The Breakdown - IMF Financial Stability Report Highlights Crypto

Starting point is 00:00:04 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 nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, April 19th, and today we are talking about the IMF's latest financial stability report. And specifically, it's kind of extensive comments about the... crypto and digital asset space. Before we dig in, however, a few housekeeping items. There are two ways to enjoy the breakdown. You can listen to the breakdown on the CoinDesk Crypto Podcast Network feed, which features both the breakdown but also other shows. You can also

Starting point is 00:00:51 listen on the breakdown only feed, which, as you might imagine, has just the breakdown. Both come out on the same day with CoinDesk's feed coming out in the afternoon and the breakdown-only version of the show coming out in the evening. Whichever feed you listen to, if you are enjoying the show, please go subscribe, give it a rating, give it a review, and if you want to dig 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. Finally, a disclosure as always, in addition to being a sponsor of the show, I also work with

Starting point is 00:01:25 FTX. So today we're going to touch on a couple of different topics, but first we're going to go to this title story of the International Monetary Fund's just released report called Shockwaves from the War in Ukraine test the financial system's resilience. The subheader is financial stability risks have risen as war tests the resilience of the financial system through various channels. Now, this is a really important topic, right? We live in a highly globally interconnected economy and such a big disruption has

Starting point is 00:01:57 ramifications for the resilience of the system. In fact, in a lot of ways, you could view the breakdown for the past couple of months as being a daily update on the resiliency or threats to resiliency of the financial system. What's interesting here is how much crypto features as a part of this report, even though the conclusion is largely about stuff that might happen in the future. The introduction says crypto asset trading volumes against some emerging market currencies have spiked, following the introduction of sanctions against Russia and the use of capital restrictions in Russia and Ukraine. This is occurring against a longer-term increase in such cross-border transactions, bringing to the four the challenges of applying capital flow measures and sanctions. And really here in this first couple of sentences, you have the position, I believe, of this report, which is more or less using the Ukraine and Russia war as a way to talk about how crypto could be

Starting point is 00:02:51 a problem in the future, despite there not being a lot of evidence that it's a problem right now. The key section is called risks of cryptoization and sanction evasion through the crypto ecosystem. And here's the key section. The war in Ukraine has brought to the forefront some of the challenges that regulators face in terms of applying sanctions and capital flow management measures.

Starting point is 00:03:10 Crucially, the implementation of such measures require that intermediaries verify the identities of the transacting parties. The crypto ecosystem, however, could allow users to circumvent such requirements through several means, including, one, the use of exchanges and other crypto asset providers

Starting point is 00:03:24 that are non-compliant with sanctions and or capital flow management measures, two, poor implementation of adequate due diligence procedures by crypto asset providers, and three, the use of technologies and platforms that increase the anonymity of transactions, such as mixers, decentralized exchanges, and privacy coins. Interestingly, the report also hones in on mining, saying, over time, sanctioned countries could also allocate more resources towards evading sanctions through mining. Mining for energy-intensive blockchains like Bitcoin can allow countries to monetize energy

Starting point is 00:03:54 resources, some of which cannot be exported due to sanctions. The monetization happens directly on blockchains and outside the financial system where the sanctions are implemented. Miners can also generate revenues directly from users that pay transaction fees to miners, which in this case might be sanctioned governments. At this point, the share of mining in countries under sanctions and the overall size of mining revenues suggest that the magnitude of such flows is relatively contained, though risks to financial integrity remain.

Starting point is 00:04:21 For example, the monthly average of all Bitcoin mining revenues last year was about $1.4 billion, of which Russian miners could have captured close to 11%, and Iranian miners 3%. Now, there's a lot to unpack around this mining section. For example, one could reverse this argument in a pretty significant way. What I mean by that is that the IMF is coming at this talking about how it would be within the power of sanctioned governments to use mining to evade those sanctions, or to just have another way to monetize their energy resources. You could also see this as a strategic imperative for those countries that are applying

Starting point is 00:04:55 sanctions on places like Russia and Iran to create incentives for Bitcoin miners to be located there. Remember, in the wake of China's mining ban, the biggest beneficiary in the world was the United States. We've recently read a number of pieces on Longreed Sunday about Bitcoin as a strategic national imperative, and this is a great example of why, even though the IMF is kind of making the case from the opposite angle. Now, when it comes to their arguments around sanctions evasion, they do note in the report that this is largely future-focused because in terms of right now, they write, liquidity in the rubble and herivnia trading pairs in centralized exchanges remains limited and has even declined more recently in the case of the rubble, making large-scale transfers of value

Starting point is 00:05:37 through crypto-asset exchanges impractical. So to be clear, despite giving a bunch of time and space to crypto and digital assets destabilizing effect in the context of this war, they're also saying that the evidence suggests that it's not actually happening in this war and it's just something to look at going forward. Looking for ways to step up your crypto game? Then go with Nexo. For starters, you get free crypto for each purchase or swap.

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Starting point is 00:07:08 FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas. fees. Download the FTX app today and use referral code breakdown to support the show. What really got people's attention was a call for crypto to be included in capital controls. Quote, laws and regulations for foreign exchange and capital flow management measures should

Starting point is 00:07:50 be reviewed and amended if necessary to cover crypto assets, end quote. This is despite the fact that Bitcoin and other crypto assets don't formally count as financial assets or foreign currency in most places. There is something of an interesting divide. growing, it seems, between the U.S. and Europe as it relates to the digital asset industry and the impact of Russia's war in Ukraine. In the U.S., we've seen no less than the Treasury of the Secretary Janet Yellen and other members of the Treasury Department, having to frequently explain to press, to the Congress, to Senate, that crypto is not, in fact, being used for sanctions. European politicians and political bodies, however, have been somewhat more hostile.

