The Breakdown - How Stablecoins Could Extend Dollar Dominance

Episode Date: June 18, 2024

In today's episode, NLW looks at a recent op-ed by former House speaker Paul Ryan on why stablecoins on permissionless blockchains are aligned with US values and could extend dollar dominance another generation. We also cover an upcoming crypto roundtable that theoretically has White House buy-in. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Monday, June 17th, and today we are talking about how stable coins will fund the U.S. debt and the Biden White House participating in a crypto roundtable. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, happy Monday. Hope you had a great summer weekend. We got some interesting stuff to kick off the week. And in the ongoing follow-up to the shifting political sands underneath crypto in the U.S., Biden administration officials are expected to attend a Bitcoin and blockchain roundtable in early July.

The event will be hosted by California Democrat Ro Khanna in Washington, D.C. According to a private invitation email cited by Bitcoin magazine, the event is expected to feature House and Senate officials as well as pro-cryptop businessman Mark Cuban. The email said the meeting's objective is to strategize on how to keep Bitcoin and blockchain innovation in the United States. Kana's office described the event as, quote, the most significant meeting between policymakers and innovation leaders in blockchain to date. This is all very plainly a reaction to Trump's crypto pivot, which is only intensified over the past month. Last week, the former president hosted a Bitcoin mining summit at Mara Lago. By all reports, Trump was engaged with the discussion

and took the time to listen to industry executives. He came away from the event with a new catchphrase, stating that he wants, quote, all the remaining Bitcoin to be made in the USA. Leaving aside the technical issues with that statement, it was still a clearly expressed policy goal. What's more, Trump continued to restate this position throughout the week. On Friday during a campaign appearance,

in West Palm Beach, he said, to further secure America's future and create opportunity for young people, I will end Joe Biden's war on crypto, and we will ensure that the future of crypto and the future of Bitcoin will be made in America. We're going to keep it right here, and a lot of it is going to be done right here in Florida. Finance lawyer Scott Johnson tweeted,

it's still kind of insane how hard he's leaning into this. To make this point really crisply, Bitcoin was mentioned at this rally ahead of protecting Medicare and Social Security. In other words, this is now a stump speech-level issue. On the Democrat side of the ledger, the main issue is still the dissonance between what they're saying, or at least what they're starting to say and what they're doing.

To be fair, Rokana has been a longtime crypto supporter, so it's no surprise that he's attempting to change the mind of his colleagues from within. while some in the crypto community have been quick to latch on to any headline suggesting a Democrat pivot, at this point there really hasn't been any evidence of a change in policy from the Biden administration. Even this report only spoke about the possible attendance of administration officials with no expectation that Biden himself would attend. In other words, the supposed Democrat pivot hasn't shown up yet as anything but sources telling crypto media about things that might happen in the future. It's also not clear yet that the Democrats are actually interested in meeting with industry figures.

Mark Cuban is the only named guest, and he certainly has been outspoken about crypto policy, most recently stating that Gary Gensler's actions could, quote, literally cost Joe Biden the election. However, Cuban doesn't really operate in the industry. At best, he's an advocate and an investor. In other words, as many have pointed out, this seems a far cry from Trump hosting a summit with Bitcoin mining executives. Meanwhile, anti-grypto actions continue. Biden delivered on his promise to veto SB 121 and apparently hasn't leaned on the SEC to retract the controversial accounting guidance. More recently, the administration released a statement on upcoming agency appointments. CFTC Commissioner Christy Goldsmith-Ramero has been nominated as the next head of the

