SLP291 Caitlin Long Stablecoins, Bitcoin & The Fed

Caitlin Long of Avanti rejoins me on the show to talk about the coming regulatory crackdown. We discuss:

The growth in stablecoins
How there’s so much stablecoin volume off a low base
Coming regulatory crackdown
Getting direct access to the Fed
Compliance in the industry
Improving the on ramps for Bitcoin

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Podcast Transcript:

Stephan Livera:

Caitlin. Welcome back to the show.

Caitlin Long:

Hey, Stephan, it’s great to see you again from the other side of the world.

Stephan Livera:

Yeah, that’s right. I’m a little closer to where you are though, but we’ll get to that later, but it’s been really interesting. So it’s been a while since we’ve last spoken on a call as well, and wanted to chat with you about stablecoins. I know you’ve been talking about this recently and I know it’s kind of — it’s always in there in the mind, right? So people, and I guess this is an interesting thing. I’ve mentioned this before, and I think people intuitively get this. It seems like every run has its like, excuse. Right? So in 2013 they were like, oh, it’s Wily bot pumping on Mt. Gox. And then in 2017, oh, see it’s tether pumping the coin and therefore Bitcoin is a bubble and oh, look-see and then it doesn’t matter how many times people come out and try to debunk these things. They say, oh see, it’s all because of tether and these dodgy stablecoins. It’s funny, isn’t it?

Caitlin Long:

Well, in this time it’s leveraged too. I think we have so many more speculators in Bitcoin than we did before. And to harken back to our pal Trace Mayer’s was it the seventh network effect or six? I can’t remember which one was financialization, right? And I remember he and I had serious debate. I mean, we’re friends, but we just disagreed on some of this stuff. Like you know, that not all financialization is good for Bitcoin. And boy, are we seeing the impact of that right now? It’s funny. I just saw that the Bitcoin 2021 conference just played a clip of a debate between Sam Bankman-Fried and me at Bitcoin 2021 over whether leverage was good for Bitcoin. And the clip that they played is go back and read your Mises. That circulation credit is bad by definition. Commodity credit is fine. You know, Mises was not opposed to credit. He was not opposed to leverage. There was a type of leverage. That was fine. It was self-liquidating leverage it’s commodity leverage. And the way I translate that is if you go up to one-to-one then you’re okay. So yes, if you want to leverage your Bitcoin, you want to borrow cash against it to pay your taxes or pay your bills. So you don’t have to recognize capital gains taxes, or you don’t have to sell an appreciating asset, I get it. But, but anything that goes above one-to-one leverage falls into that circulation credit bucket, and that is creating more claims than there are real things. It is a form of fractional reserve banking, and, oh boy, have we seen that in spades.

Caitlin Long:

So it’s interesting. I know your point is that you know, certainly the press is portraying that stablecoins are the thing in this Bitcoin bull market. But I would disagree with that. I would say it’s more what’s happening with leverage and all the speculation. That’s the characteristic of this bull market, but stablecoins were there back then too. Although it’s funny to shift gears a little bit back to stablecoins, I did just do the analysis of the growth of the stablecoin markets for the fed comment letter that we submitted yesterday. And, you know at the beginning of 2017, there were $9.9 million of stablecoins outstanding. It was nothing. And now it’s $101 billion and growing very fast. It’s very interesting. I also compared it to PayPal because PayPal is the largest FinTech.

Caitlin Long:

At year end, it had $33 billion of customer cash that it was holding for customers. The total stablecoin market was 27 billion. And the total stablecoin market is now 101 billion. And PayPal is now 35. So the stablecoin market has grown more than two PayPal’s in six months, it’s staggering. Yeah, absolutely staggering and no wonder why we’re seeing fed governors, starting to talk about it. And I just saw the bank of England came out with a paper today as well on the systemic risks of stablecoins. And there’s a lot of history we can go into here. I think basically this is changing the money markets and there was a big fight in 1977. That’s the history I’m referring to between the banks and Merrill Lynch over whether a money market mutual fund could offer checks and credit cards and the money market mutual funds won, but they’re SEC registered, they’re not registered as banks.

Caitlin Long:

They are SEC registered so that they are regulated. But there’s definitely a split in the economist community over whether everything should be in the banking system or whether it’s okay for everything to stay out of the banking system in the so-called shadow banking system, money market funds are in the shadow banking system, same thing with stablecoins. And you know, I think this debate is given what has happened with stablecoins. There was a very, very, very, very vigorous debate about whether fintechs should be allowed to get as big as they are, including PayPal at 35 billion. Well, stablecoins blew past that in the span of six months. And so I don’t think anybody should expect that regulators are going to be sitting on the sidelines. And I think it’s a replay of that whole 1977, years long debate which Merrill Lynch sparked over whether money market funds needed to be inside of the banking system or not. We’re going to replay that again here, except now we’ve got the SEC at the table in the US as well.

Stephan Livera:

Yeah. I love the insight you’re sharing there. And so it’s like, there’s this demand because people want to be able to move their money around in a way that’s a little bit more frictionless. And of course you know, while we might love, if everyone just went straight to Bitcoin, we know that’s not where a lot of people want to go straight away. They’re not ready to go to that level. And so people want this kind of in-between now it’s interesting because I think to some extent, people, maybe they’re understating the level of the risks, right? Like there’s a reason e-gold and Liberty reserve and these things got shut down, right? And there’s a reason Bitcoin had to be designed in this way that you couldn’t shut it down and that you could it more permissionlessly. And yet, nevertheless, stablecoins have grown massively, right? the Tethers of the world, the USDC, the GUSD, these different stablecoins have grown. And I guess if you had to give an explanation, why is it that so many people want these stablecoins?

