IMF Calls On El Salvador to Drop Bitcoin

The biggest crypto news and ideas of the day

Jan. 26, 2022

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Welcome to The Node.

In today’s newsletter: Diem is looking to return money to investors. Binance to reinstate payments in EU. And Cathie Wood’s ARK predicts BTC could hit $1M by 2030, citing nation-state adoption, as IMF asks El Salvador to drop bitcoin aspirations.

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Today’s must-reads

Top Shelf

STABLECOINS DESTABILIZED: The Diem Association, the would-be stablecoin developers led by the entity formerly known as Facebook, is considering the sale of the project's assets to return money to investors, according to Bloomberg. The original vision for libra, a stablecoin backed by a basket of assets beset by regulatory scrutiny, has been significantly reworked and renamed. Now, project leaders are in conversations with investment bankers to sell Diem's intellectual property and help the Diem devs find new jobs. Meanwhile, a new Bank of America report suggests if the U.S. does not develop a federal digital dollar, stablecoins would benefit.

BACK IN BIZ: Crypto exchange Binance is about to reinstate payments "in the coming hours'' from the European Union's Single Euro Payments Area (SEPA), according to Bloomberg. The rollout will be phased, starting in Belgium and Bulgaria, and will expand throughout the bloc in the following weeks. The U.K. is not part of the rollout. Binance temporarily halted payments from SEPA in July.

FTX RAISES: FTX US on Wednesday said it raised $400 million at an $8 billion valuation – one of the industry’s largest Series A rounds. Parent company FTX commanded a $25 billion valuation in October. The crypto trading giant’s stateside wing, which entered the market in 2020 and is looking to dominate derivatives trading through strategic investments, will deploy the capital raised from Paradigm, Temasek, Multicoin Capital, SoftBank and others to “accelerate its growth.”

FANCIFUL PREDICTIONS: ARK Investment Management, the firm led by star fund manager Cathie Wood, predicts bitcoin’s price could exceed $1 million by 2030. “Bitcoin’s market capitalization still represents a fraction of global assets and is likely to scale as nation-states adopt [it] as legal tender,” ARK analyst Yassine Elmandjra wrote in Tuesday’s "Big Ideas 2022" report. Separately, the Bank of America has predicted Solana, the high throughput blockchain still in beta, could become “the Visa” of the digital asset world.

IMF CONCERNS: The International Monetary Fund’s executive board recommended that El Salvador discontinue the use of bitcoin as legal tender due to the financial risks and liabilities created. The recommendation came in a Tuesday report following bilateral discussions regarding a $1.3 billion IMF loan to El Salvador. IMF reportedly “stressed” concerns over the Latin American country’s financial stability and its bitcoin-backed loans.

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Putting the news in perspective

The Takeaway

What Today’s Fed Announcement Will Mean for Crypto

At 2:30 p.m. Eastern time Wednesday, the Federal Open Markets Committee (FOMC) will announce the decisions reached during its latest two-day meeting that started yesterday. The announcement will have a huge bearing on the direction of the U.S. economy as a whole. It may have particularly pronounced impacts on both short- and long-term trends for the cryptocurrency industry.

The FOMC is expected to firm up at least two elements of the Federal Reserve’s plans for the year, though both have been broadly telegraphed. There may be more details about the schedule for “tapering” the Fed’s bond-buying program, which more than doubled its balance sheet during the coronavirus pandemic to nearly $9 trillion. The tapering and divestment schedule has significant implications for inflation and capital markets.

But the real headline issue is the potential for change in the Fed’s interbank interest rate. There is very little chance of a hike actually coming out of the current meeting – the Fed has said it needs to begin the asset taper before hiking rates, apparently for technical reasons. But we already have a solid sense of the direction things are going.

The Fed has previously said it plans three rate hikes this year, in response to rising inflation and an incredibly tight job market. Goldman Sachs, apparently seeing even more pressure ahead, predicts four hikes, with rates rising to 2.5% to 2.75% by 2024. The FMOC could provide more clarity on that schedule today.

