The Breakdown - Circle Becomes First European Licensed Stablecoin Issuer

Episode Date: July 3, 2024

As Europe's MiCA rules go into effect, the continent narrowly avoids serious stablecoin-crypto-trading issues by granting a license to Circle. NLW also looks at a settlement in the Silvergate case. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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 Tuesday, July 2nd. And today we are talking about Circle in Europe, Silvergate settling, 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. Hello, friends. We have a bit of a mishmash of stories today, and this is what I would kind of expect for the rest of the week.

With the July 4th holiday coming up in America, obviously news is going to be a little bit lighter. And while that might be a bummer for us news junkies and content producers, it's kind of nice for everyone else, right? In any case, there are still some things that are worth discussing, starting with the fact that Circle has become the first global stable coin issuer to secure a license in Europe under new regulations. The EU's markets and crypto assets or MECA framework has now begun its implementation phase. The first regulatory measure came into force at the beginning of this week, requiring exchanges to deal only in licensed stablecoins. Regulators had cut it very close. Until Circle's announcement, it seemed that no major stablecoin had been able to obtain

licensing. There were fears this would cause chaos in European markets if exchanges were forced to delist major stablecoin pairs. Under their new license, Circle will be able to continue offering both Dollar and Eurobacked stablecoins in the EU. The license was issued by the French banking regulator and will be held by Circle's domestic subsidiary Circleman France. The entity will issue and redeem tokens directly, effectively on-shoring stablecoin operations for Europe. USDC will move to a dual issuance model based on region,

while the Euro stablecoin will be exclusively issued and redeemed by the French entity. Circles head of policy Dante Desparte felt that this moment marked a transition point for the industry, stating Mika is both vindicating of the industry and its permanence. But it's also clear that there are no shortcuts, at least not in the third largest economy in the world. Gone are the days where you could operate in a regulatory haven or in the shadows and then expect to have liberal and free access to consumers and market participants. Circle CEO Jeremy Allaire was more focused on the landmark of stablecoins being recognized under a major regulatory framework, commenting, the entire concept of fiat digital currency did not really even exist outside of very early crypto circles. The concept

of seeing major global laws that enshrines stablecoins into the financial system was inconceivable. This week's deadline to bring stable coins under the regulatory umbrella has been controversial and confusing for European crypto firms. Over recent months, exchanges have delisted numerous stablecoins on the assumption that they would be unable to gain licensing. It was extremely unclear that even Circle would be successful in their application, which led to more existential concerns for European-based trading. The biggest headline has been all major exchanges delisting Tether for European customers. Tether CEO, Paulo Arduino, had flagged that his company was unlikely to seek licensing and openly criticized the Mika rules. His primary concern was a mandate to keep cash

reserves in domestic bank accounts rather than utilizing treasury bonds and other securities as reserve assets. He claimed the requirements, quote, could not only render the job of a stablecoin issuer extremely complex, but also make EU licensed stablecoins extremely vulnerable and riskier to operate. We, of course, saw firsthand the risks involved in keeping stablecoin reserves in banks during the collapse of Silicon Valley Bank, which trapped 3.3 billion worth of Circles' reserves over a tense weekend. Cryptotrader John Brown parodied the issue, tweeting, Thanks to Circle's new Mika license, USDC users from the EU now see the reserves backing their token

go from rather safe U.S. Treasury bills to uninsured deposits in shaky EU banks. Mika also contains restrictions that may not be suitable for larger stable coins. If a stable coin has more than 200 million euros worth in circulation or is being used to clear over 1 million transactions per day, further issuance is prohibited. This provision only applies to stable coins which are, quote, used widely as a means of exchange,

so might not be applied to trading activity. It seems as though the aim is to ensure that private privately issued stable coins don't compete with a European CBDC. It's unclear how Circle plans to deal with the restriction at this stage. It could imply that European-based tokens are accounted for separately to stable coins issued in the rest of the world. However, the separation is handled, Circle was clear that stablecoins will remain fungible between jurisdictions. Aside from size limitations, there was also speculation that Mika would be used to promote Eurobacked stable coins over their more popular dollar equivalence. With Circle gaining licensing for both

