March 24, 2023

Exploring transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

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The biggest threat from the banking crisis triggered by this month’s collapse of Silicon Valley Bank might not lie in the potential for depositors to lose their savings but in the censorship power that massive banks are now accumulating as customers move their money. That topic, and the related idea of bitcoin’s appeal as an escape hatch from that world of control, is the theme of this week’s column. 

The banking crisis was also central to this week’s “Money Reimagined” podcast in which my co-host Sheila Warren and I tapped the big brains of Lumida Wealth Management CEO Ram Ahluwalia and Galaxy Digital head of research Alex Thorn to explore the wider implications of this sudden, intense challenge to the financial establishment. 

Have a listen after reading the newsletter. 

Bank Consolidation Threatens Freedom, Makes Case for Bitcoin

(Too Big to Fail/HBO Films)

The developing world’s case for bitcoin is starting to resonate in the developed world. 

I, like many, have long argued it’s easier to explain bitcoin to people who live within dysfunctional financial and political systems than to those from stable, developed economies such as the U.S. Such populations have PTSD from past hyperinflation. Just as importantly, they often have first-hand experience of how banks can act as gatekeepers to their money.

I’ll always remember an image I was greeted with when, in 2003, I relocated to Argentina amid the ongoing banking freeze imposed during its financial crisis: Buenos Aires bank branches encased in impenetrable cages to protect them from enraged customers, their steel walls emblazoned with graffiti against “banqueros ladrones” (thieving bankers). It shouldn’t be a surprise that a decade later, once that banking crisis had run its sad, inevitable course toward profligate fiscal and monetary solutions that fostered perpetual double-digit inflation, Argentina became a hotbed of bitcoin adoption and crypto innovation.  

For now, I don’t see U.S. and European banks forced into the same Argentina-style shutdown. But the current banking crisis, which has introduced a new source of uncertainty to developed economies, points to a more subtle but arguably more dangerous threat to freedom that also underscores the importance of bitcoin. 

That threat won’t necessarily come from the Federal Reserve or other central banks being compelled to pursue lax monetary policy that becomes inflationary. (Those buying Balaji Srinivasan’s wild bet on $1 million bitcoin price by June 17 are missing the point that, to start with, collapsing banks equals collapsing money creation – i.e., the crisis will have a deflationary effect, not an inflationary one. Only if the Fed were to go full Weimar Republic would that effect be offset by massive money-printing.) 

Rather, it relates to the second part of that developing world experience: society’s vulnerability to the centralized control that banks exert over people’s savings and transactions. In overseeing the lifeblood of an economy, banks have unique, corruptible power. 

The core issue is not that people’s deposits are at risk from there being too little federal insurance or bailout money to go around, though the problem that there’s a natural limit to that important backstop is another argument for bitcoin. It’s the concentration of banking power that fearful depositors are now enabling by pulling their funds out of small regional banks and funneling them into a few behemoths: Citibank, JPMorgan Chase, Bank of America, Wells Fargo, et al. 

There are very clear signs, if not hardline proof, that governments and banks are coordinating a crackdown on crypto firms. There are accounts everywhere that startups in the crypto industry that had previously banked with failed entities Silvergate, Signature or Silicon Valley Bank are getting rejections as they try to open new bank accounts. 

What’s at issue is much more than whether crypto firms can write and deposit checks. It’s that as banking becomes concentrated among a few huge, tightly regulated institutions, a very real threat to human freedom arises. Without the capacity to transact, people can be blocked from engaging in many otherwise legal activities that are unpalatable to the powers that be. 

This is why Bitcoin’s censorship-resistant money matters. It offers an alternative to dependence on that banking system. 

Off the Charts: Follow the Dots

Wednesday produced one of the most closely watched meetings of the Federal Reserve’s Open Markets Committee. The Fed announced another quarter-point hike in interest rates but also noted that banking system uncertainty could weigh on economic conditions, hinting that, if needed, it’s ready to end a yearlong monetary tightening campaign. That mixed signal sent markets, including crypto markets, bouncing around before flattening out over Wednesday and Thursday, which is where I imagine the Fed wanted them to be. 

It was also the quarterly release of the FOMC’s economic projections report, which delivers a particularly odd-looking chart that economists and bond traders obsess over: the so-called dot plot. It shows where 18 voting and non-voting members of the committee expect the Fed’s target federal funds rate to be at the end of the calendar years to come. Here’s what it looked like this week.

It’s telling us that 10 FOMC policy-setters, a majority, expect the fed funds rates will end the year at 5%, unchanged from where the Fed set it on Tuesday. That’s exactly the same as the previous report in December. What’s striking about that is how there’s so little change, given the dramatic news out of banks, which many believe was destined to force the Fed to ease its policy stance. It’s the sign of a remarkably confident small group of economists, a group with enormous power. 

If you’re placing big bets that bitcoin might one day surge on the back of a failure by the Federal reserve to contain monetary dysfunction, you can either read this self-assuredness as a form of hubris or as cohesive, steady monetary policy-setting. History will be the judge of which it was.

The Conversation: The Ref Has the Wrong Rulebook

Coinbase CEO Brian Armstrong used a Twitter thread Wednesday to drop the alarming news that the Securities Exchange Commission had served his company with a Wells Notice  – indicating an impending enforcement action – and that it would fight it in court. In reply, Dave Dennis, as a cloud engineer from Dallas, asked for it to be explained in “NFL terms,”referring to the National Football League. 

Armstrong’s response was particularly colorful, capturing both a common view that the United States’ 1933 securities laws should be updated for a 21st-century age of decentralized tokens in a digital economy, and his company’s position that, after approving Coinbase’s public listing two years ago, the SEC is now reversing its own position.

Relevant Reads: Regulatory Battles

It was another busy week for U.S. regulators, which appear now to have effectively declared war on crypto. Check out some of CoinDesk’s coverage:

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