OCC Muddies the Water on Crypto Rules for Banks

The biggest crypto news and ideas of the day

Nov. 24, 2021

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Today's must-reads

Top Shelf

INSTITUTIONAL BACKING: Crypto investment firm Pantera Capital has raised $600 million for its fourth fund, with about 75% of the capital coming from institutional investors such as endowments. The institutional backing is a change from the firm's $175 million fund in 2018, which was largely funded by wealthy crypto investors. The fund, which is expected to reach $1 billion when it closes in March, will invest in venture equity and tokens directly.

SHUT DOWN: Crypto mining company Xive shut down a 2,500-rig mine in South Kazakhstan due to lack of sufficient electricity supply from the national grid, co-founder Didar Bekbau said. Kazakhstan has been grappling with electricity shortages, partly caused by an influx of crypto miners from China. Crypto miners, like Xive and Enegix, have been facing electricity issues since September due to rationing from KEGOC, the national grid operator.

FASHION MEETS CRYPTO: French luxury fashion house Givenchy has dropped 15 non-fungible tokens (NFT) that can be used as online avatars or profile pictures and were created in collaboration with the graphic artist Chito on the OpenSea marketplace. The sale of the NFTs will be through a seven-day auction starting Tuesday. Givenchy decided to launch its NFTs on Polygon because of the network's low energy consumption. Meanwhile, metaverse platform The Sandbox's SAND token surged 25% after sports fashion house Adidas seemed to confirm a relationship between the two companies on Twitter.

REGULATION: The U.S. Office of the Comptroller of the Currency (OCC) wants banks to be very sure they can provide crypto services before they do so. The federal bank regulator published an interpretative letter Tuesday telling banks to be very clear they can comply with existing regulations involving stablecoins and other cryptocurrency services if they want to begin offering custody or node verification services. Former acting OCC lead Brian Brooks made waves when publishing several interpretative letters allowing banks to provide various crypto services.

–Helene Braun

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Overheard on CoinDesk TV...

Sound Bites

"I know the concerns here in D.C. are about losing the power of the dollar and we can understand that, but El Salvador has to move on [because] it wants to be on a different level."

–El Salvador's Ambassador to the United States Milena Mayorga, on "First Mover."

What others are writing...

Off-Chain Signals

A Baysenian reckons with whether crypto is bullhockey (Model Citizen)
"NFT" is Collins Dictionary's word of the year (Collins Dictionary)
Decrypt went to El Salvador to find out how easy it is to spend sats (Decrypt)
Post Malone secretly paid $750K Ether to lace music vid with MoonPay ad (Protos)
EU must ban bitcoin mining to hit Paris climate goal (EuroNews)

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Putting the news in perspective

The Takeaway

El Salvador: Who Needs the IMF When You Have Bitcoin?

Hi, David Z. Morris here. Christopher Nolan's third Batman film, "The Dark Knight Rises," is generally considered the weakest entry, in part because it's so easily read as a celebration of neoliberal authoritarianism. The film's plot has the villain, Bane, take over Gotham City, wipe out all financial ledgers and reign over a kind of mega-Occupy movement. To fight back, Batman engages in a series of moral compromises that he justifies as, more or less, necessary exceptions to defend a more broadly just system.

The International Monetary Fund has been playing the Batman role in the global order for decades. Though nominally aimed at supporting democracy and free markets, reforms mandated by the IMF in exchange for its loans have historically included serious cuts to social spending and industrial policy. The fallout is often devastating: The IMF's (real world) body count is considerably higher than Batman's.

El Salvador, a country with low income and high debt, has been in negotiations with the IMF for one of its loans in the amount of $1.3 billion. One roadblock has been the country's recent adoption of bitcoin as legal tender. The IMF signaled it wasn't too happy with that idea.

On Monday, El Salvador introduced a $1 billion "Bitcoin Bond" that could present at least a partial end-run around the IMF, highlighting why bitcoin made the IMF so queasy in the first place. "The Dark Knight Rises" contains a notorious moment, drawn from the Batman comics, in which Bane pummels Batman so badly that his back is broken, leaving him paralyzed and vulnerable. That's about how the IMF is going to feel if El Salvador finds a way to raise large sums of international financing, as a developing country with a troubled economy, without the IMF or the corruption-riddled global banks.

The bond allows purchases in units of $100, using bitcoin or tether. It will be issued by Bitfinex, an essentially stateless and unregulated platform. So there are probably few if any controls on who can buy into this bond, either by source or by amount.

That means one simple thing: El Salvador will absolutely sell out of this bond, and will probably be able to issue another round. It will replace that $1.3 billion from the IMF without breaking a sweat, even taking into account that about half of the first bond sale will go into a bitcoin fund.

There doesn't need to be any further explanation of this than "Bitcoiners are nuts and rich," and would gladly pump money into this small country for the lulz. More seriously, every one of these experiments that pans out is another win for bitcoin, so pitching in is also a matter of enlightened self-interest. Remember that an Ethereum DAO just raised $40 million for what was essentially a vaguely civic-minded prank – $1 billion for an actual bond with an actual return is nothing.

Let's leave aside the touted "Bitcoin City" El Salvador says it wants to build using the other half of the first bond. That's mostly a marketing stunt: For $500 million, at best the country will get a couple of power plants, a server farm and an IHOP. And that's actually fine! Assuming El Salvador follows through in broad strokes, you do need some kind of infrastructure to support the mining facilities, so whether or not it's a "city" right off the bat is a matter of semantics. And $500 million of new capital in the small country will have a major impact regardless of how it's spent.

So, kudos to El Salvador for burning down Wall Street and building a throne out of the skulls of predatory bankers. That said, the bond might not be a terribly great investment.

For one thing, it introduces political counterparty risk to your bitcoin strategy. This is a country that only emerged from near-anarchy in 1994, and while President Nayib Bukele seems to have sturdy popularity, a disruptive change in leadership or the political order could mean creditors don't get paid back. That's not necessarily likely, but it's on the table in a way that it's not with, say, U.S. Treasury bonds (or just buying bitcoin yourself).

Also, Blockstream's projection that the bond will return 165% annually over 10 years is based on the bet that bitcoin will be trading at $1 million by that time. I consider that completely possible, but also completely unknowable. A 10-year projection for literally any asset is pretty much always going to be a made-up number. Invest accordingly – unless your real priority is to change the world.

–David Z. Morris

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