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HEALTH, WEALTH, AND HAPPINESS |
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| “Like Warren [Buffett], I had a considerable passion to get rich, not because I wanted Ferraris – I wanted the independence. I desperately wanted it.” - Charlie Munger |
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| Video: How China's Digital Yuan Works (Wall Street Journal): We've been reporting on the digital yuan, also known as e-CNY, which faces its first big test at this year's Winter Olympics. Here's a quick video on how it works.
Investor takeaway: Don't let the pessimistic tone of this video fool you. China has an enormous head start over the rest of the world in developing a Central Bank Digital Currency: the U.S. is only just starting to evaluate a CBDC, "hypothetically."
The e-CNY, if it's widely adopted, will rocket China ahead on infrastructure, growth, and development. Consider adding a China-focused fund to your investment portfolio: we're not the only ones saying it. |
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The SSE Composite Index, which tracks shares of the Shanghai Stock Exchange, has certainly not grown much in the past 5 years: |
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| However, for Blockchain Believers, investing in the Chinese stock market could be an interesting way to diversify your portfolio.
Investor takeaway: China has largely outlawed cryptocurrency, while at the same time developing its own cryptocurrency. Investing in China could provide safety from the roller-coaster price swings of bitcoin, while still investing in blockchain's long-term potential. |
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| Hi Everyone,
The Securities and Exchange Commission (SEC) recently announced that U.S.-based crypto platform BlockFi would pay a whopping $100 million in penalties.
In today's column, we are going to break this down, and look at the good, the bad and the ugly of crypto regulation in the U.S.
I am very concerned about this news, and what it means for U.S. investors, as well as the competitiveness of the American crypto industry. However, I don't feel this will negatively impact the global crypto markets in any way.
BlockFi will pay a $50 million penalty to the SEC and $50 million in fines that will go to 32 states.
Before I get into this, and why I am concerned, I want to touch on the sometimes unpleasant subject of regulation.
Retail investors, a category that includes myself and I believe most of you, are not generally excited to hear about regulation. I believe that in the short-term, headlines about that particular subject can spook retail investors and cause price drops.
However, in the long-term, I strongly believe regulatory clarity is a good thing, and it will help the digital currency space attract institutional investors. Any movement of outsiders needs to get the blessing of mainstream regulators before it, well, goes mainstream.
There is no doubt in my mind that clearer regulation is where we are headed.
Now back to the good, the bad and the ugly.
Let's look at the good first. Personally, I believe in regulations that are clear and use a light touch. Bad actors will be caught and punished, while those with good products for the public will not be hindered with excessive rules and fees.
You need to know the rules of the game so you can follow them, and current regulations for crypto in the U.S. are too murky.
This is one reason why I am fan of the Congressional Blockchain Caucus, which I believe is working to solve this. Their message is clear and positive. According to their website:
"We are a bi-partisan group of Members of Congress and Staff who believe in the future of blockchain technology, and understand that Congress has a role to play in its development. As a Caucus, we have decided on a light touch regulatory approach." |
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| The bad
Now let's take a look at the bad.
Lawmakers making progress toward updating laws or making news ones is only half the battle. In the U.S., laws are passed by the legislative branch, a process that usually requires the president's approval.
They are then enforced by the executive branch. The executive branch includes bodies such as the SEC, which oversees securities like stocks and bonds, and the Commodity Futures Trading Commission, which oversees derivatives, as well as commodities such as gold, oil and soybeans.
Earlier, I mentioned that crypto regulations seemed murky. For example, in the U.S., it hasn't been clarified whether bitcoin is a commodity, a security or a currency.
What about other cryptocurrencies, such as ERC-20 tokens used for DeFi? And of course, there is the ongoing SEC lawsuit with Ripple over whether XRP is a security.
Regardless of any opinions on the above matters, my point is that currently, they are not clearly laid out.
Now let's get back to this $100 million headline, the players involved and who the villain is in my piece.
BlockFi, which started in 2018 as a company offering a custodial wallet, has expanded its services gradually.
Starting with offering crypto lending and savings interest products, the company grew into an exchange, launching one of the first bitcoin-backed credit cards. I have used their interest service to HODL my crypto since 2020, and I still do.
Since the beginning, BlockFi has stated its intention to work with regulators. It was no different this time, where the company accepted the fine, announcing the news to its clients in this letter.
The fine came about because the SEC has determined that BlockFi's crypto interest accounts are securities, like stocks or bonds, instead of being similar to bank accounts. For full disclosure, I have no law degree, and I have not read the Securities Act of 1933.
