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This US politician wants to use crypto to maintain the dollar's primacy
Sound like a contradiction? Read on for the week's biggest news stories and why it's not.
Max
June 21, 2024
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Good morning everyone,
Let's start with the top four news stories of the week:
The Reserve Bank of Australia (RBA) kept the cash rate on hold at 4.35 percent this week. The Bank of Canada and the European Central Bank recently started to cut rates, marking the beginning of the end of a global tightening cycle. The US Federal Reserve and Australia's RBA resisted pressure to cut rates at their latest meetings, keeping rates on hold.
Australia has another Bitcoin ETF. VanEck's Bitcoin ETF VBTC began trading on Australia's largest stock exchange, the ASX, on Thursday. VBTC is not Australia's first Bitcoin ETF, but it is the first to trade on the ASX. Two other Bitcoin ETFs already trade on a smaller exchange, CBOE Australia.
NAB Ventures, the venture arm of National Australia Bank (NAB), one of Australia's four major banks, has announced an investment in Zodia Custody, a digital asset custodian. The investment shows that banks around the world are making a foray into crypto custody. Put simply, banks are trying to figure out how to hold crypto assets for their clients.
The Securities and Exchange Commission (SEC), the US regulator, has confirmed that it will not classify Ether as a security. Instead, the SEC will treat the asset as a commodity, just like Bitcoin. Classifying Ether as a commodity provides regulatory clarity and will have far-reaching implications. While the SEC approved Ether ETFs back in May, the ETFs are expected to start trading in July.
DISCLAIMER: This newsletter is not financial advice. It does not take into account your financial situation, is general in nature, and is for educational purposes only.
Also, this newsletter contains affiliate links. This means that I may receive a commission from them. But for Crypto Down Under, I only choose products I use myself and can recommend wholeheartedly. Don’t forget to do your own research.
For my main story, I want to follow up on something I touched on in last week's newsletter about the "banana zone".
Last week I talked about the biggest bubble in the market right now.
It's not AI and it's not crypto. It's the US national debt.
As I mentioned, the US is nearly USD35 trillion in debt, and the debt pile is growing by a remarkable USD1 trillion every 100 days. In fact, the US will spend more on interest payments than on defense this year.
When the national debt gets to that level, you don't really have a lot of options as a government.
You can cut spending. (That's unlikely because it's unpopular.)
You can raise all kinds of taxes. (Your room for maneuver is limited because it's politically unpopular and economically damaging.)
You can hope that AI will increase productivity and lead to economic growth that will allow you to start paying back some of the debt. (Hope is not a strategy.)
You can default. (No, you can't. That's the equivalent of an economic nuclear bomb.)
You can try to keep doing what you're doing. (This is the most likely scenario.)
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Paul Ryan wants the US to keep overspending, thanks to stablecoins
This week, the Wall Street Journal published an article entitled "Crypto Could Stave Off a U.S. Debt Crisis" by Paul Ryan, who argues that the US should keep doing what they're doing. But with crypto.
In case you don't know, the Wall Street Journal is a must-read for the suits who work on Wall Street. And Paul Ryan is a member of the Republican Party who served as Speaker of the House of Representatives from 2015 to 2019.
The article shows that top politicians are very aware of the US debt crisis, even though it's not much discussed in the wider public because it's a very unpopular topic.
Paul Ryan begins by saying:
The American experiment is being tested. Nowhere is this more evident than in the trajectory of the national debt. The U.S. is headed toward a predictable yet avoidable debt crisis. If nothing is done, the economy will stall while government promises of healthcare and retirement security will be broken. Cuts to national defense will put the country at risk.
With no fiscal solution in sight, the crisis is likely to start with a failed Treasury auction forcing an ugly surgery on the budget. As the economy contracts, the dollar will suffer a major confidence shock, further imperiling prospects for growth. The obvious answer is to deal with the root causes of the problem. Entitlement programs are driving the debt and require reform, but politicians can’t find the courage to do what needs to be done. The country thus proceeds down this perilous path. What can be done?
That's a sober analysis, and I agree with it. But here comes the twist.
Ryan continues:
We might start by taking stablecoins seriously. According to the Treasury Department and DeFi Llama, a cryptocurrency analytics site, dollar-backed stablecoins are becoming an important net purchaser of U.S. government debt. If fiat-backed dollar stablecoin issuers were a country, it would sit just outside the top 10 in countries holding Treasurys—smaller than Hong Kong but larger than Saudi Arabia. If the sector continues to grow, stablecoins could become one of the largest purchasers of U.S. government debt and a reliable source of new demand.
Their emergence as a mechanism for promoting the dollar couldn’t be timelier. The U.S. benefits from the dollar’s status as the primary international reserve currency. Among the perks: cheap, reliable financing for fiscal spending and substantial influence over the global financial system. Most financial activities eventually flow through U.S. banks thanks to the dollar’s dominance. As the global economy becomes more digital and multipolar, the dollar’s primacy is constantly under threat.
Essentially, Ryan is arguing that the US should keep doing what they're doing. But this time with dollar-backed stablecoins.
In case you don't know, stablecoins are cryptocurrencies that are pegged to another asset, such as a fiat (government) currency or a commodity like gold. The idea is to create a crypto asset with much lower price volatility, making it more suitable for use in transactions.
Ryan's reasoning is: Global demand for dollar-backed stablecoins will allow the US to borrow more and more money, enabling Washington to finance its deficit and exert considerable influence over the global financial system.
This is an interesting argument for two reasons.
After all, what is crypto?
It's interesting because when an influential Republican like Paul Ryan makes this point in the Wall Street Journal, it means that he and his political network are already working towards making this a reality.
I wouldn't be surprised to see more politicians on the Republican side (and then maybe on the Democratic side too) embracing dollar-backed stablecoins and arguing for a friendly regulatory framework for them.
It's also interesting because it makes you think twice about what crypto is. The crypto movement began with the launch of Bitcoin in 2009 as a clear antidote to government control of money.
But then a whole new world followed. Ether, altcoins, stablecoins, meme coins, the list goes on.
And as we move forward in time, some of these crypto things are starting to be incorporated into traditional finance, as we can see with the political embrace of dollar-backed stablecoins.
Which begs the question: What is crypto?
I tend to agree with the chart below, which says that Bitcoin is mostly perceived as part of crypto, but crypto is actually part of the fiat (government money) world.
Of course, that doesn't mean you can't make money in crypto. I have small investment positions in some cryptocurrencies.
But conceptually my position is this: I believe that only Bitcoin has truly revolutionary potential. At the same time, I never expected Bitcoin to upend traditional finance. And yes, some parts of crypto will be used to maintain the status quo of traditional finance.
Let me know what you think.
Have a great weekend everyone!
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