Binaries fractures – individuals and institutions presented with a choice between different polarities instead of being able to align along a median – is a theme from the OODA Almanac 2023.
Decentralized versus centralized systems is the high-level, umbrella “binary fracture” you can put over all the geopolitical and technological arenas we explore here at OODA Loop.
But it drills down quickly into a few real-world polarities, like:
- Autocracy versus Democracy: The conflict in Ukraine – a tangible result of the autocracy versus democracy fracture- has induced further food insecurity by way of the weaponization of the wheat crop from Ukraine, long considered the “Breadbasket of Europe.”
- The Occupy Wall Street-born, Marx-informed, Alexandria Ocasio-Cortez-led, progressive “woke” framework versus the Tea Party-born, Ayn Rand-Leo Strauss-René Girard-William Luther Pierce-informed, Peter Thiel-led, libertarian “accelerationist” framework
nother binary fracture has crystallized in the last few weeks, which is – at its core – also rooted in the centralization versus decentralization binary fracture induced by the ongoing digital revolution, and that is:
The traditional global, centralized banking financial system
with the U.S. dollar as the dominant fiat currency
v.
An innovative, secure, global, digital self-sovereign, blockchain-based, decentralized financial system
with “fiat currency multipolarity.”
The recent headlines compiled below (with brief analyses) reveal vital exponentiality in this fracture, specifically:
- Crypto market movements are now inversely proportional and a logical, equal, and opposite market response to the ongoing regional banking crisis: What does this mean? That the market does what the market does – and corrects. All the narratives (correct or not) around and further failures of regional banks in the U.S. is actually bolstering activity in the hedge bet that is crypto. Sooner than we anticipated, the crypto marketplace is now the biggest strategic bet against the dollar as the global fiat currency – ever. This binary fracture is now palpable and quantifiable: individuals and institutions are presented with a choice between different polarities – a store of value in a traditional U.S. regional bank versus a further position in the crypto market – instead of being able to align along a median. These two fractures are now headed in two aggressively opposite directions.
- De-Dollarization – New Fronts in the Global War Being Waged Against the U.S. Dollar: the nation-state strategic interests in fiat currency multipolarity over time are completely aligned with the crypto marketplace as a fiat currency choice in that multipolar financial system; and
- Overregulation and National Security Risk: If crypto is now a one-to-one bet against the American financial system, coupled with de-dollarization, the crypto market is strategically aligned with American adversaries like China and Russia – which OODA CEO Matt Devost foreshadowed in his Is Bitcoin a National Security Risk?:
“The secondary challenge here for the U.S. government is ensuring that any inevitable movement to a new reserve currency model is tied directly to the U.S. innovation ecosystem. The catch-22 here being that any efforts to thwart innovation in this space could create durable national security risks in the future if the U.S. loses innovation advantage by driving key projects to external domiciles or ceding control of critical infrastructure to foreign governments.
The government has frequently exhibited inefficient tendencies in regulating disruptive technologies – and the exponential growth expected in the Web3 domain will further exacerbate things. However, it is critical to consider that an approach that disrupts innovation could create an even greater long-term national security risk than those articulated by Executive Orders or expressed through other regulatory entities. Given the established pace of innovation, the increasing value being created, and the anticipated disruption to a wide variety of business domains expected, an environment in which regulatory arbitrage becomes the de-facto determinant of jurisdiction could result in the U.S. being disadvantaged in the long term. We must work to manage risk appropriately while not stifling innovation.”
Again, sooner than we anticipated, the following headlines from the last two weeks confirm that the U.S. has officially dropped the ball and has begun to stifle innovation in crypto – and companies and countries are looking abroad for international addresses to host their crypto operations. This week was the tipping point on all of these issues – and it has an “exponential speed” feeling to it – as the above-aforementioned forces act as exponential multipliers, feeding on each other and exponentially accelerating the transformation of the global financial system.
In a nutshell: Centralized Systems versus Decentralized Systems is the classic OODA Loop binary fracture. But if you follow the money, the binary fracture that trumps and touches all other binary fractures existent in the world in terms of global risks, opportunities, and uncertainties may well be:
The Dollar
v.
