The Breakdown - Is bitcoin rogue state money? / The impact of Libra on central banks / Fed repo market injections continue

Episode Date: September 27, 2019

News broke of Venezuela exploring whether they could use bitcoin and ether as reserve assets, prompting questions about what the potential impact of widescale adoption of bitcoin as a tool to evade sanctions might be. Libra continues to spur central banks to action. This week, the project saw some support from the UN while the ECB called it a 'wake up call' for governments. Finally, we look at the second week of Fed injections into the overnight repo markets and what it means for bitcoin.  Watch: https://www.youtube.com/nathanielwhittemorecrypto

Welcome back to another crypto daily 3 at 3. All right, guys, what's going on? It is Friday, September 27th. Happy Friday, everyone. Sorry for not being here yesterday. Had some family stuff that got in the way, but we're back. And we're going to talk about first, Bitcoin as rogue state money and reports about Venezuela's central bank using or thinking about using Bitcoin and Ethereum as reserves.

Second, we're going to talk about the latest in Libra and Central Bank digital currencies, a bunch of interesting new things in that space. And third, we're going to do a quick repo recap. We talked a lot about the repo market injections from the Fed last week. We're going to look into what has transpired since then. So let's start off with this idea of what's happening in Venezuela, and this question about Bitcoin as rogue state money. So a news story came out from Bloomberg.

You see here one of the authors, Patrice Leia, who wrote about this, that said that Venezuela's central bank is running tests to determine whether it can hold cryptocurrencies and reserves and basically use crypto, right? And so there's been a lot of chatter about this. So you had Pomp wrote, he showed. He shared that article yesterday and he said, reports are servicing that Venezuela is considering holding Bitcoin and Ethereum in their central bank reserves while also using it to pay organizations. Every country will eventually do this just a matter of time before the game theory kicks in.

Fire emoji standard. Fire emoji standard. And this got 3,000 likes yesterday. You had Alex Kruger who was responding to Pomp and others for what he saw as an unwarranted bullishness. he says, Bitcoiners are celebrating the central bank of the ninth most corrupt country in the world considering holding Bitcoin as Petrolos de Venezuela somehow owns some Bitcoin and is desperate to use it to skirt U.S. sanctions. Common sense indicates that this is not at all bullish. He goes on to say, if anything, Venezuela using Bitcoin to skirt U.S. sanctions would increase the probability

of the U.S. cracking down on Bitcoin as a national security issue. And so, again, he's coming hard at this notion that this is somehow a good thing for Bitcoin. You have bully who says, I do not find countries like Venezuela and North Korea holding Bitcoin to be bullish at all. It could give the U.S. the rationale it needs to ban Bitcoin. Look at what happened to Petrocoin. OFAC is serious business. If BTC becomes the go-to for rogue nations, that's a bad thing. This was reinforced or agreed with by Larry Sermak, who said something really similar. He said, says if this becomes a trend, U.S. can very easily start over-regulating Bitcoin to the point of making it illegal for people to hold. If that were ever to happen, it would be incredibly bearish on every

level. Now, some others looked at this from the standpoint of simply kind of black swan events. What do you think would happen if Venezuela says they will sell oil for Bitcoin? This is the kind of thing that people miss when they try to trade by drawing triangles on charts. There is so much potential for a positive black swan event in crypto that no amount of lines drawn on charts can predict. So he's saying that this could be good and create really positive price pressure. So what do I actually think about this? What's my take? So first of all, I don't necessarily think that Pomp was making an exclusively bullish claim, right? I think that to the extent that people were taking issue with it, it's the idea that every government will eventually do this. I do think

that to some extent that's what he was claiming, though, which is this idea of inevitability, that that countries will start to adopt crypto as or will buy Bitcoin basically as part of their central reserve holdings. And, you know, I think that it's likely that if not all countries do, certainly the stronger that Bitcoin gets, the more likely it is that every country fund has some allocation in that, right? That's just sort of part of the game. But I don't really think that that's what this is about even a little bit, right? I don't think that, extrapolating what might happen five, 10, 15 years from now, I think this is a question of right now and what the potential geopolitical ramifications of Bitcoin are. Now, another argument that we saw is folks who are saying that this is just censorship resistance in action and that, you know, it doesn't matter, right?

