Is the "Strict Principal" of BTC here? If he takes charge of the Federal Reserve, the crypto party may come to an abrupt end

Original | Odaily Planet Daily Ethan

As the year-end approaches, the "master switch" of global liquidity—the Federal Reserve Chair's scepter—has become the most anticipated suspense of the year.

Months ago, when the benchmark interest rate ended its long pause with its first cut, the market was once certain that Christopher Waller was the chosen one (recommended reading* “The Academic's Counterattack: Small Town Professor Waller Becomes the Most Popular Candidate for Federal Reserve Chair”*). In October, the winds shifted dramatically, and Kevin Hassett surged ahead, with odds approaching 85%. He was seen as "the White House's mouthpiece; if he takes office, policies may completely follow Trump's will," even being jokingly referred to as "a human money printer."

However, today we will not discuss the "top candidate" with the highest odds, but rather focus on the most variable "second in line"—Kevin Warsh.

If Hassett represents the market's "greedy expectations" (lower rates, more liquidity), then Warsh embodies the market's "fear and reverence" (tighter monetary policy, stricter rules). Why is the market re-evaluating this once-lauded "Wall Street golden boy"? If he truly takes the helm of the Federal Reserve, what monumental changes will occur in the underlying logic of the crypto market? (Odaily Note: The core views of this article are based on Warsh's recent speeches and interviews.)

Warsh's Evolution: From Wall Street Golden Boy to Federal Reserve Outsider

Kevin Warsh does not hold a PhD in macroeconomics, and his career did not begin in academia but in Morgan Stanley's mergers and acquisitions department. This experience gave him a mindset completely different from that of Bernanke or Yellen: in the eyes of academics, a crisis is merely a data anomaly in a model; but for Warsh, a crisis is the moment a counterparty defaults, the life-and-death moment when liquidity shifts from "available" to "non-existent."

When Warsh was appointed as a Federal Reserve Governor at the age of 35 in 2006, many questioned his qualifications. But history is humorous; it was precisely this "Wall Street insider's" practical experience that made him an indispensable figure in the subsequent financial storm. During the darkest moments of 2008, Warsh's role had already transcended that of a regulator; he became the only "translator" between the Federal Reserve and Wall Street.

A clip from Warsh's interview at Stanford University's Hoover Institution

On one hand, he had to translate the toxic assets of Bear Stearns, which became worthless overnight, into a language that academic officials could understand; on the other hand, he had to convey the Federal Reserve's obscure intentions to the panicked market. He experienced the frantic negotiations of the weekend before Lehman's collapse, and this close-quarters combat gave him a physiological sensitivity to "liquidity." He saw through the essence of quantitative easing (QE): central banks do indeed need to act as "lenders of last resort" during a crisis, but this is essentially a transaction that overdraws future credit to buy time for survival. He even pointed out sharply that the long-term blood transfusion after a crisis is actually "reverse Robin Hood," artificially inflating asset prices to rob the poor and benefit the rich, which not only distorts market signals but also sows greater risks.

It is this acute sense of systemic fragility that became his core bargaining chip when Trump was selecting candidates for the next Federal Reserve Chair. On Trump's list, Warsh stood in stark contrast to another popular candidate, Kevin Hassett, and this contest was humorously dubbed the "Battle of the Two Kevins" by the media.

Federal Reserve Chair candidates: Hassett vs. Warsh, image source Odaily Original

Hassett is a typical "growth-first" advocate, with a simple and direct logic: as long as the economy is growing, low interest rates are reasonable. The market generally believes that if Hassett takes office, he will likely cater to Trump's desire for low rates, even starting to cut rates before inflation is fully under control. This also explains why whenever Hassett's odds rise, long-term bond yields soar, as the market fears uncontrollable inflation.

In contrast, Warsh's logic is much more complex; it is difficult to simply define him as "hawkish" or "dovish." While he also advocates for rate cuts, his reasoning is entirely different. Warsh believes that the current inflationary pressures are not due to excessive demand but rather to supply constraints and excessive monetary expansion over the past decade. The Federal Reserve's bloated balance sheet is actually "crowding out" private credit, distorting capital allocation.

Thus, Warsh's prescription is a highly experimental combination: aggressive balance sheet reduction (QT) coupled with moderate rate cuts. His intention is clear: to control inflation expectations by reducing the money supply, restoring the purchasing power credibility of the dollar, which means pulling back the liquidity a bit; while simultaneously lowering nominal interest rates to ease financing costs for businesses. This is a hardcore attempt to restart the economy without flooding it with liquidity.

The Butterfly Effect on the Crypto Market: Liquidity, Regulation, and Hawkish Undertones

If Powell is like a cautious "gentle stepfather" in the crypto market, not wanting to wake the child, then Warsh resembles a "strict headmaster" wielding a ruler. The storm triggered by this butterfly flapping its wings may be more intense than we anticipate.

This "strictness" is first reflected in his obsession with liquidity. The crypto market, especially Bitcoin, has, to some extent, been a derivative of the global dollar glut over the past decade. Warsh's policy core is a "strategic reset," returning to the sound monetary principles of the Volcker era. His previously mentioned "aggressive balance sheet reduction" is both bad news for Bitcoin in the short term and a litmus test in the long term.

