The Breakdown - Why One Stablecoin Is Being Backed by Bitcoin

Starting point is 00:00:00 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 nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, February 23rd, and today we are discussing a few catch-up issues, follow-ups on stories that we've had over the past couple days, as well as looking at why one. unstable coin is going Bitcoin. First, however, if you're enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to get deeper into the conversation, come join the Breakers Discord. The conversation is absolutely popping off. You can find a link in the show notes,

Starting point is 00:00:53 or go to bit.com.com. Finally, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Now, as I mentioned today, we're going to start by catching up on some recent situations. They are all extremely fast evolving, and I want to be a tour guide to the insanity that is happening right now. Let's start with Russia and sanctions. To get a sense of how things evolved overnight, let's look at just a sample of the headlines. The New York Times says Ukraine vows to defend itself as Putin remains defiant. The Wall Street Journal, Ukraine prepares for war, urges citizens to leave Russia. The big piece of news is that Ukraine has declared a state of emergency and has begun mobilizing reserve troops.

Starting point is 00:01:37 Now, where we left off the discussion yesterday around sanctions was that we were waiting for the Biden administration to announce what they would be doing. Here's the prepared tweets from Biden. The information came out just as I was finishing the show, of course, and here are the summary tweets from President Biden. Today, in close coordination with our allies and partners, I am announcing the first tranche of sanctions to impose costs on Russia in response to yesterday's actions. We will continue to escalate sanctions as Russia escalates. We are implementing full-blocking sanctions on two large Russian financial institutions, VEbb and their military bank, and we are implementing comprehensive sanctions on Russian sovereign debt. That means we've cut the

Starting point is 00:02:17 Russian government from Western financing. It can no longer raise money from the West and cannot trade its new debt in our markets or European markets. Starting tomorrow and continuing in the days ahead, we will also be imposing sanctions on Russian elites and their family members. They share in the corrupt gains of the Kremlin's policies and should share in the pain as well. Because of Russia's actions, we've worked with Germany to ensure Nord Stream 2 will not move forward. So the question, of course, is how did people respond to this? Did they see this as strong sanctions that were promised or something different? Here's Bloomberg's headline. Biden's first salvo of Russia sanctions hits with thud, not roar. Going on, they write, instead of a sweeping package that crippled top Russian banks,

Starting point is 00:02:58 cut its financial tractions off from the global economy or personally singled out President Vladimir Putin, the U.S. and its allies settled on a modest first tranche of penalties. Markets responded with a shrug. The sanctions hardly amounted to the precedent-shattering economy-cripling measures, the U.S. and its partners long telegraphed if Russian troops were to roll across the border. Brian O'Toole, a senior fellow at the Atlantic Council, called the sanctions, quote, incremental and said, We must wait and see if the U.S. will impose the impact they've promised for further

Starting point is 00:03:28 and how that is defined. I fear at the moment that Putin may not think the West has the stomach to follow through. Both sides of the aisle in the U.S. are targeting Biden around this. Lindsay Graham called it the 1930s all over again, but Senator Bob Menendez, a New Jersey Democrat who also chairs the Foreign Relations Committee, made a similar analogy, saying, I don't know what we need to wait for. What we can't have here is another Munich moment, which is a reference to a 1938 agreement that allowed Nazi Germany to seize a part of Czechoslovakia. The EU, for their part, followed through on their sanctions, including restrictions on Russian bonds, bringing it in line with the U.S. A funny quote on that from Peter Zahan, who shared a news article about the EU's proposed sanctions and said, is it enough to make Putin change his mind? Of course not. But if we get sanctions out of the Europeans today, it would be the fastest the Europeans have moved on anything ever.