Caitlin Long:

Well it is easier to move money in and out than it is to move US dollars, right? Fedwire is not programmable. It’s the best it’s the fastest settlement system for US Dollars that exists, and it’s not programmable. And you know, sometimes Fedwire takes more than 15 minutes. Sometimes it takes even more than a day. It’s not perfect, right? And whereas with crypto, you can trace it and it goes fast with stablecoins. But to your point, they have issuers. And I think, again, a lot of it, a lot of this is the speculators. If you look at where the volume for stablecoins is, it’s in the off shore exchanges for the most part. And that’s where there are just a lot of speculators. It’s both institutions and retail, and that is what’s new.

Caitlin Long:

So coming back to your first question, stablecoins were around in the last bull market, right? Tether went from 9.9 million to 1.4 billion in calendar 2017, right? And Bitcoin peaked in mid December, 2017. So it obviously had a huge run-up in 2017, but unlike Bitcoin, it never went back and never looked back. it plateaued a little bit after Bitcoin peaked, but it never actually declined. And even net of treasury of coins held in treasury, it never actually declined. and so tether has been around, this is truly its second full market. And so I, again, that’s why I say we can’t say that this is all about stablecoins, but there is connectivity to the speculation that’s happening in these highly leveraged, offshore exchanges. The on-shore futures markets will let you it’s –been awhile since I looked, but last I looked in the US you could lever Bitcoin two and a half times.

Caitlin Long:

You can lever Bitcoin 125 times in the off shore exchanges. And this is where the debate we had at Bitcoin 2021 with Sam Bankman-Fried about you know, I came right out and said, look, that’s not good for Bitcoin. And also I I’ve said on Twitter something that where your customer is stopped out and loses their Bitcoin collateral to you in only a 75 basis point move in Bitcoin, or if it’s a hundred to one, a 1% move in Bitcoin that happens every day. Right? So what I challenge the exchanges who are offering the high leverage to do is to publish the profit expectations on their contracts. Because I think if they did that and took advantage of the information asymmetry that they have, that their customers don’t, which is what is the probability of payoff on these contracts? If they actually did that, I think there probably would be a lot less volume. And the extent to which stablecoins are used in those markets then becomes the question is how much of it is driven by the leverage speculation versus versus those two things are entirely separate.

Stephan Livera:

Yeah. It’s a really fascinating argument there around leverage. And is it really good for Bitcoin? Right. So the argument might be something like, oh, see, it’s all part of price discovery. And do you need a speculator to take the other side of the trade for the person who’s producing and theoretically in this case, it’s like a miner, but the reality is there’s a lot of let’s say just degen traders who are just getting wrecked on high leverage. And it’s not really like some grand serving the market purpose. It’s people who just want to gamble and don’t want to admit they’re gambling.

Caitlin Long:

Well, it’s not hedging, but a hundred to one leverage on Bitcoin is not hedging. The miners who are interested in locking in a forward price, which is why the futures markets evolved in the first place. There were farmers who wanted to lock in a price and they were hedging. That hedging activity is typically very low leverage. And once you start getting up above these high leverage you know, really two and a half times leverage and to be fair, one of the things that Sam said is that most of the leverage of course, is not in the a hundred or 125 to one levered contracts. Most of it is in these lower leverage contracts, because most full to do understand that there’s a pretty high probability of losing their collateral, that they’re posting to the exchange when they’re trading with a hundred to one contracts.

Caitlin Long:

And the probability that a hundred to one contract ever pays out in the favor of the customer is probably far less than 5%, right? So you have greater than 95% give or take expectation of loss on a contract like that, because Bitcoin’s gonna move 1% and you’re going to get stopped out in the wrong direction before your contract matures, right? So if you stop and think about it that way, yeah. It’s no wonder why many don’t use them, but the fact is onshore, they’re illegal, right? There are a lot of things happening offshore that would be illegal onshore, which is why you see these organizations have special US subsidiaries and they try to ring fence the activities onshore in the US versus offshore. And I think you know, we’re witnessing some crackdowns right now.

Caitlin Long:

That part of my tweets from yesterday was look, it’s pretty clear. You see it on crypto Twitter. I don’t even need to call out names. You see what’s going on? There’s definitely some crackdowns going on, it goes well beyond just the Chinese miners and the Chinese crackdowns on crypto. It is getting at the US Dollar end points or the Fiat currency end points in a lot of these G7 countries. and you know, it’s yet another round of regulatory crackdown. We saw it towards the end of the last bull market in 2017 as well. And it didn’t shut it down every time I talk about these things, I must underscore all this FUD we’re talking about, has nothing to do with Bitcoin. It has everything to do with intermediaries, everything to do with stablecoins, that kind of thing.

Caitlin Long:

It’s not Bitcoin itself. And so if you’re a speculator, you care about it. You know, if you’re not a speculator, you just you know, your hands are in your pockets and you’re just Turkey necking at the car accident as you drive by it, right? But you use a bad analogy, but you know what I mean? It’s, you’re just watching it, right? The speculators are the ones that are so worried about it. And boy, that is the bulk of the conversation on crypto Twitter, for sure. But it’s the speculators that are, that stand the most to lose from all this as well.

