Getting some guidance

Introduction

This week we look at the bipartisan crypto proposal known as the Responsible Financial Innovation Act as well as ETH's poor relative performance compared to BTC in recent weeks.

We also just published our Monthly Outlook, where we discuss liquid staking – specifically the factors that have contributed to the widening discount between Lido’s liquid staked stETH vs ETH despite the higher capital efficiency of these assets. In our view, the price divergence reflects important liquidity, yield, credit and technological risks, which we need to consider against the benefits offered by liquid staked derivatives – such as the opportunities to efficiently utilize staked assets as collateral to trade, lend, and provision more quickly. For more details, please see our full report.

Weekly Market Call

View replays of our weekly crypto market analyses from our Americas, APAC and EMEA Coinbase Institutional teams, available here.

Market View

After teasing the release of the Responsible Financial Innovation Act since the end of March, U.S. Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) finally announced their proposed bipartisan bill for regulating digital assets this week. The full text can be found here.

We see the effort to create regulatory clarity and oversight for the crypto industry as broadly positive and offer our summary of the key elements below.

• First, the legislation classifies certain digital assets as “ancillary assets” which are defined in title III, section 301. According to the overview, such assets may not be “fully decentralized” but they “do not represent securities because they are not debt or equity or do not create rights to profits, liquidation preferences or other financial interests in a business entity.”
• Accordingly, the bill proposes that disclosures would need to be filed with the SEC (U.S. Securities and Exchange Commission) twice a year but the markets relating to those ancillary assets would be regulated by the CFTC (Commodity Futures Trading Commission.)
• Meanwhile, ancillary assets that are fully decentralized would be considered commodities and would not be subject to disclosure requirements.
• Second, the legislation also establishes “payment stablecoins” as neither a commodity or a security. It puts parameters around the quality of stablecoin reserves and audit requirements to verify those reserve assets, akin to the regulatory framework that was proposed by Senator Patrick Toomey (R-PA) in early April.
• It also sets up a framework for depository institutions like banks and credit unions to issue stablecoins, but stablecoin issuance would not be exclusive to such institutions. The overview states that new entrants should have an “adequate opportunity” to compete with these entities.
• Finally, the legislation would characterize digital asset exchanges as “financial institutions” and create requirements for them to register with the CFTC. It also provides legal clarification about the treatment of their assets in custody.

With midterm elections coming up in 2H22, we think it’s more likely that this bill will be evaluated in congressional committees next year, meaning the earliest possible rollout would probably be in 2024. Note too that many of the U.S. Treasury and agency reports associated with President Biden’s executive order in March are due sometime in September/October, which could be relevant to the conversation.

Meanwhile, the ETH/BTC cross has breached the floor established in October 2021, despite positive developments on Ethereum’s merge roadmap including the successful merge of the Ropsten testnet on June 8. Indeed, we have seen nine consecutive weeks of outflows in ether with YTD outflows totaling US$250M according to Coinshares. There has been a lack of demand for Ethereum block space recently that reflects a massive 50% reduction in total value locked in decentralized applications (dapps) since April 1 from US$224B to $112B (June 1) based on DeFiLlama data.

Chart 1. ETH/BTC cross falls below 0.06

Crypto & Traditional Overview

Coinbase Exchange and CES Insights

Volumes last week were on the lighter side of average for the year. BTC has found itself bound inside a relatively tight range within $2,000. ETH has also been less volatile but inside a descending range. Other tokens told a similar story of declining volatility and weak price action. We expect volume to continue to be light until crypto assets break one way or another as these tight ranges are tough for traders to position for. Trading on the exchange was concentrated in the largest and most popular coins with no surprising standouts to take note of.

On the CES desk institutional flows have mirrored what we have seen on the exchange. They have been a bit lighter than typical, concentrated in the largest most popular assets, and skewed slightly to the sell side. Speaking with clients there seems to be a lot of interest in re-entering longs, but they are being patient and waiting for more clarity that the sell off is likely to be over.

Bitcoin Technicals

The BTC chart remains bearish despite basically being flat / unchanged over the last three weeks. After four consecutive EMA20 rejections in the past week, BTC managed to close above its EMA20 on June 6 and June 7 but failed on June 8 and closed below. As it stands now, BTC has an EMA9 vs EMA20 cross rejection fully formed with the StochRSI K line cross of the D line which indicates more downside to come. On June 7, the candle closed as a bearish inverted hammer which is another strong downside signal. We would need to see BTC successfully reclaim / close above its EMA20 for the bearish thesis to be invalidated in the short term, which seems unlikely. On the weekly chart, the EMA20 is likely to cross the EMA100 (sometime next week) which should take BTC on the next leg down. The next strong level of support lies at $23,500 followed by $19,734.

Financing Rates

Notable Crypto News

• Bitwise, Multicoin Capital Spin Up Metaverse Index and Fund (Blockworks)
• DeFi venture funding deal activity fell in May, data shows (The Block)

• Bipartisan crypto regulatory overhaul would treat most digital assets as commodities under CFTC oversight (CNBC)
• US Department of Justice calls for more international cooperation, coordination on crypto law enforcement (The Block)
• US Probes Binance Over Token That Is Now World’s Fifth Largest (Bloomberg)
• New York Senate passes moratorium on proof-of-work mining (The Block)
• New York’s Crypto Regulator Publishes Formal Stablecoin Guidance (CoinDesk)

• $40 billion payments giant Checkout.com starts accepting stablecoins in major crypto push (CNBC)
• Cosmos-based DeFi Exchange Osmosis Hit by $5M Exploit (Decrypt)

• Connecting great talent with new opportunities: Introducing the Coinbase Talent Hub (Coinbase Blog)
• Scaling Container Technologies at Coinbase with Kubernetes (Coinbase Blog)

View From Around the World

Major crypto exchanges in South Korea, including Upbit, Bithumb, Coinone, Korbit, and Gopax, have announced their intention to delist Litecoin from their trading services subject to the new privacy-based MimbleWimble upgrade on the Litecoin blockchain.

The idea of delisting has been brewing for a while. On May 20, Litecoin developers activated a privacy-preserving protocol called MimbleWimble Extension Blocks (MWEB) on the cryptocurrency. The new MimbleWimble update has added a ‘confidential transactions’ feature to the Litecoin blockchain, allowing users to transfer coins while concealing transactional data.

But South Korean crypto exchanges have not been comfortable with the new upgrade because they have to comply with strict laws regarding privacy coins. (Cointelegraph)

The Week Ahead