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Is the US Trying to Destroy Bitcoin?

  • May 1, 2023
  • 17 min read


Bitcoin, the world's first and most famous cryptocurrency, has gained widespread attention and adoption over the years. However, with its growing popularity, it has also attracted several opponents who view it as a threat to their interests. In this blog, we will discuss the biggest enemies of Bitcoin and the reasons behind their opposition.


Governments and Regulators

Governments and regulators are perhaps the most significant enemies of Bitcoin. As Bitcoin operates independently of any central authority, it poses a significant threat to the traditional financial system, which is heavily regulated by governments. The decentralized nature of Bitcoin has made it challenging for governments to control and regulate its use. Additionally, governments are concerned that Bitcoin could be used to facilitate illegal activities such as money laundering and terrorism financing. Furthermore, the use of Bitcoin could also impact government revenues as they cannot collect taxes on Bitcoin transactions. As such, several governments have imposed strict regulations on Bitcoin, making it difficult for individuals and businesses to use the cryptocurrency.


Banks and Financial Institutions

Banks and financial institutions are also significant enemies of Bitcoin. Bitcoin challenges the traditional banking system by providing users with an alternative means of storing and transferring value without relying on banks. This means that banks could potentially lose their customers to Bitcoin, which could result in a significant loss of revenue.

Furthermore, Bitcoin's decentralized nature means that it operates independently of banks, which undermines the role of banks in the financial system. As such, banks and financial institutions have been critical of Bitcoin, and many have refused to provide services to businesses that deal with cryptocurrencies.


Skeptics and Critics

While Bitcoin has gained widespread adoption, it still faces skepticism and criticism from many quarters. Some critics argue that Bitcoin is a bubble that is bound to burst, while others believe that it is a tool for criminals and hackers. Additionally, some people are skeptical about the technology behind Bitcoin, particularly blockchain, which is the technology that powers Bitcoin. They argue that blockchain is not scalable and cannot handle the high transaction volumes that are required for mainstream adoption.


Competing Cryptocurrencies

Bitcoin is not the only cryptocurrency in the market. There are several competing cryptocurrencies such as Ethereum, Litecoin, and Ripple, among others. These cryptocurrencies pose a significant threat to Bitcoin as they offer similar functionalities but with added features that make them more appealing to users. For instance, Ethereum is known for its smart contract functionality, which allows users to create and execute complex financial contracts without the need for intermediaries. Ripple, on the other hand, is designed to facilitate international payments, making it a more attractive option for businesses that operate globally.


Hackers and Cybercriminals

Bitcoin's decentralized nature makes it an attractive target for hackers and cybercriminals. While Bitcoin transactions are secured by cryptography, there have been several high-profile hacks and thefts in the past, which have resulted in the loss of millions of dollars worth of Bitcoin.


Additionally, Bitcoin's anonymity feature has made it a popular tool for cybercriminals who use it to facilitate illegal activities such as ransomware attacks and drug trafficking.

In conclusion, Bitcoin has gained widespread adoption over the years, but it still faces significant opposition from several quarters. Governments and regulators are concerned about the threat that Bitcoin poses to the traditional financial system, while banks and financial institutions view Bitcoin as a potential competitor that could result in a loss of revenue.


Skeptics and critics are also critical of Bitcoin, with some arguing that it is a bubble that is bound to burst, while others believe that it is a tool for criminals and hackers. Competing cryptocurrencies also pose a significant threat to Bitcoin, as they offer similar functionalities but with added features that make them more appealing to users.


Elizabeth Warren



The single biggest enemy of Bitcoin is Elizabeth Warren, a prominent American politician who currently serves as a United States Senator from Massachusetts. She is known for her progressive views on economic and social issues and has been an outspoken critic of Wall Street and big banks. In recent years, she has also emerged as a vocal opponent of Bitcoin, which she views as a threat to consumers and the financial system.


Warren's criticisms of Bitcoin can be traced back to at least 2014 when she first raised concerns about the cryptocurrency in a Senate hearing. At the time, she argued that Bitcoin posed a significant risk to consumers due to its decentralized and unregulated nature. She also expressed concerns about the use of Bitcoin for illegal activities such as money laundering and drug trafficking.


Since then, Warren's criticism of Bitcoin has only grown stronger. In a 2018 interview with CNBC, she called Bitcoin a "wild west" form of currency and argued that it lacked the stability and protections offered by traditional financial institutions. She also expressed concerns about the environmental impact of Bitcoin mining, which she views as a waste of energy and a threat to the planet.


