The Breakdown - Should the US Federal Reserve Buy Bitcoin?

Episode Date: February 21, 2021

On this week’s “Long Reads Sunday,” NLW reads Alex Treece’s recent essay “Why the US Needs Bitcoin.” The piece argues the U.S. will inevitably adopt bitcoin as a treasury reserve asset, but by doing so sooner rather than later it can enjoy geopolitical advantages.  NLW follows with a discussion of his assessment of the prospects of a digital dollar backed by digital gold.  -- 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

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 Sunday, February 21st, and that means it's time for Long Reads Sunday. And I have a fun one for you guys today. Obviously, we have been talking all. about Bitcoin coming to institutions and more specifically Bitcoin coming to corporate treasuries. Just this week, the motley fool of all people, put $5 million of Bitcoin on its corporate treasury.

Still, there is a sense that some people have that this is still the small time. And what really will be the big driver of some future cycle, if not this one, is sovereign wealth funds and central banks themselves putting Bitcoin on the balance sheet. Today I am reading an essay from CoinDesk called Why the U.S. needs Bitcoin. It is by Alex Treese, a co-founder at Zabo, and it's all about Bitcoin as a reserve asset for the United States. So let's listen in. Why the U.S. needs Bitcoin. Elon Musk and other VIPs have endorsed it.

here's why the Federal Reserve should seriously consider BTC for its balance sheet. The United States will adopt Bitcoin as a reserve asset. Why? Because it is unequivocally in U.S. strategic interest to do so. The question is not if this will happen, but when. Whether it happens within 12 months, two years, five years, or 10 years will have major implications for U.S. positioning for decades. Failure to embrace Bitcoin sooner rather than later will damage U.S. strategic interests and benefit rivals adopting it first. By examining how the U.S. and other countries manage their reserve assets today, we can already see the logic for this transition to occur. Golden Empire

Today, the U.S. holds 261 million Troy ounces, 8,133 metric tons of gold, or about 475 billion worth. This makes the U.S. the largest holder of gold in the world, by a wide margin, with over two times the amount of the next largest holder, Germany. Historically, there was a very good reason for the U.S. to own gold. The U.S. dollar was pegged to its value. Yet, the U.S. broke with the gold standard in 1971, ushering in the fiat currency age that has existed ever since. So why exactly did the U.S. and other countries continue to own all this gold? Here are some of the reasons provided directly from central bankers themselves. Gold is the de facto safe haven asset. It is an insurance policy against any major economic, monetary or geopolitical shifts. Given gold's ample liquidity and

universal appeal, countries can easily liquidate it for other assets in turbulent times. Gold is both independent of any given country's economic or monetary policies, while also having a fixed supply on Earth, with relatively stable supply growth, making it an ideal hedge against both monetary inflation and fluctuations in other reserve assets. Gold is viewed as nobody's liability. It cannot be frozen in a bank account or defaulted on when frictions between countries arise. Combine these reasons with the cultural importance of gold, and it's uncontroversial to say that having more gold than everyone else is a very good thing. Fort Knox 2.0. Bitcoin's similarities to gold are well documented, earning it the appropriate

nickname of digital gold. Yet, while Bitcoin shares many similarities with gold, including scarcity, stable supply inflation, fungibility, and durability, it also makes major improvements over gold in some key areas. When gold is in high demand, miners are incentivized to dig up more of it, increasing its supply. Bitcoin supply does not change in the face of demand, making it less inflationary and more predictable. It's far easier and cheaper to verify the authenticity of Bitcoin than gold. Bitcoin is much easier to transfer than gold and cost much less to store securely. Bitcoin is easily divided, whereas gold is not. For these reasons, a rapidly increasing number of people, companies and institutional investors agree that having more Bitcoin than everyone else is a very good

