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- [00:00]
Stacey Marie Ishmael
This is an iHeart podcast. Guaranteed Human
- [00:05]
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- [01:04]
Stacey Marie Ishmael
I'm Stacey Marie Ishmael, Managing Editor of Crypto for Bloomberg News, and this is Bloomberg Crypto, a Daily Bloomberg iHeart podcast. It's Friday, March 17th.
- [01:23]
Chris Naeji
Foreign.
- [01:30]
Stacey Marie Ishmael
It has been another wild week of financial mayhem. Some of it connected to crypto, some of it very tradfi. 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
- [01:46]
Public Investing Announcer
that two US Banks have failed.
- [01:48]
Stacey Marie Ishmael
This morning, the failure of two regional banks has revealed the delayed effect of the Federal Reserve's approach to fight inflation,
- [01:55]
Cincinnati Insurance Announcer
the biggest bank collapse since the 2008 financial crisis.
- [01:59]
Stacey Marie Ishmael
It all started earlier this year when Silvergate Capital shut down operations. The California based bank was known for being one of the last remaining crypto friendly banks and counted among its clients big crypto companies like Coinbase and Gemini. But its most famous or infamous client, depending on your perspective, was the now bankrupt crypto exchange FTX and its sister firm Alameda Research. As these two former crypto giants faltered, so did Silvergate. In addition, Silvergate fell under increasingly intense regulatory scrutiny. 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, the stablecoin, revealed that it had a $3 billion exposure to SVB. That led to some slightly panicky investor response in the crypto market. And Circle's stablecoin was markedly less stable over the weekend. By Sunday, regulators had made it clear that they would make all 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 asset industry, both because it had crypto companies who deposited money there, but also because, like Silvergate, it ran a crypto focused 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, 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 fared and how does it move forward? Fortunately, we're joined today by Chris Naeji, a senior executive editor here at Bloomberg and my boss. He joins us now to talk more about the state of markets, crypto and otherwise. Chris, welcome back to the podcast.
- [04:38]
Chris Naeji
Hi. Thank you for having me, Stacey.
- [04:40]
Stacey Marie Ishmael
I feel like it's been an interesting time in markets. Is that a fair assessment of the world?
- [04:50]
Chris Naeji
Depending on what if your baseline is 2008, maybe it's sort of 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.
- [05:02]
Stacey Marie Ishmael
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 were three bank collapses in the past two weeks. As we record this episode, Credit Suisse shares are at not looking at 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.
- [05:30]
Chris Naeji
Oh, it's so good. I mean, it's sort of everything come full circle and there's a lot to unpack in what you just described. 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 peripheral player in all of the drama. It's definitely interesting in that regard. I feel like the rally to some degree, which has got to be the most ironic thing that's happened the entire time that we've been covering this thing, is maybe A restoration of crypto to its somewhat peripheral role. The. The kind of renegade, outsider role that it first imagined himself as. Now that's become. Because it did have its moment in the sun. There was a period where I think people were under pressure to believe that crypto was becoming part of the institutional picture. And what's happened in the last couple 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, 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.
- [06:49]
Stacey Marie Ishmael
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. There's this enormous narrative right now, and I think it's a somewhat misleading one on the merits, that the reason that Silicon Valley bank Silvergate 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 really seized upon this idea that you're describing, that it's like, well, if y' all don't want to bank us, we'll be fine over here. We have defi, we have stablecoins. We're going to figure this out.
- [07:32]
Chris Naeji
Yeah. Again, a million little strands to connect. But one thing you can say is that when big tectonic crises like this start to break out, and that's what it seems like, certainly crypto didn't have a role in that, a huge role in the asset liability mismatch that's laying banks low. When you have the beginnings emanations of a crisis, I don't want to push it too far. This is a day word recording when it looks particularly grim for the financial system, but God knows how it'll shake out. There are reasons to think that that's overblown as well. But you can feel regulators coming into this and operating in this with a kind of sentiment that crypto is maybe a luxury that A, we can't afford, and B, is kind of part of the problem in that it's luring. You know, it's a bubble phenomenon that was luring a certain amount of kind of crime to the. To the borders of the financial system. Certainly we've seen some Pretty big blow ups since our last discussion. And tolerance for the kind of shenanigans that I think regulators view crypto as representing is pretty much zero at the moment. So they're consciously or unconsciously seem to be trying to chase it out of a system that they're worried about just at its sort of core at this point.
- [08:45]
Stacey Marie Ishmael
What I find sort of fascinating is how this is now being seized upon as a victory for and by people who over the weekend were like freaking out about Circle's exposure to one of those traditional banks to an extent that caused Circle stablecoin to significantly depeg from the dollar. Like, how would you describe the psychology at play here?
- [09:11]
Chris Naeji
I mean, things start to move very fast and going from the favored bank going under to giant rally in crypto is extremely fast. I think we can, 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 fold at is crazy. And crypto's favorite thesis the whole time has been that when the banking system goes poof, 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 DCs came fast and furious and look, is that clearly the reason Bitcoin's going up? Let's be honest, that that may be the reason. That's certainly a suggestion. A markets journalist. I'm never convinced that any one, one idea or one explanation is clearly the right one, I would point out. I mean people have thrown a lot of money at things like the Ark Fund in the last week 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 fall in bond rates, not for good reasons, but interest rates did go way down. And there's a Pavlov and VN reaction in crypto space to that as well. So while the usurpers of the banking system thesis is definitely the most attractive one to crypto proponents right now, it's not clear that it's exactly that. It's indisputably the reason for the rally
- [10:46]
Stacey Marie Ishmael
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, the full swaps. And in 2008 there was this idea that people would look at the credit default swaps against the United States government, which is essentially an Armageddon trade. Right. If you think that the United States government is not going to repay its debts, it sort of doesn't matter. What's your plan B here? You're talking complete financial Armageddon. And so right now we're in this situation in which the bitcoin and the crypto thesis that you're describing is like, well, if all banks go bust, 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, south park joke where they're like, we're going to steal some underwear, there's going to be profit, but in between is just a big question mark.
