Stealing bitcoin’s golden narrative and getting BIS’d — Bitvo

It’s a “fraud,” according to JP Morgan’s Jamie Dimon in 2017.

Cranky old Charlie Munger said of Bitcoin in 2021: “I think I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization.”

And in a recent interview, Nassim Taleb said it wasn’t even good for what they claimed it was used for, which was money laundering. Because, of course, if you can track something, it isn’t very good for that application.

Then while the major crypto exchanges were engaged in a duel with the SEC, Blackrock applied for a Bitcoin ETF license. Blackrock’s Larry Fink then called bitcoin digital gold.

Huh.

Coming from the firm that was tapped to be the bond buyer and manager for the Federal Reserve in 2020, that’s kinda interesting.

On the other hand, the Central Bank of Central Banks, the BIS, was putting the blade to crypto, blockchain, and DeFi in a recent report to help pave the way for CBDCs.

So basically, the biggest players in the space have crypto on their mind.

I wonder why?

Let’s dive a bit deeper.

The summer of 2023 hasn’t been boring

Crypto has been rich with headlines.

Three big wall street firms, including Blackrock, applied for ETFs as soon as Coinbase, Binance, and Kraken were being the equivalent of “fingerprinted and photographed” in the digital realm.

The former CEO of failed quasi-hedge fund Celsius was finally put in bracelets.

The SEC is “slapping crypto in the face” with hot slices of pizza daily (As the Fly would say) while another crypto bill just came out in Congress suggesting that the CFTC really is the right place for regulation to reside.

There are rumors of the Mt. Gox BTC hoard hitting the tape as the government liquidates another tranche.

And yet bitcoin remains surprisingly resilient.

XRP finally got a ruling, but it looks a lot more nuanced than is being presented.

And all around us, the broader market is suffering from a form of interest rate schizophrenia.

If you followed the old Wall Street saying to sell in May and go away, you would have missed all the fun.

Speaking of rates…

The economic backdrop is like a soap opera

The overall market is trying to figure out where the Fed will pivot, when, and why. In reality, they are trying to influence the behavior of JPow and see if they can goad him into a move.

Every day whispers of anecdotes and data contradict each other like a UFC cage match.

But as old market mavins have pointed out, the reversal of an upside interest rate cycle isn’t usually a buying opportunity. It is often a marker of something that has failed, resulting in sellers instead.

There appear to be many holding on by their fingernails while crossing their toes, hoping that a reversal is coming. The hope for near-zero rates in the future remains surprisingly stubborn. Although, it is much more likely that rates will remain closer to the current state for the foreseeable future.

Under the surface, lots of refinancing is in the hopper. Commercial real estate has a conundrum as higher rates, remote work, and seemingly lawless jurisdictions give investors a lot to contemplate.

And it is remarkable that everywhere you look in the Western world, you see the same problem with execution, thinking, and results. It’s like the kid deciding to cheat by copying at the work of the dumbest kid in class. And they keep doing it for every class they have together.

The results become self-referential and this keeps all eyes focused on money.

Which brings us back to crypto

Blackrock and Bitcoin may not mix

The Blackrock announcement was hailed as a triumph by many. A validation of sorts. What they forgot to take into account was that Blackrock is a unique outfit with very special access.

In 2020, they were tapped by the Federal Reserve as their bond-buying partner and manager. They also have a history of advising governments in times of financial stress, including providing solutions for financial crises of various kinds.

This gives Blackrock a uniquely powerful position with regard to the US Treasury and Federal Reserve. It gives them uncanny insight and influence over the monetary policy of not just the US but the entire world.

So when they move, it cannot be seen in isolation and without context.

Like most ETFs in the space, ETFs give investors access to the product. But they also introduce a series of potential challenges. One is tracking errors where the price of the product doesn’t accurately reflect the price of the underlying asset.

Then there are the fees charged for management and custody. These chip away at returns month after month, meaning that while you gain exposure and some upside, you are losing basis points in the process.

But that’s not all you are losing.

If Bitcoin is a parallel system, a way of stepping out of the system, having the most influential financial entity on the planet managing a BTC ETF may not be the flex some think it is.

Which brings us to the recent BIS report on crypto.

The BIS

The BIS released its recent report on crypto in July 2023. The beginning of the report does a great job of summarizing the space. Then it dives into the purpose of their paper, which is to set the stage for their preferred outcome, which we will get to in a second.

But first, let’s review what the BIS is and why its pronouncements, activities, and actions are important.

The BIS was founded by some familiar names in 1930 in Basel, Switzerland. They are considered the Central Bank of Central Banks. Which is to say, the various central banks are members of the BIS which is served by various central bankers and monetary authorities.

However, that isn’t the most interesting thing about them.

They are a private institution with some extraordinary powers. As in, they have a level of legal protection or rather the absence of legal risk that few institutions on the planet enjoy. According to Corey Lynn of Corey’s Digs, the BIS operates with extraordinary legal exemptions that are extended to their members, employees, and agents.

This is to say, this organization and all of its partners operate outside of the legal system of almost every nation. Which, as it turns out, applies to pretty much every other central bank.

One immunity mentioned by Corey in her article is that the BIS enjoys Immunity of Premises. She interprets this as meaning “that there is absolutely no transparency, traceability, or accountability for where funds are being moved.” Which, as Taleb pointed out, is the opposite of the problem with Bitcoin, because traceability is an undesirable quality for money laundering.

So BIS prognostications about crypto and their preferred control option, CBDCs, have to be carefully considered.

Let’s get back to their recent report.

Getting BIS’d

The report begins with a good summary of crypto and then dives into the criticisms. There are several valid points with regard to crypto’s current problems and risks.

