As the year comes to a close, the 'master key' of global liquidity—the Federal Reserve chair's scepter—has become the most watched suspense of the year.
Article author: Ethan (@ethanzhang_web3)
Source: ODAILY
Months ago, when the benchmark interest rate ended a long pause with its first cut, the market was convinced that Christopher Waller was the chosen one (recommended reading: (The academic's comeback, small-town professor Waller becomes the hottest candidate for Federal Reserve chair)). In October, the winds changed, and Kevin Hassett surged ahead, with odds approaching 85%, being seen as 'the mouthpiece of the White House'; if he takes office, the policy may completely follow Trump's will, even being dubbed 'the human printing machine.'
However, today, we will not discuss the frontrunner 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 represents the market's 'fear and reverence' (harder money, stricter rules). Why is the market now re-evaluating this once-lauded 'Wall Street golden boy' outsider? If he truly takes the helm of the Federal Reserve, what profound 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 outsider at the Federal Reserve
Kevin Warsh does not hold a Ph.D. in macroeconomics, and his career began not in academia but in Morgan Stanley's mergers and acquisitions department. This experience left him with a mindset that is entirely different from that of Bernanke or Yellen: for academics, a crisis is just a data anomaly in a model; but for Warsh, a crisis is the moment a counterparty defaults, the life-and-death moment when liquidity suddenly shifts from 'available' to 'non-existent.'
In 2006, when Warsh was appointed as a Federal Reserve governor at the age of 35, 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 hour of 2008, Warsh's role had already transcended that of a regulator; he became the only 'interpreter' between the Federal Reserve and Wall Street.
A clip of Warsh participating in an interview at the Hoover Institution at Stanford University
On one hand, he had to translate the toxic assets of Bear Stearns that went to zero overnight into a language that academic officials could understand; on the other hand, he had to translate the Fed's obscure intentions to save the market to the panicking investors. He lived through the frantic weekend of negotiations just before Lehman’s collapse, and this close-hand combat gave him a physiological sensitivity to 'liquidity.' He saw through the essence of quantitative easing (QE): during a crisis, the central bank must act as the 'lender of last resort,' but this is essentially a transaction that overdraws future credit to buy time for present survival. He sharply pointed out that the long-term blood transfusion after the crisis is essentially 'reverse Robin Hood,' artificially inflating asset prices to rob the poor and enrich the wealthy, which not only distorts market signals but also lays the groundwork for greater risks.
It is this keen sense of the system's fragility that became his core bargaining chip when Trump was selecting candidates for the next Federal Reserve chair. In Trump's list, Warsh stood in stark contrast to another popular candidate, Kevin Hassett, with the media dubbing this contest as the 'Battle of the Two Kevins.'
Federal Reserve Chair candidates: Hassett vs. Warsh, image source Odaily original
Hassett is a typical 'growth-first' type; his logic is simple and direct: as long as the economy is growing, low interest rates are reasonable. The market generally believes that if Hassett takes office, he is likely to 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 chances rise, long-term bond yields spike, as the market fears uncontrollable inflation.
In contrast, Warsh's logic is much more complex, making it difficult to simply label him as 'hawkish' or 'dovish.' While he also advocates for interest rate cuts, his reasoning is entirely different. Warsh believes that the current inflationary pressures are not due to excessive consumer spending but rather due to supply constraints and excessive monetary expansion over the past decade. The Fed's bloated balance sheet is effectively 'crowding out' private credit and distorting capital allocation.
Thus, Warsh's prescription is a highly experimental combination: aggressive quantitative tightening (QT) paired with moderate interest rate cuts. His intention is clear: to control inflation expectations by reducing the money supply and restoring the credibility of the dollar's purchasing power, essentially drawing down the water a bit; simultaneously, by lowering nominal interest rates, he aims to ease financing costs for businesses. This is a hard-core attempt to get the economy moving again without resorting to monetary easing.
The butterfly effect on the crypto market: liquidity, regulation, and hawkish undertones
If Powell is like a cautious 'gentle stepfather' in the crypto market who doesn't want to wake the child, then Warsh resembles a stern 'boarding school principal' with a cane in hand. The storm stirred up by this butterfly's wings may be more intense than we anticipated.
This 'sternness' is first reflected in his obsession with liquidity. The crypto market, especially Bitcoin, has been to some extent a derivative of the global dollar flood over the past decade. Warsh's policy core is the 'strategic reset,' returning to Volcker-era principles of sound money. The 'aggressive balance sheet reduction' he mentioned earlier is both short-term bad news for Bitcoin and a long-term litmus test.
