The Breakdown - Why We’ll Remember This Banking Crisis as a Turning Point for Bitcoin

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Starting point is 00:00:45 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 produced and distributed by CoinDesk. What's going on, guys? It is Sunday, March 26th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go. 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.ly slash breakdown pod. All right, friends, back with another long read Sunday. And today

Starting point is 00:01:23 we are exploring really the themes that we've been exploring pretty extensively all of this week and pretty much the week before it as well. And so we're going to kick this off with another piece from Michael Casey from Coin Desk called This Crisis Will Define the Future of. of money. I think the title of the piece is pretty self-explanatory, so let's dive in. Michael writes, 10 years ago, a strange new digital currency called Bitcoin caught my attention for the first time as its price surged during the Cyprus banking crisis. Local authorities had infuriated Cypriots by slapping a 10% tax on withdrawals, unwittingly encouraging some to warm to

Starting point is 00:02:01 the idea of bankless digital money. I'm not alone in seeing parallels between the past week's events. Again, Bitcoin's prices rallied on speculation that stress among U.S. and European banks will open people's eyes to the leading cryptocurrency censorship-resistant intermediary free qualities. But if this is Bitcoin's Cyprus moment, the context is very different from 2013. With crypto now embedded in public consciousness, negatively mostly, the industry faces its biggest ever test, one that involves an intensified struggle with the financial establishment. The community now has a narrow opportunity to seize the day and define the future of money. Echoes of 2008-2009.

Starting point is 00:02:37 Recall that the Bitcoin blockchain was born out of the chaos of the 2008-2009 financial crisis, with Satoshi Nakamoto's Immortal Timestamp on January 3, 2009, inscribing a headline from that day's London Times, Chancellor on the brink of second bailout for banks. That crisis highlighted how our dependence on banks to run the plumbing of our money and payments leaves the entire economy vulnerable to mismatches in banks' investments and liabilities,

Starting point is 00:03:00 which can undermine their ability to honor deposits. And it showed how the largest banks, whose interwoven credit exposure creates systemic risk, exploited their too big to fail status. The idea that governments would always bail them out to protect the economy, to place asymmetric, high-return risky bets. It showed how Wall Street and other financial centers, in effect, hold our democracy's hostage. Now with the collapse of three high-profile banks, hundreds of regional banks facing worrying outflows,

Starting point is 00:03:25 the U.S. Federal Reserve creating a new backstop facility reportedly worth $2 trillion, and Switzerland's central bank bailing out credit suites to the tune of $54 billion, dollars, the echoes of that prior crisis are loud. As the Fed and Federal Deposit Insurance Commission scrambled last weekend to put a funding plan in place so that thousands of startups with deposits at Silicon Valley Bank would meet payroll this week, we got a flashback to September 17, 2008. On that day, two days after the collapse of Lehman Brothers, the reserve primary fund, used by companies to manage their cash reserves, quote-unquote, broke the buck.

Starting point is 00:03:56 We feared that failures at similar short-term money market funds would lead to widespread chaos and the economy-wide system for paying employees and commercial contractors. It's not only the familiarity that's striking here. It's also the cause and effect. A direct line can be drawn from SVB's failure to the policies introduced in the wake of that prior crisis. In 2009, with the divided U.S. government unable to agree on fiscal solutions to revive growth, the Fed launched what would become a multi-year quantitative easing program, delivering a surfeet of dollars that left Silicon Valley's venture funds flush with money that they poured into startups. Those companies deposited the funds at SVB, which in turn made what must have seemed a conservative investment choice at the time.

Starting point is 00:04:35 It plowed the cash into long-term U.S. government bonds and mortgage-backed securities. The problem was that in January 2022, once the Fed finally acknowledged that its easy monetary policies had stoked sustained inflation, it started aggressively hiking rates. This tanked the bond market and lumped massive losses on SVB, which had made the fatal error of not hedging its interest rate risk. Now, as fear spreads to smaller regional banks, depositors have fled en masse into Wall Street's too big to fail and institutions, making them even bigger, to an unprecedented degree that will position an elite group of bankers as gatekeepers of our economy, a centralizing power that's already showing signs of overreach. Crypto as the bad guy. Bitcoin's raison d'etre has always been that in removing