- [11:43]
Chris Naeji
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, but I would agree it's not all of the sort convenient ways that middle America like to access their crypto bags would presumably be gone, are very much in the process of being rooted out as it is. Never mind the banking crisis. Regulators seem pretty, I mean they've taken down two of the big sort of conduits for that specific task in the last seven days. So I think that the crypto, the bitcoin faithful would say, oh, we never needed those conduits anyway. There's still basically other ways to get into the bitcoin network. And indeed I think it's true that over this weekend lots of them did. I think that's sort of one notable fact of the last seven days that the amount of crypto owning addresses surged over the weekend. So that kind of rhymes with their theory on why the rally happened. Another theory is that there's a bunch of whales that kind of control everything. It kind 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 at this. So I think you're right. I think that the dream of sort of a seamless, well, some people sort of tradfi's dream of relatively seamless give and take between the two systems seems like pretty much a pipe dream at this point. I have no doubt that there are bitcoin maximalists all over the world. Who would say we never knew that stuff to begin with?
- [13:14]
Stacey Marie Ishmael
We'll be right back with more of the top crypto stories, joined by Bloomberg Senior Executive editor Chris Naegee.
- [13:23]
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- [15:12]
Stacey Marie Ishmael
What about the DEFI people? Because one 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 Ether turned out to be heavily underpinned by stablecoins, which by definition are tied into traditional banking systems.
- [15:33]
Chris Naeji
Yeah, they have to be feeling a little queasy about that as well. But although that, I mean, let's face it, that's sort of the rarefied realm of the absolute true believers. I'm sure in spite of the inconvenience that all this is causing and their general antipathy towards anything kind of new, wavy newfangled that's going on, which you know is going to rely on defi it already has largely that they're public posture is that at some level this is all good and that this is precisely the environment that we expect it to thrive in when we're all the banks go out of business.
- [16:08]
Stacey Marie Ishmael
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. You have the securities and Exchange Commission versus Grayscale. On the topic of whether Grayscale's Bitcoin trust will be allowed to convert into an etf. You have the securities and Exchange Commission versus Ripple on the question of whether Ripple is a security. But going back to the tradfi thing, one of the dynamics that's playing out right now with all of these banks collapsing is which of the so called systemically important banks and institutions will step in to save the day or be allowed to step in to save the day. Is there any sense at all that you are getting or that any of our colleagues 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?
- [17:00]
Chris Naeji
If that's happening, that's not known to me at the moment. They have 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 sort of new kind of initiatives take place. My senses everyone is so worried right now. I mean, yes, the very big systemically important banks are probably not really at risk of any kind of insolvency thing or a la 2008, who knows, but 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 Suisse. So whether or not they're holding conferences about the Bitcoin or the crypto opportunity at the moment, it strikes me as somewhat unlikely. I think longer term what you're talking about is possibly realistic. Although again, away from any legal stuff around grayscale, the regulatory response at the moment seems really definitively the last thing we need on our hands now is a bunch of crypto kooks muddying the already pretty, pretty murky waters. You know, it gives me our joy to say that. But that does seem to be the direction of sort of the larger financial institution at the moment.
- [18:21]
Stacey Marie Ishmael
If you believed that FTX was 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 your like, risk people about, you know, the risks that were posed by those things. And now to your point, we're seeing other banks that are currently 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 2008 and the thing that came out in 2008 was supposedly that everybody was going to get better at risk modelling, that the regulators were going to get better at enforcing capital requirements and everything else. And yet here we are again. So how come?
- [19:04]
Chris Naeji
Yeah, right. Well, the reason is that greed will always find a way. And 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 by definition anticipate the next crisis. Just a 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 in how they tried to wring money out of this thing. There were some actually legitimate innovations in the area of futures trading. The defi 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 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 this 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 is a big dose of innovation, of legitimate innovation. I mean innovation could also have been used to describe things like CDOs and et cetera. It's not always the greatest thing in the world for the stability of the financial system. But I would argue, given the much vaunted intellectual power that's always touted around crypto and also existed around things like investment banking and trading in 2008, it's impossible for anyone to anticipate exactly how to regulate it and keep it from blowing up more or less. It's just going to be sort of a cyclical thing that occurs in the world.
- [20:51]
Stacey Marie Ishmael
Thank you Chris, appreciate you being on the show.
- [20:53]
Chris Naeji
Thank you for having me.
- [20:55]
Stacey Marie Ishmael
That was Bloomberg Senior Executive Editor Chris Najee. You can find more of his work on the Bloomberg terminal and on bloomberg.com. This is Bloomberg Crypto, a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. A quick programming note for you. We're working on something new that expands on how we're covering crypto and the future of finance, and we'll be back soon to tell you more. Follow or subscribe to Bloomberg Crypto to stay tuned for updates. We'll be bringing you info about what's next right here in this feed. In the meantime, get caught up on all of our Bloomberg iHeart podcasts, the Big Take Daily Crash Course, and our narrative series In Trust to stay in touch with Bloomberg Crypto. You can find our coverage as always@bloomberg.com crypto the supervising producer of Bloomberg Crypto is Vicky Vergolina. Our senior producer is Janet Babin. Our producers are Mohammed Farouk and Sharon Barrero. Our associate producers are Ty Butler and Moses Undom. Desta Wonderad is our engineer. Original music by Leo Sidrin I'm Stacey Marie Ishmael. We'll be back tomorrow.
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- [23:55]
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