They’re Coming For Crypto!

There are a few monsters lurking under crypto’s bed and one of them is starting to slither out. The Financial Action Task Force or FATF has been making menacing noises about crypto in recent years and a number of countries are starting to get spooked.

The loudest noise of all concerns the implementation of the ‘travel rule’, which is designed to force crypto companies to collect information about any transfer of digital assets worth more than US$1,000. Some countries, notably the UK, have in the past pushed back against this ‘recommendation’ from the FATF, but their resistance now appears to be wavering.

You may recall the recent news about PayPal stopping its UK users from buying BTC until early next year. This is because of the travel rule, and you can expect to hear similar announcements coming out of other countries in the near future. The FATF is on the warpath and it has crypto firmly in its sights.

In today’s video, we examine what the FATF is up to; what it could mean for your country and, of course, what it all means for crypto. Although it may sound like yet more doom and gloom, there are reasons to believe that crypto could actually benefit in some ways from the FATF’s meddling. This particular monster under the bed may not be the scariest of the lot…

You can watch that video here.

📈 Crypto Market Forecast 📈

The response to Nvidia’s better-than-expected earnings seems to foreshadow what’s coming next for both stocks and crypto. Nvidia’s Q2 earnings exceeded expectations, and its CEO’s guidance for the next quarter was super bullish. In contrast to the last blowout earnings report however, stocks and crypto experienced a correction the next day.

This begs the question of why, and the answer seems to be China. It’s easy to forget that China is literally the world’s factory. Almost every single publicly-traded company has exposure to China. In Nvidia’s case, its Q2 earnings revealed that the demand for chips related to EVs declined for the first time in a year, due to a drop in Chinese demand.

As for China itself, it seems to be suffering a severe economic slowdown due to issues in its massively overvalued real estate sector. Initially, investors were expecting that China would respond with stimulus. However, it’s now becoming clear that China is doing everything it can to avoid stimulus, such as lowering fees on stock trades in the hope that it will spark a stock rally.

The reason why China isn’t responding with stimulus seems to be two-fold. First, stimulating when the Chinese yuan is this weak could cause it to collapse further, which could cause bigger problems domestically. Second, the CCP has been explicit about its intentions to scale down the speculation in the country’s property sector and bring things back into balance.

In other words, China will not stimulate until it becomes absolutely necessary, and this is something that the markets are starting to realise. For context, it’s believed that the time to buy is when the Fed is stimulating, because that means that things have gotten so bad that they have no other choice. This thinking has its roots in the 2008 financial crisis, which resulted in $500 billion of stimulus.

It’s also believed that China’s stimulus in 2008 played a key role in the subsequent economic recovery (which is up for debate). China stimulated to the tune of nearly $600 billion in 2008. This got the world’s factory working again, and that eventually had a positive effect on the global economy. Note that China’s economy was much smaller back then, and Xi Jinping wasn’t in power.

To bring China’s economy back from the brink today would therefore likely require trillions of dollars of stimulus, not hundreds of billions. As you might have guessed, Xi is ultimately the person standing in the way of this stimulus, and his hesitancy is reportedly affecting Asia the most. Consider that the recent weakness in the Indian rupee is believed to be because of China.

As we’ve seen with China’s zero-COVID policy, the only thing that can convince Xi to stimulate is the prospect of losing power through mass protests and the like. The good news is that this means there’s a path to stimulus (and therefore higher prices for both stocks and crypto). The bad news is that we will not see stimulus until there is significant social upheaval in China.

The worse news is that Xi might find a different solution for controlling this social upheaval. As many macro analysts have pointed out, Xi could respond by invading Taiwan. After all, there’s nothing like a war to unite the people. What’s scary is that Western governments, namely the US, are also trying to find ways to unify their populations.

As it so happens, hostility towards China is the only policy that US politicians can agree on these days. Logically, this increases the risk that there will be further escalation between the two superpowers. For what it’s worth, this escalation is unlikely to be kinetic - it will probably be economic. But, that means that stocks and crypto could continue to suffer as a consequence.

That is of course until the Fed and other central banks are forced to stimulate because China can’t or won’t.

🇺🇲 A Word on Jackson Hole 🇺🇲

Besides that Nvidia earnings call, the other big point of focus for investors last week was Jerome Powell’s speech at the Jackson Hole conference in Wyoming. This annual address amidst the symposia, seminars and speeches (to say nothing of the fly-fishing) is watched closely by market participants desperate for a bit of forward guidance.

We’ll be covering what Jerome had to say in a video this week, so stay tuned for the full lowdown. But, here’s the TLDR: higher for longer. Jerome reaffirmed (yet again) the Fed’s commitment to that 2% inflation target and didn’t rule out using further rate hikes in order to reach it.

What that means is that, as long as the US economy continues to hold up in the face of high rates (which may yet climb higher), the prospect of a Fed pivot is a distant one. This means economic conditions will remain tight and risk assets such as crypto will struggle as a result. Bear that in mind when the moonboys start banging on about the bull market being back. That is likely still a long way off.

🌪 War on Privacy 🌪

On 8th August 2022, the US Treasury Department declared war against one of crypto’s most popular privacy tools, Tornado Cash (TC). The situation was immediately recognised by the community as a grave threat to privacy - a fundamental ethos of crypto culture.

Moreover, privacy, as it stands today, is not only an essential component of crypto but also the internet. Especially in a world where data is more personal, borderless, free and increasingly at risk of falling into the hands of bad actors.

