Over the past 7 days, the FS CryptoFX Agg Index increased by 4.0%, compared with a 3.0% increase for the S&P 500 (Slide 6). After a week of testing its 50-day moving average, Bitcoin finally climbed above it on Thursday morning and finished the week 3.1% higher.
Sector Rotation
Primarily because of Bitcoin’s “laggardship”, FS CryptoFX Commodity index trailed all other non-stablecoin sector-based indices last week. The leadership of FS CryptoFX Platform and Privacy indices persist, as these indices outperformed Bitcoin by 6.8% over the past week. Ethereum and Zcash were the biggest contributors of each index, up 10% and 24%, respectively, relative to Bitcoin. FS CryptoFX Exchange index reversed back and outperformed Bitcoin by 4.3% for the week.
Due to the excellent performances of the mid-cap platform and privacy tokens, FS CryptoFX Mid-cap 40 was the best performing size-based index. FS CryptoFX Small-cap 250 was the worst-performing size-based index, trailing Bitcoin by 0.2% last week.
PBoC Confirms trials of Central Bank Digital Currency
China’s Central Bank (“the PBoC”), confirmed last week that it is indeed piloting Central Bank Digital Currency (“CBDC”) technology. While this is not such a big surprise (the PBoC has been researching digital currency technology for over five years) it represents another step major step in the inevitable deployment of the technology.
Dubbed the Digital Currency Electronic Payment (“DCEP”), China’s CBDC could bring major efficiencies to current monetary systems. In particular, the PBoC’s DCEP could help reduce monetary flows related to corruption, more easily facilitate P2P transfers, allow for 24/7 availability, and even facilitate transaction processing absent internet service.
On the other hand, CBDCs, such as China’s DCEP will most certainly come with increased levels of surveillance. By essentially eliminating physical currency in favor of a CBDC, surveillance of individual behavior will rise and personal privacy will likely suffer. In the case of China, don’t expect the populous to be up in arms over this increased surveillance. Given the country’s already high usage of digital payment systems and its relative complacency with higher levels of government surveillance, we do not expect the roll out of the CBDC to be met with staunch opposition.
Libra White Paper: Take Two
Last week, The Libra Association published v2.0 of its whitepaper which detailed major changes to its framework. In summary, there were four major developments
1. Introduction of four, single-currency stablecoins in addition to the LBR libra reserve token. Support will initially be added for USD, EUR, GBP and SGD with plans to roll out to other currencies in the future. The paper also cited that the Libra association would look to discontinue said stablecoins in favor of CBDCS should their respective monetary authorities issue them.
2. Further clarity on permitted wallet operators: The Libra association will only support two types of wallet operators in its new roll-out: “Designated Dealers” who would be authorized to buy and sell LBR coins to exchanges and OTC dealers as well as “Regulated Virtual Asset Service Providers” or entities/exchanges that are registered or licensed in a regulated, Financial Action Task Force (“FATF”) jurisdiction. “Unhosted Wallets” which would drive the spread of the Libra network to financially underserved communities, will not be permitted for the time being.
3. Postponing the transition to a permissionless system: One of the major concerns raised by regulators was how the network would ensure compliance with KYC/AML regulations while maintaining a permissionless system. The short answer? The Libra Association agreed that this is, indeed, hard to accommodate and will be putting any plans to move to a fully permissionless system on hold.
4. Further details on what assets would be held in the reserve: Each single currency stablecoin will be backed by a reserve of cash or cash-equivalents and “very short-term government securities” denominated in their respective domestic currencies. Additionally, more clarity was provided on what assets would compose the reserve for LBR, dubbed the “multicurrency coin”. The LBR token will be backed by a basket of some of the single-currency denominated stablecoins and would represent a digital composite. Libra also conceded that it is open to and will likely delegate oversight and control over the basket weights to a group of regulators or central banks.
In combination, the changes provide some more clarity on what the Libra Association could actually look like. If there was any question as to how the Libra Association would navigate the regulatory landscape, the v2.0 whitepaper confirms that regulatory concerns will be top of mind going forward. Decentralization will continue to occupy the back seat.
