Debt Ceiling Is Lifted. Now What?
• The debt limit suspension doesn't exert much influence on capital markets.
• A combination of reduced liquidity and regulators' antagonistic attitude towards crypto, the U.S. is likely to fall behind technologically and politically.
• Hong Kong and the EuroZone are leading the race to become the global crypto hub, regulation-wise.
Monetary Policies: Quantitative Easing And Quantitative Tightening
Before we even begin, it's necessary to understand the terms Quantitative Easing (QE) and Quantitative Tightening (QT) as the discussion below is built upon the basis of these monetary policies. Central banks are responsible for keeping inflation at a healthy level of 2%, and every time inflation takes a detour, they will adopt either QE or QT to control the money supply in the economy, thereby stimulating spending activities.
Crypto, as a freshly recognised part of the global financial markets, reacts to interest rate decisions. Investors' appetite will change in tandem with adjustments to the money supply; if they see access to cash reserves being limited, they could reduce the amount of risky investments in their portfolio to minimise potential losses and vice versa. The first scenario, which is referred to as QT, happens when a central bank raises their interest rate, removing liquidity from markets.
The opposite of QT is QE, with the most widely known QE attempt being that of the Federal Reserve (FED) after the Great Recession. To give spending a.k.a. consumption a boost, the FED had been keeping the federal funds rate below 2% from May 2008 to September 2018. In the EuroZone, a 0% interest rate was started by the former European Central Bank (ECB) Chief Mario Draghi in 2016 in response to the bloc's deflation.
FED's Balance Sheet And Liquidity
According to Google Trends, the number of ‘debt ceiling' and ‘debt limit' searches in the second half of May 2023 averages out at 58 per day, not that many compared to the degree of media exposure they received.
The notion that the U.S. could default on its debts may sound dangerously appealing, but the consequences would be so dreadful and contagious that the likelihood of such an event is considered very modest. Now that the House Speaker and the President have shaken hands, all the FUD - fear, uncertainty and doubt - is finally swept away; yields on the short-term T-bills have been seeing considerable decline (see the chart below), meaning investors' confidence in bonds are being restored.
Stocks markets take delight in the ‘officialisation' of the deal: the SP 500 Index is up by 2.48% (as market closed on June 06, 2023) from 4,179.83 on May 31 and the NASDAQ Composite Index rose to 13,276.42 (+2.64%), whereas Bitcoin lost 0.6% of its value over the same period.
Increasing the national debt limit is just the beginning
Although we are lucky that there was no Armageddon to be witnessed, long-term consequences on the capital markets must be discussed. Since 1960, the U.S. debt limit has been ‘permanently raised, temporarily extended or revamped' 78 times, which implies an alarming upward trend of the U.S. government’s borrowing power. By the end of May 2023, the total asset value of the FED stands at US$8,385,854 million - almost twice the pre-Covid (March 2020) value.
With the suspension of the national debt limit, the FED will most likely continue to shrink their balance sheet. QT must go on; one-third of market participants forecast that the FED will raise the interest rate by another quarter point in June 2023, which further reduces markets' liquidity. Apart from all the media play and expert talks, the FED’s dual mandate of ‘price stability and maximum employment’ is what we need to focus on.
Here is a summary of the U.S. consumption and labour market since the beginning of this new QT phase in April 2022. Inflation has been consistently down since June 2022; however, the so-called ‘more accurate' inflation rate, the Core CPI (CPI minus energy and food) doesn't show significant changes. Throwing in a still-optimistic-employment situation and the outlook of another, if not several, rate hike is reasonably justified.
Crypto is considered a security in the U.S.
While credit crunch may not be as disastrous for crypto markets, the hostile attitude of the U.S. authorities towards crypto poses a great risk for the industry. First of all, the most traded fiat currency against crypto is the US-Dollar, and the market cap of USD-pegged stablecoins is simply unbeatable. Difficulties in on-/off ramp will, for sure, affect the great crypto adoption; that's not to mention a nasty blow on the crypto startup ecosystem, which is heavily concentrated in the U.S., if Coinbase gives in to the ongoing regulatory battle.
On June 05, 2023, the Securities and Exchange Commission (SEC) filed a lawsuit against Binance, Binance.US and Binance's CEO Changpeng Zhao. Of course the news means red for crypto, but the size of Binance.US is much smaller than Binance, and crypto can and will survive even without Binance, as we did after the Mt. Gox hack. More important, though, is that the SEC identifies at least 10 tokens as securities: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS and COTI, and how they charge Coinbase for ‘unregistered offer and sale of securities' via their staking programs and for ‘unregistered broker activities' of Coinbase Wallet - a non-custodial wallet by definition. Should Coinbase choose to settle the case without a fight, it will serve as an detrimental precedent for any future crypto-related cases.
Still A Lot Of Wiggle Room For Crypto
The U.S. may take a harsh approach to crypto-related matters, yet more countries and regions have decided to give crypto a seat at the table. No more Wild West equals better user protection and official support for the whole digital space to experiment and grow sustainably.
