The Breakdown - The Bitcoin Banking Battle Heats Up

Episode Date: December 12, 2020

On this edition of the weekly recap, NLW looks at the brewing battle to be the bitcoin and crypto bank of the future. He looks at three stories reporting banks getting into crypto (BBVA, Standard Chartered and DBS) as well as crypto companies applying to become banks. Finally, he examines why this is happening right now, and what are the true stakes of the game. 

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 crypto.com, nexo.io, and level. And produced and distributed by CoinDest. What's going on, guys? It is Saturday, December 12th, and that means it's time for the weekly recap. And this week, we just have to talk about Bitcoin banking and the race around Bitcoin banking that is heating up significantly.

First, though, let's talk about Michael Saylor, the absolute madman and his team at Micro Strategy. The beginning of the week, they announced that they would be offering $400 million in convertible debt with an intention to buy more Bitcoin with it. A couple days later, they announced that they were increasing that offering to $550 million, and yesterday they announced that they had closed with $650 million. For those keeping track at home, that means they will have on their books more than a billion dollars worth of Bitcoin. If you listen to my episode with SEC Commissioner Hester Purse earlier this week, this is the de facto ETF that Hester and I discussed. City Bank may have downgraded

micro-strategy stock because they didn't like this move, but it seems like the market does, given that they were able to raise $250 million more than they even thought they would. But anyways, what I really want to talk about and what I think was the big overarching story of this week was Bitcoin banking and crypto banking and a race that is heating up. So let's go through news from this week about banks getting into crypto. First, there was standard chartered bank, a bank that has about 720 billion in assets. It is London-based. They have reportedly gathered a group of four exchanges and five of the largest OTC traders for a new digital asset. trading platform that is, of course, tailored to the institutional market.

As part of that platform, they will have an Ethereum-based settlement token. Now, we don't know which exchanges exactly are involved other than it sounds like LMAX and ErisX are both involved. Going back to this Ethereum-based settlement token, CoinDesk's source had this to say. Quote, a lot of people were pushing to use Hyperledger, Corder, etc., but we have specifically gone for something the native crypto community are comfortable with. What's more, that source said that this is, in effect, trying to build a tether for institutions. Quote, we are building our own token of fiat collateral and hoping that it will become the equivalent of tether, except that the

tokenized collateral or money will be held in the trading bank account of a proper bank, like a standard chartered, a J.P. Morgan, a Deutsche Bank. So basically, these guys are looking to recreate that stable coin settlement system, but for the entire world intersecting digital assets and traditional finance. All right, next let's move over to BBVA. This is Spain's second largest bank, with about $840 billion in assets. Reports are that they will begin offering crypto trading and custody at the beginning of next year. The offering will come out of Switzerland, but will be available to customers across Europe. And when Kondesk pushed their sources on this, they made it clear that it wasn't another tokenized security thing, but a true cryptocurrency offering.

By way of seeing just how far things have come, BBVA was dabbling in 2018 with a live transaction platform on blockchain, but had to use a test net because banks in Europe were prohibited from even holding ether. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the crypto.com app today.

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Finally, there is DBS Bank out of Singapore. This is a bank that has $330 billion in assets, and this one is actually announced as opposed to just reported. DBS's digital asset exchange will begin trading next week, and that digital exchange is 10% owned by Singapore's SGX stock exchange. Users will be able to trade in four fiats, Singapore dollars, U.S. dollars, Hong Kong dollars, and Japanese yen, and they will be tradable against Bitcoin, Ether, Bitcoin Cash, and XRP. They're also planning a security token's offering as well and will have a custody offering. This is, of course, only for institutional and accredited investors again. So in one week, we have two reports and one actual breaking news, but in total,

three banks representing nearly two trillion in assets getting big time into this crypto banking space. Now, let's talk about companies that are already in crypto who are getting into banking. Filinges revealed that Paxos is seeking to create the Paxos National Trust, effectively a bank charter. They filed their application with the Office of the Comptroller of the currency. This bank would operate out of New York where Paxos is already licensed. Paxos currently offers cash custody, gold custody, crypto, digital asset issuance, securities clearing, commodities trading, and most notably is powering PayPal's crypto service. The application has a 30-day comment period before it can proceed, which it is certainly not

guaranteed to, and importantly, Paxos is not the only crypto institution going through this process right now. Both BitPay and Anchorage are doing the same thing. Let's also not forget Avanti and Cracken. Both of these companies got Wyoming Division of Banking Charters instead of going the federal route earlier this year. This will give them many of the access of those federal benefits, but with a slightly simpler structure being regulated in the state of Wyoming. And then, of course, there's Nidig. If you listen to my show yesterday, you heard all about their new offerings, their bank solutions business, but effectively, this is a white-label approach to Bitcoin banking. So where these other companies are trying to get their own licenses,

Nidig is instead going to banks that want to offer their customers' crypto services and effectively providing the engine underneath those public-facing brands. So let's talk about why this is happening right now. I think there's two clear parts of the story. The first has to do with upside opportunity. Clearly, there are huge institutions coming into this space that need a full slate of banking services. Reiterating news again from this week, Nidig brought in mass mutual to the tune of $100 million of investment in Bitcoin. What's more, Nydig also announced last month two funds with three investors that are deploying 150 million across them. These firms all need access to a slew of banking services. So there is huge

opportunity as these whales come into the space. The second piece of this, though, is downside protection. There is, as these big players come into the space, serious consternation about how people are going to engage. In some ways, it feels to me like the stable act is a shot across the bow of something we're going to see a lot more. I discussed last week or earlier this week, who knows, time has no meaning in 2020, but Michael Saylor is discussing what things Bitcoin is going to have to give up to be a store of value in a mainstream way. Basically, there is a sense that we may be careening towards an era where there is a massive institutional uptake and a corresponding intensity of regulatory focus. A couple tweets that made this point throughout the week,

Nick Carter said, becoming very clear that Wall Street is and will be an advocate rather than an adversary of Bitcoin. Now whether these firms will support the same version of Bitcoin that Bitcoiners believe in is another question entirely. J.P. Coney said something similar. By 2026, Cypherpunk Bitcoin has been completely replaced by Wall Street Bitcoin. The former was open and censorship resistant. The latter had a carefully audited supply chain, ESG-compliant mining, and a centralized stock of clean Bitcoins governed by Coinbase and Friends. This is, I think, one of these central questions facing the Bitcoin industry. It is setting itself up to be the central question in many ways as the macro world comes to

this space. I've got a great conversation for you on exactly this next week. Ben Hunt Epsilon Theory and Alex Gladstein from the Human Rights Foundation are going to take to the podcast a conversation that they started on Twitter about what whether Bitcoin can avoid being co-opted by big Wall Street institutions, whether it can avoid becoming, as Ben Hunt put it, just another Wall Street casino game. Don't miss it. It'll be out early next week. Until then, guys, I hope you're having a great weekend. I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.