The Stifling of the U.S. Crypto Innovation Ecosystem has Begun – While the EU Takes the Lead Globally

Binaries fractures – individuals and institutions presented with a choice between different polarities instead of being able to align along a median – is a theme from the OODA Almanac 2023. 

Decentralized versus centralized systems is the high-level, umbrella “binary fracture” you can put over all the geopolitical and technological arenas we explore here at OODA Loop.

But it drills down quickly into a few real-world polarities, like:

• Autocracy versus Democracy:  The conflict in Ukraine – a tangible result of the autocracy versus democracy fracture- has induced further food insecurity by way of the weaponization of the wheat crop from Ukraine, long considered the “Breadbasket of Europe.”
• The Occupy Wall Street-born, Marx-informed, Alexandria Ocasio-Cortez-led, progressive “woke” framework versus the Tea Party-born, Ayn Rand-Leo Strauss-René Girard-William Luther Pierce-informed, Peter Thiel-led, libertarian “accelerationist” framework 

nother binary fracture has crystallized in the last few weeks, which is – at its core –  also rooted in the centralization versus decentralization binary fracture induced by the ongoing digital revolution, and that is:

The traditional global, centralized banking financial system

with the U.S. dollar as the dominant fiat currency

v.

An innovative, secure, global, digital self-sovereign, blockchain-based, decentralized financial system

with “fiat currency multipolarity.”

The recent headlines compiled below (with brief analyses) reveal vital exponentiality in this fracture, specifically: 

• Crypto market movements are now inversely proportional and a logical, equal, and opposite market response to the ongoing regional banking crisis:  What does this mean?  That the market does what the market does – and corrects. All the narratives (correct or not) around and further failures of regional banks in the U.S. is actually bolstering activity in the hedge bet that is crypto. Sooner than we anticipated, the crypto marketplace is now the biggest strategic bet against the dollar as the global fiat currency  – ever. This binary fracture is now palpable and quantifiable:  individuals and institutions are presented with a choice between different polarities  – a store of value in a traditional U.S. regional bank versus a further position in the crypto market – instead of being able to align along a median. These two fractures are now headed in two aggressively opposite directions.   
• De-Dollarization – New Fronts in the Global War Being Waged Against the U.S. Dollar: the nation-state strategic interests in fiat currency multipolarity over time are completely aligned with the crypto marketplace as a fiat currency choice in that multipolar financial system; and 
• Overregulation and National Security Risk:  If crypto is now a one-to-one bet against the American financial system, coupled with de-dollarization, the crypto market is strategically aligned with American adversaries like China and Russia – which OODA CEO Matt Devost foreshadowed in his Is Bitcoin a National Security Risk?: 

“The secondary challenge here for the U.S. government is ensuring that any inevitable movement to a new reserve currency model is tied directly to the U.S. innovation ecosystem.  The catch-22 here being that any efforts to thwart innovation in this space could create durable national security risks in the future if the U.S. loses innovation advantage by driving key projects to external domiciles or ceding control of critical infrastructure to foreign governments.

The government has frequently exhibited inefficient tendencies in regulating disruptive technologies  – and the exponential growth expected in the Web3 domain will further exacerbate things.  However, it is critical to consider that an approach that disrupts innovation could create an even greater long-term national security risk than those articulated by Executive Orders or expressed through other regulatory entities. Given the established pace of innovation, the increasing value being created, and the anticipated disruption to a wide variety of business domains expected, an environment in which regulatory arbitrage becomes the de-facto determinant of jurisdiction could result in the U.S. being disadvantaged in the long term.  We must work to manage risk appropriately while not stifling innovation.”

Again, sooner than we anticipated, the following headlines from the last two weeks confirm that the U.S. has officially dropped the ball and has begun to stifle innovation in crypto – and companies and countries are looking abroad for international addresses to host their crypto operations.  This week was the tipping point on all of these issues – and it has an “exponential speed” feeling to it – as the above-aforementioned forces act as exponential multipliers, feeding on each other and exponentially accelerating the transformation of the global financial system. 

In a nutshell:  Centralized Systems versus Decentralized Systems is the classic OODA Loop binary fracture.  But if you follow the money, the binary fracture that trumps and touches all other binary fractures existent in the world in terms of global risks, opportunities, and uncertainties may well be:  

The Dollar

v. 

Everyone and Everything Else 

The Big Picture

U.S. Banking System Turmoil Has Spurred Bitcoin Outperformance: Coinbase (coindesk.com)

by Will Canny at Coindesk 

The cryptocurrency has topped other digital assets in the last month, a report from the exchange noted.