Starting point is 00:05:17 intermediaries from payments and hard-coding monetary policy into a predictable issue in schedule, it offers an alternative to the centralized model of fiat sovereign currency run by central banks in coordination with private banks, and so mitigates the entrenched vulnerabilities exposed by this past week's events. At first blush, however, the news hasn't been good for Bitcoin and the rest of the crypto community. Silvergate Bank, the first of a trio to collapse, was brought down in part by its heavy exposure to failing crypto firms. That encouraged anti-crypto politicians like U.S. Senator Elizabeth Warren to call for tough measures against the industry, helping feed a guilt-by-association impact on SVB, although that bank's actual exposure to crypto was proportionally quite low. With authorities,

Starting point is 00:05:57 last weekend also shuttering signature bank, another crypto favorite, the government is either intentionally or indirectly using its relationship with these gatekeeping financial institutions to squeeze the industry. Crypto companies that previously banked with one or more of these three shuttered institutions have been rejected repeatedly by bank compliance officers as they desperately try to open alternative accounts. Although the New York Department of Financial Services said signatures closure had nothing to do with crypto and was instead triggered by a, quote, crisis of confidence in its leadership, people are scratching their heads over why a supposedly solvent bank was shut down. Former U.S. Representative Barney Frank, now a board member at Signature,

Starting point is 00:06:32 speculated in a New York magazine interview that the New York financial regulator had made the bank, quote, a poster child to say, stay away from crypto. Later, Reuters reported the FDIC is insisting that any prospective buyer will have to give up on signature's crypto business. The regulator later denied that report. NLW note right here cutting into Michael's piece. After he wrote this essay, signature was in fact sold. And as part of it, the buyer did. did not buy the crypto business, leading many to think that there was actually, if not an explicit prohibition against buying the crypto business, certainly some pressure not to. All right, back to the piece. Blacklisting a legal industry in this way is an abuse of power. But if that is what the

Starting point is 00:07:13 NYDFS was doing, presumably in coordination with federal agencies, for now, there's little crypto leaders can do about it. Meanwhile, stable coins, which are vital to fiat-to-crypto exchange operations have been caught up in this. When Circle Financial announced that some of the reserves backing USDC were held at Silicon Valley Bank, the stable coin briefly lost its one-to-one peg to the dollar. That situation has been resolved, but the closure of signature bank has meant Circle can no longer use its 24-7 signet dollar clearing system for redemptions, forcing it to rely solely on the time-bound services of Wall Street behemoth B&Y Mellon. Still, as Angel Investor and Myth of Money newsletter author Tatyana Kaufman wrote in a coin desk op-ed last week, Bitcoin is made for this moment. If you

Starting point is 00:07:53 will continue to lose confidence in banks' ability to keep their money safe, the narrative around Bitcoin's self-custody model will only get stronger. Its appeal will be further enhanced if the Fed is forced to reverse course and cut interest rates, which could weaken the dollar. That prospect grew stronger last Thursday, with news of an unexpected softening in U.S. inflation. I see all this playing out in a complicated, multifaceted clash of power, one that ultimately compels governments to accelerate the implementation of new regulatory frameworks for the coming era of digital money. On one level, the bank failures underscore the need to divorce payments from crisis-prone fractional reserve banking, precisely the solution for which fully

Starting point is 00:08:27 reserved stablecoins are designed. Given the USDA's stablecoin hiccups this past week, the argument will grow for requiring stablecoin issuers to hold banking licenses with access to the Fed's discount window, rather than storing their reserves at third-party traditional banks. This is what Wyoming-based Custodia Bank applied to do only to be rejected by the Fed last month, and what now seems to be an especially boneheaded response. Circle 2 has long expressed a goal to become a bank. If this model is endorsed, how will the traditional banks respond. They're not going to want these new crypto players poaching their depositors, a super-cheap source of financing, whose departure could provoke an even bigger banking crisis.

Starting point is 00:09:01 Might governments revert to direct control via a central bank digital currency? With CBDCs, it's believed that central banks can apply targeted differentiated interest rates, including negative interest rates, to incentivize people to continue storing their savings with higher-paying traditional banks. Complicating things for governments, those same people could just exit their national currency altogether and put their savings in cryptocurrencies like Bitcoin. As the struggle to control the digitization of fiat money progresses, the OG digital currency will stand as a hard money alternative. Does that mean Bitcoin becomes a real competitor to sovereign currencies for payments?

