Pongo Points 10/19/23

NYT thinks the Chinese spy using crypto mining | France's take on DeFi | BlackRock CEO sees demand for crypto | California drafts crypto rules | Bloomberg spotlights hidden water trade

1. NY Times Suggest Chinese Use Crypto Mines to Spy on US

Why it’s interesting: Citing a report from Microsoft to the US intelligence community and an anonymous source, the NY Times lays out information suggesting that Chinese Communist Party might have a hand in the uptick in Bitcoin mining in the US.

  • The piece goes on to describe the connections between crypto mining companies and various individuals with potential ties to the Chinese Communist Party; the implication being that the companies are vehicles for intelligence gathering.

What stands out: The writers highlight a quote from a recent report from ERCOT, the electric grid operator in Texas, stating that crypto mines “magnify the severity of grid events.” The quote cited references a particular low voltage fluctuation, which is caused by poor quality power supply and has no connection to flexible load users like crypto mining facilities.

  • In that same report, ERCOT notes that “large loads with demand flexibility have the potential to be an important tool for maintaining grid reliability.” Per the NY Times article, Bitcoin mining “operations’ vast energy consumption, combined with their ability to turn on or off almost instantly, is unique among large power users.”

What’s next: The NY Times writers appeal to intrigue using global espionage to masquerade their diatribe against crypto mining. The only revelation in the article is that some crypto mining facilities are owned by Chinese investors, along with an uncharacteristically anti-ethnic tone from the newspaper.

2. French Central Bank’s Take on “Decentralized” Finance

Why it’s interesting: The ACPR, one of France’s anti-money laundering, consumer protection, and financial stability supervising bodies, consulted with a variety of crypto companies and leaders to research and develop a framework for crypto regulation.

  • The administrative authority notes that “the structural persistence of elements of centralisation in the way DeFi protocols operate” merits the renaming of “DeFi” to “disintermediated” finance. In other words: DeFi is a misnomer due to the centralized nature of the apps.

What stands out: The full report comments on the crypto industry’s desire to have a completely new regulatory body that determines appropriate protection frameworks for blockchains, but does not go so far as to support the idea.

  • In particular, the authors note that the participants in the discussion and research phase didn’t “present a specificity justifying the development of entirely different protection principles.”

What’s next: The ACPR’s findings will be submitted to the EU as the bloc continues to develop its Markets in Crypto-Assets Regulation framework, particularly with regards to the certification process for smart contracts and blockchain infrastructure governance.

3. BlackRock CEO Believes There’s “Pent-Up Interest in Crypto”

Why it’s interesting: BlackRock’s Larry Fink sees investors taking a “flight to quality,” presumably meaning commodities and treasuries that will hold value better in inflationary environments, and believes that crypto will play that role.

  • This is in response to an unverified report claiming that a spot Bitcoin ETF had been approved by the SEC, leading a surge in the price of Bitcoin that has since held up.

What stands out: In a TV interview, Fink deflects the panelist’s leading question about the spot Bitcoin ETF and describes a “pent-up interest in crypto” from global clients.

  • This is a major reversal of the CEO’s in tone and position regarding Bitcoin and crypto, given previous statements from 2017 where he calls Bitcoin an “index of money laundering.”

What’s next: As the world’s largest asset manager, BlackRock has a diverse set of customers, suggesting that Bitcoin may serve a purpose as a global safe-haven asset despite conflicting journalistic reports and opinions in the US.

4. California’s Governor Newsom Signs Crypto-Regulation Bill

Why it’s interesting: Crypto proponents that have long sought after clear regulations for the industry are getting their wish, including licensing measures, reporting requirements, and even legal definitions for digital assets and stablecoins.

  • Assembly Bill 39 introduces a number of definitions delineating what constitutes a digital asset vs. what doesn’t, as well as what constitutes a “digital asset business” and must therefore seek licensing from the state’s commissioner.

What stands out: The bill has a chapter dedicated to stablecoins (cryptocurrencies that peg their value to the US Dollar), and prohibits issuers and businesses from engaging with any stablecoin that does not comply with the bill’s licensing requirements (or is excepted from them).

  • AB39 specifies that a stablecoin issuer must have “eligible securities” that are greater than or equal to the outstanding amount of stablecoins issued or sold. The term “eligible securities” has a broad definition under California law.

What’s next: California’s Digital Finance Assets Law has been signed by Governor Newsom, with the caveat that the framework must undergo refinement to further clarify the regulatory process without stifling innovation.

5. Bloomberg Highlights the Water Usage You Don’t See

Why it’s interesting: Bloomberg explores the research and geopolitics behind the virtual water trade, which is a framework that highlights the “hidden” flow of water into food and other commodities.

  • Conceptually, virtual water is the amount of water required to make a particular product. For example, a cotton t-shirt requires 3.9 cubic meters of water to produce, given the water used to grow the cotton and to process the materials into clothing.

What stands out: The article identifies the net importers and exporters of physical water and virtual water, but also notes that “being a large importer or exporter doesn’t necessarily make a country a winner or loser in the water game.”

What’s next: While often criticized for not leading to any actionable insights, the virtual water trade could enable conversations and greater cooperation among partnering regions to more efficiently grow crops according to water needs and natural precipitation patterns.

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