Regulatory action in the US took centre stage this week, with Bitcoin falling 4.1% to A$31,260 (US$21,755). Ethereum dropped 7.1% to A$2,150 (US$1,500). Despite the crackdown the big market mover is likely to be the imminent release of inflation figures in the US, with anything indicating an increase likely to weigh heavily on prices. XRP lost 5.1%, Cardano was down 6.1% and Dogecoin lost 8.1%. The Crypto Fear And Greed Index is at 48 or Neutral.
From the OTC Desk
With the major central banks having now convened, their overwhelming message has been one of data dependency. While monetary policy tightening has continued, as well as hawkish rhetoric, it will be the pace of disinflation that guides their thinking and policy approach from here. The critical data, therefore, will remain: inflation (CPI and PCE); inflation expectations; and the strength of the labour market (non-farm payrolls, JOLTS, wage inflation). In this publication, we have previously spoken at length about the ‘stickiness’ of wage inflation. The strength of the labour market, and whether there remains a relative imbalance between available supply and demand of labour, will continue to drive high wages.
This week, the critical economic data is the US CPI. Scheduled for Wednesday, February 15 at 12:30am (AEDT), market expectation is for headline inflation to move from 6.5% in December 2022 to 6.2% in January 2023. On the core, current forecasts are indicating a move from 5.7% in December 2022 to 5.5% in January 2023. This data will drive US equity market sentiment, and in turn risk assets and cryptocurrencies. Watch this space.
In Australia, there has been much discussion around the actions and projected policy pathway of the Reserve Bank of Australia (RBA). Last week the RBA updated the Statement of Monetary Policy for February 2023. The key takeaway is that the RBA’s projected rate of inflation is to remain outside of the target band until 2025! Naturally, the short term interest rate futures market, as well as the Australian Government bond market have repriced RBA cash rate expectations higher. The terminal cash rate is now forecast to reach more than 4%, from an expected maximum of 3.7% before the meeting.
In cryptocurrencies, the combination of higher bond yields and US SEC (Securities and Exchange Commission) and OCC (the US Office of the Comptroller of the Currency) regulatory headlines has seen crypto underperform this week. With much of the regulatory attention relating to US staking platforms (as well as banking), ETH/BTC has highlighted the markets concern – trading below 0.07000 to 0.06890. On the OTC desk, stable coin flow continues to trade in high volumes, with both buy and sell flow occurring in size. USDT would appear to remain the stable coin of choice to access Defi markets; USDC being a close second. With the macro landscape changing session by session (under a policy approach of data dependency), expect cryptocurrencies to also show increased volatility around data points.
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The US Securities and Exchange Commission plans to sue Paxos over its Binance USD stablecoin alleging it is an unregistered security. It’s not quite clear however how a stablecoin satisfies the Howey test about investments offering an expectation of a return. Paxos said it “categorically” disagrees with the SEC’s categorization and will “vigorously litigate”. The New York Department of Financial Services has ordered Paxos to halt the minting of new BUSD tokens. It is the third largest stablecoin with about US$16 billion (A$23B) in circulation. Binance admitted last month it has not always maintained a proper backing for the token which may or may not have something to do with the SEC action. Binance saw about US $1 billion (A$1.44B) in outflows following the announcement.
Buy an NFT and plant a tree
The Foundation for National Parks & Wildlife has teamed up with Tokens for Humanity and Independent Reserve to offer the Ethereum community the ability to mint NFTs and plant real trees in fire and flood-damaged areas. Minting each NFT costs just 0.01 ETH (A$22). Help this great initiative by minting a Merge Tree today.
Kraken reached a settlement with the SEC to shut down its staking operation and hand over a US$30 million (A$43M) fine. SEC boss Gary Gensler then released a cringey dad joke video about the move complete with stake/steak gags. The service offered 20% APY. SEC Commissioner Hester Peirce was scathing about the move saying: “A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down.” Coinbase also offers staking services, which accounts for a large part of its revenue, and CEO Brian Armstrong has said the company will go to court to defend its right to do so.
The big question is whether the SEC intends to go after all staking services, including decentralised services, or if it simply applies to centralised staking-as-a-service providers offering high APYs. Decentralised staking platforms Lido and Rocket Pool are both up this week, suggesting the market believes they will benefit, however Lido has been criticised for not actually being all that decentralised. Ark Invest’s director of research Frank Downing suggested the SEC action rings of a “China mining ban” for Proof of Stake networks such as Ethereum. However, it is almost impossible to ban truly decentralised networks.
Operation Choke Point 2.0
Castle Island Ventures founder Nic Carter argues there’s an all out war being conducted by regulators on crypto, pointing to various crypto providers including Binance losing banking partners and the situation with Paxos. In a blog Carter wrote the US Government was using “the banking sector to organize a sophisticated, widespread crackdown against the crypto industry” which he said was making crypto veterans “nervous that crypto businesses might end up completely unbanked, stablecoins may be stranded and unable to manage flows in and out of crypto, and exchanges might be shut off from the banking system entirely.” He said it was reminiscent of ‘Operation Choke Point’ from a few years ago which saw legal but ‘risky’ businesses from gun manufacturers to adult entertainment get largely shut out of the banking system.
Local Bitcoins shuts down
Peer-to-peer marketplace Local Bitcoins has shut down after a decade of operations, citing the “ongoing very cold crypto winter’ as the reason. The marketplace allowed users from 189 countries to trade Bitcoin directly, holding the funds in escrow until both parties confirmed the transaction.
Bitcoin NFTs are taking off in a big way, with around 50,000 ‘ordinals’ inscribed on the blockchain so far. Ordinals use a hack of the taproot upgrade to enable up to 4MB of data to be inscribed on the Bitcoin blockchain directly – so they are arguably actually better than Ethereum NFTs which are mostly just tokens that point to an image somewhere. Ordinals have sparked controversy, but are helping fill up around 50% of Bitcoin block space and are increasing fees (which ultimately should help with the security of the blockchain).
Tether minting money
Tether truthers won’t like it, but the stablecoin issuer reported a US$700 million (A$1M) fourth-quarter profit for 2022 and its latest attestation from BDO says it no longer holds any risky commercial paper. US$39.2B (A$56.2B) of its reserves are in US Treasury bills now and secured loans are down to US$300M (A$430M) in line with a plan to reduce them to zero.