Stephan Livera:

Yeah. It reminds me of a post or so by Arthur Hayes recently, or you might’ve seen it as well, where he made a very similar point to what you were saying. It’s like, look, all these stablecoins and all this stuff can happen, but really if you just hold Bitcoin and you hold it in your own keys and you’ve got your DCA plan swanbitcoin.com, right? You’re going there and you’re doing all that, then you don’t really care. Like you’re just holding the keys, right? But ultimately the broader market and governments will, if they see a lot of people getting wrecked or a lot of things going on, then that’s where, like, let’s say it stayed really small, it might not be worth their while, but as these things get bigger and bigger and bigger, well, they’re going to start cracking down. So what does the current state of government’s cracking down look like in your view?

Caitlin Long:

Well, there’s let me come to that in a minute, but there’s one of the brilliant takeaway that I had from Bitcoin 2021, which was Nick Szabo speech, where he said, liquid markets are nice to have, but they are not required for Bitcoin to play the most important role that it’s playing, which is store of value. You need to be able to get in and out. Yes, but you don’t need liquidity. There’s a big difference between getting in and out and having to pay a big bid offer spread when you do versus having a lot of liquidity. So there’s no bid offer spread every day on high-frequency traders can go back and forth all the time. And I couldn’t agree with that more to me, that was the big takeaway of Bitcoin 2021. It’s the one thing that will endure of my memory from that conference is what Nick said.

Caitlin Long:

He’s in the same camp that all this leveraged speculation. Sure. It provides liquidity. It’s nice to have, but it doesn’t actually help the core role of Bitcoin, which is store of value. But to then answer your question we do need US Dollar on and off ramps, right? Or Fiat currency on and off ramps. Bitcoin would not be what it is today, if we didn’t have them. And it won’t be what it will be tomorrow if they get shut off. So and I don’t think they’ll be shut off. There are people like Senator Elizabeth Warren who are calling for that here in the US but I think that ship sailed a long, long time ago what we’re seeing and I’ve been chronicling it in on my Twitter account since April don’t shoot the messenger here, guys.

Caitlin Long:

My ears are very close to the ground because of the business that I have here at Avanti. But you know, the policy is being made by a small number of people in Washington, DC. And the best that we in the industry can do is work with the people that we know in Washington, DC, who can help to guide that. And that’s not me. So I’m an observer just like you are, but I’m watching it maybe more closely than the average person. And it’s very clear that there is some crackdown happening. Like I said, I don’t want to call out names, just go on crypto Twitter, and you’ll see what’s going on. There are people who are not able to get money out of certain exchanges right now.

Caitlin Long:

And I don’t know how far that’s going to go. Honestly, I don’t have any sense. the most significant piece of information that I’ve read recently is that Janet Yellen, the treasury secretary, who’s the former fed governor — chair of the fed. She wants FSOC, which is the financial stability oversight committee to delegate to the fed the ability to regulate stablecoins. So what I look at with that is all right, well, what’s the probability of that happening fast? Can they do that without needing congressional action? And for those of you who are not sitting in the United States you may not know this Congress is a, you know what, right now it’s a mess to use a polite term. And you know, I’m not sure we want congressional action about any of this right now.

Caitlin Long:

But as I look at the landscape, it’s not clear to me that FSOC has the ability to delegate that authority to the fed without congressional action. What’s interesting though, about where Avanti, Kraken, and a third chartered Wyoming SPDI bank called WTT financial are, is that we all are a pathway that we’ve been working to open up with the fed and they have definitely slowed us down. But I’m confident we’re going to be able to open that pathway. It’s been a long haul to get that pathway open directly to the fed. As I articulated in the tweetstorm, we want this, we need US dollar access and having crypto native companies that actually can can bank directly at the fed is a big deal for the industry. Not only do we cut out the layers that everybody has right now, because nobody is able to bank at the fed directly, not even Coinbase in the US is able to bank at the fed directly because that path has been closed.

Caitlin Long:

The ones that are closest to opening that pathway are the three Wyoming SPDI banks Kraken, Avanti, and WTT financial, and the fed does not need congressional approval to open that pathway. We’re at the altar with them, and they can make the decision to go ahead and grant us the opening. And if we do, then I think that’s a big signal because it’s basically saying that the fed is okay with this. Let’s do it in a risk managed way, and let’s get it inside the banking system so that it doesn’t proliferate in the shadow banking system. And I think what will happen if that pathway does open is that you will see a lot of companies who’ve been circling, watching to see if that pathway would open. A lot of them will immediately then come and apply for bank charters as well.

Stephan Livera:

It’d be like a dam breaks moment.

Caitlin Long:

Absolutely. You know, we’ve been trying really hard to get that direct access to the fed. It goes back to the history of this whole industry, having huge problems in 2017 when the whole banking industry in the United States started de-banking everybody and a very small number of banks, silvergate, and signature, metropolitan back then stuck with the industry. And we all owe them a debt of gratitude for having done that because almost every other bank in the United States abandoned us. You know, whether legitimate business, whether scam, whether in one case, a trade association that wasn’t even touching crypto the banks, de-bank them, and this is a trade association that was only handling US Dollars come on, right? That’s how bad it got in 2017. And so the whole idea is if we can control our own banking relationships, then we’re not at the whim of some faceless compliance person way far away who doesn’t know us, and doesn’t want to take the time to get to know us and doesn’t understand the risks and doesn’t want to invest the time and effort to manage those risks appropriately.

