Should banks offer yield on your BTC?

Two of Bitcoin’s preeminent thought leaders are at odds over whether banks can or should provide a sustainable return on their customers’ BTC deposits.

Michael Saylor, executive chairman of MicroStrategy, the world’s largest corporate owner of Bitcoin, said in a recent podcast appearance that Bitcoin could become a form of “refined capital” that also generates a return for its holders in through digital banking services.

Conversely, Saifedean Ammous, author of the famous Bitcoin tome “The Bitcoin Standard” – countered that sustainable performance is not possible with a fixed supply asset like BTC.

Can Bitcoin Yield Really Work?

According to Saylor, the first generation of “digital banks” that offered Bitcoin performance were companies like BlockFi and Celsius, which eventually collapsed due to irresponsible management.

The performance of both companies was built through lending, borrowing and rehypothecating strategies, but collapsed when these companies were liquidated with their crypto-collateralized loans. That said, if major banks were to provide the same services with “adult supervision” and risk controls, Saylor believes they could provide Bitcoin performance in a sustainable manner.

“The best situation would be for the U.S. government to back one of the ten biggest banks that then gave you a return on your Bitcoin and then made the loans,” Saylor said. By doing so, he claimed that companies with megalithic balance sheets like JPMorgan could generate a “risk-free” return of 5% to customers on their BTC without those customers ever having to sell it.

Saifedean remained skeptical, however. “Ultimately, I don’t think this model will work without a lender of last resort,” he said. “I think people are just going to learn the hard way not to do that.”

Lender of last resort

“Lender of last resort” refers to a central bank that can print money to bail out insolvent commercial banks and their creditors, such as happened during the regional banking crisis in March 2023. Saifedean’s book goes a long way of time reprimanding the evils of central banking. to allow the printing of money that devalues ​​the savings of the population.

“If everyone has their Bitcoin at 5%, how are we going to make more Bitcoin?” asked the economist. “Eventually more Bitcoin must be paid than there is Bitcoin.”

Saifedean made a similar point to Celsius CEO Alex Mashinsky in 2019 before the latter’s company went under 3 years later. Mashinsky was scheduled to begin his fraud trial this week, but the trial has been delayed until January 2025.

In response, Saylor said that the big banks are backed by the government and therefore could not ultimately fail unless the US government itself failed. He further said that if holders cannot generate returns on their Bitcoin, then BTC will be an “unprofitable” asset no better than government bonds that pay 0% yield.

“We need a banking system that works to move capital,” he said. “Why are you apologizing for getting a return on your capital?”

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