thing. Today, this includes the world's richest man, highly conservative long-term thinking asset managers, industry-leading companies, and the most prominent macro investors in the world. Tomorrow, it will include countries too. Sovereign techno-economic games. So far, countries in their central banks have resisted publicly making or disclosing investments in Bitcoin. In fact, they've done the opposite in some cases. European Central Bank head Christine Lagarde was quoted saying that it's very unlikely central banks would make the move into Bitcoin in the near future. Nigeria's central bank recently reiterated its outright ban on cryptocurrency. India's parliament proposed its own crypto ban despite the country's Supreme Court ruling it lawful. These negative actions have occurred in the name of

protecting the existing fiat currency regime, e.g. Nigeria, or limiting competition for planned central bank digital currencies, e.g. India. But there is near certainty that this dynamic ultimately reverse, potentially within the next 12 months. Why? Simple economic incentives. In the near term, there exists an irresistible arbitrage opportunity for a country silently to accumulate a Bitcoin position and later announce its holdings. Bitcoin being adopted as a sovereign reserve asset is often considered the final boss of adoption milestones. It finally happening would send an ultra-bullish signal and vaporized doubts among traditional investor holdouts, including other central banks. The resulting adoption,

acceleration would bestow huge windfalls for early adopter countries who managed to accumulate early in this transition. In the longer term, Bitcoin represents a sovereign wealth-building opportunity with asymmetric risk-reward upside. Let's assume a country agrees and decides to buy a relatively small hedge position in Bitcoin, one to five percent of its reserves. The upsides are clear, but what's the downside for being wrong? If it turns out that Bitcoin never becomes a global reserve asset, the nation is simply stuck with owning a rapidly growing, highly liquid alternative asset that behaves a lot like gold. But what if it doesn't buy any Bitcoin and it does become a global reserve asset? Any late adopter country would see its sovereign wealth diminished relative to

early adopters and would be forced to capitulate at higher prices later. Yet for the US, the downside of not being one of the winners of Bitcoin is greater than just about anyone else. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup or fund their education. Try Nexus' instant crypto credit lines. and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention the APR starts at just 5.9%. Stay on top of your investment game with nexo.io.

And remember, it's your crypto, your credit, your choice. Get started at nexo.io. Another great race. The U.S. is well known for using the global financial system and the U.S. dollar status as the global reserve currency to project its power and punish its adversaries. It's no surprise, then, that rivals such as Russia and China have built their gold reserves to historical levels at the expense of U.S. and U.S. treasuries. Their overall goals are clear. Create alternatives to the current U.S. monetary hegemony. As Bitcoin continues to gain adoption

and becomes a global reserve asset, it will be thrust into this great competition between nations. If America's rivals embrace Bitcoin first and take advantage of the reserve asset arbitrage, not only will they secure a once-in-a-generation economic windfall, they will also be in a position to damage U.S. foreign policy and strategic interests. Fortunately, the U.S. can avoid this outcome if it acts boldly and embraces Bitcoin first. Despite a complete lack of leadership from executive and legislative branches of government so far, corporate America and American investors are currently winning this competition for the U.S. of the world's Bitcoin is custodied in the United States. Many of the iconic companies in the

cryptocurrency industry, firms like Coinbase, Gemini, Bitco, Nidig, Digital Currency Group, and others are all U.S.-based. The vast majority of corporate treasury purchases have been made by U.S. companies. Whether to maintain its leading position of power and wealth, or to prevent adversaries from gaining an economic and geopolitical edge, the right strategic move is very clear. The U.S. should play to win with Bitcoin. This includes being one of the first to adopt Bitcoin as a reserve asset and doing everything possible to ensure the U.S. continues to be the home for many of the most innovative cryptocurrency companies. The U.S. has found itself at the crossroads of many consequential technology shifts before. The space race, the atom bomb, the internet,

and more recently, the race for general purpose artificial intelligence. The outcomes of these sovereign techno-economic games determine the fate of empires. For the U.S., it is a game it is unknowingly leading and can still decisively win. But the opportunity to do so is. is closing. All right, back to NLW here. And first of all, thank you, Alex. I love this piece and specifically the conversation it provokes. So I just want to share a few thoughts for you guys to maybe extend this conversation. We can take it to Twitter and YouTube and Clubhouse and everywhere else. But first of all, one of the things that I think makes this less likely right now, at least in kind of a level one thinking sort of way, is that it feels very likely to me that

