The Breakdown - Is Janet Yellen Bitcoin's Biggest Enemy or Greatest Asset? Yes

Episode Date: January 21, 2021

Today on the Brief: Jack Ma is not dead The latest in crypto M&A Deutsche Bank survey sites bitcoin as biggest bubble Our main discussion: Yellen’s impact on bitcoin and digital assets In this episode, NLW breaks down the cryptocurrency FUD competing to be the “wall of worry” for the new 2021 bull market, including Tether FUD, environmental FUD and the idea that crypto is only used for crime.  The illicit transactions idea was given new oxygen when Janet Yellen repeated it in her Senate confirmation hearing this week. New research from Chainalysis shows, however, that the percentage of crypto volume involved in crime is decreasing.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content? SUBSCRIBE to the Podcast Apple: https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M= Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW The Breakdown is produced and distributed by CoinDesk.com

In 2020, crypto-criminal activity fell to 0.34% or 10 billion in transaction volume. Both of these numbers are very small as percentages and very small as total volumes, especially in the context of the larger world. This is less volume than an exchange like Binance did yesterday. What's more, within this, the amount of crime that is the actual crime that Yellen is talking about isn't even close to the biggest category, which are scams. Terrorist financing represents almost nothing. 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 nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, January 20th, and today we are talking about the new Biden administration and Janet Yellen specifically. Is she Bitcoin's biggest enemy or greatest asset? First up, however, let's do the brief. First up on the brief today, Jack Ma is not dead. Jack Ma, the founder of Alibaba, has not been seen in public for months. The TLDR is that he upset the CCP when he said that the Chinese financial system needed to reform and be updated for a new era.

This was last November, and a couple of days later, they pulled the Ant Financial IPO, which was slated at the time to be the biggest IPO in history. It was a power play to show the place of private companies, particularly financial companies, in the Chinese system. And it's also been rumored that the move had a lot to do with the power accruing to these fintech firms specifically that the CCP wants for itself as part of the digital yuan. I did a full episode about this if you're interested last week, but either way, today he appeared for less than a minute in a live-streamed video speaking to a group of teachers. Just based on that tiny little nugget of Jack Ma, the value of Alibaba soared $58 billion, which is absolutely insane. Analysts say that this likely means the worst-case scenario of jail time or a government takeover of the company might be off the table, and that he wouldn't have appeared without

at least tacit approval. His comments entirely discussed philanthropic issues, specifically narrowing the income disparity and reviving China's countryside, which are both CCP talking points. Now, markets may have been glad enough that he was still around to see a huge $60 billion boom almost in the value of Alibaba, but it's still absolutely crazy that after months of not showing up, this person who is huge in the media, who is running a TV show, just shows up for 30 seconds on a live stream, and we think that everything is fine. Wild, wild stuff. With that, let's move to our second brief bullet, the latest in crypto M&A. Coinbase is buying Bison Trails. Bison Trails is building, quote, cross-blockchain integration tools that link disparate protocols.

Now, the block calls this a play to compete in the market for infrastructure as a service. We'll come back to what that means in just a second. There's no reported numbers, but it's said to be one of Coinbase's largest acquisition, which if it's around the size of the Tagomi and Earn acquisition would put it in nine figures. So what's really going on here? I think this relates to Nidig's acquisition of digital assets data and Gemini's acquisition of blockrise. Basically, the gist is this. Based on the new OCC guidance, you're going to see a lot of traditional financial institutions want to start offering crypto services to their customers.

For example, crypto custody. In order to be able to offer those services, they have to build a lot of infrastructure. These are technically complicated products. So if you're a bank trying to race out ahead, trying to leverage your brand to compete in this new market now that it has been opened up and given the green light by authorities, what are you going to do? Are you going to, one, take all the time to build that capacity in-house with people who maybe don't know, and in fact, most likely don't have the experience doing it? Or, alternatively, are you going to white-label it? Are you going to take the available infrastructure that's been

built in battle-tested by someone else in the space, repackage it, put your name, name on it and offer it to your customers as your own. Bingo, bango, bongo. I think it's going to be the second in the vast majority of cases. And I see this as something that suggests just how intense the competition to offer those white label services to traditional financial institutions is likely to be. Last on the brief today, is Bitcoin the biggest bubble? Deutsche Bank's latest investor survey thinks Bitcoin and tech stops are the top bubbles. So the survey asked people whether they think a particular asset is more likely to double or more likely to have. 25% said they think Bitcoin is more likely to double versus 56% that think it's more likely to have from its current price. Tesla was even more

