Bitcoin: Microstrategy´s Michael Saylor unchained

The thinking and the strategies behind Saylor´s bold bitcoin investing.

Published March 7, 2021 on Medium and Hackernoon and Coinmonks

 

Michael Saylor is relatively new to the crypto sector. By his own admission he did not know much about bitcoin until February 2020. He then made the news in August 2020 when his company, Microstrategy, announced that it bought US$ 250 million of bitcoin as a treasury reserve. It was the first publicly listed company to make such an historical move. Since then he has built a 90.000 bitcoin treasury reserve worth over US$ 4 billion and no doubt this has influenced other public companies´ decisions to invest in bitcoin, such as Paypal, Tesla, Square and institutional investors such as MassMutual. In a short time he became arguably the most powerful of bitcoin advocates.

So I was curious to learn more about this new bitcoin advocate, about his thoughts on bitcoin and about his company´s investment strategy.

If one had doubts that Saylor was just selling a story and was in for a quick speculation one must rethink, cause Saylor did not only put all his money — and more of it because of the leverage — where his mouth is, but because he really thinks like a bitcoiner and he seems to have assimilated quite well Bitcoin complexities in a surprisingly short time frame.

Every bitcoiner has gone through virtually the same learning path — usually a few years long — made of initial denial, open criticism, conditional acceptance, before arriving to the full awareness in what I call the “illumination” phase, that moment of clarity in which suddenly everything falls neatly into place. So, the hat´s off to him for the remarkably short journey he has done.

He says he has got his moment of clarity only in March 2020 when markets collapsed and he watched the FED printing trillions of dollars to furiously buy securities while figuring the effects of that on his company´s US$ 500 million treasury chest and the loss of purchasing power that would follow.

This is the same mental process, charged with anxiety, which anyone who has experienced massive inflation or hyperinflation in modern times — such as the people in Argentina, Venezuela, Zimbabwe or Turkey — goes through. These are the people who come to bitcoin because of need. For them bitcoin becomes a survival tool. And they are always the fastest learners.

Saylor has been — by his own admission — also lucky, in the sense that he jumped on the bitcoin train at a time which might have marked an historical inflection point. Which is when the FED and other central banks have abandoned any pretense of fulfilling their mandates of price stability, employment and inflation control and gone fully on decoupling the risk-taking from the consequences of it. Since the financialization of western economies has grown the financial markets to the point that they represent the largest part of the whole economy, they cannot let the markets go down. They will print all it takes to sustain markets, the GDP and to keep interest rates low.

Saylor had a good mentor in Ross Stevens, CEO of NY based Stone Ridge Asset Management, one of the asset managers who pioneered bitcoin investment back in 2013 and which currently holds over US$ 6 billion in bitcoin and has additional US$ 25 billion in the pipeline from institutional investors.

Saylor was also clearly influenced by Dr Saifedean Ammous´ excellent book “The Bitcoin Standard”, on the history of money and the role of Bitcoin in a new monetary system. As a keen Austrian economics scholar myself, I found Ammous´ prospective of Bitcoin´s role in a new monetary system fascinating, which inspired my post “Bitcoin and the lost art of commercial banking”.

The first stop to learn more about Michael Saylor — I mean to truly learn more than what Twitter can tell — was Microstrategy´s conference “Bitcoin for Corporations” which they recently organized to promote bitcoin adoption among corporate CEOs. They put together a playbook for corporations to adopt bitcoin delving into accounting issues, legal issues, treasury financial issues and of course buying strategies. Very interesting stuff to go through if you are interested. All the material is available online on Microstrategy´s website including a highly interesting introductory interview with Ross Stevens in which Stevens explains to his fellow CEOs his views on Bitcoin and its future adoption.

Next was Michael Saylor´s video presentation in which he explains Microstrategy´s playbook for investing in bitcoin and how to create products to lock-in bitcoin growth potential.

Then I listened to an interview/podcast made by Saifedean Ammous with Michael Saylor.

And here Michael Saylor was unchained. What follows is a summary of what he said to Ammous on different topics (please note my general disclaimer at the bottom of this post):

 

Is Bitcoin a speculative asset?:

 

“It´s always labeled a speculation if you do not understand the science behind something. Argentinians do not buy bitcoin for speculation”.

 

Saylor hints here that the need for Bitcoin is caused by monetary debasement. Whether this happens in the US, Europe or Argentina the difference is only the time frame, the scale of it and the different level of awareness among the population. Therefore he does not see Bitcoin as a speculation, rather a very much needed tool to safeguard purchasing power from monetary inflation.

 

Bitcoin is the hardest and most salable money:

 

Saylor made an interesting analogy with engineering and gold when was the hardest form of money and it enabled the development of civilization. Like the hardest materials enable the strongest and tallest of constructions, the hardest money should lay the foundations for human development. Cathedrals and objects of art which took many years to complete could be built because the money that financed it did not lose value across time. Gold was the money that funded all such infrastructure in history and was the most salable form of money at the time. By the same token bitcoin is today the most salable form of money, the hardest money around. And it will enable the very same infrastructure development that gold did in the renaissance or during the gold standard from 1800 until 1914. In the future, borrowing against a hard asset such as bitcoin, will enable just that. And he mentioned as an example Jack Dorsey´s 500 bitcoin endowment trust to finance Bitcoin development in Africa. Hard money lowers time preference which is the key to investing in the future.

 

Bitcoin is the fastest money:

 

Saylor said that it is hard to conceive today what can be done with a high frequency, fast money like bitcoin. The comparison and contrast here cannot be done with fiat money because even if it is very fast, fiat money does not have finality of settlement (of course except for public enemy nr.1 the cash). So we should rather compare and contrast Bitcoin with gold because both have settlement finality. Try moving 1 billion worth of gold and 1 billion worth of bitcoin across time and space and you have the answer. The important point he makes is that high frequency money will enable a whole new different infrastructure and a totally new range of services yet unheard of. Think about flash loans: hours up to a few months.

