The quietness of the market is either causing me to read the newsfeed more than normal, or my intuition is on to something. What I keep seeing are stories involving government and regulatory entities. The origin of these news items range from cities to nation-states to the world’s most powerful institutions. It’s like the entire globe is suddenly talking crypto. And it's filling up all my news feeds. The interesting part here is this is taking place NOT in the thick of a euphoric fervor. It’s during the quiet doldrums that often follow periods where the market gets chopped in half. Which causes me to ask why now? Is it all a coincidence? Is there something more afoot? Or am I really just killing time by digesting more news than normal and trying to come up with some sort of insight? To help me decide I went ahead and put together this issue. My hope is by the end of it I, and you, have a better understanding of the larger currents at play across the globe, and at the nexus of government and crypto. Now in order to keep this organized I’ll attempt to do it in a top-down manner. Meaning I’ll start with global entities, move to nation-4states, hit on a few non-categorical pieces like Facebook’s Diem that deserve their own space, and then tie it all together. Let’s see where it takes us. Global Entities First up is the top of the food chain. Global entities and organizations. These are the global institutions that can dictate the most widespread change. They can also end any progress with a flick of a pen. Let’s see what they have to say of late. First up… Bank of International Settlements (BIS) News out of BIS came out regarding how banks can handle cryptocurrencies. It came via their Basel Committee, a group that sets international banking standards. The committee proposed a 1:1 backing for cryptocurrencies (excluding stablecoins) held by the bank. Meaning the bank needed to have equal amount of capital reserves on hand. Thus, $100 in bitcoin required $100 in reserve. While the technicalities can fill the entire issue here, the key takeaway is the committee placed crypto in its own risk class outside of stocks and bonds. It’s essentially a green light for banks in holding crypto. And it might set the precedent to look at crypto as its own asset class. No more fitting a square peg into a round hole. Hopefully, others follow suit. World Economic Forum (WEF) We next saw some news from the WEF. This group helps world leaders understand trends and how to deal with them. They regularly publish toolkits in dealing with various issues such as cryptocurrencies. The latest . toolkit issued from WEF was centered on DeFi I found it fascinating to see an entire publication from the WEF centered on DeFi. After going through the document it appeared the toolkit recommended softer approaches to emerging protocols. It even recommended that leaders engage with developers and perhaps draft new rules and guidelines around these innovative creations. My impression is the WEF is telling world leaders DeFi is here to stay. When we combine the news from BIS and WEF, it appears the global elite don’t expect crypto to go away. And they are now beginning to work with it. To me, this means we can ignore a lot of the empty comments and media one liners from leaders who say crypto is nothing. Because if it were nothing, you wouldn’t see things like this created or discussed. Now it just comes down to individual countries and nations to develop their own rules and forms of adoption. So what are some of these countries saying? Nation-States Moving from global institutions down to nation-states let’s start with the groundbreaking news out of the smallest country in Central America. El Salvador Bitcoin is legal tender in El Salvador. (Mic drop.) You likely read this all over the crypto-sphere last week. It’s a monumental move for bitcoin as this makes the Latin American country the first in the world to recognize the king of crypto as money. It’s a new frontier for bitcoin and crypto as a whole. Very exciting. And when looking at what the leaders of the world are thinking in regards to this event, we can take a look at a note from JPMorgan. In a recent letter to their clients on the matter, they stated, [it might get] complicated if this is the beginning of a broader trend among similarly situated, smaller nations. Which is to say the bank believes this could escalate into a situation where smaller nations begin to adopt multi-currency systems using bitcoin, similar to what El Salvador is doing. Well, we likely won’t need to wait too long as those concerns are already starting to manifest. For example, Tanzania’s president called on its central bank to start preparing to facilitate for cryptocurrencies widespread use. Strong words from the leader. And while this was the strongest reaction so far... it wasn’t the only. We also witnessed some chatter from Nigeria, Brazil, Paraguay and Panama. Each showing varying levels of interest or praising El Salvador’s move. Now, the concern here in bitcoin being legal tender is that it might be a trend that starts via one country, but soon progresses into a trend with a dozen countries. Which sets up an interesting dynamic to watch unfold in the coming months. Particularly with the IMF. You see, El Salvador is in talks with the IMF for a $1 billion funding program to help make up its $3.2 billion budget deficit for 2021. With this recent move, El Salvador might soon be labeled as too risky or having loose monetary policy. And it could lead to some negative blowbacks by various global institutions that make up the established world order. To them, change is likely not a