The Breakdown - The Central Banks Strike Back on Stablecoins

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. What's going on, guys? It is Wednesday, June 25th, and today we are talking about the bank for international settlements, latest stablecoin arguments. 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 in the show notes or go to Bit.L.Y. down pod. All right, friends, as is going to be our custom for a little while, we will start with an Iran update. After President Trump dropped the F-bomb yesterday morning, a shaky sea spire is settling in. Israeli bombers returned to their hangars throughout the day, doing the so-called

Starting point is 00:00:52 friendly plane wave as requested by the president. Later on Tuesday, Israeli Prime Minister Benjamin Netanyahu released a statement saying that, quote, Israel has removed a dual immediate existential threat, both in the nuclear and ballistic missile fields. In light of the achievement of the operation's objectives and in full coordination with President Trump, Israel has agreed to the president's proposal for a bilateral ceasefire. Most commentators are reading this as Netanyahu bending the knee to Trump's demands, given his prior position that regime change was the ultimate goal. Now that said, the peace is extremely tentative. Iran's top security body confirmed that they have agreed to the truce, but added that they have their, quote, hands on the trigger, ready to deliver

Starting point is 00:01:27 a decisive strike in response to any violating act. But for now, the ceasefire is holding and Trump is in the Netherlands to attend the NATO summit. Tentative would also accurately describe the market response as well. Bitcoin traded in a tight range above 105,000, one of its least volatile days and weeks. The S&P 500 was up a little over 1% on the day in a slow grind upwards. The Dixie inched higher while gold gained 1.5% after losing 2% overnight on Monday. Essentially, markets are on hold while they wait to see if the ceasefire is sustainable. Indeed, some traders are already on to the next geopolitical shop, with Joan von Borg tweeting, this war was a fate. Ukraine next. So luckily for us, we don't have to spend all that much time on this situation

Starting point is 00:02:08 today, and instead we can dig into the latest discourse around stablecoins this time for the bank for international settlements. That old stick-in-the-mud institutions, the perennial combatant of crypto, has warned that stable coins are not suitable as money. In a new report, the BIS warns that stable coins fail three key tests that make them unsuitable to form the, quote, mainstay of the monetary system. They claim that stable coins don't have the qualities of singleness, elasticity, and integrity. Singleness refers to the idea that any dollar is completely interchangeable with any other dollar and is universally accepted. Elasticity is the idea that money supply can be easily expanded and contracted to accommodate payments in economic activity.

Starting point is 00:02:46 Integrity refers to a monetary system being able to defend against widespread fraud, financial crime, and illicit activities. Now, the authors do acknowledge the benefits, including programmability, pseudonymity, and easy access for new users. They note that lower costs and faster transaction speeds allow stable coins to perform better in cross-border transactions and other lower-cost banking. But this is still a deeply negative report. And given that, the context is important here. The BIS is considered the central bank for central banks. Practically, they coordinate global central bank policy and the regulation of monetary systems, but they also serve as a clearinghouse for academic research on how money works. The report then has

Starting point is 00:03:23 a clear bias. Over recent years, the BIS has had a clear institutional preference for a CBDC-based monetary system that clears through a global unified ledger. Essentially, they seek to connect every central bank and financial market in the world together in a shared consensus layer. Their stated preference in this paper is to re-architect the global financial system around tokenized money, tokenized bonds, and tokenized central bank reserves. The unspoken goal seems to be to keep the central banks as the center of monetary policy, rather than allowing stable coins to perform an end-run around the existing system. As stable coins are backed entirely with T-bills, that would leave central banks without a role to play in settling the supply of

Starting point is 00:03:59 money if stable coins take over. The paper is, in other words, a loud call to pump the brakes on stablecoin adoption coming from the dominant monetary policy body in the world. The BIS writes, Society has a choice. The monetary system can transform into a next generation system built on tried and tested foundations of trust and technologically superior programmable infrastructures, or society can relearn the historical lessons about the limitations of unsound money with real societal costs by taking a detour involving private digital currencies that fail the triple test of singleness, elasticity, and integrity. Bold actions by central banks and other public authorities can push the financial system along the right path in partnership with the financial sector.

Starting point is 00:04:36 Now, none of this is surprising in the slightest. While the BIS has been enthusiastically testing CBDCs, they've been staunchly against the idea of privately issued money. The paper even draws the comparison between stable coins and privately issued banknotes of the 19th century free banking era. Today's episode of The Breaktown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products, ranging from single asset to diversified to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection of Tradfai and Crypto, and one of the benefits for a lot of us is that

Starting point is 00:05:20 grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visit grayscale.com. Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. What makes this paper important is that the U.S. is, of course, on the cusp of making the decision to open the floodgate for stablecoins. Enthusiasm to issue stablecoins once legislation is passed, far exceeds anyone's expectations

Starting point is 00:05:51 even from just six months ago. Rather than talking through hypotheticals, the BIS is rushing to have the conversation about what widespread stablecoin adoption looks like in practice. Ultimately, they're talking about a future situation where stable coins are the dominant form of money, a future that looks more plausible than it did just a little while ago. To them, integrity and singleness concerns are real, but they seem to pale in comparison to elasticity. Currently, commercial banks can extend additional loans in the good times to expand the money supply and lubricate economic activity. During a crisis, the central banks can expand the money supply through bank reserves and liquidity programs