 

Bitcoin energy footprint:

 

To summarize Saylor´s view here, one must contrast the fiat standard footprint with the Bitcoin footprint and consider both their externalities in order to get the real picture. Bitcoin´s energy footprint is totally transparent, 100% accountable and does not have substantial externalities. Its energy footprint is the mining rig. Full stop. As big as this may seem it is a tiny fraction of the energy footprint of the whole fiat system and its externalities. This system is based on a massive infrastructure which includes thousands of banks around the world, thousands of finance related service businesses, tens of millions of people employed in the sector and the huge US military machine to back stop the dollar reserve currency. Externalities include the debasement of fiat currencies and the damages that this causes to millions of lives worldwide. He made unarguably the point that if governments are debasing, conservatively, at 5% per year US$ 500 trillion of global monetary assets, that´s a US$ 25 trillion of wealth per year which is literally stolen from people worldwide. To add my personal view to that of Saylor, one must also take into account the distorted perverse incentives which a fiat system generates, such as for example the need to keep alive and profitable the huge arms/military complex which needs to sell its products and therefore increase GDP revenues by periodically leading useless wars and causing the loss of millions of lives (the list of the GDP beneficial wars in modern times is endless, starting with the Vietnam to end with the latest disastrous western interventions in Iraq, Syria, Libya and Yemen).

 

The store of value problem in a fiat system:

 

In 80 years we transitioned from the Bretton Woods system, centred on the US dollar redeemable with gold (this system was broken in 1971 by Nixon defaulting on the gold-dollar redeemability), to a system based on US Treasuries as a store of value and finally to a system based on risk assets as a store of value. Saylor sees that this last transition happened lately around 2010 when investors have been forced into risk assets by the artificial compression and manipulation of interest rates by central banks. Investors had no alternative than seeking refuge in risk assets to protect themselves from zero or negative interest rates and monetary debasement. Investors soon realized that while government bonds were not even covering half of the monetary inflation, the stock indexes were averaging 7–8% per year and therefore were tracking pretty well monetary inflation. That´s why stock indexes became the preferred store of value (remember in 2011 the Swiss Central Bank buying hand over fist stocks). This investment framework collapsed in March 2020 when monetary supply increased at 25% per year. That is why bitcoin became now a compelling investment case for corporate and institutional investors and the sole store of value in this final chapter of the fast collapsing fiat standard.

Saylor also mentions that the “progressive” and fairly new smart money considers bitcoin the primary store of value, while the “old” conservative smart money embraces the Nasdaq Tech Index as a store of value.

Looking at the year on year ROI for the main investment classes bitcoin yields + 356%, Nasdaq + 43%, Gold + 14,7%, S&P 16%, Treasuries 2%. If one factors in the monetary supply increase at 25% per year, an investor does not have any options left to beat inflation except for bitcoin and the Nasdaq.

Therefore Saylor puts bitcoin — with a current market cap of approx. US$ 1 trillion — at the core of a “monetary planet” which value is currently approx US$ 500 trillion and sees this core expanding to 10, 50 and eventually US$ 100 trillion to project the global monetary value of the planet to a quadrillion dollars.

One can argue the numbers thrown here by Saylor, but one certainly agrees with his reasoning.

 

What about gold´s role in Saylor´s “monetary planet”?

 

Well, here Saylor takes an extreme view with which I do not entirely agree and I would have expected Ammous to challenge him on that issue. But he did not, so I will try.

Unarguably, Saylor sees bitcoin as a superior store of value to gold for more or less the same reasons that I have also highlighted in my post “Oops! Ray Dalio missed the biggest of all paradigm shifts: crypto” . But he goes to the extreme of arguing that bitcoin will completely destroy gold. He seems to overlook the fact that gold is STILL the reserve asset of the main central banks worldwide. If he envisages, as I do, a monetary system in which fiat currencies will coexist with bitcoin — which main use will be as a store of value, the hard salable money which constitutes the foundational layer of a new economic infrastructure — how could then fiat currencies survive the current level of debasement if central banks do not intervene to backstop their currencies with the only real asset they own?

In my opinion a possible scenario is a new Bretton Woods, in which the main central banks which hold the largest gold reserves (US, Germany, Italy, France, Russia and China) will coordinate to backstop the falling fiat currencies with their gold reserves and will bid up the gold price x times until it balances their liabilities. Therefore we might see a two tiered system in which we have the main fiat currencies, somehow fractionally backed up by gold reserves in order to restore confidence among the population, while all those who do not hold relevant gold reserves will rather adopt bitcoin as the main reserve asset.

The fact mentioned by Saylor, that only one store of value is needed and that while bitcoin is better and more functional than gold it will achieve market supremacy and destroy gold, is conceptually correct but fails to consider what I have mentioned above. Which is that gold still is THE reserve asset for the financial elites and central banks. In a longer time frame — because of the technological superiority of Bitcoin — the demise of gold as a store of value envisaged by Saylor is a possible scenario, but this is far too early to foresee and it will depend on many factors among which how bitcoin behaves in the future and its adoption curve.

 

Is bitcoin volatile? any worries?:

 

March 2020 was for Saylor an inflection point. All that has happened to bitcoin before that inflection point, Saylor thinks will be irrelevant in the future. The inflection point has been the sudden awareness by a group of institutional and corporate investors of the impact of monetary debasement on their treasuries, which suddenly made bitcoin a compelling store of value for all. He is convinced that the new flow of institutional money into bitcoin will prove wrong all the previous models used to forecast price fluctuations (including my beloved indicator, Plan B so far extremely accurate and reliable stock to flow model). But undoubtedly his reasoning has merit and if March 2020 will really prove to be the inflection point which then triggered the investments of Microstrategy, Square, Paypal, Marathon, MassMutual and Tesla, this will mean that any other large institutional investor or quoted corporation entering bitcoin will add fuel to the fire and propel bitcoin to levels which no one could have dreamed of only 1 year ago. My own August 2020 prediction of US$ 248.000 bitcoin looks today quite conservative. Maybe we will have to re-calibrate the old models based on a completely new set of assumptions. Bitcoin´s past history might after all be little relevant in the future.

 

Conclusion

 

If Saylor is right, March 2020 has marked the first page of a whole new chapter in bitcoin´s adoption book. For the adoption to scale to the levels foreseen by Saylor though, I am convinced that we will have to see a consolidation of bitcoin´s market cap around US$ 1 trillion for quite some time in order to attract the interest of really large institutional investors. While the likes of Saylor, Ross Stevens, Mike Novogratz and Musk have written the first historical page of this new chapter, the likes of Apple and Blackrock will have to drive the next adoption phase.

