The latest banking crisis gives Bitcoin an opportunity to seize the day |
March 17, 2023
Exploring transformation of value in the digital age
By Michael J. Casey, Chief Content Officer
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I really had no choice of topics for this week’s column. After all, the newsletter’s title is called “Money Reimagined.” If some are saying, “bitcoin was made for this moment,” I can also say that Money Reimagined was made for this moment.
Ten years ago, a strange new digital currency called bitcoin (BTC) 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 the idea of bankless digital money.
Per Omkar Godbole’s reporting, I’m not alone in seeing parallels between the past week’s events. Again, bitcoin’s price has rallied on speculation that stress among U.S. and European banks will open people’s eyes to the leading cryptocurrency’s 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.
Recall that the Bitcoin blockchain was born out of the chaos of the 2008-2009 financial crisis, with Satoshi Nakamoto’s immortal timestamp on Jan. 3, 2009, inscribing a headline from that day’s London Times: “Chancellor on the brink of second bailout for banks” (chancellor being the U.K.’s finance minister).
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, which can undermine their ability to honor deposits. And it showed how the largest banks, whose interwoven credit exposures create “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 democracies hostage.
As the Fed and the 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 Sept. 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 – “broke the buck.” We feared then that failures at similar short-term money market funds would lead to widespread chaos in the economy-wide system for paying employees and commercial contractors.
Now, with SVB contagion spreading to smaller regional banks, depositors have fled en masse into Wall Street’s too-big-to-fail 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.
As angel investor and Myth of Money newsletter author Tatiana Koffman wrote in a CoinDesk OpEd, “Bitcoin is made for this moment.” If people 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 Thursday with news of an unexpected softening in U.S. inflation.)
At its core, money is a confidence game, a matter of faith and trust among the population that uses it. It’s likely that confidence in governments and their banking partners will wane 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.
Noelle zeroed in on the historical significance of something that many economists see as an important indicator of recession risk: a so-called inversion in the yield curve for government bonds. It’s a relatively rare scenario, typically triggered by aggressive central bank rate hikes, in which bonds with long-dated maturities pay a lower return than those falling due in a shorter time period.
Comparing the difference between the yield on the 10-year U.S. Treasury note with that of the three-year Treasury bill against the federal funds rate that the Fed targets to set monetary policy, she observed that ever since the data was available in the 1980s the Fed has never continued to hike rates after that yield spread went negative – i.e., after the curve inverted.
The chart she created from the Federal Reserve Bank of St. Louis’s FRED database also showed that since the data series began, the Treasury’s yield spread has never been more negative than now.
Noelle’s conclusion: She’s “rapidly moving toward the ‘pause’ faction,” meaning she’s joining the ranks of those who now expect the Fed to halt their rate hikes at the next meeting.
In ordinary circumstances, the emergence of a banking crisis would not only be a reason to pause interest rate hikes but potentially for the Fed to cut rates. The problem is that, notwithstanding the slightly lower inflation readout of 6% this week, consumer prices continue to stubbornly resist the impact of the recent hikes. No central bank wants to give up on inflation. But neither do they want to do extensive harm to the banking system. The Fed is in a bind.
To me, that dilemma is the embodiment of why some of us eventually see value in Bitcoin. It’s not whether central banks are, or aren’t, evil, stupid or even corrupt. It’s that existing economic and psychological forces are just too big for a narrow group of fallible humans to get under control.
The Conversation: Was Signature a Crypto Warning?
As discussed in today’s column, there are different narratives over the closure of Signature Bank over the weekend. Two prominent members of Crypto Twitter distinctly encapsulated these competing views.
One was Castle Island Ventures’ Nic Carter, whose tweet thread picked up on Signature board member Barney Frank’s “poster child” reference, to argue that regulators were sending an anti-crypto message and to warn of the dangers in that.
The other is Ram Ahluwalia, CEO of Lumida Wealth, who took the NYDFS’ explanation in good faith and observed that the FDIC taking charge of the bank’s Signet system brings the government directly in contact with the power of real-time crypto settlement systems. The implication is that this could lead to greater acceptance of the sector’s place in the overall financial system.
Relevant Reads: Culture Week
In what I assume is a welcome relief from the intensity of bank runs and speculation on the future of money, we’ll close the newsletter with a sampling from Consensus Magazine’s Culture Week edition, which looks into how Web3 technologies such as non-fungible tokens (NFT) are shaping the art and business of entertainment and culture.
David Z. Morris looked at two high-profile sports NFT projects, NBA Top Shot and NFL Day Pass, to ask what drove the success of the former and the relative non-success of the latter? Lessons: Timing is everything, scarcity drives value, and community makes an NFT sing.
Max Good, from CoinDesk’s Indices team, explored the relationship between soccer team performance and fan token performance.
And CoinDesk regular Jeff Wilser stepped into the world of Stepn, a move-to-earn juggernaut that rose spectacularly during COVID-19, when everyone was speculating and looking for new ways to exercise. Upshot: fitness tokens may be Ponzi schemes but they also get people fit.
We know that the recent events with the U.S. banking system have put many in the crypto and Web3 community in a challenging situation. That’s why we have decided to extend our current prices for Consensus 2023. This means that you have a few more days to take advantage of these savings on your registration for the most important event in crypto and Web3.
