SEC’s exemption of bitcoin from the label of security also helped |
February 17, 2023
Exploring transformation of value in the digital age
By Michael J. Casey, Chief Content Officer
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This week’s big jump in the price of bitcoin, which briefly got above $25,000, has come as a welcome surprise to bitcoiners. This week’s column looks at the confluence of two forces that’s contributing to that gain and, as I see it, setting up a positive scenario for the wider world of crypto as well.
In this week’s “Money Reimagined” podcast, I talk to Alex McDougall, the CEO of Toronto-based Stablecorp, and Gordon Liao, chief economist at Circle, about how they’ve collaborated to integrate Stablecorp’s Canadian dollar-backed token QCAD with Circle’s dollar-backed stablecoin USDC, and about their efforts to use the technology to overhaul the world of foreign exchange trading. Have a listen after reading the newsletter.
Bitcoin Ordinals Can Lift the Entire Crypto Ecosystem
(Rachel Sun/CoinDesk)
Let me posit two reasons why, over the past month, bitcoin has surged to its highest level since mid-August and outperformed every other major asset in both crypto and traditional markets.
Together, they highlight the unique advantage that Bitcoin draws from its status as the oldest, most established and most decentralized protocol and from a surprising new opportunity to harness that.
The arrival of the Ordinals Protocol, which enables users to inscribe references to digital art into small transactions on the Bitcoin blockchain, essentially creating Bitcoin-based non-fungible tokens. This has demonstrated a new, high-value use case for the longest-running cryptocurrency chain. Already, one report from research firm FSInsight argues that an Ordinals-driven resurgence in development and the expansion in the total value transacted and secured over the Bitcoin blockchain should drive up its price.
A string of U.S. regulatory actions has highlighted the risks that many, if not all, major non-Bitcoin blockchains will fall afoul of the Securities and Exchange Commission Chairman Gary Gensler’s hardline position that most tokens are securities. It appears bitcoin is the one reliable exception to that. That’s making it attractive in relative terms to Ethereum’s ether, Solana’s SOL and all others.
Many “maxis” might celebrate this moment as proof that their beloved Bitcoin is proving itself as the one and only – except perhaps those who see the addition of “JPEGs”to its blockchain as an abuse of Satoshi’s original intent to form a new system of money. But I’ve never thought it constructive to view the crypto landscape through the maxis’ zero-sum-game lens.
I see this NFTs–on-Bitcoin moment as opening the door to a future in which the most established blockchain functions as a kind of uber-anchor for everything, the ultimate “layer 0” record of truth. Meanwhile, Ethereum and other smart contract platforms could take on higher-level functionality, with each specializing in different types of transactions and data-processing that the rather clunky, limited-function Bitcoin blockchain is not built to perform. It will need greater cross-chain operability, but there are plenty of people working on that.
The Bitcoin blockchain now has a purpose beyond peer-to-peer payments, whose mainstream appeal has always been undermined by regulation of the on- and off-ramps to the banking system and by bitcoin’s own price volatility. Now that it incorporates NFTs – the most important crypto innovation since Bitcoin itself – the Bitcoin blockchain is engaging with creators of digital content, the backbone of the internet economy. That will unleash a torrent of new creative innovation in the space.
I see these kinds of developments leading to a more integrated crypto ecosystem in which different protocols perform different functions, with all of it anchored into a 15-year-old deeply established proof-of-work blockchain that no U.S. regulator can shut down.
It was inevitable: a rapid rise in the price of bitcoin that was fueled by factors endemic to Bitcoin itself was sure to not only increase the token’s market capitalization but to gain ground on other protocols.
Sure enough, as this chart from my colleague Sage D. Young shows, “bitcoin dominance,” a measure of how much of the total crypto market cap is captured by bitcoin, rose to around 45% this week, in line with levels hit earlier this month that were the highest since June.
I imagine that, if the trend I laid out in the column above plays out, this divergence between bitcoin and the rest of crypto could continue for some time. But if my thesis about the advantages to Ethereum and others of having a base-layer record of truth is correct, there would presumably come a time when the value of those protocols’ tokens starts catching up again.
But who knows? As always, this is just idle speculation. It is not intended as investment advice.
The Conversation: A Way Out of the Regulatory Gloom
With news of SEC enforcement actions coming thick and fast these past two weeks, the crypto community can be excused for feeling like it is under attack.
In an effort to make sense of it all, Blockchain Association’s chief policy officer, Jake Chervinksy, posted this useful tweet thread. Chervinsky explains why – in the absence of a clear legislative framework for the industry and political pressure to get tough in the wake of the FTX debacle – regulators are stepping up high-profile enforcement actions and how, in due time, a more reasonable, comprehensive approach to regulation will eventually take shape.
Relevant Reads: A Busy SEC
If you thought last week was a busy week for regulators, with the SEC’s Kraken action and our report that stablecoin-issuer Paxos was under investigation by the New York Department of Financial Services, then take a look at this week. There were major crypto moves, all from the SEC: Chair Gary Gensler is getting serious.
On Monday, the SEC confirmed that Paxos was indeed in for some bad news, announcing an order that it stop minting its Binance-branded stablecoin, BUSD. Jamie Crawley had the report.
As a result of that action, withdrawals surged on Binance, the world’s biggest crypto exchange, and continued through the week. Krisztian Sandor reported.
BUSD’s price dropped below its target one-dollar value to trade at a two-year low of $0.9950 until comments from Binance CEO Changpeng Zhao helped boost confidence to bring the token closer to parity. Shaurya Malwa reported.
Then, on Wednesday, Jesse Hamilton reported that the SEC had a new proposal that would bar financial advisers from custodying assets with crypto firms, limiting their options to mostly traditional finance roster of formally registered custodians.
To cap off a bombshell week, the SEC charged Terraform Labs, the company behind the doomed TerraUSD stablecoin, whose collapse in the spring last year started the rot that led to the collapse of various key players in the industry. The SEC also charged founder Do Kwon with misleading investors. Nelson Wang and Nikhilesh De reported.
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