The Future of Money: The 3 New Ideas You Need to Know this Week (Issue 37 - 4 April 2021)

Dear Friends, 

Welcome back to my weekly newsletter where I share some of the major developments on the future of money that you need to know about!

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1. Can Governments Ban Bitcoin?

In last week’s newsletter, we looked back to the Great Depression and the U.S. government’s ban on investing in gold, which lasted from 1933 until 1974. 

This piece of recent history is often discussed in crypto circles and recently made a resurgence, with some commentators mentioning that in a post-COVID-19 economic environment, such a scenario could very well happen again. 

Source: Library of Congress

For example, Bridgewater’s Ray Dalio recently wrote:

“If history and logic are to be a guide, policy makers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected.”

Ray Dalio also mentioned that he believes there is a “good probability” that governments will try to ban Bitcoin. 

It’s certainly worth reflecting on whether a government could ban Bitcoin.

In theory at least, banning Bitcoin could be easier than banning gold. 

For instance, unlike gold that one can physically hide, Bitcoin transactions are traceable, meaning governments could trace it back to their owners using some of the tools available in the market today along with the quasi omnipresence of KYC requirements at crypto exchanges.

This is particularly the case when it can be argued that buying Bitcoin in countries like the U.S. is probably easier than buying gold.

In less than 5 minutes, anyone in the U.S. with a credit card can open an account at a crypto exchange and buy Bitcoin. 

On the other hand, buying gold could be a bit trickier, as it would require someone to open a brokerage account or physically go to a pawn shop, for example.

In addition, many recent regulatory efforts have focused on crypto wallets (including self custody wallets) as well as decentralised finance.

Whilst initially it could have been argued that citizens could always have the option to self custody their crypto assets (and thus be able to hide their crypto assets somewhat like hiding a bar of gold under your mattress), the KYC requirements on those wallets, if they are enacted, could also enable governments to trace them.

The reality is that whilst a certain country could decide to ban Bitcoin, the decentralised and digital nature of crypto assets make it difficult to do so. 

For example, whilst crypto trading in China has been banned for a couple of years now, the reality is that many Chinese users can simply buy and sell crypto peer to peer. A lot of crypto trading also takes place on crypto platforms offshore or simply on permissionless DeFi platforms.

In addition, unlike the 1930s, the world is much more globalized and interconnected today.

Even if a large economy like the United States banned Bitcoin, users would have many options to find other venues in other jurisdictions where they could interact with digital assets. 

It could be argued that due to these practical difficulties, governments may try instead to tax the asset rather than outright ban it.

Many crypto investors could then simply pay the relevant tax and have peace of mind.

As a matter of fact, and as we have covered in previous issues of this newsletter, every American is now asked on their annual tax return whether they have made any crypto investments. 

And countries are getting better are taxing Bitcoin and other crypto assets. 

For example, a recent survey showed that an increasing number of countries are coming up with tax guidance on crypto. 

Source: PwC Annual Global Crypto Tax Report

Whilst this is a theoretical topic for now, it's definitely one worth reflecting on. 

Source: Henri Arslanian GIF page

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Pic of the Week

2. How Do Stable Coin Issuers Make Money?

Whilst we are seeing increased usage of stablecoins, it is worth looking at the incentives for those issuing them.  

Source: The Block

It is important to remember that historically speaking, whoever is issuing a currency has some benefits.

Historically, this was called seigniorage (which comes from Seigneur, the French word for lord), which is the difference between the face value of the money and the cost to issue it.

For example, if it costs 5 cents to produce a 1 dollar note, then the issuing entity is making 95 cents of seigniorage on each $1 banknote.  

The same principle applies for central banks when it comes to the treasury bills that they issue.

Along with governments, commercial banks play a big role in modern finance and economics, as they are able to create money (by generating loans for example) with deposits that they hold via the principle of fractional reserve banking, which is the system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. 

The reality with stablecoins, meanwhile, is much simpler.

Whilst issuing stablecoins can be a fun activity, an entity would only do so if there are clear benefits, including generating revenues, from that activity.

Stablecoin issuers generate revenues through two main actions. 

First, there is short term investing in safe assets like treasuries and money market funds.

A stablecoin issuer generally has the right to invest its reserves into very safe, liquid and short term investments.

Whilst the interest rate on such products is low (as is the risk), this can become quite lucrative for a stablecoin with large reserves.

Second are issuance and redemption fees.

