The big worry among the bitcoin perma-bears is the threat of government ‘making it illegal.’
The latest bogeyman on this front is none other than U.S. Treasury Secretary Steve Mnuchin. Rumors float that he’s considering outlawing ‘self-custody wallets,’ in effect confiscating the private keys of everyone’s cryptos.
In a Twitter-thread, the chief executive [of Coinbase Brian Armstrong] said that his firm “heard rumors” about the US Treasury Secretary Steven Mnuchin’s plans to introduce fresh rules for “self-custody wallets” by the end of his term.
The open nature of cryptocurrencies allows anyone to create a private wallet by downloading third-party software on their computers/smartphones or through hardware devices that store digital assets. These types of self-custodial solutions come cheaper than traditional financial services — and they ensure privacy.
Those rumors are apparently valid since Mnuchin received a letter from four Congressmen imploring him not to do such a monumentally stupid thing.
Davidson et.al. make the very salient point that a move like this would be crippling to the burgeoning cryptocurrency, decentralized finance world.
It’s a stunningly well-written letter that shows a level of understanding about crypto that one simply wouldn’t expect from a Congressman. But, hey, I’ll take the pleasant surprise.
Now, by the same token, Davidson is talking to one of the ultimate oligarchs holding one of the most powerful offices in the world. Mnuchin, like the rest of the world-be world governors, sees the threat to central-bank issued currencies and doesn’t like the competition.
So many who have argued that Bitcoin would eventually ‘just be made illegal’ have done so on, at best, sophomoric grounds, ignoring the practicality of how the internet functions, etc.
I’ve already addressed these arguments in the past, c.f. Bitcoin vs. The Man published back in August.
With Stock to Flow rising, meaning the rate of inflation is falling while the total hoarded pile is rising, marginal demand can easily push prices to levels that make even the most ardent bitcoin bull blush.
Governments are, as I said earlier, in a Catch-22. If they ban bitcoin demand goes underground, people simply buy and hold it. They acquire it however they can and new technologies come in (decentralized exchanges) come in to replace current ones (Coinbase).
If they don’t ban it then they allow the demand for it as a store of value and financial asset to flourish. It exists in a gray-area where you can use it but you really don’t want to. That allows another relief valve for capital to exit the dying debt-based system and wait for the storm to pass.
Either way, bitcoin and cryptocurrencies win.
The Davidson Four’s letter acknowledges this basic understanding. Trying to make holding your private keys to your cryptos illegal will simply drive capital away from the U.S.
Now, if Mnuchin is a good little Davos Man than that is exactly what he must do because that’s their plan, man.
If he isn’t and he’s just your garden-variety clueless regulator then making such a move would be another classic case of what I’ll now call the Melinda Gates Syndrome — We Didn’t Think Through the Economic Implications of our Actions.
The truth lies somewhere in the middle, I’m sure.
But like I said at the outset, this is all a bogeyman in the end. If Mnuchin falls into the authoritarian trap of trying to ban ‘self-custody wallets’ he will set off two firestorms.
The first is to drive even more of the existing stock of bitcoins underground, and likely into privacy coins or onto distributed exchanges where the capital will never be found nor clawed back.
That will ultimately drive the price straight through the $20,000 level and set it on a path to much higher, headline-grabbing levels.
The second will be to re-engage the normies because of this who have already began rushing into this space in a big way especially after the insanity of 2020.
So, while Mnuchin may make it really difficult for people to get their coins off of Coinbase or any other approved KYC/AML-compliant on-ramp, most people really won’t care.
And all he’s doing is making the people who are building the systems to challenge his “Authoritah!” even more well-capitalized.
So, even if the worst comes to pass what will happen will not blunt the rise of the private currency markets.
Remember folks capital flows to where it is treated best. And if Mnuchin treats U.S. savers this poorly, which I expect him to try to do, then he will ensure Davidson’s predictions come true.
It is for this reason that he won’t dare do it. Because while this is being discussed at the highest levels of government everyday another major player on Wall St. takes the plunge into the world of Bitcoin.
This week it was Mass Mutual who put in another $100 million of its treasury into bitcoin. Even J.P. Morgan strategists are admitting what’s happening here.
In a note earlier in the week they noted:
In a Tuesday note, they said that bitcoin’s near-term price is “skewed to the downside,” while gold looks more positive. However, they see the medium- to longer-term trending in the opposite direction.
“The adoption of bitcoin by institutional investors has only begun, while for gold its adoption by institutional investors is very advanced,” JPMorgan said. “If this medium to longer term thesis proves right, the price of gold would suffer from a structural flow headwind over the coming years.”
While I’m not advocating their commentary about gold, given that J.P. Morgan is always on the opposite side of gold as a company, admitting that institutional investors are now pushing into bitcoin is significant.
Wall St. loves money. They don’t care how they make it, including allowing billions to pump into something today knowing a major rule change is incoming to dump the losses onto their muppet clients tomorrow.
Years ago, during the early stages of the gold bull market Jim Sinclair warned all of us budding gold bulls that the very people today who are making your life miserable in gold, suppressing the price and playing their games, will be the very people who make the most money off the gold bull market.
That shouldn’t matter, however. His lesson was get comfortable with that, accept that reality and don’t try to time the peaks or the troughs, because you won’t be allowed to get them anyway.
With the evolution of the cryptocurrency market into a safe-haven asset capable of absorbing billions in inflows, Wall St. will make their vig on it. And Mnuchin will not be allowed to kill that golden goose too quickly.
I think this rumor is real but I also think, at this point in time, it’s mostly just headline MOPE — Management of Perspective Economics — trying to hold the line for a few weeks/months.
Because it isn’t like Mnuchin’s expected replacement, Former FOMC Chair Janet Yellen, will be any less hostile to an asset which directly competes with the Fed’s almighty dollar.
It was just meant to spew a little CO2 on this electrical fire and slow it down help keep things from getting out of control.
One last point about all of this, the DeFi market today is quickly becoming the new junk bond market. And it’s been that very market which has helped prop up asset prices, i.e. stocks, for years in the Fed’s zero-bound regime.
The search for yield in a mandated ‘yield-free world’ eventually creates the very markets the financial repression of central banks are loathe to admit doesn’t work.
Whether you would partake in Ethereum-staking projects or even think they are anything other than scams (which, likely, most of them are), like the junk bond market, they only exist because there’s a market for them.
People are pulling their coins off of exchanges into cold storage, they are staking them in projects like Wrapped Bitcoin (WBTC) to pull a yield off their HODL’ings. It’s happening and there’s nothing the Fed and Steve Mnuchin can really do to stop it.
They can slow it down, scare people off, but after more than a decade of zero return on capital, something has to give. DeFi may take Ethereum to levels which will likely break it once the next wave of investors come into the space.
Governments are always fighting the last war, while the markets innovate and leave them breathless and confused playing catch up. Just wait until the gold bugs and the bitcoiners put down their Hatfield/McCoy feud and build a real monetary system for the digital age.
Then things get really interesting.