Crypto refresher

When I wrote about bitcoin in October 2020 (see here for a refresher) I made the following comment:

“So, before discounting bitcoin and crypto because it sounds too hard (or dodgy) perhaps consider whether you think it could develop into a fully-fledged asset class, given a little more time and help from key central banks, major global corporations and a lot of pretty smart people looking for a solution to 75 years of fiat.” Mike

My view has not changed.

What has changed is the crypto space, which was capitalised at US$368 billion back then, and is now capitalised at $2.1 trillion.

That means it’s gone 5.7x in a little over 16 months.

If it goes another 5x from here it won’t be credible to say that it’s not a legitimate asset class.

Bitcoin makes up around 40% of that, i.e., around US$800 billion and over A$1 trillion at present.

What’s also changed is that non fungible tokens (NFTs) have provided an artistic dress rehearsal for their role in decentralised finance (DeFi), incentivising community building and upcoming web 3.0/creator economy applications.

Finally, central bank digital currencies (CBDC) and stable coins have progressed with over 100 countries looking into CBDCs.

Given how far we’ve come technologically and in light of the amount of money invested in the crypto verse and President Biden’s recent executive order on ensuring responsible innovation in digital assets, I thought it timely to look at what the regulators in the world’s largest economy are saying.

President Biden’s executive order and U.S. regulators

You will have seen President Biden’s executive ordering ensuring responsible innovation in digital assets.

Essentially, it’s a discussion paper about assessing risks and identifying benefits. Here’s the summary.

President Biden has tasked Treasury and 22 other agencies and offices to come up with regulation in which healthy innovation can thrive.

While still skeptical, Treasurer Yellen acknowledges that there are benefits to crypto and that innovation would be healthy.

One reason to get this right is that the IRS can also thrive. More taxes mean less bond issuance from Yellen and less QE from Powell, in order to fund President Biden’s spending, the twin deficits and any new fiscal transfer payments required as a result of COVID, broken supply chains and cost push inflation.

Even Federal Reserve Chair, Jerome Powell understands that crypto is here to stay. In October last year, and in a reversal (he’s good at that) of his more aggressive stance a few months ago, Powell confirmed he had no intention of banning crypto.

Since then, he’s acknowledged it’s here to stay and that new regulations will need to be created.

But vigilance is still required. An example is the “Keep your Coins Act” which was brought by Congressman Warren Davidson of Ohio and prevents any agency head from prohibiting or otherwise restricting “the ability of a covered user to— (1) use virtual currency or its equivalent for such user’s own purposes, such as to purchase real or virtual goods and services for the user’s own use; or (2) conduct transactions through a self-hosted wallet.”

This and other balanced approaches from politicians who know what they’re doing in the crypto space will help to keep the argument balanced.

Perhaps the wild card in the pack is the Chair of the U.S. Securities and Exchange Commission, Gary Gensler.

With an Elliott Ness style about him, he likens the crypto verse to the wild west and has already launched action against a crypto lending platform, a Defi loan provider and a digital asset exchange. Not to mention the case against centralised Ripple Labs continues.

Nonetheless as adoption of cryptographically secure digital assets increases and institutional/sovereign funds load up, it becomes more difficult for regulators to ‘ban’ due to the amount of invested capital in the system.

On that growing investment, President Biden’s executive order sites survey data which suggests that around 16 percent of adult Americans – approximately 40 million people – have invested in, traded, or used cryptocurrencies. It goes on to say that 100 countries are exploring or piloting CBDCs, a digital form of a country’s sovereign currency.

So, I think what we will see in the U.S. is each of these 22 departments maneuvering to claim their pound of flesh from what will be a feeding frenzy of value creation in the future - and not banning.

Unlike Yeti, Crypto could become ubiquitous if regulation is balanced

The world needs a replacement for trust.

The world needs a life boat out of eroding fiat currency.

The old system of cross border transfers is inefficient and subject to weaponization and interference from centralised actors – not all good.

The new economy is demanding a better and fairer system which only blockchain can bring.

Digital natives are a growing % of the demographic and prefer to exist within cultural communities that don’t interact within the centralised institutional system - crypto is their form of value exchange and cultural identity.

Even sovereigns are jumping on the CBDC train.

These secular tailwinds are some of what is behind the rise of crypto.

But we’re at an important junction and while it’s clear major institutions and influencers have spotted and identified crypto as a ‘thing’, we should not celebrate that just yet. Instead, we should push for balanced regulation.

Only then will regulation become the antigen to fuel adoption.

Mike