dollar and Euroback stable coins, that speculation now appears to be unfounded. Moving back over to the U.S., Silvergate Bank has settled charges with the SEC, the Federal Reserve, and the California Department of Financial Protection and Innovation. The regulators alleged that the failed crypto-friendly bank had not maintained a proper anti-money laundering program and made misleading disclosures about the program's efficacy. Silvergate's parent company agreed to pay a total of $63 million in fines. In addition to the fines, multiple senior executives agreed to a five-year ban on being officers or directors in a public company. Silvergate will also surrender its banking charter. Silvergate was the first casualty of the March 23 banking crisis. Compared to the

other banks that failed during that period, Silvergate was relatively tiny with just 11 billion in assets. Silvergate had been a key bank for FTCS and much of the crypto industry, which led to issues when crypto traders scrambled to withdraw funds industry-wide in the wake of the FTX collapse. Silvergate reported a billion-dollar net loss in the fourth quarter of 2022 as a result of this run-on deposits across crypto firms. In addition to traditional banking services, Silvergate also operated an internal clearance system that was available around the clock, known as the Silvergate Exchange Network or Sen. The core allegation from the SEC complaint was that Silvergate failed to detect nearly $9 billion worth of suspicious transactions made by FTX. The complaint said,

for most of 2021 and 2022, the bank had not conducted appropriate automated monitoring of its preeminent product, the Sen, the Silvergate Exchange Network. The Sen was a key mechanism for the bank's crypto asset customers to transfer funds amongst themselves and was tailor-made to attract crypto asset customers. But the bank failed to adequately or automatically monitor for suspicious activity, approximately $1 trillion in banking transactions that occurred on the SEN. According to the complaint, automated monitoring of the SEN was only activated in September 2022. The allegations also claim that FTX customers had been instructed to wire money to an account held by Alameda research at Silvergate. Silvergate had received a warning from bank examiners that their monitoring was

inadequate, but no risk factors associated with the SEN were disclosed in public SEC filings. The complaint features extensive quotes from Silvergate officers discussing difficulties with monitoring the send. The internal transfers apparently did not fit into existing risk monitoring frameworks. The bank's COO was quoted as saying, we have known of this issue and either we have established other controls to account for it, or we haven't and we have to take our lumps. SEC Director of Enforcement, Grubier-Rawal said, rather than coming clean to investors about serious efficiencies in its compliance program in the wake of the collapse of FTX, they doubled down in a way that misled investors about the soundness of the programs. Now, while the former CEO and

COO agreed to settle the SEC matter, former chief financial officer Antonio Martino is denying the allegations. In a statement from attorneys, he said the accusations are tied to events in a single quarter of 2022 and relate to, quote, judgment-driven decisions. He added, The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name. Silvergate's statement claimed that all banking customers have been repaid as of November 2023 and that banking activities cease shortly afterwards. They said that the settlements, quote, are part of the banks continued orderly wind down and successfully conclude investigations by the Federal Reserve, DFPI, and SEC.

Hello, friends. Before we get back to the rest of the show, I want you to join me at Permissionless. Permissionless is a conference for Cryptonatives by Cryptonatives. And the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the U.S. remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it, which will lead to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is a conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And what's more, I'm going to be there. The location is Salt Lake City. The dates are October 9th to the

