The Breakdown - The View on Bitcoin From Inside Fidelity Digital Assets, feat. Ria Bhutoria

Episode Date: December 26, 2020

Ria Bhutoria is the director of research at Fidelity Digital Assets. In this conversation she gives listeners a look at how one of the most important institutional players in the space has viewed the evolution of bitcoin over the past year. Find our guest online: @riabhutoria The Breakdown is produced and distributed by CoinDesk.com

The maturation of crypto-native companies has been really impressive. And over time, they could come to become top-tier financial institutions that started off as crypto-centric companies, but eventually contend with some of the traditional financial institutions of today. So that's something that I'm excited to keep a pulse on going into 2021. 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 and nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Friday, December 25th, Merry Christmas.

Today on the breakdown's end of year extravaganza, I am joined by Ria Boutoria, the director of research at Fidelity Digital Assets. Ria's research and writing on the Bitcoin and Crypto Space is some of the most salient and well-thought-out data analysis out there, and obviously Fidelity has had a hugely significant place in the market. In a year where the big story has been the growth of institutional participation in this space, I wanted to have this very special Christmas episode of the end of year extravaganza be from someone who is inside that hugely important actor Fidelity Digital Assets. So without any further yammering, let's talk some Bitcoin and Crypto now.

All right, Rio, welcome to The Breakdown. It's great to have you here. Thank you so much, Nathaniel. It's an honor. The Breakdown is one of my favorite podcasts, so it's great to be on here. Love it. Well, it's long overdue then, too. So this should be super fun. Basically, this show is all about just exploring the year that's been the year to come, and you spend so much time living inside the data that I know it's going to be a really fun conversation. And I guess just to kick us off, let's stay at the highest possible level. What, in your opinion, was the most important economic story of 2020?

Yeah, sure. So, you know, based on how much has been written about it and how much it comes up in conversations, both in and outside of crypto, I think the most important economic story is, you know, the use of coordinated and exotic monetary and fiscal policies that we've seen at a global level this year, as some of the existing tools that have been used in prior crises have proved to be less effective and get exhausted. So, you know, if we just focus on the Fed, they've been, their first line of defense at the beginning of the emergency was to unleash tools that they had already used in the past. But what was different about this year is that they took these tools to an extreme in a way that they haven't in the past. So they lowered interest rates of the zero lower bound.

They lowered the reserve requirements of banks to zero. And then they committed to unlimited quantitative easing. And they did more QE in a matter of weeks than everything that was printed during all rounds of QE during and after the 0809 Global financial crisis. And then on top of that, you know, they rolled out exotic tools that they haven't used in decade or haven't, you know, used in recent history, things like fiscal stimulus that's facilitated by quantitative easing, average inflation targeting, which means that they would allow inflation to fluctuate above an average over time. And then even, you know, setting up special vehicles to buy corporate bond

ETFs, which is the first time that the central bank has bought risky assets of this kind, at least in the U.S. And, you know, each of these tools is really being stretched to the maximum. And that's causing governments and central banks to reach for the next

exotic tool. And the consequence is that markets and the economy have become more and more reliant on stimulus, measures that have been more and more untested and exotic and that we don't really know the long-term consequences of. So I think that's really been, you know, the overarching economic story of 2020. I think that the way that you framed it of these sort of increasingly exotic and experimental

instruments that we don't know about the consequences or unintended consequences of yet because we haven't seen them in practice is a good way to put a lot of what we've seen become normalized or orthodox. I guess I'm interested in what you see, what you see, what are we flirting with next? Like, what are the next set of experimental instruments that appear to be being primed if there's any clarity around that? Yeah, I mean, I think we could get, you know, into more, potentially more direct forms of modern monetary stimulus. Another thing that people have mentioned And this year that we haven't seen any of is, you know, yield curve control. So, you know, that's, I think that's doing as much quantitative easing as is necessary to kind

of reduce longer-term rates. I think those are some of the more exotic forms that we could see going forward. But, you know, who really knows? Yeah, I think that the limits on what we might try have been pretty well blown out of the water. Yeah. Okay, so it's a slight tweak on that first question, I guess. What was the most important economic story that people didn't pay enough attention to? I think this is a socioeconomic trend that I've been reading more about that I don't think there has been enough discussion around.