But there are a couple of interesting points, at least the way they were presented and shaped.

They have a particular interest in stablecoins for obvious reasons. As a derivative, stablecoins piggyback on the currency managed by the central banks.

One of the statements that was interesting in this section was the claim that fiat currencies “whose value is guaranteed by a central bank.” But they don’t unpack this statement.

Remember, the Central Bank is, in most countries, a private institution, and the currency of these nations is backed by the full faith and credit of the government. Or in other words, the value of a currency is some conglomerate of the value of the resources, assets, and productive capacity of the citizens of the nation and the ability of the government to extract a tithe (taxes) for the services they provide. And this value is relative to other reflections of these capacities in other nations.

And given that as a group Central Banks have presided over sustained loss of value, this claimed guarantee may seem a little overstated.

However, one recurring theme in the paper is to describe the crypto ecosystem as self-referential.

As in it derives its value from itself or from the other elements inside of the crypto system. And to take it one step further, they say that crypto doesn’t contribute to the financing of the real economy.

These statements make sense when you are pro-CBDC and beyond the scope of any legal remedy by any government on earth.

But are these valid criticisms?

Creating something from nothing and charging for it

In terms of contributing to the financing of the economy, the statement in the BIS paper, taken at face value, might have merit. After all, the crypto system doesn’t have access to the ability to create and sustain the one thing that makes the modern financial system work. Although it could be argued that they have tried.

2022 was an example of the failure of this one part of the financial system that makes finance work.

And that is credit.

The banking system creates something out of nothing and charges a fee for it. This is how money is created in the financial system. As Australian economist Steve Keen and Central Bank advisor Richard Werner have both pointed out, the credit is extended first, and then the deposits come later.

This process ironically makes the traditional financial system seem like the ultimate self-referential system.

But having said that, there are many professionals, services, real estate agents, and car dealerships (and don’t forget chip manufacturers) in the real economy that have benefitted as a result of the development of the trillion-dollar crypto industry. They have facilitated the exchange of assets based on the proceeds of the industry. Lots of the subsequent asset purchases can be used for another financial idea, collateral. And collateral is valuable for securing credit. So not contributing to financing the real economy is perhaps only partially true.

Then you might consider the development and building of crypto itself, which is technically financed by tokens, coins, and various innovative digital assets.

But it is interesting that they choose the term self-referential. The measure of the value of various tokens is based on their value relative to something else, which is typically measured in fiat currencies. So not entirely self-referential. Although, for Terra Luna and UST, this would be a valid statement.

But what the BIS paper is avoiding in this critique is the insight from Jeffrey Tucker on Bitcoin.

It’s about Bitcoin, not bitcoin

I started reading Tucker’s work when he took over for George Gilder as Gilder was completing his latest book, Life After Capitalism. He went on to found the Brownstone Institute, a digital alternative media platform for a wide variety of opinions.

He has been a Bitcoiner since near the beginning. And he penned a piece on Bitcoin in 2020, which recently found its way back onto Twitter.

His argument is that the magic of Bitcoin isn’t any one part and not exclusively the money part. Things used for exchange have varied over time and were determined through necessity. He refers to Carl Menger’s statement that money originates from the market, not the government.

So, the value of Bitcoin is based on something else.

Part of it is a decentralized payment infrastructure that is outside the control and influence of the government and the banking system. Another is the peer-to-peer network that comes in a software package that acts like a chameleon. It can be a payment system, immutable ledger, storage and transfer system.

Now another way of looking at this would be Bitcoin is an economic seed in a software program. The seed creates a way to measure and exchange units of value between various parties and keep a record without the need for an intermediary.

And the token is a reflection of the value of that unique monetary infrastructure.

Which has become even more important since SWIFT was weaponized to kick Russia off its key international payment infrastructure.

More importantly, what Bitcoin has done is open up people’s minds to a range of possibilities for financial interaction. And just as the idea of creating something out of nothing and charging a fee for it, like with credit, new ideas can have powerful implications.

Especially for legally immune private banking institutions running the other infrastructure.

Bitcoin demonstrates the power of a simple idea

In a recent interview, Dan Morehead of Pantera Capital described modern banking as the development of double-entry bookkeeping by the Medici banking family of Florence.

Crypto, according to him, simply digitizes and upgrades the process.

This is a compelling argument.

But here, the focus is still on the ledger rather than the two steps beyond the ledger.

The first step is a software package that acts as an economic seed for trade, record keeping, and exchange through a peer-to-peer payment system outside the current banking system. The one so eloquently described by Jeff Tucker. Yes, there are on and off-ramps between the two, but like any asset, it is measured relative to something else.

The second, and I would argue a more significant step, is that Bitcoin has unveiled the magic and the mythology of money.

Martin Armstrong of Armstrong Economics, an avid coin collector and economic historian, has pointed out that all forms of money come and go. Like when one British pound coin was rendered to no legal value while a new one obtained value. All that was required was a redesign and the stroke of a pen.

What the battle between the old world and the new is over is the discovery of the elephant in the room.

That creating something out of nothing and charging a fee for it is the ultimate systemic risk.

Which is to say, it is a tad ironic to call crypto worthless and lacking in intrinsic value when you might likely describe the entire concept of credit in the same way if it was created today.

Because now we have the ability to facilitate exchange between individuals in a reimagined way. A way that can reshape relationships and value discovery, creation, exchange, and the nature of economic activity.

And millions of minds considering what this could be.

_____________

Bitvo is a crypto trading platform regulated with FINTRAC as a Money Services Business and as a restricted dealer with the Canadian Securities Administrators.

Originally published at https://bitvo.com on July 18, 2023.