Starting point is 00:04:19 Australia, Canada, and Japan also imposed sanctions. Australia, for example, announced travel bans and financial penalties on eight members of Russia's Security Council, and China unsurprisingly disagreed with sanctions. A spokeswoman for China's foreign ministry said the position of the Chinese government is that we believe that sanctions have never been a fundamental and effective way to solve problems, and China always opposes any illegal unilateral sanctions. So what about the commentary from the Twitterati? Well, there were a few different extremes to the conversation. One position that I will sum up as the sober about the potential impact, but it's still important to do these sanctions, comes from Ben Rhodes, the host

Starting point is 00:04:57 Pod Save the World on MSNBC, who said, The Putin we saw yesterday clearly won't be deterred by sanctions, so this is more about imposing a cost over time, which is why it's important to focus above all on Russian elites who have participated in kleptocracy and aggression. There's also the important matter of reinforcing the principle that doing things like invading a country and attempting to redraw the borders of a sovereign democracy

Starting point is 00:05:18 will harm a country's economic interests. Another category of responses on Twitter were the, This is laughable. Ian Dunt, who's a columnist at INews paper in the UK wrote, the argument about keeping some sanctions in reserve would make more sense if the first round was of any impact whatsoever. Two or three rounds of f-call still amounts to fuck-all. We've got to keep something in the cupboard in case Putin goes further. Yes, I shouldn't worry too much about that. His network of oligarchs owns half of our capital city. You've plenty

Starting point is 00:05:45 left in the cupboard, you hapless, disingenuous cowards. And then there's a position which I'll call the this was never going to work. Exemplified by Richard Haas, who's the president of the Council of foreign relations. Many are calling for tougher sanctions versus Russia, but there is little in the history of sanctions, suggesting they can be decisive, especially as Russia has built up its foreign currency reserves, benefits from high oil prices, and has China in reserve if needed. Meanwhile, right now, government sites and banks in Ukraine again appear to be hitting by a cyber attack. Markets are pretty flat in their reaction to all this, which means they are also underwhelmed by what they're seeing from global governments. A last note on Russia before

Starting point is 00:06:24 move on, a small narrative watch. CBS News tweeted today, the U.S. economy has been hit with increased gas prices, inflation, and supply chain issues due to the Ukraine crisis. You might be thinking to yourself, wow, that's a bit of a shifted narrative about why gas prices, inflation, and supply chain issues are happening. Dimitri Kofinus from Hidden Forces wrote, to be clear, this is not why we have inflation, increased gas prices, and supply chain issues. We have those things because we shut down the economy, disincentivized investment in oil and gas, and printed a lot of money. In fact, there are so many people noticing this narrative shift and so many quote tweets of the CBS News tweet that due to the Ukraine is actually trending on Twitter right now. Nexo is a trusted and easy to use crypto platform where you can buy cryptocurrencies at the touch of a button and start earning up to 18% annual interest that is paid out daily.

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Starting point is 00:08:12 Buy now at getarculus.com. That's G-E-T-A-R-C-U-L-S dot com. The breakdown is sponsored by FTX US. FTX-U-S is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. Now let's move to another update and let's go back to Canada.

Starting point is 00:09:05 One of the sub-dramas of the trucker protest story is the impact of Bitcoin on a protests that a government is trying to use financial means to shut down. When GoFundMe and other normal Fiat fundraisers were shuttered, some Bitcoiners organized a tally coin fundraiser. They raised about 20 BTC, and nearly all of that is now gone from the recipient addresses. On February 16th, Canadian authorities ordered that all financial firms stop facilitating transactions for 34 wallets associated with the protest. And that evening, an address connected to the tally coin fundraiser sent 14.28 Bitcoin to 101 addresses in fractions of zero. 0.1 for Bitcoin each. The next day, February 17th, in a separate legal fight brought by locals

