Tim Heath: The fiat financial system is failing and Bitcoin is the antidote we need
Last month, the former CTO of Coinbase and General Partner at Andreessen Horowitz, Balaji Srinivasan, accepted a bet with renowned hyperinflation doubter James Medlock totalling $2m that Bitcoin (BTC) would reach $1m per coin within 90 days.
Srinivasan believes that there is an impending crisis that will lead to the deflation of the dollar, resulting in mass hyperinflation that will in turn drive up BTC’s price.
It might be that the bet is unwinnable based on BTC’s current price, but I do believe there is a lot of truth in Srinivasan’s arguments, both now and prior, that DeFi solutions such as BTC are needed more than ever in our current, broken financial system.
Indeed, we are moving from over half a century of dollar hegemony to a multipolar monetary system encompassing other currencies, the dollar and, of course, BTC.
I don’t believe that there is an impending crisis. My case is that we’re bang in the middle of one right now.
The Bretton Woods financial system architecture which established a global system based on the US dollar around us is creaking. We have witnessed a multitude of Lehman Brothers moments manifesting over the past year alone, a clear sign that something has to change to protect consumers.
Multipolar monetary order
The dollar today is solely backed by debt. Free of a link to gold since 1971 and with the petrodollar system looking increasingly vulnerable as major Gulf states pivot east towards the likes of Beijing, the value of the dollar now relies solely on trust.With BRIC nations increasingly calling for their own currencies for international trade, we are seeing the emergence of a multipolar monetary order with currencies like the Yuan increasingly being used for international transactions.
The inherent value of the dollar is now less obvious than it ever has been, with only faith in the Fed alone backing it.
Should there be a debt ceiling, the Fed would likely default, resulting in a major stock market crash. Such realities are resulting in de-dollarisation and reinforce the need for BTC which has a set supply and cannot see its value inflated away. Trust in third parties and reliance on debt is not a factor with BTC.
Over just 11 days in March, four US banks failed: Silvergate, Silicon Valley Bank (SVB), Signature and First Republic. We also saw Credit Suisse bailed out, with total direct support for these major collapses totalling over $400bn just to keep the ship above water, by many metrics eclipsing records set in 2008.
No lessons learned
The ‘too big to fail’ narrative continues to be reinforced emphatically at the expense of consumers each and every time as we fail to learn lessons from each collapse. Indeed, many of the changes implemented post 2008 continue to fail.
Rampant money printing and inflation remain out of control, with customers continuing to abandon banks out of fear of collapse and as they seek higher yields, a move catalysed by SVB’s collapse earlier this year.
Average US bank account savings rates are just 0.37%, compared with the Fed’s benchmark rate of almost 5%.
With recent banking collapses, subsequent bailouts and at a time when dozens of regional and midsized banks are set to announce their financial results, it is highly likely that mass deposit outflows by traditionally staid retail investors will continue, thus further impacting market volatility.
In the past year alone, commercial bank deposits have sunk by half a trillion dollars, a decline of nearly three percent as investors move their cash into money-market funds. As consumer funds remain in such ‘narrow bank’ accounts, banks are being undermined and slowly bled as deposits grow scarcer, meaning that further SVB-type collapses are inevitable.
Large corporations like Apple are also giving banks a run for their money. The Silicon Valley-based company entered the savings market this month, offering 4.15% interest in high-yield savings accounts, more than ten times the US national average, in a move designed to test big banks.
In a letter to its investors issued in November last year before the aforementioned major crashes, Elliot Management, a major US-based hedge fund managing nearly $56bn in assets, warned that rising inflation and continued interest rate hikes ‘have set the stage for the biggest economic upheaval since World War II’.
Such warnings, as stark as they may be, unfortunately should come as no surprise to us given that we are working with a system designed in 1944 ill-equipped to deal with the realities of the situation in 2023.
Continued war in Eastern Europe, ongoing recovery from a worldwide pandemic, global supply chain issues, rising inequality and increasing protectionism are rallying together to stress test our existing system en-masse; a test our system is failing.
Taking the situation in Ukraine as one example and subsequent Western sanctions on Russia, we are seeing BRIC currencies such as the renminbi used for international transactions at an increasing rate, at the expense of the dollar.
All of a sudden, Balaji Srinivasan’s assertion that our current system is ill-equipped to deal with our existing situation and that DeFi has a large role to play in forging a better future doesn’t look like some utopian ideology.
Need for major change
There is no ultimate silver bullet solution, but existing problems demand major financial architecture change.
Bitcoin, I believe, holds the key to helping us unlock a more stable, prosperous financial future.
As investors have increasingly fewer places to shelter in our current financial storm, it should come as no surprise that many are looking to crypto, and particularly Bitcoin, as a hedge against inflation and the fiat standard’s major deficiencies.
Bitcoin hit a 10-month high earlier this month, a psychologically important milestone as it represents where it stood last summer before the market’s decline.
BTC is a form of currency that cannot be manipulated, unlike fiat and traditional banks. Further, its fixed supply means it is the check balance and opt-out of the problems associated with money printing.
Other inherent benefits such as its self-custodial nature and being able to reach anyone with an internet connection and compatible device mean that people need not be needlessly left behind as its cross-border potential is realised every day, reaching those who need it the most.
New financial market infrastructure
Of course, DeFi has its own problems, and FTX’s collapse showcased the need for further regulation and measures such as third-party confirmation of ‘proof of reserves’ in major exchanges. Bitcoin however, as the first kid on the block, is well established and trusted by hundreds of millions already.
The emerging multipolar monetary order will require new financial market infrastructure that enables the co-existence of TradFi and DeFi.
This means that further crypto regulation, large-scale investments and government support is required. The technology must be respected, understood and utilised, and we must work with it, not against it if we are to secure a better financial future.
We have been plastering over the major gaps in our 1944-based financial architecture for too long and must look to DeFi technology when forging a more secure, better financial future placing consumer protection at its very core. The world must move on from dollar hegemony to one where the dollar, BRIC currencies and BTC can co-exist.
As central banks continue creating instability by manipulating money supply, it is only a matter of time before the next collapse.
This post first appeared on Medium.com.
Tim Heath draws upon two decades of experience within the iGaming and emerging technologies sectors as GP of Yolo Investments. An early adopter of Bitcoin in 2013, he was founder and CEO of the Yolo Group (formerly the Coingaming Group) until 2020. The group operates leading crypto gaming brands Bitcasino and Sportsbet.io, with the latter securing high-profile sponsorships with Premier League clubs Arsenal and Southampton.