• Cryptocurrency markets have displayed resilience in the face of recent upheaval in the U.S. banking system, with bitcoin (BTC) in particular outperforming, crypto exchange Coinbase (COIN) said in a research report Friday.
• Coinbase noted that bitcoin has outperformed other assets since the middle of February, with the cryptocurrency’s dominance as a percentage of total crypto market cap increasing to 47.7% from 43.9% during March. The outperformance accelerated early in the month, which coincided with the onset of the U.S. banking system turmoil, Coinbase said.
• “Part of the reason is that the stress in the banking system reinforced bitcoin’s store-of-value properties,” the report stated, and because BTC mainly exists outside of the traditional financial system “it offers a hedge against current conditions.”
• It has also benefited from investor concerns about the regulatory status of other cryptocurrencies, analysts David Duong and Brian Cubellis wrote.
• Bitcoin’s correlation to the S&P 500 stock index dropped to 25% at the end of March from a peak of 70% in May last year, the analysts wrote. They didn’t give the timespan for the correlation calculation.
• The cryptocurrency’s relative outperformance versus other digital coins and tokens also reflects investor concerns about the regulatory status of other digital assets, and thinner liquidity specific to some BTC versus stablecoin trading pairs, the report added. (4)

Bitcoin Decouples From Stocks As Fed Decision Looms (thedefiant.io)

As reported by Owen Fernau at The Defiant: 

Daily Transactions Hit All-time High Driven By Ordinals

After remaining elevated for most of 2022, Bitcoin’s correlation to equities has plummeted to 12%, a level not seen since mid-2021.

BTC vs World Stocks

Bitcoin's correlation to equities is now only 12%. pic.twitter.com/ihcM98NPGx

— James Butterfill (@jbutterfill) April 28, 2023

James Butterfill, head of research at the investment firm Coinshares, first pointed out the decoupling on Twitter.

In an interview with The Defiant, he said he wasn’t surprised by the development. “Equities never do well, with the prospects of recession, but something like Bitcoin will do quite well because it’s like a monetary policy hedge,” he said, adding that the two are fundamentally different kinds of assets.  In Butterfill’s view, the idea that Bitcoin is a leveraged bet on tech stocks is a flawed one. “It was very frustrating last year, when I just saw these tweets coming out saying Bitcoin is just another risk asset,” he said. “I thought that was such a naive and short-term view.”

BTC Price + SPY Price, Source: The Defiant Terminal

Bitcoin was largely grouped as “just another tech stock” in 2022 as rising interest rates seemed to bring down equities and crypto together. Now, with elevated rates starting to cause significant problems in the banking sector, BTC may be entering an environment where it can thrive while equities don’t.

Butterfill emphasized that with the banking sector showing signs of stress, it’s clear that the US Federal Reserve may have made a mistake. The central bank is in a tough position – it can either lower rates, potentially pushing persistent inflation even higher, or it can raise rates, continuing to wreak havoc on the banking system.

Bitcoin has tended to trend higher when banks fail, which has happened three times this year, going by the Federal Deposit Insurance Corporation’s (FDIC) count. The three failures represent three of the top four failures in US history based on the assets held by the institution at the time of failure.

Jordi Alexander, an investor at Selini Capital who spoke to The Defiant about the “all one trade” phenomenon nearly a year ago, added that liquidity for BTC is currently low. This makes it easy for large buyers and sellers to push the price of the digital asset around. “A billion-dollar flow in either direction can be enough to overpower the equity correlation,” he said.

Both Butterfill and Alexander think that if the United States enters a period of stagflation, characterized by low growth coupled with high inflation, BTC will have a chance to shine.

Digital Gold

And it’s not just Bitcoin. The digital asset’s correlation with gold rose to a two-year high in April, according to data provider Kaiko. As gold approaches its all-time high above $2,000/oz, Butterfill thinks the precious metal is also entering an environment where its relatively stable supply will attract capital.

BTC correlation with Gold. Source: Kaiko

Dollar Drop

Butterfill also noted that BTC tends to trade inversely with the dollar, and that if the Fed cuts interest rates tomorrow, the dollar index (DXY) will continue to slide. “Rates will probably stay elevated for some time, but they will start backing off,” he said.

DXY has dropped nearly 10% in the last six months, according to TradingView.

Ordinals Fuel Bitcoin Activity

Outside of macroeconomics, Bitcoin usage is also picking up in a big way thanks to the advent of Ordinals, a way of storing data on the world’s most valuable blockchain.

Transactions hit an all-time high on May 2 at roughly 682,000, according to BitInfoCharts. (1)

Bitcoin Daily Transactions

Bitcoin (BTC) Rises Toward $30,000 as Bank Woes Ripple Across Markets – Bloomberg

Investors also strengthened bets on Fed interest-rate cuts later this year after Chair Jerome Powell hinted that the central bank’s latest hike could be the last. Tighter credit conditions and risks such as the struggling commercial real estate sector are stoking expectations of economic turbulence.  “We expect to see significantly more volatility in the months ahead, especially if there are any further aftershocks in US regional banking or concerns around the state of commercial property loans,” said Tommy Honan, head of market analysis at crypto exchange Swyftx.