extreme. 18% think it's more likely to double, while 62% think it's more likely to have. So basically, they hate Kathy Wood and her arc funds. Half of the respondents say they view Bitcoin as a 10 on a 1 to 10 bubble scale, but still, that other quarter says they think it could be north of $70,000 in a year. Two-thirds also said the Fed will not end stimulus before the end of 2021. I actually kind of love these numbers. They feel just about right to me. I would be very nervous if 50% of investors or 75% of investors assumed or thought that Bitcoin was going to go to 70,000 by the end of the year. That would feel way too aggressive just in terms of the percentages, not in terms of the number. So I don't view this as stressful at all. I think it's probably right about where things are supposed to be, given where we

are right now in the market and the market's understanding of what Bitcoin actually is. And speaking of that understanding, let's move to our main discussion, Janet Yellen and what she means for Bitcoin and the crypto space as a whole. Let's talk about this year, 2021. The key story of this year so far is an insane growth story based on institutional inflows, right? You know this narrative. We talk about it every day. And what's more, it's clear that it's not actually just a narrative. It's real. At the same time, you have to believe that in those institutions, there are two emotions fighting a huge battle. The first is FOMO. Of course, we've discussed this already. But the second is terror. How the hell could this asset that took three years to get back to 20K take less than three weeks to double again?

Basically, the question is, what's the catch? Or more specifically, in the case of these institutional investors, what's the risk? What's the thing that could bring this all down? You have to remember that this is a new group of people. They weren't necessarily paying attention last time around, at least not more than very passively. That means they haven't gone through the same long fud cycles, and because of that, it's not surprising that we're seeing some of the same fud come up over and over again. There's also a concept called a wall of worry, and the idea of a wall of worry is that as bear markets transition to bull markets, there tends to be some external issue, some exogenous concern that investors have to fight through for the full bull market to take hold. It's a short-term

rate limiting factor on how fast the bull market onset is. Right now, we're trying out contenders for the Wall of Worry for the Bitcoin Bowl of 2021. And so far, I've seen three major persistent fuds that have entered the ring for their chance to be this cycle's wall of worry. The first is, of course, TetherFud. TetherFud has been back with a vengeance. It's coming from a few different sources. First, there are the people who have been screaming about it from the hills for years, and I frankly, even if I disagree, at least they have conviction, I suppose. But then there's this new set of macro folks who are peering over into the space. These are often the type of folks that I have on the show, who I help try to expand our understanding of other dimensions of the economy and macro issues

using their expertise. For some reason, this issue has really hit with them. And although there are some engaging in good faith, Nick Carter, for example, called out Brent Johnson, as someone who seem to be asking questions in good faith with legitimate curiosity, I also do think there's a public spectacle element to it as well. In other words, there are some folks who just like triggering bitcoins for Twitter engagement because it works. We are an extremely fierce force on Twitter that will come and engage, and when it comes to Twitter, almost all engagement increases your numbers. But for the sake of not having it be cynical, let's hold that aside for a second. TetherFut is actually two separate things that get massively conflated. The first is about how Tether runs its operations.

The second is about what the implications are for the industry as a whole and Bitcoin more specifically. When it comes to how it runs its operations, the core issue is whether it's actually fully backed one-to-one as it says it is. The concern is that if it's not fully backed, it could just print and invent money willy-nilly, and all those fake, air quotes, dollars could be used to buy Bitcoin. Which gets to the second part, which is whether manipulation of Tether is the driving fact. causing the price of Bitcoin to rise. I wish very, very much that these conversations would get disentangled. And by that, I mean, how you feel about how Tether runs its operations and the idea that somehow it is the central driving factor or even a meaningful driving factor of Bitcoin price.

Alex Kruger put it well. He wrote, Tether is not under investigation by the New York Attorney General for pumping Bitcoin, printing fake dollars, or security status, but for fraud committed by making untrue claims about reserves backing Tether and their ability to honor customer withdrawal requests. As many have pointed out, it seems rather strange that if Tether could be manipulated to pump the price of Bitcoin, it would have spent years of 2018 and 2019 languishing. When it comes to this question about the ability to honor customer withdrawal requests, folks like Sam over at FTX have tweeted extensive threads about the fact that they don't know what to tell you when people say that because they do it frequently at huge dollar amounts with no

problem. Finally, and most frustrating to me is just the Occam's Razor argument. The causality of the price of Bitcoin argument ignores the most obvious reason why the price of Bitcoin is going up. Companies like Grayscale are buying all of it, and holders aren't settling. We see this over and over every day. We have the numbers. We have the receipts. It's simple supply and demand. And so reaching to say that somehow it's the manipulability of this other asset just, again, ignores the most simple explanations sitting there in front of us. I really don't want to do a full episode on this. I really, really don't, but I will if I have to. Either way, on the one hand, this fud is a thing. Lynn Alden actually responded to a tweet of mine saying that she's getting so many

questions about this that she has a template for emailing people back. But at the same time, I just don't think it has the juice to be the true wall of worry. Looking for the best way to stay on top of your investment game? Nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. With that, let's move to the second wall of worry contender. Questions of the environmental impact.