FDIC. Her fellow commissioner, Kristen Johnson, has been tapped to become the assistant secretary for financial institutions at Treasury. SEC Commissioner Carolyn Crenshaw has been nominated for a second term. All of these officials are well qualified, but they have also all demonstrated a very clear anti-crypto stance during this administration. The choice of replacement at the FDIC is particularly important, as outgoing Chairman Marty Groomberg is a key architect of both iterations of Operation Chokepoint. If the Biden White House wanted to signal a softening on crypto policy, this appointment could have been an opportunity to do so. On hearing of the FDIC nomination, Nick Carter tweeted, unsurprising but bad news. Chokepoint 2.0 would likely continue unabated under Romero. This is why

flipping the Senate is so important. While one might find it completely understandable that the Biden administration has chosen to stick with existing personnel, it is these kinds of choices, not small things like accepting crypto donations that will actually impact the industry. Investor Adam Cochran continues to remain more optimistic that the Democrats are coming around on crypto, tweeting, they will continue to pivot. It's not as fast as we like because actually shifting perception in a party takes time, whereas empty off-the-cuff promises are easy. Crypto will become nonpartisan and that's how we win. I think for many, the proof will be in the pudding. Next up, maybe not a direct partisan issue, but former Republican House Speaker Paul Ryan thinks that crypto adoption could become strategically important

for the U.S. While Trump is talking about Bitcoin mining driving energy dominance, Ryan is laser-focused on how stable coins interact with the spiraling national debt. In an opinion piece appearing in the Wall Street Journal on Friday, Ryan argued that the dominoes are already beginning to fall. He suggested that the U.S. is hurtling towards a, quote, predictable yet avoidable debt crisis. If nothing is done, Ryan claimed that a failed treasury auction would lead to a loss of confidence in the dollar. He thinks this will result in the government breaking promises on health care, retirement, and potentially even cutting national defense spending. The solution, according to Ryan, is, stablecoins? He argues that large buyers of U.S. debt like China and Saudi Arabia are gradually

retreating from the market. Ryan compared the adoption of stablecoins to the rapid expansion of the Eurodollar market in the 1970s, which helped cement the dollar as the global currency of choice. He wrote, promoting dollar-backed stablecoins would follow a well-trodden path and offer clear near-term benefits. There would be an immediate durable increase in demand for U.S. debt, which would reduce the risk of a failed debt auction and an attendant crisis. Unlike China's digital financial infrastructure, dollar-backed stablecoins issued on public permissionless blockchains, come packaged with the deeply American values of freedom and openness. The article concluded with Ryan encouraging lawmakers to pass the bipartisan Stablecoin bill, which he thinks could dramatically

expand the use of dollar stable coins globally. He added, in an election year, given all the ugly politics to come, we sure could use a win. Ryan has been discussing stable coins within this framework over the past month. He seems convinced that stable coins are a critical part of retaining dollar hegemony over the coming decades as the economy becomes more digital. Whether or not you believe that Treasury demand is about to become a problem, it's undeniable that stablecoins already have a major place in the market. If reserve attestations are accurate, then stablecoin issuers are now on the scale of nation-states when it comes to treasury holdings. They would rank as the 19th largest sovereign between South Korea and Germany. Compared to Ryan's prior comments, the article leaned a little more

heavily on competition with China. He noted that the Chinese CBDC is poised to play a critical role in the country's international development strategy and foreign policy. The digital yuan could be integrated into emerging market financial systems as China pushes digital infrastructure investment. Ryan wrote, The U.S. can't afford to sit idly by as its largest international competitor taps late in demand for safe and convenient digital money. The framework for understanding how the dollar gets its power needs to be updated for a changing world. Hello, friends. Before we get back to the rest of the show, I want you to join me at Permissionless. Permissionless is a conference for Cryptonatives by Cryptonatives.

