5MF (WEEK 36): THE RUSH TO OFFER ETH STAKING, BINANCE DITCHES USDC, ‘RECESSION’ TALK

Five Minute Finance

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11 min readSep 9, 2022

The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

Let’s see what’s going on this week:

September Effect: A Prelude to More Market Selloffs?
The Rise of CBDCs: IRL Governance Tokens are Taking Flight
MakerDAO Proposal to Transfer $1.6B USDC to CeFi Platform
Binance ‘Ditches’ USDC: What’s Actually Happening
Platforms Rush to Offer ETH Staking Before Merge (even in the US)

Is September Ushering in a Dark Winter?

Predicted Recessions Not Yet Priced Into Equities: BlackRock Report (link)
BTC Drops Below $19,000 as September Spells Bad News for Stocks and Crypto (link)

Talk of ‘Recession’ is Unofficially Everywhere, but Officially Nowhere

Are we currently in a recession? If not, will we soon face one?

Technically, the consecutive fall of GDP by -1.6% in Q1 and by -0.9% in Q2 — meaning, negative GDP growth in two consecutive quarters — traditionally constitutes one. But, the only economic body in charge of declaring a recession, the NBER, has yet to make the official ‘recession’ call, which could take between 4 to 21 months.

In December of 2008 for example, the NBER announced that the U.S. was in a recession — and had been since December of 2007, one year earlier.

Given that 76% of Americans believe a recession is already here, does it really matter when the NBER declares it officially?

Let’s look at a few of the other metrics considered when determining a recession, and where they currently fall:

Unemployment rate, which has increased to 3.7%, the highest since February
US wages, which is recording an annual increase of 5.2%
Inflation, which is measured by CPI and was most recently reported at 8.5% growth YoY
Personal savings rate (a percentage of disposable personal income), at 5%, its lowest level since 2009, while consumer credit spiked to 7.7%, its highest since 2011

These are all pro-recession drivers, as they whittle down people’s consumer power, and therefore economic activity. On the other hand, Brent crude oil fell to $85 per barrel on Wednesday, a 7-month low. Skyrocketing energy prices have been bloating prices across the board.

In other words, lowered demand is decreasing inflation at the same time as inflation’s twin sister, energy price, is also decreasing.

But will that be enough to lower inflation to 2% without causing recession, as the ideal scenario? At the next FOMC meeting on September 20th, Powell all but announced the Fed will increase interest rates by another 75 bps. When that happened in June, for the first time since 1994, we all saw how markets reacted:

S&P 500 and BTC reactions to the Fed’s 75bps hike in June. Image credit: Trading View

Yet, in July, the Fed also hiked rates by 75 bps, without such a downward effect. The market absorbed the shock.

So, that’s it then — rate hikes are priced in going forward, right?

Not according to BlackRock. As the world’s largest asset manager and former Fed employee, BlackRock says, “the Fed has to crush activity in the rate-sensitive part of the economy to bring inflation back to its 2% target.”

Meaning, the ‘rate-sensitive’ aspect of the market has yet to acquire resistance. These are typically risk-on assets — companies whose growth depends on cheap capital (tech), and even Bitcoin. Given that September has been historically a bad month for both Bitcoin and stocks, this is not good news.

Only in 2015, 2016, and during the 2021 bullrun were Septembers kind to Bitcoin. Image credit: Twitter

After the summer vacation and at the beginning of the new school year, individual investors tend to liquidate stocks to pay for putting their children back in school, while larger investors ditch losing positions to optimize their tax situations. This “September Effect” is then building momentum into a new market selloff event. Yesterday, Powell went full hardcore mode, saying “we will not be influenced by political considerations.”

He further noted they are still moving to fulfill their dual mandate — low inflation and low unemployment. It is in the balance between these mandates that either a soft or hard landing will happen.

CBDCs: 15 Pilot Programs Live, India and Brazil Latest to Jump In

Brazil, India Join CDBC Race: Will Start Pilot Projects in 2022 (link)
Committee Republicans Demand Fed Vice Chair Brainard Clarify Testimony Regarding Authority to Issue a CBDC (link)

CBDC Development Since 2018

Among the world’s governments, central bank digital currencies (CBDCs) are all the rave. They provide unprecedented and flexible control over people’s finances, while also making fiat money native to the internet, with all the payment efficiency that goes with it.

