The Breakdown - The UK Bans Bitcoin & Crypto Derivatives

Episode Date: October 7, 2020

Today on the Brief: John McAfee arrested in Spain BTC addresses added spikes to two-year high A new election-market narrative emerges Our main discussion: The U.K. has banned crypto derivatives.  Just days after the U.S. announced significant action involving BitMEX, the U.K.’s Financial Conduct Authority has made its own move to stop crypto derivatives.  In this episode, NLW breaks down what actually happened, and looks at the reactions from the crypto industry including: Accusations of hypocrisy Skepticism of enforceability  Why it might actually be good for bitcoin 

The UK has banned the sale of crypto derivatives to retail customers. For me personally, I keep coming back to this notion that the ban would, quote, save retail consumers around 53 million pounds, as though they were guaranteed to lose those 53 million pounds, and even more importantly, as though they didn't have the right to lose those 53 million pounds. 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 crypto.com, nexo.io, and elliptic, and produced and distributed by CoinDesk.

What's going on, guys? It is Tuesday, October 6th, and today we are talking about the UK's ban of crypto derivatives. Is this a big deal? Is this a non-event? We're going to get into all of the reactions. But first, First, let's do the brief. First up on the brief today, John McAfee has been arrested in Spain. Yes, it looks like John McCaffey is going to have to eat his dick from prison. I refer, of course, to a famous and highly emblematic tweet, or really a set of tweets, predicting 500K and then 1 million Bitcoin by the end of 2020. These tweets are reflective of, let's call it a colorful personality that not everyone has always loved as a face of

crypto, but let's get into what actually happened. McAfee was arrested in Spain on allegations of tax evasion. Basically, actually, there were two things going on here. The first was a suit from the SEC saying that McCaffey had been pumping ICO coins without disclosing that he was being paid. The complaint showed that he received $11.6 million worth of Bitcoin and ETH for tweets around seven ICOs and received another 11.5 million in the promoted tokens of the projects themselves. The SEC doesn't name the specific projects, but I'm with Crypto Cobain when he says, wait, McCaffee got paid how fucking much? Also, the ratio here is insane. McAfee raised a total of 23.2 million from these projects, which themselves raised a cumulative $41 million.

Their go-to-market strategy was literally McCaffey tweets. Yeah, kids, 2017 was out. Absolutely wild. Anyway, on top of this SEC suit, he was arrested for tax evasion because, surprise, he didn't pay any taxes on any of that. I would have to describe the most common response from the crypto-twitter community as this was inevitable. You just can't be out there like that for this long, flaunting it in the U.S.'s face without expecting something to happen. In fact, as a last note, I'll just say that the SEC mentioned the famous tweet in their suit. quote, McCaffey's extravagant posts such as tweeting predictions about Bitcoin price increases and promising to, quote, eat my dick on national television, if such predictions did not pan out, generated an enormous amount of publicity. So there you go, this is crypto. Or at least this was

crypto. Next up on the brief today is a China pro-crypto campaign increasing new Bitcoin addresses. I almost did this one as the full show. I was planning on it before this ban happened, but this is a really fascinating story. So we typically see something like 5 to 10K new Bitcoin addresses added per day, but last week it peaked at 22K per day, which was the highest it had been in two years. So what's going on? For this, I'm just going to straight up read Cole Garner's thread on it because it perfectly explains things. New Bitcoin addresses were absolutely off the charts last week. The backstory is bullish and intriguing, a unique view on a new bull market catalyst. I'm about to break this down.

First, volume precedes price, and Bitcoin active address counts are an OG on-chain lending indicator of volume. We typically see 5 to 10K new Bitcoin addresses per day. That figure grew at its highest level in over two years last week, peaking above 22K. Where are these new Bitcoin addresses coming from? We'll never know for sure, but here's my suspicion. It's a story from last week that mostly passed under the radar, despite being the most bullish force I can imagine.

Last week, the Chinese government began a coordinated marketing campaign to focus Chinese retail investor's psyche on crypto. Yes, this is really happening. Dovi Wan pointed this out with a tweet that said, hmm, this is an interesting propaganda vibe from CCP's official media outlets. The headline crypto asset is the best performing asset year to date was featured on all avenues, newspapers, online media, and TV. It's rare for such a coordinated effort. Back to Cole Garner's thread, he says, the Chinese government seems to want to ignite the bull market and references a CZ tweet where he says most people on Twitter probably don't understand how big this is. It's big. Back to Cole. But doesn't

