Welcome to Thoughts on the market. I'm Sheena Shah, Senior Cryptocurrency Analyst at Morgan Stanley Research. Together with my colleagues, to provide you with a variety of perspectives, I will talk about the increasing financialization of the cryptocurrency markets. It's Tuesday December 14 at 2:00 pm in London.
BYOB - Be your own bank. This has been the wake-up call of Bitcoin evangelists since its inception. But in an ironic turn of events, crypto companies Avanti, Anchorage, and Kraken have become banks in the U.S. Not in the sense advocated by the bitcoin maximalists, but in fiat, that is, in the sense regulated by the government.
And regulators have focused much of their attention on the notoriously inflated interest rates offered to depositors through crypto loans. On December 10, you could deposit a cryptocurrency called USDC with a company called BlockFi and receive an interest rate of 9%.
Concerns have been raised that USDC issuers seek to control its value, such that a single USDC should, in theory at least, always reach a value of about one US dollar. The disparity between a 9% rate on what is essentially a substitute for the dollar and historically low rates on real dollar deposits at retail banks has regulators concerned about the emergence of a shadow banking system.
The irony here is that it was the pre-existing banking regulation itself that helped create this high rate. Traditional banks have turned away cryptocurrency traders due to regulatory risk, which is why these traders were forced to borrow on the cryptocurrency markets and offer lenders higher rates of return.
However, US regulators appear to be taking steps to limit competition with the dollar banking system. New Jersey regulators have directed BlockFi to stop offering high-interest crypto deposit accounts starting in February next year. And in September, the Securities and Exchange Commission sent Coinbase a notice from Wells, after which Coinbase aborted a plan to offer 4% interest on USDC deposits.
Ultimately, regulators will have to decide how aggressively they want to safeguard the dollar's primacy. They could certainly hamper much of the industry or hope the dollar will stand up to scrutiny to allow the crypto industry to grow. The longer they wait, the greater the risk. After multi-million dollar stimulus packages and more than a decade of quantitative easing, the dollar has been left as open to competitors as it has been since the Bretton Woods agreement in 1944. Investors should be aware of the direction that regulators take In the face of this and the wide spectrum of outcomes that those regulations could herald for cryptocurrency valuations, ranging from new highs to old lows of past price cycles.
The meeting of crypto culture and traditional banking regulation is a pivotal moment for the crypto industry. I, for one, am excited to see how this interaction evolves. Crypto companies are becoming more and more like banks, just as traditional banks have started offering crypto products.
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