Weekly Top Stories - 9/20

This week in the newsletter, we write about Trump's visit to Pubkey, the Fed initiating a cutting cycle, and the SEC's latest DeFi enforcement.

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Trump Becomes First President to Pay with Bitcoin

Former President Donald J. Trump made history on Wednesday becoming the first U.S. President to make a payment with bitcoin. Before his rally in Long Island, Trump made a surprise appearance at PubKey, the Bitcoin-themed bar in NYC. After the former President greeted supporters, he purchased burgers 50 burgers, and 50 diet Cokes for those at the bar.

Following the purchase, Trump declared "I just made the first transaction in Bitcoin," to roars of approval from the Bitcoin-loving crowd. When asked about the payment process, Trump noted that it was "very easy".

OUR TAKE:

The payment was made via the Lightning Network, the high-speed low-cost layer 2 network. To complete the transaction, Trump utilized the Strike platform to send satoshis (the smallest unit of bitcoin) to a Lightning Invoice generated by Zaprite. This process mirrors traditional point-of-sale systems, displaying the amount due for the customer. The payment for Trump's burgers was then routed through Pubkey's Lightning node, supported by Voltage, a prominent Lightning infrastructure company.

While a former U.S. president using bitcoin for payment is noteworthy in itself, the involvement of the Lightning Network adds another layer of significance. Operational since 2018, the Lightning Network has proven its value in the crypto payments sector. Trump's seamless purchase of burgers for his supporters, bypassing centralized payment systems entirely, underscores Bitcoin's potential as a decentralized payment network.

Trump's visit to Pubkey is also notable given some pushback he received this week following the launch of his Ethereum DeFi application World Liberty Financial. Several Bitcoin analysts criticized the application. Regardless of whether Trump's appearance was timed to coincide with the launch of WLFI, Trump is continuing to take steps to signal his support to the Bitcoin community.

One last point. Trump paid with Bitcoin moments after the Fed announced its first rate cut since 2020. There's no denying the power of such a juxtaposition. - Gabe Parker

Crypto Rebounds as the Fed Cuts Rates by 50 bps

Fed slashes rates in aggressive start to easing campaign. On Wednesday, the Federal Reserve cut rates by 50 bps, setting the federal funds benchmark rate at 4.75%-5.00%. This marks the first rate cut in over four years and is the cut of 50bps since 2008. Heading into Wednesday's FOMC, the market was roughly split between a cut of 25 bps or 50. Policymakers are now projecting rates to fall another 50 bps by year-end, a full percentage point in 2025, followed by 50 bps in 2026 to end at 2.75%-3.00%.

During the post-FOMC press conference, Jerome Powell said that the rate cut was meant to show policymakers' commitment to sustaining low unemployment rates since inflationary fears had moderated, though he did not commit to making similar cuts for future meetings. "Inflation is now closer to our objective and we have gained greater confidence that inflation is moving sustainably towards 2%," he said, adding that economic data would drive monetary policy decisions and rate cuts can happen faster or slower as needed.

The market's reaction to the Fed slashing rates was initially mixed - equities ended the day in the red before surging to new highs the following day. BTC price rose from below $60k pre-FOMC to $64k as of Thursday evening.

OUR TAKE:

Wednesday's rate cut by the Fed kicks off an easing cycle after a hiking campaign intended to curb inflation, which saw the Fed increase rates for 11 consecutive meetings starting in 2022 and lasting until July 2023 before leaving rates unchanged until now. Policymakers voted 11:1 in favor of a 50 bps cut as Fed governor Miki Bowman dissented in favor of a smaller 25 bps cut, marking the first dissenting vote on Fed rate changes since 2005. The risk of a recession still looms amid rising unemployment, but Powell's commentary post-FOMC may have eased some of those immediate concerns.

Crypto and risk assets tend to perform better in lower interest rate environments and in election years. As crypto prices have struggled to reach new highs over the past several months, many market participants are hoping that this easing cycle will be the spark to reverse the downward momentum and rejuvenate interest in this space.

However, one potential negative impact of rate cuts could be that they could slow the pace of RWA tokenization - the past two years saw an explosive growth of tokenized Treasuries and MMFs from near-zero levels as 'TradFi' rates (i.e., Treasury yields) began looking more favorable to DeFi rates. Rate cuts would lower the incentive to bring these yields on-chain. Still, assuming the outlook for the economy continues to improve and any risk of recession is removed, the start of this easing cycle should result in an expansion of global liquidity with greater flows into crypto and DeFi. - Charles Yu

Rari Capital Settles with SEC, Founders Fined and Banned

The DeFi lending platform Rari Capital and its founders settled with the U.S. Securities and Exchange Commission (SEC) on accusations of misleading investors and offering unregistered securities and broker services. The charges were concerning the application's Earn and Fuse pools, which allowed users to deposit crypto assets in exchange for yield and, in some cases, Rari's governance token - RGT. The SEC alleged that these pools, which were actively managed by the Rari Capital team in the case of Earn and permissionless at users' discretions in the case of Fuse, functioned like investment funds and that users were misled on expected yields and pool functionality.