pariah nations, i.e. Venezuela, i.e. Iran, i.e. North Korea, are actually the first early adopters of putting Bitcoin on their balance sheets. And the reason for that is quite simple. These are the countries that are most affected by the U.S.'s control of the monetary system, specifically interbank payments and the SWIFT system, which can be used as a weapon against these countries. To the extent that they see Bitcoin as a viable alternative to the Swift system and to the U.S. dollar order in general, it would not surprise me if we found out later that they had been slowly accumulating for a very long time. There will be a temptation among many policymakers, particularly those who don't want to engage too deeply, to say this is the money of my enemy, therefore it is not of interest to me.

Now, one other geopolitical opportunity that relates to this that's not related to the U.S. or those pariah nations that are on the outskirts of the U.S. system is it seems like a very interesting opportunity for, call it opportunistic tier two economies, Turkey, Argentina, Indonesia, even Nigeria, even though they've been in the news for sort of the opposite. Making a bet on a Bitcoin standard or at least a Bitcoin complement that recognizes the supremacy and importance of the internet in this day and age could be a really smart way to take some economic power back that has potentially been lost in the constant cycles of IMF debt and renegotiation and so on and so forth. I would also not be surprised if over the next couple years, with the right leadership,

one of this category of countries announced that they are making a big bet or have been making a big bet on Bitcoin. But now let's bring it back to the U.S. I do think that it is an extremely strong narrative for those of us who are in Bitcoin to say that being pro-Bitcoin is being pro-US. There's a chance to reframe mining, to look at companies like great American mining as something that is helping the energy supply come back home, that's supporting American energy independence, that's enabling people to capture and use energy that would otherwise be lost. I think it's strong to point out, as Alex does in his piece, to point out just how much of the legitimate institutional side of the market is anchored in the traditional U.S. centers of financial power.

There's an ability to say, sure, Bitcoin has some shady sides, but when it comes to the legitimate above-board-regulated side, we've got the biggest and most important players here. Finally, I think it's strong to focus on a next generation of dollar dominance that doesn't require guns to reinforce. And what I mean by that is, we have been retreating from the world as the U.S. for some time now, for decades now. What started as a slow retreat became a wrecking ball under President Trump. And to the extent that we are no longer willing to be the world, policeman, that means you're likely to see some amount of returning to regional blocks and geography mattering, as Peter Zeon would put it. And in that context, you have the question of how much the dollar

will matter. Will other currencies, particularly China's digital yuan, fill in a gap based on that regional projection of power? Potentially connecting to Bitcoin as a part of the future US financial system could extend that dominance for another generation. And I think this brings in another piece of the conversation, which has to be CBTC's. There is, in fact, some momentum for this type of narrative. Christian Carlo, the former CFTC chairman, has been beating down the drums and halls of Washington, talking about why we need a digital dollar and talking specifically about why we need an American digital currency, not just a Chinese digital currency. He has a very interesting take that basically says the Constitution offers a lot more protections, even if you are concerned about privacy,

than does something like the Chinese regime when it comes to a currency that they totally control. I could see a really powerful argument for a digital dollar backed by digital gold, right? And the last thing I want to mention is that if you are just an economic realist, one of the things that you might be looking with concern if you're in a position of power in the U.S. government or the U.S. monetary regime is that the U.S. is increasingly in a position where it has to buy the treasuries that foreigners used to. Here's a quote from Lynn Alden from just a couple days ago. The foreign sector accumulated a little less than 5% of the total U.S. Treasury issuance in 2020.

That compares to 60% that were bought by the Fed. This is effectively a monetization of debt, and that's something that is a real concern for many policy makers. In that context, is it impossible that Bitcoin becomes an appealing hedge? As I said at the top, a lot to explore here, and the thing that I love is the conversation opening up. So I hope you guys enjoyed Alex's piece and the little discussion we had after. Let me know what you think on all those networks I mentioned before. And until tomorrow, guys, be safe and take care of each other. Peace.