A stablecoin issuer can charge a fee each time a token is issued (the issuer receives fiat and issues a token) or is redeemed (the issuer receives the token and provides fiat).

This can generate revenues for the issuer when there are lots of inflows or outflows from the fiat to the crypto ecosystems.

Also, such activity may be done by firms trying to arbitrage the price of a stablecoin with the value of their underlying fiat currency.

For example, in the event that a 1 US dollar stablecoin is trading at 99.8 cents, someone can buy that stablecoin and return it to the issuer in order to receive its $1 in fiat.

However, the arbitrage opportunity must be worth it.

For example, the popular stablecoin Tether charges a fee of 0.1% of the issuance or redemption of stablecoins and charges a US$150 verification fee.

There are also other activities that may take place, like market making, but short term investing and issuance and redemption fees are generally the primary sources of revenue for any issuer.

After all, nothing comes for free!

Money Quote of the Week

“The Stock Market is designed to transfer money from the Active to the Patient.” 

Warren Buffett

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3. Goldman Sachs Enters the Crypto Space (Again!)

It was reported this was that Goldman Sachs is looking at offering the full spectrum of Bitcoin and other digital assets products to its wealth management clients.

The bank's new head of digital assets for its private wealth management division stated that it believes we are sitting at the dawn of a new Internet and that Goldman is looking to participate in this space. 

There have been numerous media reports in recent years of Goldman entering the crypto space. 

In 2017 it was reported that they were setting up a crypto trading desk.

Less than a year later, however, it was reported that Goldman reversed course and dropped those plans.

And last summer, the bank named a new global head of digital assets.

All of these reports have now led to the media reports this week that the bank will be offering the full spectrum of crypto products to its wealth management clients. 

This is not surprising, considering that other wealth managers, including Morgan Stanley just last month, already announced their plans in this space. 

But what is somewhat funny is that it was only 10 months ago that the bank told its clients that cryptocurrencies, including Bitcoin, are not an asset class.

Source: Goldman Sachs

Of course, global investment banks are huge organisations with different individuals holding different views so such conflicting views on certain asset classes are bound to occur.

And the reality is that changing your views and making a big about-face on crypto happens regularly with banks. 

For example, in 2017 JP Morgan CEO Jamie Dimon took a shot at Bitcoin, remarking that the crypto asset was a fraud and that he would fire any trader who got involved in it.

But shortly after these comments, the bank announced the launch of its JPM Coin.

Not too long after that, the bank launched its own inhouse crypto and blockchain division. 

Who said banks weren’t fun!

My Crypto Capsule This Week

My Upcoming Virtual Speaking Engagements

7 April - Web Wednesday (B2B Influencer Marketing)

13 April - ASIFMA (Introduction to CBDCs)

28 April - OMFIF (Digital Monetary Institute)

6 May - Financial markets Association of Singapore

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Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with.

Who is Henri?

Passionate and focused on the future of finance and money, Henri Arslanian is the PwC Global Crypto Leader, the former Chairman of the FinTech Association of Hong Kong and an Adjunct Professor at the University of Hong Kong, where he teaches the first FinTech university course in Asia.

Henri advises many of the world’s leading crypto exchanges, investors, financial institutions and tech firms on their FinTech and crypto initiatives as well numerous governments, regulators and central banks on Fintech and crypto regulatory and policy matters.

 With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author and is regularly featured in global media, including Bloomberg, CNBC, CNN, the Wall Street Journal and the Financial Times.

Henri was named by LinkedIn as one of the global Top Voices in Economy & Finance and is the host of the FinTechCapsules? and CryptoCapsules? social media series.

Henri was recently named by Onalytica as the #1 most influential individual on Finance globally on LinkedIn out of 50k+ individuals working at the top professional services and management consulting firms in the world. 

Chambers Global also named Henri the “highest profile FinTech consultant in Hong Kong” and Asian Private Banker awarded him the “FinTech Changemaker of the Year” award.

Henri’s latest book, The Future of Finance: The Impact of FinTech, AI and Crypto on Financial Services, published by Palgrave Macmillan, was ranked as one of Amazon’s global top 10 best-sellers in financial services and was recognized as one of the “Best FinTech Books of All Time” by Bookauthority.

Before joining PwC, Henri was with a FinTech start-up and previously spent many years with UBS Investment Bank in Hong Kong. Henri started his career as a financial markets and funds lawyer in Canada and Hong Kong.

You can learn more about Henri on his website (www.henriarslanian.com) and you can reach him at [email protected]