Cryptocurrencies were once a hedge play that could no longer be ignored, but now Larry Fink sees “very little investor demand” for crypto.
On this episode of “The Breakdown,” NLW addresses recent shifts in institutional and regulatory discussions on crypto, including:
- How BlackRock CEO Larry Fink sees the state of crypto
- ShapeShift’s final structural shift
- Fed Chairman Jerome Powell’s stance against stablecoins
- A dissenting letter from two SEC commissioners
BlackRock made headlines when it entered the crypto market because it viewed bitcoin as a hedge play that could no longer be ignored. Now, this investment management company finds itself in a changed landscape as bitcoin prices have fallen from all-time highs. How has CEO Larry Fink’s view of crypto changed with this new price point?
ShapeShift, a global digital asset trading platform, was created with a vision of minimizing user-collected data. That vision was tarnished in 2018 when the platform began requiring basic information, resulting in a 95% loss of its user base. ShapeShift’s tumultuous history has added another chapter today with the announcement that it is converting to a distributed autonomous organization, or DAO, owned by the users. Is this one step in a greater trend of fundamentally shedding corporate organizational power structures?
Federal Reserve Chairman Jerome Powell countered Vice Chairman Randal Quarles’ pro-stablecoin stance in a recent testimony before Congress. While Quarles asserted successful stablecoins would make a U.S. central bank digital currency (CBDC) redundant, Powell offered the opposite opinion: “You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency.” Whose stance will win in the growing stablecoin versus CBDC debate?
Two members of the U.S. Securities and Exchange Commission released a letter of dissent following a SEC enforcement action against U.K. company Coinschedule for anti-touting provisions. The letter expressed the members’ disappointment at the lack of regulatory clarification following the Coinschedule opportunity and an overarching distaste at a lack of transparency surrounding crypto guidance. Will more members follow in their footsteps and push for a clearer SEC stance?
The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Stefan Wermuth/Bloomberg/Getty Images, modified by CoinDesk.
What's going on guys? It is Thursday, July 15, and today is one of our "extended-brief" editions. So, four topics given roughly equal weight, there was just too much interesting stuff happening to do a normal episode.
Let's kick it off by discussing some comments by the CEO of BlackRock, Larry Fink around the state of crypto demand. BlackRock is the world's biggest asset manager and as such is undoubtedly one of the most influential institutions out there. Folks in the bitcoin space have been tracking their attitude towards crypto pretty closely. Last November, CIO Rick Rieder said that he thought that bitcoin and crypto "could take the place of gold to a large extent." That's a direct quote. I think digital currency and the receptivity, particularly millennials' receptivity, of technology and cryptocurrency is real.
Last December, CEO Larry Fink followed that up making news when he spoke at the Council on Foreign Relations with former Bank of England Governor Mark Carney in that appearance he said: "Bitcoin has caught the attention and the imagination of many people. Still untested, pretty small market relative to other markets. See these big giant moves every day... it's a thin market. Can it evolve into a global market? Possibly." This was, at the time, a big deal. It was seen rightly, I think, as an endorsement. Remember, at that point, Bitcoin hadn't reclaimed a new all time high.
It just heated up from there. In January, BlackRock added bitcoin futures as a possible investment for two of its funds. Then, in February, BlackRock CEO Rick Rieder again jumped on Squawk Box and let the market know that BlackRock was officially in the bitcoin business: "Today, the volatility of it is extraordinary. But listen, people are looking for storehouses of value, people are looking for places that could appreciate under the assumption that inflation moves higher, and that that's our building. So we've started to dabble a bit into it," that is of course being bitcoin. Now, this was pretty peak bitcoin this year, it was up 70% on the year at the time, Tesla had just announced its big $1.5 billion investment and the framing that reader was going for is that effectively, it was a hedge play that shouldn't any longer be ignored, quote, "duration doesn't work. Interest rates don't work as a hedge and so diversifying into other assets makes some sense, holding some portion of what you hold in cash and things like crypto seems to make some sense to me."
But now, let's come up to today. Bitcoin has been floating down and sideways for months. So, where is BlackRock at with it now? Let's listen to Larry Fink on CNBC earlier this week.
In the past, you've asked me about crypto and bitcoin. Again, in my last two weeks of business travel, not one question been asked about that. That is just not part of the focus on retirement and long term investors and we see very little in terms of investor demand on those types of things. But, quite frankly, they may not come to BlackRock for that type of demand. But I would say for all the pension funds in the insurance company, for all the RIAs that we're talking to for their clients on behalf of their retirement, you know, the dialogue is about "how should I navigate my portfolio and how should I think about my portfolio over a long horizon?"
