by Fade_Dance | 2025-09-13 14:36:40+00:00
Edit:

Just to button up that bottom part, since it sounds a bit wonky. It looks like there's a new sort of Eurodollar system developing, which is more accessible and more democratized. That's pretty cool.

Ex: Tether was a 7th largest purchaser of US debt in 2024, ahead of South Korea and Germany.

Instead of EuroDollars (offshore dollar denominated deposits in non-us regulated institutions - say two non-us countries denominate alone in US dollars, they have spawned additions to the global dollar liquidity system without US involvement) you have stablecoins. Some of these stable coins are backed by hard US assets (just like foreign banks May hold hard dollars or TBills to cover their exposure), but some will inevitably not be and there will be a spectrum of risk and creditworthiness that will naturally arise. Likewise, these stable coins are passed around, lent and re-lent, which originates leverage in the crypto space, much like how we use Repo markets in the "real" financial system.

To dig into the history a bit more, after the GFC things like Repo and bank reserve requirements were tightened up quite a bit. No more sending off your dubious credit default swaps to repo to originate leverage every day if you are Bear Sterns, for example. Within developed was what we know as Shadow banking (which really isn't a descriptive term for it), and to me all of this crypto stuff is really just part of that offshoot Shadow banking narrative since the GFC.

History also has a tendency to repeat itself which crypto seems to be rapidly doing. Let's look back a few years ago with the banking crisis in the US, that was really a repeat of the savings and loan crisis from 40 to 50 years ago. So in a sense we're sort of on track for the new crop of humans to repeat some of the narratives that came after that are we not? Let's take that hard data point that tether, a stable coin, is now a huge holder of US debt. There's a reason why we have entities like the FED that step in to backstop these markets (like in 2020). Let's see the crypto market keeps developing, and is highly automated and mechanized as expected. Let's say something like a security flaw in one of the major backbones with regards to quantum computing starts a bank run in the space, and these stable coins start having to liquidate their treasury holdings aggressively and mechanistically. Well there's a classic reflexive loop that in the regulated financial system regulators would step into stop. Now because it's US debt to the tune of hundreds of billions of dollars in real supply, this could be an actual, perhaps even mid-sized financial crisis! At the end of the day this sort of thing is exactly what I expect us to keep doing occasionally, after all humanity needs to relearn its lessons within new frameworks!

As for Bitcoin, it's the gold equivalent in this parallel shadow liquidity complex.

So yes, wonkish, but imo all of this stuff is pretty interesting and maybe even under discussed. Probably more useful to think about than stock price going up or stock price going down...

And then a note on why traditional financial participants seem to be getting on board with crypto, even people who may have initially been against it. I think it has something to do with how liquidity sensitive this stuff is. We live in a world where liquidity is ever more dominant a factor in financial markets, yet a bit paradoxically it's harder than ever to measure it. Let's take something like levels of reserves in the banking system, that thing which if it gets too low spikes repo rates and can cause an overnight crisis. Even the FED doesn't exactly know how to measure this and is largely guessing. There was an interesting research paper a little while back that proposes a new measuring system where they hook into bank transactions and measure if payments are a little late, like "did this bank pay their bill at 10am or 11:30". Believe it or not, that sounded like a large improvement over the higher frequency stuff we have! LIBOR was also replaced with SOFR, so the embedded overnight lending risk between financial institutions is not as viewable as it once was (granted LIBOR was manipulated, so at least that's better...) I've increasingly seen crypto used as a liquidity monitor. Ex: if Bitcoin explodes higher and diverges from the S&P, people will take that data point with sometimes even medium seriousness. That alone may be adding a chunk of legitimacy to the thing, and it may be self-reinforcing. Compared to the current insights we have the true nature of liquidity, maybe it isn't even that crazy an idea.