The Breakdown - Bitcoin, Stablecoins, DeFi and Privacy: How COVID-19 is Changing Key Crypto Narratives

Episode Date: March 30, 2020

On January 28th, Bloomberg’s Joe Weisenthal tweeted “Notable overlap on here between the most alarmist people tweeting about the virus and those who are obsessed with the size of the Fed balance sheet.”  There is no doubt that the bitcoin and crypto community broadly were far earlier in recognizing the potential significance of the Covid-19 crisis than most professional communities. Today, America preps for at least another month of lockdown and social distancing. The markets continue their chaotic swing as investors are simply unable to price in such a once in a lifetime event.  A question for the crypto community becomes: how is this impacting narratives about our own industry?  In this episode, @NLW looks at the impact of the Covid-19 crisis on narratives around: Bitcoin Stablecoins Digital Dollars and Central Bank Digital Currencies DeFi  Privacy

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Monday, March 30th, and today we are discussing narratives. It's hard to believe that we are really less than a month into the widespread acknowledgement of the coronavirus crisis. and so fast already so much has changed. And I thought it would be interesting in this context as we prepare to expand the duration of the social distancing period

for at least another month through April to actually ask how much this crisis is changing the narrative of some key aspects of crypto. I'm going to start with Bitcoin, and then we're going to look at stablecoins, defy, cash slash digital dollars, or central bank digital currencies, and finally, privacy. All right, so first up is Bitcoin.

And obviously, Bitcoin as the biggest asset in the crypto space, the asset that everything is really built around, has the highest stakes in some ways from a narrative perspective. And we've seen this play out in some pretty interesting ways over the course of the last few weeks. The long and the short of it is that what's been up for grabs a little bit is Bitcoin's narrative as an uncorrelated or a safe haven asset. And actually, let's start by unpacking those two things, because I feel like the first thing that happened in this crisis was a decoupling of the uncorrelated narrative from a safe haven narrative. These are actually two separate things.

The idea of an uncorrelated asset is something that doesn't move in concert with other types of assets. The idea of a safe haven is something that moves perhaps in opposite directions as other types of assets. So if you look at gold as an exemplary safe haven, and you think that it moves in. in a way that's oppositely correlated to equities, that's what you would expect in times of crisis. Now, with an uncorrelated asset, it might move opposite to other things, but the point of it being uncorrelated is that it doesn't really engage with or respond to the same set of stimuli that a correlated asset does. So it's not a safe haven by definition in the sense of going in the opposite direction of equities markets or whatever you're trying to provide a safe haven against,

but is something that just is moving in its own fashion. Arguably, the last few weeks have been one of Bitcoin's most correlated periods ever as it relates to stocks and equities. And there's a couple reasons for this, which we've discussed on the show before. The first has to do with just the flight to liquidity that we saw. As markets started to tank, people had to get their money into cash, and it didn't mean that they got to sell what they wanted to sell. They had to sell anything they had.

Bitcoin is a highly liquid asset comparatively. And so, of course, it was going to be liquidated as part of that larger crunch to just get the cash that you needed to settle and move on and survive as a business, right? So that was one part where we did see that correlation. Now, another part of this narrative sort of story that we've been paying attention to is the fact that for the last couple years, there has been a concerted effort from people in the Bitcoin world to go get institutional investors to get off zero as the Morgan Creek. phrase was, to have some small allocation as a hedge. Well, when you spend a couple years convincing those institutional investors to get involved with the asset, that means that their behavior vis-a-vis that asset is likely to be more correlated. They have to make decisions from the standpoint of an entire portfolio versus part of what gives Bitcoin its historical lack of correlation is that its investor base represents such a different set of people, such a diverse, weird, global set of buyers. Now, it's not to say that those aren't there, but when you do have larger concentrations of Bitcoin within institutions, I think it's natural to expect some amount more correlation,

which we've certainly been seeing. Now, there's one other interesting dimension to the Bitcoin narrative evolution in the context of the corona crash, which has to do with its sound moneyness, the fact that it is a fixed supply as compared to fiat, which is showing its fiatness right now, in dramatic fashion as central banks rev the money printer in order to just try to provide some amount of solvency and liquidity to these markets and ensure that they don't just go off the cliff. There are many in the Bitcoin world for whom that is exactly the context that really matters about Bitcoin, right? This idea that it is a fixed supply that can't inflate the same way that a central bank can just print more U.S. dollars. That narrate,

is certainly picking up steam in the face of extraordinary government intervention, both from the U.S., but also from central banks around the world. Now, of course, we're not likely to see inflationary impacts immediately in terms of the way that this government stimulus happens. So this narrative is likely to stick around and be debated for a while. But what's interesting to me, again, from a narrative shifting standpoint, is Bitcoin has a lot of different dimensions to its story. It has this sound money story.

