Global Adoption continues while SEC fails to provide Guidance on Yields

Hartmann Capital Newsletter, Friday September 10, 2021

In this issue

Market by Numbers

“Eth-killer” layer 1’s such as Solana shrugged off the dip in BTC, ETH and DeFi. The Metaverse finally had its expected correction, breaking a long uninterrupted bull run.

Bitcoin Legal Tender in El Salvador

On Tuesday, Bitcoin became legal tender in El Salvador, joining the USD. By law every business must accept Bitcoin and it can be used to pay taxes. For now, businesses without adequate technology have an exemption. Forcing Bitcoin on El Salvadorians has made many of them unhappy, while also offending Bitcoin supporters who don’t believe the government should require Bitcoin to be accepted by fiat.

To prepare, the government approved an official wallet, Chivo, with $30 worth of free bitcoin and has put 550 Bitcoins on the central bank’s balance sheet. It appears President Nayib Bukele bought the dip.

The country’s biggest bank, Bancoagrícola has partnered with Lightning network enabler Flexa so that Bitcoin can be used across the bank’s network for all payments.  

Yet less than half of El Salvadorians have access to the internet, and the majority would favor a repeal of the law enforcing Bitcoin’s legal tender status. 

That implies that the dollar is likely to remind the currency most used in the country. 

How much of this negative news is fear, uncertainty and doubt (FUD) spread by the mainstream? After all, crypto remittances have the potential to undermine a major revenue stream for banks and payment companies. Western Union, for sure, doesn’t like it.

Nevertheless, the rubicon has been crossed. This same week, Ukraine granted legal status to Bitcoin. Previously, citizens who purchased BTC were in a legal gray area. Cuba and Germany have also recognized Bitcoin as an investment in some form in the past month.

What country is next? 

The Feds Are Coming for Centralized Crypto Yields. What Next?

Banks offer deposits with yields to retail customers, why can’t Coinbase

The simple answer is that the Securities Exchange Commission (SEC) exempt regulated banks from registering deposit accounts as securities. No such exemption applies to unregulated deposit takers, for good reason. 

US government regulators, for all of the criticism they receive, have been mostly standing back from intervening in crypto markets, and investigating only the most egregious examples of selling unregistered securities (I’m looking at you Ripple Labs). And having some crypto-knowledgeable regulators in prominent positions also appeared crypto-positive ... for a time. 

Yet when entrenched interests are threatened, lobbying money comes out and mainstream media is often co-opted into cooperating with the oligopolists. And banks are some of the best in the game. The Global Financial Crisis revealed that banks and dealers had captured the regulators and the legislative process in the US. Lehman, Bear and Morgan Stanley got to carry their mortgage backed securities without any capital to absorb losses. And then they got a bail out. Regulatory barriers to entry for new banks make it difficult for disruptors to innovate in the space. 

At the same time, regulators are tasked with financial stability. Crypto, being new, is something they fear. Goldman Sachs CEO Lloyd Blankfein told CNBC earlier this year that “If I were a regulator I would be kind of hyperventilating at the success of [crypto] at the moment, and I’d be arming myself to deal with it.” 

Nevertheless, the SEC and others have been somewhat consistent in telegraphing their view that crypto deposits are securities. As recently as July, New Jersey's Bureau of Securities brought an enforcement action against BlockFi, laying out their argument that Bitcoin deposits are indeed securities under the Howey Test. A security involves “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” 

What outrages many in the crypto sphere is that the SEC refuses to say what constitutes a security under the Test. Indeed, yesterday the SEC rejected a “request” to explain their judgement that XRP is a security.

Coinbase went on the offensive on Twitter after it was served a Wells Notice, indicating it would act if Coinbase continued with its plan to take crypto deposits on Coinbase Lend.

The truth is that the SEC does not provide guidance in advance of what exactly would and would not be classified as a “security” under the Howey Test, so the complaint is likely to fall on deaf ears in Washington and state capitals. 

What’s at stake is the entire burgeoning DeFi ecosystem, now over $100 billion, that is only now moving from serving only the crypto trading community (collateralized borrowing for leverage and shorts, decentralized exchanges for non-custodial trading, and stablecoins for benchmarking value) to the mainstream and the so-called DeFi Mullet: Fintech in the front and crypto in the back.

It is clear that regulation and enforcement is heating up. Long time crypto experts such as Ryan Selkis at Messari have advocated for a more aggressive approach in lobbying the Feds and legislators while bringing the fight for realistic regulation to the “streets”, to the crypto community and beyond.

It’s time for the crypto community to be better represented in Washington, in the media and in other countries’ legislatures. We all must do our part.

The Summer Sun and Fall Moon: SOL and LUNA Breakout

Owning ETH year to date has been a very smart play, as it’s up 5x from Jan 1. However the big news continues to be the rise of the so-called “Eth-killers” as highlighted last week. Though Avalanche, Fantom and (soon?) Harmony have been taking a page out of Polygon’s book by launching nine-figure incentive packages to attract devs, users and TVL, it’s easy to forget how well Solana (SOL) and Terra (LUNA) have been doing. Expectations are high, yet these two chains are growing rapidly enough to justify the hype. As such, Hartmann Capital is a big believer in the Solana and Luna ecosystems. You should never bet against young multi-billionaire Sam Bankman-Fried, while Do Kwan’s team at Terraform Labs keeps innovating on new Asia-focused use cases destined to crossover into the mainstream. The price action says it all: LUNA at 45x dominated the summer’s news, while SOL at 125x has been exponential into September.

Blog this week: “88mph Shifts Into Overdrive With V3”

Hartmann Capital often takes an activist position in protocols that appear to have a competitive advantage in their market yet for whatever reason are undervalued by the market. 88mph is our latest investment in that vein. This week’s blog introduces the market for crypto yield derivatives and assesses the potential for our investment to outperform the others in the space. We believe that it is the only protocol that succeeds in optimizing both the fixed rate and floating rate token UX. We also believe the team understands what it takes to grow market share beyond crypto natives. Team first. Market second. Product third.

Hartmann Capital Weekly written by Head of Communications, Rasheed Saleuddin, PhD, CFA


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Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.