Major Positive Crypto Regulatory Shift
Last month regulatory actions against Tornado Cash and Samourai Wallet highlighted ongoing resistance to crypto amongst the US administration. However demographic forces are almost certainly shifting the regulatory and political perspective towards crypto in the world’s largest economy. Bipartisan support for proactive crypto regulation is now a possibility. A market structure or stablecoin bill could become a reality this year, which could significantly support crypto adoption. There remains opposition from the Biden administration but Senators in Congress suggest that crypto is a bipartisan issue which is constructive for adoption over the coming years. Crypto could even become an issue in this year’s US Presidential elections.
Demographics Imply Crypto Adoption is Inevitable
I have long argued that three powerful market forces make crypto adoption inevitable:
Digitization: Despite digital advancements, banking and finance remain largely unaffected. Bitcoin represents the advent of digital scarcity, bringing money and finance into the digital age.
Monetary Shifts: Monetary regimes don't last forever. The US dollar global reserve system, established in the 1970s, is showing strain under excessive debt and ultra-low interest rates. An alternative monetary system is required, with few viable options available.
Demographics: For 50 years, Baby Boomers have dominated global economics, politics, and culture (Born between 1946-1964, Boomers own approx 50% of US wealth). As Boomers age, Millennials—who favour crypto—will take the reins. This generational shift will change aggregate perceptions of crypto, forcing politicians to become more crypto-friendly to appeal to this important constituency.
Is Crypto More Bipartisan than the Biden Administration Suggests?
A month ago, Ethereum (ETH) approval prospects seemed slim. Additionally, the Department of Justice’s actions against privacy-enhancing crypto mixers indicated strong opposition. The DoJ’s actions were merely another market in the US Presidencies ongoing attack on crypto. Gary Gensler at the SEC, Senator Elizabeth Warren and Martin Gruenberg have led the charge in what Warren termed an “anti-crypto army”. However, events in Washington in May suggest a shift in approach towards crypto:
Bipartisan Support: The SAB 121 CRA received bipartisan Congressional support to overturn the SEC’s Staff Accounting Bulletin (SAB) 121, which imposed impractical actions on digital asset custodians.
Legislative Advances: Key Democrat Nancy Pelosi and others supported FIT 21, allowing the bill to pass through the House of Representatives. FIT 21 aims to regulate U.S. crypto markets, establishing the CFTC as the leading regulator of digital assets. In other words, Democrats appear far more favourable to crypto than what is suggested by Biden, Warren, Gruenberg and Gensler.
Leadership Changes: In addition, FDIC Chairperson Gruenberg resigned in May. This could end Operation Choke Point, which has targeted crypto by weaponizing the banking industry.
Is Trump's Populism is Working in Crypto's Favor?
It is unclear to what degree Democrats have been swayed by Donald Trump’s increasing support for crypto. Perhaps Democrats were favourable to crypto without the pressure from the opposition. However, Donald Trump's comments in March, when he called Bitcoin an "additional form of currency" and discussed his involvement in NFTs could have tilted the scales.
Unfortunately, President Biden vetoed Congress’ efforts on SAB 121 CRA. However, the bipartisan support is noteworthy and potentially more important. Biden increasingly appears like a lost old man, on numerous issues. Post Biden’s veto Democrat Senator Ron Wyden argued that SAB 121 imposes a different standard for crypto compared with other financial assets. I expect more dissension and the demographic shifts to pressure politicians towards constructive policies for their crypto voters.
President Biden is akin to an Old Man Shouting at a Cloud (Simpson’s reference)
The ETH ETF Has Opened Up a Whole New World
While the Bitcoin ETF approval was monumental, concerns remained about institutional capital being limited to Bitcoin. With the launch of ETH ETFs on the horizon (post SEC approval in May), a new precedent is set. We can expect ETFs for other assets, like SOL, in the coming quarters. This shift encourages a broader acceptance of non-Bitcoin assets. Listen to bitcoin-only champion Michael Saylor in this interview: "You just have to rethink your models and move forward in a new world"
At this stage it should be noted that the ETF applications don't include staking, which will somewhat reduce the value-proposition. The 3-4% yield is a very attractive prospect for yield-hungry investment managers. We expect staking to be included in the ETFs eventually.
Crypto as a Presidential Election Issue:
Donald Trump, the front-runner for the U.S. Presidency, has shown support for crypto, highlighting its importance in votes and campaign contributions. While he may flip-flop on policies, his stance indicates the significant influence of either the crypto constituency or campaign donors (given the decentralised nature of crypto, the influence could be more from donations at this stage).
Thus far Joe Biden has been firm on his anti-crypto stance after he vetoed SAB 121 CRA, but he has said he is willing to work with Congress on proactive crypto regulation. It should also be noted that significant work must be done in Congress to truly ease the negative regulatory pressure enacted in the last few years. Here’s a list of the obstacles still in place.
Proactive Crypto Regulation is a Powerful Prospect
With Democrats and potentially Biden on board, stablecoin regulation seems like an absolute no-brainer. Listen to this short interview from Paul Ryan (former speaker of the House in Washington) where he highlights the case for stablecoin support.
I always saw positive stablecoin regulation as a high probability outcome. I was just very unsure of the time horizon. Now looks like it'll take place in the next year. Suddenly there are a lot of possibilities.
I think clear stablecoin regulation will be a game changer for crypto adoption. All fintech apps will suddenly shift to stablecoins because they are far superior to existing technology. Basically, everyone follows PayPals lead. Once you're in USDC, its pretty easy to convert to BTC & ETH
Market Dynamics
We held a weaker thesis on the market direction heading into May. This somewhat played out but the downside was limited below $60K. The market reset at those levels, fund rates on perpetual futures briefly went negative and ETF buyers stepped in. Inefficient miners miners are capitulating post the halving and liquidity has started to tighten again suggesting that the consolidation phase might be ending and the next leg higher in the market could be around the corner.
The approval of the ETH ETF has created a much stronger possibility of ETH outperformance relative to BTC over the coming quarters. At first, this could pressure other altcoins as capital could become concentrated in BTC & ETH for a period. Eventually, we expect capital will flow into other corners of the market as participants speculate on the possibility of broader crypto use-cases in defi.
In the past month, we’ve seen a major regulatory shift in favour of crypto, driven by demographic changes. Unfortunately, Biden isn’t quite playing ball yet, but crypto has become a relevant topic in the U.S. Presidential elections, with bipartisan support for proactive regulation possible. This could lead to significant adoption of stablecoins and other crypto assets. The approval of the ETH ETF is a game-changer, confirming the shift towards a multi-chain world and opening up prospects for numerous crypto ETFs in the future. The future is alive with possibilities.
