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Ripple is being sued by the SEC

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Just in time for Christmas, Ripple, the banker-bro Silicon Valley cryptocurrency start-up, says it is about to be slapped with a lawsuit from the US Securities and Exchange Commission.

In the early hours of Tuesday morning UK-time, the company’s CEO Brad Garlinghouse tweeted the following:

The case seemingly hangs on whether the early distribution of pre-mined XRP — the cryptocurrency created by Ripple — constituted a securities offering, and whether XRP “stock” should have been registered accordingly. This, say XRP critics, can be argued because unlike other cryptocurrencies, XRP’s supply and distribution was centrally controlled in its early days and even now efforts taken to separate control are merely cosmetic in nature.

Garlinghouse linked to a Fortune article, in which he is quoted as saying:

It’s not just Grinch-worthy, it’s shocking . . . It’s an attack on the entire crypto industry and American innovation.

It was also noted in the article that the decision by Ripple (which the news outlet calls one of most important companies in the crypto industry) to announce that it is being sued is an unusual one.

This is partially true. Usually, companies under investigation — even if they note they have been served a Wells Notice — shy away from offering any insight into such matters until the SEC itself is prepared to announce an action. This is mostly out of fear of getting themselves into even more trouble with regulators.

In 2019, however, Elon Musk turned provocation of the SEC into an art form.

His dealings with the SEC since then — which have regularly seen him taunt the regulator on Twitter — have opened the door to a new norm being established in terms of acceptable communications between authorities and executives with large social media followings.

In trying to get ahead of the regulatory-action news curve, Garlinghouse appears to be running with that norm, or at the very least flagging he too is prepared to throw down the gauntlet to the SEC in a similar fashion. This he has done not only by revealing that the lawsuit will name him and co-founder Chris Larsen as defendants but also by publishing Ripple’s own take on matters to his legion of 279k followers. (Though how many of those followers are flesh-and-blood people is harder to determine.)

And the company is making some very interesting arguments in its bid to control the narrative . . . 

Chief among them is that XRP has always been a digital asset with “a fully functional ecosystem and a real use case as a bridge currency that does not rely on Ripple’s efforts for its functionality or price”.

Garlinghouse, however, is channelling another familiar argument too:

In its official Wells submission (the response to the Wells notice) Ripple specifically notes:

Innovation in the cryptocurrency industry will be fully ceded to China. The Bitcoin and Ethereum blockchains are highly susceptible to Chinese control because both are subject to simple majority rule, whereas the XRPL prevents comparable centralization

It is a fascinatingly paradoxical point if you really think about it. The argument suggests only XRP can defend us from China because it alone has the power to defy centralising free-market forces (since presumably it is already controlled and centralised by someone else?).

The above reminds us of the time that those other famous do-gooders, Facebook, kept on trying to say that their planned “Libra” coin was actually all about fighting China and extending “America’s financial leadership as well as our democratic values and oversight around the world”. (Incidentally, “Libra” is no longer and something called “Diem” is due to be launched next year instead. Remember when we dedicated a whole series to arguing that Libra wasn’t going to work out? Yeah. Read Alphaville. 😎)

Silicon Valley invoking the CHAYNA threat while simultaneously replicating Chinese centralisation practices is pretty funny in our parish.

At pixel time, XRP was down more than 6 per cent on the day, having been down as much as 19 per cent earlier. Its “market cap” now stands at $22.5bn, according to Coinmarketcap.com. Though the website also notes XRP’s “circulating supply” (which we presume also includes coins that have been mined but not publicly released) stands at $45.4bn. Who actually knows how “market cap” is calculated in this space? It is after all a bit of a nonsense metric.

Fortune reported that Judith Burns, a spokesperson for the SEC, declined to confirm whether there would indeed be a lawsuit.

Related links:
Who’s been editing the Ripple Wikipedia page? – FT Alphaville
The art of redefining success, MoneyGram and Ripple edition (Updated) – FT Alphaville
With $16bn in cryptocurrency, Ripple attempts a reset – FT
The Ripple effect – FT





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Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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