China have a long track record of suppressing crypto? Yes, but the reality is more complex. Simplified, Chinese leadership promotes whatever narrative benefits their positions at any given time. Why the new narrative? My guess. China dominates Bitcoin mining and no doubt holds more BTC than any other country by a wide margin. Bitcoin is China's national treasure. Sooner or later, maximizing Bitcoin's potential becomes an unavoidable economic incentive. The recent explosion in tetherprinting might have been a leading precursor to China's marketing campaign. China dominates USDT volume globally, and tether dominates their fiat-on-ramp liquidity. And of course, tether printing has been an effective leading indicator for years. I suspect Chinese retail buying interests help Bitcoin absorb

last week's bearish headlines. I'd love to validate the theory overall with OKX, who Quibi and finance volume, but it doesn't work that way. New retail buyers won't make a statistically significant impact on exchange volume that's dominated by much larger players, already in excess of a billion dollars a day. Bottom line, this news is incredibly bullish and appears to have fundamental confirmation. I definitely expect more shakeouts and sideways price action moving forward, but I'm fundamentally bullish on Bitcoin. And I think hodlers will be grinning by Christmas. So like I said, I think this is super interesting. It is a story that people weren't picking up enough. even I was watching it because I saw Dovi's tweets and I saw CZ's response, and I still didn't ever actually get a chance to fit it in.

I think it's worth being skeptical always when it comes to trying to add too much analysis to China and what's going on in China. I think there's a lot to unpack. There's a lot of context that's worth exploring. But I do think it's a really interesting theory and was worth sharing with you guys. Last up on the brief today, let's look at a narrative watch from traditional markets. There is a new consensus narrative emerging, and I guess I'll just read a tweet from crypto-Twitter's bully Esquire, which sums it up. All the Trump bros think there's some silent majority that will save him this time, but he's down squint 16, 16 points in a recent national poll. Biden is boring, and we want boring again. I hate to be the one to tell you, it's over. If this was just bully,

that'd be one thing, but this is reflected and splashed across so many financial news outlets. The Wall Street Journal says U.S. stocks waiver after sharp swings hovered around the flatline showing hints of calm. Here's a quote from that piece. Some analysts say that polls showing Mr. Biden could secure a decisive victory over Mr. Trump in November are helping buoy markets. Investors had grown concerned in recent weeks about a narrow win for either candidate, which would escalate the risk of legal disputes and lead to a period of uncertainty in the days after the election. Some also say that a sweep by Democrats could increase the chances of a large fiscal spending package after a new government is in place. This wasn't just the Wall Street Journal, though. On Bloomberg

opinion today, you saw a piece called Trump's chances are dwindling. You also saw another piece called bond traders start to bet on a democratic sweep. With the sub-headline, the big jump in 30-year U.S. Treasury yield suggests investors are thinking about the policy implications of much more fiscal stimulus. I think this much consolidation around a narrative should provoke both interest as well as skepticism. I'm always worried when I see so much conventional wisdom converge so quickly. However, it is interesting to note this happening right on the wake of this coronavirus scare, which seems like it could have gone the exact opposite direction for Trump with the electoral populace. For the sake of the breakdown, just so you guys know, I will sometimes cover election things

because, I mean, come on, they're going to be one of the driving factors in the markets. But I'm going to stay away from the political side of this. I'm really going to keep focused on what the markets seem to be saying, thinking, and what they want out of these elections, which is very different, I hope, than the normal sort of coverage you'd get. This episode is brought to you by Crypto.com, the Crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you've

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Britain's financial watchdog said on Tuesday, it will ban the sale to retail investors of products that track the prices of crypto assets like Bitcoin, saying most people lose money on them. The rationale has to do with the idea that these products cannot be reliably valued by retail customers because of, quote, the inherent nature of the underlying assets, which means they have no reliable basis for valuation, the prevalence of market abuse and financial crime in the secondary market, e.g. cyber theft,

extreme volatility in crypto asset price movements, inadequate understanding of crypto assets by retail consumers, lack of legitimate investment need for retail consumers to invest in these products. Of course, you have to wonder, are we seeing the emergence of a pattern where derivatives are on the chopping block. This comes just a few days after the US going after Bitmex in a big way. But let's move over to what the reactions have been. First, let's talk about the personal impactor.

sentiment. Chow Wang ran a poll last week after the Bitmex thing and said sentiment poll. Defy investors, how are you feeling today? Feel free to comment. He used the possibilities numb, fatigue, fear, or anger. NUM was at 44.4%. Fatigue was at 32.7%. Fear was at 15.9% and anger was at 7.1%. This was 1,500 votes, so not nothing. He updated it this morning and said, let's try the sentiment poll again. Defy investors, how are you feeling today? Feel free to comment. NUM had jumped a little bit to 46.2%. Fatigue is actually down so far from 32.7% before to 27.5% today.