If the Fed stays the course, it could amount to a dramatic change to the macroeconomic environment. More to the point, it might be perceived as a major change by investors and employers, who would shift their own choices accordingly. Among other impacts, higher Fed interest rates usually draw capital away from speculative sectors because savers and investors are drawn to safer returns in government bonds. At the margins, this will inevitably pull value out of both tokens and crypto startups (along with tech and venture capital more generally).

The question is how much money will move to more conservative positions, how fast it will move and whether the shift is already “priced in” to markets. The likely impact is unclear in part because of the nuances of the current moment, in which even significant interest rate hikes would still leave rates historically low. Fed rates mostly have been near zero since the 2008 financial crisis, only inching up to 2.4% in late 2019 – before being cut again in the face of another crisis. Prior to the 2008 crisis, the Fed rate had not been as low as 2.4% since 1962.

But will investors see the slow march upwards as the end of the post-crisis era of near-free money? The near-zero-interest environment gave rise to perverse phenomena like “The Startup That Loses Money Forever'' – operations like WeWork or Uber that are able to raise funds on the slim chance of future returns in part because more reliable and solid investments just aren’t available. Heading from 0% to 2.5% doesn’t automatically mean the end of the USD silly season, but it will dampen things to some degree.

Crypto companies have only fairly recently joined the ranks of companies able to attract large amounts of mainstream venture capital. So it’s unclear to me just how rough a tumble the more formalized and regulated portions of the sector could see from a broad investment pullback. On the one hand, we may see fewer initial public offerings (IPO) like Coinbase (where the stock is currently more than 40% down from its opening price).

On the other hand, many, many crypto companies are sitting on big war chests, even after the current crash in bitcoin (BTC) and ether (ETH). A wild example popped on my radar this morning when SingularDTV, which had an initial coin offering (ICO) in late 2016 (and for a short time employed me at a startup crypto magazine called BREAKER), moved a stash of ETH that’s still worth nearly $30 million. No comment on their treasury management and market timing skills, but they’re far from alone among older crypto startups in having gargantuan ETH or BTC bags with the potential to see them through a stretch of tougher capital markets.

The big X-factor in all of this is the stock market. For better or for worse, the Fed has for nearly three decades consistently moved to protect equity market prices. That is absolutely not part of the Fed’s mandate, which concerns only managing employment and inflation. But former Fed Chair Alan Greenspan seemed so consistent in supporting asset prices with looser money that the tendency became known as the “Greenspan Put.”

It turned out to be a long-term mistake that created instability and bubbles, but the mindset has seemed to persist at the Fed. Though the Fed has denied paying any attention to short-term asset prices, the recent plunge of the U.S. stock market (the S&P 500 is off more than 7% since the start of January) would appear to be at least somewhat of an obstacle to a rate hike. The Fed will still project its future hikes, though, and its paramount need for long-term credibility means it would only change course under truly extraordinary circumstances.

But a continued, steep stock market decline might be one of them. It would be incredibly distressing and a fundamentally bad idea for the Fed to keep the zero-interest orgy going as the real economy recovers from COVID-19, but the possibility can’t be entirely counted out. And if Powell does let it ride, the frothiness has just begun.

–David Z. Morris

How to Create Luxury NFTs: A Template From Malta*

Creating a luxury NFT is about much more than only creating buzz. Just as in the physical world, it involves vision, craftsmanship, artistry and timing. A recent NFT project created in Malta called “ETH in Mellieha” perfectly exemplifies the level of detail needed to create a luxury NFT. Much more than a digital image, it’s also a physical memento of a real-world experience.

And, unlike many other NFTs, it also incorporates uncontestable legal rights to the physical asset for the owner of the NFT, regardless of the citizenship or current domicile of the holder.

*This is sponsored content from ETH in Mellieha.

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