Bitcoin Struggles After Inflation Report; California Crypto Bill is an Overreach, Legal Experts Say
Good morning. Here’s what happens:
Prices: Bitcoin, ether and other major cryptos spent the day deep in the red after a disappointing price index report.
Insight: A crypto law recently passed by the California Assembly is an overreach, say two legal experts, including the bill’s author.
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Prices
● Bitcoin (BTC): $20,451 -7.8%
● Ether (ETH): $1592 -6.1%
● CoinDesk Market Index (CMI): $1,018 -6.0%
● S&P 500 daily close: 3,932.69 -4.3%
● Gold: $1,713 per troy ounce +0.5%
● Ten-year Treasury yield daily close: 3.42% +0.06
Bitcoin, Ether and Gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the spot price for COMEX. Information on CoinDesk indices can be found at coindesk.com/indices.
Bitcoin’s Tuesday Post CPI Travails
By James Rubin
So much for surprises.
The much-anticipated August consumer price index (CPI) hit an unexpectedly high 8.3%, and investors — crypto and otherwise — didn’t like what they saw.
Bitcoin, the largest cryptocurrency by market capitalization, recently traded just above $20,400, down more than 7% from 24 hours earlier. BTC, which had hovered well above $22,500 just prior to the release of the report, plunged over 5% in the hour following the CPI release and continued to spiral.
Ether, the second-largest crypto by market cap, followed a similar pattern, changing hands below $1,600, down about 6% from a day earlier as inflation concerns trumped Merger excitement. The merger, the shift of the Ethereum blockchain from a slower, more energy-intensive proof-of-work protocol to proof-of-stake, is set to take place on Thursday, although recent ETH activity, even before the disappointing CPI, has suggested that most significant price increases have already occurred.
Other major altcoins spent the day in a deep red funk with SOL and AVAX recently off more than 12% and 9%, respectively.
“Struggling is the right word,” Raghu Yarlagadda, co-founder and CEO of FalconX, told CoinDesk TV. “People didn’t expect 8.3%.”
Yarlagadda said the August CPI, which economic observers had expected to fall to 8.1%, provided the latest evidence that inflation remained a threat to the US economy and that the Federal Reserve would be more likely to raise interest rates a third time in a row by 75 basis points at the meeting of the Federal Open Market Committee next week.
“[The] The Fed was very clear that they want to fight inflation first and then prioritize the soft landing,” he said. “That means it’s going to make some aggressive moves.” He added: “The inflation data will probably create some drag on risk on assets, and that’s going to spill over into crypto.”
As they have largely done in recent months, crypto prices followed the stock markets, which also fell on Tuesday. The tech-heavy Nasdaq, the S&P 500, which has a strong technology component, and the Dow Jones Industrial Average struggled through their worst day since June 2020 with the Nasdaq falling more than 5%. Market observers had expected falling energy prices to stimulate a more favorable CPI, but food and housing costs remain high.
Crypto news
The exodus from cryptocurrency hedge fund and venture capital investor Pantera Capital continued with CFO Ryan Davis leaving, as CoinDesk’s Nick Baker reported Tuesday. His departure follows that of Chief Technical Officer Terence Schofield, Chief Operating Officer Samir Shah and other staff.
Earlier in the day, lawyers for Craig Wright, the Australian computer scientist best known for claiming to be the inventor of Bitcoin, said he will not provide any new cryptographic evidence that he is Satoshi Nakamoto at the trial of Bitcoiner Hodlonaut, which began in Oslo on Monday.
Meanwhile, Yarlagadda noted that financial institutions have been tight-lipped about the merger’s impact on pricing, with some seeing it as a “starting point for something bigger”, while others believe increases last month already accounted for the change. “Both sides are extremely passionate, but I don’t think there is strong conviction that ETH is going to rally right after the merger,” he said. “Retail seems to be on both sides of the fence at this point, based on what we’re seeing.”
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Insight
California’s Crypto Overstep
By Sam Reynolds
The Merge isn’t the only big crypto event this week.
California’s new digital asset bill that singles out stablecoins and is currently awaiting Governor Gavin Newsom’s signature could reshape the world’s digital asset industry, given the state’s size and importance in the cryptocurrency industry.
Or will it?
The crypto industry has changed dramatically since New York, another major US state, passed a BitLicense law in 2015 that set a precedent for state-level crypto regulations and led to the New York Attorney General’s investigation into Tether and a settlement.
California Dreamin’
Although federal legislative interest remains in stablecoins, an initial iteration of the STABLE Act, which would have regulated stablecoin issuers, died in the halls of power. But the passage of California’s digital asset law threatens to fundamentally change the stablecoin environment.
