The Breakdown - Stablecoins in the Hot Seat: Powell Calls Bitcoin a Substitute for Gold While Fed Says Digital Dollar Prototype Coming in July

Starting point is 00:00:04 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, Casper, and Exodus, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, March 23rd, and today we are talking about stable coins in the hot seat. Bitcoin is a substitute for gold and a digital dollar prototype. coming by July. There was an absolute flurry of content and commentary yesterday around the place of Bitcoin, Stablecoins, Defi, and the digital asset industry as a whole vis-a-vis U.S. government regulation, as well as how a digital dollar might shake that all up. Before we get into it,

Starting point is 00:00:52 let's set the terms of the debate. One of the competitors for this cycle's top fud is the government will ban it if it gets sufficiently threatening. Now, to be clear, banning, depending on your Fuddster, could mean anything from an outright ban of use in holding to forceful seizure, to limiting access to on and off ramps, to the more benign from a commercial standpoint, but no less threatening from a privacy standpoint, integration of the full crypto infrastructure into the AML KYC money surveillance apparatus. I've spent some time on this show looking into global versions where this FUD seems to be playing out. In particular, we've been watching the evolving situation in India and Nigeria. India, which seems gearing up for

Starting point is 00:01:32 a bill that would have some sort of outright ban, although at least one finance minister says that that's not the case. And Nigeria, where the central bank of Nigeria first reiterated that banks should not be working with crypto users, which they've then subsequently rolled back just a little bit. Either way, however, really, what everyone has been focused on is the U.S., particularly in the context of a new administration. The last administration had friends and foes alike when it came to Bitcoin and Crypt. Trump, obviously famously tweeted that he said, he did not like Bitcoin or crypto, but we didn't really take that seriously as a threat because it was so clearly about Zuckerberg and Libra. Manuchin was a much bigger enemy, probably wrote that

Starting point is 00:02:13 text for Trump's tweet even, and clearly wanted to tighten the reins. In his final act, he was trying to require exchanges to collect more information when users transferred crypto to their own wallets. On the flip side, however, there was Brian Brooks, who was absolutely revolutionary at the Office of the Comptroller of the Currency. The changes he oversaw. saw are a huge reason why so many big institutions are now playing in this space, why so many big traditional banks feel like they have to race to catch up to allow people to offer their customers crypto services. However, as we know from physics, every action has a reaction, and to some extent, one reason why observers are so keenly watching the Biden administration is to see how much they're

Starting point is 00:02:55 going to respond or try to walk back what Brooks and the OCC changed. On top of that, as the Biden administration has come to power, the price and volume around Bitcoin, stable coins, and the rest of the digital asset industries have made them much more unignorable. The last time Joe Biden was in office, Bitcoin was about $430. Now it's been over $50,000 for 16 days in a row. Tether was barely out of diapers. Now it has a market supply above $40 billion and is doing upwards of $100 billion in volume per day. Combined with USDC and you've got over $50 billion of USD approximately. oxymets out there, so a lot more is at stake. With that, people have been watching two things, who has come in and what they're saying. On the who has come inside, Janet Yellen is back for another round,

Starting point is 00:03:42 although this time is Treasury Secretary rather than SEC Chair. Gary Gensler, too, is back, although this time as SEC Chair instead of CFTC chair. Of these two, there is much more optimism around Gensler, who has done a pretty fair bit of work to understand where the crypto industry is coming from, even teaching a course at MIT about Bitcoin and blockchain. And then of course we have someone who's still around in the form of Jay Powell, the Federal Reserve chairman. His X factor in all these discussions is the potential of a central bank digital currency, a digital dollar that could potentially shift the U.S.'s relationship with these projects. Now, in terms of what we've seen these actors say so far over the last few months, up until now it's been pretty standard fare. One part,

