The Breakdown - BTC Down, Jobs Up, Tether Working with OFAC?

Episode Date: December 12, 2023

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Welcome back to The Breakdown with me, NLW. It's a daily podcast on Macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, December 11th, and today we are catching up on macro, tether, working with OFAC, and much, much more. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod.

All right, friends, well, as I said, today we are doing a few different things, a little bit of macro, some interesting KYC news. But let's start off with just a quick update on price action, as of course we were covering this pretty closely last week. Bitcoin dumped by 6.5% late on Sunday night, falling below 41,000 and wiping out five days of gains. The rapid drawdown occurred around 9 p.m. East Coast time and took just 15 minutes to play out. As I record, Bitcoin is at around 41,700, which is a slight recovery, but still a long way off

of last week's $44,000 level. According to Coinglass data, the collapse caused more than 270 million in long liquidations, with $1.2 billion in futures open interest removed, around 6% of open positions. This was the largest single-day drawdown for Bitcoin in over a month. Now, some looked two macro factors as part of the reason. Greta Yuan, the head of research at VDX, said, the broader market has seen a minor adjustment at the start of this week due to the better than expected non-farm payroll and lower unemployment. The stronger labor market slightly diminished the hope of the Fed lowering the rate early next year. Gold price also dropped with the U.S.

dollar index rallied. Now, of course, I don't think anyone reasonable is making an argument that a strong non-farm payroll report would make Bitcoin do a 6% sell-off on a Sunday night, but we're including it here for completeness. Lucy Who, senior analyst at Meta Alpha said, the recent minor correction in the broader market is part of the rationale process of profit taking, as traders might have hit the price target at the end of the year, given Bitcoin rallied over 70% since October. Other analysts, however, look to more mechanical reasons for the drawdown. Will Wu noted a gap in the CME trading data at 39,700, which could act as a magnet for price action. Gaps open up during the weekends when CME futures are closed, but Bitcoin continues to

trade on other venues. Wu said, by my count, 28 out of 30 gaps have been filled on CME Daily candles. For what it's worth, the other unfilled gap sits at $20,000. Now, to some, it felt like a bit of an inevitability. Indeed, last night, just before this all happened, Scott Melker had tweeted, Bitcoin just closed its eighth weekly green candle in a row. This week's candle was a monster. When corrections, sir? Still with some note of calm, BJ Boyapati wrote, every Bitcoin bull market has drawdowns, many of which are deep and violent. If this is your first bull market, buckle up. Now, let's move over to the macro and to that job report, because I do think it's part of a larger story that is worth catching up on. So as we mentioned, Friday's

jobs report showed stronger than expected growth in the labor market for November. 199,000 jobs were added for the month compared to forecasts of 180,000. This was a significant month-on-month increase from the 150,000 new jobs reported in October. The unemployment rate had been expected to remain flat at 3.9%, but instead dropped to 3.7%. Average hourly earnings increased 0.4% for the month and are now up 4% compared to this time last year. Below the headline numbers, the largest growth in employment was seen in the healthcare sector, which added 77,000 new jobs. Government employment was the second largest sector for growth, adding 49,000 new roles.

Now, some are concerned that growth in employment for non-economic sectors is papering over a slowdown in productive sectors. Still, the solid jobs growth, regardless of the source, is countering any narrative of rapid deterioration in the labor market. Robert Frick, an economist with Navy Federal Credit Union, said, what we wanted was a strong but moderating labor market, and that's what we saw in the November report. Healthy job growth, lower unemployment, and decent wage increases. All this points to the labor market reaching a natural equilibrium around 150,000 jobs per month next year, which is planning

to continue the expansion and not enough to trigger a Fed rate hike. Now, the non-farm payroll report is one of the last major pieces of economic data to be released ahead of Wednesday's Fed meeting. The FOMC will convene to decide whether to hold rate steady for a third meeting in a row. markets are currently pricing in no changes in rates policy this month, but over one percentage point of rate cuts are priced in over the next year expected to begin in the second quarter. According to reporting from the Wall Street journals Nick Timrose, the newspaper's resident Fed whisperer, the timing of rate cuts is not expected to be a serious topic of conversation during this week's meeting. Officials will present their updated rate projections, which will likely

show cuts as a decision to be made later in the new year. David Wilcox, a former senior Fed economist who is now at the Peterson Institute for International Economics said, It would be very difficult if they cut rates now, only to turn around and hike again later. At the same time, they need to be on their front foot, ready to ease as evidence accumulates that inflation is persuasively moving down. Timoros highlighted the main issue facing the Fed over the next few months. If inflation continues to moderate while rates are held steady, Fed policy will become increasingly tight as real rates increase.

