June 16, 2023

Exploring transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

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It's not all doom and gloom in crypto. Per this week's column, a recent survey suggests there's a lot more enthusiasm among traditional financial (TradFi) institutions for the sector than might seem to be the case.

In this week's Money Reimagined podcast, my co-host Sheila Warren and I take a break (almost) from discussing the regulatory drama in Washington to talk about another positive sign: a recent spate of creative NFT offerings from prominent brands and celebrities. The episode includes a heavily bleeped clip from NFT-embracing rapper Snoop Dogg, who complained during a recent appearance at the Milken Institute about the poor payouts that artists receive from streaming platforms like Spotify, a problem that many believe NFTs could help overcome.

Have a listen after reading the newsletter.

Institutions Favor Digital Assets Outside US

(Unsplash)

Amid the angst over crypto U.S. regulation and a revived bear market, an email from the digital assets team of a major international investment bank presented me with a contrarian indicator and a reminder not to solely view this industry with a U.S. lens.

Its subject read: "Major global study reveals pension funds, fund managers, other institutional investors and wealth managers are positive on digital assets and plan to invest."

Did this come from Bizarro cryptoland? My mind immediately went to that Seinfeld episode in which Bizzaro is referred to as a separate parallel universe in which everything is the opposite of what's going on in this one.

My recent experience with, say, recruiting staffers from investment institutions to go on stage at our Consensus conference has been that many are now too afraid to publicly show their interest lest it put a target on them for Elizabeth Warren's "anti-crypto army."

But, no. This is a legit survey, with some big findings. (It was later written up by CoinDesk's Sam Reynolds.)

The survey was conducted by Laser Digital, the digital assets team at Nomura, a household name on Wall Street and a powerhouse of Japanese finance. The team said its survey covered "pension funds, wealth managers, family offices, hedge funds and investment funds, insurance asset managers and sovereign wealth funds) who collectively manage around $4.956 trillion in assets."

And then it offered up some striking numbers:

96% see digital assets as an investment diversification opportunity,
91% see digital assets helping to produce "all-weather' income strategies to "cope with the risk of inflation and the debasement risk of fiat currencies,
82% are positive about the digital asset class in general and Bitcoin and Ethereum in particular over the next 12 months,
Just 3% of respondents are negative about the outlook for the sector while 15% are neutral.

While the summary did note there were challenges to implementation and, not surprisingly, highlighted regulation as one of the main ones, this is a strikingly upbeat response from an industry that doesn't like to put its views on crypto out there very publicly.

My takeaways from this:

Institutions have a deeper understanding of crypto and a greater degree of conviction than ever before. That respondents had firmly held positions on the sector is a sign many are now aware and educated. That is a good thing.

This was a global study. It included institutions of significant diversity in terms of their structure, ownership and geographic location. That brings a much broader perspective on this industry than hearing from banks and U.S. fund managers that are more tightly woven into the language and mindset of Wall Street.

The diametric view of crypto in other financial centers stems in part because of a more constructive approach by governments there. Hong Kong, Dubai, Singapore, London, Bermuda, Switzerland, and Paris are all financial hubs with ties to institutions and capital managers of different stripes. Each has taken deliberate steps to create a legislative framework for digital assets that, while setting up compliance requirements of varying strictness, is designed to enable innovation in the space. In the U.S., we are stuck with turf wars between the Securities and Exchange Commission and the Commodities Futures Trading Commission and between Democrats and Republicans.

Amid Crypto Winter, there is a pendulum swing back toward integrating blockchain technology into the existing financial system, with a special focus on tokenizing "real-world assets." This is helping sustain and spur institutional interest, since many of them are sitting on assets ripe for tokenization. (It was notable, however, that the survey respondents also expressed interest in bitcoin as a hedge against fiat currency risks.)

The angst in the U.S. will pass. There is no way the U.S. can afford to stay isolated if the rest of the world is diving in.

So, cheer up. There's a way out of this.

