In Conversation With: Gold, Bitcoin and Hard Money Post-COVID
Garrick Hileman, head of research at Blockchain.com, and Daniel Masters, executive chairman at CoinShares, discussed an extensive report that Blockchain.com published on gold. CoinShares and Blockchain.com are part of a consortium behind the DGLD token, which is a gold-backed token on a Bitcoin sidechain. Masters discussed the investment case for gold as it relates to the cryptocurrency investor, saying:
“Let’s be honest, there are many very effective ways of trading gold, through ETFs, through physical gold, through gold futures, through gold swaps, even apps like Robinhood and Revolut now have sort of a gold-tracking kind of instrument you can very easily buy. But I think the gold, the idea for a crypto investor in a general sense is, here I am, I’m trying to get out of the volatility of crypto and into something more stable. So the question then becomes, ‘what and how do you do that?’… (11:06) What’s cool about gold in general and cool about gold tokens in particular is that gold is such a unique commodity and because of its long, long history and because of the way it’s become an international clearing asset for central banks when they borrow and lend to each other, gold exists entirely outside of the banking system and banking regulation and financial services regulation in general. So long as the gold you’re talking about is of a certain kind and allocated in a certain way, that gold escapes all central bank, governmental and regulatory policy. And therefore it really is the most secure and stable form of value that’s currently available in the environment we’re looking at.”
Masters also addressed central bank digital currencies and the dynamic between them, gold and bitcoin, saying:
“Central bank digital currencies bring in real-time accounting, a lack of…black market, there’s surveillance good or bad around currencies, it’s very, very powerful. And I think the fact the Chinese are now road testing a digital currency is really going to advance that argument. And so that spectrum, on the one hand China is going to eat your lunch and use a digital currency for international finance and on the other hand how am I going to close negative interest rates, which are a real possibility, that speaks volumes to digital currencies. But those digital currencies may well come with a haircut. And that’s where a gold token actually has a tremendous potential as a currency. And it’s almost like a whole parallel new universe that’s created. Beforehand we had fiat money and banks and gold. And now you may have bitcoin and central bank digital currencies, and they’ll form the same kind of pairing: fiat and gold, bitcoin and CBDC. And in a world where there’s lots of CBDCs, bitcoin doesn’t look so strange…So this is all connected. Negative rates, the retail adoption of coins and wallets, the central bank digital currencies, this is all going to come into play I think in the next 12 months.”
Bitcoin’s volatility isn’t going to go away, but the market has changed since the 2017 bull run. And many people who invest in bitcoin are trading it. To those people, Masters says,
“To me, you’re trading gold and bitcoin. You’re trading the same idea in different forms. One’s highly volatile and quite risky, ones less volatile and less risky. And it also happens to be a place to park your bitcoin when you’re not in bitcoin. So those two come into a bucket. My personal feeling at the moment is that, it’s sort of a technical issue, what we’re seeing in bitcoin at the moment is that the big spikes are getting quickly sold. And I think part of the reason for that is there is still so much leverage available. When people see a little pop, everybody jumps in 20x and tries to make a quick $2,000 in BTC. that’s where you see these little spikes up followed by big spikes down But I think what’s actually going to happen in bitcoin, it’s going to go in a shallow uptrend. And so I do feel like the outsized reurtrns of 20-30% in a day that you’ve senin bitcoin in the past while profitable and risky and alluring to investors, i think there’s going to be much less of that going forward and a much more steady flow punctuated by some of these leverage-based pops.”
Philip Gradwell, chief economist at Chainalysis, went through the latest on-chain data on the blockchain with a focus on April 13-26. In that time, during which time the bitcoin price rose significantly.
- The BTC price had major climbs on the 16th and 23rd of April.
- BTC flows into exchanges increased the day before the price increases, which is unusual.
- “We have heard that there were large amounts of fear sitting on exchanges waiting to buy BTC. So perhaps when they saw the price start to move and they saw this extra liquidity enter the market, that was seen as a signal to buy. And actually that waiting demand that was on the sidelines has actually helped buoy up prices.”
- A net flow of $158 million in BTC was cashed out from crypto to crypto exchanges to crypto to fiat exchanges last week.
Governance and Guardrails - The 9th Circuit Said What?
Teana Baker-Taylor spoke with Stephen Palley, partner at law firm Anderson Kill, about the recent decision by the U.S. 9th circuit of appeals in the Thomas Costanzo case. Costanzo in 2018 was convicted for selling bitcoin for USD to FBI agents posing as drug traffickers. He was sentenced to more than 40 months in federal prison for laundering money. Costanzo appealed, saying they didn’t prove the transaction was interstate commerce. He was convicted using the federal AML statute and in his appeal argued they didn’t prove the transaction was interstate commerce. Palley provided some insight, context and analysis.
“Basically what happened is the agent…gave Costanzo $13,000 in cash. Costanzo transferred bitcoin to the agent, to his phone, is the way the court describes it. The next month, this happened again. And what Costanzo said, he was like look, there’s no interstate commerce nexus. This was peer-to-peer from one phone to another. So therefore you didn’t prove the interstate commerce nexus necessary to apply the statute. And the 9th circuit said look, it might have been what you call peer to peer, but you sent communication over the internet. And there’s a pretty well established law that says using the internet can create an interstate commerce nexus. And what’s more, we understand that this thing, bitcoin is, it’s recorded on a blockchain, which exists everywhere in the world. And to me, I didn’t think the analysis was that hard to get to if you’re familiar with…the case on jurisdiction. But it is really interesting in my mind to realize that in the court’s view…it took maybe a page or two pages to reach this conclusion — the court’s like nope, the very nature of a bitcoin transaction is that it implicates interstate commerce.”
Palley went on to explain that the 9th circuit court set a binding precedent in its decision that using bitcoin for a transaction is enough to trigger federal jurisdiction. He doesn’t think it will have much of an impact on financial services in and of itself, however, saying:
“I want to give you an explosive, ‘this will change the world,’ conclusion. I’m not sure that it does. I think..it’s another brick in a wall of jurisprudence about what this stuff is and what the transactions are. And a court is saying, these transactions appear to happen in interstate commerce. So that would mean that my, I suppose my business transaction with somebody within my state where I use bitcoin arguably implicates or creates a nexus to federal law even though neither of us have left the state simply by use of bitcoin.”
Palley warns that the crypto community can’t set their own interpretation of the law.
“New technologies come along and people say, oh everything is different, the world has changed. Laws don’t apply. And this is just an example of how that’s not true. The court looks at it and they’re like, ‘walks like a duck, sounds like a duck. I guess it’s a duck.’ Right? We can always find a way to place things into existing categories.”
Palley ended with saying whether this is something someone should spend three years in prison for, he’s not so sure.