Notes 6/21: Bitcoin Price Pops Past $30,000, Stablecoin Regulation

Bitcoin price continues its logic-defying ascent amid a flurry of bitcoin ETF filings. It swept past the $30,000 mark this afternoon, touching a high of $30,585 before retreating slightly.

As of this writing, it is changing hands at $30,206.95, up by a staggering 8% from yesterday and 16% from last week. During its surge, the cryptocurrency also caused the biggest short squeeze of this past month and liquidated roughly $36.6 million worth of short positions.

How to Pump Bitcoin Price 101

Analysts and reports attribute bitcoin’s latest price hijinks to trader optimism about the ETF filings. But the Securities and Exchange Commission (SEC) is yet to comment on the filings and the chances that they will be approved, even with surveillance agreements in place, are far from certain.

A further problem with this narrative is crypto’s prevailing conditions.

Traders have deserted its ecosystem and whales are hoarding up positions in their wallets after regulators began cracking down on cryptocurrencies at the beginning of this year. Investing products related to bitcoin have also witnessed a steady exodus over the last couple of months. Trading volumes at exchanges like Binance and Coinbase, which propped up bitcoin price earlier, are down. In other words, crypto and bitcoin are illiquid.

Who, then, are the supposed traders enthused about a cryptocurrency that seems to lurch from crisis to another?

The TUSD and Tether Effect

The TrueUSD (TUSD) stablecoin was launched in 2018 but mostly hovered in the background even as other coins like Tether and USDC took centerstage.

Binance – the crypto world’s biggest exchange by market cap and arbiter of bitcoin price – lifted TUSD out of obscurity this year after its own stablecoin BUSD was charged by regulators for being a security. BUSD is currently winding down operations and Binance is nurturing TUSD as a replacement. It has promised zero-fee trading for all TUSD pairs beginning June 30.

According to data from online publication The Block, TUSD’s trading volumes in spot markets have shot up from less than one percent at the beginning of March to approximately 18%, as of this writing.   

TrueUSD (TUSD) minted $1 billion worth of TUSD on the Tron network last week, according to analytics firm Arkham Intelligence. Most of those new tokens are busy being routed towards an assortment of wallets, including hot wallets at Binance, since yesterday. While it doesn’t trade directly against bitcoin, around 70% of TUSD’s trading volumes are against controversial stablecoin Tether which, in turn, is the biggest trading partner for bitcoin.

Bitcoin As S—coin

Tether also minted new tokens at Ethereum, meaning there is enough dry powder in reserve to push bitcoin price higher.  Not that it would require a billion tokens to lift bitcoin price. Crypto’s illiquid ecosystem means that even a minor trade, such as the purchase of $100 worth of bitcoin, is enough to set off cause tremors in its price.

This has led some traders to compare the biggest cryptocurrency by market capitalization to a “s—-coin” or coins that have zero liquidity and no intrinsic worth. They are not far off in their assessment.  

Targeting Stablecoins

According to investment bank Berenberg, regulators will target stablecoins next in their war against cryptocurrencies. Their aim is to “weaken” the decentralized finance (DeFi) ecosystem by targeting the stablecoins “that serve as the lifeblood of decentralized finance”, wrote the firm’s analyst Mark Palmer. It is, of course, up for debate whether DeFi is strong enough to be weakened or that there is blood coursing through an anemic ecosystem that mostly consists of worthless tokens.

CoinDesk’s Jennifer Sanasie astutely pointed out that they might be targeting pockets of centralization within the so-called DeFi. They might want to start with Uniswap, one of the biggest so-called decentralized exchanges that is backed by centralized entities.

But back to stablecoins. Some of the biggest stablecoins operating in the DeFi ecosystem today are Tether’s USDT and Circle’s USDC. Binance’s stablecoin BUSD was also a major player but it was felled by regulators earlier this year and is winding down its operations.

Making A Case Against Stablecoins

It is hardly difficult to make a case against Tether – an algorithmic stablecoin that pretends to have reserves. The stablecoin has already been charged by the New York Department of Financial Services (NYDFS) earlier and is “practically quilted out of red flags”. It is also accused of manipulating bitcoin price. More ominously, its loss of a peg last week occurred at a decentralized exchange, perhaps a portent of future occurrences.

Catching USDC in regulatory crosshairs might be more difficult. The stablecoin, which is issued by a firm that was a market maker in crypto earlier, presents itself as a regulated alternative to Tether and claims to have adequate reserves to back its circulating supply. Most of those reserves reside in a fund managed by Blackrock, a firm that has developed a fondness for crypto in the last year. But the reserves have not been audited. Like Tether, they are attested.   

Circle’s CEO has testified before Congress on several occasions. [Although, a Congressional testimony is hardly any sort of guarantee]. There’s also the chance that USDC could also be an algorithmic stablecoin like Tether. But let’s not go down that road.  

USDC As Security

One way for the SEC to box USDC into the regulatory corner is to declare it a security. USDC’s interest income contributed to most of Coinbase’s profits and revenue for the last two quarters. Coinbase is part of the Center consortium that launched USDC in 2018.

A press release issued by the Federal Reserve already pointed in that direction. Circle had been hoping for access to an account with the New York Federal Reserve’s RRP program for its reserve fund. But the Fed’s release denies access to funds “organized for a single beneficial owner.”

Regulation, of course, does not provide immunity from loss of pegs. Circle’s banking relationships and dependencies on real world assets means that it is still at risk of going down, and taking big chunks of the DeFi ecosystem, with it.

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