Everyone and Everything Else
The Big Picture
U.S. Banking System Turmoil Has Spurred Bitcoin Outperformance: Coinbase (coindesk.com)
by Will Canny at Coindesk
The cryptocurrency has topped other digital assets in the last month, a report from the exchange noted.
- Cryptocurrency markets have displayed resilience in the face of recent upheaval in the U.S. banking system, with bitcoin (BTC) in particular outperforming, crypto exchange Coinbase (COIN) said in a research report Friday.
- Coinbase noted that bitcoin has outperformed other assets since the middle of February, with the cryptocurrency’s dominance as a percentage of total crypto market cap increasing to 47.7% from 43.9% during March. The outperformance accelerated early in the month, which coincided with the onset of the U.S. banking system turmoil, Coinbase said.
- “Part of the reason is that the stress in the banking system reinforced bitcoin’s store-of-value properties,” the report stated, and because BTC mainly exists outside of the traditional financial system “it offers a hedge against current conditions.”
- It has also benefited from investor concerns about the regulatory status of other cryptocurrencies, analysts David Duong and Brian Cubellis wrote.
- Bitcoin’s correlation to the S&P 500 stock index dropped to 25% at the end of March from a peak of 70% in May last year, the analysts wrote. They didn’t give the timespan for the correlation calculation.
- The cryptocurrency’s relative outperformance versus other digital coins and tokens also reflects investor concerns about the regulatory status of other digital assets, and thinner liquidity specific to some BTC versus stablecoin trading pairs, the report added. (4)
Bitcoin Decouples From Stocks As Fed Decision Looms (thedefiant.io)
As reported by Owen Fernau at The Defiant:
Daily Transactions Hit All-time High Driven By Ordinals
After remaining elevated for most of 2022, Bitcoin’s correlation to equities has plummeted to 12%, a level not seen since mid-2021.
BTC vs World Stocks
Bitcoin’s correlation to equities is now only 12%. pic.twitter.com/ihcM98NPGx— James Butterfill (@jbutterfill) April 28, 2023
James Butterfill, head of research at the investment firm Coinshares, first pointed out the decoupling on Twitter.
In an interview with The Defiant, he said he wasn’t surprised by the development. “Equities never do well, with the prospects of recession, but something like Bitcoin will do quite well because it’s like a monetary policy hedge,” he said, adding that the two are fundamentally different kinds of assets. In Butterfill’s view, the idea that Bitcoin is a leveraged bet on tech stocks is a flawed one. “It was very frustrating last year, when I just saw these tweets coming out saying Bitcoin is just another risk asset,” he said. “I thought that was such a naive and short-term view.”
BTC Price + SPY Price, Source: The Defiant Terminal
Bitcoin was largely grouped as “just another tech stock” in 2022 as rising interest rates seemed to bring down equities and crypto together. Now, with elevated rates starting to cause significant problems in the banking sector, BTC may be entering an environment where it can thrive while equities don’t.
Butterfill emphasized that with the banking sector showing signs of stress, it’s clear that the US Federal Reserve may have made a mistake. The central bank is in a tough position – it can either lower rates, potentially pushing persistent inflation even higher, or it can raise rates, continuing to wreak havoc on the banking system.
Bitcoin has tended to trend higher when banks fail, which has happened three times this year, going by the Federal Deposit Insurance Corporation’s (FDIC) count. The three failures represent three of the top four failures in US history based on the assets held by the institution at the time of failure.
Jordi Alexander, an investor at Selini Capital who spoke to The Defiant about the “all one trade” phenomenon nearly a year ago, added that liquidity for BTC is currently low. This makes it easy for large buyers and sellers to push the price of the digital asset around. “A billion-dollar flow in either direction can be enough to overpower the equity correlation,” he said.
Both Butterfill and Alexander think that if the United States enters a period of stagflation, characterized by low growth coupled with high inflation, BTC will have a chance to shine.
Digital Gold
And it’s not just Bitcoin. The digital asset’s correlation with gold rose to a two-year high in April, according to data provider Kaiko. As gold approaches its all-time high above $2,000/oz, Butterfill thinks the precious metal is also entering an environment where its relatively stable supply will attract capital.
BTC correlation with Gold. Source: Kaiko
Dollar Drop
Butterfill also noted that BTC tends to trade inversely with the dollar, and that if the Fed cuts interest rates tomorrow, the dollar index (DXY) will continue to slide. “Rates will probably stay elevated for some time, but they will start backing off,” he said.
