October - November 2024: The American Crypto Renaissance: Regulatory, Fiscal, Monetary, and Global Catalysts Align

The Post-Election Crypto Everything Rally

The result of the U.S. elections presents the opportunity for regulatory clarity and unprecedented growth for the U.S. crypto industry.

Trump’s “plan to ensure that the United States will be the crypto capital of the planet,” as well as promises to bring regulatory clarity and a rollback of stringent policies that have created barriers for cryptocurrency companies in recent years, have brought renewed optimism to the digital assets market. The impending departure of anti-crypto SEC chair Gary Gensler further supported this market sentiment. Other key catalysts are the potential for a Strategic National Bitcoin Reserve, the appointment of pro-crypto leaders at the Treasury and Commerce Departments, at the SEC, the CFTC, a change in the Senate Banking Committee, and an appointment of an executive "crypto czar."

These implicit and explicit regulatory “blessings” will finally force large institutions to buy vs. build and take strategic positions in the space fostering an M&A boom.

Crypto appreciation: As of today, BTC is teetering at just under its all-time high of almost $100,000 (+ 45% from Nov 4th) and SOL at $253 (+61% from Nov 4th). The total AUM for spot BTC ETFs topped $100B, and the total AUM for ETH ETFs surpassed $9B, representing some of the most successful ETF launches of all time across all asset classes.

For the first time, the reputational risk of NOT being in crypto has outweighed the reputational risk of being IN crypto. Regulatory de-risking is what institutional investors have been waiting for.

Increased M&A activity and revival of IPO plans: The anticipated financial deregulation and more crypto-friendly leadership of regulatory agencies will provide air cover to institutions previously cautious of wading into the space despite compelling strategic rationale. This will drive M&A and accelerate IPOs. Investment bankers focused on digital assets expect CEOs to use takeovers to speed up expansion plans in the second Trump presidency. In Q4’24, we are already seeing a spike in crypto M&A with 39 announced deals, including the largest crypto M&A in history, a $1.1B acquisition of Bridge by Stripe.

Removing the regulatory risk will make it easier for crypto companies to go public. A solid list of crypto companies considering going public next year; many companies have meaningful volumes and built platforms that generate revenue across multiple products.

Stablecoins - the main beneficiary of the rally: The total supply of stablecoins jumped substantially in the wake of the election, up $20B. This is indicative of new money coming in to purchase digital assets, such as Bitcoin. Following the election, the top five finance apps on the iOS store — Coinbase, Robinhood, Cash App, PayPal, and Crypto.com — all offer crypto and stablecoin products. The use of stablecoins extends far beyond crypto trading. Stablecoins have become a core part of Web3. Stablecoin issuers own more U.S. Treasuries than South Korea and Germany and have become an important buyer of U.S. Government debt. Stablecoin legislation is expected to be on President-elect Donald Trump's desk in 2025.

Corporate treasuries embracing Bitcoin: Over the past few weeks there has been an acceleration of announcements from companies adding Bitcoin to their corporate treasuries. Over 60 public and thousands of private companies now have a Bitcoin treasury strategy, according to River Financial. Many of Bitcoin’s properties, such as a programmatically finite supply and verifiable scarcity on a public blockchain, make it an attractive store of value. This critical portfolio segment could be a valuable hedge against growing fiscal deficits, currency debasement, and geopolitical risks.

Rebound of decentralized finance: Tokens associated with Decentralized Finance (DeFi) have outperformed most other categories after the election, according to CoinGecko. UNI, the native token of Uniswap decentralized exchange, one of the main beneficiaries of regulatory unlock in the U.S., climbed over 60% after the election. The SEC and CFTC will likely withdraw or settle many of their ongoing lawsuits and investigations against crypto industry participants, and particularly against such DeFi companies, as Uniswap and Metamask.

Roadmap of Regulatory Changes In The Year Ahead

The crypto community, which spent heavily in this election cycle, expect the new administration to deliver a wholesale reboot from the new administration, including greater clarity, more reasoned enforcement, and a balanced regulatory posture at the agency level. Regulatory clarity will open the floodgates for institutional adoption of cryptocurrencies. Corporations can use blockchain within their operations without fear of regulatory backlash, and institutions can invest in digital assets knowing there is are safe-harbors and frameworks in place to protect their investment. Below is a summary of the most anticipated regulatory changes:

1. Crypto-friendly Leadership Of Regulatory Agencies

• The leadership of the major government agencies, such as the SEC, CFTC, OCC, FDIC, and Treasury, are expected to be pro-crypto. The new administration has already appointed leaders who view digital assets as economic growth and innovation opportunities, and will continue to do so.

• The SEC Chair, Gary Gensler, will step down on January 20, 2025. New SEC leadership is expected to ease restrictions on crypto assets by prioritizing the development of a clear framework to facilitate mainstream adoption and by moderating rules of engagement for enforcement.

• Similarly, the OCC and FDIC may allow banks to engage with crypto services more freely, such as digital custody.

• Federal Reserve Chair Jerome Powell is unlikely to change, though he has expressed openness to some digital currency initiatives and the Fed does not have a primary policing role.