Caitlin Long:

If we can take responsibility to meet all the laws and regulations to get our own US Dollar banking services, then we should. And we’re at the end of that long pathway, I don’t know how much longer it’s going to be. But we’re down to now the very last thing that has to get done, which is the fed says yes or no, and either lets us in or doesn’t.

Stephan Livera:

Yeah. Gotcha. So let me just summarize a bit there just to paraphrase and make sure everyone’s following along. So essentially Bitcoin companies in the ecosystem have had a lot of difficulty with the traditional banking system. Now, of course, Bitcoin is its own system. It doesn’t need approval, but for people who want to translate their fiat currency into Bitcoin, well, you need an exchange or broker, some kind of partner. And then that exchange or broker or partner needs it’s, in turn, a US bank account, or in other countries around the world, I’ve had similar issues. And so, as you’re saying essentially it has fallen down to the Silvergates and the Signatures of the world to bank these Bitcoin companies. And I think it’s also arguably true that while a lot of people criticize the Bitcoin markets and things and say, oh, look see you’re being pumped by tether and the stablecoins.

Stephan Livera:

But the reality of it is there were very few banking solutions available to Bitcoin companies. And that’s why they’ve had to go for stablecoins. Right? And so overseas, lots of overseas exchanges have been using stablecoins because that was their only way that was their only option. And so what we’re talking about now is essentially this idea of having so potentially three banks who are, let’s say, front runners in this race to actually have direct access to the Fed. And so this would be a big step forward in terms of financial inclusion, right? Access to the — we’re talking about financial inclusion in terms of like people who are from like a lower SES socioeconomic standard. And so this is about trying to get access for Bitcoin companies as well. And so what are some of the key issues there, because I think part of the argument is also that if you don’t let these three banks in, then…

Caitlin Long:

And all those behind us, yeah.

Stephan Livera:

It might just mean that there’s going to be more and more stablecoin use, and there’s just going to be more and more shadow banking. So maybe that’s kind of, that’s part of the argument. And then I guess also part of the argument is also to say, well, we want to, if we’re going to let you in, well, then we’re going to require X, Y, and Z compliance. We need you to have this kind of capital requirements, Basel requirements, this and that on top of the normal AML KYC stuff, you’re doing the sanctions regulation stuff you’re doing. There might also be some other kinds of payments system supervision and monitoring requirements. And it sounded like those three banks and whoever else wants to get that direct access at the fed has to be sort of willing to take on that level of regulatory burden, right?

Caitlin Long:

Yeah. Great summary. Really terrific summary. The only thing I would, I would caveat is the whole stablecoin question is different than the banking question. It’s possible that they overlap. It’s possible that the fed says to all the stablecoin issuers, go get a bank charter if possible, or they might say, go get registered at the SEC. In which case they’re outside of the banking system, but there’s some regulation coming. We just don’t know exactly what just again, reading, reading the tea leaves. And so the bank charters are there and they don’t need congressional authority. So if the fed says, yes come on in then I think a lot of things happen it’s really, it is good for our industry. and again, it’s a little bit strange for a Bitcoiner to be talking about working with the fed.

Caitlin Long:

And again, Trace Mayer just to bring up his name again, is he was the lead investor in our series A for Avanti earlier this year. And yet we also have a lot of mainstream investors who are part of our cap table as well. And I told all of them, this is a little bit strange bedfellows, right? Because we are on that leading edge of creating an open pathway as wide as we possibly can for flows to go back and forth between the two ecosystems between the traditional dollar ecosystem and Bitcoin. But so I just want to make it clear, I don’t know that stablecoins are going to end up being told to go down the bank pathway. If they are, then there is a bank pathway charter.

Caitlin Long:

And I do expect that if this pathway is opened, a number of crypto companies are going to follow because people have been watching it and saying, well, we don’t know if it’s real. And once the fed approves it than it is, if the fed doesn’t approve it, then you know, then it wasn’t. But again, I think it’s just as likely that the stablecoin issuers end up being told to go register as money market funds something like that is going to come out. We just don’t know what but yeah. So then back to the whole point about this being good for Bitcoin — yes, it cuts out the layers of intermediaries. That a lot of companies are dealing with right now. If they’re not able to get their own bank account at those banks, then they get banking services through an intermediary and their customers pay an extra layer of fees.

Caitlin Long:

And there’s a lot, I think what the other thing that’s happening with that is there are some models that are kind of aggressive some regulatory models that attorneys in the industry tell me once the regulators kind of catch on that, this is how it’s done that you’re likely to see some reduction in the, in how often those particular models are used. I’m not going to say anything more than that, but there’s some aggressive regulatory posture in some of the intermediaries. I think we all know that. That’s not a shocker. And that’s also going to be, I suspect part of all of this, but it the regulators can’t talk out of both sides of their mouth saying you can’t do this because you’re not sufficiently regulated, but then not having a pathway to go get sufficiently regulated in their minds.

Caitlin Long:

And that’s why this bank thing has been a big issue. And it’s hurting both sides. The reason that it’s hurting, we just talked about how it’s hurting the crypto industry. But the reason that it’s hurting the traditional industry is there’s a lot of settlement risk in crypto when it’s plugged into a bank. And that has nothing to do with Bitcoin or Ethereum or any of the crypto protocols themselves. They are great. What is the issue that I’m flagging is the banks are not set up for assets that settle that fast. Most banks reconcile their books once a day, and Bitcoin settles. You know, it moves at the speed of light and settles in once it’s in the block. You know, that first block, right on average 10 minutes, a lot of intermediaries will make you wait until there are six confirmations.

