The Breakdown - Citadel Is Coming to Crypto

Starting point is 00:00:00 The notable thing to me is that this isn't Bitcoin as some big announcement, some indeterminate purchase that's mostly meant for headlines. In fact, it's the exact opposite. This is someone who's trying to build, in their words, a fortress-like balance sheet that has decided that some part of that $1.6 billion needed to be contained in Bitcoin and only revealed that when asked directly. I think this shows the shift and in some ways connects the dots between the macro bid and the geopolitical bid.

Starting point is 00:00:30 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 nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, March 2nd, and today we are revisiting the institutional narrative in crypto. That has, of course, been sidelined due to the geopolitical narrative. But As Citadel gets into this space, it's worth checking back in on. But before we do that, if you were enjoying The Breakdown, please go subscribe, give it a rating, give it a review, or if you want to get deeper into the conversation, come join the Breakers Discord.

Starting point is 00:01:13 You can find a link in the show notes or go to Bit.orgly slash Breakdown Pod. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Finally, one special sponsor this week, just in time for tax time, is CoinTeli. Cointelli is here to make crypto tax reporting stress-free for both individuals and accountants. Designed by CPAs, Cointeli supports hundreds of crypto platforms and provides accurate calculations so you don't pay any extra on your taxes. Cointelli also charges no added fees for up to 100,000 transactions and offers 24-7 customer support from tax advisors.

Starting point is 00:01:53 Check them out at cointeli.com. That's coin t-E-E-L-I dot com. Thanks to Cointelli for joining as a sponsor of the breakdown this week. All right, to today's show. As you guys know, I've gone over a couple times one of the big narrative shifts in this space from the call it macro bid in 2020 to the geopolitical bid this year.

Starting point is 00:02:16 And what I mean by that is that the story of the bull market that took hold over the course of 2020 was all about institutional adoption. Now, that institutional adoption was driven by a larger macroeconomic context. It started in the wake of the COVID-19 crisis when people like Paul Tudor Jones came out with his great monetary inflation thesis, basically predicting that the incredible amount of money that was going to be pumped into the system around that crisis was inevitably going to lead to inflation, the likes of which we hadn't seen for a very long time.

Starting point is 00:02:48 In that context, he personally had come to Bitcoin, and that gave a lot of other institutions' narrative cover to start exploring as well. That macro bit evolved in the form of micro strategy, and then of course crescendoed in the beginning of 2021 with Tesla's Bitcoin buy. In the middle and second half of 2021, big global events kind of knocked that out of the way. The China Bitcoin ban being won, El Salvador's Bitcoin adoption, putting it in a totally new category of discussion. And then, of course, as we've been dealing with, as you well know for the last couple weeks, the discussion around Ukraine's sanctions and where Bitcoin and Crypto fit into that has come to the four. Today's show, however, is all about how while we may be focused on the geopolitics surrounding Bitcoin and Crypto and the discussions of censorship resistance and what they might mean,

Starting point is 00:03:40 it's not like institutions stopped being interested. And the headline from the last couple of days that didn't have to do with Ukraine is right back on that institutional side. Ken Griffin, the head of Citadel, was on Bloomberg wealth with David Rubenstein. They had a wide-ranging conversation about Citadel and Ken's thoughts on big events, and since we've been focused for the last few days on sanctions, let's start with his thoughts there. Basically, Griffin had two concerns. The first was that our approach to limiting access to the export of our technologies creates an opportunity for Chinese alternatives. He talks specifically about Apple, Google, and Microsoft, about how important they had been to American economic dominance,

Starting point is 00:04:22 and he talked about the competition for emerging markets like Africa that might have just gotten harder because of these sanctions. He also talked about the threat to the dollar, saying, quote, the second one is the United States weaponization of the dollar. The U.S. dollar is the reserve currency for the world. That's an incredible asset for our nation, particularly as it faces record levels of indebtedness. When we put on the table the possibility that your dollars will become seized, or you can't move dollars. We're telling the rest of the world to embrace other currencies in their portfolio, and we diminish the value of the dollar as the reserve currency. American taxpayers are going to pay for this in the form of higher interest rates on our debt.