• Pro-crypto Cantor Fitzgerald's CEO, Howard Lutnick, has already been nominated as the next Secretary of Commerce.

• One change to keep in mind is Crypto Presidential Advisory Council. This group will be put together and tasked with designing transparent regulatory guidance for the industry within the first 100 days of the new administration.

• Lastly, there is the Elon factor. He, Peter Thiel, and the other “grey cardinals” in the election are pro-crypto investors.

2. Revision Of Crypto Legislation

• A Republican-controlled Congress may revise the proposed Financial Innovation and Technology for the 21st Century Act (FIT21) and Stablecoin Legislation. The FIT21 Act, that defines the roles of the CFTC and the SEC and clarifies when digital assets should be classified as commodities or securities based on decentralization criteria, and Stablecoin Legislation, designed to establish clear standards for stablecoin issuance and backing, have been hotly debated topics.

• There are also rumours that the upcoming administration may grant the CFTC the ability to regulate crypto exchanges and spot markets dealing with digital assets deemed commodities, such as Bitcoin and Ether.

• With Donald Trump's endorsement of the concept, the Bitcoin Act stands a greater chance of gaining approval. Bitcoin Act proposes the creation of a strategic Bitcoin reserve in the United States, allowing the federal government to hold Bitcoin as a hedge against potential economic instability.

3. Revision Of Other Crypto Regulation

• This shift could allow banks to integrate blockchain technology more directly into their services, enhancing their role in the evolving digital economy. With Republicans in control, we can expect that Staff Accounting Bulletin 121 (SAB 121), which has significantly impacted banks' ability to engage with crypto assets by requiring them to recognize customer-held digital assets on their balance sheets, may be repealed under the new administration.

• Federal Reserve's SR 22–6/CA 22–6 letters, which effectively limited covered banks' ability to engage in digital activities, are expected to be revised, enabling banks to take on more Web3 firms as clients.

4. Turning Down The Heat In The Courts

• Multiple lawsuits against crypto companies like Ripple Labs, Coinbase, Binance, Kraken, and Cumberland were driven by the SEC's aggressive stance on treating numerous crypto assets as unregistered securities. A new leadership of the SEC may seek settlements with these companies, allowing them to operate within a clarified regulatory framework or, in some cases, drop certain lawsuits entirely, especially if they are viewed as not serving the best public interest.

• DeFi And Web3 Applications. Similarly, the SEC may refrain from following through on Wells notices issued to entities such as Uniswap, Consensys, Immutable, Crypto.com, and Robinhood. These notices were early warnings that the SEC might file lawsuits alleging securities violations.

• Staking Services. Multiple courts are examining the treatment of staking services in the context of securities regulations. While some crypto services providers have settled on this issue with the SEC, Coinbase continues its fight with the SEC.

Key Themes In October - November

Stablecoins Are Mainstream: Stripe's $1.1B Acquisition of Bridge

The recently announced $1.1B acquisition of the stablecoin API firm Bridge by the payments giant Stripe ($70B latest valuation) became Stripe's largest acquisition and the largest acquisition in the crypto industry's history. Bridge had raised $58M from investors like Index Ventures and Sequoia Capital and was valued at $350M⁽¹⁾ in its last round this August. Industry sources estimate the price/revenue multiple for the deal at 70-110x, with a deal structure likely involving a high equity financing component. The deal validates the usage and growth of stablecoins in building a new set of global payments rail. The transaction also marks a much-needed win for VCs in the crypto space.

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Looking Beyond the Horizon: TEN Surprises for Crypto in 2024

Last December, we shared some thoughts on what 2024 may bring with ten predictions that we thought are more likely to happen than the average investor would think. The year delivered more than we could have imagined, and seven out of ten predictions ended up playing out the way we anticipated:

1. Yield generating tokenized funds launched by Blackrock,
2. FTX & Celsius creditors are seeing their recoveries increase,
3. The battle royale game “Off-The-Grid” occupied the top spot in the Epic Games store,
4. Household brands are using loyalty programs powered by the blockchain,
5. JP Morgan’s blockchain settles over $2B in daily transactions,
6. Polymarket predicted a Trump victory with significantly higher odds than traditional polling, and
7. A wave of new Blockchain x AI startups launched.

Keep an eye out for our 2025 predictions, where we will be even bolder.

Tokenization Finally Finding Product-market Fit, With Japan Leading The Way

The tokenization of Real-World Assets (RWA) into the blockchain ecosystem represents one of the most promising and transformative trends in the crypto industry, and the real estate industry has recognized the benefits of this product and structure since at least 2017. This transformation is expected to create a market worth up to $1.5 - $3.2 trillionof tokenized real estate by 2030.

In recent years, the industry has seen a surge of innovation, with multiple startups offering blockchain-based solutions for real estate tokenization and traditional financial players launching proof-of-concept projects.

At 10SQ we are actively looking for RWA tokenization startups with resilient unit economics that promises to lead to revenue streams. These companies will have some form of unique advantage or innovation in their technology, customer acquisition, analytics, insights, or distribution.

Japan has become a global leader in tokenizing real estate, with a remarkable growth in issuances over the last three years. The country sets the benchmark for clarity of crypto regulation, securitization infrastructure, distribution, and ecosystem development.