Crypto Weekly: The regulation saga continues

Crypto Weekly: The regulation saga continues

Mads Eberhardt

Cryptocurrency Analyst

Summary:  It has been an intense week in the US as the Senate cannot agree on the infrastructure bill. Presently, it looks like a less favorable outcome for the crypto-market. On the technology side, the London update was successfully implemented on Ethereum, starting to burn Ether paid in transaction fees.


The US infrastructure law saga continues

We wrote last week about the infrastructure bill in the US, which intends to heavily regulate the crypto-market if passed, and a lot has happened since. Throughout the week, several cryptocurrency exchanges and think tanks continued pushing to get the definition of brokers to specifically exclude miners, validators, and software developers, so they do not have to comply with the bill. Due to the nature of cryptocurrencies, miners and validators are simply not able to comply with the bill, specifically the know-your-customer (KYC) procedures, due to technical limitations in the crypto software protocol. Last week culminated when several senators formed an amendment to the bill explicitly excluding miners, validators, and software developers from the definition of brokers. In essence, the bill would then only define brokers as someone who is a broker like cryptocurrency exchanges.

The voting of the amendment has been postponed over the last couple of days before ending on Sunday, where the United States Senate voted in favor of ending the voting of amendments before the final vote tomorrow. Correspondingly, it is not sure whether the Senate will vote on the amendment at all. One of the senators behind the amendment, Senator Cynthia Lummis, wrote today on Twitter that she assumes that they cannot obtain a vote on the amendment. Though, if they do, it will most likely pass. Conclusively, without any doubt, the last thing about cryptocurrency regulation in the infrastructure bill has not yet been said.

Burning Ether while staking issues new

On Thursday last week, Ethereum’s London update was successfully implemented. The update contains several improvements to the network. The most notable improvement is EIP 1559. EIP 1559 changes the way users pay transaction fees on the network, making the fee sizes more predictable. From being solely based on an auction, the fees are now based on a fixed fee with the option to tip miners. Concurrently, some of the fees are now getting burned instead of solely being compensated to miners, in order to limit the inflation in Ethereum. As the fixed fee is greatly based upon the demand for transactions on the network, it is still fluctuating rather significantly. The amount of burned Ether fluctuates in line with the fixed fee, meaning it changes how much Ether get burned from block to block it. Some blocks burn close to 0 Ether, whereas other blocks burn over 10 Ether. Since the implementation on Thursday, in total around 17,000 ETH worth around $50mn have been burned.

It is, however, important to notice that the miners are still getting compensated with Ether when confirming blocks, as the mining reward has stayed the same at around 2 ETH per block. The mining reward is made of newly issued Ether to the supply. As the amount of Ether getting burned in a single block does not often exceed the block reward of 2 ETH, the cryptocurrency is still inflationary. Though, not to the same extent as before the London update. In theory, with the update, the cryptocurrency can constantly be deflationary if the fees increase significantly. The protocol has experienced this multiple times since the update, where the fees suddenly increased significantly, resulting in a deflationary supply for some blocks in a row before decreasing again.

The burning mechanism can possibly affect the price short-time as miners are being compensated with less Ether, thus limiting potential sell pressure from them. On the other hand, what is often not considered is the fact that the ETH 2.0 staking contract is also issuing new Ether. It has currently issued over 200,000 Ether since it went live on December 1st, 2020. At present, these Ether are locked. They will first be unlocked when the merge happens from proof-of-work to proof-of-stake likely somewhat next year, but they are crucial to consider when looking at the total supply long-term. Correspondingly, it will take some time for the burning mechanism to catch up with the newly issued Ether on ETH 2.0.

Source: Saxo Group
Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.