WEEKLY, Sept 2, 2023

Sep 02, 2023

Hello everyone! You’re reading the free weekly Crypto is Macro Now email, where I look at the intersection between the crypto and macro landscapes.

The Saturday edition is changing its format slightly, to shift focus more toward the title of this newsletter and to adjust the workflow. Rather than discuss markets (since that’s what I do during the week), I’ll re-publish a couple of the segments from the dailies – if you’re a premium subscriber, you’ve probably already read them, and if you’re not, well, I hope you’ll consider becoming one! Not only will you get a broader range of content like this on a more timely basis, but you’ll be supporting my continued research and writing. I also include charts with stick figures, listening recommendations, usually a cheerful gif or music video, and sometimes links to longer reads. It’s only $8/month for now (I’ll be raising the price soon), with a free trial, and I’d really appreciate it! 😊

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What the US budget deficit means for crypto investors
Checking in on rates expectations and BTC
Economic cooling in the US
China’s half-hearted liquidity measures
The significance of the US jobs report
Revised Bitcoin mining energy consumption estimates
The SEC was “arbitrary and capricious”
The changing odds of a BTC spot ETF
The Uniswap case, another big legal win for crypto
The BTC dip
China’s emerging blockchain ecosystem
Forensic evidence on the blockchain
The good and bad news about centralized counterparties

The bigger picture

Another coup in central Africa

Earlier this week, just as results of last weekend’s elections in Gabon were being announced, a group of senior military officers claimed that they had seized power.

Why it matters:

If successful, this will be the eighth coup in the region since 2020, following July’s military seizure of power in Niger. While the region has never been known for its stability, this level of turnover is unusual and highlights the political polarization we are seeing in both the developed and developing world. It also hints at an intensification of the geopolitical scramble for the region’s resources, especially relevant given the shifting alliances we are seeing in Africa and elsewhere.

Most of Africa does not yet have the infrastructure for cryptocurrencies to be considered a lifeline – trading and speculation is generally the main use case, internet connection is often spotty at best, and trustworthy onramps exist but are still largely regional. But situations like this reinforce the need for alternatives, and could hopefully encourage more demand for and investment in crypto education and support.

Inevitably, political polarization leads to disenfranchisement of those that support the “wrong” side – this is where the seizure resistance of cryptocurrencies becomes an important economic feature. The ability to transact outside gated payment rails is another.

And beyond crypto assets, the ecosystem’s work on resilient communication infrastructure is likely to become increasingly urgent. On Saturday, just in time for the elections, the incumbent political party cut off internet access, ostensibly to mitigate “unrest”. This also happened recently in Senegal, and over the past couple of years, governments in Congo, Niger, Uganda, and Zambia have cut off internet access during election periods.

For many, crypto is about markets, trading and making money. That’s a necessary feature for the funding of ecosystem development, and more efficient market infrastructure benefits savers and entrepreneurs as well as traders. For even more of the world’s population, however, the crypto ecosystem is working on solutions that affect quality of life, freedom, and even survival.

The crypto impact of the BRICS expansion

At last week’s BRICS summit held in South Africa, the leaders of Brazil, India, China and South Africa (Putin was unable to personally represent the “R” in the acronym due to an inconvenient order from the International Court of Justice for his arrest) met with leaders from approximately 60 nations to discuss trade agreements and the bloc’s strategic objectives, among other things. One surprise announcement to emerge was the official expansion of the group, with invitations to join extended to six more nations: Saudi Arabia, Iran, United Arab Emirates, Egypt, Argentina and Ethiopia.

Why it matters:

This wasn’t totally unexpected – it had long been known that other nations were interested in joining. Few, however, anticipated that in one fell swoop the group would more than double its membership numbers, and the list of countries selected has triggered some speculation.

Including the large oil producers seems like a no-brainer. With the entrance of Saudi Arabia, Iran and the UAE, the group now controls more than half the world’s oil exports and a significant portion of its oil finance flows.

What is surprising is that Indonesia was not included, given the heft of its economy, its geographical location and the strategic importance of its oil production. It turns out that Indonesia’s prime minister, who had travelled to South Africa for the summit, had requested some time to consult with other strategic partners. It’s probably not a coincidence that, on Thursday of last week, Indonesia’s defence minister was at the Pentagon. This shines an even harsher light on Saudi Arabia’s eagerness to join, given its traditional military ties to the US which are feeling somewhat weaker these days.

The inclusion of Egypt makes sense given its strategic location, control of the Suez canal as well as its recent oil and gas discoveries. And Egypt’s eagerness is not hard to understand given the social hardship exacerbated by persistent dollar shortages as well as its strong relationship with Russia and growing trade with China.

Ethiopia is also seen as having a strategic location, even though technically it is land-locked. But although its economy is growing rapidly, it is still one of the poorest countries in the world, with significant internal turmoil. Yet Nigeria, the largest economy in Africa by GDP, was left out.

The inclusion of Argentina is perhaps the most surprising. True, it increases the BRICS influence in Latin America, bringing the region’s second largest economy to the table. It also presumably smooths access for BRICS members to the country’s rich agricultural potential. But, economically it is a mess, and later this year it has a particularly rambunctious election coming up.