Caitlin Long:

So on average 60 minutes, but you’ve gotten finality within minutes in Bitcoin, and it’s irreversible. Whereas in the traditional financial system, in the US, we don’t have a real time gross settlement system. That’s programmable and irreversible. So you’ve got fundamental operational mismatches. And when you have Bitcoin inside of a bank that can only settle its books once a day, it’s very easy to start to see how a bank can get an exposure that builds intra-day that it doesn’t even understand it has until it sees its reconciliation report at night. And then that next day is when they realize, oh, no, we’ve got a problem. And so the banks need to up their game. If they’re going to get into Bitcoin. And I made the point in our public comment letter, it’s actually less risky for central banks to let crypto companies have direct access to traditional payment systems than it is for them to let traditional banks get involved with crypto because the traditional banks don’t have the operational and IT systems to handle crypto. Whereas the crypto native companies are going to have no problem handling the traditional legacy payment.

Stephan Livera:

Yeah. Because every Bitcoin exchange has already had to deal with this whole idea of reconciling deposits withdrawals, and making sure that everything all ticks together and lines up. And there’s no issues there, but the traditional banks, yeah.

Caitlin Long:

Yeah. In the US ACH is the most common platform. It typically takes overnight. Sometimes can take three days, but here’s the kicker. A consumer can reverse an ACH payment for up to two years after it’s taken place. If they alleged fraud. Now not many payments are reversed. And the bulk of payments that are reversed get reversed in the first 48 hours or 72 hours after a payment has taken place. But these clawbacks it’s true of the card networks. I’m sure it’s true in Australia as well. The card networks, right? The merchants have these clawback exposures. And so if the merchant is delivering a crypto asset or a good that’s paid for in crypto, and then all of a sudden, because it went through a card network, the payment gets clawed back the merchants out, both the good and the payment.

Caitlin Long:

So that’s a huge risk issue for them, right? it’s one of the things I consider to be a feature, not a bug of crypto it’s irreversible that’s, you don’t necessarily want to use it for every single payment that you make, but for certain things where you don’t want that payment to be reversed, then you want to use it. So high value payments, you want to be able to trace it. You want to know it got to where it was supposed to go within a nanosecond. And that’s the beauty of Bitcoin. You do know that and it’s not reversible, but in traditional Fiat, merchants deal with this all the time. It’s a, it’s a big risk issue. And that’s another reason why stablecoins took off. Absolutely because they settle in minutes with, and they match those settlement characteristics of our industry. And so our industry has adopted them much faster than US Dollars And of course, with the US Dollar issue, we all remember what happened in 2017. If you were around in the industry at that time, a lot of people lost bank accounts and a lot of legitimate startups sadly had to close their doors as a result.

Stephan Livera:

Yeah. That’s really confronting in some ways, because you might’ve done everything right. But you, on this one thing, if you didn’t have a US bank account, well you’re up the Creek without a paddle, right? So the other interesting development, and I think this is a really interesting one around the stablecoin stuff as well is just that the incredible volume we’re seeing, right? And people might think, well, how come we’re seeing such crazy volume off such a low base? Why is that what’s is it to do with the velocity?

Caitlin Long:

The velocity, this is my favorite characteristic of stablecoins. And again, the guys at tether really truly invented an amazing financial innovation — hats off to them for that, no question, because what they gave us is technology that gets monetary velocity without leverage. What I mean by that is if you took an economics class, you learn about fractional reserve banking, a dollar of monetary base typically got lent out 10 times, nine times, so that you’d actually have $10 of M2 outstanding. Right? So the M2 multiplier for decades was 10. A dollar of monetary base equals $10 of M2. So what is that? As we know, a fractional reserve banking, we’re basically creating money ex nihilo how to use the Latin phrase from thin air, right? That $9 got created on the back of $1 or something real.

Caitlin Long:

And so as a result that was small, I inflationary but that’s how they got velocity, right? The velocity, the money multiplier was 10. In that example, you had $10 of M2 off $1 of monetary base. What’s so interesting is that we’re getting 500 times multipliers in stablecoins, off an M1 monetary base of 101 billion. Now I noticed when I did the math, the velocity’s gone down recently trading volumes in the last month, as we know, have gone down, but it’s still $25 trillion. The annualized velocity of US Dollar stablecoins is $25 trillion right now. And so to put that in perspective, I think all of Fedwire and ACH is something like $800 trillion in total payment volume. So it’s small, but it’s not insignificant. And again, to put it into perspective from the very beginning, when we talked about that market has grown by more than two PayPals in six months you know, it’s growing fast, right?

Caitlin Long:

And so it is starting to become meaningful in overall payment volume. It is also fair to say it I’ve seen the fed say this, most of that volume is trading volume in crypto markets. But once that dollar gets into a stablecoin, it just stays there and circulates and circulates and circulates. So where’s that coming from? Where’s the velocity coming from? It’s coming from the fast settlement with finality. It gets back to good old Bitcoin fast settlement with irreversibility, and you don’t have therefore somebody carrying an unsettled trade overnight. And if somebody is carrying an unsettled trade overnight in their risk management models, they’ve got to hold capital against the potential that trade doesn’t settle. Whereas in the crypto world, once the trade is settled, you’re free to trade again. And again, and again, and again, and again and again, every day. And that’s where the velocity comes from. And so I love that this technology has given us the ability to get monetary velocity without having to use fractional reserve banking i.e. Leverage we can get the velocity from the tech as opposed to velocity from the leverage. And that’s a powerful concept.

