23rd October 2024 > > ETP staking & US debt.
tl;dr
Staking within ETPs is a powerful tool, encouraging greater crypto adoption. The US debt pile is about to get a whole lot worse, to the benefit of hard assets.
Market Snap
Market Wrap
Fixed income markets are getting increasingly concerned that both Harris and Trump will turn on the government spending taps in some style. They are not wrong about that, but increased rates will not be the response, quite the opposite.
Curious Cryptos’ Commentary – Staking within an ETP
Now this is a very interesting development.
VanEck has a SOL ETP (exchange-traded product) issued out of Liechtenstein. This is a common approach, as many of these products seek to take advantage of Liechtenstein’s position as one of the two largest tax-havens in the world, the other being the Republic of Ireland, neither of whom will ever allow the EU to move to a consistent tax basis given how lucrative they both find the current situation.
Traded on some of the smaller European exchanges, total assets under management sit at only $73mm, so you may be wondering what is our interest in this rather niche product.
Matthew Sigel, Head of digital assets research at VanEck, has announced that staking has been enabled for the assets held in the ETP, and that rewards will accrue daily by being added to the end-of-day valuation. Financial regulations ensure that assets held on behalf of ETPs and ETFs, are held in a segregated account at an arms-length custodian removing the solvency risk of the issuing entity. That custodian is now staking SOL in a self-custodial manner and adding the rewards to the stash of SOL, minus a fee of course.
This is huge.
One of the reasons why the ETH ETFs have performed poorly is because the SEC, under the command of anti-crypto warrior Gensler, refused to countenance the staking of those assets, effectively adding a near 4% charge on investors in the spot ETH ETFs. The CCC raised this as a major stumbling block to adoption long before the ETFs were launched.
As and when the SEC moves to a crypto-friendly stance, once Gensler has been fired and he can start building up his own crypto stash (he frequently boasts about how much moolah he has earnt in his career), such an easy and obvious improvement will be swiftly implemented in the US.
The next iteration will be an ETP of LSTs (liquid staking tokens) removing much of the operational risk of staking/unstaking and ensuring adequate liquidity during the unstaking epoch.
This development adds weight to the investment case for cryptos in general.
Curious Cryptos’ Commentary – The US debt problem
Jerome Powell, Chair of the Fed, was interviewed earlier this year about the gargantuan debt pile for the US of over $34 TRILLION. And that’s just the on-balance sheet liabilities. Unfunded off-balance sheet liabilities are many multiples of that total.
Powell, who acts at the command of the US government, strayed off-message when he had this to say:
“The U.S. federal government is on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable. I don't think that's at all controversial. And I think we know that we have to get back on a sustainable fiscal path.”
That much is obvious. If the government is forever running an annual deficit, all interest payments are effectively added to the debt pile. Even if nothing ever changed again, that debt pile would never stop growing, a function of the eighth wonder of the world, compound interest, but in reverse.
Powell then swiftly moves onto more familiar and comforting territory for him, that of wishful thinking, not that of hard facts:
“And I think you're starting to hear now from people in the elected branches who can make that happen.”
Oh boy, seriously? The only recent legislation that touched upon the US’s ever-growing debt was the misnamed Inflation Reduction Act, which simply freed up more debt to be spent on politicians’ various follies. Neither Trump nor Harris has any intention of addressing this problem – they will be both make it far worse than it is today.
The response from the Fed will be to ramp up QE in a futile attempt to limit the damage caused by the annual interest payments, payments that are increasingly crowding out other government expenses. Which is the essential folly at the heart of Modern Monetary Theory.
There are some who mistakenly believe that this will encourage the return of inflation, conveniently ignoring all the evidence of the last decade and a half. Printing money in open economies does not cause inflation. Printing money in closed economies – which was the situation created by the illiberal and illegal response to the Covid scare – will always cause inflation.
Hard assets – property, stocks, gold, commodities, and yes cryptos, will all benefit from the devaluation of the dollar. The outcome of the US election won’t change the dial on this angle, not one jot.
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