Is The Fed Trying to Replace USDC?
Fed intervention | How the Fed “Went Broke” | How CMS Survived FTX | Frax: BAMM
GM Intels, this is your Daily Bolt briefing.
Today there has been more volatility in the equities and crypto markets, with BTC going back down to ~$24,000.
In today’s edition, we cover what Frax is building in stealth, how CMS holdings survived FTX, Lyn Alden’s thoughts on the fed, and more.
And for those that missed our most recent episode of What’s On My Mind…
We’ve prepared a short report with a few key takeaways.
Over and out.
Key Discussions Happening Today
1/ What’s On My Mind Ep. 9 - with Nick Drakon and Souvlaki - Mar. 13, 23
Preview: Revelo Intel Founder Nick Drakon and team member Souvlaki talk about the recent $USDC depeg, Silicon Valley Bank, Silvergate, Fed intervention and more. Click here to listen to the full episode.
Length: 78 mins | OUR NOTE: 7 mins
Silvergate and Signature both created an internal network where instead of relying on the banking system to move money around between counterparties, they could instantly transact with each other which is a banking system built inside a banking system.
Circle had $32.4B worth of treasury bills that have less than 3-months to maturity and $9.7B with financial institutions some of which was $3.3B is in SVB.
As long as banks are not giving money through bad loans, they’re going to be fine.
SVB and Silvergate should have seen this coming if they manage their risks appropriately.
2/ What Bitcoin Did Ep.627 - How the Fed “Went Broke” with Lyn Alden
Preview: Lyn Alden discusses her latest article: How the Fed “Went Broke”, how the Fed is operating at a loss, and more! Click here to listen to the full episode.
Length: 55 mins | OUR NOTE: 4 mins
Here are some key takeaways:
Lynn wrote an article about the Federal Reserve going broke, which the person found interesting.
Central banks are in trouble because their liabilities are paying out higher interest rates than their assets, leading to negative interest income and eating away at their equity.
If a product is free or if we are getting paid, we are essentially the product and providing a low-cost loan to the bank.
3/ Empire - Dan Matuszewski's (CMS) Trading Playbook
Preview: Jason and Santi are joined by Dan Matuszewski, the founder of CMS to discuss upcoming catalysts, the Coinbase trade, punting on L1s vs L2s, lending markets, what it's like managing a crypto fund, and more. Click here to listen to the full episode.
Length: 63 mins | OUR NOTE: 5 mins
Here are some key takeaways:
The reason (CMS Holdings) made it out was due to self-custody and mitigating the risk of catastrophic loss of funds on exchanges.
The company lost around 15m AUM (assets under management).
The period of intense selling in the crypto market is over.
4/ Flywheel - Fraxcheck #30
Preview: In this episode, DeFi Dave, kiet and Samuel McCulloch talk about the updates on Frax’s products and more. Click here to listen to the full episode.
Length: 35 mins | OUR NOTE: 1 min
Here are some key takeaways:
$FRAX total supply is at 1.045B.
$frxETH TVL is at $182.65M, market share is at 1.49% and APY is at 6.47%.
Fraxlend TVL is at $107.3M, total borrowed is at $27M and utilization rate is at 66%.
5/ Flywheel - Interview with Frax Founder Sam Kazemian
Preview:DeFi Dave interviews Sam Kazemian to talk about Frax, monetary premium, stealth products, on-chain governance and more. Click here to listen to the full episode.
Length: 39 mins | OUR NOTE: 3 mins
Here are some key takeaways:
Monetary premium is a concept in which if you issue a stablecoin or liability, people use that stablecoin without expecting payment or interest rate from the issuer.
The Frax team is working on something called BAMM which means a Borrow Automated Market Maker which is potentially zero to one innovation for DeFi.
The idea is you don’t need oracles, it builds liquidity against any asset and allows people to borrow it as the liquidity for the asset rises.
On the Revelo Intel platform, we’ve summarized these 5 episodes and in total, would have saved you: 4 hours and 10 minutes!
To get access, you just have to sign up for a FREE plan.
Note of the Day
Coin Bureau - Weekly Crypto News ft. Benjamin Cowen - Mar. 13, 23
What are this week’s news highlights?
In this episode, Guy talks about the crypto market, Ethereum, FedNow and Benjamin Cowen gives his market analysis.
Read our notes below to learn more.
Crypto Market Crisis
Over the weekend, $USDC stablecoin lost its peg after Circle confirmed that $3.3B of the assets backing the $USDC were stuck in the Silicon Valley Bank which went under last Friday.
$USDC fell to as low as $0.89.
SVB collapsed because it didn’t have enough money on hand to honor customer withdrawals.
SVB invested some of its customers’ money to buy U.S. government debt which had lost some of its value due to the Fed’s ongoing rate hikes.
Many of the other banks are in a similar position to SVB.