Stephan Livera:

Yeah. That’s a really great explanation there because fundamentally what a lot of businesses have done is just take a risk approach, right? They might say, okay, we’re just gonna look at the numbers, probability, make a guess. Okay. Probably 30 days is good, you know? So we’ll put a hold on it for 30 days. And this was historically as well, even for some listeners, you might, if you were around at the time where people were selling Bitcoin for Fiat over PayPal, let’s say, and then there was always that chargeback risk, right? But then, yeah, so it’s a similar kind of thing. Right? So then the business has to build in this model and this percentage and all of these things…

Caitlin Long:

And hold on a transactional reserve for payments that get clawed back. Yeah, absolutely. That’s part of the reason why bid offer spreads are so wide in our industry to compensate the exchanges for some percentage of payments that get clawed back, you bet.

Stephan Livera:

Yeah. So they have to deal with all of these aspects of it. I’m also curious as well, I’ve seen you write about this or speak about this also is about this idea of competition for the scarce high quality liquid assets and T-bills, and so on and stablecoins actually competing with that. Can you explain a little bit what’s going on there? What’s with that dynamic? Well, high quality

Caitlin Long:

Liquid assets are the grease that greases financial markets, what are they, they’re government, securities, and other and cash basically in the US it’s government it’s cash on T-bills. And also the government sponsored enterprises in the mortgage markets that have an implicit US guarantee. So it’s a lot, it’s a huge market and they’re what I’d call them the base money, the monetary base of the shadow banking system, because the shadow banking system works on. It has leverage but instead of leverage through fractional reserve banking, which we just talked about, which applies to traditional banks, the leverage in the shadow banking system comes from something called hypothecation, where the same collateral gets pledged again and again, and again every day to different parties, there’s really only one T bill at the base of that pyramid.

Caitlin Long:

But there are X number of people who claim that they own that T bill. And by the way, I’ve been pretty critical of the accounting methods because all of those parties are allowed to claim that they own it as long as they have a dollar of debt against it. So what you really have when you consolidate all the parties down is you’ve probably got $10 of debt and one actual T bill right. $10 of T-bills versus versus one actual T bill at the base, it’s the same thing as fractional reserve banking, just a different form, is the point. So, but here’s the issue. The lubrication of the money markets comes from the ability to rehypothecate collateral. And when Facebook Libra two years ago was announced, you saw for the first time central bankers start talking about crypto.

Caitlin Long:

And it wasn’t because Bitcoin suddenly had a bull run. We were in the middle of a bear market. Why did central bankers start talking about crypto? It was because of stablecoins. It was because those were going to touch the US dollar and in particular it was Facebook. And what was it in particular about Facebook that they were flagging as a risk? It was going to become a silo of collateral, a so-called Roach motel. The collateral goes in and never comes back out. And it’s not going to be re-hypothecated because one of the fundamental premises of stablecoins is that the collateral is supposed to be backed — the liabilities are supposed to be backed one for one with assets. And so if your rehab navigating your T-bills, then it’s not backed one for one with assets.

Caitlin Long:

And so there’s you, and by the way, with proof of reserves and you know, audits back then everyone thought that was what it was going to be. Instead of these attestations we have now. But everyone assumed they really truly had to be back one for one with assets, and it was high quality liquid assets cash. And T-bills, that is also by the way, the New York department of financial services does require that for NYDFS, regulated companies, that issue stablecoins, so Paxos and Gemini and there’s I think, a third that goes through the New York department of financial services, regulatory regime. It’s very different than the regulatory regimes of USDC, which is not subject to that and tether which is not subject to that either to my knowledge in both the case of tether and USDC, but definitely PAX us and Gemini dollar are subject to that restriction.

Caitlin Long:

So their cash and T-bills the others obviously we all know there’s some questions about what exactly is backing them. But long story short, if all those assets go in to those Roach motels and don’t come back out, then they suck away all this financing capacity out of the traditional repo market. And that is where central banks are conducting their monetary policy. They still do the M0 to M2 multiplier, but not much credit is created in traditional banks anymore. It’s credited in securities markets and they need that base money; the T-bills to act as, as collateral that gets multiplied to 10 T-bills and or whatever the number happens to be. And if that T-bill is siloed away and in some collateral silo, and can’t come back out, then you can start to see how that is going to gum up monetary policy. That is the reason why central bankers started focusing on crypto two years ago. It was Facebook. And ever since then, they’ve been hyper-focused on the stablecoin market. Everything that they’re saying about stablecoins now, by the way, is not new. They’ve been talking about it for a while. It’s just that it’s making the news now.

Stephan Livera:

Yeah. stablecoins and the competition that they provide in some sense for T-bills, because I guess in some sense, we could say the issuers of the stablecoins must hold some T-bills as the underlying collateral as an example, if they’ve issued 1 billion tethers and theoretically have they held some T-bills in reserve in their bank in in relation to that, or have they got cash in the bank in relation to that? Right. And so the impact then in some ways, as you’re saying is that stablecoins might be seen as a threat to the overall financial system, just because of that impact there. So in some ways it’s almost like, and I think to some extent, the Australian regulators and government, maybe they’ve taken a sort of similar view as well, that they almost view Bitcoin like or whatever.

