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