There were three central components of the complaint: one related to Rari's use of "receipt tokens" and RGT, one related to the team's marketed yields and pool operation, and another related to the facilitation of Fuse pools under Rari Infrastructure LLC.

Receipt tokens are digital depictions of funds deposited into DeFi protocols. They are used as a means of accounting for and redeeming deposited funds across many application types in DeFi and are not a feature exclusive to Rari Capital and its specific functionality as a lending application. On the grounds of receipt tokens representing sold interest in an investment fund and RGT emissions through liquidity mining, the complaint alleges the Rari Capital team conducted unregistered offers and sales of securities. Secondly, when marketing expected yields of its Earn pool the Rari team did not account for several costs that resulted in users losing capital. On top of this, the Rari team stated Earn pools were autonomously rebalancing to capture the highest yield possible, when, in reality, the rebalancing activity required manual, human-guided input. Given this, the SEC alleged the Rari team misled investors. Lastly, the SEC alleged that Rari Infrastructure LLC was engaging in unregistered broker activities by setting users up with a platform to create yield-generating lending pools through its Fuse product.

As part of their settlement, Rari's co-founders agreed to fines and five-year officer-and-director bans. Rari Capital Infrastructure LLC also settled unregistered securities and broker charges, agreeing to a cease-and-desist order.

OUR TAKE:

The SEC's complaint against Rari Capital and its team raises issues about protocol management rights, receipt tokens, and governance token allocation mechanisms.

• Admin. Rights - Will teams that simply set parameters for yield-generating mechanisms and deploy contracts be viewed in the same light as Rari's actively managed pools? The SEC is targeting Rari because the team had an outsized amount of control over the yield and asset allocation. This is a notable difference between Rari and other lending apps / DeFi protocols at large - backends and yield-generating mechanisms are largely algorithmically guided (such as staking operations and simple deposit-to-earn lending apps like Aave) and teams just launch contracts onchain. Most don't give users the option to spin up their own markets, and ones that do (e.g. Morpho) have gated permissions on who can do it + KYC where necessary. However, in some cases, lending apps outline or employ outside groups to set and adjust borrow/lend parameters like yield curves, collateral LTV, global v. isolated pool assets, and other risk/return bound parameters. While Rari appears to have taken a more direct and active role in the management of the protocol, the extent to which the SEC expands the scope of what counts as "management" will potentially affect other DeFi applications. Read our 2023 report on the impact of the IRS "broker rule," which also raises similar issues around the use of admin keys and the upgradeability of smart contracts.

• Receipt tokens - Receipt tokens take many forms in DeFi; some depict LP deposits into DEX and lending pools while others are commonly held and traded tokens (liquid (re)staking tokens are by far the largest sector of DeFi). If the SEC expands to attack the use of these tokens or encumber them with securities laws, that will affect large swaths of DeFi.

• Token emissions through liquidity mining - Do the governance tokens become securities when they are passed to users as yield when they have an interest in application pools?

The SEC's fiscal year ends at the end of this month and historically the period leading into Sep. 30 has seen a flurry of enforcement and activity from the agency, so we may see more in the coming weeks. - Zack Pokorny

Charts of the Week

The price of bitcoin has increased $x (x%) in the wake of the Federal Reserve's decision to cut its benchmark interest rate by 50 basis points on Wednesday, September 18. The move pushed the market price of BTC over the short-term holder (STH) cost basis for the first time since August 25, 2024. The STH cost basis represents the aggregate price at which coins aged less than 155 days were last moved. It's an important measure because it is used to assess the profitability of coins maintained by younger, possibly more speculatory holders who carry a cost basis roughly at or over the market price in bullish environments and consistently below in bearish ones.

The recent extension of market price over the STH cost basis after dipping as much as 14% below is a sign of strength in the price of BTC, as the STH cost basis has historically served as a level of support in bullish market trends. At market close on Thursday, August 19, 2024, the STH market value to realized (MVRV) ratio, which is the market price of BTC / STH cost basis, stands at 1. This is the second time in the last year that the STH MVRV ratio has used the ~0.9 level as support, further highlighting the strength in the price of BTC over the last 365 days.

As the price of BTC moved higher this week so did its futures open interest. This happened with spot BTC ETF trade volume remaining mostly flat. Note the trade volume represents the value of ETF shares traded each day and does not represent the amount of BTC held by the ETFs in any capacity. This is a sign suggesting more speculative behavior is aiding in moving the price of BTC higher as opposed to spot-driven behavior.

Other News

• Canada Central Bank Shelves Digital Loonie CBDC Plans

• Fintech Giant Revolut Said to Be Planning Stablecoin

• Solana-Based Drift Raises $25m to build 'Super App' for DeFi Trading

• Solana's New Phone Promises More for Less-And Already Seeing Huge Demand

• BitGo Takes on Coinbase and Tether with USDS Stablecoin Launch

• FTX Auditor Prager Metis Settles SEC Charges Over 'Negligence'

• Circle's USDC in Brazil and Mexico Now Available to Businesses Via the Banking System

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