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Welcome to the On the Margin Newsletter, brought to you by Ben Strack, Casey Wagner and Felix Jauvin. Here’s what you’ll find in today’s edition:

• No matter how you slice it, the QT taper is here. We break down what it means for markets. 

• Election season is ramping up. Let’s talk crypto’s favorite candidates. 

• Hashdex’s new plan to get in on the US crypto ETF hype.

The Fed pivot no one’s talking about 

Despite the action-packed June FOMC meeting last week, there was very little talk about the major shift in balance sheet policy by the Fed that began this month.

After running the balance sheet up from $4 trillion to $8.9 trillion during the COVID-era quantitative easing campaign, the Fed has been employing quantitative tightening since 2022 to decrease the size of its balance sheet and lower the total amount of bank reserves within the system.

There are two ways QT can work: “soft” or “hard.” 

QT “soft” is when the Fed does not actually sell the assets on its balance sheet to a market participant, but rather lets the securities (a combo of Treasurys and mortgage-backed securities) mature and “roll off” its balance sheet. They take the proceeds of the security and retire that cash instead of reinvesting the proceeds into more of the same security that matured as a way to “stay even.” 

QT “hard” is when a central bank actually sells its securities to dealers and other market participants. It is a much more potent and effective version of QT as it leads to increased sell pressure, causing higher yields in turn. The Bank of England currently employs this method, but the Fed never has.

The Fed has a simple framework for understanding reserve levels: We are currently in a regime of “abundant reserves,” characterized by more reserves than what is required for the financial system to effectively operate. The Reverse Repo Facility has a $100 billion+ balance sheet, i.e., abundant reserves. 

The Fed wants to get to an “ample reserve regime,” which allows a buffer to the reserve level so that no hiccups occur in the deep parts of the Fed’s plumbing system.

In 2019, the last time the Fed did QT, reserves hit $3.7 trillion and the Repo market blew up since there were not enough reserves within the system to effectively operate. The situation is known as a “scarce reserve regime.” Repo rates exploded higher, forcing the Fed to end QT overnight and begin lending in Repo markets. 

To avoid this happening again, the Fed is preemptively tapering the pace of its QT despite no signs of stress in the plumbing markets of the Fed. A simple way to view this “stress” is looking at the spread between SOFR and IORB — as long as it’s negative, there is no concern for reserve levels:

Despite this lack of stress, the Fed is slowing down its QT significantly. Starting this month, the Fed is lowering the runoff from $60 billion per month down to $25 billion per month. 

This taper in the pace of QT will lead to the Fed’s balance sheet flattening out after nearly two years of down-only, easing pressure on liquidity.

Freeing up this amount of pressure on risk assets is setting up for a much more positive liquidity environment than the one from the past couple of years. Buckle up.

— Felix Jauvin

The number of virtual currency-related applications New York’s Division of Financial Services has so far approved this year. The most recent of which happened on Monday, when crypto trading firm Cumberland said it secured a coveted BitLicense. 

“As one of the only principal trading firms to hold a BitLicense, we look forward to strong trading relationships with institutional New York counterparties,” the company noted in an X post. It did not return a request for further comment. 

WisdomTree and PayPal were granted what is known as limited purpose trust charters in March and May, respectively. Though similar to a BitLicense, those charters (under the New York Banking Law) include other benefits, such as allowing recipients to engage in money transmission in New York without obtaining a separate license.

Otherwise, the last BitLicense recipient before Cumberland was eToro in February 2023. Coin Cafe also received one the month before that.

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Coinbase-initiated nonprofit Stand With Crypto unveiled its endorsement of 18 new US House and Senate candidates yesterday. The 510(c)(4), which launched its own PAC last month, now backs 22 Congressional hopefuls. 

Stand With Crypto is taking a gamble by backing six newcomers this election season. Among these non-incumbents are Democrats Shomari Figures (running for the US House in Alabama’s second district) and Sarah McBride (looking to represent Delaware in the same chamber). 

Despite speaking little about crypto, McBride and Figures have successfully caught the industry’s attention — and their checks (at least for Figures). McBride’s Stand With Crypto profile notes she “strongly supports crypto,” yet cites only a single statement about digital assets. 

The statement came in April, when McBride said “embracing” blockchain technology and crypto could lead to greater financial inclusion. Props to her (or her speech writer) for hitting all the keywords there. 

Figures, per Stand With Crypto, has also made a solitary statement about digital assets. He noted on his campaign website in March that crypto could advance industries through “supply chain management, healthcare and identity verification.”

If the bar is that low to get some extra campaign cash from an industry that seems to be chomping at the bit to spend, we’d suggest every Congressional hopeful (especially those who don’t have federal voting records yet) get on board. 

As of the end of April, crypto super PAC Protect Progress has spent $2.4 million backing Figures, according to Federal Election Commission data. 

McBride had not received big bucks from the crypto industry, as of March 31. But it’s still early, and the Stand With Crypto PAC has not yet filed any FEC reports — so there could be cash that just hasn’t been tracked.

— Casey Wagner

Hashdex, after not exactly emerging as a winner in the US spot bitcoin ETF battle, has no plans to launch a single-asset spot ETH fund. 

But the Brazil-based asset manager has made some waves by plotting an ETF that would hold both BTC and ETH.  

The first US spot bitcoin ETFs got the SEC’s long-awaited blessing in January. Spot ether ETF launches appear imminent as the agency works with issuers to finalize the planned funds’ registration statements.

It was only a matter of time before we saw a proposal for a US fund looking to invest in both assets.

The Hashdex Nasdaq Crypto Index US ETF would initially just hold the top two cryptos, plus cash. The index it tracks currently weights BTC and ETH at roughly 70% and 30%, respectively. 

The filing by Nasdaq — the exchange on which the fund would trade — is careful, noting the product would “not invest in crypto securities, tokenized assets or stablecoins.”

But its language signals Hashdex would have the option, down the line, to allocate to other crypto assets ultimately added to the aforementioned Nasdaq index. Such assets would need to meet certain criteria, such as trading on a US-regulated platform or being the underlying asset for a derivative instrument listed on such a venue.

Bitwise senior crypto analyst Ryan Rasmussen told Blockworks last month that crypto index ETFs are one day likely to play a significant role in crypto investing. Though it’s unclear when such products could list, they would see “significant demand” from advisers not wanting to have to pick winning assets in the space, he added.  

The SEC is slated to rule on this proposed Hashdex ETF by March 2025 — perhaps serving as a catalyst for yet another year of crypto product innovation.

— Ben Strack

• Crypto prices slipped Tuesday afternoon, with bitcoin and ether each dropping by about 3% on the day, at time of writing. Bitcoin was below $65,000, extending a two-week decline that has seen the largest crypto asset trade under the key $70,000 level. 

• Just after the Supreme Court agreed to hear Nvidia’s appeal in its suit involving alleged crypto mining sales fraud, the AI powerhouse became the world’s most valuable company Tuesday with a market cap of $3.3 trillion. 

• Speaking of mining, bitcoin mining company CleanSpark expects to soon close its deal to buy five more facilities in Georgia for $26 million. Read more about the acquisitions here.