BlockFi offers a 4.75% average percentage yield on bitcoin and 8.75% on USD coin. |
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| The ugly
My take is twofold. First, this penalty is way too harsh. In comparison, let's review the following:
1. Tether was charged with misleading the public by falsely stating that their stablecoins were backed by dollars in a bank account. They were issued a $42.5 million fine by the CFTC. This seems relatively small for a company that made $326 million in profit in 2021 and have $69 billion in assets under management.
2. Poloniex was fined $10 million by the SEC in 2021 for running an unregistered crypto exchange, which was founded in 2014 - seven years earlier. That's a penalty of just over $1 million per year.
A $100 million fine for a company that has been working with regulators since it received a state-level license to operate in 2018? That's way, way too harsh.
My second point is that an interest account that gives an APY for stablecoins comparable to the level of inflation (7.5% in the U.S.) is not a security. To me, it seems more like a bank account that provides a fair interest rate.
I see this as a real threat to banks, since none of them will even try to compete with this.
The Chase Savings account offers 0.01% APY. The bank's profit was $48.3 billion in 2021. BlockFi's USDC interest is 87,500% more than Chase.
Based on BlockFi's announcement, they will file with the SEC for a new product for U.S. customers only. This is basically the same product, but it has a new name and the blessing of regulators, and oh yeah, one other detail: It is only available to high-net worth individuals. |
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| The villain - Double G
The antagonist of my story is none other than SEC Chair Gary Gensler. "Double G," as we like to call him, was nominated by the Biden administration in February 2021, and he was even celebrated by some industry participants as a crypto advocate.
As usual, I was skeptical, but also hopeful. After all, he did teach the blockchain classes at Massachusetts Institute of Technology, and he does actually understand and appreciate what bitcoin is. However, through his actions, he has shown himself to be the very opposite of an advocate.
Here is what he had to say in the official SEC announcement this week regarding BlockFi:
"This is the first case of its kind with respect to crypto lending platforms."
"Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940," the statement added.
"It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws."
Despite positive developments resulting from crypto advocates in Congress, I see Double G as a major thorn in the side of the U.S. crypto industry now and going forward.
Instead of protecting the public, today's action protects the big banks and the wealthiest, who already have access to the tools of high finance.
Foreigners will continue to be able to access products Americans cannot, and banks like The Goldman Sachs Group, Inc., Gensler's employer for 18 years, will be very much protected. |
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| Investors' take
So other than being pissed off at Gensler, what are some things investors can do? I am not a financial advisor, and nothing I say represents financial advice. That being said, here are some areas investors can consider in this market climate.
1. DCA into bitcoin and HODL
Whether you have access to an interest account or not, one tried and true method of taking advantage of an asset that gains value over the long-term is dollar-cost averaging, or DCA.
Bitcoin is the world's largest digital currency by market capitalization, and it has outperformed other major asset classes significantly.
More specifically, bitcoin was up 9 of the last 11 years. The lazy way, and arguably the best way to build wealth by using this cryptocurrency, is to simply buy some bitcoin every month and HODL.
It will go down, and it will go up, but the trend is your friend, and long-term, it looks like bitcoin will continue on its course.
2. DCA into DeFi-focused digital currencies and HODL
This carries a higher risk and reward potential than simply investing in bitcoin. This would mean getting involved with digital currencies crucial to the DeFi space. CoinMarketCap has an entire list of such cryptocurrencies here.
Aave, Avalanche, Avax, Compound, Nexo and Pancake are some popular ones.
Any investor who is into digital assets should understand the current market risks. Geopolitical events could result in market volatility.
3. Harness DeFi platforms
Want to dive into the deep end of the pool? Another strategy for those who want to access potentially greater returns is leveraging DeFi platforms, where one can still earn interest on their crypto.
There are platforms that allow staking, as well as yield farming. These are both more complicated and more high-risk investments, and one should not enter them without fully understanding the risks.
Some popular sites include Aave, Compound, Sushi Swap, Pancake Swap and Curve.
Personally, I am focusing on the first and second categories, but alas, I can tend to be on the more conservative side when it comes to financial strategy.
Make it a great day!
Sincerely, |
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| Alexandre Lores Opportunity Analyst |
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Statements like this help show that more (current and former) officials are recognizing crypto's importance. |
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Long-term investors are the lion kings. |
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| Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It is created by Evamarie Augustine, Charles Bovaird, Mati Greenspan, John Hargrave, and Alexandre Lores.
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