Good Morning. Stocks were mixed yesterday as the markets digested Jerome Powell’s latest comments that it was unlikely that the Fed would raise rates despite inflation pressures. While investors were pleased that rates were not increasing, there is not much market data to give investors confidence that inflation is under control.
Bitcoin had quite a rough week after dropping more than 10% to around $57,000 yesterday. CoinDesk blamed the pinch on “rising macro headwinds and falling liquidity.” Not only that, but last week we reported that BlackRock had finally snapped its continuous positive inflow record, and this week BlackRock saw millions in outflows. It seems the tides of markets are turning.
This week we discuss the implications of a populist monetary policy as it becomes a growing topic among the presidential hopefuls. We also discuss the latest prison sentence in the crypto-sphere: billionaire Binance founder CZ. Lastly, a name that we haven’t heard from in a while makes a startling announcement about his company and crypto. Check that out in the media section. Enjoy!
Crypto News You Can’t Miss: Binance Founder Sentenced to Prison
Changpeng Zhao, the billionaire founder of Binance, the world’s largest cryptocurrency exchange, was sentenced to four months in prison on charges of enabling money laundering. This sentence, delivered in a Seattle federal court by U.S. District Judge Richard Jones, is notably less than the three years sought by federal prosecutors. Originally, sentencing guidelines recommended a 12 to 18-month prison term, while Zhao's defense requested only five months of probation.
Judge Jones criticized Zhao for not fully leveraging his resources at Binance to ensure compliance with every regulation. Zhao, showing regret, apologized in court, acknowledging his failure to implement an adequate anti-money laundering program and recognizing the gravity of his oversight.
The charges stem from accusations that under Zhao’s leadership, Binance failed to establish an effective anti-money laundering program as mandated by the Bank Secrecy Act. Additionally, the exchange processed transactions linked to criminal activities, involving Americans and individuals in sanctioned jurisdictions. This led to a broader investigation into Binance by the U.S. government, culminating in a settlement in November where Zhao stepped down as CEO but maintained a significant 90% ownership stake in the company.
As part of the settlement, Binance was ordered to pay $4.3 billion in fines and forfeiture, with Zhao personally agreeing to a $50 million fine. This action against Binance was spearheaded by the Department of Justice, the Commodity Futures Trading Commission (CFTC), and the Treasury Department. Notably, the Securities and Exchange Commission (SEC) did not participate in this specific case but has sued Binance over other issues, including the mishandling of customer assets and operating an unregistered exchange.
Despite the legal challenges, a Binance spokesperson highlighted the company's commitment to enhancing compliance, security, and transparency. These efforts include significant improvements in anti-money laundering detection and the recruitment of key compliance personnel.
Zhao's case, focusing on regulatory and compliance failures, contrasts with other high-profile cases in the cryptocurrency space, such as Sam Bankman-Fried of FTX, who faces up to 50 years in prison for financial misconduct and deception. This distinction underscores a broader legal perspective that may view compliance failures as less severe compared to direct financial crimes.
Op-Ed: Will Populism Take Over US Monetary Policy?
Image from CNBC
Earlier in my career, I spent time as a currency trader at a large bank based in London and whenever the Fed chair would speak, it would capture the markets focus. Every word of these speeches would be analyzed for hints on where monetary policy was going or if there was a policy change on the USD. Subtle shifts in policy would have significant impacts on markets. Interest rate forecasters would refer to this art as ‘reading the tea leaves’ and other phrases that highlighted the nuance. And when bond markets moved, they often had implications for government funding. Higher yields would immediately impact the expected costs of funding the deficit and congress was constantly looking at what bond markets were doing. Bill Clinton’s chief strategist James Carville famously said: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”
In the 80s and 90s, monetary policy was something that few outside of the financial markets spent much time on. The independence of the Fed allowed for decisions to be made based on long-term price stability. Congress would occasionally try to make tweaks to the Fed policy including when the ‘dual mandate’ of including unemployment as a factor when deciding rate policy, but generally the Fed has been seen as autonomous in their policy making. In some cases, the President’s administration could be at odds with the Fed in an election year, but the importance of this independence has always won out.
The rise of populism is a global trend, but in the US we are seeing some signs that the long-respected independence of the central bank might be under threat. Trump has recently stated "We have a Fed that's going to be Republican, I'm going to get rid of the whole damned thing.” The Trump campaign plan, obtained by The Wall Street Journal, would end decades of institutional protections built to insulate the Fed from the political whims of the president. The plan calls for installing a Fed chair who would consult with Trump on interest rate decisions which would be a major breach of the bank’s operational autonomy. The plan also calls for giving the White House more authority over Fed regulations and the Treasury Department a greater role in joint emergency lending programs, such as those deployed during the 2007-08 and 2020 recessions.
Whereas for much of the US population who do not understand some of the complexities of monetary policy and its relationship to price stability, they see higher rates as a tax on borrowers. The concept that the President will simply lower borrowing costs will be welcomed news. However, if a country like the United States that is saddled with $34 trillion in national debt, attempts to wield monetary policy as a populist instrument to score political points, it would likely precipitate in a severe economic crisis. History offers sobering examples, when price stability is exchanged for populist policies, high inflation follows. Looking at the costs of funding the US government, investors in US treasuries would require higher yields to justify the higher expected inflation. Funding the US deficit would likely become a challenge.
Should a future US administration follow through on removing the independence of the Fed, it would risk cratering the dollar's status as the world's reserve currency. Not only would the direct impact of higher inflation eat away at the greenback's purchasing power, but the indirect forfeiting of the currency's credibility and reserve status could spark capital flight. Should global markets price in an unmoored monetary path, yields on Treasuries would likely spike much higher.
In such a doomsday scenario where the US enters a period of hyperinflation, alternative models of credible hardening may rise up to fill the void. Already investors have flocked to virtual "cryptocurrencies" like Bitcoin which has limited circulation and no central bank to dictate lending rates. While current DeFi assets are small compared to traditional finance, decentralized blockchain-based systems governing digital finance are maturing and spreading. Were the US to find itself with high inflation and issues funding the deficit, crypto platforms could start to take on newly systemic importance in underwriting commerce and trade flows.
The parallel decentralized finance (DeFi) ecosystem, with smart contracts for loans, derivatives and leverage built directly into robust blockchain-powered code, could provide a blockchain-native avenue for global capital to reconstitute outside of dollar hegemony. It would not be efficient nor elegant, but desperate investors would seek whatever refuge they could to escape the discontents of ‘Trumpian’ monetary populism.
To speak about the political outlook in market terms, a Trump presidency is not currently priced in but as we get closer to the election date, should his poll numbers rise, investors should consider what a populist driven monetary policy means for the US and for the USD. Crypto currencies might see significant inflows as a way of getting money out of the US banking systems and into wallets that are not dependent on banks or US policy.
Media of the Week: A Name You Might Have Forgotten
Jack Dorsey, the former CEO of Twitter, has said he is expanding his Bitcoin mining center. Yes, the Jack Dorsey of Twitter - remember him? On Tuesday the former founder of Twitter and current founder of Block announced that the firm has finished the development of its own full bitcoin mining system. Not only that, but in addition to their mining system they have developed ‘system design.’
“Building on these insights and pursuant to our goal of supporting mining decentralization, we plan to offer both a standalone mining chip as well as a full mining system of our own design,” according to Block. Read more here.
One Person prompted me to leave a comment here: Jack Dorsey, former twitter CEO. He has been a great example of modern day capitalist-socialist might look like. It's fascinating to see how macroeconomic factors are impacting both traditional and crypto markets, with Bitcoin's volatility reflecting broader economic uncertainties.
The scrutiny on figures like CZ and the attention towards populist monetary policies highlight the evolving landscape of finance and regulation, influencing market sentiments and investor strategies.