Foreword
This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
USA
Yesterday, an article came out of the New York Times, discussing potentially upcoming regulations in the USA. The article highlighted the facts that
- Regulators in the USA have mostly ignored cryptocurrencies before as they were mostly little threat to the financial system
- But as cryptocurrencies grew in value and popularity, they are now becoming impossible to ignore
- Both the Treasury and the SEC have come out rather strongly for bringing cryptocurrencies under the existing regulatory fold
- With a particular focus on stablecoins, as they appear to fall pretty clearly within the bounds of what a security means — they look and smell almost identically to “money market funds”, which have clearly been ruled as securities by the Supreme Court
It is currently unclear to what extent the Treasury and the SEC will pursue this. Fully complying with securities rules mean providing a bunch of disclosures and statements that are somewhere between “damn bloody hard” to “impossible” — just as an example, how would most coins, nominally marketed as semi-anonymous, be able to do KYC checks? Yes, various brokers might be able to do KYC checks at the broker level, but KYC checks at the coin level seems daunting — who would even be responsible for such a task?
China
I hadn’t really wanted to write about this topic, since the USA side of the story is still developing and not really concrete. But today, China drop a bombshell, by declaring all activities related to digital coins as “illegal”.
Prior to the crackdown on mining in China, a large fraction of cryptocurrency holders are Chinese nationals. After the crackdown on mining, since the coins were themselves legal still, I’m guessing a majority of Chinese holders did not divest. And now, it appears they might not be able to, at least not legally.
Currently there are many crypto exchanges based in China, naming just the big/famous ones:
- OKCoin
- BTCC
- Huobi
- FTX
It’s not clear what’s going to happen to them, though likely those with a substantial presence still in China will be forced to close down, essentially a much more dramatic action compared to techedu a while back.
More importantly, and more interestingly there is the question of Binance (and by extension, those other crypto exchanges started/based nominally in China but have since moved out a majority of their operations). Binance is the largest crypto exchange in the world, by a very long shot. While it is technically operating out of the Cayman Islands, and its CEO is adamant that Binance is a “global company” with no real national ties, that has never really been tested.
So what’s going to happen, when the Unstoppable Force of China hits the Immovable Object of Binance?
Some potentials, in increasing order of “bad”:
- Binance moves all operations completely out of China, and continues to operate normally. Chinese citizens use Binance to skirt the local laws. Nothing really changes.
- Binance moves all operations completely out of China, loses a large market, but not much else.
- China somehow gets a hold of a key person of Binance, and forces the company to shut off all Chinese operations and pay a huge fine. Maybe some employees are jailed.
- China somehow gets a hold of a key person of Binance, and leverages that into obtaining control over the company and forces it to shutdown completely.
It is the last possibility, albeit currently remote, that is concerning. What happens to the assets on a crypto exchange’s balance sheet if it is deemed illegal?
Precedence generally has been that the assets of illegal companies are confiscated and then become state property. But Binance doesn’t really own its assets — Binance has matching liabilities for most of its assets because it is holding those assets for clients. Again, precedence suggests that counterparties of liabilities on illegal companies’ balance sheets are just out of luck. Would China really do that, though? A large number of Binance’s clients are outside of China, both in terms of citizenship, as well as physically, and technically outside of its jurisdiction.
If nothing else, this seems like it’s going to be an interesting space for that much longer.
Janky Thoughts 