Hey, hope you’re well. Here’s this week’s focus on some trends and themes in the world of crypto/DeFi/blockchain.
News that El Salvador is down $12 million on its Bitcoin buys prompted us to place it in context of government attitudes to crypto this year. Now Walmart is getting serious about the metaverse, what other big names are dipping a toe, and why?
As usual, a statement of intent: Our plan is to keep things short and concise, and try to pull together strands that might shed light on deeper trends, or angles that might otherwise have got lost. We’re not here to evangelise or criticise, but hopefully to add perspective, context and a bit of insight about the week’s moves within DeFi, as well as on its fringes.
tl;dr
2022 will be crunch time for governments in deciding whether support, or thwart, DeFi;
the surprises may well be governments we haven’t thought of which see an opportunity to leverage crypto’s rapid innovation;
retail, and familiar brands, are treading into the unfamiliar, drawn mostly by the lure of shiny NFTs.
Feedback is welcome, and if there’s anything we can help more on, don’t hesitate to ping us at thecontext@yapglobal.com.
Thanks for reading.
[A rock and a hard place]
This year is likely to be crucial in setting the parameters of DeFi’s relationship with governments. Here are some brief thoughts on where things stand.
China’s ban on cryptocurrencies and mining is well-known. But that doesn’t mean Beijing isn’t venturing into this territory. It’s pushing its own digital currency (a central bank digital currency, or CBDC), has a national blockchain network, and is about to launch new infrastructure to support non-fungible tokens (NFTs) – which won’t be connected to any cryptocurrency or public blockchain.
No single entity in the U.S. has been given, or taken, full control over regulating crypto, so the SEC, the CTFC, FinCEN, OFAC and OCC are all taking a pop at it when it overlaps, or appears to overlap, their jurisdiction. The crypto industry’s lobbyists are making slow progress. The most interesting developments may be happening at the state level; a list of those states trying to woo crypto startups and encourage crypto usage can be found here : These 5 U.S. States Are the Best for Crypto Investors .
The EU is still pondering. While it has made clear that it wants to avoid “creating excessive regulatory burden” and “help the EU crypto-asset industry develop” it has made clear only authorised providers can deal in crypto and will supervise the resilience of financial institutions. Most important, it is trying to build a regulatory regime from the ground up, something the US Is not doing, and so it’s going to take longer.
The EU Securities and Markets Authority launched a consultation on January 4 seeking feedback about whether anything needed fixing in its regulatory technical standards on a pilot regime for any service built on distributed ledger technology (aka ‘a blockchain’ and anything that runs on one. The pilot is part of a bigger package related to digital finance, and is unlikely to start operating this year.
Silencing the Gunners: Some countries are trying to draw a line between allowing a market to thrive and its impact on the retail investor. In the absence of EU-wide regulations on Spain may be the first in Europe to crackdown on crypto promotions, granting powers to its securities market commission to oversee the promotion of crypto ads. The commission ordered that any provider, including influencers, must notify the watchdog if they are making paid promotions, and must issue a warning about the risks of investing. France has begun its own crackdown, and the UK Advertising Standards Agency has banned ads, including some from Arsenal Football Club, promoting ‘fan tokens’.
Behind all this, say some, is fear: regulators and central banks are afraid on the one hand that crypto will create a huge bubble for which they’ll be blamed. On the other hand there’s the fear that if DeFi does deliver on its promise to decentralise finance, there won’t be much left to regulate. This is where the more nuanced arguments are being directed: DeFi is not yet ‘de’, the arguments go, since a core of stakeholders (governance token holders etc) end up making and implementing decisions. “These entry points should allow public authorities to contain DeFi-related issues before this ecosystem attains systemic importance," according to a report issued by the Bank of Settlements in December.
Sources:
[Opportunities rock]
With the EU going for a ground-up approach, China smothering what it doesn’t like and strongly backing what it does, and the U.S. which is trying to fold the space into existing definitions and regulations, the field may be open for other players. Some are familiar figures, but by the end of 2022 the main protagonists might well be recent converts.
The most obvious, such as financial hotspots like Hong Kong, Singapore and Switzerland, are going through their own seasons of doubt. Singapore has to some extent gained from China’s crackdown, but is still nervous enough about it to see Binance skip town. A little like China, Singapore sees potential in blockchain technologies – decentralisation, smart contracts and encryption – but is queasy about a retail cryptocurrency market.
Emerging markets may, in the end, be the pioneers, not just in encouraging crypto but adopting it as part of government policy. El Salvador was one of the first countries to adopt Bitcoin as legal tender, and Brazil is considering allowing workers to receive their salaries in Bitcoin. Politicians in Argentina, Paraguay, Brazil, and Panama have supported El Salvador’s decision, according to BanklessDAO. Of course, the transition is far from smooth. El Salvador’s experiment has been dubbed a failure by some, but it’s probably too early to make that call. A more nuanced assessment can be found in The Defiant.
This push is coming from public demand and growing comfort with decentralised finance. Chainalysis ranked Vietnam first in its global Cryptocurrency Adoption Index, while Conformant ranked Indonesia the first among 50 global markets in its 2021 Cryptocurrency Interest Index. Chainalysis found that emerging markets in Asia were largely responsible for the 880% increase in worldwide cryptocurrency adoption last year. While gambling may well be driving much of this adoption, it also reflects “the lack of access to highly regulated capital markets to trade stocks, ETFs, and other securitised assets,” according to a piece in DealStreetAsia by Andi Haswidi. All this is prompting responses from governments, some of it positive, some of it not.
Sources:
Singapore’s Wary Crypto Embrace Leaves Binance CEO CZ in the Cold - Bloomberg
SE Asia is en route to becoming a global DeFi hub as greed fuels innovation
[Retail and crypto]
At the same time as government regulators are trying to work out how they feel about crypto and whether its adoption by consumers is a good thing, big traditional retailers have already begun to sniff around.
Sources
Accounting Firms Scoop Up Virtual Land in the Metaverse - WSJ
Metaverse, NFTs and Cryptos Are the Next Big Thing for Retail Giant – Walmart
This newsletter is pulled together by a team led by Jeremy Wagstaff, formerly of the WSJ, BBC and Reuters and Samantha Yap, founder of YAP Global. Other members: Farhan Musa, Rebecca Campbell and Ruby Wu. Many thanks to Joey Woo for production. Any views expressed here are not necessarily those of the writers, YAP Global or its clients.