WEEKLY, July 29, 2023

A big week for US crypto regulation

Hi all! You’re reading the free weekly Crypto is Macro Now email, where I look at the intersection between the crypto and macro landscapes, pick at established narratives and share listening recommendations. Nothing I say is investment advice!

I’m going to keep this very short today, because it’s the middle of summer, traffic is low, and I hope you’re all out there touching grass or similar. There is a LOT going on, though, and if you’re not a subscriber to the daily premium version, I urge you to consider becoming one – you’ll get a deeper dive daily on the deepening overlap between macro and crypto, along with market commentary (which admittedly is boring these days) and some interesting links. Plus, your support will enable me to continue doing this, and would be much appreciated!

Some topics discussed this week:

• Why crypto market price movements have been boring while macro markets haven’t

• Web3 and Japanese “soft power”

• The Bank of Japan’s surprise move and what this could mean for markets

• Why a recession is likely, despite what current data says

• Why current sentiment is deceptive

• Why inflation is likely to come back

• Worldcoin risks

• The Goldilocks assumptions baked into the stock market, and the downside risk

• What capital markets firms are up to with blockchain applications

• McDonalds and the metaverse

• Why the space race heating up matters for crypto

• Why use a blockchain for centralized payments?

• US influence in Africa and what it says about the role of the US dollar

• What Chinese stimulus could do to inflation

• … and more

Programming note: Due to a conflict, I won’t be able to publish the premium daily newsletter on Monday, July 31, apologies! Back in your inbox on Tuesday, August 1.

WHAT I’M WATCHING

Bigsteps on US crypto regulation

This was a week of regulatory moves in crypto. Normally, I avoid writing about proposed bills because they rarely seem to go anywhere and the noise can get numbing, but this week felt different. Regulation in the US moves so slowly (as it should!) that even a tiny shift in the atmosphere can seem significant, and the past few days have delivered several of those.

1) Top of the list has to be the Financial Innovation and Technology for the 21st Century Act (Fit21), which aims to provide a broad framework for the definition of digital assets, sketch a path for crypto platforms to register with the appropriate regulators, give more supervisory power to the CFTC and enshrine a slew of investor protections. This week, it was passed by both the House Financial Services Committee and the House Agriculture Committee.

This feat was achieved by a surprising and encouraging sign of bipartisan collaboration – until now, crypto debates seem to have been largely divided along party lines, with Democrats against any ecosystem support while Republicans have been touting the pro-innovation line. After Wednesday’s House Financial Services Committee markup session (for those not used to the US political process, a markup session is the process by which a congressional committee debates and amends proposed legislation), the vote was split 35 in favour and 15 against, which means it now goes to the floor of the House of Representatives for a broader vote. This is the first time that crypto-specific bills have made it out of committee.  

A total of six out of the 23 Democrats (more than 25%!) on the committee broke party ranks to vote in favour. In so doing, they sent a strong signal to other politicians perhaps also worried about the party’s anti-innovation stance. Full passage is still a long shot as passage by the House of Representatives is not a given, and even if it makes it through, the bill would also have to pass the Democrat-led Senate. Nevertheless, the example set by principled politicians uncomfortable with the slippage of the reputation of US markets, and willing to accept the career risk implicit in going against the party doctrine, could inspire others to consider what their younger constituents and future voters would want.

What’s more, the tone set in the two committees highlights the growing awareness that legislation is needed, and that the SEC cannot continue to regulate via enforcement. Apart from unfair to business trying to innovate while working within the law, it is an inefficient use of government resources.

2) Earlier this week, representatives Gus Bilirakis (R-FL) and Jan Schakowsky (D-IL), respectively the Chairman and Ranking Member of the Innovation, Data, and Commerce Subcommittee, sent a letter to Apple CEO Tim Cook expressing concern that the company’s App Store guidelines restrict blockchain applications.

It’s unclear what, if anything, will result from this move, but it does hint at another shift in tone, suggesting that the growing discomfort with the power of large tech firms is diverting some attention to the decentralizing potential of blockchain applications.

3) On Thursday, the US Senate passed the 2024 National Defense Authorization Act (NDAA). This was a “must pass” piece of legislation, and as is usual with these bills, all sorts of things got tacked on that slipped through without much debate.

One of these is a bipartisan move to tighten KYC/AML requirements for crypto services, including mixers and other privacy tools.

On the one hand, greater clarity around KYC/AML requirements for crypto is probably a prerequisite for any comprehensive crypto-focused framework. On the other hand, this bill did not get the rigorous debate it deserved. Yet rather than enact specific measures, it calls for deeper study of what those measures should be as well as how they should be enforced, so there is still time for the ecosystem to get involved in the crafting of new rules around transparency and privacy.

Stepping back, it could serve to focus attention on KYC and AML rules more broadly. Former US prosecutor Katie Haun highlighted the issue with the following tweet:

“As an ex-federal prosecutor, I know the massive flaws in our AML/KYC system. We spend >$40B each year on rules that have a 99% failure rate – and keep millions of legitimate customers from accessing financial services. It’s broken.

We need something better. Senators that genuinely care about national security will work collaboratively with TradFi and crypto to fix *that* problem rather than beating up on the most auditable payments infrastructure ever invented.”

Will anything change with this week’s developments? Legislation is hard, especially in such a cumbersome and polarized system with few remedies in sight. But it is possible, especially once the partisan nature of crypto support starts to focus on facts, potential and global developments. Progress on this front in the US would not only unleash more investment and innovation in the intersection between finance and technology – it could also trigger deeper discussions about other fundamental pillars of progress. Things are getting interesting, and this week shone a ray of light on what has until now been a swamp of paralysis and confusion.

HAVE A GREAT WEEKEND!

I have a confession to make: I love Lego sets. I don’t actually have any because I live in an apartment without much spare surface area. But the implied sense of order from shaped blocks fitting together to create colourful 3d snapshots appeals to remnants of my childhood fantasies. Maybe it’s also to do with a sense of control, however artificial. Or maybe it’s just quirky nostalgia.

I also love artful photography, and have an Ansel Adams calendar that is well out of date but which I won’t throw away.

So, today I want to share with you a Lego animation of an Ansel Adams shoot. Simple yet powerful, and a charming digital throwback to a pre-digital age.