While many in the West are downplaying the potential impact, an expanded BRICS will almost certainly boost trade in non-dollar currencies. This will not be by anywhere near enough to push the dollar off its reserve currency pedestal, but it will weaken dependence on the dollar system and also potentially weaken dollar demand. There are signs this is already starting: last week, Brazil proposed accepting yuan guarantees for exports to Argentina (its third largest trading partner behind China and the US) in a bid to help solve the country’s dollar shortage – Argentina has currency swap agreements in place with China. And any BRICS buyers of Iranian crude will be paying in non-dollar currencies, given sanctions constraints.

This has very little direct bearing on cryptocurrencies as yet – it’s unlikely we’ll see any of the BRICS nations seriously propose moving to a bitcoin standard or similar. But the rapid fragmentation of global finance is likely to have a longer-term impact. There’s the expected bump in currency volatility as demand adjusts, which should make crypto assets such as bitcoin a less “risky” proposition for treasurers and traders. There are also potential changes in central bank reserves – if demand for dollars weakens while BRICS internal bilateral trade increases yet partner currencies are relatively unstable to hold, new types of non-dollar reserve assets are more worth exploring.

There’s also the potential extension of China’s digital currency. The mBridge project, developed by China, the UAE (now a BRICS partner), Thailand and Hong Kong with support from the BIS, is expected to extend the digital yuan’s use for cross-border trade. It’s not hard to see a similar network for inter-BRICS commerce emerge, leveraging the digital yuan’s head start in platform and application development.

An interesting twist: the 2024 BRICS summit is expected to take place in Kazan, Russia’s fifth-largest city. It’s anyone’s guess what Russia’s global standing will be by then.

Are NFTs securities?

Earlier this week, the SEC published an action against Impact Theory LLC, a Los Angeles-based media company, with conducting an unregistered security offering with its $30 million sale of limited edition digital “Founder’s Keys”.

Why it matters:

This marks the first official action against an NFT issuer, and highlights the problematic approach of the SEC to regulating crypto assets. It also highlights the problem with tech entrepreneurs thinking that NFTs are a cool fund-raising mechanism.

The SEC alleges that Impact Theory promised Founder’s Key holders an increase in the value of the tokens, without specifying how or why this would happen. The NFTs don’t actually do anything, as far as I can tell. They’re not even particularly attractive or unique (the SEC filing shares some images), they’re not the sort of thing you would pull out every now and then and think “this is beautiful, I’m so glad I own it”. The value proposition seems to be one of association with the success of the project the NFT sales would fund.

But only association, not actual ownership. The NFTs confer no “rights” at all. Yet according to the SEC filing, Impact Theory executives bragged about the “crushing, hilarious amount of value” the NFTs would accrue (please tell me that not all tech entrepreneurs speak like that), because the team was “trying to build the next Disney”.

It feels sort of like a “trust me, bro”, which could leave investors open to fraud, although investors here were not fed false numbers or invited to invest in production facilities that do not exist. In other words, there wasn’t really securities fraud per se, rather a set of vague yet enthusiastic promises that surely investors would have known were not a “sure thing”.

To be fair, the SEC is not alleging fraud, just the lack of registration. A question worth asking is: why isn’t the SEC focusing on cases of actual fraud, rather than a tiny NFT offering that delivered a teensy settlement ($6 million)? Is this a good use of SEC funding? Are they really protecting investors?

But let’s not digress…

Two SEC commissioners, Hester Peirce and Mark Uyeda, dissented on the action. Their main objections are worth underlining:

NFTs are not shares of a company.
The SEC doesn’t prosecute art or collectibles that will increase in value along with the artist’s cachet.
Even if the sale of these NFTs do constitute an investment contract, why go the heavy-handed route of an enforcement action?
The SEC should be offering guidance to NFT issuers, rather than wasting resources going after small infractions.

My take here is that the issuers did intentionally use NFTs as a financing mechanism and should definitely not have delivered such cringe promises as “I will do whatever it takes” and “there is [sic] a lot of cool things coming in the next 18 to 24 months” and “we’re delivering just an obscene amount of value”. But does this make these NFTs a security? No – there is no direct relationship between the asset and the project, other than hubris. If the SEC went around prosecuting founders for making stupid statements, it would be pretty darn busy, and could be fairly accused of overstepping its mandate.

And anyway, as commissioners Peirce and Uyeda point out, is an enforcement action the way to go? For such a small project? The precedent itself may have limited application, given how varied NFTs can be.

The problem here is that, yet again, the SEC is trying to fit crypto assets into the established securities definitions, and they just don’t fit. Instead, we need regulators that acknowledge this, and that are willing to adapt securities markets to new technologies. The alternative is to watch innovation and funding continue to leave the US.

Moon gazing

This week, on Wednesday to be precise, we got the largest and brightest full moon of the year – it’s called the “blue” moon not because of its colour, but because it is the second full moon in a month. On Wednesday, the moon was as close to the earth as it gets, which makes this a “supermoon”. As if that wasn’t enough of a big deal, the next blue moon isn’t until January 2037.

Below are some photos from various media sources – it is hard to not feel complete awe at the majesty of the glowing orb in the sky, knowing that our two spheres have been together practically since the beginning of what we think of as time.