It has the digital gold story. It has all of these different pieces. And in some ways what we see going on is not so much a wholesale rejection of one narrative for another, but more a uncovering of which narratives really matter. What draws people to Bitcoin in times of crisis? And I think that's a really important dimension of this. Safe havens are safe in part because of collective belief. There's more to it than that, of course.

but it's part of it. And why it's so interesting to watch this happen now is that what people are being drawn to Bitcoin for is that fixed supply in the face of so much money printing. And there's reason to think that there is interest being drawn to Bitcoin. We're seeing rises in Google trends. Michael Casey from CoinDesk pointed out that the Bitcoin 101 pages on that site have been growing and growing and growing in terms of people finding it there. We've seen more interest in Bitcoin and crypto podcasts, even though around the industry, podcasts are down something like 15 to 20 percent as a whole. There are all these anecdotes that suggest that as the money printer revs up, some portion of the population is looking to see what else is out there and finding their way to

Bitcoin. So again, we're now back in narrative territory where we can't use the kind of scorecard of the market day to day. And cynics will say, well, that's just Bitcoiners resetting the goalpost, but whatever, I'm not here to debate them. What I'm here to do is to tell you how I see this narrative evolve. So has COVID, has coronavirus impacted the narrative of Bitcoin? Absolutely. We are now in another extraordinary moment of government intervention in markets, and that is bringing out that side of the Bitcoin narrative in a huge, huge way.

All right. Next up, let's talk stable coins. How has or has COVID-19 and the ensuing crash impacted the stable coin narrative? Well, it's very clear that there have been impacts in terms of stable coin, in terms of transaction volume, in terms of new stable coins minted, that coronavirus and the market around it has created an impact. The question is whether it will have an impact on narrative as well. But first, let's talk about some of the numbers.

And I'm using an analysis from Hasu, who's an independent researcher that was on CoinDesk earlier today. He says, since Bitcoin fell from its 9,000 range all the way below 4,000 before consolidating around 5,000 in mid-March, stable coins as a group have seen net inflows of around 2 billion, a 33% increase. This represents the largest surge in demand ever, in line with the dollars demand surge in traditional markets. Most of these inflows went to tether with $1.55 billion since the start of the year,

but USDC and BUSD also gained $170 million and $150 million respectively. Now, what's to explain this? Hasu has three answers, which I think are compelling. First, he says, we've seen a flight to safety from risky crypto assets. So he thinks that there are folks who are maybe bullish on crypto in the long term, but in the short term are just trying to get that dollar exposure like everything else, which gets us to a second point. Second, he says there is big demand for USD from emerging market currencies that are weakening

against the dollar. So right now, as the entire world floods into US dollars, one of the impacts of that is that currencies that aren't the dollar necessarily. fall. Even the British pound is down 9% on the year against the dollar. The Brazilian Real is down something like 25%, the Russian ruble is down 25%, right? Everything, every asset in the world really is down against the dollar because it's seen as the one great safe haven. In that context, as people are trying to get their money into dollars, it can be difficult. And there is literally a crunch in terms of the amount of actual physical dollars available.

Tether becomes a really interesting asset in that context. Hasu says it's become one of the best ways to dollarize in places like China, Indonesia, Russia, and Brazil. Now, Hasu's third point has to do with something that I think we'll get into later as well, which is that the physical reality of coronavirus specifically has made people less interested in cash, not to mention that just travel restrictions mean moving cash around in big ways has become extremely difficult. So in that context, basically a dollar on the blockchain has a lot of valuable properties, at least in the short term. So these are all really interesting reasons. I think what's for sure is that there's a lot of money flowing into and through stable coins right now.

