Bitcoin Wins in China!

July 26, 2019
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“An investment in knowledge pays the best interest”
― Benjamin Franklin

5-Day Change

  • Bitcoin: $9,769.80
    -8.74%
  • Ethereum: $216.33
    -5.69%
  • S&P 500: $3,003.70
    -0.01%
  • Dow Jones: $27,141.00
    -0.59%

Bitcoin Wins in China!

Bitcoin finally has a proper legal status...but only in China. A judge from China’s Hangzhou Internet Court ruled that Bitcoin is virtual property and is owed the same protections as physical property. The ruling applies to all cryptocurrency assets. While the crypto itself may be legal, trading crypto for fiat and ICOs are still illegal under current Chinese law, and the Chinese government is looking to eliminate crypto mining as well. (Chinese miners are estimated to contribute about 40% to the overall Bitcoin hash rate.) 

How did this happen? China has been something of a trend-setter for digital law, starting with the founding of internet courts (courts tasked explicitly with handling online and digital cases). The Hangzhou Internet Court, in particular, is one of three internet courts in the country and had previously ruled that blockchain data is permissible as evidence. This case stems from a dispute between a user of a now-shuttered exchange - the user stored their BTC on the exchange, and lost access to it after the exchange was shut down. While they didn’t win the case, the court did confirm Bitcoin’s status as property.

So what does being property actually mean? The recent ruling allows Bitcoin holders to now benefit from the same protections against theft, fraud, and damages as traditional commodities and property in China. On the other hand, the Chinese legal system is based heavily on Soviet jurisprudence, where the law works in a much more top-down fashion than US and UK common law systems, or even European civil law systems, so a regional court ruling may not change much. Internationally, however, the verdict means almost nothing - China is not usually taken as a source of international law, due to the highly politicized nature of its rulings.

How did the markets react? If traders were enthusiastic about this development, it didn’t show in the price. Volatility has hit a bit of a lull, with prices hovering between $9,500 and $11,000 for the past week, more or less in line with the sideways movement seen recently. Some of this uncertainty may have to do with politics - while China recognized Bitcoin as property, India has indicated it may ban crypto altogether.

Wut We Think: China recognizing Bitcoin as property may have less of an effect than some may hope, but it does signal a normalization of crypto in a time when Facebook’s Libra is coming under heavy regulatory scrutiny. With the price having fallen beneath the crucial $10,000 support, we may even be in for more short-term drops below $9,000 as bears set bearish lower highs. But little has changed for the long-term outlook: the Bitcoin network itself is even stronger than during the $20,000 peak, and the halving is still coming and is nearly guaranteed to raise the price. That shows that despite any momentary news or blips, Bitcoin is expected to increase going forward.

 

Facebook and Swiss Regulators: A Continuing Saga + Updates from the US Senate Debates

Facebook’s Libra has the potential to make digital currencies mainstream...but only if it can get past the global herd of regulators first. And judging by recent events, that’s not going well. The Swiss regulator Federal Data Protection and Information Commissioner (as the Libra governance consortium is based in Switzerland) stated that it has yet to receive a response from Libra regarding its intentions, despite Facebook saying to the United States Senate that it expects the FDPIC to be Libra’s main regulatory agency.

Is Facebook trying to dodge regulations again? We don’t know that for sure, but it’s not like this would be the first time the company has run afoul of regulators. Facebook was just charged a $5 billion fine for breaching privacy laws, and, while $5 billion is nothing to scoff at, it’s far from the first time that Facebook has ended up under a regulator's microscope. In fact, it’s not uncommon to think that the $5 billion didn’t go far enough.

What sort of privacy concerns are there about Libra? Many of the same as there are about Facebook. But now, not only will Facebook have access to all the social media data they’ve collected - they’ll also be able to see where each and every Libra is sold, bought, transferred, or sent, by whom, when, and where. This will give Facebook unprecedented access to information that not even governments can collect - a perfect record of every single transaction, tied to an entirely non-anonymous Facebook account. These concerns have led the US government to schedule even more Libra hearings in the coming weeks.

Is Facebook really the only company that gets this data? Not exactly. Technically, the Libra Association is comprised of multiple companies, including the big payment processors like Visa and Mastercard, as well as venture capital firms, telecom companies like Vodafone, and even taxi companies like Uber. However, the actual privacy structure of Libra is unclear, and it isn’t apparent how data access will be shared or provisioned amongst the Libra Association members. 

Wut We Think: Facebook’s stock is still up 7% since the Libra whitepaper dropped on June 18th, showing that despite the regulatory hurdles, investors are still bullish on Facebook’s new currency. On the other hand, this week’s gains have almost been eliminated by a sharp 4.5% after news broke about the $5 billion fine on Thursday. In addition to the fine, Facebook must now set up an independent privacy board, and Facebook’s co-founder, Chris Hughes, is lobbying to break the social media giant up. This much negative press may put downward pressure on the stock for a while, and it may be that Libra’s success or failure will determine Facebook’s future going forward.

 

The Big Tech antitrust investigation may be a political game, but that doesn’t mean it will end quickly

Big Tech isn’t the same as Standard Oil or Ma Bell...but a new investigation by the United States, announced Tuesday, may very well lead into the same territory. The investigation will be looking into the anti-competitive practices of Facebook, Apple, Alphabet (Google), and Amazon. Antitrust and anticompetition refers to monopolistic practices, banned in most modern economies after it became common knowledge that monopolies are inherently bad for free markets. 

Is Big Tech a monopoly? In the strictest sense - it depends on the company. Platforms like Facebook and Amazon may be hard to sell as a monopoly - despite their obvious oversized influence. Some of the main grounds for establishing monopolies can be hard to apply to modern tech companies, though others - like exclusionary conduct, where one firm uses its dominance to interfere with a competitor, are a more straightforward example. (Google forcing smartphone makers to preload Google apps on their phones is one.)

What are the consequences? Investigations like this can take years to resolve, and even longer to litigate, given the prodigious resources of the companies targeted. If, and when, there is a resolution, it will most likely entail a settlement and some minor policy changes. For example, Microsoft’s antitrust case at the turn of the millennium did not result in Microsoft breaking up - instead, Microsoft was liable for a cash settlement as well as the need to stop promoting Internet Explorer as its default browser for Windows.

Can Big Tech be broken up? Well, like all things, it’s down to politics. The investigation and resulting cases will take time and effort. And outside of sweeping new laws and regulations passing Congress, there’s little chance the courts will take actions as significant as splitting up Alphabet or Apple. On the other hand, if there is a sea-change in US politics in the next year, like say the US presidential elections in 2020, then things may change rather quickly.

Wut We Think: While tech stocks may have dipped on the news, they rebounded rather quickly as Q2 earnings came rolling in. Google jumped up 7%, while Amazon dropped about 1%. Earnings still play a bigger role than any long-running antitrust suit, and without any obvious signs of government intervention, tech stocks are expected to keep growing. Microsoft, another big tech name, has been curiously missing from the latest round of antitrust murmurs, and like Google, it’s posted quite encouraging Q2 numbers with positive guidance going forward. In other words, the sky isn’t falling, and while the law may have a long arm, it also has the agility of a sloth.

 

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