Balaji Srinivasan Expands on Worry of a Fiat Collapse and His $1 Million Bitcoin Bet
More detail on a publicity stunt
Key names in crypto took to the stage at Coindesk’s Consensus conference on Friday, warning of an existential risk to fiat currencies. Balaji Srinivasan, the former Coinbase chief technology officer and general partner at venture capital firm Andreessen Horowitz who popularized the “network state” theory, believes national currencies are on the brink of collapse.
“There’s a pretty serious existential risk for the financial system and I’m not the only one who thinks so,” he said in a keynote address in Austin, Texas. “Former U.S. Treasury Secretary Larry Summers believes [there’s a] 3 percent [chance] of a technical default within the next few months.”
Mixed economic evidence doesn’t necessarily back up Balaji’s assertions. Corporate earnings thus for the first quarter have been strong, with a rise in the stock market preceding those results, but there are growing concerns a tightening credit market could hurt growth.
“Most people who have an estimate of the fragility of the system are quietly exiting,” Balaji said. “They’re moving their money and going to wherever their safe place is. I'm unusual in that I'm actually telling the public what I'm seeing.”
In March, Balaji tweeted that Bitcoin will hit $1 million within 90 days. A patently ridiculous assertion, it nonetheless achieved his desired effect of drawing attention to his argument that fiat currencies are in danger of failing, and he admitted he was willing to spend a million dollars to get that message across.
He said this tweet wasn’t performative, but a “directional signal of the collapse of fiat.” He added, “I’m doing what I think of as my duty as a citizen to tell you something that the corrupt media, banks, regulators, and rate agencies are not doing. I may be wrong but I’m burning a million to tell you they’re printing trillions.” Bitcoin, which traded at about $29,500 yesterday, has until June 15 to hit $1 million for Balaji’s bet to pay off.
Back on planet Earth, Balaji said the market isn’t experiencing black swan events or an “act of nature.” Rather, he said he’s just reading the writing on the wall, much like Goldman Sachs did in 2006 before the 2008 financial crisis. “That’s a Wall Street mentality – sell then tell,” Balaji said.
He cited a few signs of fiat’s collapse, whenever that might be, and that there’s a 10 percent chance of it within months. Multiple crises happening at once – such as concerns about repayments on auto loans, credit cards, student loans and commercial real estate – are bad signals and are leading to the international movement of capital, he said.
“This is the first time in my life that I’ve seen Indian founders move their money back to Indian banks. Whether it’s gold, Bitcoin, another crypto or something else, allocation is not 100 percent to Fed-controlled accounts,” he said. “Any asset that the Fed could seize or freeze, such as stock, DTCC or real estate, I would consider potentially at risk.”
He said a move away from the U.S. dollar as the world’s reserve currency is a type of decentralization. “When you start to think of the dollar, not as a piece of paper or a money printer but as a network, there’s a lot of options – smaller and larger foreign currencies and cryptocurrencies that can complete with some or all functions,” he said.
Indonesia, the fourth biggest country by population is saying it doesn’t want to rely on Visa or Mastercard. “They want their homegrown thing. If they’re on a dollar network, the U.S. can remotely turn off their entire economy,” Balaji said.
“People are moving off the dollar, even within the U.S. We’re seeing that within the U.S. with crypto. There’s a ton of different kinds of pressures on the U.S. establishment at the same time,” he said.
Caitlin Long, founder and chief executive officer of crypto-friendly Custodia Bank, echoed Balaji’s cautions.
“One of the stress tests that the regulators do with traditional banks is to assume that 35 percent of their demand deposits are withdrawn in a short period of time. If you've got six cents of cash and 35 percent of your demand deposit is going away, you're done,” Long said.
There’s a huge issue with the banking industry in this country, she said. Custodia has said in regulatory filings that it plans to hold excess collateral on the cash deposits it oversees, a stark contrast to the prevalent fractional reserve banking model where banks retain only cents on the dollar in reserve compared to their deposits.
“It’s rather ironic that the Federal Reserve talked about how a bank that was going to be holding 108 cents of cash for every dollar of deposits was a run risk, when the average bank holds six cents of cash,” Long said.