Starting point is 00:06:24 in an attempt to address whatever issue has sprung up. Neither of these functions work with full reserve stablecoins, where supply is entirely determined by the issuance of government bonds. Currently, the U.S. Treasury is thinking about the scenario where a few trillion dollars of stable coins are issued, which would boost demand for T-bills and make the government debt more sustainable. In fact, the paper predicts that stable coin growth will drive down T-bill rates on the margin, easing the burden of government interest payments. However, the BIS seems to be contemplating a scenario where in tens or even hundreds of trillions of dollars of stablecoins are issued and take over the legacy system. That scenario functionally removes the elasticity function

Starting point is 00:06:58 from central banks. In the extreme case, it would be the de facto end of the fiat dollar system, replaced by a harder dollar where supplies capped by government debt. Now, there is an entire body of academic work yet to be written on these issues, and this BIS paper barely scratches the surface. A lot of their arguments lean on outdated views of blockchains or bad faith assessments of criminality in crypto. But the core premise that fully reserved stablecoins could put a stricter limit on money supply is an interesting conversation that's only just begun. The BIS are largely arguing that central banks need to continue to be the center of the monetary universe. As stablecoin expert Austin Campbell summarized it, central banks say we should only use central banks. Still, hold aside

Starting point is 00:07:36 the clever tweets, and that is a clever tweet, there is a really important discussion about the future shape of the monetary system to be had as the U.S. hurdles towards a stablecoin standard. Ultimately, the takeaway is that the BIS is no longer thinking about stable coins as a hypothetical. They are accepting that the nature of money is changing and trying to drive it to change in the way that they see most fit. Whole lots to talk about there. But for now, let's cover a couple stories before we get out of here. Specifically, let's do a couple of Bitcoin stories to pair with that stable coin story. Bitcoin dominance has rebounded to 65% as geopolitical fears limit all coin speculation. One of the notable market dynamics of the past few weeks of turmoil

Starting point is 00:08:14 in the Middle East was that Bitcoin seriously outperformed alts. Each wobble for Bitcoin was a plunge for altcoins, and each recovery was tilted more and more towards Bitcoin. You could see it, clearly in the flows. Although price wasn't surging, Bitcoin ETFs have recorded net inflows every day since the missile started flying. Bitcoin dominance is now at a new high for the cycle, as cautious investors shy away from alt-coin exposure. Bitcoin dominance had dipped all the way down to 52% in mid-May as markets went risk-on after news of a truce in the trade war with China. The chart of Bitcoin dominance really tells the story of this very different cycle. It's been up into the right with very few interruptions since bottoming in November 2022.

Starting point is 00:08:51 This is markedly different to the last two cycles, which each feature a massive drop in Bitcoin dominance as alt seasons took hold. The typical analysis has been that institutional flows are driving the cycle rather than retail participation, and that those institutional buyers have basically no interest in all coins so far. More recently, we've seen crypto stocks taking off with strong interest in Bitcoin Treasury companies and stable coins via the Circle IPO. Indeed, many feel that crypto stocks have become the all coins of this cycle, with financial reporting covering them in the same way as previous cryptocurrencies. Still, there is a larger story going on with crypto-native tokens, with investors

Starting point is 00:09:24 changing the way they view investing in crypto protocols. Real adoption seems to be the big theme of this cycle. In other words, it's not enough for tokens to market themselves as the next Bitcoin, pump up fake metrics, or sell investors on a future promise of adoption. When asked which tokens he wanted to hold over the next few years, Chao Wang of Alliance Dow said, on a three to five-year time horizon, the only correct answer is tokens with strong future revenue and currently trading at reasonable multiples. Everything else is going to zero. Monetary premium outside Bitcoin is a thing of the past. And people seem to agree. Bybit research says that almost a third of investor portfolios are allocated to Bitcoin. In a new report, the exchange

Starting point is 00:10:01 highlighted that Bitcoin holdings have skyrocketed this year. Their study of user allocation showed that 30.9% of portfolio value was held by Bitcoin up from 25.4% in November. A further 33% was held in stable coins, so all coins represent just 36% of portfolios. The numbers look even worse if you break out major all coins. Ether was just 8.4% of user assets, meaning that on average, investors held four times more Bitcoin than they did Ethereum, and Salana holdings were less than 2%, which is two-thirds the size they were in October. There has been a big shift in capital away from Salana and towards Ripple, with the report

Starting point is 00:10:33 authors suggesting tradings were betting that a ripple ETAF will be approved before a Salana ETF. Still, the big story is simply the shift of capital towards Bitcoin. The ratio of Bitcoin to ETH Holdings has collapsed since November when it was close to parity. There was a slight uptick from April to May, but otherwise Bitcoin has been the clear investment of choice. Reflecting on the report, LWS financial research wrote, Bitcoin remains the anchor asset for crypto portfolios in 2025, driven by institutional confidence and regulatory tailwinds. While retail traders pivot to altcoins, institutions continue to accumulate Bitcoin. reinforcing its role as a long-term store of value and a key hedge in diversified portfolios.

Starting point is 00:11:09 Seriously, friends, the story of this cycle is really clear. Bitcoin and stablecoins, Bitcoin and stablecoins, Bitcoin and stablecoins. For now that that's going to do it for today's breakdown. Appreciate you listening, as always, and until next time, peace.

The Breakdown - The Central Banks Strike Back on Stablecoins

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