The Breakdown - Wait, Crypto Caused the Fentanyl Crisis?!

Episode Date: June 1, 2023

Today on The Breakdown, NLW looks at the latest assinine argument about crypto from Senator Elizabeth Warren, as well as digging into the finalized debt deal, MiCA and more. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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 Thursday, June 1st, and today we're discussing, well, a little bit of everything. Before we dive into that, 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, yesterday was my May wrap-up, and of course we were focused on the big narrative shift, which was away from the U.S. and towards China and the East more broadly. Today, then, we kick off June with a slew of stories that point to what we're going to be dealing

with for the rest of the summer. First, let's do a bit of an update on the debt ceiling. The debt ceiling deal was passed in the house during a late-night session, almost certainly averting a default. Lawmakers across the aisle approved the bill in a 314 to 117 vote. The legislation will now move to the Senate for a vote which is anticipated to succeed without controversy before passing over to the president's desk for ratification. Two-thirds of House Republicans voted for the bill with some of the most outspoken members of the House Freedom Caucus either rejecting the bill or abstaining from voting. The bill enjoy even more support, meanwhile, from Democrats, with 77% supporting it and a

much smaller contingent of progressives opposing the bill than had been anticipated. Given that a greater number of Democrats approved the bill than Republicans, commentators have started to argue that GOP House Speaker Kevin McCarthy secured a bad deal for his party. This could potentially set up a leadership contest to dethrone the speaker. Remember, Republican Dan Bishop said on Tuesday that he would call for a vote to remove the speaker, who was elected on a razor-thin margin after six rounds of voting at the beginning of this year. Presuming that the bill passes through Congress uneventfully from here, the debt ceiling will be suspended until January 2025. That means it will uncap debt accumulation until then and defer further debt-sealing

negotiations until sometime in the middle of that year. President Biden called the vote, quote, good news for the American people and the American economy. Markets seemed to agree with the risk premium in one-month treasury bills disappearing early this week and anticipation of the deal moving forward without delay. One-month bills are now trading at a 5.14% interest rate in line with Fed funds. Now, Bitcoin fell by almost 2% on the news that the vote had succeeded, perhaps confirming concerns that the refilling of the Treasury's coffers would be negative for liquidity in the short term. And indeed, the big question is the impact of refilling the Treasury coffers. Eric Wallerstein, markets reporter for the Wall Street Journal, wrote,

1 trillion of net treasury bill issuance is expected by September 30th. Without much of the buying coming from money market funds, fed reverse repo, the liquidity drain could be massive, per Stratigis. Per Deutsche Bank, TGA fell by $400 billion from February to mid-April, yet USD in stock markets were unchanged. The four largest TGA rebuilds over the last two decades have also had minimal impact on the market. Why should anything be different now? Lynn Alden has been tweeting a lot about this recently. In fact, she wrote today, some of my posts and interviews on liquidity went semi-viral lately, so it's worth a thread to summarize and clarify the dynamic. Lin goes on, the first half of 2022 was really bad for

liquidity and asset prices. By late Q3, 2022, the dollar index spiked high, the U.S. Treasury market became sloppy, the UK gilt market broke, and the stock market dropped hard. The Treasury then began draining its cash balance back into the financial system. Overall, measures of liquidity started trending sideways. The dollar index rolled over and the stock market rebounded. Then in January 2023, the debt ceiling was reached, which meant the Treasury had to continue pushing its liquidity into the financial system to pay its bills. This continued to positively offset a lot of the Fed's liquidity drain for the next several

months. Some of the recent liquidity comments have been described as permabair stuff, but back in January, I described it more positively. liquidity would continue to be flat for the next few months, and indeed it has been. However, now that the Treasury cash drain is finished and we start looking ahead past the debt ceiling, we are potentially encountering the next period of negative liquidity rather than sideways liquidity. Exactly how will it play out? It's honestly hard to say, because it comes down to certain centralized decision points.

How fast will the Treasury refill its account, i.e. liquidity drain? To what extent will they manage to suck liquidity out of reverse repos rather than banks? And what will break next? In September 2022, it was the UK gilt market and nearly the U.S. Treasury market. In March 2023, it was select regional banks with unusually high duration exposure and uninsured deposit exposure. You have to watch, small banks, and the treasury market. When something breaks, it can cause sharply divergent outcomes.