So, a couple follow-up thoughts. First, I think there is an important self-awareness here that BlackRock isn't going to be most people's first stop to learn about crypto. I also don't particularly mind that retirees aren't beating down the doors to get into this industry. A couple of weeks ago at the congressional hearing on crypto, there was a weird amount of discussion about how it was going to bankrupt people's retirement funds, so much that I ended up tweeting a joke about it. Given that, it doesn't really bug me that this isn't a mainstream bitcoin demo just yet. Still, I do think that this may be one more data point about the state of the institutional conversation or, lack thereof. This is a firm that just a couple of months ago was revving its bitcoin plays up that now says no one is asking them about it at all.
Still, there's a fair bit of counter evidence and some on Twitter wondered if there weren't other things going on. Scott Johnson tweeted: "BlackRock statement is curious, mostly for the fact that it flies in the face of the actions of nearly every other major financial institution. I don't doubt demand is down from a few months ago, but Goldman Sachs, BNY, State Street, Morgan Stanley, all entered the space in response to demand. My guess is Fink is more motivated by his ESG goals, which clouds his thinking. So he's either downplaying, lying or willfully ignorant." Now, interestingly, when I asked Cathie Wood about Elon Musk and his bitcoin reversal a couple of months ago, she also pointed to ESG pressure from folks like Fink as a potential culprit, so maybe there is something there.
However, with that, let's shift gears and talk about ShapeShift's final shape shift. One of the big explorations of the crypto space is around new organizational forms. This started right from the very beginning with bitcoin which was propagated and grew without any of the normal trappings of a company. In many ways, one of the key questions of this space is can decentralized networks compete with centralized corporations and institutions? This is still an extremely nascent battle. Decentralization for the sake of decentralization hasn't proven itself out, especially in the context of crypto powered apps like social networks. However, there are other reasons for people to be interested in decentralization, particularly around financial protocols. Regulatory scrutiny and cost of compliance are pretty high on that list, in that, ShapeShift presents a fascinating case study.
Founded in 2014 by Erik Voorhees, ShapeShift has long sought to minimize the information it collected about its customers. For years, it used a no-account model for trading that enabled trades without users having to register. In 2018, that changed and ShapeShift started requiring basic info. Many saw this as a fundamental and irreconcilable shift. At the time, WhalePanda tweeted: "You still have the option to shut down your business or become a KYC honeypot. I have no issues with exchanges doing KYC/AML. ShapeShift's business model was that it was free of that." Peter Todd said: "ShapeShift bites the dust" but others were more forgiving, recognizing that that shift towards KYC was an inevitable one beyond ShapeShift as well. PJ Kershaw wrote: "The compliance overhead being enforced has clearly gotten to the point whereby it makes sense to lose this fight to continue the war, for want of a better phrase. Gritten survival trumps pride and ideals and business survive.
ShapeShift did but it clearly never loved its new model of collecting customers' info. It also, according to Voorhees, cost ShapeShift some 95% of its users. In January of this year, ShapeShift announced that it was getting rid of their trading desk entirely and shifting to route orders through DeFi apps in an attempt to get rid of KYC rules once again. Here's what Voorhees said about this change when they announced it: "ShapeShift's original model was designed to protect users, provide instant liquidity without requiring them to trust a custodian. We had to be the counterpart, the market maker, to provide that service at scale. The decentralized protocols are now providing a superior service. So, we're embracing this evolution and helping our customers easily connect with them." The press release went on: "Because shapeshift is no longer acting as any form of financial intermediary or counterparty, this new frictionless user experience frees users from having to provide personal private information."
Now, today, ShapeShift is going even farther. The company has begun a month-long process of completely closing its doors. Currently having 65 employees, when the process is done, ShapeShift will have no employees, no accounts, no CEO, no marketing, no anything resembling a normal company. Instead, it is airdropping 340 million FOX tokens to past users of ShapeShift and other users of prominent DeFi protocols. This was initially worth about $100 million, but the value of the FOX token went up significantly around the news. ShapeShift will then become a DAO governed by its users. A piece in CoinDesk breaks out token ownership, quote, "34% is getting distributed to the community and to other crypto communities, 32% will be distributed to shape ShapeShift, 24% to the ShapeShift DAO, of which FOX token holders will have control, 7.5% to the Foundation, which will steward whatever can't be decentralized now until it can and 1.3% of the company to use as it winds down."
