President Biden’s crypto executive order embraces the industry and illustrates how digital assets have become mainstream. It’s surreal to hear “the rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier…” coming from the White House. The various government departments and agencies are instructed to come up with crypto policies focused on six priorities. The Dispatch is skeptical that the current Democratic administration will do anything other than try to over-regulate the crypto industry when policies are announced in the future. We would love to be proven wrong!
The longer the Ukraine war continues, the more likely we are to see the world split into Western and Russia-China spheres. The daily atrocities committed by Russia will make it difficult to roll back sanctions even if a ceasefire is reached. Rebuilding separate supply chains and systems (software, cloud services, consulting, etc.) will be negative to growth and, possibly, inflationary. We are gradually incorporating this thesis into client portfolios. A transition will take years, but the max pain could be felt early.
The Dispatch will be off for the next two weeks. Dispatch #8 on March 11th, 2022, has the following lineup of stories:
- Biden’s crypto executive order
- European Bitcoin ban sneaked into legislation
- Defi founder’s departure hit token prices
- Undisclosed government financial surveillance program
- February CPI and Owner Equivalent Rents tick higher
Biden’s crypto executive order embraces crypto assets
President Biden signed a much-anticipated crypto executive order last week. The starting paragraph of the White House press release set the overall tone.
Does this sound like a government that is about to ban crypto? It certainly does not to us. The order instructs government agencies to develop policies focused on six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
We hope this order leads to some clear financial rules for digital assets instead of the current SEC’s rule-by-threat environment. This is not how the leader of the western capital markets is supposed to regulate a rising asset class. This Blockworks article offers a few more thoughts. The full length government release is here.
Cryro insiders see a favorable executive order
Many thoughtful crypto insiders have a positive take on the order. Here’s Coin Center’s (crypto policy outfit) Director, Jerry Brito.
It’ll be important to monitor policies that federal agencies release in the future. The likes of the Treasury Department often overreach on oversight at the expense of privacy and consumer safety. Government institutions can and do control the financial conduits into the digital asset ecosystem. Combine that with the transparency of blockchains, and we already have a powerful system to ensure that criminal activity does not proliferate on blockchains.
There is likely to be intense lobbying around the forthcoming proposals, but this time, there’s a crypto lobby as well. Here’s Coin Center’s Brito and Blockchain Association’s Jake Chervinsky.
Our bet is that government bureaucrats will try to squeeze crypto into the regulatory framework based on Congressional Acts from the 1930 and 1940s. It’s hard to imagine that in today’s polarized government that we’ll see new Congressional action to suit decentralized blockchains.
European Union sneaks in ban on Proof of Work (PoW) crypt ban
While America moves forward on crypto, Europeans have just sneaked in a provision that could potentially ban crypto networks that use PoW consensus mechanisms. Bitcoin is by far the largest network using PoW consensus. EU law makers dropped the ban in draft regulations a few days back. Yet, on Friday night (3/11), the PoW ban was sneaked back with a vote scheduled for Monday. There will be much wrangling after Monday’s vote in the European Parliament before final legislation is passed. It is still possible that the European politicians realize that it’ll be foolish to drive out this rapidly growing industry and possibly into the arms of a newly accomodative US!
Defi protocols are hit by founder’s departure
The departure of a high-profile founder from a project (think company) can be negative news in traditional markets, except that in the digital asset world, it can have far greater impact on recently created projects. Andre Cronje, one of the pillars of Defi is leaving crypto as this The Defiant article explains. The article also explains that the token prices of protocols founded by Cronje have come under pressure. The more established projects like Yearn Finance, have performed far better than some of his more recent projects that have collapsed. This is just another example of how breaking news has a much larger impact in the nascent crypto asset world compared to traditional companies with many decades of history.
The elaborate and crafty government surveillance program
Government surveillance of citizens should worry everyone, as privacy is a fundamental right afforded by the constitution. There’s a process to access the financial activity of criminals. Instead, the government has been collecting bulk data and sheltered that effort behind a not-for-profit entity to avoid freedom of information requests. Doesn’t this smell like an offshore shell company structure that the government tries to prosecute? Democratic Senator Ron Wyden of Oregan is pushing for details about this undisclosed program. We expect shell companies from crooks, but it’s sad and worrying when the government takes these extra measures to hide what may well turn out to be illegal activity. We doubt this investigation goes very far. This WSJ article has more details.
Owner’s equivalent rent (OER) continues upwards
This is by far the largest component of the CPI basket. It is ~ 24% of the headline CPI basket and ~ 30% of the core-CPI basket. OER hit +4.3% YoY in February, up from +4.1% YoY in January. Recall rents take roughly 18 months to reflect home price changes, as we discussed in more detail when we laid out our inflation thesis last August in Dispatch #23.
House prices have surged well beyond the OER increases
There’s a good deal more for the OER index to rise before it captures the near 20% jump in house prices and market rents. This catch up will make it very difficult to subdue core inflation even as used car prices ease.
That’s it for this week. Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.
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