First Mover Asia: China to widen test of digital Yuan as Russia invasion spotlights Crypto’s potential role

Good morning. Here’s what’s happening:

Prices: Bitcoin and other major cryptos decline as Russia escalates its attack.

Technician's take: Intraday charts show downside exhaustion, which could encourage short-term BTC buying.

Prices

Bitcoin (BTC): $42,528 -3.2%

Ether (ETH): $2,839 -3.8%

Top Gainers

Top Losers

Bitcoin and other major cryptos declined on a dark Thursday in Ukraine.

At the time of publication, bitcoin was trading at about $42,500, down more than 3% over the previous 24 hours. Ether, the second-largest cryptocurrency by market capitalization, was changing hands at about $2,800, down roughly 4% over the same period. Most other cryptos in the CoinDesk top 20 by market cap were in the red.

Russian forces captured Kherson, a port city of about $300,000 in the southern part of Ukraine and ship-building hub, and continued to grab huge swathes of the region with its access to the Black Sea. Rocket fire and cluster bombs barraged Ukraine's largest cities and more than one million people fled the now war-torn country, including foreign students and workers from Asia.

Meanwhile, the Biden Administration requested $10 billion in humanitarian and defense aid and imposed new sanctions on Russia as crypto and other donations poured into the country. The attack on a sovereign country has brightened the spotlight on crypto's potential as a way to conduct transactions outside traditional financial services networks.

Earlier this week, investors viewed this development optimistically. But momentum has faded as investors shied away from riskier assets over the past two days.

"Bitcoin’s rally is starting to show signs of exhaustion," wrote OANDA Americas Senior Market Analyst Edward Moya in an email. "Bitcoin needs risk appetite to be healthy for prices to make a run above the $50,000 level, so it should come as no surprise if prices consolidate around the $40,000 level."

Markets

S&P 500: 4,363 -0.5%

DJIA: 33,794 -0.2%

Nasdaq: 13,537 -1.5%

Gold: $1,936 +0.4%

Insights

China Ratchets Up Testing of Digital Yuan; India to Tweak Definition of Crypto

Russia’s financial isolation and the cryptocurrency donations pouring into Ukraine have intensified the spotlight on governments’ crypto initiatives and the potential role of digital assets.

An expansionist China, arguably an even greater challenger than Russia to the U.S-led rules-based order, “will soon approve a third batch of localities set to launch trials of its digital yuan currency,” according to Reuters, which cited state-backed financial outlet Securities Times. The report says that “a number of cities and regions have applied to authorities for permission to test the digital yuan,” including the cities of Guangzhou, Chongqing, Fuzhou and Xiamen.

Meanwhile, according to a report in the South China Morning Post, analysts said that "Western sanctions imposed on Russia following the invasion of Ukraine, including exclusion from the SWIFT financial messaging system, could offer new development opportunities for China’s digital currency and its home-grown yuan cross-border payment system."

One analyst wrote, “It is necessary and urgent to vigorously promote yuan internationalization, especially the development of the CIPS system (Cross-Border Interbank Payment System set up to boost international use of China’s currency in trade settlements) and the digital yuan.”

China’s crypto narrative, though, appears to be focused on its central bank digital currency, or e-yuan. A note by the Financial Stability Bureau of the Chinese central bank revealed that China’s share in bitcoin transactions has declined 80 percentage points after the government's crackdown.

“The global share of Bitcoin transactions in China has dropped rapidly from more than 90% to 10%," the note said.

China’s crypto narrative appears to be accelerating again just as Ukraine generated a high level of crypto adoption excitement by announcing an airdrop for donations, a first by a country. It had to be canceled after it became apparent that a third party may have been spoofing the much-anticipated event.

Instead, Ukraine will announce NFTs (non-fungible tokens) to support Ukrainian Armed Forces soon, according to Mykhailo Fedorov, Ukraine's minister of digital transformation.

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India, the world’s largest democracy, may make its tax policy clearer by tweaking the definition of crypto or virtual digital assets. According to a report by CNBC TV-18, the Indian government is likely to tweak the definition to clarify that only cryptocurrencies, crypto tokens, NFTs and vouchers fall under the definition of virtual digital assets, but not other categories such as Demat shares, credit card points, frequent flier points, e-vouchers, cash bank points, etc. The government will also include a detailed FAQ to explain the definition, according to the report.

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And while the world has its eyes on the U.S. Federal Reserve and its plans to combat inflation, the debate around how inflation will affect cryptocurrencies remains active.

Adding to the conversation, Bill Gross, the "bond king" who co-founded the Pacific Investment Management Co. (PIMCO), said he sees the possibility of stagflation and he wouldn't buy stocks aggressively now, according to CNBC.

However, Kathy Bostjancic, chief U.S. economist at Oxford Economics, told CNBC “we are not in stagflation yet.”

Stagflation takes place when stagnant economic growth, high unemployment and high inflation occur concurrently.

Technician's take

Bitcoin's daily chart shows support/resistance levels. (Damanick Dantes/CoinDesk, TradingView)

On Thursday, bitcoin extended its pullback from the $45,000 resistance level, although initial support at $40,000 could stabilize the down move.

Buyers will need to keep BTC above the $37,000 breakout level to sustain the recovery phase. Further, if momentum builds, a decisive move above $46,000 could yield further upside targets toward $50,000.

Intraday charts are showing initial signs of downside exhaustion, which could encourage short-term buying into the Asian trading day.

Important events

6 p.m. HKT/SGT (10 a.m. UTC): Europe retail sales (Jan. MoM/YoY)

9:30 p.m. HKT/SGT (1:30 UTC): U.S. labor force participation rate (Feb.)

9:30 p.m. HKT/SGT (1:30 UTC): U.S. average hourly earnings (Feb. MoM/YoY)