And it's kind of this idea that the number of women that have left the workforce and may stay out of the workforce due to, COVID has been, you know, unparalleled relative to other crises. And I think the reasons why are probably well understood, but they include things like female dominated industries have been badly impacted, you know, things like health care, education, hospitality, and then, you know, specifically roles like teachers, daycare, housekeepers, waitresses, and so on. And then even in more, you know, even more, even in industries that have been more resilient to the pandemic, women, especially mothers, have been affected in a different way. You know, the support system that they rely on, like schools and child care facilities

have really been closed or open on and off, and that creates a lot of disruption in their work. To get to put like more concrete statistics around this, I think I read a stat that, from August to September, over 850,000 women left the workforce. And that was more than four times the number of men in the same period and more than three times the number of jobs that were gained by women over the same period. So as a result of this, the share of women in the workforce is the lowest that it's been since the late 1980s. And some of the consequences include things like the reversing or stalling of progress towards gender pay equality,

and also declining women in executive positions, which is really bad for companies because research shows that businesses that have more gender diversity, especially at high ranks, tend to be more profitable. And then when it comes to the crypto industry, you know, relative to two years ago, I do think that we've made a lot more progress in attracting women's, to the industry and supporting women in leadership positions. But there's a really long way to go still. And it's unfortunate to see this kind of larger crisis pushing back on some of those efforts to

increase diversity. Yeah, I mean, I think this is hugely significant. I definitely agree that it's a radically under-indexed conversation. And I think it's part of a larger misalignment or dislocation in terms of our conversation, which has been so top line as it relates to numbers, right? It's like, it's all we are discussing economically are the big top line numbers. Even, even when it comes to trying to point out, you know, there's sort of the narrative around the K-shaped recovery. It's still not specific stories like that, trying to understand who has been disproportionately

affected and why. It's just like the baseball stats reporting of the sort of number of new jobless claims on Thursdays, you know? And I think it's a, I think that one of the things that we're going to have to reconcile with in 2021, as we try to reconstitute and kind of rebuild from where we were, is getting more granular and specific about, again, who was affected and why and how and what the right path forward was. Because we're using very blunt instruments that I don't think are necessarily going to get us to where we need to be. Yeah, I totally agree. It's been, you know, it's already been such an overload seeing those top. line numbers. So yeah, the next step once we get past that is definitely to see, you know, some of the granular consequences. This episode is brought to you by crypto.com, the crypto super

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Let's shift over to crypto for a minute. You know, when all was said and done, what were the biggest Bitcoin or crypto stories of the year? Yeah. I mean, I think 2020 has been one of those years where the adage that there are some weeks where decades happened couldn't be more fitting. One of the biggest stories, I think,

was the diversity in institutions that are interested in and taking actionable steps towards that interest in Bitcoin in a way that they haven't until this year. You know, the story of institutions are coming has been going on for a really long time, but it really came to the forefront this year with macro funds like Paul Tudor Jones, public companies like Square and micro strategy especially, and more recently insurance companies, an insurance company, mass mutual, and then even investment banks that are publishing research and exploring potential custody of digital assets are actually entering the space in a way that they really haven't before. And I think this has significantly reduced the headline and

career risk of becoming educated and then eventually allocating to Bitcoin or crypto or, you know, creating a business line that's supportive of the industry. I also think the OCC's interpretive letter that provided more regulatory clarity on banking at crypto companies and providing digital asset custody service is a big win for the industry. And what that does is it paves the way for optionality in service providers for both retail and institutional investors. And it also creates opportunities for existing crypto service providers to kind of partner with some of these traditional financial institutions to help them serve this new market. And then to add to that, you know, more on the retail side, I think PayPal's decision to