Read the full story

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Off the Charts: Uncorrelated Once More

It has been a good week for stocks, albeit with some short-lived gloom after Federal Reserve Chairman Jerome Powell offered some unexpectedly hawkish comments on the outlook for monetary policy. It wasn't such a good week for bitcoin. In fact, these divergent paths have been in place since the second quarter began as the below chart comparing the S&P 500 to BTCUSD shows.

Notwithstanding Powell's attempts to rein in a bullish market, equity investors have clearly been buoyed by expectations for the Fed to ease off on interest rate hikes. The mood was improved this week by a lower-than-forecast consumer price index report and by the Fed complying with predictions that it wouldn't hike its target fed funds rates at its meeting on Wednesday. By contrast, Bitcoiners have real problems to deal with as two of the biggest exchanges (Binance and Coinbase) come under attack by the regulators in the U.S. Hence the divergent fortunes.

There was a time when bitcoin traders bemoaned the fact that the cryptocurrency had become too closely correlated with stocks. As interest rates rose through 2022 in response to the Federal Reserve's efforts to contain rising consumer prices, investors took profits in a variety of risk-dependent assets including equities and cryptocurrencies. It made it hard to make the case for Bitcoin as an inflation hedge.

But while investors won't be happy that the price of BTC is down more than 17% since its 2023 peak on April 14, over the long-term this should be to the advantage of its long-term legitimacy. As we discussed in the column today, institutional investors are in part drawn to bitcoin for its potential to act as an uncorrelated bulwark against sharp moves in their portfolio from time to time. It diversifies their exposure. With this divergence, Bitcoin's 30-day correlation to the S&P 500 has gone from a record high 0.8 readout midway through last year to around 0.3 now, bringing it closer to the uncorrelated norms of the past.

Ironically, Bitcoin's regulatory issues legitimize it in an indirect way. It suggests that this is not some hollow speculative play, but a distinct value proposition that generates unique political tensions. If an asset is bringing discussion, debate and policy action that's affecting its price, it means it's recognized for its unique properties.

So, see this, too, as another reason to cheer up.

The Conversation: Reddit's Dilemma

This isn't a crypto story per se, but it's one many in this industry can relate to: the challenges companies face when, often for narrow financial reasons, they try to rein in decentralized communities that drive value in their networks.

This is the story of the "strike" by Reddit's army of unpaid moderators, who aren't happy with how the company is squeezing third-party applications for money. It takes a crypto commentator like Jonathan Wu, head of growth at Aztec, aka @jonwu.eth, to identify the essence of the dilemma. Read his thread on the topic.

Relevant Reads: Prometheum Catch-22

On Tuesday, a hearing at the House Financial Services Committee included an appearance by Aaron Kaplan, the co-CEO and founder of Prometheum, described as a trading platform and broker that was recently registered with the Securities and Exchange Commission.

Kaplan was strongly supportive of SEC Chairman Gary Gensler's contention that it is possible for crypto platforms to function under existing SEC laws. But, when the crypto community dug into these claims, it was clear it doesn't offer trading in any crypto tokens since those tokens are not registered as securities. It seems Prometheum might actually be proof of the opposite claim – put forward by the SEC's critics, including Coinbase, which the agency recently sued – that, under current rules, SEC registration is impossible for a fully functioning crypto exchange. CoinDesk covered the twists and turns in the story.

Following the hearing, Kaplan appeared on CoinDesk TV's First Mover show, where, among other statements, he dismissed what's known as the Hinman Doctrine on a token's capacity to shed itself of security status if its network evolves into a sufficiently decentralized state.

After Kaplan failed to show evidence of functioning, registered crypto trading on Prometheum's site, crypto lobbyists filed a Freedom of Information Act demand with SEC to uncover the agency's dealings with the firm while others in the crypto community uncovered its management's close ties to former regulators. The suspicion, as laid out in this report by a group of CoinDesk reporters, is that Prometheum's registration and appearance in Congress was purely political.

Columnist David Z. Morris summarized the contradiction in Prometheum's status as a registered crypto platform that cannot trade any crypto as a classic "Catch-22" dilemma.

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