Warren's most recent comments on Bitcoin came in early 2021, during the Senate confirmation hearing for Gary Gensler, the new chair of the Securities and Exchange Commission (SEC). Warren used the hearing to press Gensler on his views on Bitcoin and other cryptocurrencies, arguing that they pose a threat to investors and the broader financial system. She also called for greater regulation of the cryptocurrency industry, including measures to protect consumers from fraud and manipulation.


So why does Elizabeth Warren view Bitcoin as such a threat? There are several reasons.


First and foremost, Warren is a staunch defender of consumers and their rights. She has spent much of her career fighting against predatory lending practices, corporate greed, and other forms of financial exploitation. From her perspective, Bitcoin represents a new frontier of potential abuse, with bad actors using the cryptocurrency to scam unsuspecting consumers out of their money.


Secondly, Warren is a strong advocate for government regulation and oversight of financial institutions. She believes that the government has a responsibility to protect consumers from financial fraud and abuse and that this can only be achieved through strong regulation and enforcement. From her perspective, Bitcoin represents a significant challenge to this regulatory framework, as it operates outside of traditional financial institutions and is not subject to the same rules and standards.


Finally, Warren is deeply committed to combating climate change and protecting the environment. She has been a vocal supporter of efforts to transition to clean energy and reduce carbon emissions. From her perspective, Bitcoin represents a threat to these efforts, as it requires massive amounts of energy to mine and process transactions. This energy consumption, she argues, is both wasteful and harmful to the environment.


So where does all of this leave Bitcoin? It's clear that Elizabeth Warren views cryptocurrency as a significant threat to consumers, the financial system, and the planet. Her criticisms of Bitcoin are unlikely to go away anytime soon, and she will likely continue to push for greater regulation and oversight of the cryptocurrency industry.


At the same time, however, Bitcoin has proven to be a remarkably resilient and adaptable technology. Despite numerous setbacks and challenges over the years, it has continued to grow in popularity and value, attracting a wide range of investors and users. While Warren's criticisms may have some impact on the perception and adoption of Bitcoin, it seems unlikely that they will ultimately derail the cryptocurrency's long-term trajectory.


Is the United States Trying to Destroy Crypto

Operation Choke Point 2.0 is a term used to refer to a set of policies or initiatives that are designed to discourage financial institutions from providing services to industries that are deemed to be high-risk or undesirable.


The original Operation Choke Point was brought into life during the Obama administration in 2013 and was designed to target fraud and other illegal activities and focused on payday lenders, firearm dealers, and marijuana businesses. The initiative was criticized for being overly broad and leading to the denial of banking services to legitimate businesses, and the operation was ended by the Trump administration in 2017.


The term has now come back into the media in the 2.0 iteration and is being used to describe the concerted efforts by the Biden administration to restrict access to the banking industry for cryptocurrency companies. Look at what has happened over the past few months:

  • The SEC announced a lawsuit against the crypto infrastructure company Paxos for issuing the BUSD stablecoin.

  • Crypto exchange Kraken settled with the SEC for offering a staking product.

  • SEC Chair Gensler openly labeled every crypto asset other than Bitcoin a security.

  • The Senate Committee on Environment and Public Works held a hearing lambasting Bitcoin for its environmental footprint.

  • The Biden admin proposed a bill that singles out crypto miners for onerous tax treatment.

  • The NY Attorney General declared Ethereum, the second-largest crypto asset, a security.

  • The SEC continued its anti-consumer protection efforts by doubling down on their attempts to block a spot Bitcoin ETF in court as well as trying to stop Binance US from buying the assets of the bankrupt Voyager.

  • The OCC let crypto bank Protego’s application for a national trust charter expire without approval.

  • The SEC sent Coinbase a Wells Notice, indicating its intent to bring enforcement actions against them for a variety of their business lines.

Let's now take a closer look at the current banking crisis, which some have said is worse than what we saw in 2008. At the center of the crisis is the US Federal Reserve Bank - an unusual organization because it is not Federal, has no reserves, and is not a bank. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System. It is governed by the Board Board of Governors and chaired by the Chairman (Jerome Powell) who is nominated by the United States President and then confirmed by the US Senate. On numerous occasions during the Trump presidency, Donald threatened to fire the chairman. In reality, he does not have the power to do so.