Hopefully this phase will also attract a new breed of bright, progressive and forward thinking central bankers and politicians from emerging economies. These countries have an historical opportunity and a first mover advantage to be at the centre of a new economic infrastructure built upon Bitcoin. Ideally this should promote a new renaissance based on hard salable money to foster real free trade and cooperation, solidarity, liberty, sustainable economic development and widespread shared wealth to replace the current status of rampant wealth inequality, financial repression, coercion and unsustainable economic development. All this is the result of misaligned incentives, corrupted vested interests and enormous privileges which have been generated by the adoption of the fake fiat money standard as the weak foundation of our economic and societal infrastructure. And one cannot build a solid house on weak foundations, only a house of cards.

This system is breathing its last. Satoshi gave us the hardest of the monetary tools to use and to build upon, it is now on us to build something better with it.

 

General Disclaimer: All the above content is my own summary of an interview/podcast made by Saifedean Ammous with Michael Saylor. Unless Saylor´s words are directly quoted in the above post, the post content then represents my own interpretation of the podcast interview. Sometimes I have expanded on Saylor´s concepts to explain them better, clarify them and make them more comprehensible using my own words. I apologize if I have misinterpreted his words. Therefore, despite having made my best efforts to report as truthfully as possible the content of the podcast, I encourage the readers to listen to the original podcast and not to rely solely on my summary. I do not know Michael Saylor nor have I received any type of economical compensation for writing this article. If you appreciate my free and independent work donate crypto to https://www.bianconiandrea.com

 

Legal Disclaimer: The website and the information contained herein is for general guidance only and it does not constitute legal advice. As such, it should not be used as a substitute for consultation with lawyers on specific issues. All information in this paper is provided “as is”, with no guarantee of completeness, accuracy, timeliness or warranty of any kind, express or implied.

 

Investment Disclaimer: The website and the information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this website do not constitute investment advice.


Bitcoin financialization and custodial services, the real threat too few talk about

Financialization will bring new risks and will increase third party custody well above 50% of current stock. This may be a systemic risk for bitcoin.

Published Feb. 24, 2021 on Medium and Hackernoon and Coinmonks

 

Financialization of bitcoin is coming. This is the only reason why Wall Street is interested in bitcoin. The objective is to package bitcoin into some fancy financial product that they can sell for a profit. And sell a lot of it, for lots of profits.

Some say this is good because it increases adoption. Think about a bitcoin ETF. It is no doubt easier for traditional investors to buy an ETF and get an exposure to the bitcoin price rather than buying the real thing with the added complications of self-custody. The recently launched Canadian physically settled ETF BTCC undoubtedly has merit and it has been attracting investors at breakneck pace since its inception.

But there are certainly drawbacks as well. One is the potential impact that the financialization of bitcoin could have on the price of the real asset. Think if the ETF is not a physical one but a synthetic one. This will divert investors from “physically” holding bitcoin to holding an IOU which mimics bitcoin´s price fluctuations.

Indeed, Caitlin Long said, “what is the purpose of bitcoin if we go back to the same [paper] instruments which are the cause of the problem”.

If Wall Street creates a large enough supply of “paper” alternatives to bitcoin, the demand for the real asset can be easily capped. This is what effectively caps the physical demand and the price of precious metals.

But one thing is to steer investors away from the real asset into a paper product and another is an outright manipulation of the price. Crypto IQ´s Zachary Mashiach makes the case that CME´s bitcoin futures have been responsible for the long 2018–19 drop in bitcoin prices, drawing a similitude with the alleged manipulations of precious metals in the futures market.

But I am not convinced. The reason is that the price for bitcoin futures is set on the main spot exchanges such as Binance, Coinbase, Bitfinex, Kraken etc. and so far it has been spot driven. So much that one can argue that in the past the price of bitcoin could have been manipulated by unloading a large quantity of bitcoins on a major spot exchange to trigger a cascading effect with stop-losses in both spot and futures market. Then positions are switched to profit from both spot and futures long position rebounding. But the trigger was initiated in the spot market, not vice versa. How can a large sale on the futures market trigger the same cascading effect on spot markets if there is no connection between the two markets? Differently from precious metals markets bitcoin futures do not have a physical settlement, they are solely cash settled. It is like a betting market giving the odds on a horse race. It does not affect how the race goes. The only possibility would be a reflexive psychological loop if investors on the spot market were influenced by what happens in the futures market. But who cares about what bitcoin futures are doing? Do you first look at spot markets or futures markets?

But no doubt this is an issue which has complexities that I might be missing and which might be worth looking into more detail with people who know better how futures markets work.

Furthermore, if we look at how precious metals have been allegedly manipulated via paper products, another problem appears. Precious metals are difficult to audit. A reputable and trustworthy auditor is needed. Then vaults must be physically inspected and the bars must be visually identified and counted. In most cases this happens once a year. Barring extreme cases of outright fraud, issuing IOUs on unallocated accounts is therefore a piece of cake, so much so that no one really knows how many claims exist for every ounce of physical metal vaulted, some say 100 some say even more. Luckily though, bitcoin is clearly superior to precious metals on that aspect, in the sense that it is 100% auditable at any moment without need for a trustworthy auditor. Thus — for the Wall Street con artists — playing the three-card trick will be much harder if the investors remain vigilant and require the proof of reserve and the periodical disclosure of the bitcoin addresses.

But the real threat might be yet another one. And it might be a systemic one for bitcoin.

Bitcoin´s exploding custodial services are the culprit.

 

Jameson Lopp and Hasu have indicated the main causes for concern:

 

(i) “…if something goes wrong [with the custodian] and people want to exit to the safety of self-custody, the on-chain throughput limits mean that it’s infeasible for a mass exit to happen quickly. Another point was that custodians will be more capable of paying very high transaction fees to make settlement transactions between each other, thus pricing out the average user from making on-chain transactions”

 

(ii) a political attack could unfold, whereby authorities “… will demand more onerous disclosure requirements from exchanges, more draconian rules around AML/KYC, and so on. Eventually, pressure from regulators and nation states results in custodians censoring transactions and seizing funds” [like banks did to do to comply with Roosevelt Executive Order 6102].

