The Breakdown - Crypto's Liminal Phase

Starting point is 00:00:00 So take this together and what we have is an in-between macro context, which is really an in-between geopolitical context, if we're being honest. We also have in-crypto an in-between market cycle, an in-between adoption cycle, an in-between regulatory regime. And that's why this is crypto's liminal phase. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Pets, power shifts remaking our world. The breakdown is sponsored by nex0.io,

Starting point is 00:00:34 Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, April 20th, and today we are talking about crypto's liminal phase. Before we dig into that, however, a few housekeeping items. There are two, count them two ways to enjoy the breakdown. You can listen to the show on the CoinDesk Crypto Podcast Network feed that includes not only the breakdown, but other awesome CoinDesk shows as well. You can also listen on the breakdown only feed, which has just the breakdown. Both shows come out on the same day with CoinDesk coming out in the afternoon and the breakdown only feed updating in the evening. Whichever feed you listen to,

Starting point is 00:01:17 if you're enjoying the breakdown, please go subscribe to that feed. Give it a rating, give it a review, and if you want to dig deeper into the conversation, and what better time is there for a conversation than this sort of in-between phase, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.le. That's L.Y slash breakdown pod. Also, a disclosure, as always in addition to them being a sponsor of the show, I also work with FTX. So to today's topic, one of my favorite words is liminal. It means in between, relating to the transitional. In anthropology, it's usually used to refer to that uncomfortable middle part of a right of passage where the participant is no longer who they were, but they're

Starting point is 00:02:03 also not yet who they're going to become. When it comes to the crypto industry, I would argue that this is a pretty liminal moment. Now, one big reason for that is the macro itself. On the highest level, economics and even geopolitics are at a very in-between moment. We're in the midst of a secular shift from easy to tight monetary policy, from quantitative easing to quantitative tightening, from balance sheet increases to balance sheet reduction. And what's more on top of all of that is that that's happening in the context of a much longer-term trend. We're at the end of an 80-year debt cycle that is likely bringing with it some pretty big changes. Those longer-term trends are making some people skeptical about just how much room there really even is for this second

Starting point is 00:02:54 shift from QE to QT. Given the debt to GDP ratio in the United States, can the Fed really keep interest rates high for very long? Can it afford to suck liquidity out of the system? Can it afford for the stock market to go down? These are all unresolved questions that are debated day in, day out every day, but serve to reinforce just how in-between things are. And that's not all that's going on in the macro. Of course, we are still waiting for coal. shutdown-related supply chain disruptions to resolve. And this has been one of the thornyest problems in the global economy for the last two years. We discussed just yesterday or the day before how Shanghai has a huge number of ships waiting in port more than they've ever seen before. And then, of course,

Starting point is 00:03:42 when it comes to supply chain issues, having a war involving one of the world's largest exporters of foodstuffs, wheat, heavy metals used for electronics, not to mention energy, obviously stands to exacerbate the already fragile supply chain challenges that we're facing. What's more? If you've been listening to this show, you know that there's a larger sense that we are potentially in a transition moment as it relates to the global monetary system. Some, and this is not just Bitcoiners, see the U.S.'s moves to weaponize the dollar as heralding the last phase of the dollar-led era. That has defined the global monetary system since the end of World War II. So clearly, there is a lot going on in the world that makes it feel very unresolved and liminal and in-between on the highest levels.

Starting point is 00:04:30 Honing in on the crypto industry, it's also pretty clear that we're in an in-between as well. From a market cycle perspective, we are clearly no longer in the bull run of 2021. There are many who think that we weren't for most of the last half of last year after Elon's switch and Tesla's decision to reverse course and not accept Bitcoin for payment. and of course after China's Bitcoin mining ban. We didn't have that burst in the fall where Bitcoin hit a new all-time high, but in many ways the momentum was stalled around a year ago at this point. And whatever the case, it's clear that the same narratives that we're driving the bull run then

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Starting point is 00:06:27 The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy an insurance. sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. Now, from a mass adoption perspective, we're also in an interesting in-between period. On the one hand, the industry has seen serious and profound normalization.

