The Travel Rule
This week in Crypto
Fear is gripping the equities markets as the confluence of renewed European lockdowns and the potential for major US political upheaval sits uncomfortably with portfolio managers and investors around the world. The VIX CBOE Index, which tracks the volatility of the S&P 500 has been trending up this past month and hitting a 6-month high at the end of last week at over 41 points (a VIX >30 is considered high). The VIX is often referred to as the Fear Index, as increased volatility in the S&P typically correlates to the erratic and uncertain position taking by investors as disruptive and unpredictable news is interpreted in a multitude of ways, allowing fear and emotion to take over trading decisions. Much like at the start of the pandemic in the West, equities have suffered as economies are shut down, however the difference with this recent risk off trend in equities is that Bitcoin’s price has remained impressively stubborn in maintaining its recent gains above $13,000. Although not enough time has passed to observe and confirm a real change, correlations between Bitcoin and the rest of the market are reducing, at least for now.
BTC dominance, as we discussed several weeks back, continues to trend upwards as we see altcoin price action suffer. Bitcoin was the only digital asset in the top 20 (by market cap) that has seen positive USD gains during the past week as traders move out of alts to the relative safety of stablecoins and Bitcoin.
Despite its common use by analysts within the industry, market dominance by Market Cap is not an entirely accurate metric for gauging relative success or failure of a digital asset. Liquidity, value transferred, number of active users and transactions, rate of increase of active users and network security are all arguably more important measures. Despite this, we will continue to observe this trend in BTC dominance (which we see somewhat as a self-fulfilling gauge) and we expect Bitcoin to move to ~67% dominance supported by more’ long-term time preference’ institutional investors entering the market and the superior and ever increasing Lindy Effect which Bitcoin enjoys.
The below chart shows the rising BTC dominance since mid-September during which time BTC price moved 38% from ~$10,000 to $13,800. Possible resistance in market dominance sits at ~67%.
As we enter the final 2-months of 2020, Bitcoin spectacularly posted its second highest monthly close at ~$13,800. It is worth noting from the chart below that $13,800 is a hugely important level for Bitcoin and also reinforces the importance of high time frame analysis when studying Bitcoin price action. The Dec 17 close was ~$13,800, as was the Jun 19 high and now the October close is the same approximate level. Above $13,800 the air is thin and there is not a lot of resistance until the previous all-time high. A break out and monthly close above $13,800 would certainly help quash the ‘’2017 was a bubble’’ narrative and add momentum to possible new all-time highs and beyond for 2021.
The bullish October monthly close was indeed a cause for celebration amongst hodlers and was an apt gift to Bitcoiners on the anniversary of the Bitcoin whitepaper being published via The Cryptography Mailing List. 12 years ago on Halloween, Satoshi published in our opinion one of the most important papers in modern human history — the Bitcoin Whitepaper. Satoshi’s audacious vision and invention, which would be born into action on January 3rd the following year, was technologically groundbreaking and if successful in finding adoption, would result in a radical change to how human financial and societal systems are built as a Bitcoin standard emerges from the unrestrained fiat standard we have been subjected to since 1971.
‘’The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts’’
Satoshi Nakamoto, taken from the Bitcoin White Paper
We wonder what Satoshi would have made of last week’s continuation of the recent torrent of bullish news as major Singaporean bank, DBS released its intention to launch a crypto exchange, custodian services as well as a Security Token Offering (STO) platform. The banks Satoshi was so vehemently opposed to are taking over Bitcoin!?
DBS has 4.6 million retail customers and over 200,000 institutional clients and arguably further legitimizes Bitcoin and digital assets as yet another major regulated institution enters the market. However, the game is far from won, and there are concerning headwinds which should be noted as the one industry which Satoshi targeted Bitcoin to disrupt, gets very close to his/her/their invention — the banks.
The Travel Rule
Within the US Bank Secrecy Act, a piece of legislation often referred to as the Travel Rule is currently under discussion to be amended. As we noted several weeks back, the creeping regulation that we are seeing, not just within crypto but also within traditional markets is concerning. Our financial freedoms and privacies are being eroded around us under the pretense of detecting money laundering and criminal activities. The proposed rule if passed, expands the current definition of money to include crypto transactions and will enforce all virtual asset service providers (VASPs) to share data on transactions greater than $250. The previous threshold for the traditional banking system’s Travel Rule was initially $10,000 which was then revised down to $3,000. Now the establishment want the data on much smaller transactions above $250. If adopted, the Proposed Rules would bring the United States in line with Financial Action Task Force (FATF) recommendations that provide that countries should adopt a de minimis threshold of no higher than USD/EUR 1,000 for recordkeeping requirements applicable to cross-border transactions.
The data potentially required every time users move crypto from a VASP to VASP includes the following:
The name of the transmitter, the account number of the transmitter, the address of the transmitter, the identity of the transmitter’s financial institution, the amount of the transmittal order, the execution date of the transmittal order, and the identity of the recipient’s financial institution. At the other end of the transfer they will potentially also require the name of the recipient, the address of the recipient, the account number of the recipient and any other specific identifier of the recipient.
12 years in and although we welcome institutional adoption, Satoshi’s permissionless, decentralized, peer-to-peer electronic cash system is starting to look a lot like fiat banking. Fundamentally, the most important resistance to these creeping and over-reaching regulations is self-custody and the development of decentralized applications to provide the banking rails and services for users. If users of Satoshi’s 12-year project all self-custody then these new rules are much harder to enforce as the system exists outside the banking system. However, if users all depend on centralized entities that fall under the Bank Secrecy Act then they will be subject to this orgy of data sharing and abuse of power. It concerns us that there is a trend that new institutional platforms that enter the market are offering crypto services but without allowing users to self-custody — PayPal’s recent crypto integration as a prime example. We must question if these new institutions are already anticipating these rule changes so do not want to be seen to be providing users the ability to self-custody and opt out of the system and the rules. Or are these institutions receiving the licenses from the regulators on the basis that they don’t offer self-custody, thus contradicting the new Travel Rules they are subject to?
If BTC does become the multi-trillion asset class we believe it will, then the battle of self-custody and privacy is the obvious front line of the conflict. If BTC poses a serious threat to the government fiat system and the impending transition to CBDCs, it is not ridiculous to envision a world where self-custody becomes legally problematic for users. We would do well to remember the 1933 US executive order 6102 which made owning physical gold illegal in the US and the UK’s 1946 Exchange Control Act which restricted the ownership of gold in order to protect a plummeting British Pound.
In a world of uncertainty, rampant debasement of fiat currencies, data hacks and loss of freedoms and privacy, the anniversary of Bitcoin’s whitepaper serves as an important reminder as to why this project is so crucial to human privacy rights and the self-sovereignty of society. Property rights are the cornerstone of democracy and freedoms and should be upheld at all costs.
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