positive, particularly when it comes to the nation’s currency. But consider something else here. Consider what happens when you upset the little guy… If there is in fact blowback, how does El Salvador respond? Or better yet, how do other countries respond that appear to be backing their recent move? Do they band together? This is to say that maybe the IMF will try to avoid any potential outcome that creates a united enemy. We’ll see, but no matter what, this move by El Salvador has started a game of chess with the world order just as they appear to be warming up to it. India India decided recently to ditch the bitcoin ban agenda, and looks to create an asset classification. This is similar to what we saw from the global entities. For some background, a lot of what gets reported on India tends to be from unknown sources, which ends up causing a lot of FUD in the market. This was seen just a few months ago. with Ketan Surana, a member of the Internet and Mobile Association of India. The quote is, Well the latest news out of India looks to be quoted “We can definitely say that the new committee which is working on cryptocurrencies is very optimistic on cryptocurrency regulation and legislation.” This seems like a positive. And it comes after the government told banks to stop some of their negative actions against crypto. Note, anything coming out of India will take substantial time, likely on the magnitude of years. So change isn’t coming from the country this year. But if we ignore the time aspect for a moment, this might help clear up some of the FUD that occasionally makes its way into the media cycle. Thus, we have another type of news topic to ignore for the time being. And we can also see if other countries follow suit and begin to adopt similar narratives to India, which borrow from global entities. China This is one of the most unique situations in the world. China is pushing forward with the most ambitious roadmap of any country when it comes to its Central Bank Digital Currency (CBDC). Simultaneously, the government is cracking down on businesses taking part in the cryptocurrency space. This includes mining operations, custodians, exchanges, and any other business that touches the asset. The reason is likely connected to their agenda for their CBDC. By limiting the amount of capital moving into cryptocurrencies, they remove competition for their own currency - which on a side note was recently said to be able to transact on Ethereum in the future. This tells us the idea for China to have a global reserve currency does in include public blockchains in some capacity. To me, even though the currency won’t be issued on a public blockchain, the fact it might touch a public network is as big as adoption can get for the time being. That’s because if a global player like China looks at Ethereum as a way to move capital, then banning cryptocurrencies is not done to protect its citizens from speculative behaviors. It’s done for a first mover type of advantage. My belief is the government wants to onboard their citizens with their CBDC first, then control their movement into crypto. The idea here is to make sure the CBDC is the go to currency for its citizens, and not alternatives like BTC, USDt, or the Digital US Dollar. While the thinking here is more of an educated guess, it’s yet another story to watch unfold in the coming months. The news is not very positive coming out of China lately, but what we want to see evolve is how their stance towards crypto evolves once their CBDC gets released. United States The last nation to look at is the one that many in crypto have their eye on virtually 24/7. That’s because any decision out of the US tends to ripple through the markets, making it the one to watch when it comes to price action. Unfortunately, there is literally no further clarity whatsoever taking place here. If there is to be a bright side to this lack of clarity, the mere fact there are more regulators talking about crypto than ever before might be viewed as a positive. Over the last month we’ve seen comments from the SEC, IRS, Treasury, the FED, CFTC, OCC, Biden Administration, FDIC, Congress, and likely other three letter agencies I glossed over. And what the consensus seems to be among all these various agencies is simply if you play nice, don’t launder money, or do any shady shenanigans, then continue doing what you are doing. It’s frustrating for investors and project creators in the US as it’s pretty much a status quo of living in fear. And it’s what most have been doing since 2017. The issue is, how are we no further along in crypto than we were four years ago? What the heck is everybody waiting for? Why does the US continually kick the can down the road? Well, for brevity’s sake, let’s get on to what I believe every US regulator is waiting on… Digital US Dollar The Federal Reserve is set to talk this summer on what they have been researching when it comes to the Digital US dollar. My hunch is that whatever they reveal, it’ll be underwhelming. That’s because they are likely leaning on Facebook’s Diem to act as the test. Recall, Facebook’s Diem was originally Libra. It was a project-based out of Switzerland. The coin itself was a basket of currencies. Since then, the project has changed course. In fact, just a little over a week before Powell announced the upcoming discussion paper, Diem moved back to the United States. The same day it announced it was partnering with Silvergate Bank to issue the new US dollar-backed stablecoin, Diem USD. This is the same Facebook that is known to be lobbying the US government hard, and even poaching talent from their very own regulators. Which is