The Breakdown - Blockchain is a National Security Issue, According to Trump Admin

Episode Date: October 17, 2020

On this edition of The Breakdown weekly recap, NLW looks at: Growth in the institutional investment space in crypto A new 10,000 BTC treasury announcement  Reports from the Bank for International Settlements, G20, WEF, IMF and more around central bank digital currencies A National Security Council report labeling distributed ledger technology key for national security

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and elliptic, and produced and distributed by CoinDes. What's going on, guys? It is Saturday, October 17th, and that means it's time for the weekly recap. I think, looking back over everything, the theme of this. This week was a real bigification. So what does that mean? Well, let's first talk about news that we got that was both an advancement of the Bitcoin

Treasury story, as well as gave us new information about the state of play with institutional investors in Bitcoin. Stone Ridge Asset Management announced $50 million in new funding for the New York Digital Investments Group, NYDig, which brings its total to $100 million. Now, most people haven't really heard much about this organization, but we found out that they have over a billion dollars worth of crypto custody, and basically we discover that there was this new, significant-sized player in the institutional investment space that maybe actually makes us think that the institutional investment space around Bitcoin is even bigger than we thought.

As part of the announcement, we also learned that NYDIG's parent company Stone Ridge Asset Management, which is a $10 billion asset manager. had 10,000 Bitcoin worth about $115 million as their primary Treasury Reserve asset. Adding onto this, we also got the latest figures from another giant in the institutional investment space, Grayscale, who started the week announcing that their Ethereum Trust, their ETH trust, had become an SEC reporting company, which means basically that they will be much more open about certain types of financials, reporting them regularly to the SEC, it increases trust in a way that many investors like, and it could open the floodgates to a new pool of investors.

Later in the week, we also found out that Grayscale had its best ever quarter in Q3, with a billion dollars of new investment. This brings Grayscale's total for the year to $2.4 billion, which is a significant increase over any previous years. So again, we have two trends that we're seeing here. First, is growth in institutional interest in the space. Between discovering everything about New York dig that we did, as well as seeing grayscale just continue to crank forward, there is clearly more institutional investor interest in Bitcoin in the crypto space as a whole than we thought.

Second, let's not scoff at 10,000 Bitcoin held as the primary Treasury Reserve asset of a well-known, well-respected, large-scale asset manager. This is more key. for the Bitcoin Treasury fire. And that's a trend I think we're just going to see increase. But the other thing that was hugely noticeable about the last week was the number of announcements, reports, and general intrigue relating to central bank digital currencies specifically and the relationship of the big countries to crypto and digital currencies more broadly. Let's take a quick tally of what we've gotten over the last 10 days or so. We got a bank for international settlements report with seven other central banks about the core principles for designing

central bank digital currencies. Now, keep in mind, these were some of the biggest central banks in the world, including the Federal Reserve, not just small fries. The three core principles that they articulated were, one, CBDCs should not compromise monetary or fiscal stability, two, they need to coexist with existing forms of money, and three, they should promote innovation and efficiency. So that report came out about a week ago today. Then at the beginning of this week, the ECB, the European Central Bank, just kept on its conversation at the highest level about a digital euro. This week, they launched a public consultation, which basically means that they're asking individual citizens, businesses, NGOs, unions, and academics to take a survey to understand

which features of a CBDC people actually want and are most in demand. Survey options for that question include things like, I want payments to remain private. I want to pay when there is no internet. I want to use it without having additional costs. I want transactions to be instantaneous. I think on the one hand, it's valuable to try to get some amount of data like that. Anyone who's ever seen me ask about podcast titles will know that I'm a big fan of surveying your audience. At the same time, when it comes to something as fundamental as a digital currency, some things need to be decided because they're the right thing to do. Even if people don't say that they demand, private payments, I think that privacy should be a huge priority when designing central bank currencies,

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report that said by the end of 2022, they will have completed regulatory frameworks and a selection of CBDC designs as well as a whole bunch of other stuff. The OECD is preparing a tax framework to pitch the G20 next year. The World Economic Forum released a report about blockchain technical standards. And then there were individual countries who all made their own announcements about new pilots or expansion of CBDC initiatives, including South Korea, Japan, and Russia. Of course, in the background, China is just cruising ahead with its DeSep, its digital currency electronic payment system. Last weekend, they did a 10 million digital yuan air drop worth about 1.5 million U.S. to citizens in Chenjin, and that is just showing how much more aggressive there being about digital currency than

anyone else. But in all this, it would be reasonable to say, hey, you know what, the big cahuna is missing? Where is the U.S.? Aside from being sort of one of the signatures on that Bank for International Settlements report, we're really not seeing that much from the U.S. itself. So now here's two new things that we haven't discussed yet on the show. First, on Thursday, the National Security Council, this is President Trump's National Security Council, released a document they called a critical and emerging technologies shortlist. Basically, these are technologies that they believe are critical to the national security interest and which they believe the U.S. should be strategically investing in, developing, adopting, and promoting.

The technologies they mention include AI, data science, quantum computing, space technology, weapons of mass destruction mitigation techniques, energy, human machine interfaces, medical and public health agriculture, biotech engineering materials, and distributed ledger technologies. Now literally this report says much more about the overall idea that these are technologies that they should be investing in than anything specific about each of these individual tech. So this is just a name on a list. However, it is clear that technology as issue of national security is something that this administration has a rhetorical interest in. It's something that's increasing. If you remember, the TikTok and WhatsApp bands are theoretically about national security

considerations. And going back to China, China has obviously been on this idea of blockchain as a national security concern for quite some time. Beyond even just the DeSep, they also have the Blockchain Services Network, which is one of their major five-year initiatives to really take on global leadership in the development of blockchain. And speaking of the digital yuan and its potential digital dollar complement or competitor, the IMF is having their annual meeting next week and Jerome Powell, the head of the Federal Reserve, will be speaking on a panel about cross-border payments. He's speaking alongside the head of the bank for international settlements as well as central bank heads from Malaysia and Saudi Arabia. It will be interesting to see if Powell says

anything more about a prospective digital dollar? What we've seen so far is that the Fed is clearly doing more on the research front than they've indicated in most interviews. They seem to be trying to be preparing for the possibility of needing a digital dollar while also not boxing themselves into it by saying it's a priority or even something that they're really considering. When it comes to the potential design of a digital dollar, a key question is going to be that of anonymity and just how much anonymity will be allowed at the center of that design. On the one hand, there's no reason that we couldn't have a digital currency system that truly is a digital cash that has the same sort of anonymous principles as cash. On the other, the fact that

cash is so anonymous is the bane of law enforcement. And given what we've seen over the last few years in terms of changes in AML and KYC policy, it feels very unlikely that digital currencies from a major administration like the U.S. will be anything other than outright government surveillance money. But perhaps we'll hear something different at the IMF meeting next week. For now, guys, I hope you're having a great weekend wherever you are, enjoying peak fall. And so until tomorrow, be safe and take care of each other. Peace.