Starting point is 00:04:57 It hurts our country in a profound way. Now, whether you like the source or not, Griffin is echoing an argument that I've heard from numerous bitcoins. There are lots of counterpoints, but the fact is, this is now a mainstream discussion. But then there was the set of questions that really caught the crypto world's interests, and for the sake of giving you the full picture, I'm just going to read them in their entirety. Rubinstein asks, recently you sold a stake in Citadel Securities to Sequoia and Paradine, a cryptocurrency related firm? Griffin says, I and roughly 50 people own both Citadel Securities and the hedge fund. What makes us different from many partnerships is that virtually the entire firm is owned by

Starting point is 00:05:33 people who are here today. So our retired partners over the years, we bought their interest back to keep the firm owned by those who are active and engaged in the business today. For us, the opportunity to work with Sequoia, to have Sequoia as an anchor investors in Citadel Securities was an incredibly compelling proposition. As both you and I know, Sequoias had some of the great success stories in American technology, whether it be Apple or Nvidia or Google. To have their expertise helping us think about positioning Citadel Securities for the next two or three decades has been a really powerful opportunity that we availed ourselves in. crypto has been one of the great stories in finance over the course of the last 15 years,

Starting point is 00:06:10 and I'll be clear I've been in the naysayer camp over that period of time. But the crypto market today has a market capitalization of about $2 trillion in round numbers, which tells you that I haven't been right on this call. I still have my skepticism, but there are hundreds and millions of people in this world today who disagree with that. To the extent that we're trying to help institutions and investors solve their portfolio allocation problems, we have to give serious consideration to being a market maker in crypto. It's fair to assume that over the months to come, you will see us engage in market making

Starting point is 00:06:40 in cryptocurrencies. Now, to me, this is very reminiscent of other institutions that we've seen who had a famously skeptical boss start to come around. Jamie Diamond and J.P. Morgan Chase are right at the top of that list, although Jamie Diamond remains himself personally dismissive, but there is something here that suggests that institutions frankly just have to put aside their priors. Nexo is the go-to platform for all things crypto. Invest in the hottest coins out there and start earning risk-free interest of up to 20% APR, paid out daily. Need cash ASAP but don't want to sell?

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Starting point is 00:08:56 This marks the beginning of a new era. DC investor humorously made a joke about how Ken Griffin had won the Constitution purchase from Constitution Dow saying, first he takes our Constitution and now he's coming directly for our bags. Frank Chaparro from the block says someone finally showed him how much much money he'll make. Funny thing is like five months ago, he said he was waiting for regulatory clarity. Regulators haven't given any clarity since then. It's all about understanding what's going on and the money. The Old Guard uses regulation as cover not to move quickly. J.P. Apes said didn't really

Starting point is 00:09:27 care about Ken Griffin's opinion on crypto when he faded the entirety of a historic generational bull run. Don't really care about it now. But Tradify people with nine figure plus net worths do. Now, there's another whole dimension to this story in terms of the specifics of how Citadel might interact with crypto market structure in ways that could be good or bad. But I think to me, the much more significant thing, at least in the immediate term, is exactly what J.B. Apes just pointed out. The signaling to other individuals and institutions. The fact that he in such a clear way, and with no sign of ass covering, says, I got this one wrong. Now, that might have been the big story in the institutional crypto space, but it wasn't the only one. KPMG Canada, who you may remember

Starting point is 00:10:10 from when they bought Bitcoin and ETH for their balance sheet in February, has just purchased a World of Women NFT for $73,000. I noted then that the KPMG Canada buy was significant, not just because it was a conservative accounting institution putting Bitcoin and Eth on its balance sheet, but because they were clearly positioning themselves to be a leader to help their clients do the same. They thought it was a significant enough line of business

Starting point is 00:10:38 that they wanted to get in and have experience doing it so that they could go then sell themselves having done it. This seems to be pretty clearly the same type of thing. Listen to the quote. This acquisition reflects our belief not only in the continued growth of NFTs but in the value of world of women in its mission. Having now gone through the process, we are well positioned to guide our clients around building a corporate NFT strategy, including acquiring and safeguarding NFTs. So there it is, plain as day, corporate NFT strategy. No one knows what the hell that means, but a lot of corporations think they need one, and now KPMG can help. Also in the corporate institutional crypto space, a bunch of personnel shuffling.

Starting point is 00:11:22 A city group exec is moving to Providence blockchain as CEO, and I think CoinDesk's tweet sums it up perfectly. The stampede from traditional finance to crypto continues, as a former city execs decamps for Providence blockchain. Morgan McKinney had been with City for 18 years, most recently is the COO of global consumer banking. CoinDest describes Providence as, quote, an open-source public blockchain that was built specifically for the financial services industry and aims to help firms digitize and reduce costs and risks. More than $3 billion in transactions have been carried out on Providence since its inception in 2013, and over 50 financial institutions now use the platform.