 

(iii) an attack on the protocol could unfold, whereby “the custodians coordinate a fork (hard or soft) and change the rules. Any contentious fork results in a chain split, at which point each side vies for economic superiority by selling off the branch of the fork they don’t support. This could be made more devious by custodians selling off the fork branch they want to see die off.”

 

On the more technical issues (i) and (iii) above and the chances of success of such actions, there are more qualified people who can give more reliable answers, though the highlighted risks seems entirely plausible. On the point (ii), the risk of a more geopolitically motivated attack, this is no doubt a highly probable scenario. But if on one side one can be confident about the battle tested censorship resistant capabilities of Bitcoin to deflect such an attack — most certainly if one keeps custody of its own keys — on the other side one has to be concerned of the likely repercussions that this attack might have on the whole network considering that it might impact between 40% to 60% of the total bitcoin supply. And the quantity of third party custodied bitcoins will increase proportionally in the future with its financialization. This threat will therefore grow exponentially bigger.

I wish there were more awareness and more discussion on the above topics within the bitcoin community. So far these are fairly new topics but they are far more complex to understand and potentially far more damaging than the usual FUD theories which have been dealt with in the last 10 years.

Above all the community must continue educating new bitcoiners and investors about the importance of both self-custody and the proof of reserve concept. The time to do it is now.

Elon Musk must prove Tesla owns the bitcoins he claims it does. Bitcoiners should not trust him, they should verify. The same goes for every big Wall Street or corporate investor who goes about boasting its holdings. And if you are a Tesla or a Microstrategy investor you should ask the company to show you their bitcoin addresses duly authenticated with a message signed with their private key. Form 8K is not enough as it simply shows a material acquisition or disposition of assets. You want to be able to monitor their bitcoin holdings, as this might materially affect the value of your investment.

Start questioning, not their keys, not their bitcoins.

 

Legal Disclaimer: The website and the information contained herein is for general guidance only and it does not constitute legal advice. As such, it should not be used as a substitute for consultation with lawyers on specific issues. All information in this paper is provided “as is”, with no guarantee of completeness, accuracy, timeliness or warranty of any kind, express or implied.

 

Investment Disclaimer: The website and the information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this website do not constitute investment advice.


Which country will first enter the multi-trillion bitcoin adoption race?

While institutional investors and large corporations increasingly adopt bitcoin, emerging economies can still gain a first-mover advantage in building a bitcoin centric economy.

Published Feb. 12, 2021 on Medium and Hackernoon and Coinmonks

 

Governments around the world have dealt with bitcoin and cryptocurrency adoption substantially in 3 ways: (i) countries like Switzerland and Liechtenstein have been first movers and have fully and openly adopted cryptos thereby creating thousands of new businesses and jobs in their prosperous crypto-valleys, (ii) countries like the USA and Europe have tended to regulate the sector albeit remaining permissive, despite an emerging tendency to over-regulate and the occasional talk of some sort of possible bans, (iii) few countries have banned in one way or another cryptos like China did in the past and India and Nigeria more recently.

Despite governments´spreading the usual narratives via the ever compliant, unquestioning and corrupted mainstream media — such as the need to “protect us” from the “bad guys”, the money launderers, the criminals or newly branded terrorist groups such as the (so far harmless) “proud boys” — anyone who knows a bit of monetary history and economics knows very well that government controlled fiat money is the essential tool that enables the political and financial elites a totalitarian, albeit indirect, control over the economy and the expropriation of resources via monetary inflation, together with a bunch of additional “GDP beneficial” enterprises, such as fighting an artificially pumped up pandemic and delivering billions of fake money to their pharma cronies, or inflating asset bubbles via QEs infinity delivering billions to their financial cronies or financing endless wars against who happens to be the most convenient terrorist group of the moment (beware bitcoiners as you might also be branded a terrorist group) thereby delivering billions to their arms and oil industries cronies. This, in an endless vicious circle of fake money, cronyism and corruption which has become the foundation of the current western financial capitalism and “democracies”. Therefore the issue of controlling monetary supply is merely political, it is simply about power, vested interests, control and oppression. No more, no less.

Luckily though bitcoin is an epochal paradigm-shift which introduces a new and unique game-theoretical challenge for governments around the world, especially for those among emerging economies which are (i) more detached from the above mentioned “vicious circle” which dominates western financial capitalism and (ii) are adversely impacted by a chronic weakness of the local currency and are often subject to currency substitution (i.e dollarization) which brings adverse geopolitical and economical effects.

On one side such countries have the option to follow China, India and Nigeria— or other overly regulating jurisdiction— down the “prohibitionist/strict regulation” rabbit hole, thereby losing on a multi-trillion dollar business opportunity and exposing themselves to the geopolitical risks of currency substitution with either foreign stablecoins or crypto (I have explained in this article here the inevitable path towards currency substitution with foreign stablecoins and the uselessness of capital controls).

On the other side they can follow the path of more progressive countries and therefore put themselves at the forefront of a multi-trillion dollar technological movement that will bring massive economical benefits to their nations and at the same time it will make their fiat currency stronger and interchangeable with foreign stablecoins and cryptocurrencies.

Inevitably, the choice that local politicians have to make, sets the stage for a new level of competition between countries in order to attract both bitcoin denominated capitals and related human talents. Clearly, with the growth of bitcoins´market capitalization and the daily news of some new prominent Wallstreeter or leading tech company like Tesla joining the bitcoiners ranks, following the first option together with Nigeria and India looks increasingly suicidal. Indian entrepreneur Balaji S. Srinivasan describes unarguably well in this article what India stands to lose — not only by banning it but — by not fully embracing bitcoin:

“To summarize, India is on the verge of banning a trillion dollar industry instead of using it to strengthen its national security, economy, currency, technology, and foreign policy.”

While Switzerland and Liechtenstein remain very good examples for what can be achieved by embracing cyptocurrencies, emerging economies have to adopt a much more thorough and aggressive path which will deliver even more gains to their economies and societies. They should make bitcoin the foundational digital store of value upon which their digital monetary system will be built. At least — in addition to being sound money — bitcoin is both no one´s and every one´s money and it does not carry geopolitical bias nor risk.