The breakage in September 2022 was bad for most asset prices until the liquidity response, which was great for asset prices. The breakage in March 23 was bad for banks, but good for Bitcoin, gold, and tech stocks. The past six months were pretty benign and well telegraphed to be likely benign for those watching liquidity. The next six to 12 months, Air Pocket is a good description, are more uncertain than normal. It could go very different ways. The key thing now is risk management, in my opinion. Now, deal done or not, there are a lot of institutions and funds and individual actors who are looking more skeptically at the U.S. than they were before. On that front, stable coin issuer circle cut all U.S. Treasury bonds from its reserve mix in preparation for this week's debt ceiling standoff.

The Circle Reserve Fund, which is structured as a single-client money market fund managed by BlackRock, moved its entire $24 billion worth of assets into overnight repurchase agreements and cash, according to disclosures made on Tuesday. Now, this was a rapid shift in strategy for Circle. At the end of April, the fund held more than $30 billion worth of short-term treasuries as its primary reserve asset. The move was designed to minimize risk in the event of a U.S. government default and was implemented across the last month, with Circle declining to reinvest as their treasuries matured. Instead, Circle now has some of the largest banks in the world as their counterparties,

preferring, I guess, the creditworthiness of Goldman Sachs and Citigroup over the U.S. government. For Circle CEO, Jeremy Allaire, the choice was simple. In a recent interview, he stated, quote, We don't want to carry exposure through a potential breach of the ability of the U.S. government to pay its debts. Meanwhile, moving over to crypto, the U.S. discourse continues to be defined by toxic politicians. Elizabeth Warren has found yet another way to jam her anti-crypto agenda into the limelight, this time, unbelievably, blaming crypto for the opioid epidemic. During a Senate banking hearing where senior administration officials were assembled to discuss

how to counter China across national security, economic security, and foreign policy, Warren took the opportunity to question a Treasury official about crypto's use in purchasing fentanyl precursor chemicals from Chinese manufacturers. According to recent data, blockchain analytics firm, Elliptic identified 90 China-based firms willing to supply fentanyl precursors and found that around 90% of those firms accepted crypto payments. Elizabeth Rosenberg, the U.S. Treasury Department's Assistant Secretary for Terrorist Financing and Financial Crimes, answered Warren's question about the trade by acknowledging that, quote, Unfortunately, that is a mode that some of these precursor manufacturers and illicit drug

organizations have used. The reason why they would find this appealing is the same reason that other financial criminals would find it appealing, which is to say there's an element of pseudonymity that they seek. Now, getting to her real point, Warren responded with the renewed call for lawmakers to reconsider her digital asset anti-money laundering act, stating that the bill, would be reintroduced in this Congress. Warren's bill would, of course, put in place onerous restrictions on the use of crypto to the point that some suggest it amounts to an attempt to ban the technology from U.S. shores. Now, the senator has precious little support for such draconian legislation, reportedly unable to even find sufficient sponsors among her colleagues

to bring the bill to the Senate floor. Warren put a stamp on her point saying, crypto is helping fund the fentanyl trade, and we have the power to shut that down. It's time. Lady of Crypto writes, Warren has topped herself in making one of the dumbest anti-crypto arguments I've ever heard. Saying crypto funds fentanyl trade is baseless and an obvious play on people's fears. Cash has been used to fund drug trade for centuries. Not only is cash used to facilitate drug transactions, you can also roll it up and snort some drugs. Cash is the perfect tool for buying and using drugs. Ban cash. But crypto? A blockchain is a public ledger, which makes it far less attractive for facilitating drug transactions. I won't pretend it never happens, but cash is easier.

