_{Brought to you by:}

"Stability leads to instability."

— Hyman Minsky

Thursday unstable mailbag

Q: Is the US approaching its Minsky moment?

There are signs.

Hyman Minsky warned that credit booms fueled by risk-takers made complacent by a long period of stability often end in a sudden cascade of bankruptcies.

But a "Minsky moment" for the US government wouldn't be a literal bankruptcy — it would manifest as a market revolt triggered by a sudden loss of faith in Treasurys as the world's "risk-free" asset.

An academic study released this week suggests the revolution may be underway: "Tariff announcements have led investors to question the role of the dollar as the reserve currency."

With the rare confluence of a falling dollar and rising Treasury yield, the paper concludes that "investors have permanently decreased their willingness to pay for the safety and liquidity not just of US Treasurys, but of all dollar-denominated assets."

Permanently!

The Economist is similarly concerned. Its cover story this week warns that tariffs, tax cuts and erratic policymaking may lead to a "once-in-a-generation upheaval that pushes the global financial system into the unknown."

Some people (most of whom seem to be in the Trump administration) want to find out how global finance would work without an overvalued dollar serving as the world's reserve currency.

But after decades of relative financial stability, I'd rather not know — Hyman Minsky warns that "the more stable things become and the longer things are stable, the more unstable they will be when the crisis hits."

It may not come to that.

David Beckworth believes the dollar is more dominant and less fragile than we think: "The network effects and balance sheet capacity required to meaningfully challenge the dollar are so vast that such a shift is not just unlikely, it is borderline implausible in any foreseeable timeframe. It would take far more than a chaotic and ill-conceived trade war to dethrone the dollar."

The FT reached a similar conclusion: "The dollar's dominance is so thoroughly embedded into the fabric of the global economy…that even the Trump administration is unlikely to be able to fundamentally alter the status quo."

That's hopeful, I think.

But we should recognize the damage already done.

Demand for dollar-denominated assets has been the defining feature of markets for decades now, so the global financial system has certainly — and perhaps even permanently — changed since Liberation Day.

It's just a question of how much.

Q: Should bitcoin be doing better than this then?

I can't think of anything much more bullish for bitcoin than the president of the United States posting that the Fed chair should be "terminated" for not cutting interest rates.

Better yet, the Supreme Court may soon rule that the president has the authority to fire the Fed chair for any reason whatsoever.

The world is understandably scrambling for gold as a result but digital gold remains about 15% off its all-time highs.

To add insult to injury, onchain trading of tokenized gold is booming.

This might be good news.

Much as the stock market appears to be telling us that the US is not going into recession, bitcoin appears to be telling us that the US dollar isn't imminently headed for a Minsky moment.

That might be optimistic.

Even if Powell keeps his job for now, his term ends next year and his replacement seems likely to be pliant enough to further undermine faith in the dollar.

But markets are also smarter than me.

Maybe bitcoin isn't up more because there are 12 members of the FOMC and the chair only has one vote.

And maybe the stock market isn't down more because the president was also posting this morning about negotiating trade deals with Japan, Mexico and Italy.

Let's hope they're right.

Q: Is crypto crime legal now?

It's not legal, no, but the DOJ recently announced they'll be looking the other way.

In a memorandum to staff, the deputy attorney general wrote that "the Department will no longer target virtual currency exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or unwitting violations of regulations."

That's great for the crypto industry (newsletter writers included).

But I feel obligated to note that banks are regularly fined billions for "unwitting" violations of KYC, AML and money laundering regulations.

Ignorance of illicit activity has never been exculpatory in money laundering cases — compliance law punishes failures of oversight, irrespective of intent.

But, as JP Koning writes, the implication of the new DOJ guidance is that "when illicit activity is routed via crypto infrastructure, then it no longer qualifies as money laundering."

So, here's a new regulatory arbitrage opportunity for US banks to try: Move all of your databases to a blockchain and fire your giant compliance departments.

I'll take a modest cut of the savings from any bank that would like me to consult on this fool-proof strategy.

Q: Why are regulators embracing crypto?

There's the obvious reason that they have orders from on high to do so.

But there's also a monetary incentive: Friendly regulators can hit pay dirt when they switch to the private sector.

This is a story as old as time, but it may be amplified in crypto.

For example, Circle's recently filed form S-1 disclosed that its chief legal officer, Heath Tarbert, received $5.2 million of compensation for 2024 — and a total of almost $30 million since joining Circle from Citadel in 2023.

As CEO of the CFTC in 2021, Tarbert probably made less than $300,000.

Most of his compensation at Circle is in equity rewards that might not be worth much if the IPO market stays closed for an extended period of time.

But $30 million?

Nice work if you can get it.

Q: What's happening with Ethereum?

The answer to that question used to be all narratives — the price of ETH seemed to be strictly a function of how well its latest elevator pitch (world computer, ultra-sound money, crypto app store) was vibing on Twitter.

Now, though, we have numbers.

A new Blockworks Research dashboard shows that quarterly DEX volume is rising again after bottoming in 2023; tokenized gold is booming; and USDC recently passed ETH as the most traded asset on Ethereum.

Overall, the fees generated on Ethereum remain modest relative to its $200 billion market cap.

But this is still progress: For everything other than bitcoin, crypto is becoming a little more of a weighing machine and a little less of a voting one.

That hasn't been great news for Ethereum because the numbers aren't great.

But if it ever has a Minsky moment, we should at least see it coming.

— Byron Gilliam

_{Brought to you by:}

ZKsync is accelerating institutional blockchain adoption and the rise of tokenization.

Institutions choose ZKsync to move tokenized assets securely across enterprises while preserving privacy and governance.

With gasless transactions, seamless onboarding, and scalable ZK infrastructure, enterprises can transfer financial products and data privately using ZK Stack — an open-source, trustless blockchain platform designed for speed, low costs, security, and interoperability without sacrificing control.

Explore ZKsync

Crypto and TradFi Crossover Products

The Blockworks Research analysts discuss the rise in crossover products such as Kraken's rollout of US equity trading, and Nasdaq's plans for 24/5 trading.

Listen to 0xResearch on Spotify, Apple Podcasts or YouTube.

_{Brought to you by:}