Crypto’s next hot spot

From: POLITICO's Morning Money - Monday Apr 24,2023 12:00 pm
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By Zachary Warmbrodt

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Coinbase, the largest U.S. crypto exchange, has picked Bermuda for its next big expansion. MM talked with Coinbase CEO Brian Armstrong and Bermuda Premier David Burt about why the island is becoming a hub for the digital asset business — and why it also faces hurdles thanks to banking industry jitters.

Bermuda — a long-time offshore home for international insurers — opened its doors to the crypto industry with a 2018 digital asset law. It now lists 17 licensed digital asset businesses, with last week’s Coinbase announcement marking its biggest get yet. Other big names include Circle and Cash App.

Coinbase is increasingly looking for investments outside the U.S. as it clashes with Washington regulators — most prominently SEC Chair Gary Gensler. Armstrong told MM that the company plans to launch a derivatives exchange in Bermuda, as it keeps working on securing approvals for derivatives offerings in the U.S.

Bermuda isn’t a big market itself — its population is around 65,000 people — but it can serve as a base as the company looks to reach customers outside of countries where it already has a major presence.

“We need to seek out jurisdictions that will enable us to serve the long tail of countries that are not the U.S., not the U.K., not some of the major financial hubs,” he said.

Burt, Bermuda’s youngest premier, has become an increasingly prominent figure in the crypto world. MM asked whether he had any advice for how the U.S. could shore up its digital asset regulatory regime — a patchwork of rules for “TradFi” that’s often maligned by crypto startups like Coinbase.

“I'll be polite and say that regulatory clarity is helpful for any business,” he said.

Burt wants to entice digital asset businesses with something bigger than just licenses that help them serve customers off-island. He wants Bermuda’s 20-square miles to be a kind of test-market for companies as they develop digital asset products, allowing them to kick the tires with local adoption before they scale up for the rest of the world. He sees it as a potential boost to innovation in Bermuda.

There’s a big hitch, and it’s one that is a growing problem for crypto firms writ large: the reticence of traditional banks to serve the digital asset economy. 

Burt said Bermuda is exposed to a bottleneck because it’s seen as a high-risk location for money laundering – something he attributes to its geographic location, which creates issues for its correspondent banking relationships that allow for the exchange of U.S. dollars.

So Bermuda is in the process of licensing a new bank that is expected to help grow local adoption of digital assets.

“The real question is, how do we make sure that the country can see local benefits, while also positioning it as an attractive space for digital asset companies?” he said. “We view our entire island as an accelerator and an incubator.”

It’s Monday — How is your company preparing for a possible debt limit breach? Let us know: Zach Warmbrodt, Sam Sutton.

 

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Driving the Week

The House will consider the GOP plan for raising the debt ceiling this week … First Republic reports earnings on Monday after market close … NABE releases its business conditions survey for April on Monday (more below) … House Financial Services votes on capital markets bills on Wednesday … Experian, Equifax and TransUnion CEOs testify at Senate Banking on Thursday

This week, the debt limit fight gets real — Wall Street has largely stayed on the sidelines of the latest debt ceiling stalemate, but now — with the possibility of a summer default looming — people are starting to get nervous. House Republicans are planning to hold a vote this week on their opening gambit — a bill that will be DOA for most Democrats and the Senate because it would couple major spending cuts with raising the government’s borrowing authority.

Ben White, Sam and Eleanor Mueller report that bank executives are growing more concerned about the state of play — though they’re unsure how to inject themselves into the debate.

There is no backchannel between the White House and House Speaker Kevin McCarthy on the issue, according to POLITICO’s Eli Stokols, but Biden’s team is confident that default can still be avoided.

While the White House believes Biden has the upper hand politically, Steve Shepard reports that polls show a "mixed bag of public opinion" and that sentiment is split over who would be to blame for a U.S. default.

How bad was the banking meltdown? Check out First Republic’s earnings. - WSJ has a preview of what investors will be watching when the San Francisco lender updates its public financials later this afternoon. The bank received a $30 billion megabank rescue last month, and its stock has lost about 90 percent of its value since March 8.

Regulatory Corner

Biden regulators want to beef up oversight of nonbank giants — The Financial Stability Oversight Council, a panel of top regulators led by Treasury Secretary Janet Yellen, is planning to undo Trump-era policies that made it harder to designate nonbank firms as “systemically important” and subject them to stricter rules by the Federal Reserve.

Victoria Guida reports that FSOC voted Friday to propose guidance that would give it more flexibility on how it deals with financial risks. It’s a move that’s poised to put hedge funds and other firms outside the regulated banking sphere on alert.

Sen. Elizabeth Warren (D-Mass.), who has been pushing for the changes and has called for BlackRock to be designated as systemically important, said it was “a powerfully important step to protect hardworking Americans.”

Economy

Business survey reveals signs of slowdown — NABE's latest survey of business conditions showed fewer business economists reporting rising employment and capital spending, though they indicated they’re seeing growing sales.

Crypto

First in MM: California lawmaker pitches DAO bill — California Assemblymember Matt Haney of San Francisco announced legislation that would set up the state’s first legal framework for digital collectives known as decentralized autonomous organizations. The legislation would allow DAOs to incorporate in the state.

The venture firm Andreessen Horowitz and the Crypto Council for Innovation support the bill.

Fly Around

PE industry promotes economic impact —The American Investment Council and Ernst & Young are out with a report today that says the private equity industry employed more than 12 million workers in the U.S. last year and generated $1.7 trillion of GDP.

SVB’s new management ‘struggling to restore trust’ — FT: “Silicon Valley Bank’s new owner is ‘fighting’ to repair its damaged brand, stem deposit outflows and stop dozens more bankers quitting to join rivals as it attempts to rebuild the US technology bank that collapsed last month, according to one of its top executives.”

 

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