of Bitcoin. Now, this is an all-time classic, and to be honest, this one has only barely started this cycle. Really, frankly, it was just this one Twitter thread, which, if we're honest, was very well written and provocative, and that's kind of why it got so much notice. But Stephen Deal wrote, let's discuss the environmental costs of Bitcoin. Because despite all the push for sustainable and green investment in the tech sector, there's a giant smoldering Chernobyl sitting at the heart of Silicon Valley, which a lot of investors would prefer you mean quiet about. TLDR on Bitcoin economics. It's a pyramid-shaped investment scheme, blah, blah, blah, blah. Back by collective delusion, blah, blah, blah. Okay, so the point is, when you get to the second tweet, you have a very

clear picture of the perspective that this person is coming from. Second, the idea that somehow Bitcoin is at the heart of Silicon Valley just doesn't make any sense. In fact, go check out the video that Dan Held just put out about why Silicon Valley has missed in a historic way Bitcoin for all intents and purposes. But honestly, hold aside this thread, because who cares? It's a guy on Twitter who knows how to get engagement. I think this one is more interesting to pay attention to because I believe that with the Biden administration coming in, you're likely to see a major push on environmental impact of business. I mentioned briefly when Gary Gensler's nomination as SEC chairman was confirmed, one of the things that Wall Street is most worried about is what

he's going to try to impose vis-a-vis environmental regulations around business. Now, I think there's tons of opportunities here to have a very different conversation. in which Bitcoin can actually be a force for renewable energy, energy capture, energy efficiency, and so much more. If you haven't had a chance yet, on Long Read Sunday last week, I read Stone Ridge's investment letter from last year, and it goes into this in-depth. So I'm hopeful that this won't be the Wall of Worry because we'll get out ahead of it. So the third contender for the Wall of Worry is perhaps the most storied, which is that

this is just money for terrorists. I mean, really, this is an all-time classic. The first articles on Bitcoin were about this. Obviously, the takedown of Silk Road really reinforced this narrative, and it's been around ever since. At the Libra hearings a couple years ago, Congressman Brad Sherman focused entirely on this and how Americans wouldn't take it when they found out the next act of terrorism was funded by Bitcoin and yada, yada, yada, but really why it's on the agenda now is that it's gotten two recent boosts in the narrative. The first came last week from European Central Bank President Christine Lagarde, who said in a video interview that Bitcoin had been involved in a lot of funny business, that's her term, obviously, and needed

global regulation in loopholes to be closed, saying it was responsible for some reprehensible behaviors. The second and more pertinent to this episode was from Janet Yellen at her confirmation hearings this week. She said that cryptocurrencies were a particular concern when it comes to criminal activity in terrorist financing, saying, quote, I think many cryptocurrencies are used, at least in a transaction sense, mainly for illicit financing. And I think we really need to to examine ways in which we can curtail their use and make sure that anti-money laundering doesn't occur through those channels. I think the word that drew a lot of ire from our space was this word mainly. So we're going to come back to that, but keep it in mind. Cryptocurrencies are used

at least in a transaction sense mainly for illicit financing. So what is the response and what are the pushbacks? Some aren't particularly concerned. J.P. Koening tweeted that this actually is just a sign of Bitcoin's maturity, that any currency that's actually on the global stage is going to have more of a focus from regulators when it comes to these issues that are chief among their mindset, the Bank Secrecy Act, AML, all these issues, right? That's kind of a positive way to look at this, I guess. But of course, more Bitcoiners were upset about this for a few different reasons. First of all, there's this weird double standard for blaming a currency for what it's used for. This is problematic, of course, because by far the most popular methods for criminal activity

financing are cash in the traditional system. Crypto lawyer Haley Lennon pointed to a 2020 report from Swift, yes, that's Swift that facilitates transactions, saying, quote, cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods. What's more, you can't go a week it feels without FinCEN announcing some massive multi-million dollar settlements against the biggest financial institutions in the world for flouting the rules that the system is set up for them. Last week, it was a $390 million judgment against Capital One for, quote, willful and negligent violations of the Bank Secrecy Act. And even in this context, the actors that are being bled

are the institutions, not the medium of exchange in the store of value they facilitated. It sounds absurd, but let's go back to Brad Sherman's sentiment. Can you imagine a newspaper saying U.S.D. facilitates the attack on the Twin Towers? Of course not. So all of this gets to this hypocrisy point, which I think is a completely legitimate emotion, but a very hard political cell. Being made more so by the fact that I think it would be equally likely for someone to say, you're right, that is hypocritical, we should be even harder on financial institutions, and we should crack down on cash and only have this digital version of our cash, which is completely surveillable, which is really not the response that we want. So what then is the better pushback?