Starting point is 00:09:32 Not necessarily. While it's possible that developing nations facing monetary outflows amid this uncertainty will follow El Salvador's lead and declare Bitcoin legal tender, the use of existing national currencies will likely remain entrenched in larger economies. Technologically, Bitcoin still has to prove itself as a payments mechanism. Still, Bitcoin's mere presence as a competitor could pressure governments to, to change things up, especially as different economies such as China's, sees a competitive advantage in monetary digitization. The countervailing force in all of this is the public perception of crypto technology, which right now is deep in negative territory following the blowups of last

Starting point is 00:10:05 year. Those events left millions of retail investors with losses and stoked the impression of a community dominated by scammers and selfish bros obsessed with gaudy trappings of wealth. At its core, money is a confidence game, a matter of faith and trust among the population that uses it. It's likely confidence in governments and their banking partners will weigh in in the aftermath of this banking crisis. But crypto is, for now, dealing with an even bigger mistrust problem. As this battle to redefine money unfolds, it's incumbent on members of the crypto community to engage in behavior that breeds confidence. If they can achieve that, the future is theirs. All right, so that's Michael kind of setting up the context. Obviously, a lot of this stuff

Starting point is 00:10:40 is things you've heard before, but I think he does a good job of putting it all together as the framework. But let's check in on where the conversation might actually be, as I think that's the most relevant part. Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, and more. Use code Breakdown to get 15% off your paths.

Starting point is 00:11:21 Visit Consensus.com. or check the link in the show notes. This next piece comes from another coin desk writer George Kulutis, who writes, Bitcoin is a clear winner of the U.S. banking crisis. The narratives around bank failure, stable coins, and interest rate hikes seem strong enough to repel the price of Bitcoin. George writes, Silicon Valley Bank failed on March 10th, and since then, the price of Bitcoin has been on a tear.

Starting point is 00:11:47 In the early hours of March 10th, Bitcoin was trading around 19,600. It whipsod just above and below 20,000 until 12 p.m. Eastern time, when it was announced that SVB was going into FDIC receivership. At that point, Bitcoin shed $200 to dip below $20,000, jumped around a bit, and spent most of the weekend trading above $20,000. By Monday, March 13th at 9.30 a.m. Eastern Time, it was trading at 22,386. And then the fun began. Just 24 hours later, Bitcoin was trading at 26,175, at one point even touching up against 26,500. As a publication, it is currently sitting around 26,700. NLW note again, obviously we've seen Bitcoin up above. 28,000 at the time that I'm recording this, which is actually early in the week because I'm

Starting point is 00:12:29 traveling. So who knows what has happened since then? Back to George's piece. I've maintained that narrative matters a lot when it comes to the price of assets. If you don't believe me, you could ask Fed Chair Jerome Powell, who said that, quote, people's expectations of inflation have a real effect on inflation. So what happened to the narrative to lead to this type of aggressive 35% trough to peak change? It's simple, really. A lot happened. On one hand, the bank failures. Given In Bitcoin's history, the bank failure adjacency is obvious here. Ellie's three banks have failed. Others, both American and non-American, are failing. Because it's not because of Bitcoin, that's good for Bitcoin's price.

Starting point is 00:13:04 Actually, it isn't clear who was at fault for the three bank failures, because who even knows if these banks are failing due to insolvency. Sure, SVB failed due to an old-fashioned bank run that was spurred on due to apparent weaknesses on its balance sheet because of poor duration risk management. And yes, Silvergate was running into some issues and had to take an FHLB loan, but its eventual winding down was reportedly voluntary. And then we have signature bank where even the regulators can't figure out if the bank was shut down because of crypto or because of a crisis

Starting point is 00:13:27 of confidence in leadership. Let's add on the fact that there are wider risks to the broader financial system. Credit Suisse just received a $50 billion Swiss franc loan from the Swiss Central Bank and 11 banks just injected $30 billion into the California-based regional bank First Republic Bank in order to save it. NLW note again, lull, it's unbelievable how fast things change. Obviously in the two days or so since George wrote that, things have changed dramatically for both of those banks. But I digress back to George's piece. former, it is telling that the central banks want to save Credit Suisse. On the latter, it is even more telling that banks want to save a competitor for fear of contagion. Otherwise, why wouldn't they just

Starting point is 00:14:02 let that competitor fail? That all said, we know one thing that isn't causing these banks to fail. These banks aren't in trouble because bets on crypto, Bitcoin, or the companies in those industries. What appears to be happening is that the fractional reserve banking system is understress due to rising interest rates and it's showing cracks. And so the narrative goes. As the banks fail, opt-out, and buy Bitcoin, that narrative is strong enough to propel the price. On the other hand, stable coins were unstable. With a failure of signature bank, we saw U.S. dollar stable coin USDC lose its dollar peg last weekend. USDC regained its peg during the week, but the loss of the peg rightly spooked a lot of people. To USDC's credit, it is worth considering how rapid its recovery

