How the potential Evergrande collapse could impact cryptocurrencies

Noelle Acheson, Head of Market Insights at Genesis Trading, discusses why Cryptocurrnecies tumbled on Monday.

Video Transcript

SEANA SMITH: As we see risky assets continuing to tumble today, worry about the spillover from China's Evergrande debt crisis, it's also hitting crypto markets. Bitcoin off nearly 10% right now, Ether off just around 11%. So we're certainly seeing some of that concern spillover to the crypto markets.

We want to talk a little bit more about this with Noelle Acheson, Head of Market Insights at Genesis Trading. And, Noelle, we're looking at some collateral damage, it looks like, when it comes to crypto. From your perspective, I guess, how big of a concern should this or is this for crypto investors?

NOELLE ACHESON: Hi, Seana. Great to be with you. Yeah, just kind of brutal up there today, isn't it? The crypto sell-off has two components, basically, that I'm seeing. And they are, both of them, related to the Evergrande concerns.

I should say, I do have to point out nothing I say is investment advice, and these are my opinions not those of my employers. But broadly, Bitcoin does tend to avoid-- and other crypto assets-- it does tend to move in line with sentiment. And what we are seeing is a shift to risk-off sentiment. It started in the Asian markets overnight and just trickled through to the European and the US opens.

This is showing that Bitcoin is not the safe haven some people claim it is in the short-term-- longer term, that's a totally different story. But when investors need to sell liquid assets to raise cash when the sentiment turns, Bitcoin destiny is a liquid asset and so it falls into that bucket. The second component is much more crypto-specific. And this is related to the concerns around Tether-- stablecoin Tether-- which accounts for about half of the market capitalization of stablecoins and is a significant component of crypto market liquidity.

Tether is very active in Asia. And a large part of Tether's reserves are commercial paper. So there was some concern that some of Tether's backing was going to be Evergrande commercial paper. The collapse in Evergrande would, of course, be very bad news for Tether-- worst case scenario and also Tether, very bad news for the market as a whole.

Now, Tether did issue a statement last week saying that they do not hold any Evergrande commercial paper. But that does not yet mean that it's free from Evergrande-related risk. Because if Evergrande collapses-- again, worst case scenario-- it's very likely to take some other companies with it. And it's possible that Tether has commercial paper from those companies. Again, this is worst case scenario, which, in my opinion, is very unlikely.

ADAM SHAPIRO: I want to keep with what you've just described, and I'm glad that worst case scenario looks unlikely. But we keep hearing people say, pay no attention. Don't worry about contagion. At the core of this, and I don't want to dispute that Bitcoin, for some people, is a store of value. But it's this whole concept of currency-- it's really not, as we use currency today, a currency, which puts it, perhaps, and other cryptocurrencies, or assets, at the risk, that hopefully won't happen, that you just described-- it's not immediately liquid.

NOELLE ACHESON: You've hit on a very interesting point, Adam, and that is the diversity of the crypto asset market. We have Bitcoin, which is regarded as a store of value, but is increasingly being used as a currency, as we are seeing not just in countries like El Salvador and elsewhere, but also just through the growth of the Lightning Network, which permits cheap and fast transactions based on Bitcoin.

So it is increasingly being used as currency. But most of the market at the moment still sees it as a store of value. Other crypto tokens, however, do have totally different characteristics. And this is material when it comes to contagion-- again, not in the short-term. In the short-term, investors get jittery and they look for safe havens which, let's face it, we all know crypto assets are not.

SEANA SMITH: Well, I want to ask you about Coinbase, not so much just in terms of the news that we got today-- the fact that they announced plans for it-- abandoning its plans for its crypto lending program-- but more so what this means for us about the future of the industry when it comes to regulation, because we know that that has been a concern here amongst some investors just in terms of what that roadmap might look like. When you see an announcement like we did today from Coinbase, I guess how are investors looking at this? And what does this mean for the future of regulation in this space?

NOELLE ACHESON: Well, one thing I can say about the regulation-- the rumblings around regulation that we've been seeing that have been growing in volume over the past couple of years, even, is that is a testament to how much our industry has grown-- that it is now large enough, significant enough to be taken seriously by regulators at the highest levels all around the world. I mean, going back to what we were just talking about in stablecoins, one of the problems is the lack of clarity around what backs these very important assets for the crypto markets.

Should stablecoin regulation come down the pipeline, which everyone is expecting, we know the US Treasury are working on a stablecoin report, which some people say could be released any day now. This is being awaited eagerly by all of us in this industry because it's expected to lay out the US Treasury's stance on stablecoins, as well as good guidance on how they can be regulated. And when that starts to fall into place, when that very complicated piece of the puzzle starts to fall into place, that is going to make regulation so much easier in other areas of the industry as well.

And tying into what you mentioned, Adam, part of the problem is the lack of understanding of what these assets are. That is improving day by day. Regulators are doing their homework. That doesn't remove the problem that these assets are hard to classify. Are they currencies? Are they securities? Are they something else altogether? And even going to the functions that the market infrastructure companies in this industry offer, they need to rethink the definitions of equivalent functions in the traditional markets for regulation to be able to be applied.

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