Starting point is 00:09:45 affected by the protest, the Ontario Superior Court of Justice ordered nine crypto platforms to freeze accounts associated with 120 crypto addresses belonging to protesters and people in the broader movement around the protests. The tally coin sending address for the February 16th transaction was mentioned in this injunction. Coin desk is reporting that on February 17th and 18th, four of the addresses on the injunction list sent their 0.1 for each Bitcoin to Coinbase and crypto.com, either directly or via intermediary addresses. It's not clear whether those funds were able to be cashed out or whether they got frozen on those centralized sites. Now, one of the companies that was targeted by the February 17th injunction was Nunchuk, which is a Bitcoin

Starting point is 00:10:26 self-custody service. They published their official response. Dear the Ontario Superior Court of Justice, Nunchuk is a self-custodial collaborative multi-sig Bitcoin wallet. We are a software provider, not a custodial financial intermediary. Our software is free to use. It allows people to eliminate single points of failure and store Bitcoin in the safest way possible while preserving privacy. We do not collect any user identification information beyond email addresses. We do not hold any keys. Therefore, we cannot freeze our users' assets. We cannot prevent them from being moved. We do not have knowledge of the existence,

Starting point is 00:10:57 nature, value, and location of our user's assets. This is by design. Please look up how self-custody and private keys work. When the Canadian dollar becomes worthless, we will be here to serve. view too. Sincerely the Nunchuk team. Snarky and funny though this may be, it obviously gets at the central issue of this tension between authorities and regulators and self-custodial networks, which is that the financial intermediaries simply don't work the same way they do in traditional finance. Now, outside of the crypto world, major news outlets are reporting that the Canadian government is now instructing banks to unfreeze accounts that had been previously frozen. This, of course,

Starting point is 00:11:31 is the biggest hullabaloo in this whole issue, at least for our little part of the world. From CNN, Isabel Jock, the assistant deputy minister of finance, told a committee of MPs that up to 210 bank accounts holding about $7.8 million were frozen under the financial measures contained in the Emergencies Act. Still, interestingly, there is a bit of fog of war around which accounts had been frozen. Again from CNN, conservative MPs had claimed that constituents' accounts were frozen after making small donations to crowdfunding sites. The Royal Canadian Mounted Police claim that only organizers and truck owners who refused to leave had their details handed over to banks to freeze accounts. When asked about this claim, Isabel Jock said, it would appear to be unlikely this occurred, but not impossible. So the key thing here is not that the conservative MPs are right,

Starting point is 00:12:16 but that the deputy minister of finance can't guarantee that they're not, and this is the problem with broad-based financial dragnets that are being carried out by civilian authorities. Analyst Will Clemente wrote, even if you disagree with truckers, be objective. Facts are, the government is trying to freeze bank accounts. People are learning the permissionless nature of holding their own Bitcoin private keys. Part of Bitcoin adoption is being used by people you dislike, and that's okay.

Starting point is 00:12:39 The Blockchain Association says as countries clamped down on financial transactions, it's critical we develop crypto networks. Take self-hosted wallets that allow P-to-P online transactions without middlemen. This was impossible before crypto and now seems critical to a free society. Samson Mao from Blockstream says, Canada is a cautionary tale for why money needs to be money and not a tool for surveillance. What's legal or illegal can change with a handwave of emergency powers. If you're not 100% sure, you'll always be on the right side of those in power. You'd better buy some Bitcoin.

Starting point is 00:13:08 Now, one thing this is teeing up in a huge way is a discussion around central bank digital currencies. This is very much dramatizing some of the central issues that people who are wary of CBDCs have long pointed to. Expect more on that in the months to come. Lastly, one more interesting story, although it's a little bit more industry inside baseball. Tara tweeted out yesterday, the Luna Foundation Guard, LFG, has closed a one big, billion-dollar private token sale to establish a decentralized U.S.T. Forex Reserve denominated in BTC. The $1 billion private token sale by LFG is one of the cryptocurrency industry's largest sales to date. The sale was led by Jump Crypto and Three Arrows Capital, with participation

