Get ready for the bitcoin bank.
This week, Jonathan Gould of the OCC -- a division of the U.S. Treasury -- released a public letter saying that national banks can provide custody of bitcoin and other digital assets.
On one hand, this is not really news. Banks already allow you to safeguard precious valuables: you could just go open a safe deposit box and keep your bitcoin wallet in there. But that’s not convenient if you need to see your bitcoin balance or actually transfer the funds somewhere.
With the new guidance, banks can now “custody” (or keep safe) your crypto, as if it were traditional money. This is very big news, and here’s why.
Bitcoin Goes Legit
Symbolically, the letter is significant. It acknowledges that bitcoin has value.
We all know this, but banks have been operating in a strange world of make believe: even while the price of bitcoin soars, just mentioning the word “bitcoin” will make banks run in fear. If you’re a blockchain startup, for example, good luck finding a bank that will accept you.
By confirming that banks can custody digital assets, the OCC is confirming that bitcoin has value. Why would you even bother to write such a letter, unless digital assets are valuable? You wouldn’t have to write banks about holding on to Monopoly money -- nobody cares.
The first half of the letter, in fact, does a good job of simply describing how digital currencies work, for bankers who have not yet bothered to learn.
So it serves the dual purpose of educating banks about bitcoin – which in itself is a kind of legitimacy (when you learn about something, it becomes a “thing”).
Bitcoin Enters the Banking System
But bitcoin isn’t a “thing” in the physical sense of the word, of course. There is no paper currency to hold. Fortunately, banks are good at dealing with imaginary money. (That’s kind of their business.)
The OCC letter says that banks can hold on to a customer’s cryptographic keys. In other words, they can safeguard your wallet, and the keys for that wallet. But how will you know the value of your bitcoin, unless it is somehow displayed in your bank account?
This is the critical point: as banks begin offering digital custody services, they will now need to integrate the value of those assets into your traditional bank account. This is a massive shift, because now banks will need to track the value of bitcoin (and every other digital asset or token) they hold.
From a customer point of view, you just log into your bank account and see the value of your checking account, your savings account, and your crypto account. To you, it looks just like another kind of money – which, of course, it is!
I cannot overstate how important this is. With this letter, bitcoin (and the entire digital asset market) is now integrated into the entire banking system. Some are already throwing a wet blanket over the whole thing, saying that banks are slow to move and don’t expect anything to happen overnight.
I have a different perspective: I believe things will escalate quickly.
What Happens Next
In my view, the world is likely headed for a global financial recession that is like nothing we have experienced in our lifetime.
I’ve been reading the recent research of Ray Dalio, the founder of Bridgewater Associates, the world’s most successful hedge fund. I highly recommend it.
Although we call coronavirus “unprecedented times,” Dalio points out these times are very much precedented, and in fact repeat themselves throughout history.
To that end, he has done a 400-year study of periods of financial upheaval (such as world wars), predicting that great changes are ahead, including the U.S. dollar losing its status as the world’s reserve currency, a great conflict for world dominance between the U.S. and China, and the devaluation of cash.
Whether we go that far, most economists agree that we will see massive change in the months ahead – which presents both difficulties and opportunities. One of those opportunities is to upgrade our banking system.
Once banks start holding bitcoin, then reporting on bitcoin’s price, the next logical step is to provide “on ramps” and “off ramps” to bitcoin, allowing customers to easily switch between traditional money and digital assets – in the same way you can move money between your online checking and savings accounts.
As the global economic picture darkens, investors are likely to flee to new types of assets that they believe will offer them either greater returns, or safety in a storm. If the dollar begins to devalue, and inflation begins to run rampant, investors will hear their brains telling them, “convert your dollars to things that hold their value.”
We’re already seeing a run on gold; we might expect to see a run on bitcoin (“digital gold”) follow not long after. The only reason these are not in parallel yet is because it’s still hard to buy bitcoin. Once the banks remove this barrier, expect the floodgates to open.
Humans follow the crowd. Once everyone starts driving up the price of bitcoin, as we’ve seen over and over again, more people will want in. Banks, already in hot water from all the consumers and businesses defaulting on loans, will see a way to increase deposits. Who cares if they’re denominated in bitcoin? Beggars can’t be choosers.
Mark these words: soon we’ll have the opposite problem of trying to swing the pendulum the other way. We’ll be explaining why digital assets are not the end-all, be-all of the world’s financial problems. We’ll be explaining why bitcoin is overhyped, not underhyped.
The takeaway is that I expect the world economy to sink into an extended coronavirus-triggered depression, which will run up the price of other assets like gold, collectibles, real estate, and digital assets of all kinds.
Now that banks have the OK to embed bitcoin into their systems (which is effectively what the letter allows), I expect the price of bitcoin and digital assets to rise over time, accelerated by a depreciating dollar.
I don’t know the timeline for this – maybe next week or maybe next year – but I’m moving to get my financial house in order today. Note that I’m not moving everything into bitcoin (that’s madness), but I’m diversifying into a wide range of currencies, countries, and asset types. (As always, consider our Blockchain Believers Portfolio.)
No one knows where things will go next, and we should expect the unexpected. The only thing constant is change. This week’s letter from the OCC, at this time in history, will likely change things fast.
