Are we immune?

Bitcoin's "safe haven" status may soon be put to the test by a global market correction. 

Our weekly opinion piece and overview View this email in your browser   CoinDesk Weekly is sponsored by  June 10, 2018 Contagion-free? The global capital markets face the prospect of a deep correction amid growing jitters over trade wars, Italy's political crisis, and a shrinking Deutsche Bank. If there's a flight from risk, will bitcoin and other cryptocurrencies live up to their billing as a safe haven – or tank in tandem with traditional assets?   Read more in THE TAKEAWAY below.   TOP TRENDS ON COINDESK Crossover ambitions Two of the oldest and best-known startups in the crypto space are seeking to become highly regulated financial firms, underscoring how compliance with securities laws (not just anti-money-laundering rules) has grown in importance amid the token explosion. Circle, the wallet, trading and investment platform, is reportedly pursuing a federal banking charter in the U.S., and it also hopes to be licensed as a brokerage and trading platform. Not to be outdone, fellow exchange Coinbase said it was making strides toward the goal of operating a federally regulated broker-dealer, with pending acquisitions of three licensed firms. In both cases, part of the aim is to be able to list tokens that U.S. law deems securities. Circle also cited among its motivations federal preemption – that is, answering to one regulator in Washington, D.C., rather than 50 different states – and the benefits of being plugged into the Federal Reserve system. But many users are likely to view the Circle and Coinbase moves as a betrayal of the ideals behind the technology that gave these unicorns their original raison d'etre. As cryptocurrency maven and Wall Street veteran Jill Carlson tweeted, channeling The Who: "Meet the new boss, same as the old boss. #openfinancialsystem" Ripple watch Ripple, the payments startup that has a complicated relationship with the cryptocurrency XRP, brought out the big guns to defend itself against legal troubles. The company has hired two former Securities and Exchange Commission officials to represent it in one of the ongoing civil matters. Former SEC chairwoman Mary Jo White, along with Andrew Ceresney, a former SEC director of enforcement, are representing Ripple in the investor lawsuit filed last month. Following that revelation, another class action lawsuit was filed against Ripple, similarly alleging that XRP is a security. Separately, Ripple's former CTO Stefan Thomas, who announced his departure from the company in May, is going up against ethereum with the relaunch of Ripple's long-shelved smart contracts platform, called Codius, as the technical backbone for his new company, Coil. Tightening their grip... Regulators across the globe are exerting more influence over the young cryptocurrency industry. In the U.S., the Securities and Exchange Commission appointed its first-ever crypto czar. Valerie Szczepanik, long the agency's unofficial point person on cryptocurrency and token sales, will take on the new role as associate director of the Division of Corporation Finance and senior advisor for digital assets and innovation. On the other side of the Pacific, Japan for the first time officially denied an application to register a cryptocurrency exchange, in large part because the firm was uncooperative with government requests. Meanwhile, South Korean police recommended charging cryptocurrency exchange Coinone for offering illegal gambling that could be used to launder criminal proceeds. … while opening their arms At the same time, though, governments continue to embrace the innovations of the blockchain sector. For example, New York State Assemblyman Ron Kim hopes to introduce cryptocurrencies to local communities. He's proposed legislation that aims to launch 10 pilot programs creating local community currencies, which would be cryptocurrencies or other alternative, digital forms of money. Elsewhere, China's central bank has finished work on a blockchain-based system to digitize checks issued by domestic businesses. With that, the government aims to solve the issue of check fraud in the Chinese market. And South Africa's central bank has published the results for a trial of its blockchain-based system for interbank clearance and settlement. It claimed success for the system, which managed to settle the country's typical 70,000 daily payment transactions within two hours. See all CoinDesk stories ⭐ CoinDesk Weekly Sponsor ⭐   Your Data. Your Life In the current system, your personal data is sourced, held, used and swapped by third-party providers. The Pillar Project is an ambitious project to return ownership of personal data to you. We do this through decentralized blockchain technology, starting with a token wallet. Learn More QUOTE OF THE WEEK "I know [developers] are saying 'we're innovative, we're startups, we need to be left alone and put in a sandbox.' Toddlers play in the sandbox. Adults play by the rules." – New York State Department of Financial Services Superintendent Maria Vullo, defending the state's BitLicense regulation.   THE TAKEAWAY Michael J. Casey is the chairman of CoinDesk's advisory board and a senior advisor for blockchain research at MIT's Digital Currency Initiative. A common thought experiment in the crypto community is to ponder how cryptocurrencies would fare in the event of another global financial meltdown.  It is not an idle question. There is a host of troubling developments in the global economy: the threat of a trade war, jitters in Italian debt markets, problems at Deutsche Bank and new emerging market crises in Turkey and Argentina.  Meanwhile, central banks, led by the Federal Reserve, are tightening or signaling tighter monetary policy. That's putting a brake on the huge gains that low interest rates and quantitative easing had bestowed on global markets in the eight years since the end of the last crisis. With this combination of risk factors already in play, there's always a chance that some unforeseen trigger could set off another terrified rush for the exits among global investors.    