DXY has dropped nearly 10% in the last six months, according to TradingView.
Ordinals Fuel Bitcoin Activity
Outside of macroeconomics, Bitcoin usage is also picking up in a big way thanks to the advent of Ordinals, a way of storing data on the world’s most valuable blockchain.
Transactions hit an all-time high on May 2 at roughly 682,000, according to BitInfoCharts. (1)
Bitcoin Daily Transactions
Bitcoin (BTC) Rises Toward $30,000 as Bank Woes Ripple Across Markets – Bloomberg
Largest digital asset trades close to highest level for May
But $30,000 remains a challenge for Bitcoin’s 2023 rebound
Bitcoin and the wider crypto markets pushed higher Thursday as investors reacted to the latest signs of stress in the regional US banking sector and digested the Federal Reserve’s monetary policy decision.
The largest digital currency rose as much as 2.9% on Thursday and was trading at $29,241 as of 7:00 a.m. in New York. Smaller tokens including Ether, Cardano and Solana made gains too. Bitcoin has periodically poked above the $30,000 level over the past three weeks only to slip back, after a 76% jump this year.
PacWest Bancorp is the latest locus of concern about US regional banks after the collapse of three rival California-based lenders. Crypto proponents argue that eroding confidence in fiat currency is bolstering the case for Bitcoin.
Bloomberg
Investors also strengthened bets on Fed interest-rate cuts later this year after Chair Jerome Powell hinted that the central bank’s latest hike could be the last. Tighter credit conditions and risks such as the struggling commercial real estate sector are stoking expectations of economic turbulence. “We expect to see significantly more volatility in the months ahead, especially if there are any further aftershocks in US regional banking or concerns around the state of commercial property loans,” said Tommy Honan, head of market analysis at crypto exchange Swyftx.
Bitcoin has partially rebounded in 2023 from last year’s crypto rout, which sparked blowups including that of the FTX exchange and triggered a US regulatory crackdown. But the revival has sputtered near the $30,000 level. It reached a record of almost $69,000 in November. (2)
The Ongoing U.S. Crypto Regulatory Debacle and Flourishing International Crypto Markets
Gemini’s Plan for Derivatives Exchange Adds to Crypto’s Flight From the US – Bloomberg
Also as reported by Suvashree Ghosh:
Crypto businesses in the US are pursuing targeted international expansion amid a deepening regulatory crackdown at home.
- The latest moves came from billionaire twins Tyler and Cameron Winklevoss’ Gemini Trust Co. The exchange last week unveiled plans to target growth in Asia and to establish a non-US crypto derivatives platform.
- The Securities and Exchange Commission has rattled the US digital-asset sector with a flurry of enforcement actions this year, while American politicians are struggling to develop crypto legislation.
- In contrast, the European Union is progressing an effort to create rules for the industry and places like Hong Kong and Dubai are seeking to foster crypto hubs.
While US regulators have been busy infighting and refusing to provide the most basic of clarity for the crypto industry, the European Union just approved the MiCA regulation, which provides a comprehensive regulatory framework for crypto in Europe. It’s sad to see the US being…— Tyler Winklevoss (@tyler) April 20, 2023
- “Given the progress of regulators in the Asia Pacific and the Middle East toward clarifying their regimes, it seems likely that virtual-asset service providers will continue to gravitate toward jurisdictions that provide greater clarity and specific guidance,” said Vince Turcotte, director of digital assets at market surveillance firm Eventus in Hong Kong.
- Gemini last week named its Global Chief Technical Officer Pravjit Tiwana as Asia-Pacific chief executive.
- The company will set up an engineering hub in India and expand a team in Singapore.
- Gemini’s planned derivatives exchange will be available across 30 territories, but not the US, according to a blog post. It will initially offer Bitcoin and Ether perpetual contracts denominated in Gemini dollars or GUSD, a stablecoin.
SEC Flurry
- Gemini, Coinbase, Genesis Global Capital, Kraken and Bittrex Inc. are among the companies that have been the target of tightening SEC oversight.
- Bittrex is shutting down its US operations, citing the regulatory environment.
