CryptoAM: China goes digital, Fortress buys claims, and Polo launches fiat

Three things you need to know:

One: China steps up efforts on Central Bank Digital Currency

Image result for chinese crypto

China’s colorful crypto story continues. In light of the continuing discussion around the implications of Facebook’s Libra, China has accelerated efforts to create an officially sanctioned cryptocurrency. According to China Daily, the Chinese Central Bank is working with “market-oriented institutions to jointly research and develop a central bank digital currency…”

Chinese concern centers around two main areas:

  1. Capital controls. Beijing is worried about Libra’s impact on Chinese cross border payments and monetary policy. On the topic of cross border payments, it is worth noting that China has relatively strict capital controls that means cross border payments must go through regulators. Cryptocurrencies are an obvious threat to this system, as the government would not be able to control inflows and outflows. Commentators have drawn attention to the fact that Bitcoin prices might be affected by changes to Chinese capital controls. Although Facebook and Whatsapp are banned in China, Libra might be accessed through 3rd party wallet providers.

  2. Financial sovereignty. The government is concerned about the role the US dollar will have in Libra’s basket of currencies that will be used to maintain Libra’s stability. From a Chinese perspective not only is the Chinese Yuan not featured in the basket of currencies that Libra has announced, but it does not (nor does anyone else) know what percentage of this basket of currencies the US dollar will be.

    This is an important point. If the US dollar comprised 90% of Libra’s basket of currencies and then received mainstream adoption, US monetary policy could have significant consequences for countries outside its borders including China and other governments around the world (see dollarization in countries like Panama and Ecuador as case studies). Not being able to anticipate or manage these changes in US monetary policy is something that China and other countries fear.

The key quote comes from Wang Xin, director of the People’s Bank of China (PBOC)’s research bureau:

“There would in essence be one boss, that is the US dollar and the United States. If so, it would bring a series of economic, financial and even international political consequences.”

The role of China in crypto:
Despite “banning” cryptocurrency trading two years ago, China has continued to pay close attention to developments in the space. The Chinese Central Bank has been studying digital currencies since 2014 and the Chinese government actually sponsors monthly analyses on different crypto and blockchain projects. The country is also home to the largest mining pools in the world, crucial to the security of major crypto networks such as Bitcoin and Ethereum.

Why it matters: It seems like a strong possibility that governments across the world will look to compete with Libra through a combination of regulatory restraints and/or through launching their own digital currencies. Let’s not forget that Chinese social media platforms like WeChat have over a billion users, allowing it to potentially replicate the Libra model in a way that benefits the Chinese government.

Two: Fortress Offers to Buy Mt. Gox Claims for $900/BTC

The Mt. Gox saga continues! One of the early institutional investors in Bitcoin, Fortress Investment Group, has sent letters to Mt. Gox creditors offering to buy their claims out for $900 a Bitcoin, twice the amount that Bitcoin was worth at the time of the hack ($451).

$900 represents 7% of a Bitcoin at current prices, implying that Fortress believes that for every 100 Bitcoin they buy the rights to they expect to recover 7 Bitcoin. Of course, they view this as a strong asymmetric bet, as even a 20% recovery puts them up 3x on their investment.

Fortress has been quite active in the cryptocurrency for a while. In 2013, they considered opening a Bitcoin investment vehicle, and in 2014 they spent $20m buying Bitcoin on the market.

You can check out the letter below:

Three: Poloniex is launching a fiat - crypto gateway

Poloniex announced today that they are launching a fiat gateway for their customers.

According to the press release:

Poloniex customers can now fuel their crypto trading by depositing and withdrawing funds using cards and bank accounts.

With these updates, there are two new ways to move value on and off Poloniex. The first lets customers directly transfer money to and from their bank accounts. The other allows customers to use their debit or credit cards to buy bitcoin.

Over the last few months, we’ve been seeing a variety of state changes in the exchange ecosystem. Bitfinex ran into banking troubles and issued a new cryptocurrency, Bittrex was removed from NY state, and Binance announced it would be barring cryptocurrency investors from the United States.

It’s clear that the regulatory environment for exchanges in the U.S is turning sour. Just yesterday the NYAG produced evidence that Bitfinex was operating in NY state, giving jurisdiction to try the original case they brought the the courts. (Personally, it seems odd that the NYAG would go after Bitfinex heavily and leave every other exchange alone, despite the fact that many overseas exchanged clearly offered trading access to U.S customers.)

  • As a note, last year I attended a dinner with SEC commissioner Robert Jackson. He was asked why the SEC was not pursuing exchanges with more vigor, and his response was that the government did not want to “stifle innovation”. There are almost certainly unregistered securities in the eyes of the law being traded on many exchanges — but there hasn’t been much action. I would be surprised if this remained the case over the next few years.

