The Breakdown - Why Is the Fed so Scared of 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. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, August 21st, and that means it's time for the weekly recap. Let's do a good old-fashioned news roundup, and let's start with some exchange news. First, on Binance. news broke a couple days ago that former Coinbase General Counsel and former acting comptroller of the currency, Brian Brooks, was leaving the CEO role of beleaguered Binance. He tweeted,

Starting point is 00:00:48 Greetings, Crypto Community, letting you all know that I have resigned as CEO of Binance U.S. Despite differences over strategic direction, I wish my former colleagues much success, exciting new things to come. Now, a couple weeks later, we're getting a little more inside info about what was going on. If you'll remember, Brooks had done an interview with Forbes where he, one, tried to draw a clear distinction from Binance the parent company, saying that Binance U.S. just licensed the name and shared a board member in CZ, and two, he said that they were in the middle of a big fundraise. That suddenly, seemingly days later, whoosh. Now, according to Bloomberg in the New York Times, those strategic differences were about the inability to complete that raise. Binance US was apparently trying to raise about $100 million but could not get investors comfortable

Starting point is 00:01:37 with legal questions hanging over the head of Binance. They were worried about current investigations and couldn't get over the fact that CZ had a 90% ownership stake in Binance US. So that's that and the saga continues. Meanwhile, Binance also just announced yesterday that it would now be switching its model and all users would be required to submit KYC. This is, of course, a big shift from just a few months ago and shows how much the regulatory landscape for these exchanges has changed with increased scrutiny this year.

Starting point is 00:02:10 Let's now switch over to the big U.S. exchange that Binance U.S. is trying to supplant, Coinbase. Coinbase announced yesterday that they had gotten the green light from their board of directors to purchase more than $500 million worth of crypto for their balance sheet. This came after it was revealed that Coinbase has around $4.4 billion in cash-and-cash equivalence stored in case of a prolonged crypto winter. In addition to the $500 million up front, Coinbase will also be investing 10% of all future profits in crypto, and CEO Brian Armstrong said in a tweet, I expect this percentage to keep growing over time as this crypto economy matures. Now, people have been asking for some time if Coinbase was going to be a leader and put its

Starting point is 00:02:50 money where its mouth was when it came to building out a crypto economic system by putting crypto on its balance sheet. Indeed, CFO Alicia Haas's blog post about this news as much as said that. She wrote, we believe in the crypto economy, a future where economic transactions, buying, selling, spending, earning, will be based on crypto assets. Our products strive to make that vision a reality by making crypto trusted and easy to use for customers around the world. Today, the majority of Coinbase corporate financial transactions such as how we pay our vendors, employees, or invest corporate cash, remain heavily weighted in Fiat. We're in a strong position to lead by example and double down on how we can enable crypto adoption and utility,

Starting point is 00:03:29 starting with how we operate our business. Now, what about which assets will be invested in? Well, Haas had this to say. Quote, we will become the first publicly traded company to hold Ethereum, proof of stake assets, defy tokens, and many other crypto assets supported for trading on our platform in addition to Bitcoin on our balance sheet. It's clear then that this is not exactly a Michael sailor-melting ice cube play at least not alone, but instead a bet on the growth of the entire ecosystem. The breakdown is sponsored by Nidig, the institutional grade platform for Bitcoin. As long-time listeners know, Nidig is a major force in the Bitcoin space, and they're now making it possible for thousands of banks who have trusted relationships with hundreds of millions of

Starting point is 00:04:20 customers to offer Bitcoin. That mainstream access is critical for all of us, and you can learn more about it at nydig.com slash nLW. That's nydig.com forward slash nLW. Now let's talk about some governmental intrigue, specifically around the Fed. Around the middle of each month, the Federal Reserve releases the minutes of the previous month's Federal Open Market Committee or FOMC meeting. This is the meeting where the central bank sets monetary policies such as interest rate decisions. Last month was the first time cryptocurrencies and stable coins have come up as a formal topic for discussion during the closed door meetings. According to the minutes, quote, some participants cited various potential risks to financial

