#Cryptocurrency, Ukraine, Russia, & #Alternative Data: What Comes Next

Global outrage regarding Russia’s brutal second invasion of Ukraine has included the imposition of unpredecentedly large economic sanctions targeting Russian holdings of reserve currency assets and gold reserves. The expectation/hope is that economic constraints will incentivize Russian oligarchs to overthrow the head of state so that the oligarchs can return to their favorite global cities like London, Paris, and New York.


The economic pain is real, with the ruble tumbling. But for all the innovation and breadth involved in the sanctions, a potential back door exists to evade the sanctions. It is only a matter of time before policymakers in the United States, the United Kingdom, and Europe shut down the backdoor.


Our cryptocurrency policy data (particularly DCVS 1 Cryptocurrency and DCVS 2 CBDC) provides proven advance notice not only of regulatory policy shifts but also of market volatility. We are pleased to provide this data to risk managers and compliance professionals in addition to portfolio managers during 2022 so they can prepare dynamically for a difficult and busy year.


Background: Traditional Data


The Wild West days of cryptocurrency are numbered. We have been documenting for the last 18 months (especially HERE and HERE) how policymakers in reserve currency countries have been steadily pursuing a two-pronged expansion of the regulatory policy perimeter.

· The first prong involves the extension of securities regulation to the sale and intermediation of shares in cryptocurrency issuers and the extension of banking regulation regarding bank-issued stablecoins.

· The second prong involves launching competitive digital currencies by reserve currency central banks. China has chosen the most extreme move here by outlawing cryptocurrencies during 2021. The ECB is progressing quickly towards digital euro issuance. US officials are choosing to favor stablecoin constructs as they progress more slowly towards digital dollar issuance.

Our data shows the steady progression on all these policy issues during 2021. Our backtests last year showed conclusively that our cryptocurrency policy data specifically provides advance notice of market volatility in the VIX, the S&P AND BitCoin prices. CBDC data showed significant co-variances.


These regulatory shifts coincide with a dramatic shift in the geographic location of BitCoin mining during 2021. Data published recently by Statista shows the shift dramatically.


China entered 2019 with a stunning 75% share of all mining activities. But by the time they shut down cryptocurrency activities 18 months later in the summer of 2021, their share had shrunk to 34% as competition from Russia (together with its ally Kazakhstan) and the United States became serious.


Both the United States and Kazakhstan showed a 3x increase in their share of mining activities during the first eight months of 2021 alone; Russia showed nearly a 2x increase.

  • At the start of 2021, these three countries constituted nearly 25% of all global mining activities.

  • In June 2021, their combined share had increased to roughly 30%, on a par with China.

  • When China exited the sector, the three countries represented over 50% of all mining activities. Fortune reported recently that Kazakhstan's unstable power grid is making Texas the location of choice for cryptocurrency miners during 2022.

The geopolitical situation in Ukraine could easily incentivize Western policymakers to increase their engagement regarding privately issued currencies for a simple reason. A crashing sovereign currency within the world’s 11th largest economy will create a desperate search for financial stability both by the government and by ordinary individuals.


For example, AP News reports that Ukraine’s government has received over $30m in donations denominated in cryptocurrency donations. We have already seen small sovereigns adopt BitCoin as either the national currency or as a parallel accepted currency. How long will it take before Russia flirts with this approach as a way of evading economic sanctions?


The limited amount of BitCoin suggests strongly that the case for such a move might tempered more by market forces than by political will. The market dynamics could become increasingly complicated, with a sharper focus on exchange rates.


Western regulatory policy officials will become increasingly active seeking to shut down illicit activity in this sector of course. Leaks to AP news indeed indicate that the cryptocurrency backdoor for sanctions evasion is on the White House radar screen: "The Biden administration is working on a “focused tactical strategy” to make certain that cryptocurrency doesn’t become a mechanism that Moscow is able to utilize to avert sanctions, according to a senior administration official." The growing dominance of the United States in mining and trading cryptocurrencies will create other incentives for US policymakers to favor home-grown initiatives.


Staying Ahead of the Policy Trajectory: Alternative Data

Markets currently attempt to track public policy trajectories through the news flow. As we noted earlier this week, however, even automated news feeds only provide access to the tip of the iceberg regarding public policy moves.


Journalists provide a valuable filtering function. But in the process they cannot provide visibility into every policy shift. The same is true for analysts. Humans have bandwidth issues.


Our award-winning, patented technology solves for this problem. We are the ONLY entity that can provide markets with objective measurements of policy momentum because we hold the patent for the process that converts public policy words into integers. Those integers, time-stamped daily, provide a time series that shows where and how policymakers are taking action….even if the media misses the move.


Analysts, portfolio managers, risk managers, and compliance professionals can access our data through two main channels: direct data feeds via API deliver and the Bloomberg Terminal


Data Feeds: Digital Currency Policy Volatility Signals (DCVS 1 and DCVS 2)

DCVS 1 -- Cryptocurrency provides the action data to markets through an automated data feed focused exclusively on technical cryptocurrency policy. Our data customers see shifts occurring and can position themselves strategically well in advance of market reactions. Risk management and compliance professionals can use the same signals to spot and prepare for shifts in the policy environment, enabling their firms to become more efficient in preparing for an intensifying situation with Russia.



(c)2022 BCMstrategy, Inc. | www.bcmstrategy2.com | BBG Terminal: {APPS PLCY <GO>}

DCVS 2 -- CBDC is for those that play the long game regarding reserve currency politics and global macro strategists. The ECB, the Bank of Japan, the Federal Reserve, and other significant central banks are actively exploring how to issue digital versions of their currencies. Activity in this sector is deeply under-reported by most media. Our automated process picks up even the most technical move, enabling strategists to spot inflection points using publicly available, actionable information long before they generate headlines.


We are actively considering launching a DCVS 3 (Stablecoin) during 2022. These data feeds can be delivered individually or they can be combined.


The data feeds include access to our underlying structured/tagged language data. Firms that already use automated news feeds that take in language data can add our DCVS signals to their language feeds, delivering a 360-degree view of policy shifts as they occur. The data is also suitable for a broad range of ML/AI training purposes. We can provide guidance on how to implement these additional use cases.

Bloomberg Terminal {APPS PLCY <GO>}


Not every firm seeks quantitative data feeds. Individual analysts and strategists on the Bloomberg Terminal can access charts and graphs from the full range of digital currency policy issues through V3, our app on the Bloomberg Terminal. Users literally connect the dots at the speed of light. Incorporating the V3 app into their daily workflow enables them to spot shifts in momentum, speed read their way through the underlying documents, and then connect instantly to market data on the Bloomberg Terminal.

 

About BCMstrategy, Inc.: The company helps portfolio managers and strategists anticipate market volatility related to public policy/headline risk by delivering quantitative volume-based objective data drawn directly from the public policy process paired with data generated from media coverage from fact-checked journalism publishers like Dow Jones and ThomsonReuters. The full data set is available exclusively through the Bloomberg Enterprise Access Point. Volatility signals related to cryptocurrency policy, CBDC policy, climate finance policy, and monetary policy are available via API. Charts, graphs, and verbal data are available through the V3 PolicyScope Data app on the Bloomberg Terminal at: {APPS PLCY <GO>}.