ratings when there are openings in the index membership. Such a pattern is also confirmed by an event study that explores a rule change on index membership in 2002. Finally, discretionary additions exhibit subsequent deterioration in financial performance relative to rule-based additions.

The S&P 500 is roughly speaking an index of the 500 biggest public companies, but it is not exactly that, and S&P has a lot of discretion in choosing which companies to add to the index. Being added to the index is good for a company’s stock price (and thus for its cost of financing). S&P is a company that (1) runs this index but also (2) issues credit ratings on bonds, which the issuers of those bonds pay it for. The contention here is that companies with a shot at getting added to the index buy a lot of credit ratings from S&P in order to make S&P like them and add them to its index.

Don’t get me wrong, that is a very funny result and I am generally happy to believe that financial-services companies sometimes choose their own financial interests over the pursuit of abstract truth. Also the paper has lots of very suggestive evidence of causality:

We sharpen our identification with two additional exercises. First, we examine rating purchase behaviour during times when there is an opening in the index membership for reasons exogenous to these firms. In particular, mergers and acquisitions (M&As) between existing S&P 500 constituent firms create such an opening and are likely to be outside the control of the firms outside of the index. ... We show that in the quarter with such a merger announcement, relatively large firms outside the index tend to increase their purchases of S&P ratings (but not of Moody’s ratings). …

Another informative exercise is to use the S&P 500 index rule change in 2002. The rule change excluded foreign firms from the S&P 500 index, resulting in seven foreign firms being ousted from the index. We use this 2002 event as an adverse shock to foreign firms’ incentive to compete for S&P 500 membership. We use a difference-in-difference (DID) setting and find that there is a reduction in S&P rating purchases by foreign firms in the quarters after the event. In addition, the effect is more pronounced for large foreign firms and foreign firms from the same countries as the removed members. When we repeat the exercise in firms’ purchases of Moody’s rating, we see no comparable behaviour. This reinforces the argument that firms purchase S&P ratings partly to curry favour in order to obtain membership in the index.

I just … I don’t know, man, this seems like a very niche activity? Relatively few companies get added to the index each year, so the sample of “companies that might get added to the S&P if they just spend a bit more on S&P ratings” is small. Also it generally happens roughly once per company: You are not in the index, and then one quarter you get added, and then you are in the index for a while; you are not getting added and subtracted every year. There are no repeat players who say “ah, yes, I know how to win the game of getting added to the index.” Also you don’t generally just go to S&P and say “give me 10 ratings please, here’s a big check”; you “purchase more S&P ratings” to the extent that you are issuing more bonds, which may or may not correlate with being added to the index but which is surely based more on your financing strategy than on the index. So the idea that companies are regularly sitting down and saying “we are big enough to be in the S&P 500 now, so let’s go buy a bunch of ratings so that S&P looks favorably on us and adds us to the index” just strikes me as psychologically implausible. Who is the person at the company who even thinks to do that?