support digital assets like Bitcoin is huge news. People have said that retail users have been missing in this rally, you know, due to lower Google searches of Bitcoin. But if you look to some of the initial data that's come out of this news, I think PayPal reported like two to three times more interest via waitless signups than they initially expected. And then I also saw on Twitter,

this Missouho survey of U.S. PayPal users found that almost 20% of them have already traded Bitcoin since PayPal. Paul rolled out the capability. And to add to that, you know, we've seen consistent growth in Bitcoin volume through Squares Cash App. And then a recent survey that I think Noel from CoinDesk actually linked in her newsletter recently was from DeVir Group that said that more than two-thirds of their millennial clients surveyed prefer Bitcoin to gold as a safe haven asset. So I think these are really some of the most important headline stories in the crypto industry this year.

Yeah, I mean, it sounds like in some ways it's the story of new market participants. And I think that the institutions have obviously gotten a lot of the headlines for exactly the point that you made, which is that we've had this sort of Paul Revere, the institutions are coming, the institutions are coming forever, and it's finally actually happening. It's also happening based on a narrative that I think is resonant with and, and, stems from the Bitcoin space rather than something that's sort of external to it. But I also think to your point, though, that PayPal creates, you know, this sort of bottom-up, I mean, in Cash App as well, this sort of bottom-up new market entrant thing that's pairing

with that to just drive a lot more people into the space as a whole. Definitely. I guess beyond kind of Bitcoin specifically, what segments of the crypto industry have you guys been most closely paying attention to looking at the data, researching, et cetera? Yeah. Bitcoin has definitely been a big focus this year and the market infrastructure around Bitcoin. I think the next logical, you know, something that I personally want to do more research on next year will be things like stable coins and central bank digital currencies. And also, you know, I think we're starting to get a lot of questions as institutions kind of learn about Bitcoin, make the allocation to Bitcoin, and kind of think about what's next.

Ethereum is a logical area of research and further exploration for us. So those are kind of the things that I'm looking forward to next year. Do you think so, yeah, I'm interested in the stable coin and CBDCs. what's your take on how the, I mean, stable coins have had an unbelievable year. They're up over $22 or $23 billion in circulation from $4.7 or $4.8, I think, at the beginning of the year. And obviously the conversation around CBDCs has exploded. As it relates to the type of people that you're talking to thinking about day and day out, is that sort of thing on their radar yet?

Or is that still a step removed with the focus so much on Bitcoin right now? Yeah, I think it is on their radar. You know, it's hard to ignore that kind of growth, like you said. You know, stable coins have grown from less than $5 billion in January to more than $25 billion, I think, as of more recent. And, you know, it shows how instrumental that they've become to the crypto ecosystem. And then you have news like, you know, Visa saying it could potentially launch a USDA-backed card. And I think what we're seeing is previously stable coins were really confined to their utility in crypto capital markets. And their main purpose was to provide stable liquidity and make it easier to trade because they're less volatile collateral unit of account.

But, you know, I think their role in centralized and decentralized capital markets has grown. and this is what I think might drive some of more interest from the clients that we talk to, but it's grown in that they provide the ability to earn really attractive yields compared to near zero yields that are offered on digitized fiat currencies that are sitting in traditional financial institutions. And then, you know, so that provides a potential opportunity for them, though, you know, it's still developing, it's still small. So I think that needs to kind of grow in order for there to really be inflow of institutional capital there. And then beyond capital markets, we've seen stable coins evolve to use cases like payments, savings, remittances, and settlement for different stakeholders, as they kind of recognize the open and borderless nature of stable assets that operate on public blockchains.