This passive tightening of policy could eventually squeeze the economy and cause a downturn. Minneapolis Fed President Neil Kashgari recently voiced this concern, stating, given that monetary policy operates with a lag, it does set us up to likely over-tighten. I don't see how to avoid that. On the other side of the coin, if the Fed moves too early to cut rates, they could trigger another pulse of inflation. This was the lesson from the 1970s Fed under Arthur Burns, which Jerome Powell has gone to great lengths to communicate over the past year. Many economists are already calling on the Fed to declare victory in the fight against inflation, but that declaration will likely be deferred while officials wait for further confirmation.

Tim Doy, chief economist at SGH macro advisors, said, getting rates up above inflation and continuing to hike until inflation rolled over, the Fed overtaken policy to ensure against a wage price spiral. For all intents and purposes, the Fed has restored price stability. Reguram Rajan, a former governor of India's central bank said, I can't see declaring mission accomplished until you see some more labor market slack. More broadly, the reason to moderate rates slowly over the next year would be to achieve that fabled soft landing. Fed Governor Christopher Waller recently spoke to this scenario stating, If we see this lower inflation continuing for several more months, I don't know how long that might be,

three months, four months, five months, we might feel confident that inflation is really down. Waller's cautious optimism was received as a strong signal by markets, as Waller is typically viewed as one of the most hawkish fed officials. Under that scenario, Waller said that the case for rate cuts, quote, has nothing to do with trying to save the economy or recession. Now regarding the less desirable outcome, a hard landing with increased unemployment and the emergency rate cuts that inevitably follow, officials have attempted to quell concerns. Last month, Chicago Fed President Ostand Gouldsby said that in the case of a recession, quote, we're back to our normal playbook.

Generally, the feeling seems to be that Fed policy will continue in wait in C mode, looking for further confirmation that inflation is drifting back to the 2% target, but on watch for a reacceleration. Eric Rosengren, a former president of the Boston Fed, said, there are plenty of things that could cause them to say, we are not in a rush to do this. U.S. Economic Editor at the Financial Times, Colby Smith, writes, At the final FOMC meeting of the year this week,

Jay Powell faces a tough balancing act to maintain flexibility in the Fed's policy plans in the face of intense pressure to reveal when and by how much it intends to cut interest rates next year. Now, while Friday's non-farm payroll report showed a strong growth in new employment, the job openings report from earlier in the week was less optimistic. On Tuesday, the Labor Department's job openings and labor turnover survey, better known as the Joltz report, showed a collapse in advertised positions. Job openings retreated to an 18-month low in October, with just 1.34 vacancies per unemployed worker. The headline number of 8.7 million job openings

was a 617,000 drop from September and came in well below forecasts. Quits remained low, holding steady for the fourth month in a row with 3.6 million resignations representing a 2.3% turnover in the workforce. Looking at individual sectors, the finance and insurance industry saw one of the sharpest declines, with a decrease of 168,000 job openings for the month. Part of that reduction in advertised jobs in finance could be continued downsizing at Wells Fargo. The fourth largest bank in the U.S. has been dropping headcount throughout the year, most notably by shuddering most of its mortgage division in the first quarter. Last week, Wells Fargo announced a gigantic and unexpected severance allowance for the fourth quarter.

The bank's CEO, Charlie Schraff, said, we're looking at something like 750 million to a little less than a billion dollars of severance in the fourth quarter that we weren't anticipating, just because we want to continue to focus on efficiency. He added, Wells Fargo needs to be more aggressive managing headcount because employee attrition has slowed this year. The bank has already laid off over 11,000 employees so far this year, around a 5% reduction in headcount. Severance costs in the third quarter were 186 million, covering payments to 7,000 fired workers, just to give an idea of how deep these mass

layoffs could run. CNBC Digital Executive Editor Jay Yarrow summed up, people aren't quitting, so we got to fire them. Now, I don't know how much more there is to say right now, other than just to note that this is a theme that I'm seeing a lot more, this idea that quietly some companies and some industries really, including finance, are positioning for a more difficult economic period coming up than it might otherwise seem. So of course, something that we will just keep an eye on. Today's episode is brought to you by Cracken.

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Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, CRAKN. Second story for this Monday episode, bringing it back to the crypto world a little bit, Tether has announced a change of policy around sanctioned individuals. As of December 1st, Tether made the decision to freeze all wallet addresses, identified on OFAC special designated nationals or SDN list. Until now, Tether has frozen some wallets engaged in criminal activity on request, but will now proactively freeze funds in compliance with U.S. sanctions. In their press release, Tether claimed the policy change was voluntary,

perhaps a nod to the idea that, as a non-U.S. entity, Tether is not required by law to abide by sanctions. Tether also added that they will, quote, now offer on the secondary market, the sanctions controls it already enforces for wallets on its platform. It's not entirely clear what this offering will entail, but it sounds a lot like Tether will be offering sanctions compliance assistance to other crypto firms. Tether's CEO, Paulo Arduino, said that the policy change was part of the expansion of a, quote, close working relationship with global law enforcement and regulators. He added that, By executing voluntary wallet address freezing of new additions to the SDN list and freezing previously

added addresses, we will be able to further strengthen the positive usage of stablecoin technology and promote a safer stablecoin ecosystem for all users. While Tether has been responsive to law enforcement requests in relation to criminal matters, the firm had so far held off from freezing wallets related to tornado cash. Last October, shortly after tornado cash was added to the SDN list, Tether said that they would not blacklist wallets unless directed to by the U.S. government. On-chain analysts know that the smart contract addresses that underpin Tornado cash have now been frozen by Tether as a result of this new policy.

