January 29, 2024

Monday is for figuring out what's central and what's not. Plus, the 4/20 halvening.

Today's newsletter is 1,254 words, a 4½-minute read.

🚜 1 big thing: Public finance meets blockchains

EY's Mark MacDonald. Photo illustration: Axios Visuals. Photo: Courtesy of EY

The reality of public financing, EY's Mark MacDonald explains to Axios, is that it works in a more decentralized way than might immediately be apparent, Brady writes.

Why it matters: Blockchains are well suited to bring efficiency and accountability to how governments spend the people's money.

The big picture: Judging the effectiveness of a dollar spent in government gets complicated.

  • The federal government or a state or province might have a large pool of funds it collects from taxpayers.
  • Those might go to a regional entity, then a city government and then maybe even on to a private sector partner.
  • Every one of those entities likely has a different budget system.

Between the lines: "It's not until close to that last mile that any of those resources are actually being consumed," MacDonald explains. "Essentially, what happens today, is you ended up spending a tremendous amount of time and budget reconciling."

  • "What blockchain allows us to do is overcome any necessity for centralization," he says.

The latest: EY collaborated with OMFIF, a think tank for central banks, on a report on the advantages of public finance supervised with blockchains.

  • In the next phase of their research, the two organizations hope to propose ways to more granularly assess public expenditures, going deeper than macro stats like employment or GDP.
  • That is, they want to assess not just how money got spent, but the impact it had.

Zoom out: As a member of EY's global public finance team, MacDonald came to blockchains indirectly, as a solution for ways his team was using to help governments work more effectively.

  • He advocates for governments to adopt a holistic approach to budgeting, to connect expenditures to what happens with them.
  • "We've got inputs, we've got throughputs, we've got outputs and we have outcomes," he said. "What we're really not great at is understanding the linkage between all those."

Zoom in: Tokenization can really help with integrated reporting, MacDonald says, when dollars allocated get tied to software that makes them more traceable.

  • Blockchains are amorphous repositories of data that work well for plugging into disparate systems.
  • Such systems can be adapted to share information with a blockchain, rather than imposing a large centralized system on every entity in a chain of funding.

The bottom line: MacDonald argues that the technology is ready. It's the officials who need to adopt it.

  • "People ought to be well more aware than they currently are," he said. "It has not taken hold in the way that it ought to."

⚖️ 2. Charted: Coinbase

Data: Yahoo Finance; Chart: Axios Visuals

Newly launched spot bitcoin ETFs don't appear to be doing any favors for the price of bitcoin... nor Coinbase Global's stock, COIN, Crystal writes.

By the numbers: The bitcoin proxy has fallen roughly 20% this year, with a noticeably steep decline in COIN coinciding with the approval and debut listing of new, more direct bitcoin proxies.

Yes, but: COIN isn't just a gauge for how well bitcoin is doing, but a representation of how well the market thinks Coinbase Global, the company, is doing.

  • Coinbase is a custodian for several of the ETFs. But there have been concerns lately that the funds will take volume from the exchange.

What they're saying: "Coinbase has long-term growth drivers, because a whole bunch of people are buying the ETFs — but short-term it will probably take a bath because crypto trading volumes switch to buying the ETFs for the price benefits," Sandeep Rao, head of research at ETF shop Leverage Shares, tells Axios.

  • The other side: A sell-side analyst at Oppenheimer raised his rating on the company's stock a notch on Friday, to outperform, but maintained a price target of $160.

Between the lines: It's cheaper to buy bitcoin ETFs than it is to buy bitcoin off of Coinbase. (Remember, some issuers are charging nothing for a period of time or until a certain assets threshold is met.)

💭 Crystal's thought bubble: It's not shocking to see COIN give back its gains after its runup last year despite one major event — the Securities and Exchange Commission's lawsuit.

  • With Bloomberg analyst Elliott Stein putting odds of a Coinbase win at 70%, we wonder if that has also been priced in.

🪢 3. How to regulate DeFi

Illustration: Annelise Capossela/Axios

A white paper published today by lawyers in decentralized finance (DeFi) comes with suggestions on how best to regulate that corner of crypto, Crystal writes.

What they're saying: DeFi tech, at heart, is a "communications system that allows users to transmit information about desired transactions," according to the authors, Polygon Labs' chief legal and policy officer Rebecca Rettig and former Financial Crimes Enforcement Network (FinCEN) acting deputy director Michael Mosier.

  • That's the crux of "Genuine DeFi as Critical Infrastructure."
  • Between the lines: Regulators shouldn't impose rules that apply to financial institutions to software service providers. (Same risk, same regulation.)

The big picture: DeFi does not want to get lumped into a catchall category that would force it to adhere to anti-money laundering/countering the financing of terrorism rules applied to TradFi and its centralized peers.

Be smart: The paper distinguishes between real DeFi and what is mistaken for it.

  • DeFi exchanges include Uniswap or Balancer, aggregators 1inch and ParaSwap, and liquidity/lending providers Compound and Aave. (Centralized firms on-chain, don't count.)

Zoom in: The paper appears to respond to recent calls for action in that space, and/or formalized criticisms over its lack of accountability.

  • And between the U.S. Treasury Department's April risk assessment report and FinCEN's October proposal, there are differences and gaps to work out.

Details: For one, the authors of the paper propose a definition of "independent control," identifying systems dependent on centralized actors versus those without them, which would be classified as "critical infrastructure."

  • That would make sense given DeFi vectors of risk differ from TradFi, with the former's stemming from the code itself rather than human judgment.
  • It also lays out DeFi transaction flows step by step and suggests policymakers identify a "regulatory focal point" to combat illicit activity.

The bottom line: Tech-neutral rules should understand the tech is the idea.

🏃‍♂️ 4. Catch up quick

Illustration: Shoshana Gordon/Axios

🏦 The specter of the Federal Reserve stepping in to regulate stablecoins is haunting the industry. (CoinDesk)

ğŸŽ The spot bitcoin ETF race starts in Hong Kong. (The Block)

🇬🇧 The U.K. is one place hanging back on bitcoin ETFs. (Financial Times)

🥑 5. Culture hash: Meme halving

Illustration: Natalie Peeples/Axios

A report in Blockworks estimates the Bitcoin halvening on April 20, crediting Flipside Crypto research for the estimate, Brady writes.

Why it matters: If the historic block reward adjustment hits on 4/20, that will be a source of great joy for the meme-loving world of cryptocurrencies.

  • (The number "420" in any form is code for weed consumption, so April 20th is the pothead Independence Day.)

Background: Every four years, Bitcoin automatically reduces the reward miners can win.

  • Now the block subsidy is 6.25 BTC per block (approximately $262,000).
  • After the halvening, it will be 3.125 BTC.
  • Context: A "block" is a set of transactions that have been finalized and written forever into Bitcoin's ledger, sealed and signed cryptographically. There's about 144 blocks per day.

Be smart: Halving events are exciting for Bitcoiners — it means there's a tangible supply restriction, which should be positive for the price of bitcoins.

  • Typically, it is. A lot of all-time highs have hit a little after a halving.
  • If the halvening hits on 4/20, look for a lot "Bitcoin getting high" jokes.

What we're watching: Estimates for the halvening are all over early April, with April 20 hitting at the late end of the range.

  • The halvening is linked to a number of blocks produced, not a date.

This newsletter was edited by Pete Gannon and copy edited by Carolyn DiPaolo.

Bitcoin had a nice weekend. Hopefully, you did, too. —C & B