Fear is down a little bit, down from 15.9% to 14.5%. And the big winner so far is anger, which is up from 7.1% to 11.7%. This, I think, gets us to our second category of reaction, which is that this is patronizing. Bitcoin Marcus says it explicitly says it's for retail investors only. Why do you think that is? Also, the reasons stated, like volatility, no way to price it, and scam seem a bit patronizing to me. Not so fast says thanks, Nanny State. And for me personally, I keep coming back to this notion that the ban would, quote, save retail consumers around 53 million pounds, as though they were guaranteed to lose those 53 million pounds. And even more importantly, as though they didn't have the right to

lose those 53 million pounds. This gets to a subset of patronizing that I saw in the reactions, which is basically saying, okay, but the casinos are still open. Bitcoin Birch tweeted out, the UK bans crypto derivatives trading, which would save citizens over 50 million, according to the release. Meanwhile, they allow UK citizens to lose 14 billion gambling at literal casinos last year. This, of course, brings up another, I think, very reasonable reaction, which has to do with the hypocrisy of it. Let's hold aside the hypocrisy in questions of being allowed to spend money on lotteries but not on cryptos.

And let's just look at the FinCEN files. The UK was the most listed country for likely financial crimes in that file leak that we covered last week. And Max Kaiser put it even more bluntly. He said, The Financial Conduct Authority and Associated UK regulators have long been captured regulators with an established track record of providing safe harbor for crooked. banks in the UK and the US. Every financial scandal runs through the UK. Bitcoin puts these banks and their venal FCA friends out of business. It is hard not to feel like there is some serious

hypocrisy, not just in this, but in any regulation or jurisdiction, where basically people say you're allowed to spend your money on this thing, which is highly questionable, but not this thing. It's just an inconsistent logic. Another category of reaction was that this hurts fintech type companies more than exchanges of either the decentralized or centralized variety. June Ian Wong, formerly of CoinDesk, said this seems to be great for centralized exchanges and maybe even decentralized exchanges, and not great for the likes of E Toro or other fintechs that were looking for a quick boost in assets under management by offering crypto CFDs. It seems nice products like CoinShares exchange traded notes are also banned, unfortunately.

Basically in this way, you're still going to have spot access to the crypto markets. not going to get these new types of financial products, which are potentially for some a mixed bag, right? On the one hand, they allow institutions and types of investors who wouldn't otherwise be able to come in to come in, but on the other hand, they might be a net drag on the space, as we'll see in another reaction in just a few. Perhaps the most overwhelming reaction was that this is a financial non-event. Cantor and Clark tweeted exactly that. He said non-event, though it's funny how regulators try to protect people in the UK, but allow for spread-bidding bucket shops. Jeremy, aka.gibis.finance tweets, FCA requires VPN for sale of crypto derivatives to retail consumers,

showing perhaps just how toothless this might be. Nick Carter also had a financial non-event tweet, although he's focused more on Bitmax, I think it still applies. He tweeted, Bitmax going down and Bitcoin barely noticing is one of the most astonishing things to happen in a while. shows how much has changed since 2017. I used to joke that Bitcoin's primary use case was betting on the price of Bitcoin at Bitmex. Not the case anymore. The final reaction that I saw with some frequency was that this was good for Bitcoin, and the idea here was that there's no infrastructure for shorting it.

Galgatron tweeted even more crisply, saying, the FCA ban on crypto derivatives is a good thing for crypto. It eliminates value-deluding artificial inflation, scammy-fals crypto products. This means more demand for actual crypto. I think there are interesting debates to be had about derivatives products versus the underlying. I've seen folks from the gold world say to crypto people, Bitcoin people specifically, that you don't want to see a lot of these derivatives products because they undermine the central thesis of a limited supply. However, from the flip side, a lot of these products can be really important tools for bringing new people in.

And then there's, of course, just the autonomy and agency argument that people, that people should be able to do what they want with their money. That's something that I'm incredibly sympathetic to as well. So, I don't know. I'm pretty sympathetic to the hypocrisy argument. I think there's a real question about these lines that people draw and why this particular sector gets targeted when these things that are clearly money wasting for citizens aren't.

I'm always nervous when people say, this is for your own good. This is for your own protection. But in terms of how it plays out, I guess we'll just have to see. What do you guys think? Let me know at NLW on Twitter. And until tomorrow, guys, be safe and take care of each other. Peace.