To do that they need to develop a competitive framework to jump start the sector and propel a virtuous cycle:

(a) adopt crypto friendly regulations, mainly dealing with the recognition and the legal status of digitally tokenized assets (such as stablecoins and tokenized securities). The regulatory framework implemented by Liechtenstein, Switzerland and US State of Wyoming are good examples (*).

(b) reshape the local banking system to make it bitcoin centric rather than US dollar or Euro centric as I have described in “Bitcoin and the lost art of commercial banking” . Implement an agile crypto bank charter to regulate mainly the issue and the custody of crypto assets, like the one implemented in Wyoming for the SPDIs (Special Purpose Dep. Institutions). AvantiBank was recently granted the charter of crypto bank in Wyoming to custody crypto assets and to issue crypto-fiat dollars. It is important to note that the US OCC has recently issued an opinion letter which allows US banks to use blockchain infrastructure and existing stablecoins or issue their owns. This — if confirmed by coherent governmental policies — might be a radical paradigm change which might trigger a global shift towards crypto banking.

This is an important point that regulators and politicians in emerging economies should carefully consider: the US regulator proposes the easiest and fastest of all the solutions, just plug and play into the Bitcoin blockchain to build a new banking infrastructure. Very smart.

(c ) incentivize the establishment of crypto exchanges with an agile licensing process.

(d) encourage the use of bitcoin to pay for administrative fees and taxes and ensure free and full convertibility between cryptocurrencies and the local fiat currency. Business adoption is also important, specially for expensive items such as paying for real estate investments and expensive cars (see Tesla´s recent move). All this will bring sound money reserves into the government modern digital coffers.

(e) grant incentives to attract both crypto capital/investors and talented human capital. Tax incentives are very important. Money flows where it is treated better. But also human capital relocates where business opportunities and living standards are better or at least where better prospects are offered. Programs such as the residency and citizenship for investment are very important.

There are plenty of very talented individuals and investors in the crypto sector who are ready to leave Europe or the US to relocate where their money is treated better but also where basic freedoms are truly enforced and the environment for crypto investments is more friendly. It is a fast growing global movement of young and talented investors and entrepreneurs whose wealth has increased rapidly by an x factor in the last few years. This wealth will flow to those countries that will offer bitcoiners what they value the most.

Bitcoiners are generally libertarian types of people. They value very much freedoms, they are responsible for their lives, independent and reject big government interventions and bureaucracy. The Covid-19 crisis has made apparent to anyone with a clear mind that both Europe and the US are rapidly becoming oligarchic run, corrupted to the core, “police states” and that high taxes will be introduced to expropriate the leftover wealth from the once productive middle class. This represents a unique opportunity for emerging economies in South America and Asia to offer a safe heaven and attract crypto capitals and human talents. Small, but politically stable countries like Uruguay (also known as the Switzerland of South America), Costa Rica, Dominican Republic, Belize, Paraguay, Georgia, Malaysia or Singapore already have in place very good residency and citizenship for investment programs. What they need now is to implement more crypto focused types of incentives, like the ones that I have mentioned above, in order to offer the best possible value proposition to bitcoiners so that they can flock to that country with their capitals to foster a bitcoin driven societal and economic development which will bring widespread benefits and prosperity to the whole society.

The first movers today will be the leading economies 10 years into the future.

Further readings:


Bitcoin and the lost art of commercial banking

How emerging economies can lead the crypto revolution in commercial banking and enjoy an economic renaissance based on sound money

Published on January 31 on Medium and Hackernoon and Data Driven Investor

 

Introduction

In a recent post Coindesk´s Nic Carter has made a very good case for bitcoin banking. While I share his views on the future that bitcoin will play in revolutionizing the legacy banking sector, I would like to see this issue from a slightly different perspective, that of the emerging economies. The definition of emerging economies is somewhat residual. It includes all those markets/economies which do not make it into the small club of the fully developed economies such as Europe, USA and Japan, to which nowadays China and Russia also belong. Regardless of the definition, emerging economies have in common a relative weakness of their currencies and the risks of sudden capital flights together with a less mature banking and credit system.

This is one of the major factors that hinders local investment and economical development.

The partial dollarization of these economies is a common aspect which at least mitigates the disastrous effects of hyperinflations or double digit inflations suffered by local populations such as in Venezuela, Argentina or in Turkey. The efficacy of capital controls will be in the future greatly diminished by the increasingly global access to cryptocurrencies. Emerging economies therefore will be on an accelerating path towards local currency substitution for both cryptocurrencies and crypto-fiat currencies (i.e. stablecoins) - such as bitcoin or Tether/USDt, true USD or USDC - which are easily available and which will tend to gradually replace national currencies.

Counterintuitively perhaps, favouring a seamless integration and exchange between the local currency and foreign stablecoins while promoting a bitcoin centered banking system - rather than a US dollar centered one - is the solution that emerging economies need to immunize their markets from currency substitution, strengthen their banking systems and drive investments into the local economy.  

The economical and geopolitical risks of the dollarization are very well known. How then a bitcoin centered economy can function while maintaining at the same time the local currency and its full exchangeability with both bitcoin and other national currencies and stablecoins?

 

The Lost art of commercial banking

In 1974 E.C Harwood - the American autodidact economist who founded in 1933 the American Institute of Economic Research and predicted both the 1929 Great Depression and steered his clients into gold investments anticipating the 1970s inflation - wrote on the "Lost art of commercial banking". At the time - following Nixon´s 1971 infamous default on the US dollar and the breaking of the peg between gold and the US currency - the issue of money debasement was very much the talk of the moment. E.C. Harwood pointed out that the period between the end of 1800 and 1914 pre WWI, "represented the peak of development for Western civilization in monetary matters. It facilitated commerce and made possible long-term accounting records that were meaningful rather than fictitious. Not only commerce between nations but also the great increase of useful capital was encouraged by the growth of savings institutions, life insurance, and pension funds".

It is widely acknowledged that this period likely marked the farthest advance achieved by the human race in the evolutionary development of a money-credit system that could serve a modern industrial society. It is also a fact that at the time gold was the common international monetary base for all the leading industrial nations of the world and many others.