Starting point is 00:12:02 Recently, banks like First Bank and Sterling National Bank became founding members of the USDF Stablecoin consortium, which will operate on the Providence blockchain. And basically, it seems to me like they're trying to be an FDIC institution-approved version of a stablecoin issuer, which could be a good plague depending on how stablecoin regulation turns out. In an announcement post, Morgan McKenney wrote of her time on sabbatical before taking this role and why she was so excited about digital assets, saying, what became clear to me during the sabbatical is that digital disruption in financial services is accelerating in deeply foundational ways that will change the future of finance forever. For the first time, we have the ability to transform the infrastructure layer of financial services,

Starting point is 00:12:43 as opposed to continuing to make incremental improvements on the application layer at the top. It really is a flood of people from TradFi to crypto. Last week, Coinbase hired a Goldman exec, the former co-head of operations at the Global Markets Division, Roger Bartlett, to lead their financial operations. His LinkedIn post about it said, it's time to embrace the crypto economy. One more quick one on the institutional side, wrapping up this part of the story for today. Obviously, one of the big pieces of that 2020 bull run into early 2021 was the idea that corporations would increasingly put Bitcoin on their balance sheets.

Starting point is 00:13:21 As I mentioned, it sort of both culminated but then also ended with Tesla. It was a huge deal in February of last year when Tesla announced that Bitcoin buy, and it was a similarly big deal when Elon backed off Bitcoin because of it was a similarly big deal when Elon backed off Bitcoin because of environmental concerns a couple months later. It certainly put the kibosh on the PR side of Bitcoin on the balance sheet, no matter what else it did. However, that didn't stop companies from actually thinking about whether Bitcoin was a good balance sheet asset. Flexport is a big global supply chain logistics startup.

Starting point is 00:13:52 It's valued at $8 billion, and their CEO, Ryan Peterson, recently wrote a long thread about just how much disruption to global logistics Ukraine and Russia was causing. In the context of a 23-tweet thread, he wrote, all in all, an ugly situation for air cargo shippers of all kinds. Certainly, given the scale of the tragedy unfolding in Ukraine, this is a negligible issue, and yet just another example of the cascading second order effects that characterize global supply chains. Now, he went on and said Flexport is fortunate to have over $1.6 billion in net assets on our balance sheet to allow us to continue to play offense while protecting the interests of our customers, employees, and shareholders

Starting point is 00:14:30 through the volatility, uncertainty, and chaos. The reason we maintain, such a fortress-like balance sheet is simple. Planning for the unimaginable is a core part of how we operate. When someone asked what percentage of it is in hard money, aka Bitcoin, Peterson responded, we don't disclose that, but it's not zero smiley face. Now, obviously, this got a lot of Bitcoiners' attention, but the notable thing to me is that this isn't Bitcoin as some big announcement, some indeterminate purchase that's mostly meant for headlines. In fact, it's the exact opposite. This is someone who's trying to build, in their words, a fortress-like balance sheet that has decided that some part of that $1.6 billion needed to be contained in Bitcoin

Starting point is 00:15:12 and only revealed that when asked directly. I think this shows the shift and in some ways connects the dots between the macro bid and the geopolitical bid. All of a sudden, you have this macro inflation hedge protection, reason for looking at Bitcoin morphing and growing into a geopolitical volatility reason for considering Bitcoin, but in the context of the same space, i.e. corporate balance sheets. I think it's fascinating and probably reflective of some of these larger shifts that we're living through. Last one, just a quick shout out, Africa has seen one of its largest crypto fundraisers ever. Valor, a South Africa-based exchange, raised $50 million in a Series B equity round. They've processed $7.5 billion in volumes since 2019 from 250,000 retail customers and 500 global institutional users.

Starting point is 00:16:02 The funds are being used to expand to other emerging African markets in India, and the co-founder and CEO Farza Massani said, society's financial tools should unite us, not divide us. Valor is helping to build a financial system that recognizes the on the oneness of the human race. There is no longer any room for doubt regarding the impact crypto assets are having on our global financial system. Crypto assets will become more and more pivotal to all our lives. Valor is here to help bridge our customers from the old financial system to the new. If you're listening to this show, you know that crypto as a tool for financial empowerment around the world, not just in the West, not just in developed markets, is a huge part of the reason that I remain so invested and interested in it.

Starting point is 00:16:40 So it's great to see these local institutions being capitalized in the way they need to actually serve the needs of those different customer bases. We're going to wrap there. There is a ton going on around Ukraine. Crypto donations, how they're being distributed, some very confusing messaging around air drops, more color on sanctions and how private companies are interacting with them. We'll have all of that and more tomorrow. We'll also check in on Jay Powell's testimony on the Hill today. But for now, I want to say thank you again to my sponsors, nexo.io, Arculus, FTX, and Coyntelli. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Citadel Is Coming to Crypto

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