Crypto Weekly: Dodging a hard hit to the industry
Summary: The new infrastructure bill in the US did not only have an immense negative impact on the cryptocurrency industry in the US, but also had a risk of negatively impacting the market globally over time. However, it seems as the most influential part of the bill has been downplayed for now. The NFT market is still thriving with the highest volume recorded on the most popular marketplace.
Seconds before the industry was hit hard in the US
It seems that one week cannot pass without significant news on crypto regulation around the world – and this week the focus is on the US. To fund President Joe Biden’s $1.2trn infrastructure package, it is expected that the enforcement of taxes on cryptocurrencies can bring in $28bn over the next decade. Not only is the infrastructure bill setting an ambitious goal for taxes gained on profit from cryptocurrencies, but it also lays the groundwork on how the US government aims to achieve this through enforcement.
The first publicly available copy of the bill from last week was a fairly tough hit on the industry, as it specified that every broker responsible for carrying out transfers of digital assets would be responsible for complying with IRS (Internal Revenue Service) reporting requirements. This involves the implementation of know your customer (KYC) procedures and collecting personal customer data like name, address, and telephone number. The majority of US-based brokers and exchanges already comply with these rules. What shocked the industry, though, was the extremely broad definition of brokers mentioned in the bill. Specifically, it mentioned that the definition counted decentralized protocols, including decentralized exchanges. Between the lines, the definition of brokers would even count miners and validators verifying transactions on cryptocurrency networks, as well as software developers making e.g., wallets. Due to the nature of cryptocurrencies, decentralized protocols, miners, and validators are simply not able to comply with KYC due to technical limitations in the crypto software protocol.
If the bill in this format would have been approved, the decentralized aspect of the industry in the US would have been hit hard, as essentially every miner, validator, and decentralized protocol would have to move abroad. That would be a tremendous hit to the industry overall, as the US counts for a significant part of miners, validators, and decentralized protocols. Additionally, the bill would perhaps inspire other countries to heavily regulate the industry.
However, after tremendous pressure from cryptocurrency exchanges, and think tanks the last couple of days, the specific mention of decentralized protocols has been removed. Additionally, the definition of brokers is now mentioned less broadly. Though, it still falls short of specifically excluding bitcoin miners, validators, and software developers. The executive director of the cryptocurrency think tank Coin Center, Jerry Brito, wrote yesterday on Twitter that their goal is to clearly get miners, validators and software developers excluded from the bill. Only the future will tell whether they will succeed with that, but for now, the industry still thrives in the US.
As often pointed out, every investor in this space should expect supplemental regulation on the industry, which can impact the market somewhat considerably. This event should serve as a lesson for everyone involved in the industry on how sudden status quo can be challenged from a legislation point of view. This time it came out of nothing – and surprisingly, even packed into an infrastructure bill.
Record-high volume for NFTsEarlier this year, non-fungible tokens (NFT) started gaining extreme traction – for many – completely out of the blue. Non-fungible tokens are unique digital files stored on a blockchain, mainly on the Ethereum-network. As they are only stored in one single copy, they are ideal to verify the ownership of an asset, often used for pictures. The trend culminated in February as one previously unknown artist called Beeple sold an NFT for $69mn reaching a new all-time high for an NFT sold. Since then, other aspects of the crypto-market have been in focus, but that did not end the demand for NFT’s as the largest marketplace for NFT’s called OpenSea experienced a record volume on Saturday and Sunday last week of $35mn and $49mn, respectively. Some weeks ago, OpenSea raised $100mn, valuing the company at $1.5bn. Last week, Coca-Cola used the platform to auction its first non-fungible tokens.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)