Hi everyone! You’re reading the free weekly edition of Crypto is Macro Now, where I re-share a couple of things I wrote in more detail about during the week. To get daily updates on trends I’m seeing in the growing overlap between the crypto and macro landscapes, as well as some market commentary, I hope you’ll consider subscribing to the premium version! It’s only $8/month for now, and it would allow to continue to explore the impact the crypto ecosystem will have on the global economy – I really feel this intersection matters, now more than ever.
Since many of you are new here (welcome!), I’ll introduce myself again. I’m Noelle Acheson, great to meet you! After many years in traditional finance and as an ecommerce entrepreneur, I fell down the crypto rabbit hole in 2014. Between 2016-2021 I was a part of the CoinDesk team, ending up as their Managing Director of Research. In 2021, I went to set up market research at Genesis Trading, and left there in September 2022 to start Crypto is Macro Now.
As of this past Monday, I’m also host of CoinDesk’s Markets Daily podcast – come check it out! Also, I was Sheila Warren’s guest on the Money Reimagined podcast this week, she’s always stimulating to talk to. You can find the episode here. And follow me on X at @noelleinmadrid where I share photos of gorgeous city I live in, charts, comments on headlines, dog pictures and, you know, stuff depending on the mood. Of course, nothing I say is investment advice!
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These are just some of the topics discussed this week:
Crypto headwinds gather strength
BTC dominance is climbing
Inflation is warming up
The US is not avoiding CBDCs, it just doesn’t intend to build one
Institutional interest from unexpected corners
The SEC goes after creators
Bitcoin energy consumption goes macro
Global adoption is dropping, with some surprises
Regulating DeFi
Earlier this week, I had a fascinating conversation in preparation for a panel in a couple of weeks on DeFi at the Stellar Meridian conference. Participating were two lawyers and a technologist, and we touched on a lot of things, including the slippery topic of DeFi regulation.
It’s not so much a question of whether or not DeFi will be regulated; in some key financial jurisdictions, of course it will. Some decentralized applications are clearly financial services (the “Fi” in “DeFi”) and big financial markets like to keep a tight lid on those.
But the problem, and it’s a big one, is that the concept of decentralized services is still young and misunderstood, and this doesn’t sit well with regulators who feel they need to be seen to be “doing something”.
Last week, the CFTC charged three decentralized platforms – ZeroEx, Opyn and Deridex – with offering illegal derivatives trading. This is an unusual move for the US commodities and derivatives regulator; in the past, it has shown more willingness to engage with the public than its securities counterpart.
ZeroEx was charged with being responsible for a protocol that facilitated leveraged trading, with the CFTC alleging that “facilitators” (in this case, linking to the protocol) are the same as “offerors” per the Commodity Exchange Act. This is a stretch, as ZeroEx does not itself trade the commodities.
Deridex and Opyn were charged with operating unregistered commodities futures exchanges and not having AML controls in place. Yet the CFTC has not provided clarity on how decentralized exchanges can apply AML controls.
There were no allegations of misappropriation of funds or harm to users.
In her dissent, Commissioner Mersinger highlighted a concern shared by the crypto ecosystem: the CFTC was going down the path of “regulation by enforcement”, and what’s more, doing so by going after a “novel technology”. This move goes against the Commission’s 2022-2026 Strategic Plan released last year that promised increased engagement with DeFi platforms.
Engagement no longer seems to be the popular approach. This shift is understandable given the CFTC’s battle for a bigger budget, and aggression better suits the current political climate. But, in the end, the result is the dampening of financial innovation, the very force that made the US the largest capital market in the world.
Looking for silver linings, however, these actions will hopefully encourage deeper discussion around to what extent decentralized applications can be regulated. This is unlikely to be enough to support blockchain-based building in the US, at least for now – but it is something that needs to be addressed sooner or later.
For something to be regulated, it needs to be defined, and therein lies the main barrier for both officials and builders: the definitions are still evolving. “Decentralized” is treated like a binary state, but it isn’t, it’s a spectrum.
The novel concept, and a tough one for regulators to understand, is that of shifting control. When a protocol is being built, it is relatively centralized – there is a group of coders and designers who make decisions. Once it is released on a public blockchain, however, control over its structure becomes more limited. And those providing the front-end often have no control over the back-end. The extent of a project’s decentralization is often a function of design and time.
This can be guided – but first, it needs to be understood, and this is harder than it sounds. Are smart contracts like a new type of building material that will need to conform to certain standards? Or are they like a canvas on which anything goes, but the vendors will be held responsible for misrepresentation and harm?
The simple approach to DeFi regulation is “just make some rules and insist that any service operating in your jurisdiction abide by them”. Fine, that sounds relatively easy, but rules reflect the priorities of the rule makers. Investor protection from fraud and scams is something we can all get behind. But the current approach seems to be that of suppressing anything that could cause harm (typical for a “nanny state”) and being especially hard on an industry that produced a spectacular and embarrassing fraud. The longer-term danger is that suppressing innovation to head off fraud before it happens is equivalent to never letting your children play outside because they might get hurt. Safe, but not great for development.
What the CFTC should be doing instead is working with the industry to create definitions within which builders can choose to operate or not (depending on whether they want official approval or not). Enforcement when no fraud has been committed is not just overkill – it is what will shift the centre of gravity of tomorrow’s financial system elsewhere.
India plans to draw up crypto rules
Now that India fulfilled its goal of getting G20 sign-off on a global crypto framework (even though I think this was largely window-dressing), it is apparently going to turn its attention to clarifying its own crypto rules. This is especially relevant, given the publication this week of Chainalysis’ annual Global Adoption index, which showed that India has climbed to first place, up from fourth in 2022.
Why it matters:
Any validation that crypto trading is not illegal will deliver a huge boost to a potentially enormous market.
Participation from Indian traders was a significant feature early on in crypto’s history, to the extent that the country’s central bank felt compelled to deliver a warning circular way back in 2013. Repeated circulars culminating in a ban of banks servicing crypto businesses dampened both the availability and enthusiasm for crypto trading. This ban was overturned by India’s Supreme Court in 2020, but banks are still reluctant to walk back their service denials for fear of attracting unwanted regulator attention.
Greater infrastructure support would be good news for entrepreneurs and for investors eager for reliable crypto services. In a 2023 survey carried out by Consensys and YouGov showed that the Indian population is well-informed about the concept, with over half of those surveyed self-declaring an understanding of cryptocurrencies, compared to 24% of respondents globally.
Admittedly, the local sample in the survey was small and may be skewed by including only those living in certain areas. But, judging by the strong early market participation and the sheer size of the potential market, crypto clarity in the world’s largest democracy would go a long way toward encouraging both investor interest as well as financial innovation, in a country already ahead of many when it comes to fintech services, digital identity and fast payments.
HAVE A GREAT WEEKEND!
Recommended viewing, if you enjoy great character writing, excellent camera work and food: “The Bear”, on Disney streaming where I live, maybe other platforms where you are. Season 2 was even better than Season 1. They’re short episodes, a couple are stressful but that’s part of the thrill, and I would love there to be a Season 3 but also don’t want the perfection of the first two seasons diluted.