Two Is Better Than One

It might not have been on day one as promised, but day two of Trump’s second term saw two major crypto policy announcements. 

Firstly, President Trump’s ‘Strengthening American Leadership in Digital Financial Technology’ executive order (EO) can be summarised as follows:

• The policy of the new administration is to support the growth of digital assets whilst protecting the sovereignty of the US Dollar (through promoting the growth and development of dollar-backed stablecoins).
• Prohibition of a CBDC.
• Revoking President Biden’s 2022 executive order on the regulatory framework for cryptocurrencies. 
• Establishing the President’s crypto ‘Working Group’, chaired by AI & Crypto Czar David Sacks which will: look at all existing regulations and guidance documents in the digital asset sector and offer modifications/ rescindment advice, evaluate create a national digital asset stockpile, and propose a new regulatory framework for digital assets, submitting a report within 180 days to the President on their decisions. The Working Group will consist of high-ranking officials from the SEC, CFTC and the Treasury. 

Secondly, the SEC has also introduced SAB 122, designed to eliminate the guidance of SAB 121 – this was a report by the SEC that stated banks and crypto custodians should treat crypto assets as liabilities on their balance sheet, opening them up to more stringent capital reserve requirements, which prevented many institutions from offering custodial services. The change now means banks no longer have to record custodied customers’ digital assets as liabilities, meaning institutions looking to custody Bitcoin can now do so more easily. This will pave the way for more custodial options in the sector.

Prior to the EO announcement, Senator Lummis posted on X “₿ig things are coming👀” – many market participants took this as the signal that a Strategic Reserve would be announced. As we highlighted previously, BTC’s price has moved at times in lockstep with news of a SBR, and following the Senator’s tweet, we saw this again (see chart below). Instead, she announced her position as the Chair of the Senate Banking Subcommittee on Digital Assets, something many had already anticipated and the probability fell once again. 

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Interestingly, the executive order did not specify Bitcoin by name for the strategic stockpile, nor has it confirmed the U.S. government will create one. Instead, the Working Group will evaluate the creation of a “digital asset” stockpile, which may or may not be limited to just Bitcoin. The “Will Trump create Bitcoin reserve in first 100 days?” market on Polymarket fell vertically following the executive order – this is likely because it outlines a 180-day period to report on the feasibility of a reserve by which point the market will have resolved to “no” already. 

The expectation vs the reality of each of these announcements is causing volatile, whipsaw movements in spot price and implied vol smiles. The move up from $101K to $106K after Lummis’ tweet resulted in BTC’s 1-week tenor, 25-delta put-call skew rose 7% in favour of calls. Following the EO, the spot fell from $106K down to $102K, and the 7-day tenor vol smile skew fell to a more neutral level. Positioning now is once again more in favour of calls. 

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With this swinging sentiment, ATM implied volatility slightly inverted as BTC rallied, only to resolve very quickly into a now steep term structure.  

In macro, as expected, the Bank of Japan raised short-term interest rates by 25bps to “around 0.5 per cent”. Year-over-year core inflation in the region for December also came in at expectations of 3%. 

And finally in DeFi, the lending and multi-chain swap protocol, THORChain, has restricted the lending arm of its protocol amid insolvency concerns. It has lent out more BTC than holdings in its reserve pool, now facing being priced out of the spot market, and unable to rebuy the coins it lent. THORChain has actively begun a “restructuring” where they aim to pull profits from other parts of the protocol to pay for this problem.

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