Warsh has made it clear: 'If we are to lower interest rates, we must first stop the printing presses.' For risk assets accustomed to the 'Fed put,' this means the disappearance of the safety net. If he firmly implements his 'strategic reset' upon taking office, leading monetary policy back to more robust 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 really achieves 'non-inflationary growth' through supply-side reforms and keeps real yields positive in the long run, then holding fiat currency and government bonds will become profitable. This is in stark contrast to the negative interest rate era of 2020, where 'everything goes up, except cash is trash'; Bitcoin's appeal as a 'zero-yield asset' may face a severe test.
But things always have two sides. Warsh is an extremely superstitious believer in 'market discipline,' and he would never rush to rescue the market like Powell did when it fell 10%. This 'bottomless' market environment might instead give Bitcoin an opportunity to prove itself: when the traditional financial system shows cracks due to deleveraging (as seen in the Silicon Valley Bank crisis), can Bitcoin break free from the gravitational pull of U.S. stocks 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 question lies Warsh's unique definition of cryptocurrency. He once left a famous saying in the Wall Street Journal: 'Cryptocurrency is a misnomer. It is not mysterious, nor is it money. It is software.'
A segment from Kevin Warsh's column (Money Above All: The Dollar, Cryptocurrencies, and National Interests)
This statement sounds harsh, but if you look back at his resume, you will find that he is not a blind opponent but someone who deeply understands 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 banks' open market operations algorithmically; although the project ultimately succumbed to regulation, this experience made Warsh understand better than any bureaucrat how code generates 'currency.'
Because he understands, he is even harsher. 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 actions that challenge the dollar's sovereignty, such as 'private minting.'
This binary attitude will directly determine the fate of stablecoins. Warsh is likely to push for stablecoin issuers to fall under the regulatory framework of 'narrow banks': they must hold 100% cash or short-term debt reserves and be prohibited from engaging in fractional reserve lending like banks do. This is a double-edged sword for Tether or Circle; they will gain a legitimate status similar to banks, deepening their moat; but at the same time, they will lose the flexibility of 'shadow banking,' and their profit model will be completely locked into government bond interest. As for those small and medium-sized stablecoins attempting to engage in 'credit creation,' they will likely be directly eliminated under such high pressure. (Recommended reading: (Farewell to the 'Agency Era'? Five crypto firms have obtained 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' that the Federal Reserve would issue directly to individuals, seeing it as an invasion of privacy and an overreach of power, which is astonishingly consistent with the values of the crypto community. However, he is a proponent of 'wholesale CBDCs,' advocating for the use of blockchain technology to transform the interbank clearing system to meet geopolitical challenges.
Under 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 reserved for regulated public chains and Web3 institutions. For DeFi, that will mark the end of a 'Wild West' era, but perhaps also the beginning of a true spring for RWA. After all, in Warsh's logic, as long as you do not attempt to replace the dollar, the efficiency improvements of technology will always be welcomed.
Conclusion
Kevin Warsh is not just an alternative on Trump's list; he embodies Wall Street's old order trying to redeem itself in the digital age. Perhaps under his leadership, RWA and DeFi, built on real utility and institutional compliance, are only just beginning to welcome their true golden age.
However, just as the market was overinterpreting Warsh's resume, BitMEX founder Arthur Hayes poured a bucket of cold water on the situation. In Hayes's view, we may all have made a directional error; the key is not what that person believed before becoming chair, but whether he will understand who he is actually 'working for' once he occupies that position.
Looking back at the century-long history of the Federal Reserve, the game between presidents and chairs has never ceased. President Lyndon Johnson once physically intimidated then-chairman William Martin on a Texas farm to force the Fed to cut rates. In contrast, Trump's Twitter attacks are child's play. 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, hotter markets, and more abundant monetary supply, regardless of who sits in that position; ultimately, they must deliver the tools to get the job done.
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 in, when the growth demands of 'Make America Great Again' clash with his ideal of 'hard money,' will he tame inflation, or will the power games tame him?
In this game, Warsh may be a respectable 'hawkish' opponent. However, from the perspective of seasoned traders like Hayes, who becomes chair is actually not important, because no matter how tortuous the process, as long as the political machine is still running, the valve of liquidity will eventually open again.