Warsh has explicitly stated: "If we want to lower interest rates, we must first stop the printing press." This means the disappearance of the safety net for risk assets accustomed to the "Federal Reserve put." If he firmly implements his "strategic reset" after taking office, leading monetary policy back to more sound principles, the tightening of global liquidity will be the first domino to fall. As a "frontier risk asset" highly sensitive to liquidity, the cryptocurrency market will undoubtedly face pressure for valuation reassessment in the short term.

Kevin Warsh discussed Federal Reserve Chair Jerome Powell's interest rate strategy on the "Kudlow" show, source Fox Business

More importantly, if he truly achieves "non-inflationary growth" through supply-side reforms, keeping real yields positive in the long term, then holding fiat currency and government bonds will become profitable. This is in stark contrast to the 2020 era of "everything is rising, only cash is trash," and the appeal of Bitcoin as a "zero-yield asset" may face severe scrutiny.

But there are always two sides to a story. Warsh is an extremely firm believer in "market discipline," and he would never rush to rescue the market when it falls by 10% like Powell. This "bottomless" market environment might actually give Bitcoin an opportunity to prove its worth: when the traditional financial system experiences credit cracks due to deleveraging (as seen in the Silicon Valley Bank crisis), can Bitcoin detach from the gravitational pull of the stock market and truly become a Noah's Ark for safe-haven funds? This is the ultimate exam Warsh has set for the crypto market.

Behind this exam lies Warsh's unique definition of cryptocurrency. He once left a famous quote in The Wall Street Journal: "Cryptocurrency is a misnomer. It is not mysterious, nor is it money. It is software."

A snippet from Kevin Warsh's column article “Money Matters: The US Dollar, Cryptocurrency, and the National Interest”

This statement sounds harsh, but if you look back at his resume, you will find that he is not a blind opponent but an insider who understands the technical mechanisms. He is not only an advisor to the crypto index fund Bitwise but also an early angel investor in the algorithmic stablecoin project Basis. Basis attempted to mimic central bank open market operations through algorithms; although the project ultimately failed due to regulation, this experience made Warsh understand better than any bureaucrat how "money" is generated through code.

Because he understands, he is even more ruthless. Warsh is a typical "institutionalist"; he recognizes crypto assets as investment targets like commodities or tech stocks, but he has a very low tolerance for "private minting," which challenges the sovereignty of the dollar.

This binary attitude will directly determine the fate of stablecoins. Warsh is very likely to push for the inclusion of stablecoin issuers within the "narrow banking" regulatory framework: they must hold 100% cash or short-term debt reserves and are prohibited from engaging in fractional reserve lending like banks. This is a double-edged sword for Tether or Circle; they will gain a legitimate status similar to banks, creating a deep moat; but at the same time, they will lose the flexibility of "shadow banking," and their profit models will be completely locked into government bond interest. As for those small and medium-sized stablecoins attempting to create "credit," they will likely be directly eliminated under such high pressure. (recommended reading: “Farewell to the 'Agent Bank' Era? Five Crypto Institutions Obtain Keys to Direct Access to the Federal Reserve Payment System”)

The same logic extends to CBDCs. Unlike many Republicans who oppose them outright, Warsh offers a more nuanced "American solution." He firmly opposes the "retail CBDC" directly issued by the Federal Reserve to individuals, viewing it as an invasion of privacy and an overreach of power, which aligns remarkably with the values of the crypto community. However, he is an advocate for "wholesale CBDCs," arguing for the use of blockchain technology to transform the interbank clearing system to address geopolitical challenges.

In this framework, a fascinating fusion may emerge in the future: the underlying settlement layer controlled by the Federal Reserve's wholesale chain, while the upper application layer is left to regulated public chains and Web3 institutions. For DeFi, this would mark the end of a "Wild West" era, but perhaps the true spring of RWA (Real World Assets) is just beginning. After all, in Warsh's logic, as long as you do not attempt to replace the dollar, the efficiency gains from technology will always be welcomed.

Conclusion

Kevin Warsh is not just an alternative on Trump's list; he embodies the old order of Wall Street attempting to redeem itself in the digital age. Perhaps under his leadership, RWA and DeFi built on real utility and institutional compliance are just beginning to usher in a true golden age.

However, just as the market overinterprets Warsh's resume, BitMEX founder Arthur Hayes poured a bucket of cold water on the situation. In Hayes's view, we may have all made a directional error; the key is not what that person "believes" before becoming chair, but whether he understands "who he works for" after taking that position.

Looking back at the century-long history of the Federal Reserve, the power struggle between the president and the chair has never ceased. President Lyndon Johnson once resorted to physical intimidation against then-chairman William Martin to force the Federal Reserve to lower rates on his Texas ranch. In contrast, Trump's Twitter attacks seem trivial. Hayes's logic is harsh but real: the U.S. president will ultimately get the monetary policy he desires. And what Trump wants is always lower rates, a hotter market, and more abundant money supply; whoever sits in that position must ultimately deliver the tools to accomplish the task.

This is the ultimate suspense facing the crypto market:

Warsh is indeed someone who wants to put his hand on the printing press switch and tries to turn it off. But when the gravitational pull of politics comes into play, when the growth demands of "Make America Great Again" collide with his ideal of "hard money," will he tame inflation, or will the game of power tame him?

In this contest, Warsh may be a respected "hawkish" opponent. But in the eyes of seasoned traders like Hayes, who becomes chair is not really important, because no matter how convoluted the process is, as long as the political machine continues to operate, the valve of liquidity will ultimately be reopened.