This move by Poloniex seems like a hail mary to capitalize on the lack of good “altcoin” exchanges based in the U.S now that Binance has distanced itself from the arena. The U.S altcoin market is now officially up for grabs, and the exchanges with the greatest ease of use and liquidity have an unprecedented chance to capture the throne from Binance.

Also in the news:

Market Outlook:

Quick Take

Direction: Sometimes it’s okay to not know what’s going on. The last few weeks of price action have been full of chop, incredible bullishness, and then much of the opposite. The chop exhibited by Bitcoin has washed out a lot of leverage, and we are now looking at a much less levered market compared to where it was at the start of June.

Generally, the macroeconomic backdrop is very positive for Bitcoin. People are becoming alerted to the dangers of currency manipulation and the need for “safe haven” assets is growing. The ability for Bitcoin to act as a currency of last resort is becoming more feasible in eyes of institutions.

Based on current technical indicators, it seems we have entered the fourth “expansion” trend of the bull market. Expansion is the divergence upward (or downwards) of moving averages after a consolidation. 5, 10, 20, and 50 day EMA's just consolidated then expanded. Measuring the rate of change of the area between those "lines" is basically taking a derivative of momentum. It's nice trick. The boxes in green show what happens when the rate of change speeds up a lot.

I view it as more likely than not we are about the enter another parabolic advance over the next week, and that collecting long spot positions is a positive EV move.

Currency of last resort explanation from a previous CryptoAM — in case you missed it:

A currency of last resort is important for those people trapped in a governmental crisis rather than a liquidity crises. When you hold your countries currency, you are implicitly trusting the government and banking system with full faith to manage the affairs of your country. If they fail to implement effective monetary policy, then you as a citizen and holder of the currency bear a massive cost.

If you believe there is a slight chance that your central bank will not execute effectively, then it’s in your best interest to hold a currency that is not impacted by your state. It’s your hedge. It’s your currency of last resort. If you live in a country with a 1% chance of failure, you should rationally hold 1% of your savings in assets not tied to that country. 50%? Hold 50% of your savings in alternative assets.

Key Support:  12.2k

Key Resistance: 13.8k

Overall Market: Don’t buy altcoins right now. The only ones that are moving are moving on news. Unless you can predict moves — it’s not worth it. The closure of Binance to U.S customers will meaningfully hurt liquidity.

Altcoins that have large Asian followings are the best bet if you’re going to be punting.

What I’m reading today:

Thumbs Down to Facebook’s Cryptocurrency - Joseph Stiglitz

This is an interesting one. Stiglitz is an economic lion on the world stage. A former Nobel laureate in Economics and former Chief Economist of the World Bank, he’s a frequent commentator on world economic affairs. If you believe the speculation, he’s also fairly likely to have an economic role in any future Democratic administration.

The theme: Stiglitz is massively critical of Facebook’s Libra. His main argument centers around three key themes:

1. Libra would be a huge gateway for money laundering activities. He argues that changes in recent years to the banking system have made it harder to launder money, and that Libra would be a risk to this progress.

2. Lack of competition and regulation of companies that control transactions is the real issue with the existing system. He cites the billions in profit that Visa, Mastercard and others make each year as evidence that consumers “pay a multiple of what payments should cost.” He is not convinced that Facebook would help drive down these costs.

3. Lack of trust. He doubts that Facebook would truly step away from the potential goldmine of financial data available through Libra. He also raises questions about how safe a deposit would be, given prior experiences of banks not being able to redeem deposits during crisis situations (e.g. bank runs).

What I think he gets right: The issue of how much trust should be put in the basket of currencies and securities maintaining a stable value for Libra. There’s definitely a bad precedent of countries trying to stabilize the value of their currency and ultimately failing. What happens if things go wrong - do governments bail out Libra so that regular consumers can access their fiat deposits?

What I think he gets wrong:

The implication that Libra would act as some massive gateway for money laundering is misplaced (and your libertarian parts of crypto world are actually upset that Libra is too government regulated). Any quick search on the Libra design and AML/KYC standards reveals pretty quickly that the way Libra is currently setup would allow on-chain analysis by firms like Chainanalysis, mitigating much of this concern.

- He seems to think because Libra was created from currencies like the Dollar, Euro and Yen that its purpose is to mitigate against changes in these currencies. That is miles off the mark - the idea is that people who haven’t traditionally been able to access stable currencies (think Venezuelans, Zimbabweans, Iranians) can now do so.

Overall thoughts: There’s some major misunderstandings in key areas. Whether purposeful or just ignorance, this article really drove home how much of an uphill battle Libra has to convince the traditional power players of this world that it should exist.


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