So I have no idea what the future holds for ShapeShift specifically, but I do think that this is an interesting and reflective moment in the history of the changing nature of corporate and organizational structure, as well as in the balance of power between networks and governments and protocols.
Speaking of power, let's now discuss some notes from Jay Powell's recent testimony before Congress. Yesterday's episode was all about a Federal Reserve Officer talking about why we didn't need to fear stablecoins. So, does Jay Powell share that enlightened view? Nah, doesn't seem like it. Patrick McHenry, who is definitely a crypto ally, asked a question about crypto, CBDCs and Powell responded that the Fed would be releasing a report on CBDCs in September. He said that the report would outline the benefits and risks of CBDCs but that it would also discuss cryptocurrencies and stablecoins more broadly. When discussing stablecoins, Powell basically said they needed more regulation.
Quote, "Stablecoins certainly have some advantages in terms of faster payment systems and have some attributes of CBDCs. But, there are some risks with stablecoins right now. I think the issue is that stablecoins are a lot like money market funds or bank deposits or a narrow bank. If stablecoins are going to be a significant part of the payments universe, which we don't think crypto assets will be but stablecoins might be, that we need an appropriate regulatory framework, which frankly, we don't have." Anderson Kill partner Preston Byrne was not impressed with this statement, saying: "The United States has more regulation than anywhere in the world, and stablecoins have a very clear place in it: money transmission. The BSA, Bank Secrecy Act, is the most onerous financial record-keeping law in the world. What more regulation do these people want?"
Still, perhaps the most jarring quote of Powells was this one: "You wouldn't need stablecoins, you wouldn't need cryptocurrencies if you had a digital U.S. currency. I think that's one of the stronger arguments in its favor." This is such an egregious misunderstanding of the motivation for cryptocurrencies, the whole central innovation of the thing was a means to transmit value outside of a sovereign monetary regime. It's a counterweight to something that no one previously had any agency to affect in their personal lives. Mark my words, the existence of CBDCs will significantly increase the number of total holders and users of bitcoin.
In other Powell news, a much-shared article on prospect.org says that Biden is likely to replace him when his term ends next year. Quote, "As a Republican, he partly bulletproofs Biden and against the charge of being soft on inflation and serves as an administration olive branch to Republicans in Congress, but Powell has been dismal on the Fed's other job: financial regulation. My sources say the decision hasn't been made yet, but Biden is likely to name a new Fed chair."
Anyway, let's wrap this episode up with a look at a dissenting letter from two members of the SEC. The U.K. based company called Coinschedule just settled with the SEC for violations of securities laws for promoting token offerings. They're paying a $43,000 discouragement plus a $153,000 penalty. Still, what's most interesting isn't the settlement, it's that two commissioners Hester Peirce and Elad Roisman issued a statement critiquing the SEC for failing to use this as an opportunity to offer more regulatory clarity. They wrote: "We agree with our colleagues that touting securities without disclosing the fact that you are getting paid and how much violates Section 17B. We nevertheless are disappointed that the commission's settlement with Coinschedule did not explain which digital assets touted by Coinschedule were securities, an omission which is symptomatic of a reluctance to provide additional guidance about how to determine whether a token is being sold as part of a securities offering or which tokens are securities."
Peirce and Roisman go on to explain how difficult it has been for companies to get guidance, leading to an unfortunate situation where guidance mostly comes in the form of enforcement. Quote, "In this void, litigated and settled commission enforcement actions have become the go-to source of guidance, people can study the specifics of token offerings that become the subject of enforcement actions and take clues from particular cases. However, applying those clues to the facts of a completely different token offering does not necessarily produce clear answers. Providing guidance piecemeal through enforcement actions is not the best way to move forward. If the commission intends to continue to do so then we should at least be clear about which tokens we have identified to have been sold pursuant to securities offerings."
Peirce and Roisman conclude that with the rise of DeFi, this is a problem that's going to get worse and not better. Quote, "One of the ways to help work through the issue might be to develop a safe harbor, along the lines of that which Commissioner Peirce has proposed, which would allow token offerings to occur subject to a set of tailored protections for token purchasers, whether we decide that all or a subset of token offerings are securities offerings, providing clear regulatory guideposts and then bringing enforcement actions against people who ignore them is a better approach than the "clue by enforcement" approach that we have embraced to date and that today's settlement bodies. In short, we know folks have questions and confusion persists in the marketplace, it is important that we start providing clear and timely answers." To me, I think it's an extremely encouraging letter and one that I hope their colleagues take seriously. For now though, I hope you're having a great week. I appreciate you listening, until tomorrow, guys, be safe and take care of each other. Peace!