11th, and right now, tickets are just $199. Towards the end of the month, they're going up to $499, and if you want 10% off, use code breakdown 10 when you check out. If you go to the block, blockworks website, blockworks.co. There will be lots of information about how to register, and again, use code breakdown 10 to get 10% off. One upside of all the political chaos that we have, of course, been covering on the show, is that polymarket has recorded its first month of volumes above 100 million on the back of heavy activity around political outcomes. The prediction market now has $200 million worth of bets on the outcome of the presidential election. The same amount is spread across various other U.S. political markets, including increased speculation on whether President Biden continues

as the Democrat nominee. According to data from Dune Analytics, 111 million in wages replaced last month, almost doubling the previous record that was said in May. The past six months have been the most successful in the platform's four-year history. Volumes increased tenfold in January as the platform hosted markets on various aspects of the Bitcoin ETF launch. Since then, the platform has become ubiquitous in reporting around political outcomes. The betting markets have become invaluable to political reporters who can now quote real-time odds after major events. In a recent report, Bernstein analysts noted, quote, By bringing transparency and building liquid and efficient election markets,

Polymarket is ironically leading to greater appreciation of the technology and its significance to politics. This notion of transparency and public sentiment feels like it's already having a major impact on U.S. politics. Following last week's debate, political strategists didn't need to wait a week to get polling numbers in. They could simply watch the odds move on Polymarket. Coinbase engineering lead Yuga Kohler commented on how important this element

of prediction markets is, writing, prediction markets are the purest technology manifestation of liberal democracy. They take free markets and free speech as inputs and output truth. In an age when centralized control of information is a systemic risk, prediction markets offer a way of cutting through misleading narratives and viewing the unvarnished truth. Prediction markets are freedom-preserving technology that move societies forward. Still, the new wave of success for polymarket could raise the attention of regulators. Betting on elections is illegal in the U.S., which is one of the reasons that polymarket has been able to aggregate so much volume. The company has already had a close call with the CFTC.

which has become the ill-fitting regulator of prediction markets. In 2022, Polymarket paid a small fine and agreed to shut down markets that were uncomfortably close to financial derivatives. The platform also agreed to block U.S. users. Around the same time, the CFTC blocked rival prediction market Kalshi from launching political betting markets. Since then, Polymarket raised a $70 million round backed by Vitalik Buterin and Founders Fund. As Polymarket ramps up toward Election Day, we could see regulators take a closer look at the platform. A little bit of ETF news. Global Crypto Fund saw their third week of outflows in a row, but the bleeding has slowed. According to CoinShare's weekly report,

global crypto funds saw 30 million in outflows last week. The previous two weeks each had outflows above 500 million. Global Bitcoin funds actually managed a slight inflow of 10 million last week, with 37 million worth of outflows for the US spot ETFs offset against more than 70 million worth of inflows for the volatility shares leverage Bitcoin futures product. Outflows for the spot products were mostly isolated to Monday, with the rest of the week seeing slight net inflows each day. Ethereum outflows were massive, with 60 million redeemed from global ETH funds. Regional sentiment is still negative for most of the world. Brazil and Australia were the only countries to see net inflows for the week, with Germany, Hong

Kong, and Canada-based funds recording large outflows. Short Bitcoin funds also saw a rise in outflows with $4.2 million in redemptions for the week. Overall, CoinChair's head of research, James Butterfield viewed this data as a sign that sentiment is turning, with a, quote, significant stemming of the outflows. Although June was one of the worst months for the Bitcoin ETF since launch, the product still added $668 million for the month, which started incredibly strong. Monday's data showed a very strong recovery with 129 million in net inflows, the strongest flow numbers in over three weeks. So overall, while the sentiment has been overwhelmingly negative of late, these products are still continuing to grow if you zoom out just a little bit.

Also, it seems as though the SEC is waiting until after the holiday to let the Ethereum fireworks fly. ETH ETF issuers have received another round of comments from the agency and have been asked to refile by next Monday. A source said there is expected to be another round of comments after that, noting the process, quote, never ceases to be a winding path. Last month, SEC Chair Gary Gensler said he expects the ETFs to go live sometime over the course of this summer. That appears to be true based on these timelines, but it's looking like we'll have to wait another couple of weeks. As for the success of the products, pundits are beginning to line up their takes. Nate Gerasi, the president of the ETF store, tweeted, early and easy prediction.

