The Breakdown - Powell Says "No CBDC!"

Episode Date: March 8, 2024

Jerome Powell could not have been any clearer in his testimony yesterday. Plus Bitcoin hits $70,000 VERY temporarily. Today's Show Brought To You By Kraken - Go to https://kraken.com/thebreakdown and see what crypto can be Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet 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 Friday, March 8th, and today we are talking Jerome Powell comments, and of course, Bitcoin briefly touching 70K. 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 of the show. are going to bit.ly slash breakdown pod. Well, friends, a bit of deja vu earlier today just before I pressed the record button. Bitcoin once again smashed up above all-time highs for a moment or two, this time actually

getting beyond 70,000 on some venues, but then immediately came back down. Coin desk reports that liquidations of leverage derivatives reach 240 million, which is still a lot lower than Tuesday's $1.2 billion liquidation. This didn't stop Brian Armstrong, the CEO of Coinbase from tweeting, happy Bitcoin all-time high, another cycle, and once again the haters were wrong, as always trade responsibly. For me, this reminds me a lot of when we flirted so hard with 20K Bitcoin at the beginning of last cycle. I think emotionally, it won't really be a new all-time high until we are firmly over that 70K number for at least a minute. However, like I said, this was just happening

right before we recorded the show, so I had to give it mention. Where we go first in today's planned content is that Fed Chair Jerome Powell has been in Congress this week for for annual oversight hearings. In them, he covered a range of topics including monetary policy, inflation, and financial stability. The brief overview is that Powell believes that further progress on the fight against inflation is not assured. He believes that issues in commercial real estate will likely cause bank failures, but that the situation will be manageable. He also suggested that rate cuts are close, but expected them to arrive a little later this year. Effectively, his stance was that there are still challenges ahead, but the Fed is firmly on the path towards

policy normalization. For our crowd, though, Powell's most interesting comments surrounded the prospect of a U.S. CBDC. He began by making it absolutely clear that, quote, we are nowhere near recommending, let alone adopting a central bank digital currency in any form. Powell went on to explain the logic that most currency is currently in digital form already, but transacts within the banking system. The thought behind a CBDC was that the government could issue digital money, which could be transferred directly between people. He added the concern that, quote, if that were a government account, the government could see all your transactions. That's just not something we would stand for or propose in the United States.

Powell noted that this total financial surveillance is exactly how the Chinese CBDC operates, but added, if we were ever to do something like this and were a long way from even thinking about it, we would do this through the banking system. Currently, the Fed only services large financial institutions with their infrastructure. Powell hammered home, quote, the last thing the Federal Reserve would want, would be to have individual accounts for all Americans, or any Americans, for that matter. Only banks have accounts at the Fed, and that's the way we're going to keep it. Although the Fed has conducted CBDC research, Powell said, it's a question of following technology as it evolves, in a way that serves the public better. People don't need to worry about a central bank

digital currency. Nothing like that is remotely close to happening any time soon. Powell also spoke specifically to the powers of the Fed to introduce the CBDC unilaterally. He once again put on the record that the Fed cannot launch a CBDC without clear authorization from Congress. Over recent years, we've seen other jurisdictions take more tangible steps towards a CBDC, so these lines of questioning are becoming more important. Europe is currently hammering out the legislation required to introduce their digital euro, despite waves of backlash and controversy. Britain is also working towards getting a legislative and bureaucratic framework in place to allow for the

launch of their CBDC. Powell has been adamant for many years that the Fed has no formal position on whether a U.S. CBDC is good idea. He has typically remained more neutral on the topic, limiting his comments to confirming that the Fed requires the authorization of Congress to take further steps. This appears to be the first time that Powell has taken a strong political position on the matter. He made it very clear that he views government surveillance enabling CBDCs as antithetical to American values. He even went so far to say it's something the Fed wouldn't stand for. Although Powell didn't get into the topic, his comments could be signaling that Fed researchers have been unable to come

