Listen to the recording here: https://go.nydig.com/3TJ0xGq

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Executive Summary

Attendees

Ben Lawsky, Global Head of Public Policy & Regulatory Affairs

Greg Cipolaro, Global Head of Research

Connor Wilson, Head of Institutional Solutions

Performance Update

Bitcoin performed relatively well during the third quarter (+3.1%) amidst a challenging environment for most financial assets. Nearly all major asset classes were down for the quarter, while bitcoin, cash equivalents, and precious metals delivered positive performance. In the second quarter, bitcoin exhibited higher correlations with equities than what’s typical. Conversely, in the third quarter bitcoin remained in a tight trading range for most of the summer (~$19 - $22K) despite challenging performance for risk assets, a good sign that the excesses of the bitcoin market may have already been wrung out.

Notably, the developments in the UK following (now) former Prime Minister Truss’s controversial economic policies remind investors that bitcoin, an alternative monetary system detached from politically motivated individuals, can act as a hedge against fiat currency debasement and fiscal irresponsibility. Unsurprisingly, there was a sharp increase in sterling to bitcoin trading activity as the British pound reached a record low against the US dollar. 

Regulatory Developments in D.C.

Two pieces of federal legislation are progressing in a meaningful way, and they, in their current form, help clarify how crypto fits within the regulatory frameworks established for traditional assets:

• Digital Commodities Consumer Protection Act of 2022 - This bipartisan legislation was introduced in the Senate Agriculture Committee by Chairwoman Stabenow (D-MI), Ranking Member Boozman (R-AR), Senator Booker (D-NJ), and Senator Thune (R-SD). The White House was involved in the writing of this bill, which gives the Commodity Futures Trading Commission (CFTC) clear authority to regulate spot trading in digital commodities, such as bitcoin and ether. The bill details prudential requirements, such as the need for digital commodity platforms (e.g., exchanges, brokers, dealers, and custodians) to register with the CFTC. 
• ‍House Financial Services Stablecoin Bill - Under the leadership of Committee Chairwoman Waters (D-CA) and Ranking Member McHenry (R-NC), a bipartisan bill is in development that gives banks and certain non-banks the ability to issue their own stablecoins and grants the Federal Reserve the primary authority to regulate most issuers. The legislation also preserves the role of state regulators in certain circumstances with a Federal Reserve overlay. The White House has also been involved in crafting this legislation.

It’s especially hard in an election year to predict the probability that either piece of legislation will become law in the next 12 months. However, the bipartisan nature of both bodies of work is quite encouraging and meaningful progress has been made on the Digital Commodities Consumer Protection Act in particular. In fact, NYDIG wouldn’t be surprised if that bill advances further in the Senate and reaches the House floor by the Fall of ‘23, as part of a broader Ag bill that gets passed each year. The Stablecoin Bill may be rewritten if the House flips to Republican control following the midterm elections.

The Securities and Exchange Commission (SEC) continues to focus its enforcement efforts on the crypto assets they view as securities, and the venues that enable access to these assets. 

• A key question the market has faced has been which crypto assets are in fact securities, and in turn must comply with securities laws. The SEC believes the “Howey Test,” the multifactor legal test established by the U.S. Supreme Court in 1946 and applied to traditional markets, should be used to determine whether a crypto transaction qualifies as an investment contract and should fall under SEC jurisdiction. The “Howey Test” considers whether there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”¹
• Crypto industry participants have questioned whether a 75-year old Supreme Court case regarding orange groves should be applied to digital assets. The SEC has been reluctant to provide much clarity, outside of confirming that bitcoin is not a security.
• For greater clarity around the applicability of this legal standard, NYDIG is watching the ongoing SEC lawsuit against Ripple Labs, the company affiliated with the XRP cryptocurrency, to see if there is any change to whether the “Howey Test” should be applied to crypto assets. Ripple believes the XRP token is not a security under the “Howey Test.”

The Merge: Ethereum’s Move to Proof-of-Stake

Ethereum’s technical transition from a proof-of-work consensus mechanism to a proof-of-stake model went off without a hitch.

• While Bitcoin’s base layer has changed very little outside of backwards compatible features such as SegWit (2017) and Taproot (2021), Ethereum just completed a major overhaul called “The Merge,” which changes how network participants agree on the state of the network.
• The upgrade was made mainly to ameliorate environmental concerns associated with proof-of-work mechanisms which are estimated to account for 0.2 - 0.3%² of global greenhouse gas emissions. However, there are environmental benefits to proof-of-work, such as incentivizing the adoption of green energy, utilizing stranded methane, and consuming curtailed energy.
• “The Merge” is just one of many technical upgrades planned for Ethereum over the next several years. Additional benefits tied to scaling and the ability to withdraw staked ether are still to come.

What’s on the Short to Medium-Term Horizon?

• Regulatory: It’s a dynamic time for crypto regulations globally. NYDIG expects the continued move toward a single set of regulations that can be applied to both traditional and crypto assets will provide the clarity market participants and bitcoin investors have clamored for.‍
• Market: The macro environment will remain the key driver of bitcoin performance, and we are closely watching the emerging narrative around bitcoin serving as a hedge against government policy mismanagement and fiat currency debasement.