Spot-Eaths will be the second most successful debut in ETF history, only behind Spot Bitcoin ETFs. So the two most successful ETF launches in 30-plus-year ETF history will occur this year, Bitcoin and Ether. Paying attention yet? Finally today, after a few weeks of pretty miserable sentiment and price action, analysts are beginning to wonder if the Bitcoin bottom is in. June saw a 17% drawdown ending in a pair of dips below $60,000. Since then, price action is seen a solid if unimpressive recovery. July is seasonally a fairly strong month for Bitcoin. According to QCP capital, Bitcoin has a median return of 9.6% during the month, and all, often rebounds after a negative June. Coinbase analysts picked up the same seasonality in their report

and added that liquidity conditions appear to be improving. It's difficult to put numbers around liquidity issues at the moment, but markets certainly felt heavy over recent weeks. According to Coinbase analysts, average daily volumes for both Bitcoin and Ethereum declined by 16.7% in June across global exchanges. Many analysts are looking for signs of a bottom in historically low indicators, rather than positive ones. These would indicate that markets are overextended to the downside and can't get much worse from here. David Lawant, the head of Research at Falcon X noted that the Coinbase premium has been extremely negative for months and reached multi-year lows in June. The Coinbase premium refers to the spread between Coinbase

prices and other global exchanges. It is assumed this reflects onshore institutional demand that can trade on Coinbase but can't tap into offshore trading venues for compliance reasons. The negative premium suggests demand from these types of entities is extremely low. Lawant noted that the last time the premium was this negative for this long was last summer, which transitioned into a massive rally in October. The premium also went deep into the negative territory during the bare market low of November 2022. Lawant said, Always darkest before the dawn? At least recently, the Coinbase premium has become a reliable, confirming, and sometimes even leading indicator of overall market trends. This underscores

the significant influence of the U.S. market in determining market price formation. Something tells me the next 6 to 12 months will be splendid, and probably volatile. There's still a huge amount of unknowns as we head into July. Mount Gox is set to return Bitcoin to creditors, which could represent a massive supply unlock. Some analysts are skeptical how much these coins will add to selling pressure in reality, but the sentiment shock could still be significant once the distribution begins. JPMorgan analysts noted that recently returned Bitcoin for Gemini customers seemed to add significantly to selling pressure. Then again, Gemini creditors are far less long-term than Mount Gox creditors who held on for nearly a decade to see the return

of their Bitcoin. On-chain metrics also showed an increase in profit-taking activity during June. We're nowhere near high points compared to other cycles, but an increase in profit-taking is still a sign that some traders think to cycle is getting close to the top. Still, on a more simple level, Some analysts are just happy to see a slight positive shift in the market. James Van Stratton of Cryptoslate wrote, Bitcoin just holding and not falling in US hours is a massive improvement. TXMC trades is sick of the Bitcoin cycle hoodoo and wants traders to remember that buyers are what makes the price go up, writing, I don't know how else to say this, and I'm not a mathematician who can throw out fancy terms, but Bitcoin price is not governed by a power law. It is set by

bids and asks, it's more prediction voodoo from the same field of thought that gave us the debunk stock to flow model. Content creators are desperate for dogma that can relieve them of the perilous work of forecasting price. Hence, they have an asset growing exponentially from zero, and they convince themselves it has magical properties that dictate price by forces detached from the free market. On-chain analyst checkmatey concurred and emphasized that the market promises nothing and often delivers. He wrote, markets are not preordained to do anything. They are dynamic and complex systems which have no laws governing them aside from human emotion driven by fear and greed. The human reaction function is reliable. We can model it and we can understand it,

but we cannot predict it. In other words, friends, we are coming out of a very choppy and negative June into a holiday week for the U.S. and Canada, which makes it an excellent time for a reset, and hopefully the Bitcoin market delivers. For now, that is going to do it for today's breakdown. Appreciate you listening as always. Until next time, be safe and take care of each other. Peace.