But Harwood was not a gold standard radical. He was a pragmatic, full of common sense, not an ideologist. He knew monetary history and proposed practical solutions to the very well known problems of fiat money debasement at a time of growing globalization and trade.

Indeed, he also criticized the more radical position of the proponents of the 100% reserve gold standard "who would restrict the purchasing media in use to gold and perhaps silver coins or paper currency and to checking accounts directly representing these. They would go back to medieval times before the earliest beginnings of sound commercial banking. How they would cope with the flood of products to be marketed in a modern industrial civilization they do not suggest. Others among the gold-standard advocates offer a simplistic solution, raising the "price" of gold and restoring convertibility of currencies to gold. They seem not to realize that a huge volume of inflationary purchasing media exists and is polluting the money supplies of the world just as would multiple billions of counterfeit currency."

In fact not even the gold standard did by itself solve the problems of money debasement unless one applied what he defined "the basic principle of sound commercial banking", the lost art of commercial banking.  So what is this lost art?

The proper functioning of a commercial banking system is vital for the development of capitalistic economies. Its two primary functions are savings and lending, which revolve around making a profit between the interest rate paid on savings and that charged on the loans. But banks can lend either by drawing from the deposits/savings they collected or by creating new money. Harwood posits that the discriminating factor is to create new money only when such money goes into productive investments, which is when this money increases the quantity of goods and services in circulation (i.e a company builds a plant to manufacture cars) and not when this money finances consumer spending or any other non-productive investment (i.e an individual gets a loan to buy that car). In the first case the banker can create new money because this is non-inflationary. In the second case the purchase shall be rather financed by drawing from savings/deposits because creating new money - not offset by an increased amount of productive goods - would be inflationary.

Despite the gold standard being effective at the time, banking crises like that of the "Wildcat" banks or the Scottish banks happened whenever banks neglected to apply this basic principle of sound commercial banking and went on a money printing frenzy. It was the free banking era after all and banks went bust frequently.

Today this does not happen simply because there is no anchorage between fiat money and a real asset like gold. But the effects of massive debasement are the same, except that they are watered down in time and not immediately apparent due to central banks interventions, manipulations and bailouts. Just look at this chart of gold vs. the US dollar to see the hyperinflationary loss of purchasing power since the gold/dollar peg was removed in 1971 at US$35. Today you need US$ 1830 to buy one ounce of gold. That´s a 52x increase in 50 years.

The opportunity for emerging economies: a bitcoin centered commercial banking system

Now let´s fast forward to 2021 to see how E.C. Harwoods´ responsible commercial banking could be practised today .

The first consideration is that it is unlikely that we are going back to a gold standards of sorts. Or at least not like it was before. For a number of reasons our economies and societies need today a different kind of hard asset/sound money on top of which a new financial system can be build. And gold does not fit this use case for a number of reasons, among which those three are the most important: (i) gold audit is subjective. Auditing a gold reserve implies trusting the auditor. It is a subjective valuation not an objective one. (ii) gold is difficult to move around and it is complicated to withdraw and expensive to custody. Those are workable issues for central and bullion banks but they are major obstacles for smaller commercial banks and their clients. (iii) it is impossible to keep track of gold claims. Gold is rehypothecated multiple times in a fractional paper system and it cannot be ascertained how many claims/IOUs are existing on every ounce of physical gold. Some sources say over 100. Some say even more. Basically the hyper financialization of paper gold makes it worthless as a collateral unless you are prepared to hold it physically. If you don´t hold it, you don´t own it. Full stop.

Certainly gold still plays an important function in the international monetary system at the level of governments and central banks. And it might be used in what some call the "monetary reset" or a new Bretton Woods, where world governments and central banks decide to re-monetize gold at a price multiple times higher than today´s price to balance out their massive debts and shore up their fast inflating fiat currencies.

Below that level though, a new hard asset/sound money is needed to perform the reserve function in a modern digital commercial banking system. An asset that can be easily deposited, withdrawn, custodied and 100% reliably and objectively audited.

And that asset cannot be other than bitcoin.

The reasons why bitcoin is digital gold and much more, I have explained in a number of articles before such as here and here. I have also made the case here for central banks in smaller countries and developing economies to hold bitcoin rather than gold as a monetary reserve.

The fact that bitcoin is 100% auditable for Proof of Reserve and it has zero cost of carry and can be easily self-custodied and withdrawn to a personal wallet, make it the perfect modern reserve asset and collateral upon which a solid banking infrastructure can be built to make E.C. Harwood virtuous commercial banking reborn.

 

For one it will force commercial banks to create fiat money only within certain strict parameters without engaging in monetary exuberance, because everyone can see transparently and in real time on the blockchain the amount of new crypto-fiat currency created by the bank and contrast it with the amount of bitcoin held by the bank as reserve. Second, if the bank goes overboard with crypto-fiat creation, the depositors can withdraw the bitcoins lent to the bank thereby increasing the risk of a bank run. Banks therefore will have the incentive to remain virtuous - within accepted parameters - if they want to remain solvent.  There will be no bailouts.  The market will be free to price the risks of each bank individually.  There will be fully reserved banks which will pay lower interest rates on deposits and fractional reserve banks which will pay higher rates because they will be perceived as more risky.

If you think that I am a just fantasizing, you are wrong. This art of crypto banking is already here, and it is here to stay and replace todays´banking.

BlockFi founder Zac Prince says  "we deliver these banking products, because we’re operating in a crypto first world, at a global and digital scale that wasn’t possible in a traditional banking context. ... If we can build this new infrastructure starting from a blockchain and crypto first mind set, still bringing capital from that old world... we can deliver these products against bitcoin, that’s what we get really excited about."

Translated, with BlockFi you can borrow or lend bitcoins and crypto-fiat dollars. BlockFi taps into traditional cheap dollar credit liquidity pools, swaps fiat for stablecoin dollars (say USDt) and lends it to customers in emerging economies for a higher yield while holding bitcoin as a collateral.  They apply strict loan/collateral ratios and liquidate the collateral in case the ratio goes under a certain safety level. The borrower of stablecoin dollars is happy because he can borrow in a stronger currency and at cheaper rates than in the local currency.

