This Christmas in crypto: Jekyll and Hyde

There always seems to be more going on in crypto when prices are going up.

So, this month, we have quite a few interesting developments to get through. 

Some good, some bad, some downright crazy.

Starting with…

Tokenised treasury bills are coming for stablecoins

Why hold a stablecoin when you can hold a tokenised treasury bill?

In most cases, asset-backed stablecoins like USDT and USDC (the 3^rd and 7^th largest cryptos by market cap) work like this:

The issuer buys some USD and mints the equivalent value as tokenised USD in the form of a stablecoin.

Users then buy that stablecoin and use it like they would regular dollars – but within the crypto ecosystem. So, they can put it into DeFi protocols to earn yields, store it in their crypto wallets and transfer it to other people like they do regular crypto.

Meanwhile, the stablecoin issuer takes the dollars it bought – which are backing the stablecoins and ensuring their value – and uses them to buy cash-like investments that pay interest. 

These are usually some form of a short-term debt, like a US treasury bill. 

Here’s what’s backing USDC right now:

As you can see, Circle, USDC’s issuer, is collecting more than 5% yield on every USDC in circulation. 

It currently averages out to about 5.36%.

And as there are around $24.7 billion USDC in circulation, that adds up to a lot of money…

$1.32 billion per year.

Meanwhile USDC’s users get $0.

But the thing is, Bitcoin was created to remove the need for trusted third parties from financial transactions.

So, why aren’t crypto projects cutting out the third parties and creating stable cryptos backed directly with treasury bills themselves?

Well, up until the governments started hiking interest rates to try control inflation a couple of years ago, these yields were effectively zero. So it was pointless.

But today, with US interest rates at 5%+, it’s a different story. 

Which is why, over the course of 2023, we’ve seen a massive influx of tokenised treasuries.

These are cryptos backed with treasuries, that pay out the interest directly to holders.

As you can see below, tokenised treasuries are booming:

And as Axios reports:

Crypto shops used to hold their assets in stablecoins, but when the macroeconomic environment turned, using dollar-pegged stables meant accepting a 5% annual cost — the yield usually passed on to issuers like Circle or Tether.

"With that change, everyone's scrambling how to get rid of USDT and USDC and turn it into something that gives you access to the T-bill yield," Vogelsang [the CEO of Centrifuge] said.

Vogelsang thinks DAOs and other big crypto businesses will opt to hold their assets in tokenized T-bills in a more meaningful way, with stablecoins largely relegated to short-term trading needs.

"Stablecoins will stop being a store of value, but still be a medium of exchange because people will trade in stables and store cash in T-bills and other assets," he said.

It’ll be interesting to see what happens to this new dynamic if/when the federal reserve starts cutting interest rates.

But that will likely take a few years to play out, so it seems like this trend has a long way to go yet.

Meanwhile…

UK government and Bank of England divided on whether “Britcoin” CBDC should pay interest

In last month’s issue, I reported on the Bank of England’s plans to ban stablecoins from paying interest.

In line with its view that stablecoins used in systemic payment systems should not be used as a means of investment, the Bank further considers that issuers under its regime should not pay interest to coinholders. This would align the treatment of systemic stablecoins with cash, e-money, and a potential digital pound. Prohibiting e-money institutions from paying interest already incentivises the use of e-money for payments rather than as a means of investment. – Bank of England.

But then this month, the UK government has come out and said it wants any future UK central bank digital currency (CBDC) to pay interest.

From The Times (non-paywalled link):

MPs have urged the Bank of England to consider paying interest on so-called Britcoin balances if plans go ahead for the central bank digital currency.

The Treasury select committee also has said that the Bank needs to address concerns that such a digital currency could worsen bank runs and violate people’s privacy.

In a report that is conspicuously sceptical about whether the country needs a central bank digital currency at all, MPs have suggested that the payment of interest on Britcoin deposits could make monetary policy more effective and may prod banks into passing on base rate rises more quickly to savers.

That completely flies against the preference of the Treasury and the Bank, which see the digital currency as a means of payment only, not as a savings product or an instrument of monetary policy. They have argued that balances should pay no interest.