The analysis of it is stupid because the whole point of Bitcoin is that anyone can use it. Anyone can do anything they want with it, whether they're good guys or bad guys or not. not. And so I actually, I did a little poll on Twitter just a couple hours ago for science, I said, is news of Venezuela holding BTC, bearish, bullish, neutral, or other? And as of the timing of this, after about 200 votes, it was bearish for Bitcoin at 19%, neutral at 28% and bullish at 49%, which I think is really interesting. I don't, I think I'm more in the, I'm in the neutral bearish camp, I think. And so I want to explain a little bit about why. So to me, the bullish argument is basically just one of economic demand and supply pressure, right? To the extent that governments

start actively wanting to buy and hold Bitcoin, it is a new market entrant that creates more demand, which reduces the supply, which drives up price, right? This is econ one-on-one type stuff, which I totally understand and I get that. However, I think that those who are cautioning about rejoicing are making arguments about narrative association, right? They're not talking about just the economics of whether you can hold it. And I think that they're rejecting the idea on a kind of gut level that all news is good news because all news creates demand. What they're talking about is the damage potential of a narrative that Bitcoin is rogue state money. We've seen Bitcoin obviously have some less than stellar narratives in its history. It's the Silk Road kind of dark web type money.

one for a long time. You still see. I mean, the Trump's first tweet about it basically, again, said it was just used by criminals, right? It was just drug dealer money and whatever. So that narrative hasn't gone away. You had Brad Sherman as recently as yesterday, a congressman from California, who admittedly is just about the most antagonistic person to Bitcoin and cryptocurrencies in all of Congress saying that it's literally only used by criminals and tax evaders and money launders and whatever, right? This is, that narrative is still there. The rogue state money narrative is that but on on speed right it is so jacked up from here when something is rogue state money that's very different than just uh than just kind of being a money for criminals

like terrorists are a whole different degree of criminals when it comes to what the u.s will do and so ultimately i think the the the question is uh what the or the geopolitical question that people are exploring is what the U.S.'s reaction to Bitcoin becoming the preferred tool of those who are trying to get around sanctions, right? You're seeing it in North Korea. You're seeing it in Venezuela. All of a sudden, these things are becoming, Bitcoin is becoming diametrically opposed to U.S. policy. It is making U.S. policy, you know, economic sanctions harder to impose. And the U.S. is not likely to look kindly on that. Now, again, we can scream and holler all we want that it's neutral. it's censorship resistant, but that's not necessarily a good thing in the context of the U.S.

and realistically what we're talking about when we're thinking about the game theory of what U.S. politicians are going to do is, is there a justifiable argument for them to make it much harder to use Bitcoin? And so let's hold aside the argument of just straight up banning it, right? Let's say that the U.S. government is sophisticated enough to say that it's likely impossible to ban entirely. And I'm not willing to say that they're that sophisticated, but there certainly are members of Congress that we've seen, Patrick Henry from, or McHenry, rather, from Virginia, who said that it was impossible to ban, and the governments have tried to ban it, have seen that it's impossible to ban Bitcoin. He said that in the congressional hearings around Libra.

So let's say that they are smart enough to know that, you know, they can't ban it exactly. They still can make on-ramps and off-ramps illegal. They can make it illegal to hold Bitcoin and use it. I mean, they can make it so much more difficult than it already is. In the U.S., it's already harder to use Bitcoin and cryptocurrencies because of the burden of K.Y.C. and ML than in a lot of places. So I think it's kind of delusional to think that the U.S. government doesn't have or couldn't have a hugely deleterious impact on the way that U.S. citizens use it. Now, again, you can make an argument that this is a global force that the U.S. citizen usage being left behind doesn't really matter. It's not actually the point of it. Like, all of those are reasonable arguments.

What I don't think is a reasonable argument is the idea that somehow the U.S. just has no ability to impact Bitcoin, right? So, again, if you're taking a generational perspective on this and looking at Bitcoin as a 20, 30, 40 year shift in the power structure of the world, like, sure, U.S. putting incredible pressure on the system may only be in the long-term historical footnote. But we're right now in the middle of these huge institutions just starting to come in, just starting to wade their toes into Bitcoin. The U.S. government taking an extraordinarily antagonistic point of view towards it could set things back hugely. So, again, maybe you think that that's actually a good thing. Maybe you don't want the institutionalization of Bitcoin. That's, again, a reasonable perspective to take. However, the idea that it doesn't have an impact or it couldn't have an impact is, I think, crazy.

And I think that the more that the narrative of Bitcoin is rogue state money and sanction evading money, the more likely it is that there is credence and kind of political will for that sort of really big action. Now, there's one other dimension of this, which is really easy to not spend time on as we think about kind of the U.S. government policy, which is what is the impact of this for Venezuela, right? And I think one of the things that I absolutely love about the cryptocurrency space right now is that we don't just have to speculate. we can just literally go ask folks. So Crypto Noticias has a number of prominent members of the kind of Bitcoin and cryptocurrency

community who are on crypto Twitter. They had a number of different people who, they looked at this news from a bunch of different ankles, right? So they had economists from Venezuela who actually asked. So this article, which isn't automatically translated, but if you go into Chrome, it'll automatically translate a decent translation of it. Basically, these economists were arguing that it actually is deep. destabilizing for Venezuela even further to include cryptocurrencies.