Starting point is 00:08:30 There are recent comments of folks like Christine Lagarde, the president of the European Central Bank, who have continued to argue that digital assets should be a bigger focus given their potential for sanctions evasion, but it's also playing out in the regulatory sphere as well. Remember, the European Parliament is moving forward with rules that would force exchanges to collect data on basically any transaction that interacts with a self-hosted wallet. Crypto advocates in Europe are saying that this is more burdensome than rules for traditional finance, and that community is really worried about the potential implications and chilling effect on European crypto.

Starting point is 00:09:03 Meanwhile, over in the UK, the Chancellor of the Exchequer is now making a new push to turn Britain into a global hub for crypto. This includes new regulatory review around defy, integration of stablecoins as a recognized form of payment, and even the Royal Mint printing their first NFT. Meanwhile, as I mentioned a minute ago, in the U.S., there has been a lot of optimism in the wake of Biden's executive order on crypto. We neither got the rushed rulemaking that some were worried about, nor certainly anything resembling a ban that some commentators had said was likely to come. Instead, what we got was a pretty standard there are opportunities and there are challenges

Starting point is 00:09:41 political document. But the practical action was to organize the various departments of the government in a large-scale coordinated research process to help create coherent national policy around crypto and digital assets. This more positive tone was validated a couple of weeks ago by Treasury Secretary Yellen's speech, which featured, among other things, an articulation of the history of Satoshi and Bitcoin. But while the general trajectory of U.S. regulation is heading in a positive direction, there is currently a bit of a dust-up right now around an SEC rulemaking process that some think would expand the definition of exchanges in ways that could be bad for crypto and, frankly, technology in general. The block points to two recent recent,

Starting point is 00:10:23 proposals from the SEC, which, quote, push for expanded definition of terms that appear in the 1934 Securities Exchange Act. In general, the rulemaking seems to require crypto exchanges to register with the SEC as exchanges and market makers to register with the SEC as broker dealers. The big concern here is not just crypto specifically, but just the potential implications of those expanding definitions as a whole. SEC Commissioner Hester Purse, in her dissenting statement on this from January, wrote, A final message to those who operate any service that is designed to facilitate any communication

Starting point is 00:10:55 between potential buyers and sellers of any type of security. Read this release. Even if you have nothing to do with government securities or even fixed income, or with traditional securities, read this release. Preferably as soon as it is published on the commission's website. It covers a lot of ground and you should not assume that it has nothing to do with you, because it probably does. Fin twit main state chairman, Burr-Bernacki, said,

Starting point is 00:11:18 the SEC really said, screw it, we should make everything in exchange. That language, by the way, was edited for family safety. Going on, Burb says, technology, and exchange. Signal, exchange. Ice chat, separate from ice, it's now its own exchange, too. If they go by the broader definition of bringing together people to buy and sell stuff, Facebook marketplace is in exchange. There have been a ton of crypto companies commenting on this as well as you might expect, but it's not just the industry that has taken notice. On April 18th, two, senior members of the House Financial Services Committee, including ranking Republican member Representative Patrick McHenry, Republican from North Carolina, and Bill Huizenga,

Starting point is 00:11:57 Republican from Michigan, wrote a letter to SEC Chair Gary Gensler with a pretty loud critique of these recent rulemakings. They write, the SEC fails to identify the problem that the rulemakings are intended to solve, particularly as it relates to requiring certain market participants facilitating digital asset transactions to register with the SEC. The letter from the representatives also critiques the approach to the rulemaking specifically in terms of their length. Quote, we are concerned the proposed rulemakings total nearly 800 pages and include more than 300 questions for comments combined. So where we are now is we're in the open comment period and, as I said, crypto organizations of All Stripes have been sharing their public comments. If you want to see the

Starting point is 00:12:40 tenor of that discussion and their specific arguments, go check out Jake Chavinsky on Twitter. Jake is at Jay Chavinsky and he's the head of policy. blockchain association. He sums it up, quote, as usual, the crypto industry is showing up in a big way. And I think this is a really important thing to keep in mind as we have more and more of these moments where there are big things going on around the world of regulations in particular that seem like they might have dramatic impact for the crypto industry. More than ever, the digital asset space is in the regulatory and political spotlight. There are going to be more of exactly these types of debates and discussions. The government, particularly in the U.S., laborious though it might be,

Starting point is 00:13:22 also creates space for public comment, for discussion, for discourse. There are paths and avenues for companies and advocates for this industry to go speak to representatives. Indeed, for as much as we see on Twitter now with public comments, there's a huge amount of dialogue and discourse going on constantly and not just around frustrating rules, but around everything between the industry, elected officials and representative bodies. I continue to think that while we're in a period of heightened importance as it relates to the regulatory process, it's hard not to see it as a net positive thing given how engaged the industry is and given how many politicians seem to be willing to be engaged with us as well. There is a huge amount of open space to educate and engage

Starting point is 00:14:06 politicians from all parts of the political spectrum, and each one of these moments offers a chance to do exactly that. For now, I want to say thanks again to my sponsors, nexo.io, Arculus and FtX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few.

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The Breakdown - IMF Financial Stability Report Highlights Crypto

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