This is a surprising turn, as if you could get a digital pound, issued directly by the bank of England, that instantly passed on the base rate of interest to holders… why would you put your savings in a bank?

You’d be able to get a higher interest rate by holding the UK’s CBDC directly. And you’d never have to worry if your bank was going to go under, because your bank would be the Bank of England.

So, this wouldn’t exactly be great for the banking industry, which is why the Bank of England doesn’t want a UK CBDC to pay interest.

It would be very good for citizens though.

Although…

As the treasury pointed out, if banks aren’t making as much money from savers then they would start charging more for loans, which wouldn’t be good for anyone.

From UK Parliament:

The switching of some bank deposits into digital pounds in normal times could also increase the cost of bank loans to the economy. Assuming that 20% of retail deposits held in commercial banks switched to new forms of digital money, the Bank of England estimates that interest rates on bank lending could rise by 20 basis points in steady state, as a result of banks needing to replace the lost deposit funding with more expensive funding from the wholesale markets. It acknowledges that there is considerable uncertainty around this estimate however, and that under different assumptions the increase in lending rates could be as much as 80 basis points. Analysis by the trade association UK Finance suggest the impact on the cost of credit could be even higher.

So it’s proposed putting a limit on individual holdings of a UK CBDC at £10,000-£20,000:

The Bank of England and Treasury recognise these risks in their consultation paper and aim to mitigate them by placing limits on holdings of the digital pound, at least during an introductory period, to constrain the extent of outflows from bank deposits. The consultation paper proposes a limit on digital pound holdings by individuals of £10,000-£20,000, which is intended to mitigate such flight risks while making the digital pound widely usable. The proposed limit would allow the majority of UK employees to receive their salary payments in digital pounds, while limiting the outflows from bank deposits to around 20% of total deposits. The proposed limit on individual holdings is higher than that being considered in some other regions, including for example the EU, which has discussed a limit of €3,000.44

You can read the whole thing here, if you’re interested.

Or you can read a summary here.

It remains to be seen if/when a major economy will first issue a CBDC (other than China). 

But legacy-bank-backed stablecoins are already here…

From The Financial Times: 

Société Générale is set to launch its own stablecoin on a cryptocurrency exchange, becoming the first big bank to offer digital tokens tracking the price of hard currencies to a wide range of investors. 

France’s third-largest bank on Wednesday will debut trading of its own stablecoin, called EUR CoinVertible, on Bitstamp, an exchange based in Luxembourg.

What’s interesting here is that Société Générale has decided to list its stablecoin on a real crypto exchange, so it can be used in all kinds of pre-existing DeFi projects.

Again, from the Financial Times:

While some large investment banks such as JPMorgan have their own stablecoins, they are only available to small groups of institutional clients. In contrast, SocGen’s stablecoin will be widely available for trading.

Stenger said the bank hoped its stablecoin would be used to settle trades in digital bonds, funds and other assets as traditional financial institutions explore digital ledgers.

“The best way to channel [investors’] interest is to grow in the usual route and venue which you use in the crypto industry, which is to have your product listed on a crypto exchange,” he said.

And the new stablecoin has already being used in the real world. 

From Reuters:

PARIS, Dec 4 (Reuters) - Societe Generale, France's third-biggest listed bank, said on Monday it issued its first so-called digital green bond on a public blockchain, as the lender seeks to build expertise in crypto services.

The inaugural transaction amounts to 10 million euros ($10.87 million) worth of senior preferred unsecured bonds with a maturity of 3 years, the bank said. …

AXA IM made the investment in the digital green bond by acquiring and then spending 5 million euros worth of SocGen's euro-denominated stablecoin, EUR CoinVertible (EURCV).

And which blockchain did Société Générale use? Ethereum. Although, it’s also experimenting with issuing bonds on private blockchains (which is really an oxymoron).

Again from that same Reuters piece:

SocGen's bond issuance, made on the Ethereum public blockchain, follows the launch last week by the European Investment Bank (EIB) of its second euro-denominated digital bond on a private blockchain, in partnership with Goldman Sachs Bank Europe, Santander and SocGen.

And the good news for UK and EU crypto doesn’t stop there.