What would the impact be on bitcoin and other cryptocurrencies? Would their reputation as independent assets see them benefit from safe-haven inflows? Or would the market-wide reduction in risk appetite spread wide enough that crypto assets get caught up in the selloff?   Opposing scenarios   Some crypto hodlers salivate at the idea of market panic. They contend that, unlike the 2008-2009 collapse, when Satoshi Nakamoto's newly launched cryptocurrency was essentially out of sight and unavailable to the hordes seeking a haven from the fiat world's chaos, bitcoin is now widely recognized as a more versatile alternative to traditional flight-to-safety assets such as gold.    In a crisis, they say, bitcoin could shine – as might other cryptocurrencies designed as alternatives to fiat cash such as monero and zcash. Unaffected by future monetary policy responses, immune from draconian interventions such as the Cypriot bank deposit freeze of 2013, and easily acquired, they could prove their value as digital havens for the digital age in such a moment. Accordingly, the bulls' argument goes, their prices would surge.    On the other hand, if there's enough of a market-wide departure from risky investments, it's hard not to see this sector being swept up in it. Just as the most extreme gains in crypto prices in the latter part of 2017 were inextricably linked to the rapid "risk on" uptrend seen in stocks, commodities and emerging-market assets, so too a major selloff could easily infect these new markets. Cryptocurrencies and tokens are perceived by most ordinary investors as high-risk assets – you buy them with money you can afford to lose when you're feeling upbeat about market prospects. When the mood sours, this class of investment is typically the first to be retrenched as investors scramble to get cash.    At $340 billion, according to Coinmarketcap.com's undoubtedly inflated estimates, the market cap of the overall crypto token market is more than three times its value of a year ago (even though it's down more than half from its peak in early January). But it's less than 1% of the end-2017 market cap of $54.8 trillion for the S&P Global Broad Market Index, which includes most stocks from 48 countries. If once-risk-hungry investors are panicking and looking for things to dump – or for that matter if they're looking for something safe to buy – it won't take much of their funds to move the crypto markets, one way or another.    Low correlations   Backing the bitcoin bulls' argument is the fact that correlations between cryptocurrency and mainstream risk assets – the degree to which prices move in tandem with each other – are quite low.  A 90-day correlation matrix compiled by analytics firm Sifr put bitcoin's correlation with the S&P 500 index of U.S. equities at minus-0.14. That's a statistically neutral position since 1 represents a perfect positive correlation while -1 is a perfectly negative relationship.    But they say that in a crisis "all correlations go to 1." The panicked state of the crowd, with investors selling whatever they can offload to cover debts and margin calls, means that everything could go out with the flood.    Intellectually, too, that sort of wholesale downturn would comfortably stand as a logical counterpoint to the conditions seen last year when market valuations reached excessive levels. We cannot separate the flood of money that flew into crypto at the end of the year from the fact that eight years of quantitative easing had driven a "hunt for yield" in once-obscure markets as the return shrank on now pricey mainstream investments such as corporate bonds. With bond funds paying little more than, say, 2 percent for years, bitcoin looked attractive to mainstream investors. When that artificially-stoked liquidity disappears, the reverse could happen.    Despite all of this, I do believe a global financial crisis could be an important testing moment for crypto assets. Perhaps there'll be a two-phase effect. In the immediate aftermath of the panic, there would be a selloff as every market is hit by the liquidity squeeze. But after things settle, one can imagine that the narrative around bitcoin's uncorrelated returns and its status as a hedge against government and banking risk would gain more attention. Just like the mid-2013 surge in bitcoin that accompanied the Cypriot crisis' lesson that "they can come for your bank account but not for your private keys," so too a wider financial crunch could spur conversation around bitcoin's immutable, decentralized qualities and help build the case for buying it.    The wider point here is that, whether it's as an aligned element that rises and falls in sync with the broader marketplace or as a contrasting alternative to it, cryptocurrencies can't be viewed in isolation from the rest of the world.   – Michael J. Casey Share Tweet Beyond CoinDesk...   OTHERS ARE TALKING ABOUT R3 could run out of money by early next year, Fortune reports, citing former employees of the enterprise blockchain startup.  Further evidence that Chinese regulators might be more open to blockchain: According to this article in Quartz, the country's predominant TV broadcaster, CCTV, aired an hour-long show featuring government officials and international crypto experts talking about the subject.  The New York Times' business section includes a commentary piece by Peter J. Henning, who provided some insights on why fighting fraud in cryptocurrencies has almost become a game of whack-a-mole for regulators. Bloomberg reports that Bitmain, the world's leading producer of cryptocurrency mining chips, is considering going public.  Blockchain could offer a solution to the issue of fake, contaminated or stolen drugs, according to the Wall Street Journal.  UPCOMING FROM COINDESK We're taking Consensus on the road. Join us on September 18-20 at the Marina Bay Sands in Singapore for the first international Consensus event. Register here. Send feedback on this newsletter to marc@coindesk.com. Follow @CoinDeskMarkets for price updates and market analysis. And everyone interested in keeping up with this rapidly evolving field of technology should follow our main Twitter handle, @CoinDesk.      Thanks for reading! Until next week... Copyright © 2018 CoinDesk, All rights reserved. You're receiving this email because you subscribed for updates on our website. 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