Starting point is 00:04:24 there's a lot of exciting potential here. One part, we have to protect investors, though, and one part, but it's also used by criminals. Over the last couple days, however, we've gotten both comments and news that could shift us into our next phase of understanding what the U.S.'s relationship with Bitcoin, stable coins, and other digital assets is going to look like going forward. So let's talk about Powell speaking about CBDCs and cryptos at a Bank for International Settlements panel yesterday. Let's talk about the announcement of digital dollar prototypes coming this summer. And let's talk about new draft FATIF guidelines around cryptocurrencies. First up, Powell did a session yesterday with leaders from the bank for international settlements,

Starting point is 00:05:02 including Augustin Carstens, who we talked about last week. He was asked about cryptocurrencies and whether he saw them as a threat, and here's what he said. We call them crypto assets. You know, they're highly volatile, see Bitcoin, and therefore not really useful as a store of value, and they're not backed by anything. They're more of an asset for speculation. So they're also not particularly in use as a means of payment. it's more a speculative asset that's essentially a substitute for gold rather than for the dollar.

Starting point is 00:05:33 And I think with crypto assets, the public needs to understand the risks. The principal thing is there's the volatility. There's also the outsized energy requirements requirement for mining and the fact that they're not backed by anything. So let's break out these three reasons that he wasn't particularly impressed by cryptos. First, this idea of volatility or that it's just an asset. for speculation. Basically, he's dismissing Bitcoin and any other crypto as something that he does not have to stress about or really factor into his consideration around global monetary competition. While many Bitcoiners grabbed onto the essentially a substitute for gold piece as a great tweet

Starting point is 00:06:11 and a knock to the gold bugs who they're trying to convert or at least undermine, Powell was saying this more like a giant chewing away a fly. Gold is to him clearly irrelevant, an unimportant, an antiquated part of the Fiat system that he sits at the helm of. In that way, a substitute for that thing does not present a threat. Second, let's talk about this old cannerive backed by nothing. Alex Kruger tweeted, why do policymakers have to insist on saying Bitcoin is not backed by anything? As if it mattered. What are diamonds backed by? Nothing. And that's okay. If you really have to have an answer, Bitcoin is backed by a distributed ledger and by the energy it takes to produce one. This is all so repetitive. Are we going to be having the same arguments first?

Starting point is 00:06:53 ever? First of all, I resonate with this frustration wholeheartedly. But to answer Alex's question, the reason they insist on saying it is that the entire premise of fiat money is that it is backed, backed by the full faith in credit of the United States government, which actually includes even more backing, the backing, for example, of the U.S. military. This new money then, backed by math and electricity and a network, is in contrast to the money backed by governments. When they're saying it's backed by nothing. What they really mean is it's not backed by a government. Looking for the best way to unlock your crypto's liquidity? NexO.io is exactly what you need.

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Starting point is 00:08:51 Take control of your crypto and download Exodus today. Visit the app store or Google Play to download or visit exodus.com for more information. Now the third piece of fud listed in this one-sentence fud festival from Jerome Powell. It's a nearly throwaway phrase, but there's this line. There's also the outsized energy requirements for mining. To my knowledge, this is the first time that I've ever seen Powell publicly mentioned, or at least recently publicly mentioned, energy consumption as a critique of cryptos. It's suggest to me that this is a bigger behind-the-scenes topic than we've seen. Interestingly, however, this is all actually part two of a question response that included a

Starting point is 00:09:34 part one about central bank digital currencies, where Powell argued that cryptocurrencies weren't actually a driving force or motivator. Our work on CBDCs is not primarily motivated by the appearance on the scene of cryptocurrencies and stablecoins. It really is fundamentally, technology has made it possible for us to offer a new form of trusted money and that sovereign anchor that has been so important for economic development for a very long time. And we're looking carefully at whether to do that. This leads us to some interesting and sort of under the radar news. Yesterday, Bloomberg published a piece called Federal Reserve's digital dollar push worries Wall Street. So what happened?