Starting point is 00:05:05 stability, including the risks associated with expanded use of cryptocurrencies, end quote. Some officials also discuss stable coins, saying, quote, fragility and lack of transparency associated with stable coins, the importance of monitoring them closely, and the need to develop an appropriate regulatory framework to address any risks of financial stability associated with such products. The notes don't say which of the 11 member committee voiced these concerns, but we too know that many Fed members, such as Neil Kishkari, have been vocally opposed to crypto recently. Kishkari ripped into crypto earlier this week saying it was 95% scams and blah, blah, blah, blah, I talked about that the other day, but I think we can chalk him up at least to not being a supporter.

Starting point is 00:05:45 So why is the Fed afraid of stable coins? Well, it seems pretty clear that at least some people see stable coins as Eurodollar 2.0. Eurodollars refer to U.S. denominated deposits originated in offshore financial institutions that are outside the purview of the U.S. regulatory system. Euro-dollars are an absolutely integral part of allowing the world to function on the global dollar system, but they're also a pretty serious impediment to the efficacy of monetary policy. Eurodollars are a larger system than actual regulated dollars, which has a pretty dampening effect on monetary policy, given that that monetary policy doesn't impact more than half of the world's quote-unquote dollars. This is why some, like Jeff Snyder, laugh at the

Starting point is 00:06:26 degree to which the market hangs on the Fed's every move. In his estimation, the global Eurodollar system makes the Fed's monetary policy radically toothless, except insofar as it is theater that gets the market to behave in a way that it would want its policy too. In that light, if you're already concerned with lack of control over this type of legacy dollar equivalent, then it's not hard to see how a new type of digital dollar equivalent, also out of your purview, would cause red flags. Either way, the fact that the Fed is explicitly discussing crypto and stable coins shows just how far the industry has come as a market force. A couple more quick things before we wrap on this brief little one today. First, a really interesting study from Chainalysis who released their 2021 Global Crypto Adoption

Starting point is 00:07:09 Index. They rank countries adoptions by metrics that include on-chain value received, on-chain retail value received, and P2P Exchange Trade Volume. Based on those metrics, Vietnam comes out first, followed by India, Pakistan, Ukraine, Kenya, Nigeria, Venezuela, and all the way after that, the U.S. Now, of course, a wading of different metrics differently would produce a different list, but still, perhaps some surprising places at the top of this particular method. Next, something to preview for made a larger discussion next week. Naval Ravikant tweeted this week, the inflation hedges are shifting from gold, art, and farms, to Bitcoin, NFTs, and tech companies. Dmitri Kofinas quote tweeted that, saying,

Starting point is 00:07:52 I don't think this is what's happening. This is not an inflation story. Bitcoin, NFTs, T's, tech stocks, etc., are symptoms of a structurally disinflationary world held together by cheap money. They are lottery tickets chasing yield. They're not a hedge against rising prices. So hold aside the characterization of Bitcoin as a lottery ticket. At the very core of this debate is a huge difference in understanding of the dominant macro frame. Inflation is the big concerning force on the one hand, structural disinflation on the other. For what it's worth, there are bitcoins on both sides of this.

Starting point is 00:08:25 people like Kathy Wood and Jeff Booth on the structural disinflation and deflation side, and the Michael Saylars and many more on the side of inflation. It feels like there's something more to explore here and having this debate internally could actually be pretty productive to understanding how Bitcoin operates and exists and functions in a variety of different macro contexts. Finally, happy damn weekend. I'm not sure what will have happened by the time you hear this, but as I'm producing it, Bitcoin is up 2% in the last hour to 48,500.

Starting point is 00:08:54 Sometimes I think it's great to analyze. Other times I think it's just good to enjoy. So for now, I will say, I hope you're having a wonderful weekend. I appreciate you listening as always. And until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why Is the Fed so Scared of Stablecoins?

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