As we noted earlier, traders have been at a loss to explain today's sharp 10% move higher in bitcoin and the broader crypto universe, with a variety of explanations being proffered including Jerome Powell’s comments Thursday that the central bank had “no intention” to ban cryptocurrencies, others pointing to Chamath's statement that Bitcoin has “effectively replaced gold”, some pointing to Visa's announcement on Thursday outlining for what it calls a "universal payments channel" that will facilitate CBDC transactions and which will be deployed on an Ethereum layer, while the more technical traders cited price levels such as moving averages that are closely watched by technical analysts.
And while it is likely that today's burst higher in the crypto sector is some combination of all of these, we can now add one more reason for near-term crypto optimism: amid rampant speculation that the US Treasury and/or regulators seek a permanent crackdown on stablecoins such as Tether and Circle's USDC - which has for a long time been viewed as the weakest link in the crypto ecosystem, with many speculation that it facilitates currency flight out of China - moments ago the WSJ reported that the Biden administration is considering ways to impose bank-like regulation on the cryptocurrency companies that issue stablecoins, including prodding the firms to register as banks.
Just as importantly, the administration is also expected to urge Congress to consider legislation to create a special-purpose charter for such firms that would be tailored to their business models, the WSJ sources said.
According to the WSJ, the moves "are intended to address regulators’ fears that stablecoins—digital currencies pegged to national currencies like the U.S. dollar—could fuel financial panics and need to be more tightly regulated." This would take place in parallel with the Financial Stability Oversight Council deciding whether to designate stablecoin activities as systemically important.
From the administration’s perspective, it would be preferable if Congress were to impose or authorize a bank-like regulatory framework for stablecoins, as well as a series of investor protections for cryptocurrencies. If Congress doesn’t act, and its other recommendations go unheeded, the administration wouldn’t be reluctant to use FSOC, one of the people said.
And since it appears that bank-like regulation for stablecoins is now inevitable, it is also virtually assured that stablecoins will be deemed systematically important.
Which is actually great news for both stablecoins, and the greater crypto ecosystem, because it means that instead of crushing this vital link between fiat and digital tokens and seeking to snuff out cryptocurrencies at the root - as China has done - the US will instead push aggressively with a regulatory approach, one which most industry participants had already expected.
Indeed while at present many stablecoins are lightly overseen at the state level, some companies, such as Circle, have said they are seeking to become banks. And at least some members of Congress, such as Sen. Cynthia Lummis (R., Wyo.), have recently signaled that stablecoins may need to be regulated in this manner.
“It may be the case that stablecoins should only be issued by depository institutions” or by firms regulated as mutual funds, Ms. Lummis said in a Senate speech this week.
One company - which is already a bank and is certain to have a substantial advantage over its peers when the new regulation is implemented - will be Silvergate Capital, a bank which as Morgan Stanley dubbed earlier this week when it initiated coverage dubbed "a crypto bank like no other." Furthermore, the fact that Silvergate will be the issuer of Facebook's upcoming stablecoin, Diem - and one can be absolutely certain that once cleared, Facebook will seek to not only capitalize the ongoing shift to digital currencies but monopolize as much of it as it can - only assures that when the administration does move on with its treatment of stablecoins, SI will be one of the biggest winners. And, with a market cap of just $3 billion, we fully expect the company to be acquired by either its JV partner Facebook or some other major bank at multiples of its current market value.