Reflections
Bitcoin was introduced to the world as a solution to the obfuscation and fraud rampant in the financial industry that resulted in the “Great Recession” of 2007-2008. Soon after, a plethora of blockchain platforms emerged that seek to further undermine the legacy institutions that have held our money captive for generations. Through their infancy, cryptocurrencies were ignored, even laughed at, by the major banks. History rhymes, and we have seen entrenched powers ridicule their resistance many times. Mahatma Ghandi insightfully describes the process of revolution: “First they ignore you, then they laugh at you, then they fight you, then you win.”
Not only are most major banking institutions, governments, and many Fortune 500 companies investing in blockchain or developing their own proprietary blockchain technologies, but the government regulators are also showing their fangs and attempting to stake their claim in the new world of decentralized finance. Of course they may find it difficult to centralize and homogenize these intentionally decentralized technologies.
The promise and salvation of blockchain technologies is built on the distributed ledger, an immutable, massively shared, and transparent accounting of all transactions. This technology, both hardware and software, allow for disintermediation, removing the requirement of additional parties to stand between spending and receiving money. Hence the existential crisis for the legacy mega banks.
Duplicity
They appear to be responding with a forked tongue strategy. With one tine, they fund the lobby groups that are advocating for government regulations to create strict controls over digital assets. These include: promoting institutional custodial solutions, requiring extreme measures for ‘Know Your Customer’ procedures, and improperly seeking SEC registration of most digital assets. With the second tine they infiltrate their opponent, attempting to co-opt the innovation and hoard as much of the potential wealth as they can, before it is distributed to their mortal enemy, the people.
How does a bank or a government fight a decentralized network? They aim their onerous regulations at the choke points, including fiat on/off ramps and retail financial service providers. Currently we are still beholden to the US dollar and therefore the Federal Reserve Banking Cartel in order to invest in any asset class, including cryptocurrencies. Certain companies, like LUXOLO Financial, provide a service of accepting US Dollars in exchange for bitcoin and other digital assets. These exchanges are an obvious target for regulators; we learned about this in June in the US spending bill, allocating funds to more tightly regulate cryptocurrency exchanges, which is rather unnecessary in our view, given we adhere to the exact same Anti Money Laundering laws that US banks have been successfully using for decades
Fangs
More recently, Coinbase, Inc. a cryptocurrency custodial exchange was threatened by the SEC for a lending program they were developing. After a flurry of tweets by Coinbase’s CEO, Brian Armstrong, initially posturing as a righteous hero for the freedom to offer interest bearing investments, completely caved. Coinbase dropped all development of their previously announced lending platform. Around the same time, Celsius Inc. received litigation in several jurisdictions to cease and desist their interest bearing accounts. Their customers could earn yield by staking, also known as saving, their digital assets in the Celsius platform. Celsius uses this liquidity pool to offer loans, at a higher interest rate, profiting from the spread. Earlier this year, BlockFI came under the same regulatory scrutiny. Hmm, why can’t these digital asset firms offer interest bearing savings accounts? Maybe because the banks want to maintain their monopoly on this service.
Regulators are making the claim that interest bearing accounts, or yield, are in fact unlicensed securities. This notion of cryptocurrencies resembling securities first came to focus with a widely publicised and long fought investigation into Ripple Labs (XRP) by the SEC. While there is no clear manner in which XRP, or staking yield, shares any likeness with traditional securities, this is the chosen stage for the battle ground. Most likely, we will see the development of a new Howey test, designed to entangle the evolving cryptocurrency ecosystem.
The entire charade looks like stalling tactics. The banks need more time to develop their own protocols. XRP may even be the chosen platform. The players at Coinbase, the OCC, the SEC, etc; they are all connected, enjoying their privilege in the Hamptons while the drama plays out on the news feed. Stay tuned!