Expect crypto bulls to flock back to this space now that the Fed is cutting rates

By Frances Yue

A weekly look at the most important news and moves in crypto, and what's on the horizon in digital assets

Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

Last week, the Federal Reserve cut its policy rate for the first time in four years, reducing its key interest rate by half a percentage point. Fed-fund futures traders are partially pricing in as much as another 100 basis points of cuts by the end of the year, according to data from CME FedWatch.

How might the rate cuts impact the crypto space? I spoke with Chris Rhine, portfolio manager at SPDR Galaxy ETFs, who said some decentralized finance lending protocols in particular may be revitalized by the rate cuts.

Decentralized finance, or DeFi, usually refers to financial services built on blockchains that allow peer-to-peer transactions and eliminate middlemen. Many DeFi transactions are implemented via smart contracts, which are computer programs that are designed to automatically execute certain actions when conditions are met.

A DeFi comeback?

The first so-called DeFi summer was in 2020, after the Federal Reserve started cutting its policy rate in response to the COVID-19 pandemic, and it was marked by the popularity of several decentralized lending platforms and exchanges, such as Aave, Compound, MakerDAO and Uniswap.

Many investors flocked into the DeFi space then to seek better returns that came with higher risks. The borrowing rates of certain crypto on some decentralized platforms reached as high as 30%.

However, as the Fed kicked off its rate-hiking cycle in March 2022, some of the platforms took a major hit. Yields offered by such protocols became less favorable as the risk-free rate climbed, with the U.S. Treasury bills yielding over 5% at one time. Meanwhile, a tightening of overall liquidity made investors more hesitant to direct money into risk assets.

Total value locked in DeFi protocols tumbled to a cycle low of under $40 billion in December 2022, after reaching a peak of almost $180 billion in November 2021. The value locked in such protocols stood at around $87 billion as of Tuesday, according to data from DefiLlama.

With Fed now cutting its policy rate, some of the DeFi lending protocols may become popular again, Rhine said.

Investors should especially watch the supply of stablecoins, a type of cryptocurrency with its value pegged to another asset, Rhine noted. If stablecoin's supply rises, it usually indicates growing demand for such crypto and more money being deposited into ecosystems on blockchain.

Caroline Ellison's sentencing

U.S. District Judge Lewis Kaplan on Tuesday sentenced Caroline Ellison, the former girlfriend of FTX co-founder Sam Bankman-Fried and the onetime chief executive at his hedge fund Alameda Research, to two years in prison.

While Ellison played a key role in the fraud that saw Bankman-Fried moving billions of dollars in customer deposits from crypto exchange FTX to Alameda Research, she cooperated in the investigation from the beginning, leading prosecutors to seek a sentence of no jail time.

"Ellison's testimony was a cornerstone of the trial against Bankman-Fried," federal prosecutors in Manhattan wrote to Kaplan in requesting leniency at sentencing for Ellison.

In March, Bankman-Fried was sentenced to 25 years in prison.

MarketWatch's Lukas I. Alpert wrote more here.

TrustToken, TrueCoin settle charges with SEC

Crypto companies TrustToken and TrueCoin, now rebranded under the name Archblock, have settled charges with the U.S. Securities and Exchange Commission.

The SEC accused the companies of conducting fraudulent and unregistered sales of investment contracts involving the stablecoin TrueUSD, whose value is supposed to be pegged 1:1 to the U.S. dollar, according to a statement from the SEC on Tuesday.

Pending court approval, the companies have agreed to pay civil penalties of $163,766 each, and TrueCoin has agreed to pay back over $370,000 in profits and interest, according to the statement. The companies didn't admit or deny wrongdoing in the settlement.

The SEC's complaint alleged that TrueCoin and TrustToken engaged in the unregistered offer and sale of TrueUSD and also falsely marketed that TrueUSD was fully backed by U.S. dollars or their equivalent. However, a substantial portion of the assets backing TrueUSD had actually been invested in a speculative and risky offshore investment fund, the SEC alleged.

By September 2024, 99% of the reserves backing TrueUSD were invested in the speculative fund, the SEC alleged.

A representative at Archblock didn't respond to a message seeking comment.

Crypto in a snap

Bitcoin (BTCUSD) has gained 5.8% over the past seven days, to around $63,512 at the time of writing Wednesday. Ether (ETHUSD) has climbed 11.9% over the past seven days, to around $2,599, according to Dow Jones Market Data.

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-Frances Yue

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09-25-24 1332ET

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