June 19, 2022 | Issue 20
ANOTHER POSITIVE, UPBEAT, WEEK FOR CRYPTO – NOT!
This week began with shocking news. Crypto lending platform Celsius announced on Sunday night that it was preventing customers from withdrawing their funds. What? Can they do that? Yes. Investors who put their crypto into Celsius for a high return gave Celsius an unsecured loan. Celsius is not a bank and there are no customer safeguards. Ironically, many of the articles this week about the company's crisis show a photo of Celsius CEO Alex Mashinsky wearing a Celsius t-shirt with the tagline, "Banks are not your friends." Celsius had managed up to $11.4 billion in assets and had 1.7 million customers. It's now trying to survive. According to the Wall Street Journal, the Texas State Securities Board is investigating Celsius and is working with New Jersey, Kentucky, Alabama and Washington. On Wednesday, Three Arrows Capital, a multi-billion dollar hedge fund, failed to meet its margin call and is on the brink of insolvency. These are tough times in crypto and the bumpy ride will continue. Hang on tight. I am using the barrage of bad news to learn about a failing company's business model and what went wrong. When one crypto lending platform fails, that does not mean all crypto lenders will vanish. The same is true for stablecoins. Crypto is global, expansive, and revolutionary. It is still developing and you are witnessing its growing pains. On a positive note, I hope you enjoyed your Father's Day weekend. Have a productive week and stay crypto curious! Rich Hopen firstname.lastname@example.org | 908.917.7926 PS. You can find all CNR newsletters here.
▸ Crypto Legislation Sponsors Discuss Their Approach to Balancing Innovation and Investor Protection
Senators Cynthia Lummis, R-WY, and Kirsten Gillibrand, D-NY senators introduced the Responsible Financial Innovation Act which proposed a regulatory framework for digital assets in the US.
Last week, I reported on some of the most important sections of the bill. This week I will dive into how the Senators describe their process in drafting the legislation and their objectives for the legislation. Their quotes are from a terrific interview on Coindesk's The Breakdown with NLW.
Sen. Gillibrand explained that the "purpose of the legislation is to create a regulatory framework for finance, democracy building, and the art world."
The bill defines "ancillary assets" as digital assets that meet certain security requirements and are above a financial threshold. It would trigger SEC public disclosure requirements.
However, once the asset is decentralized (not connected with the purchase or sale of a security constituting an investment contract), the asset issuer can file a certificate with the SEC that would allow them to stop filing disclosure requirements.
Sen. Gillibrand said some digital assets "have become adequately distributed to be considered a commodity..., but a lot of the initial offering of tokens are going to be securities at the beginning."
The asset would then be regulated by the Commodities Futures Trading Commission through spot markets and futures markets. A spot market is where financial instruments are traded for immediate delivery. A futures market delivers the underlying asset at a future date.
Sen. Lummis discussed connecting the statutory definitions to common sense.
Lummis wants to look at the purpose of the digital asset. "A community organizer in Oakland wanting to spread democracy and other social services, voting rights, that is not a broker-dealer offering a security. That is a community organizer organizing his community."
Stable coins would be backed 100% by fiat, government-issued, currency. It would be the instrument that would be direct to retail.
The senators mandated a study of Central Bank Digital Currency (CBDC) and want to look closely at the Chinese digital yuan.
Sen Gillibrand, who also sits on the Senate Intelligence Committee said, "The digital yuan has nothing to do with money. It has everything to do with intelligence gathering and spying on the Chinese people. We need to understand what they’re doing, how they’re doing it, and why they are doing it. We can inform ourselves if America ever wants to consider having a digital dollar…. If it was consumer facing, you’d have 100% transparency on every transaction, forever."
She added, “We do not support a retail CBDC. We want it to be wholesale to wholesale, central bank to central bank."
The Senators believe it is important that the US engages with other countries on these issues. "We want to make sure the US markets aren't left behind."
▸ SEC Chair Indirectly Commented on Crypto Bill
SEC Chair Gary Gensler spoke at the Wall Street Journal's CFO Network Summit. He said that the crypto bill could "undermine" other market protections. He also said the he wants to protect SEC's role in overseeing how companies raise money from the general public.
▸ Bitcoin Approach $20,000
Bitcoin has become a global macro asset and it has been behaving like equities. It has been losing value for 12 weeks and has lost 30% over the past week.
Nik Bhatia of the The Bitcoin Layer, wrote that bitcoin is correlated to the stock market and its price is collateral damage. "Bitcoin has its own fundamentals, but it has been unable to escape this wave of weakness in risk markets due to global macroeconomic conditions."
▸ Propy Selling Avatars
As headlines in business publications scream additional Fed tightening to fight inflation and avoid recession, mortgage rates hit 6%, and real estate companies announce layoffs, Propy announced "Big News." They are selling "Meta Agents and Shredders NFTs."
Big News? With all due respect to Propy's marketing folks, in the context of the non-virtual real world, this is not even small news.
Propy's launch of its NFTs and another recent announcement to offer title services through partnerships, has not insulated Propy from market conditions. Propy's market cap is at $64 million, down from a high of over $300M in January.
CRYPTO CLASS – DECENTRALIZED FINANCE
Decentralized finance (DeFi) seeks to remove the role of banks and financial institutions by using the blockchain as a decentralized ledger.
In traditional finance, there are 1) Investors seeking to earn fees and interest by lending money; 2) Borrowers seeking a loan who want to pay minimal fees and interest; and 3) Merchants looking to pay minimal fees for the privilege of using a credit card network. Crypto lenders provide these services. They entice customers to deposit cryptocurrencies by offering attractive interest rates and then lend out the crypto for a return. Many crypto borrowers use the funds for high-risk projects. When projects fail and borrowers cannot pay their loans, the crypto lending system stops working. Crypto lending is unregulated. They don't seek approval to operate as a bank or money manager. Their interest bearing accounts are not registered with the FDIC or SEC. Crypto lender BlockFi Lending LLC, which had over $14 billion in assets, settled an enforcement action brought by the Securities and Exchange Commission last year. BlockFi agreed to pay the SEC a $100 million to settle the matter.
INFLUENCERS - People to follow CZ – @CZ_Binance
CZ is the founder of Binance, the world's largest crypto exchange by volume. CZ, age 44, graduated from McGill University with a computer science degree. He worked on the Tokyo Stock Exchange and then joined Bloomberg Tradebook where he developed futures trading software.
In 2005, CZ founded a company that built a high-frequency trading platform. He launched Binance in 2017 after raising $15 million in an initial coin offering. In 2022, Binance invested $500 million to support Elon Musk's twitter acquisition.
RESOURCES – Books, websites, podcasts, interviews, articles
SEC Chair Gary Gensler discussed crypto with WSJ financial editor Charles Forelle. Gensler discusses crypto at 7 minutes into the interview. Watch it if you want to understand how crypto will be regulated.
CRYPTO WORD – "IF IT'S NOT YOUR KEYS, IT'S NOT YOUR COINS" Crypto owners who do not hold their private key (password) relinquish control of their crypto to their exchange. OH, ONE MORE THING –
Thanks for reading! See you next week.
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