Federal Reserve

U.S. Fed Announces New Program to Supervise Member Banks’ Crypto Activities

🍨 The scoop: The U.S. Federal Reserve has initiated a new program, called the "novel activities supervision program" to oversee banks' involvement with cryptocurrency, specifying that banks under its jurisdiction need approval before participating in digital asset activities. Any bank wanting to "issue, hold, or transact in dollar tokens" must ensure they can operate in a "safe and sound manner" and get the Fed's explicit endorsement. These announcements aim to emphasize the crypto guidelines the central bank released earlier in January. This move coincides with PayPal's recent announcement about the introduction of its own stablecoin (covered in another story below).

👌 Getting the nod: This approval may be challenging to secure. Banks will have to prove their capability in identifying and managing potential risks, such as those associated with money laundering, customer withdrawals, and cyber-attacks.

🔥 Fire Wall: U.S. banking regulators consistently state their intention to keep a significant gap between the traditional banking system and the crypto sector. However, they also ‘encourage’ banks to explore, provided they remain under strict supervision. The new program will notify banks when their crypto engagements are up for review. The level of supervision will vary depending on each bank's involvement in these novel activities.

😃 The Optimistic View: An optimistic view states that the Fed’s supervision over member banks’ crypto activities will prevent scams, punish “inaccurate or misleading representations…by crypto-asset companies”, and set a standard for proper custody. And, proponents say, the Fed can do this without stifling innovation.

🤨 The Skeptical View: Those skeptical of the Fed see that view as naive. They question whether the Fed and its regulatory partners are even qualified to supervise highly technical aspects of digital asset products (such as custody) when they are seemingly incapable of preventing existing members in traditional banking from participating in risky activities (see Silicon Valley Bank and Signature Bank). The actions may also ultimately be self-serving. If the Fed views projects like Bitcoin as a threat to their ability to manage the economy, then supervision may simply be a euphemism for “regulatory sabotage”, and the granting of approvals may just be a way to pick winners and losers in the space.

WHAT WE'RE WATCHING

📉 Institutional investors are no longer betting against Bitcoin, as revealed by CoinShares' recent report. For the first time in 14 weeks, there have been no outflows into short Bitcoin products, indicating a shift in strategy by significant digital asset funds.

Despite the halt in shorting, institutions sold over $111 million in Bitcoin-related funds in the past week, the most significant weekly outflow since increased U.S. regulatory scrutiny began.

The industry currently faces challenges, including lawsuits against major platforms like Coinbase and Binance. Though, as reported on Monday, Coinbase says it expects to win its case against the SEC.

💳 U.S. credit card debt reached $1 trillion, a new all-time high. This may seem counter-intuitive since increased interest rates make borrowing more expensive. However, there are many reasons we might expect such an increase to occur.

One of them is that if consumers expect rates to continue rising, they are incentivized to open new lines of credit before rates go up even higher. Second, credit card debt is also only 6% of total household bank deposits, indicating consumers' ability to manage it. Mix these factors with what appears to be a somewhat stronger economy than anticipated, and the rise makes sense. One confounding detail…why aren’t we seeing this reflected in the Bitcoin price as well?

🔒 From @_checkmatey_ via Glassnode on Twitter, Bitcoin long-term holder supply now at 14.59M Bitcoins (75% of circulating supply). This represents a continued bullish case - you will need to pry a hodlers Bitcoins from his cold, dead fingers.

💸 July CPI numbers are in - 3.2%, which is lower than the Fed expected, but still well above it’s target of 2%. Keep in mind: this number does not include food and energy prices - a convenient carve out if you want to appear like you have things under control, or you don’t think things like eating and not dying of heat stroke are all that important.

Stablecoins

Paypal Launches New Stablecoin, Paypal USD (PYUSD)

In short: PayPal is doubling down on its attempts to take more market share in the digital currency space with the launch of its own stablecoin, "PayPal USD". Positioned as a bridge between traditional and digital economies, this currency is backed entirely by assets such as U.S. dollar deposits, short-term U.S Treasuries, and “similar cash equivalents”.

Standing Out: PayPal aims to set its stablecoin apart from others in the space by by leveraging its knack for creating simple user experiences, hoping to create a more user-friendly stablecoin. Paxos, the issuer, has also committed to publishing a public monthly Reserve Report detailing the assets backing PayPal USD via a third-party attestation of the reserve assets' value, conducted in line with standards set by the American Institute of Certified Public Accountants (AICPA).

The Facts:

• The stablecoin, issued by Paxos Trust Company, can be redeemed on a 1:1 basis for U.S. dollars.

• PayPal USD will be available for consumers, merchants, and developers, serving as the sole stablecoin supported within the PayPal network.

• PayPal was granted a BitLicense by NYDFS in June 2022 after securing a conditional BitLicense.

Schulman’s Words: "The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the U.S. dollar.” said Dan Schulman, CEO of Paypal. “Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD.“ (Emphasis mine)

POLL

MONDAY’S POLL RESULTS

On Monday, we learned that Chief Judge Laura Taylor Swain of the U.S. District Court for the Southern District Of New York dismissed a class-action lawsuit against Tether and Bitfinex. We asked readers if they thought Tether was good for Bitcoin, despite the FUD and legal battles…and they were unanimous in their opinion.

100% of you said that Tether was good for Bitcoin.

Reader btburn wrote in with a small clarification: “Tether is neutral to positive for BTC. Even a Tether collapse, which I do not believe would happen, would not be a longer-term negative for BTC.” Thanks for writing in, bt.

IN THE LOOP

🔄 Coinbase has proposed a premium buyback of part of its $1 billion bonds following a robust Q2 financial performance. The crypto exchange will repurchase up to $150 million of its bonds maturing in 2031, offering investors $645 for every $1,000 of the bond's face value if sold before Aug. 18. The move follows Coinbase's revenue of $708 million for the second quarter, surpassing estimates. Bond buybacks help companies reduce debt and benefit investors by offering early liquidity.

🇸🇻 Binance has become the first fully licensed crypto exchange in El Salvador, acquiring both a Bitcoin Services Provider license and a non-provisional Digital Assets Services Provider license. This registration marks Binance’s 18th market entrance. El Salvador was the first country to formally identify bitcoin as legal tender in 2021.

🔲 Block Inc. (formerly Square) announced a 27% YoY increase in Q2 2023 gross profit, with Bitcoin contributing $2.4 billion to its $5.5 billion net revenue. Despite Bitcoin's declining prices, Block's Cash App Bitcoin revenue grew 39%. Keep in mind, this is revenue, not profit - so it is unclear how much profit was made from its Bitcoin revenue. Block also integrated the Lightning Network into Cash App for efficient transactions.

Today’s newsletter was written by Colin and edited by Jordan.