Starting point is 00:07:11 You have crypto companies officially all over mainstream culture and advertising, purchasing stadium naming rights, doing Super Bowl ads, and just generally appearing where sports, entertainment, and culture are. Second, over the course of the last year, year and a half, NFTs created a very different type of entry point into this space that was absolutely latched onto by celebrities. First punks, then apes, then lots of other collections, NFTs became a gateway for conversations around Web 3 and the Metaverse. But even they feel like they're in an in-between phase as well right now. The enthusiasm for random PFP projects is certainly down from where it was, although individual projects can still get attention here and

Starting point is 00:07:56 there. You saw a punk floor lot sale be canceled at the last minute at Sotheby's recently, because the seller wasn't going to get what they wanted? Certainly when it comes to NFTs right now, the hype isn't exactly dead, but it is different than what it was. What's more, there are a lot of people experimenting with what NFTs are supposed to be, how they tell the story of different types of communities, how they become a beacon of representation, how they're used for utility in different ways. Some of my colleagues at FTX are in the midst of running an NFT partnership with Coachella right now, where participants at that festival can claim individual NFT, and then have a variety of benefits from using them.

Starting point is 00:08:35 It's not the same use case of NFTs as these profile pick projects, but it's something that a lot of events, like the U.S.'s best-known music festival, are actually interested in. The point is not NFTs are dead or anything like that. It's that they're growing and evolving, and what people cared about six months ago might not be the thing that people care about now and certainly isn't likely to be the thing that people care about in six months from now.

Starting point is 00:08:58 And then, of course, there's the in-betweenness of broader public perception and regulation around Web 3 in crypto. China took dramatic action last year and showed one extreme of the possibilities available to nations, which was, of course, ban everything. First, it was Bitcoin mining, and that was a move that reverberated around the world. Bitcoin's hash rate effectively halved in the month following the announcement, and all of that hash power flooded into different places, creating an entirely different geopolitical makeup of Bitcoin mining.

Starting point is 00:09:29 That's something that has cast U.S.-based mining. mining in a totally different light. China followed up that mining ban with further restrictions on how people could interact with trading crypto, working for crypto companies, etc., etc. Now, although we all know that banning Bitcoin or banning crypto really means banning your citizens from those networks, the point remains that China demonstrated what it looked like to try to totally cut out decentralized digital assets from their monetary and technology landscape. The big question in the wake of that has been what direction would the U.S. head in, and frankly, it's been tumultuous. Going back a couple years, we had then-president Donald Trump tweeting he's

Starting point is 00:10:08 no fan of Bitcoin and crypto. We saw Treasury Secretary Stephen Mnuchin's last-minute attempt at rulemaking on the way out of office. And then in the context of the Biden administration, we saw the early days being kind of dicey. There was a ton of optimism around Gary Gensler initially, based on his experience in and seemingly demonstrated interest around the crypto space. That unfortunately quickly turned to disappointment. What's more initial communiques out of the Treasury Department resurfaced some old narratives like crypto was just for criminals. And then we had the whole infrastructure bill pay-for provision dust up last summer.

Starting point is 00:10:45 This was where the definition of broker was changed in ways that would have some serious implications for the industry. And of course, the industry was incredibly frustrated. that at the last minute in this must-pass infrastructure bill, the crypto industry was being targeted for unpaid taxes as a way to pay for this thing without any real public debate or discussion. That said, the infrastructure bill fight ended up being quite a turning point moment for the industry. First of all, it surfaced some new friends that we didn't know we had. Second, it demonstrated that the battle lines around crypto and Washington are not currently partisan,

Starting point is 00:11:21 at least not entirely. There were Democrats and Republicans on one side fighting Democrats and Republicans together on the other side. That is an extraordinarily rare occurrence in today's day and age. Third, and perhaps most importantly, it showed the power of the crypto lobby. This was important both for politicians to see and consider in their future engagements with us, but also for the industry to have its own sense of opportunity for its engagement with Washington. Another more recent key moment in this in-between period of crypto's relationship in Washington and with regulatory bodies around the world seems to have been the Russia-Ukraine war.