They're playing this interesting role that maybe we wouldn't have anticipated. In terms of their narrative, I think the interesting thing is that their narrative is a little bit caught up in some ways with larger dollarization issues, right? larger issues of the dollar being the world's currency. People aren't flocking to these things as an expression of their interest in cryptocurrency necessarily. It's just becoming an actual valuable tool in the context of a market gone haywire. And it's interesting to me to think about whether we'll see a narrative compression in some ways between stable coins and digital dollars, more specifically. Will there be space for digital versions of other fiat, or is that something that's going to be relegated to the junk heap of history in 2019 and 2018 as the whole world

moves to the dollar. I think that there's a lot going on. But I think that the interesting thing to me, I guess, if I had to sum it up with stable coins, is that maybe the narrative is shifting a little bit, but more importantly, they're just being used in a very specific way at this moment in time that will have larger implications in the long term, not just for their narrative, but for their adoption. So stable coins, yes, I do think that the COVID crisis is impacting their narrative. but I think much more, it's impacting their trajectory by the way that they're being used.

All right, three, since we're already almost here, let's talk digital dollars, central bank, digital currencies, and cash. This is obviously in the family of things that we were just discussing as it relates to stable coins. So let's maybe go back through that in reverse order. Cash is in a really interesting spot where on the one hand, specifically US dollars are in high demand, but cash itself is perhaps one of the least desirable assets because of the potential that it could be transmitting coronavirus, right? And this is something that at first people were maligned in the crypto world for even suggesting. I remember a FT Alphaville piece that was basically saying that crypto people were taking advantage of this. Then governments around the world

started to come out and say that, you know, you should probably be wary of cash because the disease can live on cash and paper products and yada, yada, yada. So cash itself has this weird two-part question right now where USD itself is in high demand, but the actual physical cash is more question than ever. It seems likely to me that we will see heightened push for a digitization of that system. Now, a second moment for this came when last week during the debates around the stimulus, one of the proposals, Nancy Pelosi's proposal on last Monday, had a digital dollar built in as a mechanism to distribute stimulus funds to individuals and people around the country. Now, this didn't last long. We talked last week. We did a whole set of episodes about this

and why it didn't work and why it involved too many questions of the fundamental nature of the relationship between citizens, commercial banks, and the central bank. But I do think that it probably shifted the Overton window on that digital dollar conversation. I feel like there were staffers, at least, for many different legislators who had to actually engage with that idea. and I think that as this all unfolds, there will be more interest in a digital US dollar, right, that gives governments more power to react nimbly as well as avoid some of the downsides of cash than there was before. So I absolutely think that this is going to increase significantly the interest in digital dollars. From the leadership perspective. Now, when it comes to, like,

the average citizen, does it change the narratives? One of the critiques, of central bank digital currencies is that there hasn't really been a demand for them. In fact, that's what the chair of the Bank for International Settlements said just weeks before Libra was launched. He said that there's just no consumer demand for CBDCs. Well, obviously, Libra changed that. And I think this is a second inflection point in the narrative life cycle of digital dollars, of central bank digital currencies, but particularly and most importantly in the context of the U.S. markets. Obviously, we've seen China is racing ahead on its digital currency and has been for some time. I think that we are going to see the U.S. start to have a real conversation with itself,

at least at that leadership level, about whether it needs something like that and how fast it needs something like that. So this is one where I absolutely think coronavirus has accelerated thing by a matter of years. Huge, huge, huge narrative shift among people who get to decide whether to pay attention and whether to care about this. Next up is DFI. And DFI is in a really interesting spot in terms of narrative. So I will just say now that I think there are less narrative implications so far for defy than perhaps some of these other things that we've talked about like digital dollars or stablecoins or Bitcoin. But I don't think that they don't exist at all. And I think that they come in kind of maybe two sides.

The first is we have seen some validation of concerns in terms of risks to the system from big volatile changes, right? Like MakerDAO has had its experience of issues on Black Thursday as it related to this 4 million of loans that kind of went unfunded, there are challenges there, right? DFI is still extremely early. So I think that for those who are paying attention, you could argue it both ways, I think. You could argue that the system is shown resilience. You could also show that there's some real risks still inherent in the system. But I think that that's kind of insider baseball. And although the narrative implications matter because there's some new information that we have to assimilate, I think that the more interesting question is what the narrative implications might

be in the long run for Defi coming out the other side of this. Now, I think that the most interesting part is kind of a confluence of two factors. And maybe now I'm actually, even as I'm saying this, I'm arguing for a pitch for Defi even more than just what I anticipate. And I think that the confluence of two factors are, on the one hand, I do think that the conversation about and the demand for the programmability of money is going to be much higher after this. So many of the logistical issues as it relates to stimulus have been around like how to actually move money around and, you know, ifs and butts, right? We're using blunt tools rather than scalples because we haven't had, in part, that programmability. I think that you're going to see more and more of a

conversation around how money gets programmable. And in that conversation, there's going to be two options. Either one, that's just a conversation about the mechanism of a digital dollar, run through the Fed, that's basically just a representation of the USD. or there's going to be people who argue that that programmability of money needs to have some amount of decentralization too, right? We're going to see, and this gets, we'll get into our last topic in just a minute, a huge attempt to consolidate power from governments. And not just in a malicious way, although there will be plenty of that.