Starting point is 00:10:16 Last year, we learned that not only was the Fed paying attention to digital currencies and a digital dollar, but the Boston Fed was actively engaged with MIT on developing prototypes. James Kuna, who's leading the project for the Boston Fed, said that as soon as July, they plan to unveil that research. They plan to share at least two prototype software platforms that could move, store, and settle transactions. They're not necessarily going to be blockchain platforms, and they insist that the work is strictly to show what's possible, not to take a stand on whether they should go all the way with the digital dollar, nor to take a stand on major thorny issues. issues. Kuna said, quote, we think it's important that we not wait for the policy debate because

Starting point is 00:10:56 then will be a year or so behind. This will take significant outreach to the industry and serious debate. So what are those thorny issues? What is the serious debate about? Three big ones that stand out are one, anonymity, two, consumer protections around breaches or mistaken transactions, and three, whether the Fed hosts customer accounts directly. For those in the Bitcoin space, there is no doubt that the biggest issue is anonymity. Cash, by preserving privacy, is a tool for human rights. A central bank digital currency could represent the exact opposite, perfect surveillance of all transactions. And while some digital dollar advocates like former CFTC Chair Christian Carlos say that the U.S. digital dollar would have anonymity or would require to have some amount of anonymity based on the U.S. Constitution, there are many who simply don't buy that line of thinking. However, for the banks and lobbyists that feature in the Bloomberg story, the big issue is not the

Starting point is 00:11:55 anonymity, it is the direct accounts. In short, all of the intermediaries in our current, cumbersome, overweight system are really, really nervous that they're about to lose their cut. For commercial banks, it's about consumer deposits. Consumer deposits are perhaps their best source of income, especially recurring paychecks. It provides them the liquidity to go do all the things they do, loans for mortgages, etc. Your average consumer, when asked where is a more safe and secure place to keep my money, a random commercial bank or the Fed, is going to choose the Fed. That could create absolute havoc for other parts of the market. Payment processors are also nervous about being cut out of the system. When you transact in cash, settlement is final. The cash has exchanged hands from one

Starting point is 00:12:39 person to another. No two people can have the same $20 bill in their possession at the same time. When you transact with cards, that's not the case. It's a series of debts in IOUs facilitated by these high-level networks who do the ultimate settlement over a matter of days, obviously charging fees all along this path. If a digital dollar includes cash-like settlement without those intermediaries, it could be an existential threat to their model. And importantly, there is a lot to be said for this disintermediation. For consumers, it could mean smaller fees. Holding your money with the Fed could be more security, as I mentioned before. For vendors, settlement happening in immediately could reduce costs associated with fraud significantly. And what's more, these benefits

Starting point is 00:13:21 are now getting wrapped up with the Biden administration and Democrats' push for economic fairness and bringing in people who don't have good access to the current banking system. Ohio Senator Sherrod Brown is the new chair of the Senate Banking Committee. He is urging the Fed to create digital currency accounts directly for Americans as a way to cut out payday lenders. As I mentioned before, this could be a huge threat to the deposits that commercial banks rely on to fuel the mortgage system and more. Now, when it comes to combating these existential threats, these different groups, the banks on the one hand, the payment processors on the other, are taking different approaches. The banks are the oldest school, so they're lobbying in the oldest school way.

Starting point is 00:14:00 Their biggest trade group has told Congress that a digital dollar isn't necessary. The senior vice president of payments at the American Bankers Association said, rushing anything of this potential magnitude could introduce unintended consequences that threaten the stability of the banking system without contributing meaningfully to economic inclusion. The payment processors, which are effectively fintechs at this, are a little bit more sophisticated, and instead of just trying to outright stop this, they're trying to wheedle their way in. Both Visa and MasterCard are trying to build systems and rails that can integrate with CBDCs or even power them. I've said before that I think a CBDC digital dollar is absolutely inevitable. I do think there's going to be intense

