The Clock is Ticking

With every day that goes by without a ceasefire in the Gulf, the noose tightens around the neck of the global economy. Today’s forward guidance looks at why the US has limited options as Iran’s leaders dig in their heels, and why other potential troublemakers are watching on with interest.

Elsewhere, we take a look at what’s going on with USDC issuer Circle, following the hit to its stock price recently. Can it bounce back, or will continuing CLARITY Act conflicts keep it suppressed?

💰 Smart Money Accumulation 💰

Retail sentiment in crypto may be plumbing the darkest of depths these days, but that bearish sentiment isn’t shared by institutions. According to a recent survey, 73% of institutional investors questioned said they planned to increase their crypto exposure this year, especially if regulatory clarity puts in an appearance.

In today’s video, we summarise the recent report produced from the results of this survey by Coinbase in collaboration with EY. It reveals why institutions are piling into crypto, which vehicles they’re using to do it and which assets they’re interested in. It paints a refreshingly bullish picture for the sector over the coming year and, at times like this, who doesn’t need to hear a bit of good news?

You can watch that video here.

📈 Crypto Market Forecast 📈

Time is not on our side. The longer that the Iran war drags on, the more that the global economy and the markets struggle. This is why it’s strange that the Trump administration continues pushing back the deadline for when Iran must fully reopen the Strait of Hormuz. That might have something to do with the fact that it’s not entirely clear if Iran is even participating in peace talks.

Logically, there’s no reason for Iran to do this, because it is arguably winning the economic and financial war. Economically, many Asian countries are starting to declare states of emergency related to energy and fuel pressures. Financially, yields on government bonds globally have been rising sharply. This is pushing interest rates higher, and putting pressure on the markets.

This begs the question of what it would take for Iran to agree to de-escalate. The official answers are things that the US would likely never agree to. These conditions include: no more future attacks; reparations for damages caused by the current war; allowing Iran to maintain de facto control of the Strait of Hormuz; and a complete withdrawal of US forces from the region.

Again, these are conditions that the US would likely never agree to, because backing down is not an option. This leaves only one alternative, and that’s further escalation, specifically boots on the ground to secure the Strait of Hormuz. This could explain why the Trump administration continues pushing back deadlines - they need time to move more troops into the region.

But as noted in last week’s newsletter, further escalation from the US side would also mean further escalation from the Iranian side. In practical terms, that would mean more strikes on critical infrastructure across the Gulf. In fact, Iran has reportedly revealed the targets it would strike if the US was to send troops to Kharg Island, which was previously being considered.

That’s a long-winded way of saying that so long as the Iran war continues, the markets will continue to struggle, especially risk assets like crypto. It’s clear that the US is now willing to de-escalate, but it’s also clear that Iran sees no reason to do so, as it has the US and its allies on the back foot. It’s also important to remember that other countries are watching this closely.

For one thing, it’s believed that the months of the year when China could invade Taiwan are April, May, or August. This is because of calmer weather conditions which make it easier to cross the Taiwan Strait. With the US redirecting resources from East Asia to the Middle East, as well as everything else that’s going on, China has a relatively unique window of opportunity.

Similarly, North Korea recently launched ballistic missiles into the sea, reminding the world that there’s more than one country in Asia that’s looking for an opportunity to strike its neighbour. That said, what makes China and North Korea unique is that both claim to want reunification with their respective enemies, meaning a kinetic conflict is theoretically much less likely.

However, China could still do something like blockade Taiwan, which it has also been practicing in recent weeks. A blockade of both the Strait of Hormuz and the Taiwan Strait would bring the global economy to its knees and take the markets to the grave. The most concerning part is that China has been stockpiling resources for years, presumably in preparation for something big.

In sum then, even though the US is willing to de-escalate, Iran is not, and this means that the only option for the US is more escalation. In turn, this means that markets will continue facing downward pressure. Until the war in Iran is resolved, no amount of bullish crypto or even macro catalysts will matter, because the markets are forward looking, and they can see what’s coming.