A number of crypto allies, including Coinbase, Coin Center and the Blockchain Association, took up arms in their battle against this crackdown on privacy and code by filing legal actions challenging the validity of the regulator’s actions. Exactly a year since then, we’ve finally begun seeing major developments in these lawsuits.

Unfortunately, the initial results of this war have not been favourable. The US government managed to deliver two fatal blows that seem to have turned the tide of the battle, albeit temporarily.

The first blow, which was delivered earlier this week, came in the form of a District Court summary judgement ruling on the lawsuit funded by Coinbase. This lawsuit sought to argue that the government exceeded its power in placing TC smart contracts on the Specially Designated Nationals and Blocked Persons (SDN) list.

The primary grounds of this lawsuit lay in the argument that TC was not an ‘entity’ or ‘person’ that could be sanctioned, but rather just open-source code that was protected by free speech rights in the First Amendment.

However, Judge Robert Pitman ruled that he recognised TC as being an ‘entity’ that could be sanctioned as it qualified as “an association" comprising its founders, developers, and the DAO.

The primary logic driving this ruling is the fact that the front end was maintained by the TC DAO, which had the power to approve the smart contracts to which the front end directed user interactions. Moreover, the DAO also maintained a pool of assets that were funded from protocol fees generated as a result of users interacting with TC smart contracts.

The court reasoned that this makes TC “[a] body of persons who have combined to execute [the] common purpose” of developing, promoting, or governing TC.

This line of reasoning plays a huge role in the second blow dealt to the TC case, which was delivered in the form of indictments served to Roman Semenov and Roman Storm, the founders of TC.

While Storm was reportedly arrested on Wednesday, Semenov remains at large and has been added to the SDN list. The indictments charge the Romans with one count of conspiracy to commit money laundering, one count of conspiracy to violate the International Economic Emergency Powers Act, and one count of conspiracy to operate an unlicensed money transmitter business.

Note that the charges include the word ‘conspiracy’ - this means that the government is only planning to charge the Romans with the intention of committing such crimes, not the actual crimes themselves. This means that the DOJ only needs to prove that the founders had specific knowledge of the possible results arising from their intentional actions.

The intentional action referenced in the indictments is the act of relayers charging fees for transferring funds on behalf of the public (even though this is non-custodial). Combine this with the profit motive view observed by Judge Pitman in the Coinbase-funded case, and you’ve got a recipe for disaster.

To put it bluntly, the recent actions are punishing TC for its involvement in monetising the code, not for publishing it. Thankfully, Coin Center has already identified inconsistencies present in this novel legal approach, with the help of previous guidance given by FinCEN.

While the standing of this argument remains to be seen, we must first address the implications of allowing this novel legal approach to set a precedent. Primarily, with regards to how it affects the operation of crypto protocols or dapps moving forward.

Almost all crypto protocols have an incentive mechanism that charges their users fees. This is a self-sustaining mechanism that makes it financially possible for teams to continue building these platforms in order to further technological innovation and mass adoption.

Since such protocols are agnostic to users, the indictments only serve to indirectly cripple developers from building sustainable, long-term crypto projects. This is not just a violation of free speech or privacy anymore, but rather an infringement on the freedom of thought and intellect.

📊 Personal Portfolio 📊

BTC 36.19% | ETH 30.26% | USDC 18.72% | USDT 7.49% | USD 3.79% | ATOM 2.39% | DOT 1.16%

🔥 Deal of The Week 🔥

There are many pitfalls in crypto. However, the most soul crushing one has got to be when a hodler takes the steps to self custody their crypto, only to have it stolen or lost due to the wallet they were using.

So, how do you avoid that unnecessary pain and heartache?

Well, with a hardware wallet of course.

The coldest hardware wallet that we know of has got to be NGRAVE zero. The main benefit of this “ice cold” storage solution is that the keys are generated completely offline on the device - and they will never leave it. You can read more about it in our Ngrave review. So, don’t delay and get an Ngrave today.

👉 Get an NGRAVE & get 10% OFF when you sue the code COINBUREAU at checkout!

🔮 Video Pipeline 🔮

  • Messari crypto report: What to look out for?
  • The Bitcoin War: Has the takeover begun?
  • BRICS Countries & Crypto: What do they think?
  • US Treasury’s Attack on DeFi: Time to panic?
  • Jackson Hole Symposium Summary: What’s happening?

🏆 What's New at This Week? 🏆

Digital IDs are Coming: The Future of Identification
Phantom Wallet Review: Top Solana Wallet Pros and Cons
Top 10 Crypto TikToks to Follow: Memes, Education & More
Crypto vs. S&P 500 Performance in 2023

📖 Quote of the Week 📖

In this bear market, there is one investment that you can make without fear, and that’s an investment of time. Time spent learning as much as you can about crypto projects and protocols. While it’s not as glamorous as quick and easy gains, it’s a lot more sustainable and the rewards are that much sweeter.

“The roots of education are bitter, but the fruit is sweet” - Aristotle

Team Coin Bureau

Disclosure: Authors may own cryptoassets named in this newsletter. These are unqualified opinions, and a Coin Bureau newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor.

Guy Turner

Guy is one of the founding members and face of the Coin Bureau. Like many of us, he is just an average joe who became “crypto curious” back in 2013. After recognising the potential of blockchain technology, Guy set off on a mission to create crypto educational content, working with others to start the Coin Bureau website and released our first video on YouTube in 2019. You can learn more about him in his Who is Guy? blogpost.

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