Hello Fr3ns,
The crypto market got off to a shaky start last week when the US Treasury Department sanctioned Ethereum mixer Tornado Cash for allegedly facilitating $7 billion in money laundering. The Bitcoin price briefly fell below the $23,000 mark.
However, the price rose sharply after the July U.S. Consumer Price Index print showed an 8.5% year-over-year increase, down from the previous month’s peak of 9.1%. In July, the Producer Price Index, or wholesale purchasing index, fell for the first time since the beginning of the pandemic.
These figures bolstered the “peaking inflation” theory, putting pressure on the US Federal Reserve to ease up on monetary tightening. Furthermore, the recessionary fears have been heightened by an increase in jobless claims. From a macroeconomic standpoint, the simultaneous rise in the Nasdaq-100 index confirmed the bullish sentiments toward risk assets.
The upcoming Ethereum Merge in mid-September is the dominant story in the crypto space. The buyer pressure is being maintained by the expectation of a pump based on a successful merger and the additional ETHW “airdrop.” However, market positioning indicates that a “sell-the-news” type of event is likely following the merger.
Global Macroeconomics and Crypto Regulations
Let us consider the implications of last week’s major events, namely the Tornado Cash sanctions and the US inflation print.
Tornado Cash sanctions are important to markets because they have the potential to blacklist thousands of ETH wallets that have ever received funds from an account associated with Tornado Cash. A number of DeFi applications, including Uniswap, Oasis, and Balancer, have agreed to follow the Fed’s guidelines and share user address information with them.
Furthermore, it begs the question of how far the authorities will go to stop these activities. We cannot rule out a crackdown on other DeFi applications and custodied stablecoins such as USDC and USDT. Rune Christensen, founder of popular DeFi outlet MarkerDAO, recently advocated for the conversion of $3.5 billion USDC collateral to ETH in order to mitigate regulatory and centralization risks.
With prices rising, the markets appear to have forgotten about Tornado Cash for the time being. However, another arbitrary Treasury Department action could resurrect the ghosts of centralization at any time.
Second, the “peaking inflation” theory is driving up risk assets on the expectation that the Fed will ease quantitative tightening.
This period of bullish optimism should last until the Fed’s August 25–27 meeting in Jackson Hole, where the central bank will announce its rate policy for September and Q4 2022. Uncertainty about the Fed’s refusal to slow monetary tightening may cause some risk near the end of the month.
Energy prices must also play their part and remain low in order for the “peak inflation” narrative to hold any sway in the coming weeks and months. When energy prices rise, I’ve noticed that Bitcoin and the US Nasdaq-100 begin to fall.
Following a minor blip at the start of the month, Bitcoin appears to be resuming its correlation with the stock market and global trends. The Nasdaq-100 technical chart predicts a 1,000-point gain this month, which should put upward pressure on Bitcoin.
The economic calendar is relatively quiet this week, with the headline event being US Retail Sales. Because retail sales are notoriously volatile, any market reaction could fade quickly. However, knowing the timing of the release could be especially useful for scalp trading.
Aside from the retail figures, the minutes from the July Federal Open Market Committee meeting will be released on Wednesday. If the minutes reveal Fed members’ preferences for the size of the next rate hike, it could be a significant market mover.
We’re a week into the fallout from the Treasury’s unprecedented decision to sanction Tornado Cash, and it’s been swift and dire. Almost immediately, centralized service providers like Circle and GitHub severed ties with the pariah software, front ends across the ecosystem began denying service, and multiple wallets were blocked by various apps for containing tainted “Tornado ETH.” Overall, the mood last week was one of panic, consternation, and wondering, “What do we do now?”
⭕The Treasury Department’s decision sent shivers through the space for a variety of reasons, but the primary source of concern appears to be the unprecedented step of sanctioning a piece of software rather than a “person” or “entity,” as is usually the case. Persons and entities are clearly distinguishable parties and counterparties to a transaction, and the Treasury’s Office of Foreign Assets Control has the authority to prohibit these transactions by placing individuals or entities on the sanctions list.
⭕The Treasury has effectively made it a crime to interact with Tornado Cash by including a piece of software (open source software, no less) on the US sanctions list — you’ll notice that there are no active links to Tornado Cash anywhere in this letter because we do not recommend that you check it out. To make matters worse, some trolls appear to be “protesting” the sanctions by dusting the wallets of prominent crypto personalities (and others) with ETH funneled through Tornado Cash, raising the serious question of what liabilities the targets now face.
⭕All of this is to say that the fallout from the Treasury’s decision is only beginning, and it will almost certainly result in legal challenges to the government’s classification of open source code as a sanctionable entity. In this desperate and trying hour, crypto advocacy group Coin Center is positioning itself as a frontline champion of the space, publishing a lengthy post today outlining the possible legal case it may attempt to make. It’s worth reading in its entirety, and whether or not Coin Center is ultimately the group to bring the case, the argument it makes — that code is not a sanctionable entity — could end up in a courtroom sooner or later.
⭕The crypto industry is fraught with controversy, but everyone who cares about it appears to be on the same page on this one. Tornado Cash has been used to benefit bad actors, and the government may argue that it was purposefully designed to facilitate illegal activity (the arrest of one of Tornado’s key developers last week suggests some suspicion of criminal intent). Still, I haven’t heard anyone suggest that making it illegal to use freely available software is the best way to solve this problem. To say the least, the implications are terrifying.
On a more positive note, it’s worth noting that not all news last week was bad. Markets rose in anticipation of Ethereum’s upcoming Merge, and as the saying goes, a rising tide lifts all boats.
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Fin 🔚