In just four years, the world went from zero active CBDCs and a single pilot program in China, to 15 pilot programs and three active deployments — Nigeria, the Bahamas, and the Eastern Caribbean nations (ECCU).

Image credit: IMF

Adding to the CBDC pilot program surge are Brazil and India, each of which constitute economic and population powerhouses in their own respective continents.

India (1.3b pop.) will test its digital rupee across four state-run banks, with a possible rollout at the end of March next year.

Brazil (212m pop.) is planning to launch its pilot program by the end of this year.

Why is everyone in such a hurry? Firstly, because a traceable CBDC can crush the gray (unregulated) economy, rendering all financial flows accountable.

This would give central banks a fantastic tool to adjust their monetary policy on the fly. Secondly, in that adjustment phase, central banks could set terms of use — expiry date on CBDC tokens to spur shopping, restrict saving, or funnel the consumption in a particular direction.

For example, if the energy crisis across Europe worsens, a CBDC could be used to cut off all institutional Bitcoin mining operations to flatten the curve of electricity use. The possibilities are endless to direct macroeconomic and social conditions in real time.

But what about the US, will it be left surrounded by CBDCs, or plunge in? This is still foggy. To clear it up, Financial Committee Republicans sent a letter yesterday to Fed Vice Chair Brainard. They asked to clarify whether the Fed has the authority to issue a CBDC, if a CBDC would counter other digital assets, and if it come as tokenized dollars or retail Fed accounts.

By the end of September, the American research phase should finally be clarified.

Whatever the case may be, the trend is clear, as the world is progressing towards CBDCs. Critics argue such a development poses a significant sacrifice in terms of individual privacy and liberty.

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MakerDAO Going CeFi?

MakerDao Proposes to Transfer 33% of its $1.6B PSM in USDC to Coinbase (link)

Short-term CeFi Compromise for a DeFi Future

A month ago, Rune Christensen, the co-founder of MakerDAO, proposed to remove $3.5 billion USDC underpinning the multi-collateralized DAI stablecoin. Vitalik Buterin thought it a “terrible idea” because it could topple DAI’s peg, bringing down a liquidation cascade across MakerDAO’s ecosystem worth $8.21 billion.

Rune was tempted with this risky move after Circle, the issuer of USDC, blocked the funds and addresses linked to sanctioned Tornado Cash. On Tuesday, we saw a complete reversal of that attitude. MakerDAO tokenholders issued the MIP81 proposal, set to transfer 1.6 billion USDC (33%) to Coinbase custody.

Alongside Circle and Bitman, Coinbase is a part of Centre, the consortium that manages USDC issuance. Coinbase itself is well under BlackRock’s sheets, after BlackRock picked the exchange as its go-to private investor platform. Moreover, BlackRock led a $400 million funding round with Circle this April.

What prize does MakerDAO get for leaving the spirit of decentralization as a fading glimmer of light? Coinbase’s custodial program would earn Maker a 1.5% yield, which would translate to $24 million per year.

The proposal would then bolster DAO’s treasury to spread its…decentralized phoenix wings?

MakerDAO’s Endgame Plan proposes a free floating DAI to be overcollateralized by ETH only, achieving its dream of decentralization.

In the meantime, MakerDAO getting in bed with Coinbase is not a big deal because it already has been sleeping under USDC’s stabilized covers. With that said, the worst case scenario should be kept in mind, as pointed out by one member:

“The government can just force Coinbase to seize the funds and kill DAI instantly. So much easier for the government to understand. Fits so much more neatly into existing framework than creepy ‘blacklisting’.”

At present rate, the proposal sentiment is on the side of approval, as the risk profile isn’t that much different from other options, but the revenue boost is.

Binance’s BUSD Auto-Conversion

Binance, Issuer of Third-Biggest Stablecoin, to Stop Supporting Larger Rival USDC (link)
Binance Ditched a Bunch of Stablecoins. Even a Newly Banished Issuer Was OK With It (link)

Did Binance Actually ‘Ditch’ USDC and Other Stablecoins?