So from a mainstream kind of economics point of view, some set of folks isn't thrilled about it. You had Glenda Gonzalez who wrote an op-ed about this, who basically is saying that this suggests to her that the entire cryptocurrency policy that has been in some ways favorable for driving the adoption of cryptocurrencies is actually more or less a cynical ploy to allow to allow the government to, you know, surreptitiously and secretly be mining Bitcoin and these actual valuable cryptocurrencies versus its petro or whatever in order to evade sanctions. But that the real game, the real thing that Venezuelan should be focused on is mass adoption and what Venezuela or what cryptocurrencies and in particular Bitcoin can do for them. So I think it's a,

I think it's a really interesting moment. I think that there's geopolitical implications for what cryptocurrencies mean for the world at large. And there's also real implications for people who are in Venezuela. So I'm going to link to all these articles. I think it's really worth diving into. I think it's something that affects us, whether we realize it or not. And I think that people may be underestimating the narrative impact of having a rising narrative of Bitcoin as rogue state money. So let's keep an eye on it. But for now, let's move to another dimension of Bitcoin and cryptocurrencies in the global context. So the latest in Libra and central bank digital currency. So this is obviously one of the big mega stories. It's kind of related, obviously,

the, you know, Venezuela has the Petro, but Libra launched over the course of the summer, it was announced rather, over the course of the summer, and immediately was like a starting gun for every government in the world to consider both, one, it's cryptocurrency policy in general, but two, what it was going to do vis-a-vis its own digital currency. Or, you know, was it going to create a central bank digital currency? And so, you know, since then, David Marcus and the team at Libra have been, it can only be said on the defensive. And this week he popped back up with an article, a medium essay, why building a new protocol for money is the only way to truly change the game for people.

And frankly, I don't think there was a lot new here. He was basically just, again, kind of going through the litany of arguments about why the existing payment rails don't actually. work for people. You had folks who liked the article who came up to defend him. So Brian Armstrong from Coinbase says, Libra is one of several important crypto projects on the horizon with the potential to improve the world. Whether it works or not still remains to be seen, but I find the backlash to it a bit odd and misguided. There are lots of people who are very willing to explain what that backlash was about. Gabor from Vanek, ETF, he says, Libra doesn't seem to have controls and benefits of traditional money market accounts held

it regulated and capitalized banks. So again, judged on the basis of just a money. market account, it finds failure in it. Two, the general public doesn't seem to trust Facebook many Libra members slash big tech, right? So there's a narrative headwinds for Facebook against them being the ones to do something like Libra. And third, the Bitcoin and crypto movements are against central control. So really he's packaging the reasons that people are potentially antagonistic in a nice little box. You also had more, though, from Libra than just analysis around this essay. In an interview with Niki on Thursday, Zuckerberg says that they're not going to stay, basically, that they have to do it right. They're not going to stay strict on a like a 2020

launch date, which is what people have been working off of. You had actually some defenders pop up. So someone at the United Nations basically said that Libra could help the United Nations achieve its, it's basically it's development goals, right? It's sustainable development goals around things like poverty and gender equality. So this is kind of a rare, frankly, so far, you know, an example of support for the project and for Libra specifically. But then you add others like this, someone from the European Central Bank who commented and said, Libra is undoubtedly a wake-up call for central banks. So this is kind of what I was talking about, this idea that it was a starting gun for Central Bank's

figure out what their actual digital currency policy is going to be. Are they going to create their own central bank digital currency or something else? So this is from someone who's on the executive board at the European Central Bank saying that it's a wake-up call. You have ING, which is obviously a huge global bank that says that they believe that central bank digital currencies are likely to be real and actualized and fully fledged within two to three years. years, right? We were not talking about like this before Libra happened. And then you had some kind of blowback and commentary on Mark Carney's argument from last month in comments at the Kansas City Fed's Jackson Hall event that the central banks of the world should create a synthetic hegemonic

currency to combat Libra, basically, or not to combat Libra, excuse me, to replace the U.S. dollar as the world's global reserve. A former official from the U.S. Fed said there's basically no argument for that. And so you're seeing actually that these ideas which were the Overton window for which were opened by Libra are now starting to generate response from the Fed and the U.S. government effectively having to argue and re-argue for its the role of the U.S. dollar as the kind of the world's central reserve currency. So basically all of this is just these interesting little moments of reflection. I think for me the big story continues to be. that Libra has set off a spark of action and the rest of the governments of the world are racing