Well, the best pushback against the idea of cryptocurrencies being used in a transactional sense mainly for illicit transactions is that it's demonstrably false. With perfect timing, Chainalysis published their annual report on exactly these issues yesterday. In 2020, crypto criminal activity fell to 0.34% or 10 billion in transaction volume. Compared with 2019, when criminal activity represented 2.1% of all transaction volume, 21.4 billion. Both of these numbers are very small as percentages and very small as total volumes, especially in the context of the larger world. This is less volume than an exchange like Binance did yesterday. What's more, within this, the amount of crime that is the actual crime that Yellen is talking about isn't even close to the

biggest category, which are scams. Darknet markets represent just $1.7 billion in activity, and terrorist financing represents almost nothing. In the scope of financial market activity, these numbers are drops in the hat. The idea of singling out this technology and saying this is its primary use case is patently ridiculous. For some perspective, the UN estimates that between 2% and 5% of global GDP, 1.6 to 4 trillion annually, is connected with money laundering and illicit activity. Frankly, it's just an old idea that these networks aren't actually used for anything, but it is a persistent old idea. Former Atlantic writer Matt O'Brien snarkily retweeted Bology saying yesterday, One of the more fascinating phenomenon is people who think they understand economics that have never

issued a digital currency that people actually use for transactions. Bology kindly pointed out that U.S.D.C. does more than a half billion dollars in daily transactions, that Ethereum did a trillion in 2020 with Bitcoin contributing another 800 billion. The idea. The idea that these networks aren't used for anything is just an old idea, and the idea, especially that they're only used for criminal activity is even more debunked and derelict. Now, should we be dismayed? Well, some are hopeful that Yellen just hasn't had a chance to update her knowledge. Here's how Jake Chervinsky put it. It's disappointing to hear Dr. Yellen repeat the mistaken view that crypto is mainly used for illicit activities. Her statement is demonstrably

false. That said, it's important to remember that crypto is a relatively small issue compared to to everything else the Treasury Department is responsible for, so she likely hasn't spent time deeply considering it yet. Now, of course, I titled this episode is Janet Yellen, Bitcoin's biggest enemy or greatest asset. This is hyperbole. I apologize. It's a content thing. But hopefully you're enjoying the episode nonetheless. Anyways, the greatest asset part of this refers, of course, to the notion that with a Treasury Department under Yellen, we are going to see sustained and, in fact, increased stimulus. Yelan has a set of objectives that she wants more, not less money. for. And many of those objectives are about getting money directly in the pockets of people,

where they would be spent more, where they could contribute to the velocity of money, and so on and so forth, you know where the story goes. The greatest asset part of this title refers to the idea that every financial institution is expecting debt to become a smaller and smaller part of the calculation of the Treasury as compared to programs that put more money in people's hands. As long as that expectation remains, Janet Yellen is going to create a unbelievable tailwinds for Bitcoin as well. To close, today is a changing of a guard when it comes to the politics of cryptocurrency. And maybe I just want to end with a reading of Brian Brooks, the former acting comptroller of the currency, on his way out, who tweeted this.

Thanks to everyone who supported me and contributed ideas over the past nine months. Here's where I think we are and where we're going. First, my philosophy. The purpose of government is to set frameworks that allow each of us to safely pursue our own version of happiness. Government should expand freedom, not constrain it. Banks and other corporations are supposed to respond to demand by providing those things people want and are willing to pay for. But sometimes institutions decide people's ideas or economic choices are wrong, and then they try to suppress those ideas or choices. Hence decentralization, an open internet and an open financial system, put power back in the hands of the actual people for whose benefit government and corporations

are supposed to exist. Also unbundling, why is it that only banks and not fintechs or anyone else have access to the payment rails? Europe has this figured. out, why can't we? I'm incredibly optimistic that our big, brawling, risk-taking dynamic country will continue to lead and succeed, but not by protecting powerful incumbents. Success will come from disruptive ideas that are scary today but expected and even necessary tomorrow. Crypto? Scary to some today, but necessary tomorrow as M1 money supply goes to the moon. DeFi? Scary to some today, but necessary tomorrow as some banks start telling you what you can and can't do with your own money. Stable coins? Scary to some today, but necessary tomorrow if we want the dollar to remain a

competitive global medium of exchange. Non-depository banks? Scary to some today, but necessary tomorrow if we want the economy to grow and consumers to be protected. Be well, everyone, and don't be strangers. After a short sabbatical, I will be back in touch. There are immense opportunities in this new administration, and there are also immense challenges. I am hopeful that we're in a better position than ever to actually engage with these issues in a way that leads the country to support and take advantage of the opportunities of these new assets, but I'm also confident that even Even if that's not the case, Bitcoin has built a resilience that can overcome and withstand any sort of political infringement that might come its way. I hope you guys are having a great

inauguration day. I appreciate you listening as always. Until tomorrow, be safe and take care of each other. Peace.