Q9 Markets | It’s a Rate Race
23 September 2022
Q9 Capital: www.q9capital.com
- Fed raises rates 75bs, other economies follow
- White House releases first-ever framework on crypto regulation
- Cardano’s Vasil Hard Fork upgrade underway
Bitcoin slid to a three-month low mid-week, leading a broad decline in digital-asset markets, as traders digested another stiff interest-rate hike (+75 bps) at this week’s Fed meeting. Broad risk assets have fallen as investors continue to weigh the aggressive stance. Since the Merge, Ethereum has slid -9.7% to $1.3k.
Following the hike, countries including the UK, Norway, Indonesia, and South Africa also bumped rates with others to follow in the coming days.
There were three particularly big changes at the Fed meeting: 1) 2022 GDP growth was downgraded from 1.7% to 0.2%. 2023 got a half-point haircut to 1.2%. 2) The projected policy rate for year-end 2023 was upgraded from 3.8% to 4.6% 3) The 2023 unemployment projection went from 3.9% to 4.4%.
This is meaty stuff, and consistent with the message that rates are not just going to be high, but are going to be high for long enough to hurt. Tighter monetary policy, in general, is seen as a negative factor for prices of risky assets like Bitcoin. But it’s possible that the dire scenario is already priced into the market.
The dollar surged to a two-decade high on Wednesday. A reverse currency war is in full flow, with monetary authorities across the world ditching their standard quarter-point increases in favour of 50, 75 and (in the case of Sweden and Canada) — 100 bps moves in order to stem dollar declines.
Rate rises, while necessary to quell inflation, have become so aggressive the World Bank warned last week they risk sending the global economy into a recession that would leave the world’s poorest countries at risk of collapse. The World Bank also described the situation now as akin to the early 1980s, when the surge in global interest rates and slump in world trade sparked the Latin American debt crisis and a wave of defaults in sub-Saharan Africa.
Despite the gloomy backdrop, spot trading volumes on top crypto exchanges rose 41.6% to $1.79tn in, the highest monthly volume recorded this year.
A Way Forward on Crypto Regulation
US authorities have been on a tear this week… The White House just released its first-ever framework on what crypto regulation in the US should look like — including ways in which the financial services industry should evolve to make borderless transactions easier, and how to crack down on fraud in the digital asset space.
The new directives tap the muscle of existing regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission… but nobody’s mandating anything (yet).
Here are some of the key takeaways from the White House’s new crypto framework:
- Fighting illicit finance: The President will evaluate whether to call upon Congress to amend the Bank Secrecy Act, anti-tip-off statutes, and laws against unlicensed money transmitting to apply explicitly to digital asset service providers — including digital asset exchanges and nonfungible token (NFT) platforms;
- A new kind of digital dollar: The framework points to the potential for “significant benefits” from a US central bank digital currency (CBDC);
- Safeguarding financial stability: “Digital assets and the mainstream financial system are becoming increasingly intertwined, creating channels for turmoil to have spillover effects,” according to the White House fact sheet. The framework goes on to single out stablecoins, warning that they could create disruptive runs if not paired with appropriate regulation.
Fork, yeah!
The five-day Cardano Vasil hard fork process begins today, which the Cardano Foundation says will improve network performance. The hard fork is a backward-incompatible upgrade taking place on the main network that is intended to enrich smart contract capabilities, increase the chain’s throughput and reduce costs.
Here is their blog post on what to expect.
Ripple Effect
Payments-focused cryptocurrency Ripple (XRP) has rallied sharply this month (+47%) to $0.48, outshining most other crypto-assets. Traders are snapping up bullish bets in options markets in the hopes of continued gains into the year end.
The bullish bets are in anticipation of a resolution of Ripple’s legal tussle with the US Securities and Exchange Commission (SEC). In Dec 2020, the SEC charged San Francisco-based payment protocol developer Ripple Labs, which has close ties with XRP, with violating securities laws by raising $1.3bn through XRP sales to investors.
Last week the SEC and Ripple Labs filed for a summary judgment — a legal process where a court makes a decision based on the facts that have been provided without ordering a trial — raising expectations of a final ruling in the coming months. That would eliminate a significant source of uncertainty for XRP.
TradFi Still Rates Crypto Despite Rate Rises
Rate rises and 2022’s sharp decline in crypto prices haven’t put off the worlds largest investors who still see digital assets as the future of finance. TradFi is far from done getting into crypto, and there are a lot of investors on the side-lines waiting to pile into the industry.
Nasdaq, the second-biggest US stock market operator, announced this week that it will start a crypto custody service. The move came after BlackRock, the world’s largest asset manager, said it will offer crypto to its institutional clients, and DTCC, which processes essentially all US stock trades, released its own blockchain as it looks to speed up the settlement of trades. Many banks and brokers are working to deploy their own crypto services.
One of the main hurdles preventing mass adoption among the TradFi crowd is uncertainty around regulations. This week’s “comprehensive framework”, published by the White House, on what crypto regulation in the US should look like is a needed development for the worlds largest regulated institutions. Having TradFi dipping its toes into crypto is a good start and will eventually lead to more widespread crypto adoption.
Is there more short-term pain in store for Bitcoin? Maybe. But a more interesting question is: Will TradFi take over crypto, making it look more like old-school finance, or will it go the other direction, with crypto fundamentally reshaping how finance works?
In the News…
- S. Korean prosecutors ask Interpol to issue red notice for Do Kwon
- Major crypto trader Wintermute hit by $160mn hack
- New stablecoin bill would put two-year ban on Terra-like coins
- China to extend CBDC trial to most populous province, Guangdong, three others
- FTX in talks to raise $1bn at $32bn valuation, in-line with prior round
- Hong Kong Monetary Authority (HKMA) to begin CBDC trials in Q4
- Nasdaq joins BlackRock as TradFi defies bear market and embraces crypto
- Colorado now accepts crypto payments for state taxes
- Amazon chosen by European Central Bank to develop digital Euro
- Decentralised exchange GMX suffers $565k price manipulation exploit
- Iran to begin ‘crypto rial’ CBDC trial despite possible lack of infrastructure
- Nintendo, PlayStation, & Xbox get new competitor as Zilliqa prepares to launch Web3 gaming console
Q9 Capital: www.q9capital.com