The law, passed almost unanimously last month by California’s state assembly, would prohibit California-licensed entities from trading in stablecoins unless that stablecoin is fully backed by securities and issued by a bank or is licensed by the California Department of Financial Protection and Innovation .
But one of the minds behind the STABIL Act is skeptical about how big a significant difference this law will make.
“I feel like this is a state-level thing dealing with a federal-level problem,” Rohan Grey, a legal scholar who helped draft the STABLE Act, told CoinDesk. “The fact that this is a state-level bill still creates some limitations. They don’t have the capacity to, for example, require FDIC insurance.”
Relying on full asset backing for stablecoins is not necessarily going to be as safe as deposit insurance, says Gray.
Gray highlights how California’s bill is actually a step back from what was before Congress, as it allows for stablecoin issuance by non-bank entities – while the STABLE Act specifically requires chartered banks to play a role.
“We’re trying to actually make sure that banking perimeter is strongly enforced, while this allows someone to potentially be licensed as a stablecoin issuer without being classified as a bank,” Gray said. “One of the less widespread, but secondary and subtle goals of that was to reabsorb the remittance industry into banks.”
While Tether, given its market capitalization, is often at the forefront of legislation surrounding stablecoins, and as a result creates a stark divide between exchanges that can and cannot offer Tether (see: Binance/FTX.us versus their motherships), Gray believes it is important to look beyond bad actors and consider wider market security.
“For the people [the] behind the STABLE Act, this is not a problem about individual bad actors; This is a problem with the actual structure of the market and the structure of the theory of security,” he said. “If your theory of security is, ‘We’ll always have some assets on hand. That’ll be good enough,’ then you’re leaving out operational risk. You could get hacked. Something could go wrong. You’re not covering that.”
Crypto moves faster than lawmakers
Even if California Governor Newsom signs the bill into law this week, it won’t go into effect until 2025 based on the bill’s wording.
“This is very likely to be outdated and possibly unusable by the time we get to 2025,” Chris Lavigne, co-chair of the digital assets group at New York-based law firm Withers, told CoinDesk. “By 2025, I suspect the regulatory regime will have changed dramatically, so I don’t know to what extent this bill will be out of date and the laws in it will be out of date.”
Lavigne, like Grey, also takes issue with California doing something that makes more sense for the federal government to handle.
“This notion that they’re going to ban California-licensed entities trading stablecoins unless it’s issued by a California-licensed bank is a very aggressive position,” he said. “That would effectively prevent most exchanges from either operating in California, or the companies would have to geofence their people in California and not offer any of the digital assets that are on their exchanges in, say, California.”
A bill that can shake a lot
Despite Asia’s large growing pool of liquidity, the US remains the most important market for digital assets. At the end of the day, this complicates things much like how exchanges and protocols without meaningful exposure to the US need to be aware of New York’s rules, especially as those rules are stricter.
“This creates a situation where California is trying to create a kind of stand-alone regime where in order to play ball in the United States you have to satisfy California regulators first,” Lavigne said.
But who knows where we will be in 2025. Maybe by then bitcoin will have gone down to $0.
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CoinDesk TV
In case you missed it, here’s the latest episode of “First Mover” on CoinDesk TV:
Bitcoin Falls As August CPI Shows 8.3% Inflation
The Consumer Price Index (CPI) for August was released, showing inflation at 8.3% over the past year, which was higher than expected considering that gas prices fell. FalconX Co-Founder and CEO Raghu Yarlagadda joined “First Mover” to discuss crypto markets, including the latest inflation data and the historic Ethereum merger that is soon upon us. Raj Gokal, CEO of Solana Labs, and Securitize founder and CEO Carlos Domingo also joined the First Mover.
Headings
Craig Wright will not provide cryptographic proof that he is Satoshi, his lawyers say during the Hodlonaut trial: Wright’s lawyers say his scientific work, personal history and, above all, his success in convincing Gavin Andresen that he had Satoshi’s private keys are proof enough.
Wall Street Titan’s New Crypto Exchange Aims to Seriously Cut Costs for Investors: EDX Markets, backed by major trading and investment firms such as Schwab and Citadel Securities, will initially offer only a handful of cryptocurrencies such as bitcoin.
4 Things Blockchain Analysts Say About The Ethereum Merger: Investors are increasingly turning to futures markets over spot markets to adjust exposure ahead of the merger, researchers said.
Twitter shareholders approve Musk buyout offer: Reports: The Tesla boss has repeatedly tried to back out of the $44 billion takeover deal.
Nansen casts doubt on merger-initiated bet ETH sales: More than 70% of staked ETH is worth less today than when first purchased, the crypto analytics firm found.
