There's a saying in traditional markets that equities often 'climb wall of worry'. That means there's always some compelling reason out there for assets not to appreciate but they tend to despite the negative factors. Are the crypto markets able to climb the wall of worry that is the US regulatory construct finally coming together to address crypto regulation?
Yesterday the President's Working Group on financial markets convened with Chairman Powell to discuss stable coin regulation. The resulting press release was short and I've pasted it below. What struck me about it is that virtually every regulatory authority that touches the US financial system had representation there. In a prior post, I wrote that one reason for the SEC dragging its feet on so many of these regulatory issues was that it needed to give the Fed a chance to catch up. Otherwise, it would be overstepping its role. Now, the Fed is on it given its CBDC ambitions and has literally everyone at the table to focus on a holistic regulatory construct. Starting with stable coins- a primary liquidity source for crypto markets at large.
What does this mean for short term price action? The mass of retail buyers has gotten punched in the face and seems to be sitting on the sidelines at the moment. We have a small handful of publicly traded corporates that seem to be legging into positions, most notably Micro Systems with their carry trade. El Salvador and a few other countries have or are moving towards adoption but I have to believe that the US government now taking such a vocal position, this is likely to slow things down with at least some of those international players. I've personally talked to half a dozen of the largest hedge funds in the US over the last month in the normal course of my work and while some are definitely exploring the space, none of them are too keen on jumping in until they get a better handle of what the regulatory regime will look like.
Though I hate to admit it, I simply can't see where a fresh source of inflows will come from in the short term with the US Govt suddenly front-footing the whole regulatory thing in such a unified fashion. Ignoring that would not be prudent and the prudent man test is a key part of the fiduciary standard that institutional investors must take into consideration, whether we like it or not.
Something will change with a bit of time, but this sea of red might drag out a bit longer than most of us would like.
Cheers,
NZFX
July 19, 2021
WASHINGTON — Today, Secretary of the Treasury Janet L. Yellen convened the President’s Working Group on Financial Markets (PWG), joined by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, to discuss stablecoins. In the meeting, participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security. The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place.
The group also heard a presentation from Treasury staff on the preparation of a report on stablecoins, which would discuss their potential benefits and risks, the current U.S. regulatory framework, and the development of recommendations for addressing any regulatory gaps. The PWG expects to issue recommendations in the coming months.
In attendance were:
- Janet L. Yellen, Secretary of the Treasury
- Jerome Powell, Chair, Board of Governors of the Federal Reserve System
- Gary Gensler, Chair, Securities and Exchange Commission
- Rostin Behnam, Acting Chairman, Commodity Futures Trading Commission
- Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation
- Michael J. Hsu, Acting Comptroller of the Currency
- Randal Quarles, Vice Chair for Supervision, Board of Governors of the Federal Reserve System
- J. Nellie Liang, Under Secretary for Domestic Finance, U.S. Department of the Treasury