Starting point is 00:14:42 back to $1 was. That said, its DPEG did highlight that USDC is not immune from counterparty risk, as some may have erroneously thought. So if we establish that both USDC and the dollars in a bank account have counterparty risk, you might ask yourself, is there anything without counterparty risk? Well, yes, there is with Bitcoin. A related stablecoin story came into play with the world's largest crypto exchange by trading volume, Binance, Converting $1 billion of U.S. dollar stablecoin-BinS.D to Bitcoin, Ether, and other cryptocurrencies, in the early hours of March 13th. The conversion came as a result of Binance-rival crypto exchange Coinbase, officially shuttering BUSD trading on its platform due to, quote, liquidity concerns.

Starting point is 00:15:19 Binance's sale not only added to the buying pressure, but it could have a lot of also potentially led to a follow-the-leader effect in which people also exchanged a BUSD for Bitcoin. And if I had another hand, the U.S. Federal Reserve. It looks like we might have a suspension of interest rate hikes from the Federal Reserve, which would give the entire market a well-needed breather, especially as some view the failure of these banks as being closely tied to the raising of rates by a multiple of almost 20 over the last year. From Koindisk Jocelyn-Yang, quote, on Wednesday the CME Fedwatch tool, a predictor of interest rate decisions, forecast a 45% chance of a zero basis point rate hike. It's now predicting an 80.5% chance of a 25 basis point hike increase.

Starting point is 00:15:56 Both numbers contrasts sharply from last week when the CME showed a 68% chance of a 50 basis point rate boost. End quote. Of course, that's just the market hopping on the narrative that the rate hike might not be as high as previously expected. There has been no indication from the Fed that this will be the case. There goes that narrative and expectation again. Lastly, I keep saying Bitcoin, but don't I mean crypto? No, I don't mean crypto. I mean Bitcoin. Amid all the market turbulence, Bitcoin's prices, is going up faster than even the much smaller and often more volatile altcoins. We see that with Bitcoin dominance, a measure that looks at Bitcoin's market capitalization compared to the rest of the cryptocurrency market, which reached a nine-month high at 45.5%

Starting point is 00:16:32 on Wednesday. So in all, there's systemic global bank risks, stable coins in crypto prove they needed those banks to be stable, and amid all the general angst the Federal Reserve may be pulling back on rate hikes. All that has added up to Bitcoin swinging up massively over the last week. If that continues, is anybody's guess. To be sure, uncertainty has never caused for celebration, because of the same, of its potential negative consequences on people's lives. But for the time being, Bitcoin, with its

Starting point is 00:16:55 fixed issuance at a time of monetary expansion, looks like a way to opt out of this most recent crisis. And maybe it is. All right, back to NLW here. First of all, thanks to both Michael and George for great pieces. Something I've talked about on a few different shows and on YouTube episodes is this idea that this Bitcoin narrative coalescing around it being a desirable asset in the context of bank failures. Matters less about whether it was the thing that actually started this rally, which, again, as I've said before, might easily have been that Binance bidding. No, what matters more about it is that it becomes a self-fulfilling prophecy. In the middle of this week, we started to see publications pick up on this narrative. It wasn't just crypto publications

Starting point is 00:17:39 and CoinDesk and CoinDesk op-eds saying that this might be Bitcoin's moment. It was Reuters, it was Yahoo Finance, it was publications like that saying, Bitcoin is thriving amidst bank turmoil. The more headlines people see like that, the more it becomes the reason that new people start to nibble in, or old people who had written the industry off, come back. And so in some ways it doesn't matter what starts the ball rolling down the hill. What matters is the extent to which the narrative gives it momentum to keep going. I'm still not ready to say that we've got all that momentum going on. Like I said, I'm recording this early in the week before even the FOMC meeting, so I don't know what happened to Bitcoin's price by the end of the week. But I do think that the

Starting point is 00:18:17 seeds of a new narrative are clearly forming, and I think it's unlikely to stop anytime soon. Anyways, guys, that's the look from here. I appreciate you listening as always. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why We’ll Remember This Banking Crisis as a Turning Point for Bitcoin

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