12.07.21
Cryptosphere Continues to Encroach on Financial Services
by: Rich Blake
Forget about the price of Bitcoin for a moment. Suffice to say, it probably just crashed — again — or hit a new record high. Let’s focus instead on the bigger picture unfolding in plain view (not encrypted).
Banking and financial services are on a major collision course with crypto.
One Giant Step
Last week, Fidelity Investments declared that with respect to crypto, it waits for no U.S. regulator. The Boston-based asset management giant, with $4.5 trillion under management, launched a Bitcoin exchange-traded fund (ETF) in Canada. Why Canada? And why is this a big deal?
Although the U.S. Securities and Exchange Commission did give a green light to ETFs tied to Bitcoin futures contracts, the agency has not allowed for publicly traded products that are tied to price of actual Bitcoin (as it trades in open spot markets). And the SEC has signaled that a green light for the latter type of product might not be coming soon, if at all. Fidelity sent a loud message to the SEC that high-net worth investor clients are demanding such a fund, and so, off to Ontario it went.
An even more aggressive stance was recently taken by attorneys representing Grayscale Investments, the largest digital money manager. It also wants crypto products made more widely available to the public.
In a letter to the SEC, Davis Polk attorneys contend that the agency’s decision to approve a futures-based fund – and not a spot ETF – is not only “arbitrary and capricious” but also in violation of federal law.
The letter was released publicly by Grayscale, angling for a fight.
Grayscale previously filed papers with the SEC to convert its Grayscale Bitcoin Trust (GBTC), a “grantor trust,” into an ETF.
Digital Custody Battle
The rise of digital asset money management, even in the face of regulatory headwinds, has created a scramble to build an infrastructure to service it. Some of the largest crypto-related buyout deals have involved crypto custodians, such as a deal in which KKR took a stake in Anchorage, a digital asset bank, valued at $3 billion. This past spring, Galaxy Digital acquired digital asset custodian BitGo for $1.2 billion. In the next few years, the largest traditional custodians (Bank of New York Mellon, State Street Corporation, J.P. Morgan and Citigroup) will most likely be converging on this area and, not inconceivably, on these privately held first movers.
Overall, banking disruption is seemingly poised to begin. Blockchain, the technology that supports crypto, has the potential to transform activities associated with large banks, such as the creation and syndication of asset-backed securities. They may also be able to transform numerous other segments of banking and financial services, according to a research report published by the Royal Bank of Canada (RBC).
Stablecoins Under Scrutiny
One of the fastest-growing and most controversial sub-genres of digital money is that seemingly boring category called "stablecoins," which are cryptocurrencies pegged 1:1 to a government, or "fiat," currency, such as the U.S. dollar.
Stablecoins were designed for the crypto community to enter and exit digital assets without the kind of whipsaw volatility associated with Bitcoin.
Last fall, the stablecoin market sat at roughly $25 billion.
It is now nearly $130 billion.
Lack of visibility into the reserve assets backing stablecoins has the Biden administration calling for regulation.
The largest stablecoin, Tether (USDT), was just singled out and put on notice that the federal government is watching it closely — that is, the U.S. Commodities Futures Trading Commission (CFTC) slapped the stablecoin's operators with a $41 million fine for allegedly misstating its reserves.
For its part, Tether issued a statement insisting it always had enough money in its reserves, emphasizing the CFTC's findings were merely that the reserves were not all in cash and not all in a bank account titled in Tether’s name at all times.
The potential for systemic risks associated with stablecoins like USDT and the second-largest, USD Coin (USDC), were concerning enough to have warranted the creation of a President's Working Group on Financial Markets (PWG).The group is meant to work with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) to jointly release a report on November 22 calling for legislative action to limit the issuance of stablecoins to insured depository institutions, as well as to enable prudential regulation of stablecoins in order to address the risks to the broader financial system.
At first glance, it's a well-choreographed crackdown.
However, keep in mind that the Biden administration and governments around the world are going to seek to tax crypto to finance their ambitious post-pandemic agendas.
The framework for regulatory supervision is taking shape. That shouldn’t be lost when conversations turn to the trajectory of the price of Bitcoin.
Even as that largest digital asset crashed by $10,000 in one 24-hour period from December 3-4, a "stablecoin-ecosystem" project called Terra saw its native token surge to new heights. Why?
It was on news that the community was pushing ahead with plans to create a product to bridge the crypto realm with something very ordinary: tax preparation software. The kind used by many financial planners.