Waller signals a “regulatory perimeter” for crypto-asset regulation

Yesterday, Christopher J Waller, a member of the Board of Governors of the Federal Reserve System, delivered remarks concerning regulation of the crypto-asset space.  Governor Waller described a “regulatory perimeter” within which traditional finance operates.  The “normal backstops and safety nets” that we see applied on traditional finance are not, at this moment, being applied to the market for crypto-assets.

Governor Waller shared data on the usage practices of crypto-asset holders.  Anywhere from 12% to as high as 20% of American adults held crypto-assets during the past year.  Approximately 90% of these adults held crypto-assets for investment purposes versus for use as a payments system.

Crypto-asset trade creates the opportunity for counter-party disputes and Governor Waller discussed briefly that in the aftermath of a market loss, disputes between intermediaries and traders over poor due diligence, poor financial advice, or poor management skills could arise. 

The irony Governor Waller points out is that it is usually the intermediary i.e., a bank, that seeks out protection.  This demand for protection on the part of the larger players in a financial market did not surprise me.  Think agency co-option for the sake of putting the negative externalities of a loss on society at large.  While Governor Waller did not cite the 2007-2008 Great Financial Crisis and the bank bailouts that ensued, I gathered from his remarks that the rest of American society wants regulations that both protect taxpayers from the socialization of losses while promoting confidence in the investment ecosystem’s safety.

I don’t see crypto-asset regulation as an issue that causes political realignment.  President Biden’s executive order on crypto-assets, notwithstanding, Governor Waller’s remarks at a minimum seemed designed to stay on topic at the SNB-CIF Conference on Cryptoassets and Financial Innovation, while tangential with the “let’s have a discussion” tone of Mr Biden’s executive order.

When we hear public discussions about expanding regulations, more than likely there is a very rough written draft laying around somewhere.  Anything at this point is speculation as to content, but traders should start their own discussions and analysis now.  Nothing wrong with exploring the legislative, political, and legal scenarios.    

Alton Drew

4 June 2022

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For the trader, the draft abortion decision presents an important privacy narrative …

Our focus is primarily on the trader for trade or exchange of value.  Trade is the only reason humans bother with each other.  From the first engagement between one another we have come up with rules for settling our trades, for being transparent, for injecting trust into the markets.  An abortion decision would seem distant from this concept.  But is it?

The Constitution is a conservative document. The Constitution says nothing about abortion, nor does it provide for the federal government to involve itself in private decisions.  The irony is that those who allegedly want abortion to remain a private matter are asking the ultimate intruder to regulate in this area.  Abortion regulation is another mechanism for government expansion particularly where privacy is concerned. 

For example, I read Roe v. Wade before parsing through the U.S. Supreme Court’s draft opinion in Dobbs. I took this order in reading the opinions to avoid any taint from Justice Alito’s opinion.  My conclusion was that Roe is legal analytical trash.  After reading Roe and reading Alito’s opinion, I had to say that I was mostly in agreement with him.

The pains that the court in Roe went through to create a privacy doctrine that is not supported by the Constitution only to see the opinion sliced and diced by the legal reasoning in Dobbs and the analysis of the U.S. Constitution looked straight out of a horror movie. There is no explicit protection of privacy in the Constitution and in the narrower case it will be left up to state legislatures to guarantee it in their constitutions and/or define it in state law.

For the trader, especially the trader in crypto currencies where the concept of anonymity attracted her to that market, she has to ask, “Will this court’s attack on privacy provide more ammo for government’s attempts at looking at my trades?”

Government sees itself charged with managing all the resources in a country including human resources and maintaining that world view means piercing the veil of privacy.  I would not be surprised to see the courts take further action against privacy by reversing itself on a number of privacy cases that Roe was built on.  Traders should stay aware of this possibility that attacks on privacy could further cement threats to privacy in the markets.

 Alton Drew

6 May 2022

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Traders should keep in mind creating alternate systems

Is there a value play or logic in using regulated, fiat money? The arguments for the use and role of money, a physical or digital representation of the value of one’s wealth or work, are plausible. It would be disingenuous to say that society should go back to a bartering system for exchanging goods and services given the consequences of impaired logistics and issues surrounding the storage of the items kept in reserve for bartering. However, I believe a crucial question regarding the definition of money needs to be revisited in order to bring certainty into trade and the value of the items we trade for.

I see money as private. Money started out as private and should go back to that status. The only reason humans engage is to trade value and as a medium for trade between private individuals, money itself should be private. Money should reflect the energy, intellect, data, commercial value, and knowledge of the individual who generates it and issues it. Fiat currency relegates the common consumer to regulated markets that may or may not meet a consumer’s need for certain goods, services, or privacy. And poor monetary policy by the issuers of fiat currencies are only leading to a devalued currency that lays at the core of inflated consumer prices.