up with the technical means to launch a privacy preserving CBDC. This is something that that most crypto engineers believe is impossible, but is also a key feature for the proposals for European and UK CBDCs. More likely, however, Powell's comments seem to indicate that the Fed already has its hands full with setting monetary policy and maintaining the financial stability of the system. More than most central bankers, Powell appears to be aware of just how large the task of designing, operating, and supporting a CBDC would be. It's not something the current Fed has any obvious interest in pursuing. Bitcoin and markets host Ansel Linder said, I told you years back, while reacting often to Powell's comments, he's a straight shooter. He just

shut the door on a CBDC here. Now, in the East, CBDCs are a far less controversial topic, with multiple governments plowing ahead with their introduction. China is obviously the prime example with the digital yuan approaching four years since the first pilot program. Hong Kong has also been looking closely at retail CBDCs for a few years, but their wholesale CBDC pilots are gaining much more traction. On Thursday, the Hong Kong Monetary Authority, which is the city's equivalent of a central bank, announced the start of Project Ensemble. The project will use a wholesale CBDC to support the development of asset tokenization markets. Confusingly, they're referring to wholesale digital currency as WCbDCs, although they have nothing

to do with wrapped crypto assets, which also use that designation. Wholesale CBDCs are used only for settlement between financial institutions and have no retail-facing functionality. In their announcement, the HKMA said that Project Ensemble will, quote, seek to explore innovative financial market infrastructure that will facilitate seamless interbank settlement of tokenized money through WCBDC. Initial testing will be focused on tokenized bank deposits. This is now the fourth pilot program related to WCBTCs.

Previous experiments have focused on cross-border interoperability, trade finance, and green bond issuance. Luan Lim, the CEO of HSBC Hong Kong, seemed enthusiastic about the pilot, stating, Through this project, we will join forces with the HKMA, peers, and other industry stakeholders to build the foundation for Hong Kong to become the next generation international hub for tokenized deposits and assets. Eddie U, chief executive of the HKMA, said, Hong Kong has always championed innovation in international collaboration. Project Ensemble will provide fresh impetus to our vibrant financial industry and reinforce our forefront

position in tokenized money and assets. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow. only on for certain hours. Overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7, 365, and moves at the speed of real life.

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Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, CRAKN. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think of about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto.

Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. The Philippines are also moving forward with wholesale CBDC testing, announcing a new pilot project on Wednesday. The pilot is called Project

Aguila and will partner with six commercial banks to test interbank settlement using the WCBDCC. The pilot is much more narrowly focused, but could be a stepping stone towards a vision of democratization and lower fees. The central bank's deputy governor for payments and currency management said, we would like to see if this wholesale CBDC can be used for higher value-adding services like security settlement. Officials also noted that the CBDC would not operate on a blockchain. Pilot programs for a wholesale CBDC in the Philippines have been ongoing since 2022. So far, they have received positive assessments from the central bank, but this new pilot is the first to test substantive use cases. Finally, on the CBDC front, Nigeria is doubling down on its

CBDC in the midst of a currency crisis with new plans to introduce credit profiles. The E-Naira has struggled for adoption since it was launched in October 2021. A range of technical issues plagued the platform, but primarily the issue has been a lack of trust in the government and the national currency. The central bank has now partnered with a local technology firm called Glua to integrate credit ratings into the system. Glua said in a press release that, quote, The core objective is to harness the power of blockchain technology to enhance financial

inclusion, improve E-Naira functionality, and foster financial innovation. The new credit evaluation system seeks to offer easier loan origination, tracking, settlement, and scoring for local fintech lenders. The number of E Naira wallets currently sits around $13 million, and is settling over $10 million in transactions per quarter. These numbers improved into 2023, but are still paltry for a nation of 226 million people. The informal economy of Nigeria, meanwhile, is estimated to be $220 billion. It still primarily uses cash, and a lack of merchants willing to accept the E Naira is making CBDC adoption difficult. The hope presumably is, is that the introduction of digital credit scoring could help merchants tap into business credit,