🤔 The Stablecoin Yield Problem 🤔

This week, Circle’s $CRCL stock saw its worst daily performance since going public.

It plummeted nearly 20% on Tuesday, erasing roughly $5.6 billion in market value in a single session. This drop followed reports of the latest draft language from the CLARITY Act supposedly banning platforms from offering passive yield on a user’s stablecoin holdings.

Some of you may remember that this has been a contentious issue between the crypto firms and traditional banks for a few months now. Both sides have been going back and forth on proposing changes to the draft to suit their own interests.

From the perspective of crypto service providers, native stablecoin yield is a powerful growth engine. Offering rewards on passive holdings not only helps onboard more clients, but it also helps retain existing users during market downturns.

From the perspective of the banks, allowing this passive yield on stablecoins is a clear risk to the fractional reserve banking system. For context, a large part of the revenue generated by stablecoin issuers comes from the interest they generate on holding the reserves backing their stablecoins in short-term debt instruments such as US treasuries.

The effective yield generated by these issuers is anywhere between 4% and 7%. In contrast, the interest paid on bank deposits is markedly lower for most people – the national average (weighted across all banks and accounts) is a 0.39% APY.

Given that, it’s easy to see how passive stablecoin yield makes stablecoins a much better alternative to the average bank deposit. This is why banks believe enabling passive yield would make stablecoins a competing product that could redirect hundreds of billions in deposits away from the traditional banking system.

This is part of the reason why the GENIUS Act has already barred stablecoin issuers from passing such yield directly to holders. Congress views stablecoins as payment instruments, not as an investment asset. Not to mention how allowing direct yield from issuers would bring stablecoins under the SEC’s purview. This is mostly why the crypto industry welcomed the issuer-yield restriction in the GENIUS Act.

Besides, at the time, the law still left room for exchanges, custodians, and platforms to offer rewards or share reserve income. A prime example of such a scheme has been the passive yield on USDC that Coinbase offers its Coinbase One members.

However, the latest language in the CLARITY Act effectively seeks to close this gap. The language of the latest draft was notably wide. It explicitly states that the restricted yield on passive holdings cover both “direct and indirect” forms of yield as well as any other rewards that are “economically or functionally equivalent” to bank interest.

A notable concern here is that the deliberate vagueness of the “economic equivalence” standard could be abused by future regulators to restrict industry activity. The draft also defines permissible stablecoin rewards to be explicitly “activity based.” Examples cited include activity-based rewards tied to user activity such as loyalty, transactions, payments-linked incentives, and subscription programs, provided they don't resemble interest.

That said, it’s clear this latest draft primarily affects third-party service providers, not the issuers themselves directly. So, it’s absurd to see that Circle dropped 20% while Coinbase only dropped 11%. If anything, the CLARITY ACT draft gives a reason for Circle to drop or renegotiate its revenue share agreement with Coinbase – possibly helping it retain more profits overall. In our opinion, this is a classic example of an exaggerated reaction from the market. Though if you ask the sellers, they’ll claim it’s a forward-looking pricing of Circle’s potential lack of competitiveness without its Coinbase rewards program.

Even then, we’d argue that Coinbase’s COIN should have seen a greater relative drawdown than it did. Not to mention, Circle’s USDC has already embedded itself deep into the payment space. The Circle Payments Network is positioning as a SWIFT competitor. Case in point is Circle’s partnerships with Visa, Mastercard, FIS, Fiserv, Intuit and others. Whether this utility-driven demand can outpace yield-demand is anyone’s guess. But, if it does, then there’s no doubt that Circle is poised for success.

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📖 Quote of the Week 📖

“Expect the best. Prepare for the worst. Capitalize on what comes.” - Zig Ziglar

Team Coin Bureau

Disclosure: Authors may own cryptoassets named in this newsletter. These are unqualified opinions, and a Coin Bureau newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor.