El Salvador’s big Bitcoin bet. Kim Kardashian, crypto flirt. Hong Kong’s crackdown warning.

From the Editor’s Desk

Dear Reader,

Bitcoin investors these days are a diverse bunch, but if they share one thing, it’s an affection for the proverb “nothing ventured, nothing gained.” But for regulators and governments, it’s a mixed bag.

On one hand, that risk-taking spirit was on full display this week in El Salvador as a plan by the country’s leader to make Bitcoin legal tender bore fruit, with the original cryptocurrency taking its place alongside the U.S. dollar as a parallel currency in the tiny Central American nation.

Despite bold claims by President Nayib Bukele and his government that the move will pay big dividends, not everyone is convinced. For the two-thirds of Salvadorans who oppose it, the risks associated with such a volatile asset that lacks central bank (or any other) backing are simply too great.

And just because your favorite influencer says she likes something on social media, doesn’t mean risk doesn’t exist. This week, the head of Britain’s finance sector standards agency, pilloried celebrity-for-rent Kim Kardashian over her promotion of EthereumMax, a three-month-old crypto token entirely unrelated to Ethereum aside from its creators’ appropriation of the Ethereum name.

Financial Conduct Authority Chair Charles Randell told an economic crime conference that Ms. Kardashian’s acceptance of up to US$500,000 to push the coin to her 250 million Instagram followers had put her on the wrong side of a financial promotion that may have had the single biggest audience in history.

As EthereumMax languishes nearly 97% below the peak price it reached eight days after launch, accusations that the FCA has been a party-pooper for the coin ring rather hollow. Indeed, it’s incumbent on regulators to play it safe, and Ms. Kardashian is no Elon Musk when it comes to moving crypto markets.

And playing it safe seems to be exactly what Hong Kong’s main markets regulator has in mind when it comes to cryptos. Hong Kong is already planning to exclude all but “professional” (read: rich) investors from crypto trading. Now, the city’s Securities and Futures Commission is limbering up to further tighten its grip on the sector.

Could the once-freewheeling Hong Kong as a finance hub be set for a crackdown of its own, or are we seeing simply a dose of discipline?

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast.News

Forkast.Insights | What does it mean?

Bukele has always maintained that El Salvador’s move to adopt Bitcoin as legal tender aims to cater to the country’s largely unbanked population and help reduce the costs of remittances from abroad. A strong narrative within the cryptocurrency community is that Bitcoin can foster financial inclusion among unbanked people, whose numbers account for around 70% of El Salvador’s population. 

Last month, Bukele shared a Bank of America research note concluding that the country’s new Bitcoin law could reduce the costs of cross-border transactions and attract foreign investment as the nation became a first-mover in cryptocurrency adoption. More than 20% of El Salvador’s GDP comes from remittances, according to the latest data available, one of the highest ratios in the world.

Although using traditional remittance services such as Western Union incur relatively high costs, the potential benefits identified by the Bank of America may be overstated. A paper published by Johns Hopkins University titled “Bukele’s Bitcoin Blunder” predicts that remittances made using Bitcoin will cost more than those made through traditional channels. Bukele is also facing fierce opposition to the Bitcoinization of the country’s economy, with two-thirds of Salvadorans disagreeing with the government’s decision to adopt it as legal tender, according to a poll by the Central American University published on Sept. 2.

Bukele’s government insists that Salvadorans will be free to exchange their Bitcoin for U.S. dollars, which the country adopted as a national currency in 2001, and has proposed a US$150 million fund to ensure convertibility. However, given widespread skepticism of BTC, critics say that’s unlikely to be sufficient. It could also open the door to criminals looking to convert BTC to dollars via a national bank and more effectively launder their ill-gotten gains.

Despite his authoritarian leanings, Bukele remains one of the most popular national leaders in Latin America, whose approval rating has regularly topped 85% since he took power. But in recent weeks his support has slipped to below 75%, primarily due to mass opposition to the Bitcoin law.

Bukele’s critics are warning that El Salvador’s Bitcoin law is serving primarily to distract attention from his consolidation of political power and steady weakening of democratic institutions. Aside from ramming his Bitcoin proposal into law, Bukele has made several significant changes to the country’s constitution and now effectively controls all three branches of government.

There has also been a high degree of improvisation in the rollout of Chivo — the country’s new Bitcoin wallet, which offers its holders US$30 of free BTC on sign-up — alongside a lack of transparency around some of its more curious characteristics. The wallet, which takes the form of a mobile phone app, asks for access to the phone’s microphone and contacts — a feature whose purpose is difficult to fathom, although it is potentially useful to a government looking to snoop on its people.

Despite these caveats and complexities, Bitcoin, and cryptocurrencies more broadly, can offer — at least in theory — financial empowerment to communities excluded from the financial system. El Salvador is now in the midst of a great experiment that has provoked much speculation as to whether it will succeed.

