Securing Crypto’s Future in a Fragile Financial System

12.13.2023

Wave Leadership Thoughts  

What Threatens the Dawn?

By Henry Elder, Head of DeFi 

When I last penned this column four months ago, I encouraged you to embrace the doldrums. Crypto’s total market cap had been resolutely stuck around $1.1 trillion since January. Enthusiasm was waning and it was my duty to reinforce flagging morale.

Now the predicted dawn has arrived. Crypto is up over 50% since late October, breaching $1.7 trillion in total market cap last week. Outside capital is flooding in, volatility has come roaring back, open interest has reignited. ETF speculation is rife after BlackRock signaled their confidence with a new Ether ETF proposal. 

Yet the Devil always seeks an advocate, so let’s examine a threat brewing in the bedrock of the global financial system: US Treasuries. The US is issuing debt at a rate unprecedented outside of crises. This coincides with weakening demand from once-stalwart buyers such as central banks. Foreign buyers spent most of 2022 offloading their Treasury portfolios. They now hold less than half as much Treasury debt as in 2015.

So who is absorbing the new issuance? The fastest-growing cohort has been hedge funds playing the basis trade: selling Treasury futures, buying spot, and levering up as much as 50x. These are price-sensitive buyers, meaning that swings in Treasury pricing could force liquidations and spark a “doom loop” like that suffered by UK gilts last year. Treasury markets are supposedly the most stable in the world, yet they required major interventions in 2019 and 2020 to remain liquid – despite lower issuance and fewer price-sensitive holders. A Treasury meltdown would inflict unimaginable consequences on the global economy. 

As March 2020 showed, crypto is highly exposed to macro events and would likely suffer in line with the rest of the economy. Perhaps bitcoin could benefit from its embryonic, yet growing, reputation as a gold alternative in the longer term. But in the panic of an acute crisis, even gold falls prostrate before the true king: cold, hard cash.

Latest News:

WELCOME FRIENDS: Hundreds of institutions and prominent individuals have invested directly in crypto, adopted the value thesis, or started building technology to support digital assets since Wave started tracking these developments in late 2020. Now the rise of the Metaverse, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), and Decentralized Autonomous Organizations (DAOs) is driving mainstream adoption of blockchain technologies everywhere we look. We’re continuing to keep track of it every week here:

• Deloitte is partnering with the Polkadot-based Kilt blockchain to offer logistics and supply-chain services for the shipping industry. Deloitte will work with supply-chain technology company Nexxiot to create a new logistics service called KYX (Know Your Client and Know Your Cargo). KYX will use the Kilt network to identify and verify the client’s identity and the goods being shipped. Shipping giant Hapag-Lloyd will be the first to implement KYX, followed by telecommunications giant Vodafone. Hapag-Lloyd plans to equip 1.5 million containers with devices that can be tracked to ensure their security.
• Taiwan’s central bank, the Central Bank of the Republic of China, has finished a technical study of a wholesale central bank digital currency (CBDC). In a Dec. 7 speech, Deputy Governor Chu Mei-lie said the bank’s focus is now on conducting surveys to gather feedback from the public, government agencies, industry and academia on improving the design of a CBDC platform.
• China’s national-level blockchain initiative, the Blockchain-based Service Network (BSN), has announced that it will use blockchain technology to verify the real-name identities of China’s 1.4 billion citizens. The initiative, called RealDID, is spearheaded by China’s Ministry of Public Security in collaboration with BSN. The RealDID service will allow users to register and log in to websites anonymously using decentralized identity (DID) addresses and private keys, ensuring that personal information remains disconnected from business data and transactions.

REGULATORY ROUNDUP: We’re living through the era of regulatory recognition of digital assets. The legislation, litigation, and regulation happening today will dictate the entire future of our industry, and we have a historic chance to shape those changes by staying informed and providing public comment.

• A federal judge has warned the US Securities and Exchange Commission (SEC) that he may sanction them for making “false and misleading” arguments in a crypto case. The SEC’s attorneys allegedly convinced the court to freeze the assets of crypto firm Debt Box based on misleading claims about the company’s attempts to transfer assets and funds overseas. The judge stated that these misrepresentations undermined the integrity of the case and caused irreparable harm to Debt Box. Sanctions, which are penalties imposed on individuals who make false statements or violate court procedures, could be in the form of monetary fines.
• The U.S. Securities and Exchange Commission (SEC) has delayed its decision on NYSE Arca’s proposal to list shares of the Grayscale Ethereum Trust as an exchange-traded product. The original deadline for a decision was December 11th, but the SEC has extended it to January 25th.
• South Korea’s Financial Services Commission (FSC) has proposed rules to protect the customers of virtual asset services providers (VASPs). The rules, which come under the Virtual Asset User Protection Act passed earlier this year, are scheduled to take effect on July 19, 2024. They are open for public comment until Jan. 22. The Act defines digital assets and provides statutory grounds for sanctions, including criminal penalties and fines “to punish unfair trading activities using virtual assets.” It also requires VASPs, or exchanges, to monitor abnormal transactions and alert the FSC when appropriate.
• Tether froze 41 wallets controlled by people on the Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals (SDN) List. Tether described the actions as “precautionary measures” in a blog post.
• National security officials with the U.S., South Korean and Japanese governments discussed North Korea’s crypto thefts and other efforts to work on its nuclear and ballistic missile programs, the White House announced Friday night.
• Two crypto provisions addressing anti-money-laundering concerns were dropped from a joint version of the National Defense Authorization Act, a military-funding bill viewed as must-pass legislation, ending a backdoor effort to get digital-asset rules passed this year in the U.S.

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THE OPINIONS EXPRESSED HEREIN ARE THOSE OF THE AUTHOR ALONE AND DO NOT REPRESENT WAVE DIGITAL ASSETS, LLC OR ANY OF ITS AFFILIATES. CERTAIN INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM THIRD-PARTY SOURCES, HAS NOT BEEN INDEPENDENTLY VERIFIED AND IS BELIEVED TO BE ACCURATE AS OF THE DATE OF ITS PUBLICATION ONLY. CERTAIN WAVE ACCOUNTS HOLD INVESTMENT POSITIONS IN SOME OF THE ASSETS DISCUSSED HEREIN. WAVE AND/OR THE AUTHOR MAY HOLD INVESTMENT POSITIONS IN SOME OF THE ASSETS DISCUSSED.

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