Episode Transcript
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Speaker 1 (00:02):
I'm Stacy Murray Ishmael, Managing editor of Crypto for Bloomberg News.
And this is Bloomberg Crypto, a daily Bloomberg I Hood podcast.
It's Friday, March seventeenth. Well, it has been another wild
(00:30):
week of financial mayhem, some of it connected to crypto,
some of it very trad fi because this time a
lot of that crisis has focused on banks. Stocks tumbled
today as fears grow over the stability of the banking industry,
now that two US banks have failed this morning. The
failure of two regional banks has revealed the delayed effect
(00:50):
of the federal reserves approach to fighting inflation, the biggest
bank collapse since the two thousand and eight financial crisis.
It all started earlier this year when Silvergate Cappit shut
down operations. The California based bank was known for being
one of the last remaining crypto friendly banks and counted
among its clients vega crypto companies like coin Base and Gemini.
(01:13):
But its most famous or infamous client, depending on your perspective,
was the now bankrupt crypto exchange FTX and its sister firm,
Alimeter Research. As these two former crypto giants faultered so
did Silvergate. In addition, Silvergate fell under increasingly intense regulatory scrutiny.
(01:35):
Then last Friday, just a week ago, the tech and
startup focused Silicon Valley Bank collapsed. Crypto didn't cause Silicon
Valley Bank to collapse. It actually had relatively low exposure
to digital assets at all. But what did happen is
that Circle, the issuer of the token known as USDC
(01:56):
the stable coin, revealed that it had a three billion
in dollar exposure to SVB. That led to some slightly
panicky investor response in the crypto markets and circles. Stable
Coin was markedly less stable over the weekend. By Sunday,
regulators had made it clay that they would make all
(02:18):
depositors whole. But at the same time, yet another bank
was getting seized. New York State regulators said they were
taking possession of Signature Bank. Now, Signature did have pretty
significant ties to the digital acid industry, both because it
had crypto companies who deposited money there, but also because,
(02:41):
like Silvergate, it ran a crypto FUCUS payments platform. Signature
Bank represented again one of the largest bank failures in
US history. So you've got these trio of bank closures,
two of which were actually crypto banks, one of which
did have exposure to crypto in the form of having
been one of the banks of choice for Circle. Confusingly enough,
(03:04):
there was a major bitcoin rally happening while all of
this was going down. What does this even mean in
the aftermath of one of what's been one of the
biggest weeks in finance so far this year, how has
the crypto industry faded and how does it move forward? Fortunately,
we're joined today by Chris Nigi, a senior executive editor
here at Boomberg and my boss. He joins us now
(03:26):
to talk more about the state of markets, crypto and otherwise. Chris,
Welcome back to the podcast. Hi, thank you for having
me Stacey. I feel like it's been an interesting time
in markets. Is that a fair assessment of the world
(03:47):
depending on what If your baseline is two thousand and eight,
maybe it's for a little sleepy but versus practically any
other time, I think it's fair to say we're at
an inflection point, an interesting time, and some of that
interestingness has manifested in institutions that are supposed to be
entirely outside of the universe of things. This podcast cares
about right there. There were three bank collapses in the
(04:11):
past two weeks. As we record this episode, credit suite
shares are at not looking like positive levels of what
you would want a bank to be at. We have
no idea what the next few days are going to
look like, and yet we have a Crypto rally. It's
so good. I mean, it's sort of everything come full
(04:33):
circle and there's a lot to unpack and what you
just describe these things. These are financial institutions that five
years ago probably no one would have associated with Crypto.
Certainly several of them probably wouldn't have existed unless Crypto
existed as well. But you're seeing Crypto as sort of
at least a purple player in all of the drama.
(04:53):
It's definitely interesting in that regard. I feel like the
rally to some degree, which is going to be the
most ironic the top in the entire time that we've
been covering this thing, is maybe a restoration of Crypto
to its somewhat peripheral role, the kind of renegade outside
a role that it first imagined himself as. Now that
(05:14):
to become because it did have its moment in the sun.
There was a period where I think people were under
pressure to believe the crypto is becoming part of the
institutional picture, and what's happened in the last couple of
months I think has been a pretty resounding rejection of
that idea and crypto being sort of kicked to the sideline,
kicked to the curb a little bit, and funnily enough,
(05:35):
that seems to be where it's most apt to thrive.
And now we're getting a rally because everyone's like, well,
good luck with your banking system. Maybe crypto isn't such
an awful thing after all. When you use the phrase
kick to the side, I mean, it's almost like that
metaphor really describes how US regulators in particular have been
treating this, Like there's this enormous narrative right now, and
(05:58):
I think it's a somewhat misleading one. On the merits
that the reason that Silicon Valley Bank silver Gates signature
went down, like the immediate proximate cause was crypto. The
reality is much more complex than that Silicon Valley Bank
in particular didn't actually have a heroic amount of exposure
at all to digital assets. But the crypto faithful have
(06:20):
really seized upon this idea that you're describing that it's like, well,
if you all don't want to bank us, we'll be
fine over here. We have defied, we have table coins.
