Powell pitches 50 bps rate cut to support ‘strength of the economy and the labor market’

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:

• The Federal Reserve’s anticipated rate cut just arrived. Ben shares an initial breakdown.
• Two US Congressmen say regulators have “misapplied” securities laws to airdrops. Casey points out legal precedent on the topic.
• House members discussed the SEC’s “politicization” of crypto regulation. The hearing was more or less what you’d expect. 

The rate cut is in

After weeks (if not months) of anticipation, the Federal Reserve reduced interest rates by 50 basis points Wednesday.

Bitcoin’s price rose on the news.   

Fed Chair Jerome Powell had made it clear the central bank intended to reduce rates, noting last month: “The time has come for policy to adjust.”

In a statement this afternoon, the Federal Open Market Committee (FOMC) said the 50bps cut came “in light of the progress on inflation and the balance of risks.”

Ahead of the expected rate reduction from its previous 5.25%-5.50% range, many debated whether the cut would amount to 25bps or 50bps.

CME Group’s FedWatch tool indicated a 55% probability of a 50bps cut a few hours before the FOMC’s statement. 

Some industry analysts and executives had said that while investors could view a 25bps cut as a normal measure, a 50bps cut could spur fears of a recession and bring on volatility. 

“The Fed has only cut 50bps in a non-emergency situation once in the past 40 years,” Astoria Portfolio Advisors founder John Davi wrote in a blog post earlier this week. “In our view, the Fed would be making a mistake as it would imply the economy is much weaker than currently suggested.”

The Fed opted for the 50bps cut anyway.

Feel free to interpret the Fed’s decision how you will. The broader market will do the same.

Bitcoin’s price — at about $60,000 just before 2 pm ET — saw a bump above $60,700 in the minutes following the rate cut announcement. BTC rose to above $61,100 after Powell started speaking at 2:30 before retreating below $61,000 as we were about ready to publish this newsletter.

Jake Ostrovskis, OTC Trader at Wintermute, said earlier today that “some degree of market re-pricing is inevitable, regardless of the decision” given the differing cut expectations.

The FOMC meeting countdown clock now restarts, as segment observers expect the Fed to ultimately cut rates further during sessions slated for Nov. 7 and Dec. 18.  

A number of analysts had said the market was pricing in a total of 100bps of rate reductions (including Wednesday’s cut) by the end of the year. New projections released Wednesday show committee members have a median expectation of rates falling in the 4.25%-4.5% range (down from the current 4.75%-5.0% range) by the end of the year.

“We are not on any pre-set course,” Powell said today. “We will continue to make our decisions meeting by meeting.” 

The long-term effects of this rate cut (and potential others to come) are multifaceted. 

Erald Ghoos, general manager of Europe at crypto exchange OKX, noted before the rate decision that an increase in USD liquidity could lead to more capital flowing into various asset classes, including crypto.

“However, it’s crucial to consider that crypto markets are influenced by a complex interplay of factors beyond just monetary policy, including whether or not we’re headed into a recession, which would be bearish for digital assets overall,” Ghoos added.

Along with the FOMC meetings, investors best keep an eye on geopolitical tensions and the US election as other potential crypto (and traditional) market movers. 

In other words, the relatively quiet summer is over. 

— Ben Strack

$1.95 million 

The amount of money accounting firm Prager Metis agreed to pay the SEC to resolve two separate actions alleging misconduct. 

In one action, the SEC claims Prager Metis “misrepresented its compliance with auditing standards regarding FTX” when the firm issued two audits for the now-defunct crypto exchange. Prager has neither confirmed nor denied the allegations. 

“Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections when making their investment decisions,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said in a statement. 

Curiously, these allegedly faulty audits did not come up during former CEO Sam Bankman-Fried’s criminal trial last year. 

Gensler’s two-week countdown begins

The deadline to pass a federal budget is looming. But Congressional leaders — at least in the House — are still making time to prioritize digital asset regulation. 

Reps. Tom Emmer and Patrick McHenry have penned a letter to SEC Chair Gary Gensler, expressing concern that regulators have “misapplied” securities laws to airdrops, a technology, they say, that plays a “crucial role in the development of a decentralized blockchain system.” 