On Saturday, Tether froze 41 wallet addresses previously sanctioned by OFAC to bring their blacklist up to date. The expansion of freezing targeted 161 Ethereum wallets overall, with most related to hacking rather than specifically identified on the sanctions list. Blockchain data shows that only 11 of these wallet addresses held any tether at the time that they were frozen. Over 3.5 million worth of USDT tokens were frozen, and one wallet linked to the September hack of betting platform stake held 3.4 million USDT, the vast majority of the frozen funds. The FBI claimed that DPRK hackers Lazarus Group were responsible for this attack, and the wallet carried out hundreds of transactions over the past week but has stopped entirely since its funds were

frozen by tether. On-chain analysts, Zach, SBT said, Wallet looks like an OTC or service. They received a bunch of USDT from Thorchain recently, so curious if it is a DPRK-related blacklist. The wallet does not appear on the STN list directly, so could be an indication that Tether is extending its blacklist policy to include wallets which are linked to sanctioned entities by transactions. Speaking of DPRK, also on Saturday, leaders from the U.S., South Korea, and Japan met in Seoul to discuss countering North Korean threats. National security officials met for trilateral talks on coordination of defense policy, and a White House press briefing said,

the National Security Advisors reviewed progress on a wide range of trilateral initiatives, including the commitment to consult on regional crises, the sharing of ballistic missile defense data, and our collective efforts to respond to the DPRK's use of cryptocurrency to generate revenue for its illicit WMD programs. The briefing also noted the deepening relationship between North Korea and Russia,

with officials agreeing to, quote, work in close coordination to counter its destabilizing effects. White House National Security Advisor Jake Sullivan said that the talks were a follow-up from security and economic cooperation commitments made during a summit in August. He told reporters, we've also launched new trilateral initiatives to counter the threats posed by the DPRK, from its cybercrime and cryptocurrency money laundering to its reckless space and ballistic missile tests. His Japanese counterpart to Kiyo Akiba said that North Korea's, quote, illicit cyber

activities had emerged as the most recent challenge. He called them a source of funds for nuclear missile development. Matthew Pines, a national security fellow at the Bitcoin Policy Institute said, this will go beyond sanctioning mixers, offensive cybers and the cards, but will they engage crypto firms to bolster defense? Now lastly today, on Thursday, the final version of the National Defense Authorization Act was published, with crypto anti-money laundering amendments stripped out. This gigantic omnibus bill establishes funding across the entire government and is used as a vehicle for all manner of unrelated legislation to be shoehorned into a must-pass bill. Two proposals had been placed into the bill by senators. These would have directed the Treasury to

create an anti-money laundering examination standard for crypto assets, as well as reporting on the use of mixers and privacy tools. These proposals were removed in the House and absent from the final version, meaning that no crypto legislation will be moved forward as part of the NDAA. Later that day, a new bill was put forward aimed at addressing illicit finance and crypto. The bipartisan bill was proposed by Senators Mark Warner, Mitt Romney, Jack Reed, and Mike Rounds. The goal, according to the bill's text, is to, quote, prevent foreign terrorist organizations and their financial enablers, including those using digital assets from accessing U.S. financial institutions, imposing sanctions and strict regulations to counteract these activities. The bill would broaden current sanctions powers

which were initially focused on the Lebanese terrorist group Hezbollah. Instead, the Treasury would be granted the power to impose sanctions on all U.S. designated foreign terrorist organizations and their supporting foreign entities. The bill would function by allowing the Treasury to prohibit transactions with a foreign digital asset transaction facilitator. This expands the potential targets of sanctions to a much broader range of crypto entities and could even include some forms of infrastructure. Over recent years, the Treasury has not been shy about sanctioning crypto entities with dubious legal standing. Last year saw the first sanctioning of a smart contract with the tornado cash sanctions. And in October, a Gaza-based crypto exchange was added

to the sanctions list. This bill could therefore represent a clarification and ratification of current policy. Now, once again, the issue here is not the principle of the thing, but the same issues of fuzzy definitions that we've seen repeatedly before. That said, comparatively, this is a narrow bill. It's 10 pages long. It's not aiming to span the BSA or change the enforcement of KYC AML reporting. From a political perspective, it kind of appears like it's trying to thread the needle and get something like what Elizabeth Warren was going for, with less objections, but ultimately we'll just have to wait and see. For now, that is going to do it for today's episode. Big thank you once again to my sponsor for the show, Cracken. Go to crackin.com

slash the breakdown and see what crypto can be. Until next time, be safe and take care of each other. Peace.