We're going to figure this out. Yeah. Again, a million
little strands to connect. But one thing you can say
is that when big tectonic crises like destruct, your breakout.
And that's what it seems like. Certainly crypto didn't have
a role in the huge role in the siability mismatches
(06:43):
playing banks. Well, when you have the beginnings emanations of
a crisis and I I don't want to push you too far,
this is a day worth recording. When it looks particularly
grim for the financial system, that God knows how it'll
shake out. There are reasons to think that that's overborne
as well. But you can feel regulators coming into this
and operating in this with a kind of sentiment that
(07:05):
crypto is maybe a luxury that a we can afford,
and b is kind of part of the problem, and
that it's luring you know, it's a bubble phenomenon that
was luring a certain amount of kind of crime to
the borders of the financial system sort and they've seen
some pretty big blow up since our last discussion, and
(07:26):
tolerance for the kind of shenanigans that I think regulators
view Crypto is representing is pretty much zero at the moment,
so consciously or unconsciously seemed to be trying to chase
it out of a system that they're worried about, just
at it's sort of core. At this point. What I
find sort of fascinating is how this is now being
(07:47):
seized upon as a victory for and buy people who
over the weekend were like freaking out about Circles exposure
to one of those traditional banks to an extent that
caused circles stable coin to significantly deepeg from the dollar. Like,
how would you describe the psychology at play here? I mean,
(08:09):
where things start to move very fast, and going from
the favorite bank going under to giant Rowley and Kryptberry
is extremely fast. I think we can agree with that,
but it's as you've lived through these crisis periods before,
the speed with which history starts to unfold that is crazy.
(08:30):
And Crypto's favorite thesis the whole time has been that
when the banking system goes to proof, they'll be there
as sort of the inheritors of the dilapidated Kingdom. It
probably wasn't that difficult for them to jump from one
to the other, even though it was their bank. It
was their bank that went under. They maybe I agree
that they didn't cause it to go under, but the
(08:51):
dCas came past and furious, and look, is that clearly
the reason Bitcoin's going up? To be honest, that that
may be the reason. That's certainly a suggestion, and a
markets journalist, I've never convinced in any one one idea,
one explanation is clear way the right one, I would
point out. I mean, people thrown a lot of money
at things like the ARC Fund in the last week.
(09:13):
They've punters have been pouring money into regional bank stocks
of all things like Hope Springs Eternal. It may just
be the same ethic that's driving that. You know, we
had a big fallow in bond rates, not for good reasons,
but interest rates to go way down, and there's a
pavlon Van reaction and cryptos based to that as well.
So while the usurpers of the banking system thesis is
(09:36):
definitely the most attractive one to crypto proponents right now,
it's not clear that it's exactly that's it's indisputably the
reason for the rally we've seen. I'm going to use
this phrase only because there's like literally a dozen headlines
about it on the Bloomberg terminal right now, which is
credit to fold swaps. And in two thousand and eight,
there was this idea that you know, people would look
(09:56):
at the credit to fold swaps against the United States government,
which is essentially an armor get untrade. Right if you
think that the United States government is not going to
repay its debts, it sort of doesn't matter, like what's
your plan be here, Like you're talking, you're doing complete
financial armor get on. And so right now we're in
this situation in which the bitcoin and the crypto thesis
(10:16):
that you're describing is like, well, if all banks go bust,
bitcoin is going to persist. But what we've seen is
that if all banks go bust, getting in and out
of crypto becomes hard, if not untenable. So I think
what I find fascinating is the you know, it's almost
like that underwear gnomes Self park joke where they're like,
we're going to steal some underwear. There's going to be profit,
(10:38):
but in between is just a big question mark. I
think that that's fair. I mean, I wouldn't want to
say that there's absolutely no rail into crypto if the
banking system goes under by would agree, it's not the
all of the sort of convenient ways in Middle America
I access their crypto, their crypto bags would would would
presumably be gone. Are very much in the process of
(10:59):
being rooted out as it is. Never mind, the banking
crisis regulators seemed pretty peld bat. I mean, they've taken
down two of the big sort of conduits for that
specific task in the last you know, seven days. So
I think the crypto the bitcoin faithful would say, oh,
we never we never needed those conduits anyway, there's still
basically other ways to get into the bitcoin network. And indeed,
(11:22):
I think it's true that over this weekend lots of
them did. I think that was that sort of one
notable fact of the last seven days, that the amount
of crypto owning addresses surged over the weekend. So the
kind of rhymes with their theory and why why the
rally happened. Another theory is that there's a bunch of
whales to kind of control everything. It's kind of kind
(11:43):
of goes against that that thesis, you had a pretty
heterogeneous group of people deciding all at the same time
Saturday and Sunday to take a stab atus. So I
think you're right. I think that the dream of sort
of a seamless well some people sort of track five
stream of relatively seems give and take between the two systems,
seems like pretty much a pipe dream at this point.