UK regulators greenlight asset managers to tokenise their funds

From the Financial Times (non-paywall link):

UK asset managers will be able to develop tokenised versions of their funds, after winning government backing for their push to experiment with blockchain technology. …

The move underscores the growing interest among large institutional investors to harness the technology underlying cryptocurrencies by tokenising their funds.

I think it’s clear that at some point traditional finance (TradFi) will fully merge with Decentralised Finance (DeFi). And when it does, we’re going to see a lot of new innovation across the entire financial sector. 

Although, if US regulators have their way, America won’t be the country to lead the charge.

America’s Jekyll and Hyde approach to crypto continues

This month, the Securities and Exchange Commission (SEC) sued Kraken (again), prompting Kraken’s CEO, Jesse Powell, to say:

“Message is clear: $30m buys you about 10 months before the SEC comes around to extort you again. Lawyers can do a lot with $30m but the SEC knows that a real fight will likely cost $100m+, and valuable time. If you can't afford it, get your crypto company out of the US warzone.”

And the Department of Justice (DOJ) fined Binance $4.3 billion and ordered its CEO, Changpeng “CZ” Zhao to step down.

From the Wall Street Journal (non-paywall link):

The Justice Department’s investigation looked at Binance’s program to detect and prevent money laundering and whether it allowed individuals in sanctioned countries, such as Iran and Russia, to trade with Americans on the exchange, The Wall Street Journal previously reported.

A separate agreement resolves a civil lawsuit filed against Binance and Zhao earlier this year by the Commodity Futures Trading Commission, one of the U.S. regulators that have tried to police the freewheeling global market, the people said. The $4.3 billion that Binance must pay includes amounts to address the CFTC’s claims and those leveled by agencies of the Treasury Department.

But, crucially, this doesn’t include any kind of deal with the SEC, which sued Binance back in June. 

This case was about Binance not having strong enough anti-money-laundering procedures in place. The SEC’s case is about Binance allowing users to trade unregistered securities – which is the same thing the SEC is suing Kraken for this time around.

So right now the SEC has three big cases against three of the biggest crypto exchanges in the world: Binance, Kraken and Coinbase.

All three exchanges have chosen to fight the SEC in court, and their cases have been massively boosted by Ripple’s win against the SEC earlier this year.

However, there’s no telling how the court battles will play out.

It’s a far cry from what’s going on in the UK and Europe. 

Although, there are still powerful people in America that are pro-crypto, as evidenced by…

Crypto can now be an asset on companies’ balance sheets

This one is a small change that could have a big impact.

Up until now, if companies keep crypto on their balance sheets, they’ve had to record its value as the lowest it’s been during the entire accounting period. And they couldn’t realise gains until they sold.

From Axios back in September:

Until now, there haven't been specific accounting rules for crypto.

Businesses treated them as intangibles, which for companies like MicroStrategy meant valuing its bitcoin holdings at the lowest price for the given reporting period — resulting in huge losses on coins bought during better times.

Under this accounting treatment, gains on bitcoin were only reported when sold.

Well, this month those rules came into effect. Again, from Axios, but this time from this month:

A new cryptocurrency accounting standard from the Financial Accounting Standards Board has a mandatory effective date of Dec. 31, 2024, but folks who adopt the guidance early can apply it for their fiscal 2023 year-end reports.

MicroStrategy founder and chairman Michael Saylor said the news "will facilitate the adoption of $BTC as a treasury reserve asset by corporations worldwide."

Driving the news: The FASB finalized the update yesterday, which would allow bitcoin hodlers from MicroStrategy to Block (formerly Square) to recognize losses and gains immediately.

Between the lines: Bitcoin won't just go down on balance sheets anymore — good news given the rally of the last three months.

The new rules don’t apply to all cryptos. There are six criteria a crypto must meet for it to be counted.

From the Financial Accounting Standards Board:

The amendments in the ASU apply to all assets that meet all the following criteria:

1. Meet the definition of intangible asset as defined in the FASB Accounting Standards Codification.

2. Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets.

3. Are created or reside on a distributed ledger based on blockchain or similar technology.

4. Are secured through cryptography.

5. Are fungible.

6. Are not created or issued by the reporting entity or its related parties.

So NFTS don’t count. But Bitcoin and Ethereum do.