making the E-Naira a more appealing choice. Separately, but perhaps not entirely unrelated, the crackdown on crypto exchanges in Nigeria continues to escalate. Last week, a pair of finance executives were arrested on allegations that their peer-to-peer platform had facilitated $26 billion in untraceable transactions. The platform was essentially blamed for fueling the Naira's 40% devaluation this year by enabling currency speculation. There was some discussion of a $10 billion fine earlier this week, but no follow-through has been reported. Since then, Nigeria's securities regulator has updated its guidelines for crypto exchanges. The move was claimed to force crypto platforms to block criminals from engaging with capital markets, but it's unclear what

exactly is meant by criminals as political discourse in Nigeria is currently framing currency traders as undermining the economy. Finance has now removed the Naira as an option from its peer-to-peer platform and does not operate a centralized exchange in Nigeria. Finishing up today on some market discussions, South Korean exchanges are currently seeing Bitcoin trade 10% above U.S. prices. This effect is known as the Kimchi premium and has been around for almost a decade in crypto markets. 10% is the highest level the premium has reached in over two years. The effect is largely driven by strict capital controls in South Korea, making the premium difficult to arbitrage. It's also viewed as an indication that South Korean retail is

back in the market and bidding ferociously. Kiyang Zhu, the CEO of Crypto Quant, tweeted, Bitcoin's price premium in Korea reaches 10%. Korean retail investors are getting back. Korea Premium Index, aka Kimchi Premium, is a pure retail fomo indicator because, one, there are no notable crypto funds in Korea. Two, Korea has very strict capital control policies. Zhu is intimately familiar with the Korean markets as his company is based in Seoul. CryptoQuant's head of research, Bradley Park added.

As the Kimchi premium increases, traders will take advantage of the Arb opportunity and bring their overseas holdings home. Pantera Capital is looking to place a big bet on Solana, according to Bloomberg. The crypto fund is reportedly seeking to raise $250 million for a new fund to buy out-locked Solana from the FTX estate. The estate currently has 41.1 million sole tokens, around 10% of total supply, and worth around $5.4 billion at current prices. According to Pantara's documents, the fund will have the option to buy the sole tokens

at a 39% discount to a 30-day average price, or a fixed price of $59.95 if markets continue to rip. Investors in the fund will be subject to a four-year vesting period, which presumably means that Pantara will abide by the lockups originally applied to the tokens held by FTX. Pantara was aiming to close the fund by the end of February and required at least $25 million from each investor. They are charging a 0.75% management fee and a 10% performance fee. Moving over to the SEC, that body has delayed their decision on approval for options on the Bitcoin ETFs. The final deadline will be on April 24th just a few days before the halving.

These applications have been open for comments since they were filed. Five comments have been received so far all in favor of approval. CBOE, one of the trading venues seeking the list options wrote in a statement, current rules generally permit us to list options on an ETP three days after shares of the ETP begin trading on a national securities exchange. However, those rules do not apply to ETPs holding commodities such as Bitcoin. Many believe that options will help ETF liquidity, while others think options will throw open the door for more complex trading.

And then, of course, there's Gary. Poor beaten down Gary Gensler. The SEC chair continues to fight crypto in the media. This time he made an appearance on Bloomberg. to say, quote, this is a highly speculative asset class one can just look at the volatility of Bitcoin in the last few days. He went on to compare crypto investing to a roller coaster ride, adding, you get to the top of that hill and wonder, how's the foundation underneath it? Gensler continued to put forward his opinion that most tokens are securities, stating, for thousands of these tokens,

there's about 15,000 or 20,000 of them. They may also be securities because the investing public is relying on the efforts of some group of entrepreneurs in the middle of these projects. Gensler once again dodged questions about whether Spot Ethereum ETFs should be approved. financial regulation commentator and no real friend of crypto, Sean Tuffy tweeted, Team Crypto needs to take this as a win. You've got Gensler calling Bitcoin an asset class. It's over. You've won the war. Bitcoin is mainstream. Like he's not really talking any different than he has about meme and penny stocks. It's frankly remarkable. And on that note, friends, we will close for the day. I hope you are headed into a wonderful weekend. One more big thank you to my

sponsors for today's show. Go to crackin.com slash the breakdown and see what crypto can be. or go get yourself a Bitcoin Ledger Nano, knowing that 5% of sales go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.