Stephan Livera:

It’s just some store of assets. It’s like digital gold. You guys can have your little digital gold coin. We don’t care about that, but stablecoins, whoa, hold on. We view stablecoins as a threat to our financial system. So you better better like follow all of our regulations and all of this. And so it’s actually starting to cause more of a real question now, because these things are growing and the world needs to find a way to deal with it. You know, you can’t just, you can’t sweep it under the rug forever.

Caitlin Long:

Well, and again, we, at the beginning, we talked about this market is now three times the size of PayPal since the beginning of the year, it’s created more than two PayPal’s worth of of assets, right? And so it is starting to become material when you saw Eric Rosengren, the Boston fed president who, by the way, the Boston fed is the one working with MIT on the CBDC pilot in the US so put that into perspective, but he specifically called out tether by name. That’s the first time I’ve seen a fed governor call out a company by name before it became a systemic problem. So a lot of fed watchers, I was talking that weekend with, have you guys ever seen anything like this? The fed is so careful with what it says.

Caitlin Long:

And, and they just generally don’t single anybody out by name, but they did that time. And just knowing how the fed works, that was signed off by everybody, probably all the way up to the top. That wasn’t just the Boston fed president going rogue, so to speak and mentioning it. That was by design. Those slides went through a lot of review inside the fed. Okay. So what message are they trying to sned? It’s exactly what you’re talking about, right? That they’re seeing that this is to become — there’s a spillover risks to borrow the phrase that the bank of England used in their paper today, there’s some spillover risk into traditional financial markets. And the point that president of the Boston fed president Rosengren made is that that now the stablecoins are about, I think he said 26% of the prime money market in the United States.

Caitlin Long:

Prime money market funds are a big place where corporate treasurers keep their cash and retail mutual fund investors keep money there as well. And I looked that up the most recent number for the prime money market fund. It moves around a little bit, but as of last week was, was $485 billion. Okay. So we’re at 101 billion in stablecoins already, right? and now let me throw another number at you. When Circle announced its merger last week and filed its projections with the SEC, they projected USCC will be 190 billion by 2023, 190 billion by 2023, compared to the prime money market of $485 billion. Right now, boy, you’re going to start to squeeze the money markets is the point, right? So it shouldn’t be a surprise to people that the Fed is starting to talk about this and other central banks are starting to talk about this as a potential squeeze on money markets.

Caitlin Long:

And you know, the, again, the big question nobody knows the answer to is, are they going to require some sort of registration with the securities markets and let them kind of keep going and investing in whatever they want to invest in, or are stablecoin issuers going to be pulled into the banking system and said, all right, this is a whole new payment system. But you’ve got to become banks. And you’ve got to comply with all the requirements you were talking about in your earlier question, or is there some third way that they’re going to create to try to get stablecoins inside these systems. But you know, it’s interesting Ray Dalio made a famous multiple quoted comment about Bitcoin that it’s growth is going to be its own biggest threat to its success.

Caitlin Long:

And I don’t see that with Bitcoin. I actually see that more with stablecoins. There’s a point at which they become too big. And the success that they’ve had is the biggest threat to their success. And I think we may be there. Right, if USDC is more than alone, which is the smaller of the two big stablecoins, if that alone is more than half of the US prime money market, think about what that means in terms of sucking collateral out of the money markets. And can the Fed with its financial stability remit sit on the sidelines? I don’t think anybody should be surprised when they act, when you look at all these facts. It seems pretty clear. Something’s gonna give, because the fed doesn’t want to have to bail out money markets. Let’s put it that way.

Stephan Livera:

Yeah. So let’s trace out some of the implications of that. So let’s say these stablecoins keep growing, keep growing, keep growing and they start to more seriously compete with the money with the broader money market. What kind of impacts would we see? Would we see interest rates rise or would we see like more banks struggle to find the collateral that they need in order because they want to make loans. Right? They’re making loans. That’s how they make money. And so if they can’t get collateral to be the underlying, then they’re not gonna be able to make loans and they’ve got not going to be able to make as much money, right?

Caitlin Long:

Yeah. Well, and that’s another great point. We’ve been talking only about the money markets, right? If you think about where credit is created in the US economy, at least it’s pretty much it’s more than half is in the shadow banking system, including money markets and the other half less than half, but pretty big, still is traditional banks. Okay. So that’s your landscape, let’s call it 60 40 just to pick numbers. I don’t know the precise numbers, but that’s not that far off. Okay. So we talked about the money market implications of stablecoins, sucking collateral out of the money markets. What we didn’t talk about yet is the implication of stablecoins, sucking deposits out of the banking system. and into the stablecoin market. What’s going on is you’re seeing all the DeFi projects that are offering pretty high yields on cash.

Caitlin Long:

Now everybody’s doing something different and there’s a lot of question as to where those yields are coming from. And what’s really backing them, right? But stop and think about it. Kevin Werbach who is a Wharton professor who happens to be a law school friend of mine. He’s a tech guy. He had a really great Twitter thread about, are you people realizing the implications of — he was talking about circles announcement last week of its merger with us back. So it will become a public company. And he was saying, are you realizing the implications of an SEC blessed company offering 3% to 7% yields on cash and lending 53 billion of that by 2023? That’s let’s put it this way. I’ll let your listeners draw their own conclusion. If you’re watching money markets.