- Meanwhile, the Commodity Futures Trading Commission is suing Binance Holdings Ltd., the world’s largest crypto exchange, and its Chief Executive Officer Changpeng Zhao for breaking US derivatives rules. Binance has said it was disappointed by the suit and would continue to work with the regulator.
- FTX’s giant bankruptcy and a litany of other wipeouts following last year’s crypto rout have stoked skepticism about digital assets in the US. The SEC’s Chair Gary Gensler argues most digital tokens are unregistered securities and that sector “has built up around non-compliance.” (3)
Richard Li-Backed Venture Firm Flags Hong Kong Crypto Potential Amid US Curbs – Bloomberg
The US “is shooting themselves in the foot”
- CMCC says US crypto curbs bring opportunity for other regions
- Blockchain-focused investor set to launch a $100 million fund
- CMCC Global, a venture capital company focused on blockchain technology, said the US digital-asset crackdown is opening up opportunities for Hong Kong as the city strives to become a crypto hub.
- The US “is shooting themselves in the foot” and giving other regions a chance to woo innovative businesses, CMCC’s co-founder Charlie Morris said in a Bloomberg Television interview aired Tuesday. “We see places like Hong Kong having a real opportunity at this point in time to bring those firms and entrepreneurs to the city,” Morris added.
- Hong Kong plans to let retail investors trade major tokens like Bitcoin and Ether in a new licensing regime for virtual-asset service providers due June 1.
- In contrast, the US has turned up the regulatory heat on crypto in the wake of last year’s digital-asset rout and the collapse of the FTX exchange.
Fund Launch
- CMCC is launching a $100 million fund to invest in startups focused on blockchain projects. The targets are companies in the Series A and B stages both in their home base of Hong Kong as well as further afield.
- “There is a lot of innovation coming from Asia,” co-founder Martin Baumann said. “There’s plenty of capital sitting on the sidelines waiting for the right entry valuations to pull the trigger.”
- Baumann and Morris hold a majority stake in CMCC, while Hong Kong tycoon Richard Li and Gemini Trust Co. founders Cameron and Tyler Winklevoss are investors in its holding entity
- Venture capitalists globally have continued to pull back from crypto this year following 2022’s price crash, a string of bankruptcies and the scandal that enveloped FTX, whose co-founder Sam Bankman-Fried is awaiting trial.
- Private funding for crypto startups in the first quarter of this year plunged to its lowest level since 2020, according to data from researcher PitchBook.
- Last month, Switzerland’s Syz Group said it’s joining with CMCC Global to start a minimum $50 million fund to invest in crypto-focused hedge funds. (6)
The European Union Takes the Regulatory Lead
EU’s Crypto Industry Applauds the New Markets in Crypto Assets ‘MiCA’ Regulation – But Looks to What’s Next (coindesk.com)
EU Crypto Industry Applauds MiCA – But Looks to What’s Next
- A vote [in April] sealed the deal on the long-awaited crypto law, but plenty of details remain to be ironed out.
- The European Parliament’s landslide vote in favor of new crypto licensing rules was largely met with applause from the industry, but now attention turns to the details that need to be colored in.
- A long-awaited and expected approval of the Markets in Crypto Assets regulation means the landmark law intended to protect consumers and ensure financial stability can take effect in mid-2024.
- The initial reaction has been warm. Shortly after the vote, crypto exchange Coinbase tweeted that the vote is a “pivotal moment for crypto regulation,” because the law will “give crypto organizations the confidence to invest and grow in the region.”
- The law, known as MiCA, requires exchanges and wallet providers to obtain a license and stablecoin issuers to hold appropriate reserves,
- Antoni Trenchev, co-founder and managing partner at crypto lender Nexo, said the approval shows that the “crypto industry has finally had this affirmation,” adding in an emailed statement that “MiCA makes Europe fit for the digital age and will foster innovation and fair competition.”
- Last year, Nexo announced it would shutter its U.S. business, saying that talks with regulators there had reached a dead end.
- Optimism about MiCA’s impact seems to be matched in the traditional financial sector. “We perceive regulation as a net positive for the industry,” a report from Deutsche Bank (DB) staffers stated, citing the likely effects on corporate adoption, liquidity, and volatility.
