The Breakdown - CFTC Acting Chair: ‘Nearly 60%’ of Cryptos Are Commodities

Starting point is 00:00:00 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. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, October 27th, and today we are doing an extended brief style episode, a catch-up on a bunch of topics, all with relatively equal weight. So let's dive in. The first topic is actually a question. Should the CFTC be crypto's main regulator? That's the argument of Rostin-Benham, the acting chair of the CFTC, who is currently in confirmation hearings to serve a full term as chair. In testimony before the Senate Agricultural Committee, he said that the CFTC is ready to become the primary Fed regulator for digital assets if Congress empowers them to do so.

Starting point is 00:01:02 quote, the CFTC has responsibly and aggressively been pursuing enforcement cases in the digital asset marketplace for a number of years now. I think it's important for this committee to reconsider and consider expanding authority for the CFTC. He acknowledged that it would be something of a departure from their historical mandate, but said, quote, given the size, the scope and the scale of this emerging market, how it's interfacing and affecting customers, retail customers, and then with the scale of the growth being so rapid, potential financial stability risk, in the future. I think it's critically important to have a primary cop on the beat, and certainly the CFDC is prepared to do that if this committee so wishes. Now, the standout statistic from this

Starting point is 00:01:43 testimony was that Benham argued that nearly 60%, and those are hits words, nearly 60% of crypto's $2.7 trillion market cap represent commodities. That is obviously a big difference from the take of the Securities and Exchange Chair Gary Gensler, who seems to think that most cryptocurrencies out there, or at least the vast majority, are in fact securities. Is this just an example of when you're a hammer, you see everything as a nail? Are there genuinely interesting substantive debates to be had about whether these things are commodities or securities? Seems pretty important to me, and perhaps the fact that two major regulatory bodies are both arguing that they should be in charge will have Congress take a more concerted effort to figure out what's going on here and who should be

Starting point is 00:02:27 in charge of what. Speaking of governmental bodies with regulatory overreesome, oversight into this little industry of ours. The Federal Deposit Insurance Corporation is one of the top U.S. bank regulators. And in a Reuters interview yesterday, Jelena McWilliams, who chairs the FDIC, had some interesting and relatively positive comments surrounding banks and crypto. She said that the FDIC is trying to provide a roadmap for banks to engage with crypto, saying, I think we need to allow banks in this space while appropriately managing and mitigating risk. If we don't bring this activity inside the banks, it is going to develop outside of the banks. The federal regulators won't be able to regulate it. Now, back in May, bank regulators, including the FDIC, the Fed,

Starting point is 00:03:07 and the Office of the Comptroller of the Currency announced a collaborative sprint effort, which was their word, and it seems that there's been some progress given that this is a major topic of conversation. Now, at the same time, banks are getting involved, whether they make it easy to be involved in the crypto ecosystem or not. US Bank, for example, announced earlier this month that it is launching crypto custody. Still, to me, these are clearly some of the more positive comments we've seen from a regulator of late. My goal, McWilliams said, in this interagency group, is to basically provide a path for banks to be able to act as a custodian of these assets, use crypto assets, digital assets as some form of collateral. At some point in time, we're going

Starting point is 00:03:45 to tackle how and under what circumstances banks can hold them on their balance sheet. So remember that name, Jelena McWilliams, an ally, it seems, or at least someone who's a thoughtful advocate of integration between crypto and tradfi. Next up, a quick CBDC Central Bank digital currency check-in. Over in Europe, the European Central Bank has appointed 30 members to a digital euro market advisory committee. This is so in line with the way that they do things, which isn't necessarily the wrong way. I just always get a kick out of these big advisory committees and processes and all this sort of stuff. But either way, this 30-member digital euro market advisory group will advise the Euro system,

Starting point is 00:04:23 which represents the European Central Bank as well as member central banks, around issues regarding a potential digital euro, how to do it, how to design it, what issues that might come up, et cetera, et cetera, et cetera. Now, the ECB formally launched its digital euro investigation in July, and this investigation phase is slated to last 24 months. Now that it is up and running, there will be quarterly meetings of this advisory group, with written recommendations shared in between. The ECB continues to hold that at the end of this investigation,

Starting point is 00:04:53 it may not decide to pursue a digital euro, but that certainly doesn't seem the direction it's heading now. Meanwhile, over in Nigeria, the Central Bank of Nigeria launched the E-Naira on Monday. It is designed, as many CBDCs are, to complement but not to replace cash. Their press release on the announcement said that they are looking to, quote, make financial transactions easier and seamless for every strata of the society. Now, Nigeria has been concerned for a while about the growth of cryptocurrencies domestically, and so this may be trying to do an end run around them by providing some of the same functionalities but through a government-mediated tool. As part of this launch, they are also releasing a

Starting point is 00:05:31 wallet that can be either connected to bank accounts or topped up pay-as-you-go style. The Central Bank of Nigeria says that this quote marks a major step forward in the evolution of money. Nidig, which is the sponsor of this podcast, is at Money 2020 this week. So if you're in the banking industry and you're thinking about offering Bitcoin to your customers, bring your questions over to the Nidig booth. Fourth today on this extended brief, let's talk BACT and MasterCard. So Bact has something of a weird history. In the dark, gloomy times of 2018, it was seen as something of a huge bit of news that the parent company of the New York Stock Exchange was creating this crypto-focused company. It was supposed to be some great savior to pull us out of the

