Digital Assets Morning Call: June 7, 2022

Written by Robert Lynch
on June 7, 2022

Higher US yields pressure crypto; US legislation on crypto regulation

US yields are back on the rise, creating headwinds for crypto token prices

The US Senate will introduce bill to overhaul crypto regulations

Long term US yields are back on the rise, and that is a development that crypto markets should monitor. The 10-year US Treasury yield has risen over 30bp in the past week-plus and pushed back above 3.0%.

Inflation concerns persist

Higher yields stem in part from ongoing concerns about inflation—and ahead of the US CPI data due this Friday—as well the shift in Federal Reserve policy, as the start of its balance sheet reduction program this month reduces the amount of Treasury securities they will purchase. In other words, a considerable source of liquidity and purchasing power will be reduced.

Higher yields translate into higher investment funding costs

For crypto markets, higher yields increase funding costs that ultimately make it more expensive—and therefore less desirable—to trade higher volatility and at-times speculative assets. That could be even more impactful if the prevailing price trend in those assets is sideways or lower, rather than higher, as is the case for most crypto tokens at present. Yields/financing costs are just one of many potential inputs to crypto token prices but at present, as US rates begin to rise again, they warrant particular attention for digital assets.

Major crypto token prices weaker but remain in recent range

For now, the latest rise in yields is consistent with the pullback in major crypto token prices today, with bitcoin and ether down roughly 5% and 8% respectively from Monday’s levels. Even with those notable declines, it is important to highlight that both tokens remain in the sideways patterns evident since mid-May.

US lawmakers move to overhaul crypto regulation

Various press reports indicate that the US Senate will introduce a bipartisan bill that would dramatically overhaul regulation in the crypto industry. That would include splitting oversight between the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), where an ongoing turf battle has been a notable impediment to clarifying the current regulatory landscape.

Dividing oversight between the CFTC and SEC

A key component of the bill is that it would designate the vast majority of crypto tokens as “ancillary assets” or intangible, fungible assets which would see them fall under oversight of the CFTC. If a token behaves like a security that a company issues and includes privileges such as dividends or liquidation rights, it would then qualify as a security and be regulated by the SEC.

Details of the bill are due today and they will all be subject to debate, negotiation and change in the coming months. Note too that a potentially lengthy legislative process may not bring an actual vote on the proposals until next year.

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Robert Lynch

Robert Lynch

Head of Research and Strategy | Robert Lynch is an experienced financial market strategist, focusing on macro markets including currencies, interest rates, commodities and cryptocurrencies. He is trained and practiced in the analysis of economic developments, monetary and fiscal policy, political events and technical indicators in order to generate actionable investment solutions.