Anyways, I'm sure we'll get another open letter from Elizabeth Warren to someone about this soon enough, so let's move on. As we discussed yesterday, Hong Kong's new licensing regime has started, and finishing off another story, Europe's markets and crypto assets or Mika legislation has been formally signed into law. The crypto regulatory framework will open for license applications after some additional procedural steps anticipated to commence later this month. Stablecoin standards will take effect between 12 and 18 months later. alongside Mika, the European Parliament also passed anti-money laundering laws which will require crypto firms to verify customer identity when transferring funds. Now, with no more legislative steps to be completed, Europe will now become the largest economic

region with a clear and comprehensive regulatory framework for the industry. And what's more, now that Mika is out of the way, European legislative attention is expected to turn towards additional legal issues in the crypto industry that were purposely ignored in Mika, including DFI, NFTs, and staking. Crypto Vice writes, amazing to see smart countries moving forward. Tony Edward, writes, massive and bullish, EU signs Mika Crypto-regulations into law. Also, UAE and Hong Kong are working together on crypto regulations. Meanwhile, here in the U.S., we are dealing with anti-American innovation and anti-crypto clowns. Now, on that UAE front,

on Tuesday, officials from the UAE met with counterparts from Hong Kong to discuss the harmonization of crypto regulations across the two regions. Officials from the Hong Kong Monetary Authority and the Central Bank of the UAE agreed to, quote, strengthened cooperation on virtual asset regulations and developments. They also pledged to facilitate discussions on joint fintech development initiatives and knowledge-sharing efforts. A key aim of the meeting was to bolster financial infrastructure and financial market connectivity between the two jurisdictions. Of particular interest was a seminar discussing how cross-border trade settlement can be improved and exploring how UAE corporations can leverage Hong Kong's financial infrastructure to tap into opportunities in

mainland China and across the broader Asia region. The TLDR, obviously, is that the rest of the world continues to move forward while we not only stay in place but arguably move backward. Now, the other big thing happening in this industry is, of course, headcount cuts as companies try to position for an extended crypto winter. On Wednesday, for example, independent crypto reporter Colin Wu broke news that Binance had begun a round of layoffs, with the firm expecting to retrench 20% of its 8,000 strong workforce. Now, Binance responded later in the day denying that this was a right-sizing exercise and

claiming that the exchange was still planning to fill hundreds of open roles. A Binance spokesperson said, quote, We periodically review how we can best allocate our talent to the right teams with the right resources, and sometimes this inevitably leads to letting go of some employees who might not be performing well or who might not be the right cultural fit. In March, Binance had claimed that they were not planning any layoffs after CEO CZ said in January that the exchange was planning to up headcount by 15 to 30% this year in an attempt to, quote, ramp up again before the next bull market.

Now, a company that is making cuts and admittedly so is Nansen. Analytics firm Nansen announced on Tuesday that it needed to produce the size of its team by 30%. CEO Alex Venevick tweeted, This week we announced the extremely difficult decision to reduce the size of the Nansen team. I'm endlessly grateful to the incredible people we are parting ways with. They will go on to achieve great things and will ensure that they get a soft landing with severance and support. An accompanying statement explained that the firm had continued to invest and expand throughout crypto winter and found itself sprawling into too many areas unrelated to its core business and thus taking on unsustainable costs.

Still, by all accounts, the firm still has several years of runway remaining. So I think that's a pretty good sum up of where we are as we head into the summer. We've got, on the one hand, places like Europe and Hong Kong in the UAE moving forward with, if not what we would have called pro-crypto regulations a couple years ago, at least they are knowable, workable regimes that allow crypto entrepreneurs and companies to figure out where they stand, and to build towards that with some amount of assurance that things aren't going to be switched on them or they're going to face a regulatory rug pull. Meanwhile, in the U.S., all we have is ratcheted up political rhetoric.

It's impressive that Elizabeth Warren has found a way to be even more annoying to the crypto audience than she has been in the past. We have the macro situation of what happens post-deat ceiling deal and whether there will be a liquidity crunch as the Treasury fills its coffers. And of course, as always, we have startups repositioning to figure out the optimal way to navigate what continues to be a difficult crypto winter. That is the story heading into the warmer months up here in the Northern Hemisphere. It's quite a bit different than last year at this time when we were just coming off the collapse of Luna and 3AC. I think we'll all agree that troubling, though, some of the issues we might face are right now. This is a lot better than that. Until next time, guys, be safe and take care of each other.

Peace.