Investors in Bitcoin and other cryptocurrencies have enjoyed a phenomenal run but they are now worried that Janet Yellen’s arrival as US Treasury secretary may herald a new era of hostility from regulators and central banks towards what boosters call “libertarian” forms of digital money.
In her last press conference as chair of the Federal Reserve in 2017, Ms. Yellen said Bitcoin was a “highly speculative asset” and “not a stable store of value”. These dismissive remarks were echoed by many other public officials at the time.
A planned US Treasury rule aimed at stamping out illicit cryptocurrency transactions has recently drawn strong opposition from the industry, setting up a battle that threatens to cast a shadow over the digital currency boom. The proposal would require custodians and exchanges to collect and report identifying information about large transactions involving unhosted wallets – cryptocurrency accounts held outside financial institutions.
The Financial Crimes Enforcement Network, a unit of the Treasury, said the rule would protect national security and prevent crime, but more than 7,000 cryptocurrency groups and advocates have filed public comments on the rule, citing concerns about privacy rights and accusing the Treasury of engaging in “midnight rulemaking”.
Cryptocurrency exchange Coinbase and one of its largest investors, Andreessen Horowitz, questioned the legality of the rule in letters to the Treasury. Jack Dorsey, chief executive of payments company square, has claimed the proposals will “leave people cut off participating fully in the economy”, Gus Coldebella, general counsel of paradigm, a cryptocurrency venture capital firm, said: “Everyone who touches crypto realizes that this rule is substantively flawed.”
In a letter also signed by venture firms Ribbit Capital and Union Square Ventures, Paradigm said the rule would create “burdensome and unprecedented requirements for cryptocurrency transactions and could make it harder to police bad actors.
The responses in our opinion reflect the stakes for the sector, whose most lucrative applications are largely fee-based exchanges. Coinbase, the largest US cryptocurrency exchange, is preparing for a highly anticipated public listing, with Bitcoin surging this year to pass the 40.000 dollar mark before pulling back.
Bakkt Holdings a cryptocurrency platform majority owned by Intercontinental Exchange, has announced plans to go public through a combination with a blank – cheque company, bringing together two of the frothiest elements of US markets.
New York Stock Exchange parent ICE said last month that Bakkt had agreed to combine with a special purpose acquisition company sponsored by investment firm Victory Park Capital. Bakkt, formed by IC E in 2018, is planning to launch an app this March that will let users buy and sell cryptocurrencies and manage other digital assets such as loyalty points and gift cards. Its ambition is to reach more than 30 million customers by 2025 from none last year, it says in its regulatory filing.
The app, currently accessible only by invitation, has garnered interest from around 400,000 people seeking early access, Bakkt said. When listed on the NYSE, it will have an enterprise value of 2.1 billion dollar, ICE said. The more in our opinion highlights how a rising number of mainstream companies and investors are dabbling in the cryptocurrency sector.
Bakkt’s plans for a public market debut come shortly after Coinbase announced Its intention to float shares in an initial public offering (IPO) the announcement of Bakkt also demonstrates how Spacs after a smoother route to public markets for companies with new technologies and earlier stage businesses.
In the first crypto frenzy of 2017 – 18, comedian John Oliver described Bitcoin as “everything you don’t understand about money combined with everything you don’t understand about computers”. The technology aspects, particularly the blockchain network of digital ledgers that are used to record transactions, have not yet really lived up to the initial hype, but they are in our opinion beginning to make progress. The issuance of 20 billion dollar in “initial coin offerings” (ICOs) seem to contain elements of a speculative bubble, but the funds raised are now being used to launch projects broadly similar to other IT ventures in Silicon Valley.
Jay Clayton’s recent departure from the chair of the US Securities and Exchange Commission may result in less hostile regulatory scrutiny of these activities, especially if Gary Gensler, who teaches about digital currencies, replaces him.
However, resistance to digital currencies as payments and transfer vehicles is likely to remain in the near future.
The outgoing Treasury Secretary Steven Mnuchin has been working on new regulations to increase transparency in Bitcoin transfers and reduce the scope for money laundering. Ms. Yellen, in conjunction with the Fed, is likely to adopt an even more orthodox approach, treating the payments system as a quintessential public good.
The Fed is collaborating with foreign counterparts in investigating the development of central bank digital currencies. It is in our opinion almost certain that CBDCs (central bank digital currencies) will eventually be issued in the major jurisdictions, following China’s lead. However, they will be denominated in national currencies, not crypto. Certain countries are moving fast toward creating digital currencies. Therefore an increasing number of central banks are making substantial progress towards having an official digital currency. But challenges remain as close to 80% of the world’s central banks are either not allowed to issue a digital currency under their existing laws, or the legal framework is not clear.
A new IMF (International Monetary Fund) staff paper found out that only about 40 central banks out of 174 IMF members are legally allowed to issue digital currencies. Any money issuance is a form of debt for the central bank, so it must have a solid basis to avoid legal, financial and reputational risks for the institutions. Ultimately, it is about ensuring that a significant and potentially contentious innovation is in line with a central bank’s mandate. Otherwise, the door is opened to potential political and legal challenges.
Private competitors denominated in genuinely new currencies such as Bitcoin, will be heavily regulated or actively discouraged by the US. Hybrid stable coins, such as Facebook’s Libra, that are pegged to a single currency or a basket of fiat currencies and other real assets may be more welcome by central banks, if they were directly transferable into traditional currencies. Furthermore, they may not be powered by blockchain. Each of the major central banks may develop its own distributed ledger technology. That in our opinion still leaves a role for crypto as an investment vehicle and store of value. Can Bitcoin seriously compete with gold as a safe asset for the largest investors?
History, regulation and market volatility make that seem improbable, but it is beginning to develop a more important role. Many big hedge funds and some conventional asset managers have followed Paul Tudor Jones in adopting Bitcoin as a core hedge against inflation. While this may have seemed attractive when central banks were in effect creating money by buying up government debt last year, there are very few signs of inflation on the imminent horizon. Yet Bitcoin prices have continued to rise, apparently driven by a narrative that a privately created asset, which in theory has a finite supply, cannot be “printed” like the “legacy” fiat currencies.
According to Gold Hub, gold stocks held above ground amounted to 198,000 tons at the end of 2019, with about 57,000 tons of proven reserves below ground. This total stock would be valued at about 17 trillion dollar in today’s prices. The latest market value of Bitcoin is about 600 billion dollar – Bitcoin bulls see this as a gauge of how much further its price could rise.
There seems little reason on monetary policy or financial stability grounds why regulators should be worried about cryptocurrencies competing with gold as a store of value. The crypto world is currently in a frenzy of short-term speculation. However, if investors continue to buy into dubious narrative that these private currencies are “safer” than those controlled by the central banks, they could rise much further in market value in coming years.
Stronger things have certainly happened in financial markets.