Overall, it’s a major positive. But then we have more Mr Hyde…

Senator Elizabeth Warren’s anti-crypto bill is gaining traction

The notorious anti-crypto Sen Elizabeth Warren has is pushing her “Digital Asset Anti-Money Laundering Act” hard.

If the bill becomes law, it will effectively outlaw all crypto projects and holdings in the US.

From The Defiant:

The bill proposes extending Bank Secrecy Act's Know-Your-Customer requirements to digital asset wallet providers, including non-custodial wallets, miners, validators, and other network participants engaging in digital asset transactions.

"As non-custodial and decentralized software cannot plausibly perform centralized compliance functions, warren’s bill would effectively outlaw crypto in America," said Alex Horn, head of research at asset management firm Galaxy

Earlier this month, Warren issued a press release showing off the bill’s growing support:

United States Senators Elizabeth Warren (D-Mass.) announced an expanded coalition of Senate support for the bipartisan Digital Asset Anti-Money Laundering Act, which would mitigate the illicit finance risks that crypto poses by closing loopholes and bringing the digital asset ecosystem into greater compliance with the anti-money laundering and countering the financing of terrorism (AMF/CFT) frameworks that govern much of the financial system.

The senators announced that Senators Raphael Warnock (D-Ga.), Laphonza Butler (D-Calif.), Chris Van Hollen (D-Md.), all members of the Senate Banking, Housing, and Urban Affairs Committee, and Senators John Hickenlooper (D-Colo.) and Ben Ray Luján (D-N.M.) joined the bill as cosponsors. 

They join existing cosponsors  Senators Roger Marshall (R-Kan.), along with Senators Joe Manchin (D-W.Va.) Lindsey Graham (R-S.C.), Gary Peters (D-Mich.), Chair of the Senate Homeland Security and Governmental Affairs Committee, Dick Durbin (D-Ill.), Chair of the Senate Judiciary Committee, Tina Smith (D-Minn.), Angus King (I-Maine), Jeanne Shaheen (D-N.H.), Bob Casey (D-Pa.), Richard Blumenthal (D-Conn.), Michael Bennet (D-Colo.), Catherine Cortez Masto (D-Nev.), Sheldon Whitehouse (D-R.I.), and John Fetterman (D-Pa.). 

And it also emerged this month that the bill was basically crafted by the American Bankers’ Association.

From Coin Telegraph:

Big banks have been helping United States Senators Roger Marshall and Elizabeth Warren draft their controversial anti-crypto bill. 

In a Dec. 20 video that surfaced on X (formerly Twitter), Marshall admitted that he and Warren approached the largest lobbying organization for the U.S. banking industry — the American Bankers Association (ABA) — for assistance in crafting the Digital Asset Anti-Money Laundering Act.

Here’s that video the excerpt mentions:

So, on one hand, it looks like America is trying to ban crypto. While on the other…

Congress Committee passes pro blockchain bill

From Coin Telegraph:

A United States Congress committee has unanimously passed a pro-blockchain bill, which would task the U.S. commerce secretary with promoting blockchain deployment and thus potentially increasing the country's use of blockchain technology.

On Dec. 5, the House Committee on Energy and Commerce voted 46–0 to pass H.R. 6572, the Deploying American Blockchains Act of 2023, in a session aiming to clear 44 pieces of legislation.

The 13-page blockchain bill would direct Secretary of Commerce Gina Raimondo to “take actions necessary and appropriate to promote the competitiveness of the United States related to the deployment, use, application, and competitiveness of blockchain technology or other distributed ledger technology.”

However, as Coin Telegraph also points out:

The act, however, isn’t seen as being among those having a potentially major impact, such as the Financial Innovation and Technology for the 21st Century Act, which would affirm a process for the contentious issue of labeling cryptocurrencies as commodities or securities and clarify regulator jurisdictions.

The bill will now go to the House for a vote. If passed, it must also pass in the Senate before returning for final congressional and presidential approval.

Still, it’s a major step in the right direction.

And it’s giving the exact opposite message to crypto projects that Sen Warren’s bill is.

Like I said, Jekyll and Hyde.

Okay, that’s all for today.

Thanks for reading.

Harry

Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.

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