As much as we tout competition in American society, this is where American government, a mechanism employed by American society to ensure the smooth flow of commerce, should be forced to compete with alternative payment systems. Traders should promote the use and acceptance of alternative payment systems and currencies by multiple vendors. Traders should also advocate for the exchange of alternative and fiat currencies where such exchanges reflect the necessity to engage in trade on alternative platforms or purchase goods and services that are only offered on alternative platforms.

For example, a consumer may purchase food and clothing items from a digital Walmart or Amazon store, but can only afford the police protection services offered by state or federal governments. An end-user may, like today’s central banks, maintain her own portfolio of “reserve currencies” for use on numerous platforms.

Expanding the payment system scheme can also make government more efficient by requiring government to expend resources on the activities it is most expert at and leaving other activities to the private corporate sector.

The concept of “government” is not going away. The concept can be refined and one ideal way is to have it co-exist with alternative payment systems.

Alton Drew

19 April 2022

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CFTC chairman lays out priorities for managing commodity market and cryptocurrency risks during bursts in market activity…

Today, Commodity Futures Trading Commission chair Rostin Behnam delivered remarks at the FIA Boca 2022 International Futures Industry Conference where he described the CFTC’s priorities for managing commodities markets through what he describes as bursts in market activity.  These bursts, in some part due to technology-driven innovation in the markets, reflect the influence of monetary policy and global interconnectedness on markets.  Mr Behnam argued that market innovation emerges when there is a backdrop of regulatory reassurance.

Regulatory reassurance means the management of the risks that emerge from the bursts of transformative change in the markets.  Mr Behnam sees these risks being managed in one of two general ways.  Either the bursts themselves will have to be managed or the markets will have to get comfortable with the fallout from these risks.

Mr Behnam appears to prefer a middle-of-the-road approach by noting that policy priorities rest with core markets by achieving regulatory certainty and creating fail safe market mechanisms.

Two major policy tools stood out during Mr Behnam’s remarks.  First was an update on proposed rule making that addresses risk governance for derivatives clearing organizations.  DCOs arrange or provide on a multilateral basis for the settlement or netting of obligations.

Second, Mr Behnam wants Congress to pass legislation that gives the CFTC authority to develop a regulatory framework for the cash digital asset commodity market.  Mr Behnam noted his support of President Joe Biden’s executive order calling for coordination by financial regulatory bodies to create a framework for ensuring consumer and investor protection in the cryptocurrency market.

What is missing from Mr Behnam’s consumer/investor protection narrative is the portion that discusses government securing its legal tender turf.  While the government’s position as source of the nation’s circulating currency is not under immediate threat, the federal government’s concern has often been dressed in the rhetoric of financial stability or economic growth.  I believe market makers in the cryptocurrency trade are already mindful of this but earlier predictions about increased scrutiny are taking fruit.

Alton Drew

16.03.2022     

The Narrative: Joe Biden attempts to protect the US dollar

Yesterday, President Joe Biden issued an executive order regarding cryptocurrencies.  To summarize the order, Mr Biden has asked heads of politically independent agencies like the Board of Governors of the Federal Reserve System and Federal Deposit Insurance Commission, etc., and ordered heads of certain cabinet agencies, like the Secretary of the US Treasury, to take a closer look at the impact of cryptocurrency design and deployment on six areas:

1.Consumer and investor protection;

2. Financial stability;

3. Illicit finance;

4. U.S. leadership in the global financial system and the country’s economic competitiveness;

5.Financial inclusion of marginalized consumer groups; and

6. Responsible technology innovation.

This is at least the spoken narrative, what I refer to as the “Madison Avenue” narrative; one that is designed persuade the electorate to come onboard with the President’s agenda.  The electorate plays a crucial role as the political actor providing the primary source of votes every two years.  A president’s primary power is that of persuasion and his message has to either win additional votes or at least secure the votes he has going into a general election.

I was taken aback not only by the executive order’s length but also by how weak a platform it provides for future political, policy, and legal action.  From the political perspective, it fails to counter any arguments from the opposition.  For example, Mr Biden makes nary an attempt to clearly address the philosophy of crypto proponents. 

Proponents, especially bitcoin users, will tell you till blue in the face that using crypto is about wealth preservation.  They see the US dollar as declining in wealth protection and spending value because of ineffective monetary and fiscal policies that have done nothing but send the dollar on a decline for the last fifty years. With a significant amount of the dollars printed by the central bank over the last forty or so years being printed in the last 24 months, proponents of bitcoin use believe they have a base case for seeking an alternative method for medium of exchange, store of value, and account of wealth.

Currency is about trust and according to the President’s own statistics, 16% of the nation is exhibiting some degree of trust in crypto as a payment system and store of wealth versus the dollar.

