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Bureaucratic Thunder Rumble: Return of Darth Gensler

Knives are out from regulators. Is there a bureaucratic storm brewing? Or is it all thunder and no break?

Thunder before lightning?

Any doubt that bureaucrats are moving markets was thoroughly dispelled this week, as economic data releases were largely ignored while the ruminations of policymakers sparked market gyrations. 

Market participants, or their algorithm overlords, are focused on when central banks will abandon their tightening bias and return to the easy-money policies of the past 40 years.  Fortunes have been made betting that when policy rates rise, it is only a matter of time before the monetary spigots are re-opened and new Cantillionaires are minted.  

And so the guessing game of Federal Reserve Chairman Jerome Powell’s intentions was in high gear this week when Powell sat for an interview at The Economic Club of Washington DC. One of his first comments sent markets shooting higher: 

“The disinflationary process, the process of getting inflation down, has begun, and it’s begun in the goods sector, which is about a quarter of our economy.”

Yes! Inflation is receding and rate cuts are coming!

Thunder Rumble | Winner 1992 Travers Stakes

Alas, later in the interview, he reined that horse in by saying: 

“It’s probably going to be bumpy, and we think that we’re going to need to do further rate increases, as we said, and we think that we will need to hold policy at a restrictive level for a period of time.”


The NASDAQ 100 index was typical of the market reverberations, covering a 2% range twice during Powell’s interview before ending with a bullish bias.

Powell has made some progress in convincing rates markets that the FOMC is serious about continuing rate hikes. Fed Funds futures are now pricing in a terminal rate near 5.25% but are still forecasting a rate cut before year-end. 

With the yield on the U.S. 10-year treasury below 3.8%, the bond market is very sure that inflation is beaten, perhaps the economy as well, and the Fed will be brought to heel.

It bears repeating that the bond market is good at predicting these things. The 2-year/10-year inversion in the yield curve is currently at an unprecedented -0.77%. That sort of inversion is associated with extreme financial stress events like the S&L crisis, the Asian financial/LTCM crisis, the dot-com bust, the global financial crisis of 2007-2009, and now. The bond market sees something that the Fed does not.

Crypto prices followed other macro markets caught in the Powell vortex. But another flavor of bureaucrat caused crypto markets to veer from Scylla into Charybdis.

The Return of Darth Gensler

Darth Gensler Returns

SEC Chairman Gary (Darth) Gensler was again practicing the dark arts of securities regulation by enforcement. The SEC charged crypto exchange Kraken with failing to register their staking-as-a-service offering. In settling the charge, Kraken agreed to immediately end the service and pay a $30 million fine.

In the SEC press release regarding the action, Gensler is quoted as saying:

“Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”

He followed that up with comments in an interview on CNBC in which he suggested a simple matter of compliance was not followed.

“There’s [sic] forms on our website…They know how to do this…They are just choosing not to do it.”

Despite agreeing to the settlement, Kraken CEO Jesse Powell does not seem chastened. In a tweet, Powell lampooned Gensler’s comments saying:

“Oh man, all I had to do was fill out a form on a website and tell people that staking rewards come from staking? Wish I'd seen this video before paying a $30m fine and agreeing to permanently shut down the service in the US. How dumb do I look. Gosh.”

Crypto prices declined sharply across the board on the announcement with large-cap coins down 5-10%. Shares in rival exchange Coinbase and crypto servicing bank Silvergate both dropped 20%.

Mild Mannered Bureaucrat?

The enforcement decision by the SEC was not unanimous with crypto-friendly commissioner Hester Peirce dissenting. In her statement regarding the decision, Peirce (AKA Crypto Mom) did not pull any punches:

“Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.” 

And even punchier: 

“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.” 

SEC Commissioner Hester Peirce

One issue surrounding SEC registration is that it implies cryptocurrencies are securities. Gensler has often repeated that cryptocurrencies, apart from Bitcoin, are indeed securities.

While that is a defensible argument, it is far from a certainty and something that will probably only be settled by legislation that is a long way down the road. That is important not only for registration requirements but because if something is a security, then any time something goes wrong there are grounds for securities fraud charges.

Bloomberg’s Matt Levine has eloquently and often made the argument that everything is securities fraud.

How excited should crypto exchanges be to jump into that pool?

Anything else besides Powell, Gensler, and Powell?

It looks like Binance is being cut off from the U.S. banking system.

Following the decision by Binance partner Signature Bank to raise the minimum transfer amount to $100k, some sort of backpedal has the world’s largest crypto exchange announcing a halt to all U.S. dollar transfers until further notice.

The move does not apply to Binance’s domestic U.S. entity, which announced in a tweet that U.S. dollar withdrawals continue uninterrupted.

Breaking news from Monday, February 13 also puts Binance's Paxos-issued BUSD stablecoin in jeopardy. The New York-based digital asset platform announced it will no longer issue the stablecoin following a Wells Notice from the SEC.

Push Me Pull You

The largest U.S. commercial bank continued its pushmi-pullyu relationship with crypto this week. 

The cutting of ties between crypto and the banking system probably strikes JP Morgan CEO Jamie Dimon like the soothing sound of a waterfall in a rainforest.

Following up Dimon’s characterization of Bitcoin as a “pet rock” in a Davos interview, the bank this week released a new report “Deposit Tokens:  A foundation for stable digital money.” 

Produced in collaboration with consultancy Oliver Wyman, the report focuses on stablecoins, the one undisputed killer app spawned by blockchain technology. In proposing a variant of asset-backed offerings like USDT, USDC, and BUSD the authors identify an opportunity for an improved version issued by the banks themselves, “Deposit Tokens.”    

Despite being co-authored by the Onyx private blockchain team at JP Morgan, the report centers on the advantages inherent in public blockchains. Terms like efficiency, programmability, liquidity pools, and decentralized finance were used liberally.

But there was a whiff of cognitive dissonance about it:   

“Using a decentralized blockchain ledger as a payment infrastructure may also require industry innovation to address challenges around protocol governance. Both at the infrastructure and application layers, decentralized protocols are intended to integrate changes based on majority consensus.”

That a team running a “permissioned blockchain” should identify this as a challenge is no surprise. But imposing control over something that derives its value from neutral consensus would be destructive of such value. I would expect that conflict to be noted.  

Somehow the report also curiously lists fractional-reserve backing of “deposit tokens” as an advantage over fully-reserved stablecoins like USDC. 

But the report is another example of giant institutions' competence regarding digital assets and their steady march toward asset tokenization. Banks will inevitably issue stablecoins as tokenization progresses. Co-opting blockchain technology will enable them to protect their franchise for decades.  But in the short term, there are profits to be made. 

The market capitalization of the top five stablecoins is $129 billion!

Assuming they are fully reserved with short-term treasuries, the issuer currently receives at least 4% or $5 billion per year. That covers a lot of operations, legal, and compliance costs. And none of it is paid out to token holders. 

That income amounts to 14% of what JP Morgan earned last year with 288,000 employees. I can see how Jamie Dimon would find that galling. Stablecoins, that one killer app of crypto, is a measure of the opportunity that the TradFi giants are beginning to appreciate.

The TradFi giants continue to be drawn toward crypto unabatedly.  There is an understandable ambivalence among some of the incumbents. But a one-sided reconciliation will have to be made.  

The value of any blockchain comes from the classic attributes of an open, permissionless, decentralized, neutral, censorship-resistant platform often coupled with sound-money properties and programmability. These attributes occur on a spectrum––but they are non-negotiable. 


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