Should Banks Offer Yield On Your BTC?

Two of Bitcoin’s pre-eminent thought leaders are at odds with each other as to whether banks can – or should – provide sustainable yield on their customers’ BTC deposits.

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

By contrast, Saifedean Ammous – author of the famous Bitcoin tome “The Bitcoin Standard” – countered that sustainable yield isn’t possible with a fixed supply asset like BTC.

Can Bitcoin Yield Really Work?

According to Saylor, the first generation of “digital banks” to offer Bitcoin yield were companies like BlockFi and Celsius – which ultimately collapsed due to irresponsible management.

Yield at both firms was created using lending, borrowing, and rehypothecations strategies – but fell apart when those firms were liquidated on their crypto-collateralized loans. That said, if the same services were provided by mainstream banks with “adult supervision” and risk controls, Saylor believes they could provide Bitcoin yield in a lasting way.

“The best situation would be the United States government backing one of the ten biggest banks that then gave you yield on your Bitcoin, then made the loans,” Saylor said. In this way, he claimed firms with megalithic balance sheets like JPMorgan could generate a 5% “risk-free” yield to customers on their BTC without those customers ever having to sell it.

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

Lender of Last Resort

The “lender of last resort” refers to a central bank that can print money to bail out insolvent commercial banks and their creditors – much like what occurred during the regional banking crisis in March 2023. Saifedean’s book spends much time rebuking the evils of central banking for enabling money printing that devalues the savings of the population.

“If everyone’s got their Bitcoin at 5%, how are we gonna make more Bitcoin?” the economist asked. “Eventually more Bitcoin needs to be paid than there is Bitcoin in existence.”

Saifedean made a similar point to Celsius CEO Alex Mashinsky back 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 now been delayed until January 2025.

In response, Saylor said that big banks are backed by the government, and so they ultimately couldn’t fail unless the U.S. government itself failed. Furthermore, he said if holders can’t generate yield on their Bitcoin, then BTC will be a ‘non-performing’ asset no better than government bonds that pay 0% yield.

“We need a functioning banking system to move the capital around,” he said. “Why would you apologize for getting paid a return on your capital?”