Mr Biden could have scored more points in the direct and honest department with a concise narrative bluntly stating that cryptocurrency is a clear and present danger to the US monopoly on the payment system that is used to sustain commercial transactions and collect taxes.  This “Power Narrative” would better capture western philosophy: that the world is a place divided up in order to generate yield and the energy derived from dividing up and extracting from the environment is best captured and transferred in our current system of money and to maintain an orderly transfer of “monetary energy”, there can only be one issuer of the money: government.  Unfortunately, such a brazen power narrative would not go over well with the electorate, thus forcing Mr Biden to throw in the usual feel-good concepts like “consumer and investor” protection.

Traders who want to include bitcoin in their portfolios when collateralizing loans should expect Mr Biden’s executive order to act as a green light for regulators seeking to increase their scrutiny of digital assets.  Traders should also expect continued litigation over the use of digital assets.

In the short run as political narrative, Mr Biden’s executive order is a major fail.  Sure, 16% of Americans may take an interest in the government’s approach to bitcoin, but as political narrative that should be designed to win votes, this executive order does not cut it.  Most Americans are concerned about inflation and how their wages are being eaten into by increasing prices.   

Alton Drew

10.03.2022

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Interbank Market News Scan: Bank of England throws shade on Russian currency listing.

Interbank, Russia, ruble. The Bank of England said on Thursday it would cease publishing the rouble’s exchange rate against sterling and the U.S. dollar with immediate effect after the Russian currency slumped to a record low. See article here. Source: Reuters.

Interbank, Pakistan, rupee. “The Pakistani Rupee (PKR) continued to struggle against the US Dollar (USD) and posted losses in the interbank market today. It lost 21 paisas against the greenback after hitting an intra-day low of Rs. 177.7 against the USD during today’s open market session.” See article here.

EUR/USD=1.1107

GBP/USD=1.33369

USD/CAD=1.26908

USD/MXN=20.6689

USD/NGN=415.562

USD/GHS=6.78353

USD/INR=75.6115

USD/JPY=115.293

USD/CNY=6.3139

USD/BTC=0.00002

Source: OANDA

Dollar Index: 97.79

Source: MarketWatch

What could bitcoin represent to the Eastern Caribbean trader? Actual underlying trust and societal efficiencies …

If I traded a bitcoin for an Eastern Caribbean dollar, I would receive, according to data from OANDA, EC118,665. (Forgive me for using “EC” versus “XCD”. I am old school). If I then attempt to transact business in the United States or Europe, what could that bitcoin buy for me?

According to the website Decrypt, there are a growing number of vendors that accept bitcoin in exchange for their products. The categories include:

Used automobiles;

Private aircraft;

Houses;

Real estate investment trusts;

High-fashion clothing;

Restaurant food;

Virtual private networks and web services;

Booking hotels and flights; or

Commodities (gold, silver, platinum, etc.).

To profit from the aforementioned trade, I would wish to purchase goods and services that I would not be able to get in the Eastern Caribbean; purchase items at a cost lower than what I would face in the Eastern Caribbean; or, at the end of the day, convert that bitcoin into EC greater than EC118,665.

More importantly, as an independent trader, I could finance directly trade that I enter into with vendors in countries that accept bitcoin as legal tender, such as El Salvador. Rather than going to a bank and converting my EC for El Salvador’s colon, I could pay an El Salvador vendor directly with bitcoin, the country’s other legal tender.

Bitcoin could represent greater efficiency in trade between countries by turning a trader with the financial wherewithal into a “mini-bank.” The value of the currency he uses for trade, bitcoin or some other crypto, would be based on the underlying value of his services, goods, or knowledge, rather than on the general good faith and trust underlying fiat currencies. Blockchain ledger characteristics aside, a cryptocurrency capturing the trader’s reputation, insights, knowledge would go a much longer way with me where I can put together and engage with my own mini-community of traders in the goods and services I listed above. I could put together a community of actual producers and deal efficiently and directly with them, cutting out unnecessary middlemen along the way.

Could society benefit from such direct-financed trade? I think yes, particularly where cost savings flow to retailers and end-users. Eastern Caribbean traders should explore this model.