to figure out just what the hell they're going to do about digital money, what their role is going to be, how they're going to regulate things like Bitcoin, how they're going to update their money systems for the future, who are they going to work with on digital currencies, right? These things are now, they've gone from not on the agenda at all to a huge part of the economic agenda. Every central bank is thinking about it. And that's a remarkable thing to have happened as fast. So again, lots of little moments that show just how big and ascendant this conversation is and a lot to watch for. But with that, let's move on to number three, our final thing for the day. So we're going to be talking about just really quickly a repo recap, right? So we talked a lot

last week about how the Fed had gotten involved with overnight lending markets. Basically, the overnight repo markets are where banks lend to each other to solve their kind of of immediate short-term financial obligations. Those rates are supposed to stay in line with the larger federal funds type rates, in particular because theoretically it's bank to banks, it's backed by collateral, you know, particular U.S. Treasuries is collateral. And so it should be the most risk-free form of lending in some ways. And so when you saw the rates race up to, you know, over 8% last week, people got really nervous. And they were like, what the hell is going on? So Axios did, a really great little article about this. So basically last week, they started the Fed injected

on the first night, I think it was a Tuesday. They made $75 billion available, of which $53 billion were claimed. And then every day for the rest of the week, it was $75 billion. And then it's just sort of made this, it's routinized this policy effectively. So just going quickly through the Axios article because they do such a good job of summing it up. What's driving the news? It's prompted the New York Fed to again increase the size of overnight cash loans offered to $100 billion a day and to double the size of a two-week offering to $60 billion. Why it matters. The dysfunctional market signals that something's very wrong with the financial system. What we're hearing, nobody knows right now whether this will blow over or not.

That's from Danielle DiMartino Booth, the CEO of Quill Intelligence and a former advisor to the Dallas Fed. And this is, I think, a key part, the big picture. The unexpectedly large budget deficits of the Trump administration combined with the Fed's attempt to unwind its previous $5 trillion balance sheet have caused a backup in the market. The Fed is now having to supply cash to fix the plumbing in a process that looks eererly similar to QE, quantitative easing. So Caitlin Long has been following this. Obviously, she's a Wall Street veteran who spent a huge amount of time around this. So she said in a tweet, as expected, this isn't the big one. and that's all in caps. Repo markets are calming down by fed socializing big banks losses to all

U.S. dollar holders. Bottom line, big banks are undercapitalized. Lots of noise about other explanation for repo meltdown, but there's one basic cause. So the argument here is big banks are undercapitalized. They don't have the capital they need. Now, in an earlier post this week, Caitlin Long on Forbes got more into what that actually means. So she wrote the real story of the repo market meltdown, why banks are undercapitalized and gap accounting papers over it, why this episode probably isn't, quote, the big one, plus a teachable moment about systemic fragility and anti-fragility. And basically, Caitlin's argument is that part of the fundamental problem is that each U.S. treasury holder, each U.S. Treasury has 2.2 on average people who think they own it, right? This is re-hypothication,

where an asset is used for collateral multiple times, that same asset is used in multiple as a different piece of collateral for different institutions. And that creates a scenario where she likens it to musical chairs, where when the music stops and it's time to sit down, someone can't own that thing. It can't ultimately be owned by all 2.2 institutions that think that they own it. That to her is the key concept, right? That the music has started to stop.

There isn't enough actual liquidity in these markets. Banks are undercapitalized and they're trying to figure out who actually owns the underlying collateral. that drives the system. All of this is ultimately important because it is inextricable and inescapable that Bitcoin's roots came out of the first financial crisis or the 2008 financial crisis and that it is ultimately an answer or response to the way that money systems were redesigned in the wake of that crisis and the way that they were redesigned around central banks bolstering the economy and pumping money in. We don't know what's going to happen.

next. We don't know what the kind of lifeline is or lifetime span is for this set of policies. But as we've talked about before, as Travis Kling has said, this is uncharted waters, right? This is an experiment in central bank policy that has no precedent in earth. And part of the reason that people are so interested in Bitcoin is that it does seem in so many ways to be designed to be a basically opposite type of system. And for the first time, there's a non-state opt-out for people that's available. So again, important to watch, if only for the standpoint of how quickly these things get normalized, right? Like last week, the story of repo was, everyone was talking like TAF 2.0 and all these sort of things and they were all freaking out and it was, you know,

a non-crisis crisis moment. This week it barely made headlines because it's just kind of the new normal. So worth trying to keep an eye on, especially when you have great folks like Caitlin who are trying to explain it. But that's it for me for today for this week. Really appreciate watching, appreciate you listening. Let me know what you want to hear about and come hang out for Long Read Sunday. Every Sunday I publish basically my curation of the most important stories and threads and content of the week that goes out on Twitter. It goes out on email as well. But for now, guys, I hope you are having an excellent beginning of your weekend and I will see you next week. Peace.