(12:05):
I've no doubt that there are bitcoin masks Maximus stall
over the world. It would say we never needed that
stuff to begin with. We'll be right back with more
of the top crypto stories, joined by Bloomberg Senior Executive
editor Chris Niji. What about the defied people, Because one
(12:28):
of the storylines that I have found personally fascinating is
the fact that decentralized finance, this corner that's supposed to
be even further away from traditional banking than you know,
Bitcoin and ETHA, turned out to be heavily underpinned by
stable coins, which by definition are tied into traditional banking systems. Yeah,
(12:48):
they have they have to be feeling a little queezy
about that as well. But although that, I mean, let's
face it, that's the that's sort of the rarefied realm
of the absolute true believers, I'm sure, in spite of
the inconvenience that all of this is causing and their
general antipathy towards anything kind of new wavy and new
fangle that's going on, which you know is going to
(13:09):
rewide on de fight already has lar Joy that their
public posture is that at some level this is all
good and that this is precisely the environment that we
expected to thrive in when we're all the banks go
out of business. And as all of this is happening,
there are some pivotal foundational like pick some kind of
overblown metaphor court cases working their way to the system. Right.
(13:32):
You have the Securities and Exchange Commission versus Gray Scale
on the topic of whether Great Scale's Bitcoin trust will
be allowed to convert into an ETF. You have the
Security and Exchange Commission versus Ripple on the question of
whether Ripple is a security But going back to the
trod five thing, like, one of the dynamics that's playing
out right now with all of these banks collapsing is
(13:53):
which of the so called systemically important banks and institutions
will step in to save the day, or be allowed
to step into the day. Is there any sense at
all that you are getting, or that any of our
collegies are getting, that any of these major banks are
also looking at crypto as a place that they can
be like cleaning up on the cheap right now. If
(14:14):
that's happening, it's not. That's not known to me at
they have big, bigger problems. I mean, yeah, right, this
kind of upheaval frequently does sort of present big opportunities
and a kind of leavening of the forest where a
sort of new kind of initiatives same place. My sense
is that everyone is so worried right now. I mean, yes,
(14:36):
the very big systemically important banks are probably not really
at risk of any kind of insolvency thing or all
at two thousand and who knows, But that doesn't strike
me as the issue, except that they are counterparties with
a bank that appears to be in legitimate trouble right now,
credit suits. So whether or not they're holding conferences about
(14:57):
the bitcoin or the crypto opportunity at the moment, it
strikes me somewhat unlikely. I think longer term what you're
talking about is possibly realistic, although again away from any
legal stuff around gray scale, the regulatory response at the
moment seems really definitively the last thing we need on
(15:18):
our hands now is a bunch of crypto kook's muddying
the already pretty pretty murky waters. You know, it gives
me a joy to say that bit. That does seem
to be the direction of sort of the larger financial
institution at the moment. If you believed that FTX was
(15:39):
financially solvent and that they were separate from Alameda, or
if you believed that the condition of bitcoin miners would
have no bearing on the people who lent them a
bunch of uncollateralized money, then you have to have a
severe talking to to your like risk people about you know,
the risks that were proposed by those things. And now
to your points, we're seeing other banks that are currently
(16:01):
fine exposed to a bank that has all of the
trappings of not being so fine, which is like the
classic thing that happened in two thousand and eighths, and
the thing that came out in two thousand and eight
was supposedly that everybody was going to get better at
risk modeling, that the regulators were going to get better
at enforcing capital requirements and everything else. And yet here
we are again. So how come yeah? Right, Well, the
reason is that greed will always find a way. And
(16:22):
I think that every all of the best efforts of
regulators to stop the last crisis from happening, which is
what always happens, are not going to buy definition anticipate
the next crisis. Just the fact of nature. The people
are just too clever when it comes to greed. And
in describing what went on in bitcoin, that is the
long and short of everything, people were amazingly clever and
(16:46):
how they tried to ring money out of this thing.
They there were some actually legitimate innovations in the area
of future is trading. The defy itself has really got
some interesting stuff going on as far as market making,
et cetera. So there was a huge amount of innovation
that nobody could possibly have foreseen. On the other hand,
there was a bunch of people who were too young
(17:07):
to have lived through the real counterparty risk wars that
you're describing, and to put it mildly, there was some
foolishness going on. There are people who just hadn't heard
of all the stuff. It's this ongoing meme in crypto,
this idea that everything needs to be re experienced by
the new population that clearly was the main thing. There
(17:29):
is a big dose of innovation, of legitimate innovation. I
mean innovation could also have been used to describe things
like CDOs and etc. That's not always the greatest thing
in the world for the stability of the financial system.
But I would argue, given the much fonted intellectual power
that's always touted around crypto and also existed around things
(17:50):
like investment, banking and trading in two thousand and eight,
it's impossible for anyone to anticipate exactly how to regulate
it and keep it from blow wearing up more ors.
It's just going to be sort of a cyclical thing
that occurs in the world. Thank you, Chris, appreciate you
being on the show. Thank you for having me. That
was Bloomberg Senior Executive Editor Chris Nig. You can find
(18:13):
more of his work on the Bloomberg terminal and on
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(18:34):
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(18:57):
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(19:18):
Moses on m Desta wonder At is our engineer. Original
music by Leo Sidrin. I'm Stacy Marie schml We'll be
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