Since companies like BlockFi or Compound Finance will firstly target needing customers in emerging economies, the real risk is for the local banking sector to be sidestepped and for the local economy to become crypto-dollarized (via the use of dollar denominated stablecoins). This will have long term undesirable consequences for emerging economies, both geopolitical and economical.

Therefore political and business leaders in such countries should be quick to realize that there is a short window of opportunity to jump into the bitcoin wagon and reshape the local banking sector around a bitcoin centric model rather than a US dollar centric model. At least - in addition to being sound money - bitcoin is both no one´s and every one´s money and it does not carry geopolitical bias nor political risk.

Emerging economies have also the advantage that the local banking system has not yet achieved the full maturity of the US or Europe, which makes the first much more flexible and reactive in adapting to sudden changes vs the latter.

But moving towards the described bitcoin standard in commercial banking is not only a task for the local banking sector.  It is a transition process which involves the whole society and needs smart and courageous political leaders and regulators quick enough to grasp the dimension of the opportunity they are facing.  If they do, emerging economies can lead this revolution and in 5 to 10 years find themselves in a position of great advantage towards both direct competitors and the developed economies. 

 

A framework to jump start crypto investments and attract crypto capital and human talents

Emerging economies need to develop a competitive framework to jump start the sector and activate a virtuous cycle:

(a) adopt crypto friendly regulations, mainly dealing with the recognition and the legal status of digitally tokenized assets (such as stablecoins and tokenized securities). The regulatory framework implemented by Liechtenstein, Switzerland and US State of Wyoming are good examples (*).

(b) implement an agile crypto bank charter to regulate mainly the issue and the custody of crypto assets, like the one implemented in Wyoming for the SPDIs (Special Purpose Dep. Institutions). AvantiBank was recently granted the charter of crypto bank in Wyoming to custody crypto assets and to issue crypto-fiat dollars.  It is important to note that the US OCC has recently issued an opinion letter which allows US banks to use blockchain infrastructure and existing stablecoins or issue their owns. This - if confirmed by coherent governmental policies - might be a radical paradigm change which might trigger a global shift towards crypto banking.

This is an important point that regulators and politicians in emerging economies should carefully consider: the US regulator proposes the easiest and fastest of all the solutions, just plug and play into the Bitcoin blockchain to build a new banking infrastructure.  Very smart.

(c) incentivize the local establishment of crypto exchanges.

(d) adopt a CBDC which shall be 100% interoperable with crypto currencies in order to allow a frictionless exchange with bitcoin and stablecoins. A fintech based digital currency - not interoperable with cryptocurrencies - will not achieve the objectives that I have described. Clearly it does not have to be decentralized nor permissionless like Bitcoin. It is perfectly fine that it is fully centralized to perform the same functions of the fiat currency, but the most important thing is that its monetary supply should be fully auditable on the blockchain, just like current stablecoins. Indeed its architecture can easily mimic that of similar stablecoins.

(e) grant incentives to attract both crypto capital/investors and talented human capital. Tax incentives are very important.  Money flows where it is treated better. But also human capital relocates where business opportunities and living standards are better or at least where better prospects are offered. Citizenship offered for investment or after a few years of permanence are also sought after. There are plenty of very talented individuals and investors in the crypto sector who are ready to leave Europe or the US to relocate where their money is treated better but also where basic freedoms are truly enforced and the environment for crypto investments is more friendly. It is a fast growing global movement. At a time in which Europe and the US are rapidly becoming oligarchic run, corrupted to the core, “police states” and high taxes will be introduced to expropriate the leftover wealth of the once productive middle class (not the super rich of course), emerging economies in South America and Asia can offer a safe heaven to crypto capitals and human talents.  Small, but politically stable countries like Uruguay (also known as the Switzerland of South America), Costa Rica or Singapore could reap huge dividends from such smart policies.

 

The bitcoin reset

The lost art of commercial banking described by E.C. Harwood is in essence the foundation of industrial capitalism.  Paradoxically, this is exactly what - according to American economist M. Hudson  - communist China is doing right now: "While the US does not gain wealth by investing in means of production but in financial ways, China gains wealth the old-fashioned way, by producing it. And whether you call this, industrial capitalism or a state capitalism or a state socialism or Marxism, it basically follows the same logic of real economics, the real economy, not the financial overhead. So, you have China operating as a real economy, increasing its production, becoming the workshop of the world as England used to be..."

In essence this is industrial capitalism vs financial capitalism.

"The idea of capitalism in the 19th century... was to get rid of the landlord class. It was to get rid of the rentier class. It was to get rid of the banking class essentially..."

"[Today Americans] say that public investment is socialism. Well, it’s not socialism. It’s industrial capitalism. It’s industrialization, that’s basic economics. The idea of what, and how an economy works is so twisted academically that it’s the antithesis of what Adam Smith, John Stewart Mill and Marx all talked about. For them a free-market economy was an economy free of rentiers. But now [Americans wrongly assume that] a free-market economy is free for the rentiers, for the landlords and for the banks to make a killing. America has concentrated the planning and the resource allocation into Wall Street. And that’s the sort of central planning that is much more corrosive than any government planning, could be.”

 

This sums up pretty well what fully developed western economies have become: neo-feudal economies, neo-rentier societies, very far from the industrial capitalistic model which made us prosper and lead the world from 1800 until the 1970´s. Today China - a country theoretically governed according to communist ideology - has become the true follower of the industrial capitalistic doctrine. And this tells you how the world will shape up geopolitically in the future.  The financialization of the economy - initiated in the US and now followed even in Europe - is the terminal disease of western developed nations.

As Unchained Capital´s Parker Lewis puts it, financialization is the "direct result of misaligned monetary incentives, and bitcoin reintroduces the proper incentives to promote savings. More directly, the devaluation of monetary savings has been the principal driver of financialization, full stop. If monetary debasement induced financialization, it should be logical that a return to a sound monetary standard would have the opposite effect."

Of course there will be dire consequences for the western legacy financial system. The ruling elites will continue to kick the can down the road to preserve the status quo as long as possible. But eventually what is unsustainable will not be sustained and the whole system will need to reset around the only two existing real monetary assets without counterparty risk, bitcoin and gold.

