A Slow Walk Away from Banking
What a time to be in crypto!
It seems that banking and cryptocurrency are top of mind for investors and US policy makers at the moment. We are seeing an about-face from the Federal Reserve when it comes to their treatment of crypto assets. A clear example of this shift is the recent rejection of Caitlin Long’s proposal to start a crypto-focused bank called Custodia. Custodia’s application for FDIC membership was rejected in January but the reasons for the rejection only came to light with the accompanying FED statement released Friday. The 86-page statement is 14 times longer than the next-longest FED denial order in history! That speaks volumes about the messages the FED intended to send to both banks and crypto companies, it is not an encouraging message.
The core of the rejection centers around the FED’s fear that stablecoins issued by a member bank would be viewed as having a de facto guarantee from the FED, and that with this implied backing, they may gain in popularity very quickly. This could potentially overtake other traditional means of moving and storing money in favor of the stablecoin. (LOL EXACTLY!!) The FED’s rejection of Custodia’s application is a sharp departure from previous indications from the Office of the Comptroller of the Currency (OCC), which had suggested that member banks would be the best issuers of stablecoins. So, it seems that the FED and presumably the OCC also have changed their mind about stablecoins and US banks!
There is also news breaking today that the G7 will be coming out with additional regulations around crypto assets. To this we say, “GREAT”. We’ve been asking for clear regulation for a long time. The “problem” for the US is that I suspect that coordinated G7 action will be very unlikely to happen in the way that the US is hoping. The United States has a much different view of the role(s) that digital currencies should play in the global economy than do other G7 member countries. The United States clearly has the most to lose in a migration away from the US dollar as a global reserve asset or as the world’s transactional currency of choice for international trade. Other G7 countries have less to lose and potentially more to gain from the introduction of stateless currencies. The United States is looking to defend its monopoly. So, assuming that the G7 coordinated action to slow the growth of digital assets does not materialize, (which it won’t) what is United States still able to do? They can make it harder for crypto companies to do business. And that’s where we are.
As I shared last week, the closure of Silicon Valley Bank and especially the seizure of Signature Bank, indicates that the FDIC is looking to slow down the growth of digital assets by denying firms associated with them easy access to US banking. This IS negatively impacting Sarson Funds, but only from an operational standpoint. Our funds had accounts with Signature Bank, and now we need to open new accounts with different banks. Two Chicago-based banks are competing for our business. An annoyance yes, but it’s not materially impacting our operations. Banks still accept firms that do business in our industry since crypto is not an illegal industry and won’t likely become illegal. I say this because this is what the regulators seem to not understand. The crypto industry is so much more than just alternative banking as they often like to portray it.
Public Blockchains and their Immutability
Public Blockchains (like Bitcoin and Ethereum) are already powering online communities, smart cities, self-driving cars, international trade settlements, digital identities, advanced record keeping, supply chain management, online art and music sales, AI and AI management programs, online gaming, gambling and metaverses, distributed computing, ticket sales, digital collectables, distributed telecom, environmental projects and anti-corruption initiatives and many other small industries. So unless these applications of blockchain technology are going to be deemed illegal, which is unlikely given how widespread they are (and not associated with banking), any law governing cryptocurrencies would need to be very narrow.
What can be done? Make Bitcoin illegal? It really wouldn’t matter to most crypto firms. Firms would divest of Bitcoin and use a different public blockchain to do everything they are doing now. Stellar, Tezos, Ethereum, Casper, XRP, Cardano, Solana and many others would simply fill the void. And Bitcoin wouldn’t die. It would just be used as it is now, by firms outside of the US. It would be a horribly ineffective policy move. Maybe make all blockchains illegal? Public blockchains are already being used to further technology in every industry and no one is going backwards who understands technology. You really can’t make the use of technology illegal, not when the applications are so varied. It would be like making it illegal to use the internet generally. I know I don’t need to tell you all, but someone needs to tell Biden/Yellen and others that are still missing the bigger picture.
The good news, for all of us anyway, is that prices are not being negatively impacted by the efforts of the government. We’ve seen Bitcoin rally in the face of banking stress before and once again its flexing its muscles as an alternative to an increasingly dysfunctional fractional reserve banking system. As one author puts it “Crypto Is the Solution to Bank Runs, Not the Cause” and another, “Bank Consolidation Threatens Freedom, Makes Case for Bitcoin” No reason to believe this will change anytime soon. At Sarson Funds we expect increasing prices for Bitcoin and other crypto assets as banking stresses increase.
Coinbase Takes a Stand
Meanwhile, the US crypto industry is not going down without a fight. Coinbase has announced they are suing the SEC. A host of others have done so as well. So many in fact, that we have had to make a Google sheet to keep track of them all. You can see that here.
We also expect to see lawsuits from shareholders and debtholders of Signature Bank who think that the seizure of their bank may have had more to do with crypto than it had to do with the bank’s reporting or management issues.
Much to the chagrin of FED I’m sure, US companies continue to drive increased digital asset adoption. Financial sector leader NASDAQ, expects its custody services for digital assets to launch by the end of the second quarter. Fidelity, turned on retail purchasing for Bitcoin and Ethereum on their platform in March. Fidelity and Blackrock continue to operate and expand their market share for the rapidly expanding Digital Asset sector. We thank these institutions for their leadership, without them and a few others, the US’s chances of still being a leading global financial hub in 20 years’ time would be greatly reduced. As it stands today, the US has the ability and strategic positioning needed to capture a large portion of the future blockchain-based global financial industry, but bad policy at the Federal level is a risk to that hoped outcome. This is what’s really at stake.
Evidently, we are not the only crypto firm that has seen what is supposed to be the easiest part of our business (writing checks and sending wires) become a challenge. Our friends at Coinbase sent us and all of their institutional clients, a nice email over the weekend letting us know that they have waived fees for sending and receiving stablecoin USDC for the first 250 transactions a day, more than enough for us. Related and relevant, we recently received an opinion from our attorney that stablecoins could be used to facilitate client deposits and withdrawals. This is what a slow walk away from banking looks like. Thank you, Coinbase, for making it a cost-saving move as well!
Disclosures: Not investment advice. The Author, Sarson Funds, Inc. and its affiliated managers may hold positions in the projects mentioned.
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