Binance made an aggressive move this week, aiming to cement its position as the world’s largest crypto exchange, which processes 8x more trading volume than the one behind it, FTX. On its platform, USD Coin (USDC), Paxos Dollar (USDP) and TrueUSD (TUSD) will no longer be supported for trade.

Just these three stablecoins have a market cap of $53.6 billion, with USDC from Coinbase/Circle making 96% of the trio.

USDT is too big and not fully cash equivalent for Binance’s dollar consolidation. Image credit: Kaiko

What does this mean for the end user? Only good things. Binance will simply convert the three stablecoins into BUSD automatically. When withdrawing them from Binance, users will still receive their actual USDC, TUSD, or USDP stablecoins. The goal is to amplify Binance’s own ecosystem and its dollar liquidity.

Vicariously, user funds are arguably made safer because BUSD is regulated by the New York State Department of Financial Services (NYDFS). Additionally, because low-market cap USDP and TUSD spreads are tenfold that of BUSD, users will get the upper hand with auto-BUSD conversion.

Stablecoin liquidity reflects their market spreads. Image credit: Kaiko

You may have noticed that Tether (USDT) is unaffected, with the main brunt going to USDC. Is this a way for Binance to prevent USDC from overtaking USDT? Not according to Jeremy Allaire, the CEO of Circle, in charge of issuing USDC. He noted that the “change will likely lead to more USDC flowing to Binance”.

That’s because USDC flow from Binance to CEX/DEX will now be greased with BUSD, which is still not a major player.

BinanceUS and Swiss Bank SEBA to Offer ETH Staking

Ethereum Classic Up 14% Weekly as Ethereum Completes Final Step Before Merge (link)
Crypto firms rush to offer Ethereum staking ahead of The Merge (link)

Bellatrix Done, Paris Next

On Tuesday, Ethereum’s Bellatrix upgrade went live, the last update before the Merge itself. Bellatrix enables the communication between old miners and new proof-of-stake validators on the Beacon Chain. In other words, the latest and last upgrade represents the docking of the PoW chain into PoS.

The finalized docking will be the Paris upgrade, as the transaction execution layer also docks with the Beacon Chain, marking the Merge complete. This should happen between September 10 and 20th, depending on Ethereum’s hash power post Bellatrix update.

The most up-to-date counter is set for Thursday, September 15th. In the meantime, 15.3% of Ethereum clients still haven’t synced up for the Merge.

Image courtesy of ethernodes.org

Those are stubborn ETHPOW miners, represented by Chandler Guo. According to futures interest, their old new tokens should reach the $18 price point after the Merge, or 1.5% of ETH market cap.

But, the big capital interest lies in the brand new PoS Ethereum. On Wednesday, the US branch of Binance announced Ethereum staking with up to 6% yields. The Swiss SEBA Bank also made the move to offer ETH staking, but kept its staking yield secret.

Not only is 6% at the top range of both CeFi and DeFi yielding platforms, but this gives exposure to people less fortunate in ETH holdings. To become a block-producing validator, Ethereum requires a 32 ETH minimum stake, or $53.4k.

BinanceUS will now drop that at a measly 0.001 ETH ($1.67) to start yield farming. While Terra and Celsius left a sour staking taste, both Binance and Ethereum are the largest players in the crypto arena, with years of trust built among their user base.

Tweets of the Week

#ECB hikes interest rates by record 75 basis points as expected. Raises Main Refinancing rate by 75bps to 1.25%, raises deposit rate by 75bps to 0.75%. Expects to raise rates further over next meetings. No QT announced: PEPP reinvestments to run until at least end of 2024

@Schuldensuehner

1/ Every time we discover a new token distribution mechanism, it kicks off the next bull market
• 2013 forking new PoW tokens
• 2017 ICOs
• 2019 IDOs
• 2020 liquidity mining and airdrops
• 2021 NFTs

@thebellcurvepod

Stablecoins are slowly but surely becoming the main transaction medium in crypto.

@paddi_hansen

The Ethereum Merge is scheduled to take place on 13 September. Christmas season is here again.
ETH holders will soon be airdropped ETH PoW tokens. What should you do to best position yourself?
Here are 7 steps you may consider to fully take advantage of the Merge:

@bobbyong