So who owns the Fed? The Fed is made up of 12 regional banks - the most important of which is the Federal Reserve Bank of New York because that is where the major banks are domiciled. Each regional Fed is owned by its member banks. As of 2018, the biggest shareholder of the New York Fed was Citibank, holding 87.9 million New York Federal Reserve Bank shares – or 42.8 percent of the total. The No. 2 holder stockholder was JPMorgan Chase Bank, with 60.6 million shares, equal to 29.5 percent of the total. In other words, the two banks together control nearly three-quarters of the regional bank’s capital shares.


All you need to know is that there is a very close tie between the US government and the world's largest banks by way of the Fed. The Fed is an extraordinarily powerful institution. Some go so far as to say that the Fed chairman is the most powerful person in the world because they control the cost and supply of money. While the Fed does not actually print currency bills itself, it does determine how many bills are printed by the Treasury Department each year. We have already discussed how the two biggest enemies of Bitcoin are governments and big banks. To what extent were both the government and big banks responsible for the crisis and is it possible that they caused the crisis as a means of destroying Bitcoin specifically and crypto in general? In 2020 the COVID pandemic created a headache for the government. Shutting down an economy is risky, especially when the majority of your population is living paycheck to paycheck and are saddled with large amounts of debt. The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was a $2.2 trillion economic stimulus bill passed by the 116th U.S. Congress and signed into law by President Donald Trump on March 27, 2020, in response to the economic fallout of the COVID-19 pandemic in the United States. The spending primarily includes $300 billion in one-time cash payments to individual people who submit a tax return in America (with most single adults receiving $1,200 and families with children receiving more), $260 billion in increased unemployment benefits, the creation of the Paycheck Protection Program that provides forgivable loans to small businesses with an initial $350 billion in funding (later increased to $669 billion by subsequent legislation), $500 billion in loans for corporations, and $339.8 billion to state and local governments. The objective of this stimulus bill was to put money in the hands of regular people and businesses. They would then spend this money and that would reactivate an economy that was being slowed down by the virus. The problem is that a large chunk of this money was not spent. The recipients were not sure how long the pandemic would last. They, therefore, did the safe and responsible thing and deposited this money in the bank. Bank deposits ballooned, which then created a problem for the banks. What were they going to do with all this money? Banks were afraid to lend this money out because they too were not sure how long the virus would linger and they did not fully understand the financial implications of a world in which people could not travel far from their homes.


These banks also did the responsible thing, and they lent money to the lowest-risk counterpart on the planet - the United States government. They invested in United States treasury bonds. The challenge they found, however, was that the yield curve was flat. What the hell does that mean? Banks make money by taking money from depositors and paying them an interest rate, and then lending that money out at a far higher interest rate. This is known as the net interest margin and in the United States, it is typically between 3 and 4 percent. At the time of the COVID pandemic, interest rates in the US were very low. The Fed funds interest rate was close to zero. This meant that most banks paid nothing on this new wave of deposits. Depositors, however, did not complain - this was money they received for free and they were happy it was tucked away in a safe bank. The banks now looked at where they could find safe places to lend this money at between 3 and 4 percent to maintain their net interest margin. Thirty-year mortgage rates were around 3 percent, which was too risky for them. They looked at 10-year treasury bonds, but the yield was less than 1 percent. They went further out of the curve and there was not much improvement so they settled on investing in these long-duration bonds.


This created a massive risk for the banks because they now have a duration mismatch. Americans are depositing their money on call (in other words, they can call the money back from the banks at any time), and the banks are investing this money in long-dated treasury bonds. We mentioned that these bonds are low risk - that is not entirely true. All bonds have two risks - credit and duration. Credit risk is the possibility of a loss happening due to a borrower's failure to repay a loan or to satisfy contractual obligations. Your credit risk on a treasury bond is almost zero because the United States government is deemed to be the lowest-risk borrower in the world. There is however a second risk, and that is duration risk. Duration risk is the risk that changes in interest rates will either increase or decrease the market value of a fixed-income investment. Because payments are typically fixed, if the interest rate changes, then the market value of the investment will change. There is no need to get too far into the weeds on duration risk. All you need to know is that when interest rates go up, the price of fixed-rate treasuries goes down, and the longer the maturity of the bond, the higher the duration risk. This meant that small increases in interest rates would lead to big mark-to-market losses in the bonds. So what happened next? When you inject $2.2 trillion (this number has now ballooned to $8 trillion because additional money was printed after the CARE Act) into a limping economy, you have more money chasing fewer goods, and this leads to inflation. Russia then invades Ukraine and causes a spike in the price of oil, which increases transport costs. Given that goods need to be transported, this also boosted prices to the point that inflation spiked to the highest levels since the 1970s/1980s. In March 2022, the Federal Reserve increased interest rates from 0.08 to 4.5 percent. There are lots of decimal points there, so let's convert these numbers into basis points. The Fed increased rates from 8 to 450 basis points which is an increase of 5,550 percent! During the previous inflation scare in the 70s/80s, the Fed increased rates from 473 basis points to 1964 basis points. That is an increase of 315 percent and was done over four years which amounts to an annualized increase of 78 percent. Powell increased interest rates 71 times (5,550/78) more than Paul Volcker - that is astounding! What kind of damage did this cause to the balance sheet of US banks? It generated unrealized losses of $620 billion. It is important to realize these losses are unrealized. An unrealized loss is a paper loss that has not yet been realized through a sale or disposition of an asset. It represents a decrease in the market value of an investment or asset that an investor is still holding.