If Bitcoin adoption goes to plan in El Salvador and brings Salvadorans the benefits that Bukele claims, it could have a domino effect on other countries that rely heavily on remittances and the U.S. dollar, such as the Philippines. Although Bukele’s motivations remain unclear, like details of the financial framework intended to support Bitcoin’s adoption, El Salvador’s power-hungry president may one day be remembered as something of a prophet who helped change the global financial system forever. 

Forkast.Insights | What does it mean?

The phenomenon of celebrities promoting crypto assets is nothing new. Following the initial coin offering boom of 2017, the U.S. Securities and Exchange Commission went after several over what it said was irresponsibly pushing crypto products onto their fans. Floyd Mayweather and DJ Khaled were fined by the SEC for not disclosing payments for an ICO by Centra Tech. The SEC also laid low Steven Seagal, the 1990s martial arts film star and Aikido master for his involvement in 2018’s Bitcoiin2Gen ICO — wherein he failed to report that he had been paid more than US$250,000 to help promote the useless token.

However, the punishments handed out by the SEC have been based on the fact that the abovementioned celebrities did not disclose they had been paid to promote the coins. That was not the case with Kim Kardashian’s promotion of EthereumMax.

In an official publication on the Financial Conduct Authority’s website, its chief, Charles Randell, acknowledged that the most famous Kardashian had complied with Instagram’s rules by indicating that she had been paid to push EthereumMax. He also said she had been under no obligation to explain or make clear the utility or value of the token.  

Nevertheless, as crypto markets have sucked in money this year, many speculative assets and memecoins have been shamelessly plugged by celebrities and investors who seem willing to exploit their sway over young, inexperienced retail investors in their pursuit of a quick profit.

The most notable has, of course, been Tesla and SpaceX CEO Elon Musk, whose tweets on cryptocurrencies have moved markets mightily, so it shouldn’t be surprising that companies in the space are keen to find other influential figures to do the same.

Kardashian is estimated to have earned US$300,000 to US$500,000 for her role in the promotion of the Ethereum knock-off, and, with around 250 million followers on Instagram, she was likely worth every penny to the coin’s unidentified developers. If just 5% of Kardashian’s followers had invested US$1 each in the project, the inflows would have topped US$10 million. Not a bad return.

Kardashian is a billionaire, as is Musk, and although regulators such as the U.K.’s FCA and the U.S. SEC will have trouble crafting robust rules to put an end to the type of nonsense in which they have engaged, retail investors in the crypto space should wake up to the fact that the celebrities they worship probably care little about what happens to them. As always, it’s prudent to do one’s own research before deciding whether to splurge on whatever a celebrity is selling. As the SEC warned in 2017: “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”

Forkast.Insights | What does it mean?

Regulation in the cryptocurrency space is a basic requirement, and it will be regulation that carries the industry to critical mass and maturity. As crypto becomes more integrated into mainstream finance, regulators around the world are ramping up oversight efforts and measures to protect consumers. Although some feel frustrated by the regulatory gaps in the space, the SFC’s work has positioned Hong Kong as one of the leading jurisdictions for cryptocurrency trading and blockchain innovation.

Hong Kong has the clearest and most detailed requirements of any jurisdiction in Asia for the licensing of virtual asset service providers. Its regulatory road began with the Securities and Futures Ordinance in 2019, and the SFC’s issuance of a position paper on the regulation of virtual asset trading platforms. The paper outlined an opt-in for companies wishing to obtain licensing for platforms trading at least one tokenized security, requiring them to commit to a set of best practices

In November 2020, SFC chief Ashley Alder kicked off a firestorm during Hong Kong FinTech Week by announcing a plan to regulate all cryptocurrency exchanges operating in the city or targeting its residents. The proposed rules were to replace the voluntary framework introduced in 2019, effectively banning crypto trading for retail investors and requiring VASPs to obtain licenses to operate, causing great concern among the territory’s crypto community.

Fears began to emerge that the new regulation would force Hong Kong to cede its position as a regional fintech hub to jurisdictions such as Singapore, or fall behind other centers in the U.K. or U.S., by unduly preventing retail investors from trading while allowing the wealthy to continue.

However, for many prominent figures in the industry, the regulation represents a positive step for a maturing sector, allowing it to grow and thrive in the territory. Others believe such far-reaching regulation is inevitable and indeed necessary for the hype-prone crypto market. 

As demonstrated by the rise of memecoins such as Dogecoin and Shiba Inu, many retail investors simply cannot control themselves, and the wisdom of Leung’s recent statements to the effect that investors need protection and education is indisputable.

Fortunes can be made on speculative assets, and regulation requires filling out a few more forms, but the vast majority of speculative trading that has underpinned much of the crypto narrative this year is ultimately unhealthy for retail investors and the industry as well. Markets require proper guidance and regulation to protect investors from inflating bubbles, which also protects the crypto sector from being demonized and diminished.