Colin’s Note: I have always been fascinated by the potential of crypto and the promise of the underlying technology, blockchain. I first started buying Bitcoin in January of 2015.

However, I’ve remained skeptical of many of the projects. To truly understand this market, you need to devote yourself to years of study. That’s the only way to become an expert and invest with confidence. And I realized early on that my time would be better spent focusing on growth stocks.

Fortunately, we have a crypto expert to lead you through the exciting world of crypto – Andrew Hodges.

I first met Andrew when I took the reins at Brownstone Research a few months ago. And I was immediately impressed by his experience, his knowledge, and the connections he’s made. Andrew lives and breathes crypto, and it shows in his research.

Going forward, we’ll be sharing analysis from Andrew from time to time in the pages of The Bleeding Edge. I’m excited to see what research and ideas he brings to readers. With that said, I’ll hand things over to Andrew.

Nomi Prins

Living in South Florida, you get accustomed to tourists.

They make their way down south as Autumn rounds the corner. They happily stay through the “winter season.” And while they’re here, the locals are (mostly) happy to have them.

They dine at the restaurants. They browse the shops. They stay at the luxury resorts and make appointments for the spa. They are the lifeblood of the South Florida hospitality economy.

But inevitably, spring comes, and they head back north. The locals stay put – braving hurricanes and 70% humidity – to renovate the storefronts and await their return.

And like a summer destination not “in season,” the tourists have mostly left crypto… for now.

Meanwhile, the locals are renovating the shops. The beaches are being reinvigorated. New attractions are being designed.

Because the tourists will come back. They always do.

Those that have weathered bear markets in crypto understand this best. This is now my third bear market, or Crypto Winter as we call it.

And spring for crypto is not just around the corner. It’s already here…

Arbitrary and Capricious

The big headline this week was a ruling from a federal appeals court. It said that the Securities and Exchange Commission (SEC) was wrong to reject an application from Grayscale to convert its trust into a Bitcoin spot exchange-traded fund (ETF).

And the ruling itself didn’t mince words:

The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products.

This got a lot of attention from crypto investors, and rightfully so. The ruling means we’re one step closer to a Bitcoin spot ETF. There are currently seven applications for a Bitcoin spot ETF pending approval. BlackRock is the most anticipated of the bunch. The first deadline is on September 2.

A Bitcoin ETF would mean that any investor could gain exposure to the asset right from their brokerage account. Needless to say, that would be very bullish for Bitcoin and crypto in general. BTC was up about 5% on the news.

But as exciting as this is, I believe this is only one piece of a much larger trend, which will kick off the next leg higher for digital assets.

The Regulatory Regime Loses Steam

For the past several years, the biggest obstacle for this market has been the antagonistic stance of regulators. Investors and innovators have been begging for regulatory clarity around crypto. But so far, they’ve been met with hostility.

The SEC’s antagonism towards a spot Bitcoin ETF is one example. But it’s not the only one.

In September of 2021, the SEC went after Coinbase, arguing that the company’s planned “Lend” feature was an unregulated security. Coinbase pushed back, arguing that they had sought clarity on the service but received none.

To make the situation even more confusing, Coinbase very clearly explained its Lend feature ahead of its initial public offering, which the SEC approved. So, why the sudden reversal?

In March, the SEC gave Coinbase a notice that it was to be targeted for security violations related to its spot markets, staking service, and other areas. It was yet another blow to the exchange.

In response, Coinbase filed a document stating “the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.”

The question of why the SEC is being so hostile is a topic for another day (I have my theories). But the bottom line is that this regulatory assault has been a wet blanket over the entire market for years.

But that looks to be changing.

The ruling from the appeals court was a blow to the SEC’s credibility. And this came on the heels of the SEC losing another landmark case against Ripple Labs. In June, a federal judge ruled that Ripple did not violate securities laws when it made the token XRP available to retail traders.

The SEC can still appeal this decision. But the trendlines are clear. The agency is quickly losing credibility when it comes to digital assets. And behind the scenes, there was another huge development that nobody is talking about.

A Landmark Bill

Back in June, I was fortunate enough to sit down with one of the editors of a new piece of legislation making the rounds in Congress. The digital asset draft bill in question is a joint effort between two committees in the House of Representatives: the House Financial Services Committee and the Agriculture Committee.

At the time, the legislation didn’t even have a name. It does now. It’s titled “Financial Innovation and Technology for the 21st Century Act,” or FIT21 for short.

To start, the bill looks to bring clarity that the blockchain industry is lacking in the United States. The bill will lay down rules such as what is a blockchain and what are decentralized networks, decentralized organizations, digital asset issuers, brokers, stablecoins, digital commodities, and so much more.

There has never been legislation that has tackled so many topics with well-vetted definitions and explanations. And I’m glad to see so many topics covered.

Which brings us to the whirlwind of activity that took place in the wake of this bill.

Here’s what happened:

  • The Bank of International Settlements (BIS) released an international blueprint for tokenized assets, smart contracts, and its unified global ledger system for central bank digital currencies (CBDCs).

  • The International Monetary Fund (IMF) dropped a report suggesting a reversal of its suggestion that countries ban cryptocurrencies. And even went as far as to say it offered several benefits to its adopters.

  • U.S. Federal Reserve Chairman Jerome Powell noted the Fed’s staff is involved in talks regarding the legislation mentioned earlier.

These are the institutions that govern global money. The shift in stance towards crypto is not only in tandem but virtually an echo chamber. And when we go down to the banks who work most closely with them, the message gets even clearer.

Just look at Wall Street’s activity:

  • Banking giant JPMorgan Chase & Co. went live with euro-denominated payments for its digital stablecoin, JPM Coin.

  • The world’s largest asset manager, BlackRock, filed with the SEC to try and house the first Bitcoin spot exchange-traded fund (ETF).

  • The Credit Suisse and Deutsche Bank-backed platform, Taurus, launched on Polygon.

  • The EDX crypto exchange backed by Fidelity, Charles Schwab, and Citadel Securities began operation.

  • The Committee on Capital Markets Regulation – a trade association involving entities like JPMorgan, Bank of America, Charles Schwab, and Wells Fargo, among others – blasted the SEC saying its current regulations don’t allow for crypto platform compliance.

Open the Floodgates

To sum up, we have a regulatory agency that is quickly running out of ammunition. At the same time, we have what looks to be the green light from global regulators and institutions happening, and Wall Street is sprinting like the starting gun was shot.

The writing is not just on the wall; it’s all over the house. It’s as if – all of a sudden – somebody turned on the flashing neon sign: “Open for business.” Not only is crypto here to stay, but Wall Street is moving like it’s a gold rush.

It’s been a difficult 18 months for the crypto markets. But finally, we look to be turning a corner. The next leg higher isn’t years away. It’s already begun.

Regards,

Andrew Hodges
Analyst, Brownstone Research