The virtual spine of the crypto narration lies in blockchain technologies, whose developments are beneficial for multiple sectors ranging from travel, entertainment, learning, sports, social media, healthcare, to finance and privacy. Therefore, many countries have positioned themselves as the new global crypto hub, for example the United Kingdom, Hong Kong, or Singapore. Most eager to realise their burning ambition of becoming the new home for crypto companies is Hong Kong, who has recently opened the licensing application for virtual asset service providers (VASPs) before granting retail users crypto trading access. They have also selected Ripple to launch a pilot for e-HKD. Back in the last days of 2022, the first crypto ETF in Asia made its debut on the Hong Kong Stock Exchange, and in April 2023, the Hong Kong Financial Secretary Office announced a subsidy of HK$500 million to Cyberport to support the growth of the Web3 ecosystem here.
On the other hand, Singapore’s plan is to target crypto businesses and institutions rather than retail. DBS, the largest bank in Southeast Asia by assets, already introduced their own platform for institutional crypto trading DDEx in December 2020. The six crypto assets traded here include BTC, ETH, XRP, BCH, DOT and ADA. One year later, the bank entered the metaverse with a partnership with The Sandbox.
Now the world's second-largest crypto mining country, Russia wants to leverage this advantage and use crypto for export and import deals. If the bill becomes law, it would affect the demand for PoW cryptocurrencies, especially Bitcoin, and send their prices higher.
The EuroZone the U.K.
On April 20, 2023, the European Parliament passed the landmark Markets in Crypto-Assets (MiCA) bill, which should take effect in Q3 2024. The main focus of MiCA revolves around the oversight of crypto asset service providers (CASPs), which include any company that offers crypto and crypto services even if they are not the issuer of a token. Tighter rules regarding stablecoins are meant to prevent such industry failures as the collapse of Terra (LUNA), but many critics say that these rules will most likely suppress the growth of non-government currencies. NFTs and crypto lending are not explicitly covered by MiCA.
The second best reference currency for physically backed stablecoins is the Euro. Within the first five months of 2023, the circulating supply of USDT (TetherUSD) has increased by 25.6%, EURT (TetherEuro) by 0.2%, and EUROC (CircleEuro) by 93.6%. Meanwhile, USDC (CircleUSD) supply went down by 34.9%. The combined market cap of USDT and USDC rose by 1.2%, a figure much smaller than EURT plus EUROC's market cap growth of 10.8%. Volume of euro-denominated stablecoins also demonstrates an uptrend.
In February 2023, the HM Treasury published their proposal for crypto regulation and seeked consultation. This is part of the crypto-friendly Prime Minister Rishi Sunak plan to put the U.K. on the crypto map following the Edinburgh Reform that lays emphasis on fintech and innovation.
Let's consider the macro environment in these regions for a moment. Below is a chart illustrating inflation rate in the EuroZone and in the U.K. since the ECB kickstarted their QT in April 2022. Inflation in the EU (HICP) has already cooled down since October 2022, albeit there's a long way down to 2%. The Bank of England (BoE) keeps raising the interest rate since February 2022, which resulted in an inflation curve (CPIH) similar to that of the EU but with less significant downward sloping. Better expect prolonged periods of rate hikes from the BoE; the ECB nevertheless will have to recalculate their QT process after two quarters of economic decline.
Either way, the effort of the EU and the U.K. authorities to establish a more coordinated regulatory framework can breathe new life into crypto activities in these areas.
CBDC and tokenised assets
Central Bank Digital Currency (CBDC) is the inevitable trend. 114 countries are exploring CBDC, with China having showcased the most successful pilots. On May 18, 2023, Ripple announced the launch of their new Ripple CBDC Platform, a ‘solution’ produced exclusively for instant settlements and payments using CBDCs, and of course there will be more infrastructure providers.
Progress with CBDC opens the door to a world of regulated tokenised assets - bonds, securities, mortgages. DeFi’s mission is to innovate (e.g. liquid staking derivatives) and to disrupt the traditional finance by means of permissionless and trustless transactions, but with time global investors will get easy access to a plethora of traditional assets thanks to CBDCs.
Crypto rises above the potential risks
Bitcoin came into existence as a ‘purely peer-to-peer electronic cash' and will remain neutral until the end of time. (That is, if Satoshi Nakamoto never shows up again.) Beyond the excessive speculation and ‘degen' leveraging practices, Bitcoin is indeed the world's unbiased and riskless store of value: no infinite printing, no risk of default, no malicious manipulation. That, combined with the power of smart contracts, must be utilised to the fullest to remove the systemic risk that comes with overreliance in any fiat currency and create a truly decentralised world.
In the meantime, we could take Jim Cramer's advice and do the opposite: invest in tech and AI (we know there is an Inverse Cramer ETF). But better not say no to a cat, or any cat at all.
Source: Jim Cramer's Twitter
Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.