Phase Two of Institutional Bitcoin Adoption

**NLW** (0:05)
Welcome back to The Breakdown with me, NLW. It's a daily podcast on Macro, Bitcoin and the big picture power shifts remaking our world.
What's going on guys? It is Tuesday, January 13th, and today we are entering phase two of institutional adoption. Before we get into that, however, if you're enjoying the show, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on The Breakers Discord. You can find a link in the show notes or go to bit.ly breakdown pod. So far this year, markets have been a little directionless. We've seen a ton of big catalysts already, but Bitcoin has largely been trading sideways. However, 2026 seems to be another big year for institutional adoption. The big headline was Morgan Stanley filing for a Bitcoin ETF, signaling a desire to put wealth management clients into their own product. But we've also had dozens of minor headlines pointing in the same direction. In a recent note, Binance Research framed this year as the beginning of round two for institutional adoption. They viewed round one as the period where major financial institutions served solely as distribution channels. That era was marked by the launch of the Bitcoin ETFs, which allowed customers to get access, but didn't necessarily speak to a deeper strategy. For most of that era, the major investment banks had banned their advisors from putting clients in Bitcoin, so the sole focus was arm's length distribution. That stance began to change late last year when we started seeing more interesting and diverse products being launched. Chief among them was JP Morgan Structured Bitcoin Notes. These securities gave capped upside exposure to Bitcoin's price while providing some downside protection. The product signaled that sophisticated investors were looking for more control over how they include Bitcoin in a portfolio. Binance's note highlighted that Morgan Stanley has triggered an acceleration of the next phase of institutional adoption. They write, This front-running behavior is expected to force competitors like Goldman Sachs and JP Morgan to follow suit to avoid falling behind in this emerging asset management lane. There are still a lot of boxes to check before Bitcoin becomes a fully mainstream asset class, but this year could be an inflection point. It feels as though we went through a phase shift towards the end of 2025 and we're now looking at round two of institutional adoption. Now, if you are running through a checklist of necessary conditions for another wave of institutional adoption, there is a clear number one, passage of the market structure bill. The bill has now been in the works for years and it's starting to get close. However, we've seen a string of fumbles and delays that are starting to put the entire bill at risk. On Monday, Senator John Boozman announced that this week's markup hearing had been delayed until the end of the month. This is kind of a good news, bad news situation. The good news is that Boozman cited meaningful progress in negotiations over the weekend. This opens the door to a bipartisan markup hearing. Heading into this week, the assumption had been that the hearing would be used for open debate and was unlikely to produce a finalized bill. The bad news is that we're rapidly running out of time. The second half of this month will likely be dominated by another government shutdown negotiation. If this bill isn't prepped and ready for a vote by the Easter break, it's going to be really difficult for it to get on the president's desk before midterms poison the bipartisan well and grind Washington to a halt.
Senate banking is still expected to hold their markup on Thursday, but things are looking decidedly less bipartisan on that front. New draft language was released late on Monday night, but senators still have two days to make amendments. We'll cover the new draft in more detail after the markup hearing, but for now the chatter is largely centered on stablecoin yield. Sources told Eleanor Tarrant of Crypto in America that Monday's negotiation was a doozy, quote, full of intense heartburn from both sides over stablecoin yield, now emerging as the thorniest issue as we head towards Thursday. The draft text allows stablecoin rewards tied to payments, transfers and remittances, somewhat mirroring the way the credit card reward points work. This of course doesn't cover the use of stablecoins as a replacement for a savings account, suggesting the banking lobby got their way in the final hours. Variant Funds CLO Jake Trevinsky noted, There are a few things left that could blow up the market structure bill and stablecoin yield is one of them. What does stablecoin yield have to do with market structure, you ask? Good question, nothing, except the banks have influence and they want their regulatory moat back. FinTech lawyer Scott Johnson quipped, Stablecoin yield, so nice they banned it twice. This issue could absolutely sink the bill. Many have suggested that stablecoin yields should be non-negotiable for the crypto lobby and could lead them to withdraw support for the bill in its entirety. Columbia Business School Adjunct Professor Oman Malikhan was so frustrated by the move that he wrote an entire article debunking the banking lobby's talking point. He tweeted, I am disappointed that market structure legislation seems to be held up by the stablecoin yield issue. Most of the concerns bouncing around Washington are based on unsubstantiated myth. The core myth according to Malikhan is that yield bearing stablecoins will drain deposits from banks leading to a string of disasters in the financial system. Alright guys, listen. I very rarely do this. In fact, I basically never do. But here is my take on this particular issue. First, all the crypto folks, like Malikhan, are absolutely right that this issue is beyond preposterous and is an insane hill for the banking lobby to die on. The fear that this is somehow going to totally upend things is just