First Mover Asia: Macau’s Digital Currency Embrace Could Be a Nightmare for Its Casino Industry; Bitcoin Points Upward

Good morning. Here’s what’s happening:

Prices: Bitcoin and other cryptos point upward amid a renewed embrace of riskier assets.

Insights: Does Macau really want or need a digital currency?

Cryptos Point Upward Amid Renewed Interest in Riskier Assets

By James Rubin

Investors continued a cautious return to riskier assets, sending bitcoin and other cryptos higher for a second consecutive day.

But how long the mini-surge lasts remains to be seen.

The largest cryptocurrency by market capitalization was recently trading above $19,500, up about 1.4% over the past 24 hours, swept up in a wider, likely temporary embrace of more traditional markets. Ether also recently rose about the same and was recently changing hands over $1,300. Other major altcoins spent much of the day in the green, with ATOM and MATIC among the biggest gainers for cryptos with at least a $1 billion market cap, each rising about 5%. The CoinDesk Market Index (CMI), a broad-based market index that measures the performance of a basket of cryptocurrencies, is up 1.20%.

Crypto prices dovetailed with equity market increases as the tech-heavy Nasdaq and S&P 500, which has a heavy technology component, jumped 3.4% and 2.6%, respectively, amid continued worries about inflation and the future of the global economy. Investors will be scrutinizing third quarter earnings, which are now in full swing with Bank of America, the second largest bank in the U.S. reporting an 8% decline in profitability on Monday and Goldman Sachs and Tesla among the global brands scheduled to report later this week.

The fallout from the collapse of now bankrupt crypto hedge fund Three Arrows Capital continued with the liquidators in the case seeking authorization to serve subpoenas to the firm’s co-founders Su Zhu and Kyle Davies by alternate means, according to a court filing on Friday. The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) is now examining whether the firm violated rules by misleading investors about its balance sheet and not registering with the two agencies, according to a Bloomberg story.

Less risky than credit default swaps?

In a weekly crypto report, Jeff Dorman, chief investment officer at crypto-focused financial services firm Arca, noted that sovereign credit default swaps (CDS) had "blown out this year worldwide, indicating the risk of default has risen, or at least, the cost to insure this low probability outcome has increased significantly." CDSs are financial contracts in which purchasers of corporate or sovereign bonds try to eradicate possible losses stemming from a bond issuer defaulting. Dorman wrote that CDSs tend to be a more accurate measure of risk than bonds themselves.

"Bitcoin has always been a call option on anarchy if citizens begin to lose faith in their banks and local governments," Dorman wrote. "In fact, in February 2022, when Russia’s Ruble tanked and Canadian banks froze citizens’ accounts, we highlighted that it would not be surprising if demand for bitcoin skyrocketed. This prediction is even more relevant now with European banks imploding, England’s currency and bond market eroding, and Japan’s yield curve control flummoxing investors."

He added: "Paying a one-time fee of just under $20,000 for bitcoin doesn’t seem that expensive. Perhaps we should stop looking at bitcoin as an inflation hedge or store of value and start valuing it as wealth and livelihood protection. It’s certainly counterintuitive that bitcoin and sovereign CDS serve the same purpose, yet one is more expensive due to very real increased risks (CDS) while the other is on sale for 70% off its recent all-time highs."

Does Macau Really Need a Digital Currency?

By Sam Reynolds

Macau’s Executive Council has passed a bill creating a legal framework for the territory to begin accepting digital currency. But what does this mean for the gambling industry, which relies on a strong local privacy framework and a steady supply of gamblers?

Macau, one of China’s two Special Administrative Regions (SAR), tends to be the more obedient territory than its cousin, the erstwhile British territory of Hong Kong. Macau is smaller and more focused: Its entire economy is based around gambling. While Macau is an autonomous legal jurisdiction (after all, gambling is illegal in mainland China) there’s not the same interest in contesting Beijing’s rule as in Hong Kong because of the divergent history of the two SARs. Consider: Census data from 2016 shows that just over 55% of Hong Kong can speak English while less than 1% of Macau speaks Portuguese.