to say, Facebook will not take no for an answer. And with such a flurry of events surrounding Diem, I had to take a deeper look as there is likely more to this sudden change in direction. After all, Silvergate is a Federal Reserve member bank. Which means checks and wire transfers pass through its payment system. So if Diem got issued as a pseudo Digital US dollar, the Federal Reserve will likely be able to monitor all its activity. Its a nice alternative for a bank, and using Diem will likely mean less pushback from US citizens. And we’re already seeing the government paving the way for Diem to take place via SWIFT. SWIFT is a financial messaging service and is better understood as a cross-border payment system. It is also known as a tool of the US government for getting entities outside its borders to comply with its wants by cutting off payments, issuing sanctions, or clogging up payment lines. Most recently SWIFT got swept up in crypto via Silvergate and the most popular crypto exchange. Silvergate customers until earlier this month were able to send payments to Binance using SWIFT. One of the reasons why a SWIFT / Silvergate would cut out Binance is due to the investigation involving the US Department of Justice (DoJ) and Internal Revenue Service. The two are probing the exchange under the pretense of a tax and money laundering investigation. If we are to be realistic about the investigation, the fact this is happening is understandable. Remember, all is good if you play by already established rules. What I find a bit odd here is the US DoJ. You might remember they and the CFTC (Commodity Futures Trading Commission) went after BitMEX for trading derivatives on bitcoin. After the event, liquidity left BitMEX in mass. Well, Binance trades derivatives as well. And if the DoJ and IRS find some of its citizens traded bitcoin futures on Binance, I wouldn’t be surprised to see these enforcement officials take the current probe to another level by taking some sort of measures against the largest derivatives exchange in the world. It’s likely the reason we saw SWIFT cutoff Binance. The currents at play are favoring entities that are working with Silvergate, the Federal Reserve payment network, and SWIFT. It is likely a cue of what might be coming to anybody not playing by its rules or agenda. Which leads us to the last piece of what regulators are waiting on. Tether You might remember our issue earlier this month called . In it, we talked about Tether, how USDT has its own economy in China, how KYC works with the stablecoin, and how it’s not back 1:1 with dollars. Fear Mongering Well, to hone in on that last aspect for a minute… Global entities are saying banks need to have 1:1 backing. And the BIS stated stablecoins need to be fully redeemable in addition to being regulated. We are also witnessing other countries possibly avoiding any competition to their own agendas in rolling out their own CBDCs, which in my opinion also includes the US. This makes Tether not the most attractive stablecoin in the eyes of regulators. Not to mention you already have Tether under the watchful eye of New York’s Attorney General. Tether is required to submit mandatory reporting periodically. If Tether has one hiccup, it won’t take much to cause the market to shift their stablecoin holdings from USDT to an asset that is favorable to US regulators like Diem or even USDC (has appropriate surveillance tools in place and already in the market). The key is timing. And when it comes to an issue like timing, I like to view it similar to herding cattle. You don’t want to spook the herd, but slowly guide it to where you ultimately want the cattle to end up. And do it without causing any harm to what is already built. Which leads me to my last few thoughts on the current affairs of crypto. Final Thoughts There are some pieces of crypto that are not looked upon kindly by regulators. The magic here is in how does one weed out the bad pieces or unwanted areas of crypto without causing harm to the rest of the space. To do so requires some subtle shifting and putting certain pieces in place. All the while not hindering the development taking place. Which means, once these pieces are finally in place (ie - Diem, USDC) the space will benefit from the clarity that follows. So what I am leaving you with today is a set of stories. And how these stories evolve over the coming year will dictate how crypto evolves. Do global regulators remain consistent in how they view crypto as an asset that will stay. If they change their tune, why? Does El Salvador cause the narrative to change? Do countries begin to soften up their view on crypto similar to the way India has done. And do these softer stances borrow from the narratives set by global entities? Will China embrace crypto once they release their CBDC? Is the US awaiting for Diem, and if so, what happens with Tether? These are stories that all stand on their own, but similarly influence one another. And I do not think it’s a coincidence we are seeing a flurry of news hitting our feeds. Things are coming to a head. The needed pieces are almost in place, it just takes a bit more time. This means regulators can begin to offer subtle guidance in the meantime in order to not disrupt innovation. So let’s continue to track these stories to ensure we don’t miss any opportunities or take unnecessary risks in the market. Your Pulse on Crypto, Ben Lilly P.S. - Did you enjoy this and want to follow along on insights delivered daily? Be sure to , the newsletter where this story was first published. subscribe to Espresso Also published on: https://jarvislabs.substack.com/p/state-of-affairs