Bitcoin has partially rebounded in 2023 from last year’s crypto rout, which sparked blowups including that of the FTX exchange and triggered a US regulatory crackdown. But the revival has sputtered near the $30,000 level. It reached a record of almost $69,000 in November.   (2)

The Ongoing U.S. Crypto Regulatory Debacle and Flourishing International Crypto Markets

Gemini’s Plan for Derivatives Exchange Adds to Crypto’s Flight From the US – Bloomberg

Also as reported by Suvashree Ghosh: 

Crypto businesses in the US are pursuing targeted international expansion amid a deepening regulatory crackdown at home.

• The latest moves came from billionaire twins Tyler and Cameron Winklevoss’ Gemini Trust Co. The exchange last week unveiled plans to target growth in Asia and to establish a non-US crypto derivatives platform.
• The Securities and Exchange Commission has rattled the US digital-asset sector with a flurry of enforcement actions this year, while American politicians are struggling to develop crypto legislation.
• In contrast, the European Union is progressing an effort to create rules for the industry and places like Hong Kong and Dubai are seeking to foster crypto hubs. 

While US regulators have been busy infighting and refusing to provide the most basic of clarity for the crypto industry, the European Union just approved the MiCA regulation, which provides a comprehensive regulatory framework for crypto in Europe. It's sad to see the US being…

— Tyler Winklevoss (@tyler) April 20, 2023

• “Given the progress of regulators in the Asia Pacific and the Middle East toward clarifying their regimes, it seems likely that virtual-asset service providers will continue to gravitate toward jurisdictions that provide greater clarity and specific guidance,” said Vince Turcotte, director of digital assets at market surveillance firm Eventus in Hong Kong.
• Gemini last week named its Global Chief Technical Officer Pravjit Tiwana as Asia-Pacific chief executive.
• The company will set up an engineering hub in India and expand a team in Singapore.
• Gemini’s planned derivatives exchange will be available across 30 territories, but not the US, according to a blog post. It will initially offer Bitcoin and Ether perpetual contracts denominated in Gemini dollars or GUSD, a stablecoin.

SEC Flurry

• Gemini, Coinbase, Genesis Global Capital, Kraken and Bittrex Inc. are among the companies that have been the target of tightening SEC oversight.
• Bittrex is shutting down its US operations, citing the regulatory environment.
• Meanwhile, the Commodity Futures Trading Commission is suing Binance Holdings Ltd., the world’s largest crypto exchange, and its Chief Executive Officer Changpeng Zhao for breaking US derivatives rules. Binance has said it was disappointed by the suit and would continue to work with the regulator.
• FTX’s giant bankruptcy and a litany of other wipeouts following last year’s crypto rout have stoked skepticism about digital assets in the US. The SEC’s Chair Gary Gensler argues most digital tokens are unregistered securities and that sector “has built up around non-compliance.” (3)

Richard Li-Backed Venture Firm Flags Hong Kong Crypto Potential Amid US Curbs – Bloomberg

The US “is shooting themselves in the foot”

The European Union Takes the Regulatory Lead 

EU’s Crypto Industry Applauds the New Markets in Crypto Assets ‘MiCA’ Regulation – But Looks to What’s Next (coindesk.com)

Further interesting signals include the Blockchain Association leaving New York as a Federal regulatory fight looms and the  U.S. House Republicans making the case on Stablecoin regulation bill after Democrats called for do-over  – all well the White House pushes for punitive tax on crypto mining.  

The Coinbase Case Study 

The Gemini announcement “came not long after Coinbase Global Inc., the biggest US crypto exchange, said it had obtained a virtual-asset license in Bermuda. Some reports say Coinbase will set up a derivatives platform there.  Coinbase’s Chief Executive Officer Brian Armstrong recently said the exchange might consider moving its headquarters outside the US amid a clampdown on the industry in the world’s largest economy following the collapse of rival FTX.  Coinbase said in an April 19 blog post that, aside from Bermuda, it’s accelerating plans for the United Arab Emirates amid discussions with Abu Dhabi officials over a potential license for a regulated exchange.”  (3)

Various announcements from Coinbase and a recent earnings call are also illustrative of impact of the U.S. regulatory environment in the crypto market, including:  

• Coinbase International Exchange Starts as US Regulator Tensions Grow (COIN)
• Crypto Exchange Coinbase (COIN) Warns US SEC It Will Exhaust Options if Sued
• Coinbase Takes Jab at SEC With Lawsuit Ahead of Prolonged Legal Battle
• Crypto Exchange Coinbase Posts Loss, but Beats Expectations – WSJ

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