Market View
Crypto gains after summary judgment
On July 13, a federal judge granted partial summary judgment on the US SEC’s two-and-a-half-year lawsuit against Ripple Labs indicating that Ripple’s XRP token “is not in and of itself a 'contract, transaction, or scheme' that embodies the Howey requirements of an investment contract" (page 15).
- The court’s conclusions indicated that programmatic sales of Ripple’s XRP token (i.e. sales to public buyers on digital asset exchanges) do not constitute the offer and sale of investment contracts in those instances.
- However, sales to some institutional buyers do constitute investment contracts essentially because those investors may have purchased XRP from Ripple with the expectation that they could derive profits from Ripple's efforts.
- Other distributions of XRP to employees (for compensation) or third party developers (to build applications on the network) do not satisfy the Howey Test as these are not characterized as an investment of money.
Recall that both Ripple and the SEC filed separate motions in September 2022 requesting summary judgment. However, this ruling can be appealed to a higher court if either party is dissatisfied with the decision. Moreover, the court denied summary judgment on some remaining aspects of the SEC’s claims (such as whether Ripple CEO Brad Garlinghouse and co-founder and former CEO Chris Larsen aided and abetted in Ripple Lab’s violation of law) which may require further proceedings or a trial to adjudicate those specific issues.
The highly anticipated announcement served as a supportive catalyst for crypto markets during an otherwise sluggish summer month. Despite the case’s narrow focus on XRP, market participants extrapolated positive implications for the broader crypto ecosystem, impacting ETH in particular and even BTC – despite the fact that US regulators do not categorize the latter as a security. At the heart of the case was a question over whether XRP (and by extension, other tokens) was an unregistered offering of digital asset securities, so this result informs how current laws are being interpreted for the crypto sector.
Chart 1. BTC and ETH returns no longer correlated to moves in S&P 500
Macro outlook urges caution
The US Federal Reserve’s blackout period starts on July 15 and extends until its policy decision on July 26. Fed fund futures are pricing in about a 90% chance of a 25bps rate hike at this meeting in line with the forward guidance at the last FOMC meeting on June 13-14. But following a better than expected US inflation print for June (both headline and core CPI surprised expectations to the downside), market participants believe this may be the last hike in the cycle compared to the two hikes projected in the Fed’s dot plot. Still, it seems like fears of a recession have been pushed back a few months, reflected in futures implied rates having delayed the start of an easing cycle from 4Q23 to 1Q24 – even though the 3m10y spread shows a still deeply inverted yield curve.
We’ve remained committed to our view that the disinflation trend in the US should pick up in 2H23, as aggregate demand cools and shelter costs moderate. Leading indicators like newly signed leases suggest that changes in rental costs have come back to pre-pandemic levels. Moreover, use of artificial intelligence is a secular trend that should eventually boost productivity and lower input expenses.
That said, we’re less certain about how this will translate into the Fed’s decision making process as the board has been resistant in altering its stance in light of issues like the US regional banking turmoil. Better US economic data has led many equity bears to cover their shorts. What hasn’t changed for us is that we think this macro environment urges more defensive positioning as we enter 3Q23, though we are still constructive on crypto markets in 4Q.
