Lynn Ulbricht

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 HKMA

The stablecoin race gathered a little pace this week. The United States regulatory bill is making its way through the Senate but rather more interesting is the action on the other side of the world. Hong Kong actually passed stablecoin legislation, establishing a licensing regime for fiat-backed stablecoins.

It wouldn’t matter so much but these days Hong Kong does not pass legislation China doesn’t agree with. So one imagines this is the testing ground for something similar on the mainland. If the US is doing it, we better be ready, just in case.

The full release from the HKMA is here. It roughly amounts to, if you want to do this you need a licence from us first. 

It's an extraordinary journey for stablecoins. It’s only four years since we were getting served up this kind of story in the Financial Review.

The “convoluted mechanism” the article refers to is the idea of keeping the money in case you want it back. Banking on the other hand does not do that, it lends it out, the money is no longer there. There is a maturity mismatch which would be covered by the RBA if something went wrong. That normally doesn’t happen because banks comply with liquidity requirements and BASEL something or other. It’s in no way convoluted. 

The article got one thing right though. No bank would bank this industry, that’s how Tether was born. Everyone used it because they had no choice. Now Tether is more profitable than any bank in the world and the bankers want in on the game. 

Bitcoin Conference

The biggest bitcoin conference of the year took place in Las Vegas this week. 30,000 attendees, 5,000 exhibiting companies and over 400 speakers. In 2013 it was much smaller. It took place in San Jose, and here is bitcoin author Andreas Antonopoulos talking about bitcoin to an empty room. His full speech that day is still on YouTube, importantly it is also still relevant. If you watch a corporate presentation from 13 years ago, it almost certainly won't mean much today because the industry will have moved on. Not so here, the promise is the same. The goal is the same. The supply curve is the same. Bitcoin is the same. 

The 2025 line up is different. The Vice President of the United States is speaking along with a US Senator. Michael Saylor too, naturally. Finishing the top billing, Ross Albricht of Silk Road fame. Described as a “freedom fighter”? Not sure about that. His now commuted sentence was clearly ridiculous for what he did, even so,  I would have perhaps chosen something more modest.

He will receive a reception like no other. His mum has been attending bitcoin conferences for years to remind people what happened to her son. It will be a huge day for her too. If there is a freedom fighter, it's Lynn Ulbricht. 

Like 2013 though, it doesn’t matter who attends or who speaks. Bitcoin doesn’t care. Vice President? Whatever. 

We just want blocks every 10 minutes. 

Safe as houses

You might argue that this is wrong because house price combines the land value, which does not depreciate, with the building value that does. It's an increasingly common belief among a large cohort of technically capable people. The ‘system’ is pretend. 

@levelsio lives in Portugal. He isn't talking about Australia even though the sentiment applies here as much as anywhere. You don’t win elections if house prices go down.

Where I disagree is that “the whole system relies on a housing shortage”. Not really. It relies on houses attracting monetary premiums. That happens because money itself no longer attracts any premium at all, quite the opposite. Everyone knows that their national currency is going to lose value quickly. It is not an instrument for saving. Housing allows you to go long a hard asset that people understand and short the national currency. Mortgages are also very highly skewed to the borrower. Banks don’t want to default you on a whim. Again you don’t win elections evicting borrowers and banks don’t make big profits upsetting incumbent governments. 

The issue for younger people is “how do I save”? What instrument do you use? It cannot be money in a bank account because it does not accrue value at the rate of increase in other assets. It cannot be bonds because the same is true. Realistically, it cannot be bitcoin either because at this early stage it is too volatile. That gap in the market for “how do I save money”, remains. Bitcoin seeks to fill it but needs to be much bigger before it can. It needs to be ‘bond market big’ and I certainly believe that it one day will be. 

The market is there for the product that delivers real savings capability. That is the competition that fiat, bonds and bitcoin are all in. The reality of that competition is that you cannot continually create more of your particular instrument and expect to win the race. 

Basic Capital

To illustrate the earlier point. I came across this product for young people earlier this month. Under the heading "Why (and How) Young People Should Go Into Debt to Buy Stocks". It sounds absolutely crazy when you read that, but young people have one advantage that cannot be replicated by anyone else. Time. 

The full explanatory argument is here about why this is a reasonable idea. 

Basic Capital’s website runs with a sort of Marxist headline “Owners, not workers: you own a piece of the system”. It's a difficult one. 

Is leveraging your youth into 85% bonds and 15% equity at 5x where we want to be? I can see the product being hugely successful because it will create enormous demand for bonds (something which is missing right now).  

This is where we are. A level of financial engineering that we haven’t seen before, “Lever up your youth”. I read the documents, I understood them. I read Tyler Cowen’s take on it (economist at Marginal Revolution, I like him), he was broadly in favour. 

I concluded. It’s a trap. The premise of the product is that the bond weighting will take the volatility out of the equity exposure. The key assumption being that the bond market won’t collapse in the next 45 years.  It may not, but I wouldn't like to leverage my entire working life into that bet. 

Euro-Trash

A “global euro moment”. You can read the full speech for yourself. In essence, America is turning inward, as a result people will not want dollars and we can seize the opportunity to sell them some of our toilet paper. We call them Euros. 

From a strategic perspective yes. I think this is absolutely the right move for Europe but in all practical senses it won’t work. For example, can I have a European bank account for my newly desired Euros? A European company? No. They don’t exist. 

You must choose your country and then apply. OK then. I’ll open one in France. Yes you can have a bank account but you must come to the branch, we open at 10 and close at 12. We reopen at 2 until 4, not on Fridays or public holidays, which is most days. The application is in French and you must speak French to have the account and have an ID that is valid in France. You must have a French address. Also, if you are not French, we will be very rude to you, including totally ignoring you.

What about a European company? Again, no such thing. You must navigate the legalities of the chosen European nation. That may or may not permit you to trade with another European nation. Their laws are different and technically they aren’t supposed to discriminate against you, but they will. 

Lagarde has missed the point. People do want a currency that isn’t dollars. They want something that is useful, scarce and easy to use. The Euro is none of those things. It could be but it isn't. Take the Swiss Franc for example. The Swiss have had a terrible time, losing Credit Suisse and losing the aura of currency invincibility.  Even so, the Euro has lost 40% of its value against CHF since the Euro launched. Why?

It’s a specifically relevant example because Swiss trade is mostly with the EU. For all purposes other than currency it's basically the same. Most of the time no passport, required. French and German spoken. Yet, the Euro’s nearest neighbour, with whom all other things are equal, has somehow dramatically outperformed. 

Further information

Our April 2025 report to investors can be found here.