And the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs and executives out of the U.S., the U.S. remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it, which will lead to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is a conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And what's more, I'm going to be there. The location is Salt Lake City. The dates are October 9th to the 11th, and right now tickets are just $199. Towards the end of the month, they're going up to $499, and if you want 10% off, use code

Breakdown 10 when you check out. If you go to the Blockworks website, blockworks.com, there will be lots of information about how to register, and again, use code Breakdown 10 to get 10% off. So this is a huge political shift if people actually start having awareness of this. And it is one that I think that people who have been watching, the combination of the crypto industry's evolution as well as geopolitics for the last few years, came to the conclusion of quite some time ago. On the one hand, people point constantly and understandably to all the reasons that there is more reason for concern around the U.S. dollar than there has been in the past. Many people point to the politics around sanctions, especially those following the Russian invasion of Ukraine,

along with a host of other issues, as reasons for people to be more off the dollar than they were a few decades ago. However, at the same time, it is undeniable that around the world there is no currency that is more in demand right now than the U.S. dollar. It is accepted basically everywhere. If you have 20 bucks in your pocket almost anywhere in the world, you'll be able to make that work. One of the things that could obviously extend the dollar's hegemony for another generation or more is making it easier to access them. And that's exactly what stable coins do. I hope more people in Washington start picking up this theme. Seems like both an obvious and important one to me. Shifting to numbers for a little bit, Bitcoin price action continues to struggle its way through

the summer. Not a totally unexpected thing for this time of year. Last week saw a 6% drawdown concluding in a flush below 65,000 on Friday afternoon. Weekend trading was a little hopeful, but the slight price rise was much less important than the lack of further declines. On longer timeframes, it's starting to look like Bitcoin has put in a lower high and sentiment for this bull run is beginning to sour. The biggest and most obvious driver is rate cut expectations. At Wednesday's Fed meeting, the three rate cuts that were penciled in for this year were revised down to one. There is some chance that this hawkish guidance will be softened by weak macro data. Chair Powell said that most FOMC members had not changed their outlook based on that morning's inflation data.

The following day, producer prices surprised to the downside. They showed outright deflation in goods during May, although that was largely driven by lower oil prices. Markets are still pricing in the first rate cut to happen in September, and confidence is increasing with each soft print. On Sunday, Minneapolis Fed President Neil Keshkari stuck to the narrative that the FOMC needs to see more data before they can be confident enough to cut rates. He said that it was a, quote, reasonable prediction that the Fed would cut once this year waiting until the December meeting to do so. Looking past the Fed speak, there's a few specific market drivers for the summer dull drums as well. It's notable that the correlation between Bitcoin and the NASDAQ index has declined,

suggesting that internal factors are playing a larger role than macro conditions. It appears that longer-term holders have been taking profits over the past few weeks as the Bitcoin range returned close to all-time highs. Mark Stelian of 10x research noted, when a market continues to sell off at a specific level, it has less to do with events, narratives, or fundamentals. Instead, a large seller perceives prices to be overvalued at that level. The November 2021 all-time high of nearly 70,000 is a level where long-term holders are willing to sell their Bitcoins, as they are the most likely candidates to cash out. That intuition is backed up by data from CryptoQuant, which showed the amount of Bitcoin being held inactive for one to two years had declined recently, a sign of profit-taking.

There's also growing evidence that the past month has seen a large amount of selling from miners. Publicly listed Minor Marathon Digital disclosed the sale of $98 million in Bitcoin earlier this month, and according to CryptoQuant, miners sold at least $120,000 Bitcoin at OTC desks last Monday. This was the highest single-day volume of selling for miners in more than two months. while hash rate continues to fall and is now clearly broken an 18-month uptrend. Past month saw a 3.5% reduction in hash rate, falling below 600 exahashes per second for the first time since March. Japanese crypto exchange BitBank said in a recent newsletter, quote, since May Bitcoin miners' net Bitcoin position has been gradually declining,

suggesting their operation has become tight after the Bitcoin network went through a halving in April. During the previous cycle, post-having minor capitulation took two months to play out. If this halving takes the same amount of time, we're basically there. To the extent that there's optimism that this is just a short-term lull, the hope surrounds the removal of longer-term headwinds. Many are pointing to shifting political sentiment in Washington, aside, looming rate cuts. Both of these shifts are taking longer than expected to arrive, but the narrative change is already on the horizon. The Bitcoin price action is also bad, but surprisingly resilient. Futures markets are still bullish, with the monthly futures premium basically unchanged over the