 

Conclusion

Definancialization, the end of the aberration of negative interest rates and a return to a capitalistic productive society based on sound money, will be all the positive consequences of the system reset.  Better still, a new economic renaissance is looming based on hard money and sound banking architectures and principles which are not dictated from above but are the result of the action of free market forces and well aligned incentives. Emerging economies should smartly position themselves at the centre of the new bitcoin standard.  They can be at the forefront of a new economic renaissance which might mimic the successes of the tiny but wealthy Italian Maritime Republics which have led the world´s economical and cultural development from the end of the middle ages through the renaissance.

They have absolutely nothing to lose and all to gain. Like with bitcoin, this is an asymmetrical bet with unlimited upside potential for emerging economies. 

 

(*) Together with colleagues and fellows at Thinkblocktank.org we have helped governments shape innovative crypto friendly policies and legislations both at EU level and nationally in Switzerland, Liechtenstein, Malta and Luxembourg.

 

#crypto #blockchain  #bitcoin #centralbanks #cbdc #stablecoins #gold #goldstandard #preciousmetals

 

(c) www.bianconiandrea.com - 2021

 

Legal Disclaimer: The website and the information contained herein is for general guidance only and it does not constitute legal advice. As such, it should not be used as a substitute for consultation with lawyers on specific issues. All information in this paper is provided "as is", with no guarantee of completeness, accuracy, timeliness or warranty of any kind, express or implied.

 

Investment Disclaimer: The website and the information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this website do not constitute investment advice.

 


King Dollar will be King of crypto-fiat

Published January 7, 2021 on Medium and Hackernoon 

 

While the bitcoin community seems fully absorbed by the daily ups and ATHs of bitcoin, it seems that most people have missed what might well be the biggest and most impactful news of the year 2021 for the crypto sector.

Yesterday´s BIG news was that the US bank regulator OCC issued an opinion letter in which it allows US banks to use blockchain infrastructure and stablecoins.

I posted this yesterday but it seems that — with a few exceptions — the crypto community did not fully register the importance of such an event. This is not simply important, it is HUGE. It is like banks saying “OK we´ve criticized bitcoin and the crypto sector for 10 years until yesterday…but sorry we were wrong, now we like it and we will start using your infrastructure and even crypto assets like bitcoin and USDC, USDT for our payments”. BINGO.

Now, I wanted to add some more food for thoughts on that topic.

This is a very smart shortcut taken by the US regulator to legitimize the use of crypto dollars and counter the Chinese DCEP. Basically, while the DCEP is up and running and everyone else still ponders how to issue CBDCs, the US said “digital dollars in the form of stablecoins already exist, US banks can use them”. At a time in which the world economies are coming to terms with the problems created by the dollar hegemony and its weaponization for geopolitical reasons, this move will strengthen again the dollar hegemony on the world economy, but in a much more positive way. I mean, geopolitically, I see as a net positive the fact that the US move makes SWIFT practically obsolete and, while projecting the use of the crypto dollar as a global instrument in the digital world, it reduces also the ability of the US to use it as a weapon for its geopolitical agenda. And this is no doubt positive for the world. Let´s see how this goes down with the US establishment in the future.

But there are also additional important aspects that we will have to consider in the next few weeks and months to fully appreciate the implications of this very important decision:

(i) how will this impact on Fintech projects?

(ii) this allows US banks to offer additional services to their customers such as buy and custody bitcoin and other crypto assets, as well as to make loans while using crypto as collateral. It suddenly opens the door to instant crypto mass adoption and the onboarding of the legacy banking sector and their clients.

(iii) US banks can now run crypto nodes and even mine cryptos.

(iv) US Banks can now issue stablecoins. Therefore expect to see soon the Goldman or the JPM crypto dollar, the USD-GS or USD-JPM.

(v) possibly this might positively impact on the liquidity and lower the chronic dollar shortage of the Eurodollar inter-bank market

(vi) a dollar CBDC becomes then redundant?

(vii) adoption by banks can be scaled up massively by using the Bitcoin and Ethereum protocols which support the existing stablecoins without the need to build up any new infrastructure or specific wallets. All the work has been done the banks just have to plug in. The same goes for the banks´ own stablecoins, which can be up and running in matter of months. Banks will also benefit from the safety, security, resiliency, speed and low cost of transacting using such protocols. Very convenient, easy and very, very smart.

(viii) until yesterday Bitcoin was a parallel financial system. Tomorrow it will be the primary one, the backbone of the new financial digital system upon which everything could be built. Ray Dalio should have listened some time ago.

(ix) last but not least, with this move commercial banks position themselves one step ahead of the FED in its decision regarding the CBDC. Basically, banks consolidate their role as service providers and intermediaries also in the new digital-crypto world. This means that, should the US launch in the future its own CBDC and decide to drop helicopter-money stimulus directly to its citizens, this will be done by commercial banks crediting the citizens´ wallets rather than directly by the FED.

 

Conclusion

If the dollar wants to win the digital race and remain the reserve currency in the future, the only way to achieve that is to beat its competitors, the Chinese DCEP and the Euro.

At a time in which Europe is tragically slipping towards a dystopian reality — made of totalitarian controls, restrictions of constitutional liberties, ubiquitous surveillance, destructive lockdowns and soon to come expropriation of private properties via unsustainable taxation levels, implemented by a malignant gang of incompetent and corrupted bureaucrats/politicians serving an oligarchic elite of billionaire monopolists/rentiers and megalomanic “resetters” — the US$ can easily consolidate its primacy by offering the free people of the world a crypto-dollar without the surveillance tools that the Chinese have built into their DCEP or the EU elites wish for the Euro.

This will ensure that the US$ will remain the king of fiat-crypto, along with bitcoin the king of crypto. This first step, is an important one in the right direction.

Legal DisclaimerThe website and the information contained herein is for general guidance only and it does not constitute legal advice. As such, it should not be used as a substitute for consultation with lawyers on specific issues. All information in this paper is provided "as is", with no guarantee of completeness, accuracy, timeliness or warranty of any kind, express or implied.

 

Investment Disclaimer: The website and the information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents contained in this website do not constitute investment advice.

(c) www.bianconiandrea.com - 2021