Starting point is 00:13:48 from defiance capital, Republic Capital, GSR, Tribe Capital, and many others. One common criticism of algorithmic stable coins is their reflexive nature and the hypothetical risk of a bankrun scenario where demand to sell the stable outstripped supply in a way that causes compounding price decreases in both native tokens. Although the widespread adoption of UST as a consistently stable asset through market volatility should already refute this, a decentralized reserve can provide an additional avenue to maintain the peg in contractionary cycles that reduces the reflexivity of their system. The UST-4X reserve is a Luna Foundation Guard initiative to provide a further layer of support for the UST peg using assets that are considered less correlated to the Terra ecosystem

Starting point is 00:14:27 like Bitcoin. Doe Kwan, the founder of Terraform Lab, said a decentralized economy needs decentralized money, and decentralized money needs decentralized reserves. Eric Voorhees, the founder at Shapeshift, said Bitcoiners, check this out. UST, large decentralized stablecoin alternative to USDC, Tether, has acquired a large pool of Bitcoin to add backing to its mechanism. Example of the cooperative power of Bitcoin and DeFi. Bitcoin gets new demand as a Treasury Reserve asset, and U.S.T. Terra is hardened. as stablecoin money. And while governments bicker about how to regulate stablecoins, the industry is already moving past them. Decentralized stablecoins for the win. Nick Carter over at Castle Island

Starting point is 00:15:07 Ventures says, without commenting on the sustainability of UST, a Bitcoin reserve backing a stablecoin is an elegant way to harmonize the revealed preference of crypto users, to transact with stables, with the monetary soundness of Bitcoin. I'm used about this exact scenario in a white paper we wrote on crypto dollars in 2020. Cool to see it be realized in a meaningful way. Now, here's a quick excerpt of that paper on crypto dollars. Additionally, the question of the best approach to creating crypto dollars has not been fully settled. While the Fiat-backed model of crypto dollars is the overwhelming favorite at present, it's possible that alternatives could grab market share.

Starting point is 00:15:42 The alternative with the most mine share is the over-collateralized cryptocurrency-backed approach, which purports to be more resistant to regulation or state action, given that it relies primarily on a constellation of users creating dollar-denominated tokens by locking some risky collateral on-chain. However, it's fundamentally less capital-efficient, requiring an excess reserve of collateral for risk management, and the quantity of crypto-dollars produced is more of an externality of these systems than their direct purpose. A model that is both capital-efficient and offers meaningful censorship resistance has long been a holy grail of the crypto-dollar industry. This was the objective of high-profile projects like BASIS, which was

Starting point is 00:16:16 scuered after a $133 million capital raise. Several newer projects are taking on this challenge and will seek to displace the more centrally controlled fiat-backed systems. Lastly, questions remain about the role that cryptocurrency will play in crypto-dollar creation. Will it be ignored in favor of fiat or gold backing? Will it be employed as risky collateral in an intricate set of interlocking smart contracts a la Maker? Will it be used in tandem with derivatives exchanges to create non-bank Bitcoin-backed dollars, as value does? Or will exchanges themselves come to use crypto deposits as collateral against which they can issue crypto dollars, something they already do with fiat currency and bank accounts. While cryptocurrencies like Bitcoin are meaningfully differentiated in terms of settlement

Starting point is 00:16:56 quality and liability-freeness, serving as collateral backstopping the issuance of crypto dollars would be significantly accretive in terms of driving demand for the assets and the narrative surrounding them. So there is lots of detail that we could get into around how Luna works, but to me the clearly significant thing here is that this is another push in the direction of the symbiotic relationship between Bitcoin and Defi. This is territory that Stax has pushed into, and I think you're going to see a lot more in the months and years to come. So much going on in the world. I still have another full show of updates that I could have.

Starting point is 00:17:28 I guess that's what we'll do tomorrow. But for now, I want to say thank you to my sponsors, nexo.io, Arculus and FTX for supporting the show. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why One Stablecoin Is Being Backed by Bitcoin

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