This was terrible risk management on the part of the banks. The duration risk could have easily been hedged using derivatives but it seems that banks did not anticipate such a dramatic increase in interest rates. What happened next is a typical bank run. A bank run occurs when a large number of customers of a bank withdraw their deposits all at once, leading to a rapid depletion of the bank's reserves. This can occur due to a loss of confidence in the bank's ability to honor its obligations, such as paying out withdrawals, due to concerns about the bank's solvency or stability. A bank run can be triggered by a variety of factors, such as rumors or news of financial instability, the failure of another bank, or a sudden economic crisis. If a bank run is not contained, it can lead to the collapse of the bank, as it may not have sufficient funds to meet all the withdrawal requests. This, in turn, can have serious repercussions for the broader financial system, as it can lead to a chain reaction of bank failures and economic instability. Governments and central banks may intervene to prevent or contain a bank run, by providing emergency liquidity or guarantees, or by implementing measures to restore confidence in the banking system.


The first bank to hit the wall was Silvergate. Silvergate Bank was a commercial bank based in San Diego, California, that primarily serves the digital currency industry. The bank was founded in 1988 as Silvergate Bank of La Jolla, and initially operated as a traditional community bank, providing personal and business banking services to its customers. In the early 2010s, Silvergate began to focus on serving the emerging digital currency industry, particularly Bitcoin exchanges and other digital asset-focused companies. The bank saw an opportunity to provide much-needed banking services to these businesses, which had historically struggled to find reliable banking partners due to regulatory concerns and other challenges.


In 2013, Silvergate launched its Digital Currency Group, which provides tailored banking services to digital currency companies. The bank has since become a leading provider of banking services to the digital currency industry, with a customer base that includes some of the largest and most well-known companies in the space. In 2019, Silvergate Bank became the first bank to go public with a focus on digital currency, listing its shares on the New York Stock Exchange under the ticker symbol SI. The IPO was a major milestone for the bank and reflected the growing mainstream acceptance of digital currency as a legitimate asset class.


In late 2022—following a fall in cryptocurrency prices and the collapse of many cryptocurrency exchanges and schemes such as FTX—concerns were raised about potential effects on Silvergate due to loss of deposits and credit exposure from SEN leverage, as well as potential ramifications of Silvergate's issues for the wider cryptocurrency ecosystem due to Silvergate's key role in it. Some short sellers raised the prospect of a bank run. The share price of Silvergate had fallen 89% from its November 2021 all-time high to $25 by 5 December 2022, and its deposits fell to $9.8 billion. By December 2022 deposits at Silvergate had fallen to $3.8 billion.


On March 8, 2023, it was announced that Silvergate Bank would wind down its operations and liquidate. So was the duration mismatch the only reason for the demise of Silvergate or was there something more nefarious happening behind the scenes? Rephrased, doe Silvergate commit suicide or was it murdered? Silvergate was not alone in sitting on massive mark-to-market losses. The run on the bank started in late 2022 and it was able to survive a 70 percent redemption of its client's assets. It had weathered the worst of the storm, in addition to the crypto winter. Crypto entered 2023 roaring which should have helped the bank find its feet. Why then was it wiped out in 2023 several months after the storm had died down? Is it possible that the remaining depositors were forced to withdraw their funds? This is what happened. Operation Choke Point 2.0 was in full force in 2022 as regulators were dissuading banks from engaging with crypto clients. As a result, crypto firms had few other options with regard to crypto banking, and Silvergate was flooded with their deposits. Traditional banks did not want to service crypto clients because it would expose them to reputational costs and additional compliance costs. The three biggest beneficiaries were Silvergate, Metropolitan (before they closed their crypto practice), and Signature. Both Silvergate and Signature administered critical infrastructure in their SEN and Signey networks which allowed crypto firms to move dollars around quickly.