Alton Drew

02.17.2022

Interbank Market News Scan: U.S. inflation rate at 7.5%

Interbank, United States, Inflation. “In January, the Consumer Price Index for All Urban Consumers rose 0.6 percent, seasonally adjusted, and rose 7.5 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.6 percent in January (SA); up 6.0 percent over the year (NSA).” See report here. Source: U.S. Bureau of Labor Statistics

Interbank, Pakistan. “The buying rate of 1 SAR to PKR was Rs46.710 and selling rate of 1 SAR to PKR was Rs46.790 in the interbank market on Feb 10, 2022.” See article here. Source: BOL News

Interbank, China. “The central parity rate of the Chinese currency renminbi, or the yuan, weakened 84 pips to 6.3653 against the U.S. dollar Wednesday, according to the China Foreign Exchange Trade System.” See article here. Source: China.org

Interbank, Taiwan. “The central bank has asked exporters to sell their US dollar holdings at different times to avoid causing a sudden appreciation of the NT dollar.” See article here. Source: Taipei Times

Interbank, Japan. “Global shares rose Thursday as investors tried to gauge U.S. inflation, tensions between Russia and Ukraine and the impact of the pandemic.” See article here. Source: News4Jax

Foreign exchange rates of interest as of 8:16 am EDT

EUR/USD=1.1427

GBP/USD=1.3553

USD/MXN=20.5344

USD/GTQ=7.52045

USD/NGN=415.844

USD/GHS=6.36299

USD/VND=22,694.9

USD/JPY=115.45

USD/INR=74.6951

USD/BTC=0.00002

USD/ETH=0.00032

Source: OANDA

Dollar Index (DXY)=95.51

Source: MarketWatch

Interbank Market News Scan: Pakistan rupee losing against the dollar; Reserve Bank of Australia under pressure to hike rates; Bitcoin strengthens.

Interbank, State Bank of Pakistan. “The rupee continued to register marginal losses against the US dollar on Wednesday amid a slight uptick in greenback demand from importers.” See article here. Source: GeoNews

Interbank, Reserve Bank of Australia. “Bonds extended their losses as financial markets ramped up the pressure on the Reserve Bank of Australia to raise the cash rate as soon as May, in response to persistent inflationary pressures challenging its dovish stance.” See article here. Source: Financial Review

Interbank, Nepal Rastra Bank. “Foreign reserves have depleted due to high imports in the country. According to the data released by Nepal Rastra Bank (NRB) the current foreign reserves can support the import of goods and services for six and half months only.” See article here. Source: Khabarhub

Interbank, Bangladesh. “The Bangladesh Bank has asked foreign-currency dealer banks to submit their daily exchange position statements using a new rationalised input template (RTI) to ensure better monitoring. In a circular on Monday, the central bank said it had decided to replace the existing RTI for further convenience of supervision.” See article here. Source: The Business Standard

Foreign exchange, India, travel. “With countries around the globe opening doors to vaccinated travelers, foreign travel bookings are witnessing a massive surge in India. The rise in globetrotting among Indians has led to a considerable increase in forex transactions as well.” See article here. Source: IndianWeb2

Foreign exchange, South Africa, rand. “A generally weakening rand and mounting inflationary pressures have meant the South African Reserve Bank (SARB) has once again raised interest rates, to the distinct detriment of the weakest members of our society.” — Brian Benfield. See article here. Source: BizNews 

Foreign exchange rates of interest as of 9:18 am EDT

EUR/USD=1.1418

GBP/USD=1.3539

USD/MXN=20.6288

USD/GTQ=7.5230

USD/NGN=415.644

USD/GHS=6.3541

USD/VND=22,706.1

USD/JPY=115.431

USD/INR=74.6417

USD/BTC=0.00002

USD/ETH=0.00032

Source: OANDA

Dollar Index=95.47

Source: MarketWatch

Interbank Market News Scan: China’s overnight bank rate decreases; Ukraine’s hryvnia shows strength; Bitcoin strengthens.

Interbank, China. “The overnight Shanghai Interbank Offered Rate (Shibor), which measures the borrowing cost of China’s interbank market, decreased 4.3 basis points to 2.112 percent Monday.” See article here. Source: China.org.cn

Interbank, Pakistan. “Pakistani rupee continued to rise against the US dollar in the inter-bank market on Monday due to positive sentiments generated by the release of a $1 billion tranche by the International Monetary Fund (IMF).” See article here. Source: GeoNews

Interbank, Bank of England, inflation. “Almost certainly, 2022 will also see the most above-target inflation numbers since that change. The Bank will be heavily criticised and proposals will be made for reform. What has gone wrong?” See article here. Source: The Critic

Foreign exchange, National Bank of Ukraine. “Last week the hryvnia exchange rate has somewhat stabilized amid a decrease in rising demand for currency and increase in supply of currency, the press service of the National Bank of Ukraine (NBU) wrote on Facebook.” See article here. Source: Ukrinform

Foreign exchange rates of interest …

EUR/USD=1.1451

GBP/USD=1.3527

USD/MXN=20.667

USD/GTQ=7.5163

USD/NGN=415.7

USD/GHS=6.3313

USD/VND=22,646.8

USD/JPY=115.191

USD/INR=74.497

USD/BTC=0.00002

USD/ETH=0.00034

Source: OANDA

DXY=95.58 Source: MarketWatch