Starting point is 00:11:59 Whereas many thought it would be castigated as a sanctions evasion tool, there is a growing sort of fascinating pro-freedom Goldilocks narrative, where Bitcoin and crypto prove themselves as quite bad at helping autocrats and sanctioned oligarchs easily move their wealth, but as something that individual citizens caught up in the crossfire can use to help preserve their wealth in turbulent times. Whatever the combination of factors, there has been a shift in tone in the U.S. as we've covered. This is best demonstrated by the executive order from Biden a couple months ago ago and was affirmed in a recent speech by Treasury Secretary Janet Yellen. Now, this doesn't

Starting point is 00:12:38 mean that there aren't fault lines and big ones still in the U.S. regulatory discussion. Stable coins remain a sticky question on multiple levels. First, there are questions of financial stability concerns, and whether the seeming opacity of certain stablecoin reserves could become a broader and more endemic financial issue should there be a run on one of those stable coins if it was held by traditional financial institutions. Second and more broadly, stable coins bring up a larger question for the United States about its digital dollar policies going forward. Will the U.S. release a central bank digital currency? And if it's a central bank digital currency, and if it does, what is its relationship with a tether or a USDA or something else? I think probably the most

Starting point is 00:13:21 pertinent issue that needs to be resolved and that will be debated fiercely in the months and years to come is the question of how people in America use crypto, specifically how much the ethos of self-custody and disintermediation runs up against the AML regime. This is going to be a key battle, and in many ways, crypto is holding the wider financial system up on its shoulders in that fight. Crypto is arguing in some ways that it should be allowed to be commensurate with cash in terms of how people interact with it, that in fact banks and financial institutions and other intermediaries aren't exclusively good actors, and that less of them, lower fees, could actually be a pro-consumer change. It's not clear how that conversation is going to resolve in the U.S. or anywhere else.

Starting point is 00:14:05 In fact, Europe, for example, also still in the middle of figuring things out, seems to be leaning more aggressively towards the AML regime. This isn't necessarily surprising given what we've seen in the past in the context of things like GDPR. So take this together and what we have is an in-between macro context, which is really an in-between geopolitical context, if we're being honest. We also have in-crypto an in-between market cycle, an in-between adoption cycle, an in-between regulatory regime. And that's why this is crypto's liminal phase.

Starting point is 00:14:39 Now, there are two types of things that happen in liminal phases, being reductive, of course. The first is the waiting for things and getting over-excited about the possibility of things long desired. We're seeing this a bunch right now in the chatter around the potential for a new Bitcoin spot ETF because the SEC approved a futures ETF based on the 33-34 Securities Act instead of the 40s Act, which Gensler previously said had better protections, et cetera, et cetera, et cetera. The point is that part of what we do in these moments is look for things that will be catalysts to move to the resolved phase. But the other thing that happens during these types of phases is just building. And I think one of the most optimistic things, if you believe that, is the amount of capital that is still flowing into the space.

Starting point is 00:15:28 There is capital flowing into Bitcoin projects and Bitcoin funds. There is capital flowing in on the other end of the spectrum to Web 3, Metaverse things, NFT things. name it. This capital is a key element in building, and specifically building the things that re-excite the market participants that are already here and attract new market participants to come in. One of the things that makes this liminal moment so different than the 2018-2019 moment is how well capitalized it is. And that's not just a downside protection thing. That's an upside possibility thing. The more people are able to continue building, the shorter this in-between phase is likely to be, at least as it relates to the parts that we can control. Some of this stuff, in terms of the big

Starting point is 00:16:14 picture changes of history, are just going to take whatever time they're going to take to resolve. For now, I want to say thanks again to my sponsors, nexo.io, Arculus and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2022, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators.

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The Breakdown - Crypto's Liminal Phase

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