As we entered 2023, bank regulators, and in particular the FDIC dramatically increased their level of oversight in these two banks. They had to clear all new crypto accounts with the FDIC, which dramatically reduced their enthusiasm for dealing with crypto customers. Then FTX took place and several investigations were launched trying to link these banks, and especially Silvergate, to FTX and Alameda Research. There is no indication that Silvergate's compliance and KYC procedures were any different from other banks, but regulators decided to focus on their relationship with Sam Bsnkman Fried. Silvergate, although a victim of the FTX fraud, was branded an accomplice, and depositors started to abandon them in the face of possible reputational damage.


The last blow came in the form of the bank's relationship with the Federal Home Loan Bank, which was used to honour withdrawals. Silvergate was suddenly kicked out of the Federal Home Loan Bank scheme, and, after paying back the entire facility, it announced it would be liquidating. We know that FHLB had been brought under extreme pressure to cut its ties with Silvergate. This forced the bank to sell off its long-term bonds at a loss, and that triggered the second and fatal run on the bank.


Elizabeth Warren celebrated the collapse of the bank. Rumours also started to circulate that Warren's office coordinated her campaign to undermine confidence in Silvergate with short sellers. If that proves to be true, some difficult questions need to be asked. Savvy investors around the world took note of this, and quickly came to the conclusion that if influential members of Congress were working actively for the failure of crypto and tech-focused banks, why would they keep their funds there?


Let's now go across to Signature. If the death of Silvergate was slow and painful, the demise of Signature was swift and ruthless. On Sunday 12th March, Signature was abruptly sent into receivership and this was not some second-rate bank. At the end of 2022, it had total deposits of $110 billion of which 20 percent came from crypto-focused businesses. With the demise of Silvergate, Signature was well-positioned to strengthen its position. It was not a crypto bank like Silvergate and the problem was that it was not insolvent. Enter an unlikely ally for the crypto industry in the form of Barney Frank, the second half of the infamous Dods Frank Act. He served on the board of Signature and had a keen insight into the finances of the bank. He immediately alleged the bank could have opened on Monday and that the leadership of the bank was shocked when it had been placed into receivership.


Regulators claimed there had been a crisis of confidence and that the bank had not provided them with adequate data in a timely fashion. However, neither confidence nor data are adequate reasons to place a perfectly solvent bank into receivership. In addition, the bank was not in a precarious position as far as its hold-to-maturity portfolio was concerned, which was the issue with Silicon Valley Bank. Their ratio of unrealized losses to common equity tier 1 capital was slightly less than 40 percent which was in line with Wells Fargo and lower than that of First Republic, US Bancorp, and Bank of America.


So where do we stand today?

It is clear that the combination of the fractional reserve banking system and untethered fiat currencies has created a toxic cocktail that has given us two major banking crises in less than 15 years. The ability of banks to leverage themselves and take excessive risks, coupled with the ability of these same banks, in conjunction with governments, to print limitless money has wakened the fabric of the global financial system which in turn should shake the confidence of everyone. The value proposition of Bitcoin — an asset that is no one’s liability, and can be truly owned and held in individual self-custody — has never been more evident. Many in the crypto space see Bitcoin’s recent price performance juxtaposed against that of risk assets or financial indices as validation of this thesis.


Two of the biggest crypto banks in the US have been incapacitated. Although smaller banks will move to fill the gaps, they will need to be galvanized with steel balls, because the regulators are going to be all over them. This may cause banks to only focus on medium to large-sized crypto clients and leave the smaller ones in the cold. Possibly the most worrisome thing that has come from the Signature/Silvergate debacle is the corruption of unfettered power. Shareholders in Signature had $4.3 billion in equity ($22 billion at peak) wiped out with no recourse. This is a confiscation that you might expect from the CCP in China, not from US financial regulators. This comes shortly after the seizure of Russian reserves on the back of the Ukraine war. It should therefore come as no surprise that foreigners are starting to get nervous about the US dollar, especially at a time when half the world (led by the BRICs) wants to create their own currency, or at least settle their transactions in currencies other than the US dollar.




 
 
 

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