But that's something that I'm personally more interested in and, you know, in expanding on and kind of sharing the insights with two institutions. And then I think regarding CVDCs, a question that we get from institutions that are newer to the space and are still trying to understand the different value propositions of different crypto assets, I think their question. question is around what does, what is the impact of CVDCs on Bitcoin or are they competitive, you know, what, what, what effect does the potential introduction of central bank digital currencies have on Bitcoin? And at a high level, you know, I think in a future where CVDCs are the norm, that kind of bodes well for digital assets like Bitcoin because the widespread use of these, you know, blockchain native currencies could potentially onboard a new set of users to digital and or crypto wallet infrastructure and user experiences. And then the other angle there

is that one of the reasons, I think, that central banks are exploring central bank digital currencies is that it could allow them to more effectively implement monetary and fiscal policy decisions. And, you know, I think in that situation, that's the benefit for the central banks, but that also potentially increases interest in a non-sovereign asset that, you know, has encoded monetary policy and provides like a safe haven in the case of continued monetary inflation. So those are the two angles that we kind of approach that question with. This is a point that I still think is kind of left behind a little bit. We spend more time on the, well, this could create some good on and off ramps for Bitcoin than the monetary policy itself

reinforces the raise on debt for Bitcoin when it's going to be as newly manipulable. I mean, frankly, like even if you are optimistic or at least interested intellectually in what of experiments will see with monetary policy in the central bank digital currency era, the fact of something that is programmed and fixed from a monetary policy just as an alternative makes so much sense, you know? So I think that's a really good point. I guess what is, as you guys think about risks to Bitcoin in the years to come, I'm sure this is something that comes up for your clients. What are the things that are at top of mind for you? The way that I've been thinking about this really since I joined the industry,

I think one of the biggest risks that we've been encountering year over year is really just continuing education. You know, Bitcoin makes explicit tradeoffs that are really difficult to understand at first glance. And while I do think it is easier to wrap your head around than other more complex digital assets and blockchain networks, there's still no clear one-to-one analogy. And, you know, this is something that you've talked about in the past, something that we've really tried to clarify in our research, and this is that the narratives in this industry are really dynamic. And sometimes they're complementary,

but sometimes that they can be conflicting. And this presents a challenge across retail investors, savvy institutional investors and traditional financial institutions that may not have a keen understanding of the asset class and kind of write it off before really understanding it. But if you ask me how concerned I am about the lack of understanding or education today versus like two years ago, it's definitely come down significantly. And just because something is the biggest risk, it doesn't necessarily mean it's, you know, a great risk. I think it's going down especially with the fact that, you know,

what I love about this industry is that information is so open. You have such great educational tools available. And another thing that we've seen is research has become a core focus across different service providers. And now we're seeing more sell-side firms start to cover the industry. industry. It's just a matter of making sure that they have the narrative and story straight. Love it. Yeah, and I completely agree. Obviously, I'm a huge fan of how much dynamic information sharing ideas are flowing through this. And I appreciate you taking some time to share yours. I guess just one question to wrap up, a fun little one that I've been asking everyone.

What's one prediction that only you have? Yeah, it might not, I might not be the only one who has this prediction. But, you know, one thing that I've been thinking about going into next year is given the entrance of traditional financial institutions and the maturation of crypto-native companies, I think the potential for M&A between these two segments has really never been higher, especially as the clients of more and more of these traditional. institutions start to ask about and demand digital asset services. And then, you know, the easiest way for traditional institutions to kind of ramp up and support and satisfy this demand might be M&A. But then on the flip side, you know, I do think that the maturation of crypto-native companies has been really impressive. And over time, you know, they could come to be. become top-tier financial institutions that started off as cryptocentric companies,

but eventually contend with some of the traditional financial institutions of today. And I think that's a similar trend that you're seeing in FinTech more broadly. So that's something that I'm excited to keep a pulse on going into 2021. Love it. Awesome. Well, Ria, thank you so much for hanging out today for sharing these insights. Really appreciate all the work you do. and look forward to having you back on the show again. Thank you so much, Daniel. Thank you for having me on.

It was a pleasure. And yeah, happy holidays and happy New Year.