- Crypto is “a dangerously unregulated sector,” research analysts Marion Laboure and Cassidy Ainsworth-Grace wrote in the report, and that has “exposed investors to massive losses across all crypto platforms.”
- The key question now is how companies will prepare. John Ehlers, chief operating officer at crypto exchange Bitstamp, said that while the outlines of the law have been known for some time, there’s a 12-18 month transition period that will start ticking in June or July, and getting ready will be a bigger task for some than others.
- “For those that are new to this business, and coming into the European market, it is a step change in how they operate,” Ehler said on CoinDesk’s “First Mover” show.
- “If you’re new to this space, you’re not going to have very stringent AML (anti-money-laundering) requirements for account opening,” Ehlers said. “If you’ve already been regulated in the EU (European Union), you’re probably in pretty good shape.”
Long task
- Even long-established players face a long road ahead. That includes Binance, the world’s largest crypto exchange by volume. It already holds a number of crypto registrations within the bloc, including under the relatively well-developed and MiCA-like regime in France.
- “There are now clear rules of the game for crypto exchanges to operate in the EU,” Binance CEO Changpeng Zhao tweeted in response to the vote. “We’re ready to make adjustments to our business over the next 12-18 months to be in a position of full compliance.” But, Zhao also said, “The fine details will matter.”
- While the overarching MiCA law, known as a “level one” text, is now nailed down, EU agencies such as the European Securities and Markets Authority say they will have to draft and consult on the “substantial package of implementing measures” that lie underneath.
- Crypto industry players will be watching closely. “There are a lot of things that the MiCA level one text does not define – there are questions that will be answered in the so-called level two legislation,” Tommaso Astazi, head of regulatory affairs at lobby group Blockchain for Europe, said at an event in Brussels last month.
- There were last-minute disputes among lawmakers and governments on how the law should treat NFTs and decentralized finance, and hastily drafted compromise language may not always be clear about, for example, what is or isn’t a non-fungible token or a decentralized grouping.
- While the EU law sets a common standard, it will be enforced by individual national regulators in the bloc’s 27 member states, and some are concerned that countries could impose extra hurdles or in the other direction undercut each other in a bid to attract business.
- Final details of the law should “ensure consistent MiCA implementation across member states, especially at the licensing stage, to ensure a level playing field and avoid regulatory arbitrage,” as well as making a smooth transition from existing national regimes, Mark Jennings, head of European operations at crypto exchange Kraken, wrote in an email sent ahead of the vote.
- Those final steps could prove crucial to MiCA’s success, Jennings suggested. “What once seemed a lofty legislative goal could soon become a universal standard for customer protection and business efficiency, if the EU can get the technical implementation of this framework right,” he said. (7)
Further interesting signals include the Blockchain Association leaving New York as a Federal regulatory fight looms and the U.S. House Republicans making the case on Stablecoin regulation bill after Democrats called for do-over – all well the White House pushes for punitive tax on crypto mining.
The Coinbase Case Study
The Gemini announcement “came not long after Coinbase Global Inc., the biggest US crypto exchange, said it had obtained a virtual-asset license in Bermuda. Some reports say Coinbase will set up a derivatives platform there. Coinbase’s Chief Executive Officer Brian Armstrong recently said the exchange might consider moving its headquarters outside the US amid a clampdown on the industry in the world’s largest economy following the collapse of rival FTX. Coinbase said in an April 19 blog post that, aside from Bermuda, it’s accelerating plans for the United Arab Emirates amid discussions with Abu Dhabi officials over a potential license for a regulated exchange.” (3)
Various announcements from Coinbase and a recent earnings call are also illustrative of impact of the U.S. regulatory environment in the crypto market, including:
De-Dollarization: New Fronts in the Global War Being Waged Against the U.S. Dollar
Will Know Your Customer (KYC) Verification Regulations Stifle Crypto Innovation? And the Future of Money?
The Future of Bitcoin and the Exponential Growth of and Risks Posed by Ordinal Inscriptions
What CEOs Need To Know About Bitcoin: Including potential new business models to consider
Designing, Quantifying, and Measuring Exponential Innovation
The OODA Network on the Silicon Valley Bank Failure and the Road Ahead
The Pentagon is Strategically Positioned to Address SVB Bank Failure and Tech Startup Innovation
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