On Sunday evening, in a joint statement by the treasury, FDIC and the Fed, they agreed that all depositors of SVB would be made whole and they would have access to their money on Monday morning even if their deposits were above the $250K FDIC insurance limit.
As a result, $USDC recovered considerably.
Signature Bank also closed its doors on the orders of its state chartering authority.
Signature was one of the last remaining U.S. banks that served the crypto industry.
In a span of less than a week, the U.S. crypto sector has effectively been unbanked which will have immense consequences for the industry.
The only safe way to keep your money in crypto under these conditions is $BTC but it isn’t ideal because $BTC’s price is very volatile.
Ethereum Uncertainty Increases
One component of $USDC’s depeg incident that is overlooked is the effects it has on Ethereum’s ecosystem.
$USDC is used on almost every single DeFi protocol in Ethereum and is also held by most DAOs.
There’s also the uncertainty that $ETH could be labeled as a security by the U.S. regulators.
The Howey Test states that an asset is a security if the expectation of profit you get from investing in it is coming from an identifiable 3rd party.
NYAG is arguing that $ETH, just like $LUNA and $UST, is a speculative asset that relies on the efforts of 3rd party developers to provide profit.
NYAG’s lawsuit against KuCoin exchange alleges they were selling unregistered securities and $ETH’s price dropped 8% shortly after the press release.
The SEC stated that $BTC is the only crypto that’s not a security.
The CTFC uses a principle-based approach meaning it’s much easier for crypto companies and projects to comply.
CFTC chairman, Rostin Behnam, stated that Ethereum is a commodity and that the CTFC has jurisdiction over $ETH.
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FedNow
Using Ethereum scaling solutions with stablecoins for payments is something Vitalik Buterin was talking a lot about last summer.
Circle was also in the process of pivoting to payments and was developing a whole host of products to help with that such as digital identity.
There’s a lot of speculation that the crypto crackdown we’re seeing is happening because all these payment systems are direct competitors to the Federal Reserve’s upcoming FedNow fast payment system.
FedNow is expected to be released between May and July this year.
FedNow is close to being a CBDC system.
Almost every country is working on a digital I.D. including the U.S.
According to Custodia Bank CEO, Caitlin Long, the ability to move money 24/7 means that banks will have to hold significantly more assets on hand to make sure they can always mint withdrawal requests.
Smaller banks will have to be a lot more careful who they provide banking services to and where they invest customer deposits.
Small banks will go out of business because bigger banks will always be able to provide better deals.
One way that big banks could stay profitable in such an environment is to completely take over all remaining small banks.
It could be the beginning of the banking sector consolidation process which likely ends with all commercial banks going under and central banks taking over.
The U.S. government will try and take control of crypto then get rid of any elements that can’t be controlled.
Tax The Rich
ESG investors aren’t all that concerned about $BTC’s environmental impact because they know it’s negligible.
The Biden administration’s proposed budget in 2024 includes a 30% tax on electricity costs associated with $BTC mining including off-grid electricity.
The budget also includes a 2nd anti-crypto provision which is to eliminate crypto tax loss harvesting which involves selling a crypto at a significant loss at the end of the year then declaring that loss and buying it back at the start of next year.
The elimination of crypto tax loss harvesting is expected to raise a measly $24B.
The total value of the 2024 proposed budget is $6.8T.
The other controversial provisions in the budget relates to tax changes for other activities namely capital gains.
A capital gain is what you get when you sell a crypto or a stock on a profit.
The budget proposed increasing capital gains tax from 20% to 40% for those making more than $1M per year.
The U.S. politicians are starting to become aware that the average person is upset with the upper class.
Other taxes include raising corporate taxes from 21% to 28% and raising taxes on stock buybacks from 1% to 4%.
Not Done Yet
The central banks have been sucking money out of the system with higher interest rates since last spring and are showing no signs of slowing down.
Last week, Jerome Powell made it clear that the central bank will continue raising interest rates for the foreseeable future and plans on keeping them higher for longer.
The Fed continues to sell assets from its balance sheet mostly U.S. government debt.
The selling of U.S. government debt causes its price to fall and interest rates to rise.
If the debt ceiling is not raised before the June deadline given by the treasury, the U.S. government could risk default which will cause the markets to crash and result in a downgrade of U.S. government debt.
It’s likely that the banks will continue to experience unrealized losses as long as the Fed will sell assets on its balance sheet and these unrealized losses will be increased by the treasury once it’s able to issue more government debt.
It’s unlikely that the Fed will stop raising interest rates because inflation is still too high.
Higher than expected inflation prints could cause the markets to crash further in anticipation of the Fed pushing ahead with rate hikes.
Benjamin Cowen’s Market Analysis
The more difficult aspect of crypto is time-based capitulation.
In 2014, the market just chops both to the upside and the downside and when that happens, you get both sides wrecked.
The market is still in a time-based capitulation component and it’s likely going to last for a majority of this year.
This is the hardest part because this is where people get the most apathetic and stop caring about crypto.
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