Bitcoin Is 'Armageddon Insurance'?
  What you need to know today in crypto and beyond March 25, 2021 Sponsored By:  If you were forwarded this newsletter and would like to receive it, sign up here.
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Today's must-read Top Shelf  CONSUMER DEMAND: An affiliate of investment giant Fidelity may offer a bitcoin exchange-traded fund in the U.S., according to a Wednesday filing with the Securities and Exchange Commission (SEC). The "Wise Origin Bitcoin Trust" would track the performance of Fidelity's bitcoin index. Separately, Cboe Global Markets has not "given up" on cryptocurrency, and may introduce new products and possibly re-list bitcoin futures (suspended in 2019), according to CEO Ed Tilly. "There's a lot of demand from retail and institutions, and we need to be there," Tilly told Bloomberg. PURPOSES OF COMPANIES: IBM appears to be ditching enterprise blockchain for crypto, proper. Big Blue is licensing its software to institutional crypto custodian METACO and separately working with Deutsche Bank on the bank's planned custody and trading service, according to CoinDesk's Ian Allison. Meanwhile, Microsoft's president said financial technology firms should leave currency issuance to governments. THE ROLE OF GOVERNMENT: Fed Chair Jerome Powell said a digital dollar would need stronger privacy than its Chinese counterpart. In other news, Germany's Bundesbank is testing blockchain as a securities and bonds settlement solution that would not require a CBDC (which could destabilize the nation's banking system, officials say). Incidentally, the Reserve Bank of India is studying how a digital rupee would impact the country's financial stability.
EXCHANGE NEWS: Coinsquare must hand over detailed information on 5% to 10% of its 400,000 Canadian customers, their crypto trading activity and identifying information to the Canada Revenue Agency (CRA), after a defeat in court. The battle between exchanges and governments related to taxation and privacy is ongoing. Meanwhile, Coinbase plans to establish an outpost in India even as the country's government is preparing legislation that could ban cryptocurrency ownership.
– Daniel Kuhn
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What others are writing... Off-Chain Signals  "The Dao of DAOs," via Packy McCormack. (It's Not Boring) Cointelegraph's Andrew Thurman looks at StarkWare's $75 million raise as a case study in VCs betting big on scalability sidechains. Nice roundup of what seven prominent banks have said about bitcoin. The good, the bad and the ugly from Decrypt.
– D.K.
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Putting the news in perspective The Takeaway  Armageddon Insurance?
This got me thinking whether Earth-bound sovereigns would ever put "bitcoin on the balance sheet," as the saying goes.
Under what scenarios would a government follow Tesla and decide to buy bitcoin?
I put the question to James Angel, an associate professor at Georgetown's McDonough School of Business, who specializes in global financial markets.
Here's what he said:
First, call him Jim.
Second, most rich, developed, western governments are unlikely to ever add bitcoin to their balance sheets. Bitcoin is a private competitor to their "seigniorage franchises." If it ever catches on – like really catches on beyond Elon Musk's imaginary moon colony – "they'll have to tax people in other ways," Angel said.
In fact, governments "might be happy if it went away entirely," he said. "There is a long, long, long history of governments shooing aside private currencies."
Rogue states likely already hold some bitcoin, but not in the same way that MicroStrategy, Tesla or Square do, Angel said. Nations like North Korea or Venezuela view cryptocurrency as a way to evade sanctions, similar to how bitcoin has become a dominant medium of transaction on the dark web (after credit cards, of course).
Governments plugged into the fiat-based, global financial system are unlikely to reap any of the uncensorable benefits bitcoin provides. And while bitcoin is a comparatively cheap way to move large amounts of capital, Angel thinks governments have gotten hip to the "technological revolution" and will have their own stablecoin-like central bank digital currencies (CBDCs) online soon.
But what of the digital gold narrative? Of course no government would hold bitcoin to transact with – no, people do that!
Well, Angel invites us to consider why there are places like Fort Knox or crypts below the Bank of England. In other words, why do governments hoard gold?
"It's Armageddon insurance," Angel said. Under a scenario where it becomes too risky to accept dollars or pound sterling, when lenders stop lending, gold becomes a backstop. Fiat currencies are relatively new innovations in the history of money, a departure from centuries of commerce conducted in the yellow metal.
But it's an expensive hedge. "You have to store it and protect it," Angel said. Governments are willing to tie up resources (tax resources) because of gold's history. Bitcoin, newer than fiat currencies, would be a cheaper and potentially more secure way to hold state reserves, but it comes with an added risk of the blockchain's future.
The last wrinkle: Governments also hold foreign asset reserves. According to our Virgil, leading us through the scenarios of monetary Armageddon, this is mostly a vanity project. Nations hold other countries' currencies to show they're able to support their own local money.
If, say, the lira becomes weak, Turkey can purchase foreign assets as a way to stabilize local prices. "If you run out of foreign reserves, your currency plummets," Angel said.
So why not bitcoin? It is, by some measures, the third-largest currency. Well, Angel points to the cost-benefit analysis some CIA official has probably war-gamed. If bitcoin receives a state stamp of approval, it opens up a whole host of issues (like the taxation considerations above).
Further, as EY's Blockchain Lead Paul Brody put it: "Lots of governments hold dollars as a reserve asset both because of the asset value/stability over time but also because a lot of key international trade assets like oil are priced in dollars."
That isn't necessarily the case for bitcoin. As Carnegie Mellon Associate Professor of Economics Ariel Zetlin-Jones notes, "The enormous volatility in day-to-day price changes associated with cryptocurrencies shows no sign of slowing."
That's part of the reason why programs to collect taxes in crypto, such as in Ohio, have been wound down. Also, why agencies like the U.S. General Services Administration or federal marshals that come into possession of bitcoin through criminal asset seizures or other means, auction it off.
Last year, it was unthinkable that a public company would issue several rounds of debt to buy bitcoin. Today, there's MicroStrategy. I'm not sure anything is off the table when it comes to bitcoin.
– D.K.
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