But local law still prevails in Macau, which has what UNSW Australia Faculty of Law Professor Graham Greenleaf called some of the strongest data protection laws in Asia, in a 2014 paper on the topic.

There’s a ban on recording images and sounds in casinos, and in 2019 Macau’s Director of Gaming Inspection warned casino operators that their use of facial recognition, RFID-enabled casino chips and digitally enabled baccarat tables – all of which are used to give the house an edge – must conform to Macau’s Personal Data Protection Law. Consent for collection would be required, as would best practices like removing personally identifiable information before sending it to a third party. Gamblers prefer discretion.

But that’s Macanese law, of which Beijing respects but doesn’t approve. Beijing doesn’t want to be seen as rescinding the guarantees of autonomy it promised with The Basic Law of Macau, the territory’s mini-Constitution, but at the same time it doesn’t want its people gambling there. In 2021, China’s criminal law was amended with a supranational flavor. Gambling is now illegal for its citizens overseas.

Later in 2021, China’s Ministry of Culture and Tourism banned the organizing of tour groups to “cross-border gambling tourist destinations,” which includes Macau and other regional gambling hubs like Sihanoukville, Cambodia.

Macau embracing China’s digital currency is the logical conclusion of all of this. Macau’s own currency isn’t widely used, even at home, as it pegs the Hong Kong dollar 1:1 to the Macanese pataca, with the HKD being the currency of choice on casino floors. There’s a precedent to using a "foreign" currency for gambling, so there’s not much of a leap required to embrace a version of China’s digital currency in the territory.

Digital currency as a tool for oversight

And for Beijing, it gives bureaucrats, as well as law enforcement, much more granular insight into the gambling industry while bypassing Macau’s strong privacy laws. Beijing knows it can’t eliminate the gambling industry entirely in Macau because it would decimate the local economy, so better off controlling it instead via its central bank digital currency. Foreign nationals may be allowed to keep using cash, but Chinese nationals would need to use this digital currency in order to keep being allowed at casinos.

Macau has nothing to lose. Once upon a time, at the peak of China’s boom, the territory netted more gambling revenue than Las Vegas. But COVID-19 changed things.

Macau’s casinos are estimated to bring in $680 million in revenue for October, which should be its busiest month because of China’s Golden Week mega holiday. In contrast, the latest data available from Nevada shows Vegas cleared just over $1 billion in revenue for August, with the Las Vegas Strip reporting a 5% year-over-year increase.

With things looking so dire, how can Macau say no?

I.D.E.A.S. 2022 by CoinDesk (New York City)

TechCrunch Disrupt 2022 (San Francisco)

Digital Asset Summit 2022 by Blockworks (London)

In case you missed it, here is the most recent episode of "First Mover" on CoinDesk TV:

$114M Mango Markets Exploiter Returns a Large Sum, Chainalysis on Worst-Ever Month for Crypto Hacks

The Mango DAO plans to vote this week on how to divvy up the $67 million returned by Avraham Eisenberg, who said he was behind last week's exploit. Chainalysis Director of Research Kimberly Grauer, calling October the worst month yet for crypto hacks, joined "First Mover" to discuss the recent report. Plus, Martin Leinweber of MarketVector Indexes provided bitcoin markets analysis.

Ripple Begins Testing XRP Ledger Sidechain That’s Compatible With Ethereum Smart Contracts: This is the first step in a three-part process to introduce an EVM-compatible sidechain to the XRP Ledger mainnet.

North Korean Hacker Group Lazarus Targets Japanese Crypto Firms: Lazarus Group has been targeting Japanese firms with phishing links via email and social media.

Quant Network's QNT Token Enters Top 30 Crypto List With an Enviable 'Overbought' Status: Interoperability-focused Quant Network's QNT has surged by 450% in four months, decoupling from the broader market lull.

Japan Greenlights Tougher Anti-Money-Laundering Rules for Crypto: A cabinet decision to revise six foreign-exchange laws closely follows a government plan to introduce new rules for remittances, all aimed at tightening AML measures for crypto.

Bitcoin Fails to Produce 1 Block for Over an Hour: An 85-minute block interval left more than 13,000 transactions stuck in a pending state on Monday.