Should Banks Provide Yield on Your Bitcoin Deposits?

Two prominent figures in the Bitcoin community are in disagreement regarding the ability and appropriateness of banks to provide sustainable yield on customers’ BTC deposits.

Michael Saylor – the executive chairman of MicroStrategy, which holds the title of the largest corporate owner of Bitcoin – remarked in a recent podcast that Bitcoin has the potential to evolve into a type of “perfected capital” that can yield returns for its holders through digital banking functionalities.

On the other hand, Saifedean Ammous – renowned for his influential book “The Bitcoin Standard” – argued against the feasibility of sustainable yield with a capped supply asset like BTC.

Is Bitcoin Yield Feasible?

Saylor believes that the initial wave of “digital banks” promising Bitcoin yield included names like BlockFi and Celsius – both of which ultimately failed due to poor management decisions.

The yield generated by those companies was based on lending, borrowing, and rehypothecation practices, which collapsed when those companies were forced into liquidation regarding their crypto-collateralized loans. However, Saylor posits that if similar services were managed by established banks with adequate oversight and risk management, Bitcoin yield could be achievable in a sustainable manner.

“The optimal scenario would involve the U.S. government supporting one of the ten largest banks, which would then provide yield on your Bitcoin while facilitating loans,” Saylor expressed. He suggested that major institutions like JPMorgan could offer a 5% “risk-free” yield to clients on their BTC without necessitating any sale of the asset.

Conversely, Saifedean expressed doubts. “In the end, I don’t believe this model will succeed without a lender of last resort,” he stated. “People are going to face harsh realities when trying to pursue this.”

Lender of Last Resort

The term “lender of last resort” describes a central bank capable of generating funds to rescue insolvent commercial banks and their stakeholders – similar to the interventions seen during the regional banking crisis in March 2023. Saifedean’s work critiques the harmful effects of central banking, particularly its role in allowing money printing that erodes public savings.

“If everyone has their Bitcoin at 5%, how are we going to create more Bitcoin?” the economist queried. “Eventually, the payment of more Bitcoin than what exists will be necessary.”

Saifedean made a similar assertion back in 2019 to Celsius CEO Alex Mashinsky, shortly before the latter’s company collapsed three years later. Mashinsky’s fraud trial, initially set for this week, has now been postponed until January 2025.

In reaction, Saylor argued that large banking institutions receive government backing, implying they wouldn’t fail unless the U.S. government itself was compromised. He also mentioned that if Bitcoin holders cannot earn yield on their assets, BTC would be rendered a “non-performing” asset, akin to government bonds that yield nothing.

“A functional banking system is necessary to circulate the capital,” he continued. “Why should one apologize for earning a return on their capital?”