U.K. Bitcoin Regulation False Alarm; Economy on Pace for 6.7% Growth

CryptoCorner

The United Kingdom's Financial Conduct Authority (FCA) spoke, the media reacted, the market yawned, and the price of Bitcoin rose.

It's a tale of misreporting, and the market's reaction underscores how little control the British regulator, or any government, has on a decentralized asset like Bitcoin.

Many news reports said Monday that the FCA had banned Binance Holdings, the world's largest cryptocurrency exchange.

Chinese bitcoin mine
At their peak in the late-2010s, Chinese miners are thought to have produced 95 percent of the world’s Bitcoin. Here, a manager checks equipment inside a Bitcoin mine near Kongyuxiang, Sichuan, China. Paul Ratje/For The Washington Post via Getty Images

In fact, the regulator had simply reminded the company about dealing in derivatives.

"The only story here is that the initial reporting on this was misleading and created confusion for some retail users in the U.K.," Jason Deane, Bitcoin analyst at Quantum Economics in London, told Newsweek. "The FCA's position has not changed, there are no new policies and it doesn't have any material effects on the trading habits of anyone in the U.K. who can still use Binance, and all other exchanges, for spot trading exactly as they did before."

The FCA told Binance to be certain it wasn't actively promoting regulated products such as futures, options and "contracts for difference" (CFD), an agreement between buyer and seller that states the buyer must pay the seller the difference between the current value of an asset such as Bitcoin and its value when the deal was made.

"These derivatives products were already banned in the U.K. some time ago," Deane said, "so this is a simple restating of what the rules are."

It would be difficult, if not impossible, for the British government, or any government, to ban Bitcoin, he said.

"The network is truly global and entirely decentralized to the extent that even the most powerful governments on earth cannot interfere with it in any way," Deane said. "Governments can, however, make it difficult to use or exchange by controlling the on- and off-ramps through the banking system, and some have tried. Even then, since moving Bitcoin between jurisdictions is, by design, so easy, this has limited effect and may actually result in capital flight from the jurisdiction trying to ban it."

Deane said many investors would welcome "measured, common sense legislation," but this could create difficulties for governments because it likely would be seen as state-level "legitimization" of cryptocurrencies and that might, at least in theory, weaken a government's power over monetary policy.

In January, the FCA warned that Bitcoin investors should be prepared to lose all their money. "Investing in crypto-assets, or investments and lending linked to them, generally involves taking very high risks with investors' money," the FCA said.

So far, governmental policy has ranged from China's efforts to close Bitcoin mining operations to El Salvador's embrace of crypto as legal tender.

As much as 75% of Bitcoin mining operations were located in China. Closing mining operations may temporarily upset the hash rate.

But all miners need is an Internet connection and cheap, reliable power to re-start operations in a new location. Some appear headed for the U.S., Canada, Eastern Europe, Northern Europe and Kazakhstan, China's next-door neighbor.

China is testing a digital version of the yuan. It's unclear if Beijing's decision to clamp down on mining will be detrimental in the long run.

Meanwhile, CME Group said year-to-date daily trading volume for Bitcoin futures averages 11,500 contracts a day, a 40% increase over 2020. The contracts represent the equivalent of 57,500 Bitcoins.

Some investors use futures and options to hedge against wild Bitcoin price movements. The Chicago Mercantile Exchange had introduced Micro Bitcoin futures at one-tenth the value of one Bitcoin to enable a wider range of traders to manage price risk.

Billionaire Mircea Popescu, who claimed to own more than 1 million Bitcoins, has reportedly drowned while swimming off the coast of Costa Rica.

In 2011, he tweeted: "Bitcoin is about the most important project of the human species at the moment. That is all."

Popescu, 41, was a citizen of Romania. The status of his estate, and the fortune in Bitcoin that he held, are as yet unclear. If Popescu's coins cannot be retrieved it would reduce supply, and if demand is strong, drive the price higher.

In mid-day trading Tuesday, Bitcoin changed hands at $36,147.90, up 3.99% in the last 24 hours and up 24.67% for the year. The 24-hour range is $33,976.55 to $36,425.89. The all-time high is $64,829.14. The current market cap is $678.20 billion, CoinDesk reported.

Market Pulse

S&P Global raised its economic forecast as the U.S. continued to rebound from the COVID-19 pandemic.

Beth Bovino S&P Economist
"We expect the U.S. economy to experience a summer boom, fueled by reduced virus fears, elevated savings, and a pick-up in wages," S&P Global said in a report. Pictured is Beth Ann Bovino, Chief Economist of S&P Global. spratings.com

"We expect the U.S. economy to experience a summer boom, fueled by reduced virus fears, elevated savings, and a pick-up in wages," the Wall Street provider of independent market information said in a report. "Already witnessed in the spending data, the consumer basket is rotating from goods to services as people shed their quarantine blues."

Air travel was up, but still 25% below the 2019 average. S&P expects travel to pick up during the holiday season, especially as the U.S. approaches herd immunity.

On June 27, the Transport Security Administration screened 2,167,380 passengers at U.S. airports, 241.96% above the 633,810 screened on the same day last year during the pandemic, but still 17.65% below the 2,632,030 screened in 2019.

Airlines are betting on a rebound.

In March, discount carrier Southwest Airlines ordered 100 Boeing 737 MAX 7 jets, the largest order for the plane since it was grounded in 2019.

But inflation and the job market remain areas of concern, S&P Global said.

The Federal Reserve, the nation's central bank, now expects personal consumption expenditures inflation to hit 3.4% this year and 3.3% next year before declining to 2.1%. Its target is 2%.

The Fed has said the run-up in consumer prices is "transitory" and restated that view, but with less conviction, at its recent meeting.

Chairman Jerome Powell underscored the need for "humility" in forecasting when he spoke to the press after the Federal Open Market Committee's last meeting.

S&P looks for the first rate hike in 2023 rather than the previously forecast 2024.

"We expect policy interest rate 'lift-off' to be one hike in first-quarter 2023, with the second rate hike in the third quarter, and two more hikes in 2024," S&P said.

The Fed slashed interest rates to support the economy during the pandemic and kept them low to boost the recovery. Low interest rates spurred real estate sales and consumer spending, but hurt small savers.

The economy added 559,000 jobs in May, but it wasn't enough to meet demand. However, payrolls are still down 7.6 million, or 5%, from February 2020, the month before the pandemic hit and officials shut down the economy as part of the effort to curb the spread of COVID-19.

"There is still quite a bit of road to travel," S&P Global said. "If the economy continues at this current pace of job gains (540,000 average over the last three months), the U.S. jobs market wouldn't regain the 22.4 million jobs lost until mid-2022. But that average monthly pace would be difficult to maintain past the third quarter as the jobs that are becoming available during the economy's reopening are the low-hanging fruit. We expect to reach the pre-pandemic milestone only in fourth-quarter 2022."

A variant of the coronavirus could surge later in the year, but it's unlikely to result in an economic long-lasting downturn severe enough to be considered a recession.

S&P Global pegged the risk of a recession in the next 12 months at 10% -15%, down from January's estimate of 20% - 25%, and close to the long-term "unconditional" risk average of 13%.

Government spending has supported the recovery.

"Our infrastructure report in May 2020 found that a $2.1 trillion infrastructure program, similar in size to the $2 trillion program proposed by Biden as a candidate, if done wisely, would add an additional $5.7 trillion to the economy over a 10-year period, adding 2.4 million jobs by 2024 and the productivity boost would create more jobs later on," S&P said.