Repo Market Meltdown Shows Bitcoin’s ‘Systemic’ Stability: Caitlin Long

Caitlin Long, a member of the Wyoming Blockchain Task Force, has responded to the recent unrest in the money markets by analyzing the systemic fragility of the traditional financial sector as compared with Bitcoin (BTC).

In a Medium blog post published on Sept. 25, Long made the argument that “at a systemic level, the traditional financial system is as fragile as Bitcoin is antifragile.”

Damage “control”

Writing in the wake of last week’s weakness in the repo markets — which prompted the Federal Reserve to temporarily inject $75 billion in cash to keep rates within its target range — Long argued that the incident represented “a modern version of a bank run.” She continued: 

“And it’s not over yet. Stepping back, it reveals two big things about financial markets: first, US Treasuries are not truly ‘risk-free’ assets [...]  and second, big banks are significantly undercapitalized. The event doesn’t mean another financial meltdown is necessarily imminent [...] since the brush fire can be doused either by the Fed, or by the banks raising more equity capital.” 

The liquidity squeeze — which pushed overnight repo rates to as high as 10%, well north of the Fed’s target 2-2.25% range —  had been triggered by the coincidence of corporate tax payments and Treasury settlements falling on the same date. 

Yet rather than being a one-off instance of exceptional, unfortunate pressure on the lending markets, Long notes that this is the fourth such episode since the 2008 meltdown. 

She critiques the Fed’s assertion this June — made on the occasion of the publication of its most recent bank stress tests —  that “the financial system remains resilient,” arguing that the proclamation “strains credulity.” She further notes that:

“A staggering amount of US dollar liabilities have been issued offshore in recent decades and the Fed not only doesn’t control them but can’t measure them with any degree of accuracy.”

Bitcoin: an insurance policy against systemic instability

This inherent obfuscation — particularly glaring when it comes to highly rehypothecated assets such as U.S. Treasuries — was importantly conceded by the Chairman of the CFTC, Chris Giancarlo during questions following a 2016 speech. He remarked that:

“At the heart of the financial crisis, perhaps the most critical element was the lack of visibility into the counterparty credit exposure of one major financial institution to another. Probably the most glaring omission that needed to be addressed was that lack of visibility, and here we are in 2016 and we still don’t have it.”

In conclusion, Long makes the case that while commentators frequently point to volatile price performance when it comes to Bitcoin, it is significantly more stable systemically:

“Bitcoin’s price is highly volatile, but as a system, it is more stable [...] Bitcoin is not a debt-based system that periodically experiences bank run-like instability. In this regard, Bitcoin is an insurance policy against financial market instability. Bitcoin is no one’s IOU. It has no lender of last resort because it doesn’t need one.” 

Earlier this month, crypto fund executive Travis Kling argued that that the specific properties of Bitcoin make it an exceptional hedge against monetary and fiscal irresponsibility from central banks and governments globally.