Airdrops, which Emmer and McHenry define as digital assets distributed to early users of certain protocols, have, like many parts of the crypto industry, occupied a regulatory gray area in recent years. 

There’s not a lot of legal precedent to rely on, but here are two cases which have dealt with the question of airdrops and their status as securities:

1. In 2018, the SEC sued Tomahawk Exploration over its initial coin offering. Even though the ICO tokens were distributed for “free,” like airdrops, regulators said these assets were still securities since they created a public trading market. Airdrops are normally given to early community members or others who perform menial tasks (such as downloading an app or promoting a project), the SEC added. But even so, there does not need to be a transfer of money to constitute a “sale.”  
2. In an ongoing case brought earlier this year, crypto advocacy group the DeFi Education Fund and Texas-based clothing company Beba Collective sued the SEC. It was a preemptive measure of sorts; the plaintiffs are trying to get a court to rule that Beba’s airdropped tokens are not securities even though there hasn’t yet been an enforcement action. The next deadline in the case is coming up next month when DEF and Beba will have to file their opposition to the SEC’s motion to dismiss the case. 

Emmer and McHenry say airdrops are no different from airline miles or credit card points, which are often gifted to consumers. They asked the SEC to respond to their inquiry by the end of the month.

— Casey Wagner

SEC in the hot seat (again)

In yet another crypto-related move by the House, members of the Financial Services Digital Asset Subcommittee gathered today to discuss the SEC’s “politicization” of digital asset regulation. 

The hearing was more or less what you’d expect. 

To wit: Most Republicans expressed frustration with how the SEC handles digital assets and most Democrats said the industry is simply uncooperative. There were some deviations from party lines, though. New York Dem Ritchie Torres, for example, emerged as a crypto advocate on the left. 

“Did the SEC invent the term out of thin air?” Torres asked during the hearing, referring to the asset class of “digital asset securities,” which the SEC seems to have recently created. 

Subcommittee Chair French Hill, R-Ark., said the SEC’s refusal to adjust current policies to better fit the digital asset ecosystem is unacceptable. 

Robinhood Market’s CLO Dan Gallagher, a witness on Wednesday, agreed. 

Gallagher testified that Robinhood attempted to “come in and register” for the SEC’s coveted special purpose broker-dealer license, but found the requirements to be at odds with how crypto works. 

“We recommended modifications that would make it work, and we were submitting to full regulation by the commission,” Gallagher testified on Wednesday. “It was a fruitful process. It was very cordial with the SEC staff until about early 2023, when we got a very perfunctory note from the chairman’s office telling us that there’s no reason to talk anymore.” 

Gallagher did not specify what changes Robinhood recommended. 

Consider today’s mostly uneventful hearing a warm-up for the big event next week, when all five SEC Commissioners will face the House Financial Services Committee on Tuesday. Buckle up!

— Casey Wagner

Bulletin Board 

• Another $187 million entered US-listed spot bitcoin funds on Tuesday, Farside Investors data shows — marking four straight days of net inflows. Total net money moving into the ETF segment totals $17.5 billion a little over eight months since the launches. 
• BlackRock published a report called “Bitcoin: A Unique Diversifier.” Likely drivers of long-term bitcoin adoption are “the intensity of concerns over global monetary stability, geopolitical stability, US fiscal sustainability and US political stability,” according to company executives. Rather than classifying bitcoin as a risk-on or risk-off asset, BTC’s long-term return drivers are “fundamentally uncorrelated with other sources of portfolio returns,” they wrote.  
• Non-custodial exchange TrueX — set to use stablecoin PayPal USD as the default settlement currency — exited from stealth Wednesday. Vishal Gupta, Coinbase’s former head of exchange, and Patrick McCreary, an ex-senior staff engineer at the crypto exchange, founded the new firm.
• WisdomTree unveiled the “direct-to-business counterpart” to the “blockchain-enabled” consumer app it launched last year. The new platform is designed to unlock tokenized real-world asset access to more users, enabling them over time to interact with any WisdomTree-issued token across wallets and supported blockchains.

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