absolutely absurd. But by the same token pun intended, anyone who's saying that the crypto lobby should withdraw their support for the bill because of this is nuts and not someone that you want anywhere near the negotiations. I'm sorry, no one cares. This is a completely irrelevant issue made up by crypto Twitter people who think that the real world gives a crap about this issue, which they don't. The same reason that no one is going to all of a sudden run out to switch their savings to stable coins because they get a couple of percentages is the same reason that the crypto industry shouldn't care. Get the stupid bill done, let the banks have what they want, who cares? To be this close after this many years and fumble it because of this dumbass issue is just beyond ludicrous to me. All right, pack in the soap box up and let's move on. Even before the new draft, Cardano founder Charles Hoskinson believed the entire bill was unlikely to move forward this year. In a Scott Melker interview over the weekend, Hoskinson said, I don't think the Clarity Act is going to pass this quarter. And because it's an election year, we only have one last window. If the Democrats retake the House, we won't have another opportunity until 2029 Hoskinson went a little further, calling for scalps if the bill doesn't get done. He continued, If the bill doesn't pass this quarter, I think crypto czar David Sacks should resign. He's utterly failed us as an industry. Hoskinson listed three major failings in his view. Price isn't going up, adoption isn't going up, and the industry doesn't have certainty or a strong foundation to build on. He added, If you're the czar and you're in charge of this whole thing, I have to judge you by your track record. Most cryptos are down 40 to 50% since Trump took office. The industry is not healthy. Melker suggested the fault should be laid at the feet of the president in the inauguration night meme coin launch that squandered trust in the industry. Hoskinson responded that Sacks should have resigned in protest then and there, telling Trump, There's no path forward for us as an industry if you do this. Leaving Sacks aside, Hoskinson also has gripes about the way the Genius Act paved the way for a Wall Street takeover of the industry. He said, It centralizes the industry around BlackRock, Cantor, Goldman Sachs and Morgan Stanley and all these big guys. It essentially hinted Wall Street the keys to the crypto kingdom. I just can't with these comments, man. Whatever you think of David Sacks, the idea that it's somehow his fault that price isn't going up and that adoption isn't going up and having this time around crappy product, i.e. meme coins not be interesting to anyone, has nothing to do with the officials who are in charge of policy. Also, while it's completely reasonable to be upset that the industry has taken this institutional turn, this was inevitable for basically ever. And if you're not sure about that, go look up my episode from, I don't know, three years ago, four years ago, where Ben Hunt debates Alex Gladstein about exactly this. Now one interesting corollary to the institutional adoption story is the rising influence of the ratings agencies. Typically known for assigning risk weightings to bonds, some agencies started rating stable coins in recent years. This led to controversy last month when S&P downgraded Tether and claimed they didn't have enough assets to back their stablecoin. Now TetherFUD is nothing new, and CEO Paolo Arduino pushed back on the downgrade, claiming S&P hadn't accounted for all of Tether's assets. Still, with banks looking to start using stable coins this year, ratings matter a great deal more than they would have in the past. This week, Fitch's flagged Bitcoin-backed securities as having high market value risk. They're describing securities that function by pooling Bitcoin and issuing debt against that collateral. That description doesn't quite fit MicroStrategy's preferred stock, but it would describe JP Morgan's structured notes. The distinction is that the payback is tied to the performance of Bitcoin rather than the creditworthiness of the company. Fitch wrote that these securities carry quote, heightened risks that are consistent with speculative grade credit profiles. They pointed to Bitcoin's inherent volatility as well as counterparty risk and structural complexity. The note also referenced the collapse of the crypto lenders in 2022 as an example of how quickly collateral-backed models can unravel during periods of market stress. This is the second time Fitch has warned about crypto in the past month. They recently warned that they might downgrade banks who participate in crypto activities. This includes stablecoin payments and tokenized deposits, with Fitch concerned about operational and compliance risks. In large part, this note seems to be seeking to get ahead of a class of products expected to emerge later in the year as investment banks start to experiment with Bitcoin. It could function as a warning to those issuers, letting them know that the products will be lumped into a single basket and labeled as highly speculative. That's not altogether surprising, but it could dampen demand for these products. Institutional funds have difficulty taking positions in Bitcoin-related products, and risk managers are going to pay attention to Fitch's views. A high-risk rating could mean it isn't worth the argument to add Bitcoin-linked credit products even if they're theoretically safer than holding Bitcoin ETFs. Anyways, guys, look, the story is very similar that it's been for a while. The next big phase of Unlock has to come alongside some regulatory clarity, and we have a very short and shortening window to get it done. As you can tell, my view right now is that there are very few sacred cows and certainly stablecoin yield isn't among them. So do with that what you will, for now, that's going to do it for The Breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.