Starting point is 00:14:39 pressure to implement it in a way, however, that keeps commercial banks holding the deposits. The government has shown extraordinary sensitivity to banking liquidity issues and isn't likely to me to pursue a strategy that would cause further problems there. That's a level of centralization that I simply don't believe the U.S. has the appetite for. I think, on the other hand, the anonymity concerns are much more real. I'm not super convinced by Giancarlo's argument, although yes, almost for sure any U.S. digital dollar will be better than a Chinese digital dollar. But there is plenty of evidence to me that we're on a trend to more financial surveillance, not less. Let's take, for example, the Financial Action Task Force or FATIF's updated crypto guidelines.

Starting point is 00:15:18 Now, quick terminology, for whatever stupid reason, they call them virtual assets and virtual asset service providers. But either way, FATIF is a global organization that is made up of non-democratically elected appointed representatives from member states. Member states include most major nation states plus the EU. They had released guidance in 2015 and updated it in 2019, and while most Bitcoiners are no fans of their guidance, CoinCenters take is that while they are also against the mass warrantless surveillance, which is the word they used to describe what FATIF was recommending, they appreciated that at least FATIF put crypto on a level playing field with traditional financial institutions,

Starting point is 00:15:58 imposing no stricter or more privacy-invading policies than those already in place. Unfortunately, coin senders first take on this new guidance suggests that it represents a major shift in that in three ways. First, they believe there could be new surveillance obligations for non-custodial entities. Effectively, one could read this and interpret a vastly expanded definition of virtual asset service providers, which previously might have only meant exchanges, now including everyone from deck software developers to lightning node operators to smart contract participants. Basically, anyone who participates in a crypto network could be responsible for the sort of AML KYC customer information tracking, i.e. knowing everything about every other actor in their network and reporting

Starting point is 00:16:41 it. This functionally would destroy those peer-to-peer networks where that would be entirely impossible to do. CoinCenter also believes that this draft advocates against peer-to-peer transactions and transactions using privacy-enhancing technology and expands recommendations around what transactions should be subject to the travel rule, which is a record-keeping requirement that under current law only applies to transactions between regulated entities. Of course, all of these are big issues, but this expanded definition of VASPs to include people who are just nodes in a network, seems like the most direct threat to the architecture of a new system built on network power to me. Importantly, I've seen numerous mainstream MMT-style thinkers on Twitter defend the

Starting point is 00:17:23 notions behind this sort of thinking from the FATIF, down to including the idea. that developers of a protocol should be responsible for what everyone does with a protocol, that node operators should be responsible for whatever is flowing through their node. And at core, I believe that this debate comes back to and is driven by and is animated by stablecoins and stable coin issuers. The Fed may not be saying that it's coming out against USD stable coins, but the folks that are driving these conversations, the folks that introduced the Stable Act last December, that's what they're taking aim at.

Starting point is 00:17:55 This is a group who believes that anyone who touches money in any sort of fundamental way needs to be regulated by a bank. No exception, full stop. And if that means the undermining of a totally new way to design an architecture for a financial system, that is a reasonable price to pay. The destruction of that opportunity of something new, something more people-driven, an externality of the safety they perceive on the other side of AML KYC regimes. That's why I titled this piece stable coins on the hot seat, even though I didn't talk that much about stable coins. I do believe that these radically expanded definitions in the fat of guidance could have big implications for Bitcoin as well. I think the more that government defines its power in ways that can be interpreted expansively,

Starting point is 00:18:42 the more it hurts everything. But as I said, I do think that when it comes to what is being aimed at, it's that huge amount of volume happening through fiat-denominated stable coins. I think that's what has the attention of governments around the world, and it seems that that's what has the attention of the United States. Anyways, guys, let me know what you think. I appreciate you listening. I hope this show was informative to you. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Stablecoins in the Hot Seat: Powell Calls Bitcoin a Substitute for Gold While Fed Says Digital Dollar Prototype Coming in July

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