If you're watching what's happening in places like Hungary, there's going to be a lot of people who take advantage of an extraordinary moment to grab extraordinary power. But even in the leading democratic societies, there will necessarily be a claimant of power on the part of governments that is extraordinary as compared to what normally happens. Whether they withdraw that or not is going to be one of the great challenges for the years falling out of this. And how we as citizens kind of try to push that power back away from the locus of the state is going to be a huge question. In that context, defy could be an interesting place that some people get to as having both on the one hand, those exciting properties of programmable money, but also on the other hand, that shift away from centralized authority.

Now, that's a lot to ask, a very nascent system. But I think that from a narrative perspective, if I was in defy and if I really cared about the future of defy, and obviously I do, I'm here talking about it, I've spent enough time thinking about this to have an opinion on it. but I mean the folks who are really investing their whole lives and souls into making this real. That's kind of the narrative direction that I would be looking at. So to briefly sum up, Defi, I don't think that it's had a huge narrative impact yet from the coronavirus, but I do think that in the wake and in the rebuilding, there is potentially a really important narrative stake. All right, last up is privacy. And this, I think, dovetails nicely from what I was just saying about Defi.

This is another kind of forward-looking one. It's only been in the last week or so that people have really started to have this conversation about the civil liberties implications of coronavirus, but I think it's a really important conversation to be had. We've seen going back to February or January, even in China, surveillance as an apparatus has grown and grown and grown in the context of states trying to track the virus, right? Using citizen data from phones to see where people are moving to try to like pin this down. In different parts of the world, it's more or less pronounced.

some places it's happening kind of quietly and some places it's very explicitly happening. Last week in the stimulus bill, the CDC got $500 million to develop a data collection program. Now, this wasn't highly articulated, right? This is a bill that came together very, very fast, but there's going to be implications there. You're going to see states around the world try to use this moment to grab the power that they think they need to fight this in other issues. And a lot of times that's going to include things in terms of the power of surveillance that we wouldn't normally allow. I think that this is a conversation that has more going on than just privacy coins or privacy tokens, so I don't even want to reduce it to that. I think that there is a

strong sense of individual sovereignty, though, across the crypto community that's going to be highly threatened in the times to come. So here's the pessimistic and the optimistic side as it relates to the narrative shift around privacy. The pessimistic side is that it feels inevitable, and in fact, we're just seeing it, so it is inevitable, that governments are going to push privacy. farther and farther down the line and grab more and more ability to surveil based on especially digital data. It's just, it's already happening and it's going to happen more. That doesn't mean we can't fight about it or fight it as it happens, but it is certainly a thing that is happening. So there's deep cause for pessimism there because it's being validated in front of our eyes. The cause for optimism

is that historically people who care about privacy haven't had mainstream demand support behind them. people are willing to trade their privacy for convenience. Now, I don't know necessarily that this changes that. In fact, I think that it could go the opposite way, where the fear is so great that people are even more willing to surrender their privacy than normal. But there will be a group of people for whom this issue highlights the importance of real protections around personal privacy, and where we see lines get crossed, it will mobilize and potentially radicalize some portion of that group,

growing and swelling the ranks of people who do care about this as a political issue. So my hope, my optimism as it relates to the privacy conversation is that even though we are headed into what is likely a harder time, a worse time, a more surveillable time, at least some new group of people will be there fighting alongside us. Anyways, guys, that is my take on the narrative shift across Bitcoin, stablecoins, defy, digital dollars, and privacy as it relates to COVID-19. let me know what you think. I'm really interested. I think it's important to have these conversations even as we're living through it because all we can do is shape the next thing that happens and then the

next thing that happens after that. And so wrapping our head around how things are changing and how we want to see them change is really important. Anyways, thanks as always for listening. We'll be back tomorrow with another episode of The Breakdown. Peace.