past week. That means that derivative traders are still betting on a positive end to the month. Market intelligence platform sentiment found pretty positive sentiment from retail traders as well. The platform scraped social media posts and found that posts talking about buying Bitcoin had spiked higher on this recent dip. I don't have enough data to really explore it here, but one thing to note is that you're seeing a lot of people on crypto Twitter, basically saying that the vibes on crypto Twitter are super off right now, that the conversations are worse than they've been in years, if not ever. I don't exactly know how to account for that. I haven't seen any really compelling theories, but to the extent of that is true, it'd be interesting to see how much it is a self-reflexive

Twitter vibe dragging the whole feeling down. Then again, alongside negative price action, and sentiment, ETF flows have also turned icy cold. Four out of five trading days last week saw aggregate net outflows, with the only respite coming on Wednesday with $100 million inflow. Peak outflows hit on Thursday with $226 million redeemed from the products, which was the third worst day on record. Fidelity saw the highest outflows with more than $106 million redeemed,

which was the second largest daily outflow for the fund. Black Rock has been surprisingly steady, recording minor net inflows each day last week to stand out among a sea of red numbers. Overall, last week saw 580 million. million in net outflows coming close to the worst weeks from late March. Then again, if you can't wait for longer-term reversal, here's some good news. It seems that Michael Saylor is trying to attempt to put in the bottom all by himself. Micro Strategy have announced the pricing for their latest round of convertible note issuance. The notes will pay 2.25% per annum, with a maturity date way out in

2032. More importantly, Micro Strategy has upsized the offering from 500 million to 700 million. As usual, the proceeds from the debt issuance will be put towards operating costs and acquiring additional Bitcoin. Micro Strategy currently owns 214,400 Bitcoin worth around $14 billion, so this would be a significant portion to add on top. These debt offerings have typically closed within a week, so there's the potential that Micro Strategy will be back in the spot markets by next weekend, or that the buying may have already started. Likewise, brokerage firm Bernstein have up their Bitcoin price targets, although their time horizon has been pushed back. A new report set the cyclical high for Bitcoin at $200,000 by the end of 2025. The previous high watermark for

Bernstein's math was 150,000 set in a March report. The price target was much less committal about the timeline for Bitcoin had hit its high. Analysts explained the higher target by explaining that Bitcoin ETFs were a watershed moment that had, quote, brought in structural demand from traditional pools of capital. They expect the ETFs to hold around 7% of all Bitcoin in circulation by the end of next year, and 15% of supply by 2033. The report included a lot of back of the napkin calculations to get up to this number. What's more interesting is how research shops have adjusted their predictions over this year. Earlier, while the ETF narrative was running hot, price targets were simply up into the right as fast as possible. Now, we're starting to see

analysts dig down into timing a little more and pushing their billist projections out into next year. This Bernstein report even tied down a window for this cycle, suggesting it will run from 2024 to 2027. Lastly, the SEC seems to be finally moving on the Ethereum ETF applications. Earlier last week, Gensler gave the very loose guidance that final approval should happen sometime over the summer. Asset managers reportedly received their first round of staff comments on Friday, which led Bloomberg Senior ETF analyst Eric Belcunis to shuffle up his timeline estimate. He tweeted, we are moving up our over-underdate for the launch of Spot E3 ETFs to July 2nd, hearing that staff sent issuers comments on S-1s today and they're pretty light, nothing major,

asking for them back in a week. They'll work to declare them effective the next week and get it off their plate before the holiday weekend. Anything is possible, but this is our best guess as of now. And so, friends, that is going to do it for today's breakdown. That is the news from here, what we're kicking off the week with. Like I said, to me, it feels like there is a very significant gap between how bad it seems on crypto Twitter and how bad things actually are. So remember to enjoy the summer,

get some sun. If you're on the East Coast right now, there is a huge heat wave, touch some grass, wait for better times, and don't worry so damn much. This is supposed to be fun. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.