Starting point is 00:06:22 dregs of the bear market, to welcome a new generation of institutional investors. And obviously, that didn't really play out as such, but the company has continued to grow, continue to evolve. It got more focused on digital assets that weren't necessarily cryptocurrency. for example, loyalty points and that sort of digital loyalty program, and then just a little bit earlier this year, BACT went public via SPAC. Now, initially the SPAC was not particularly successful, but over the last week it has been surging because of the announcement of a deal with MasterCard. MasterCard and BACT announced that they will be allowing merchants and banks to build crypto into their offerings. They will also give customers custodial wallets, and there's a whole loyalty and rewards

Starting point is 00:07:03 play as well. For MasterCard, this is just the latest in a go-deep set of activities that have seen them get farther and farther into the crypto space, including notably buying Cipher Trace recently as well. I think more than the specific actors in this story, what's relevant here is the template. I believe that we are going to see a ton of deep partnerships and integrations over the next couple years that are effectively insert traditional finance firm over here and key crypto actor over there. Speaking of the blend of traditional finance and crypto finance, let's do an ETF roundup. We live in the post-Bitcoin futures ETF world now, so let's check in. Somehow, despite the SEC giving no indication that they think a spot ETF is coming soon,

Starting point is 00:07:48 the fact of a futures ETF had reignited for a while some conversation that a spot ETF must also be just around the corner. Well, over the weekend, SEC Chair Gary Gensler was interviewed by Yahoo Finance, pretty well threw cold water on it. He said that crypto hasn't come under, quote, an investor protection remit, and quote, without those protections, it's basically the Wild West. Nate Garassi, the president of ETF store, said, honestly, after hearing those Gensar comments, I don't see how a spot ETF happens in July 2022. How long will it take for Congress to develop a regulatory framework here? I'm starting to think 2023 or beyond. Look, in my estimation, a Bitcoin

Starting point is 00:08:25 Spot ETF is completely incidental to what Gary actually wants, which is an actually new regulatory framework. I simply believe that we're not getting anything else on this front until there's clarity there. That, however, hasn't stopped more ETF proposals from coming in. Just days after their first Bitcoin Futures ETF launched, Valkyrie has filed for a leveraged Bitcoin futures ETF that will provide 1.25X exposure to the Bitcoin reference rate. It intends to trade under BTFX and said Steve McClurg, the chief investment officer at Valkyrie, I think Spot is quite a bit of a ways away, but we do have some creative things that we're looking at doing. You'll probably see them filled in November and hopefully

Starting point is 00:09:03 launching in the beginning of next year. Now, this is not at all a knock on Valkyrie, but can we talk about the sort of absurdity of allowing retail investors to buy ETF products based on complicated futures and swaps that they don't necessarily understand, but not one that just buys and holds Bitcoin? I get where they're coming from sort of in the sense of the way that the CME that underlies it is regulated, but come on, guys. If investor protection is really the deal here, exotic instruments being the basis for a product that really is just a proxy for something that's available, it just doesn't make sense. But that's not the only thing going on in CME world. There's also a question, as we discussed last week, about whether the CME is going to

Starting point is 00:09:48 have to raise limits on how many total futures contracts a player can have, given that these ETFs are so popular. They haven't committed to anything yet, but a recent statement said, quote, so the existing position limits and our Bitcoin futures today, as you may or may not know, is 2,000 per spot. And then we have accountability levels going back in the deferred months that are much larger than that. But these spot months will go to 4,000 in November. And we feel very confident from a risk perspective that we are not being reckless, in any which way, shape, or form, that this has been vetted by our entire team here and with the agency, so we filed for those changes. We're confident that the product is mature enough now to increase the size of the limit, so again,

Starting point is 00:10:25 we'll be careful here. Eric Baukunis basically said that this points to them not being particularly worried about the ETFs going over that contract limit, and further, the Bloomberg ETF analyst said, quote, I'm sure they're happy. Here's Bitcoin Futures Open Interest, which appears to be at a new normal of $5 to $6 billion, up from the old normal of $2 to $3 billion. Also note, Ether is halfway to where Bitcoin was during filing process. Don't have to be a genius to predict those filings coming soon.

Starting point is 00:10:52 Finally, last on this extended brief today, it was a bad quarter for Robin Hood Crypto. Revenue fell from 233 million in the second quarter to 51 million in the third. Now, any passive observer would have expected some amount of drop, right? The market was in a downturn compared to quarter two, but still, that drop is significant. Robin Hood, for its part, is still super enthusiastic about crypto. It has more than a million people waiting for its crypto wallet. which is one of their quote most heavily requested products, and their CEO Vlad Tenav just said they're waiting for more regulatory clarity

Starting point is 00:11:24 before adding more tokens. Still, the market didn't really like it. Their stock was down around 8% and I think the question is, one, how much is this just normal market vagaries? Two, how much does this suggest that Robin Hood's user base specifically is more subject to volatility than perhaps more entrenched holders? In other words, if these were first-time crypto buyers, maybe there's just going to be a lot bigger variability between a good quarter and a bad quarter given

Starting point is 00:11:52 the profile of that type of investor. But then again, it also could be specifically a question around how much Robin Hood's activity was driven by Dogecoin. There was a ton of focus on Dogecoin in quarter two, and much less so, obviously, in quarter three. Is Robin Hood just the Archmeme app? And if so, does that mean they have to list things like Sheep to keep up? I guess we'll get our next insight into that question on their next earnings call. But for now, guys, I appreciate you listening. I hope you're having a great week. And until tomorrow, be safe and take care of each other. Peace.

The Breakdown - CFTC Acting Chair: ‘Nearly 60%’ of Cryptos Are Commodities

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