Caitlin Long:

One of the big hot stories is the reverse repo market. We’ve hit almost a trillion dollars in reverse repos, and that’s a relatively recent phenomenon. I won’t go into what reverse repos are, but it’s essentially a way for financial institutions to park cash at the fed and earn a yield. The fed just increased rates by five basis points and almost a trillion dollars migrated out of bank deposits and into reverse repos over a five basis point yield difference. And now we’re talking about potentially the mainstreaming of DeFi earning 3% to 7% yields. That’s a 300 plus basis point yield difference. And again, I mean, I’ll let you draw your own conclusions about that, do we really think the regulators are going to sit back and do nothing about that? Yeah.

Stephan Livera:

Very good. Yeah. Thinking, drawing out what’s going on there because essentially everyone’s going to be running for the 3% to 7% who wants five basis points, when you can get 3% to 7%, yeah. They’re going to be running for that. And yeah, it’s probably only going to be a matter of time until we see more and more people go for some of these now of course, I’m skeptical of the old coin DeFis and things like that, but Hey people want to gamble. That’s on them. I would avoid it.

Caitlin Long:

I’m not endorsing it, I’m just making note of it, right? It’s becoming more mainstream.

Stephan Livera:

Yeah. The neutral observation that this is what people are going to do. Yeah. Certainly, certainly.

Caitlin Long:

It’s also important to note that visa has started to use stablecoins. So I mean, when we get back to, again, the mainstreaming of all this, it’s not just staying in crypto trading. I know that there was a paper that came out from the fed last week that said the vast volume of this, of trading is crypto. And they’re right. The vast majority, of stablecoin trading volume is in crypto trading, but it’s not all there, right? It’s now going to be starting to show up in remittances especially with El Salvador. And it’s also through the Visa network and there’s another pathway that I’m aware of, which is wall street firms want to start being able to use it, to settle US Dollar transactions off banking hours. You have stocks now trading 24, 7, 365, somewhere in the world, right?

Caitlin Long:

The biggest companies in the world, they all have stocks, they’re stock trading on exchanges or other venues everywhere in the world. In every time zone, essentially 24, 7, 365 now, but you can’t settle the US dollar leg of that. And so again, somebody carrying an unsettled trade. And so the question then becomes, and hedge funds are starting to do this using stablecoins as a means by which to settle their stock trades off hours. Because they’re not, they’re not carrying that unsettled dollar obligation. They’re accepting a stablecoin instead. And so there’s definitely pressure mainstreaming of all these stablecoins, but I want to get back to your point. You and I usually talk about Bitcoin, we’ve been talking almost entirely in this segment about stablecoins and almost nothing that we’re talking about actually has to do with Bitcoin.

Caitlin Long:

And yes. You read the stories that two thirds and three quarters of Bitcoin trading has a stablecoin pair. And so I look at that and say, ho-hum, I’m not a speculator. And I don’t really care if stablecoin volumes go down, what happens to Bitcoin’s price? I really don’t. And that’s because I’m a HODLer and this gets back to this whole question of, is speculation good for Bitcoin or not? If you’re a HODLer, you use the speculative dumps as a way to accumulate more sats. And that’s what we’re indeed seeing people doing right now. And so if the speculators want to make Bitcoin more volatile. That’s a shame. It does increase the cost of capital for everybody in the industry because Bitcoin becomes more volatile as a result of that, but they do create buying opportunities as well.

Stephan Livera:

Yeah. So I wonder as well, is there a similarity now going back to Gox right. So 2013, when there were questions, serious questions being raised about Mt. Gox’s, ongoing concern. And there was a massive run-up in the price of Bitcoin on that exchange because a lot of people couldn’t get their fear now. So they were trying to Bitcoin out, right? They were trying to buy Bitcoin and get out. I wonder what a similar dynamic happen. If there were to be a stablecoin, crackdowns or stablecoin shutdowns, in which case people are like, oh, I’m on the exchange now I’ll just buy Bitcoin and pull out of there. I’m wondering, do you see that as an impact or do you see it more, just like it’s just more going to be like, they’re going to have to be regulated and come inside the regulated tent as it were.

Caitlin Long:

To be honest, it depends on how how this whole crackdown goes. It started, right? you know, you’re seeing people who are saying they’re having trouble getting funds out of exchanges. And so what does that mean? I don’t know. I mean, to your point is that I remember all that in Gox. I remember it in Quadriga goes well. What she started to see is the Bitcoin price traded at a premium on those exchanges. Now sometimes Bitcoin prices do trade a premiums for reasons having nothing to do with the counterparty risk or the potential that there’s going to be a a loss of banking services or something like that. But we have seen Bitcoin trade at a premium on exchanges in the past. and that is one of the things that tends to be a little bit of a warning sign for precisely the reason that you’re alluding to.

Caitlin Long:

So you know, I think the best that people can do is if you are leaving your coins on an exchange, not your keys, not your coins, understand the risk. There is a chance that a lot of things can go wrong when you’re using a counterparty, can the exchange get hacked? Does the regulator shut them down? Do they put a gate up where all of a sudden you can’t get your money out or your coins out for two weeks, all those things are, are common things that we’ve seen with exchanges, right? So you know, I I’d encourage everybody invest in yourself, learn how to self custody your coins, and then u use your judgment. If you need to leave your money on an exchange, know what the risks are and understand why you’re leaving it there, as opposed to just you’re afraid of self custody or or you just didn’t have time to get to it.

Caitlin Long:

You know, to quote another one of our mutual friends, Andreas Antonopoulos people are chasing up 6% yields today down 100% tomorrow. That’s the downside of what we’re seeing in this market right now is this whole concept of speculation and chasing yield farming. And it is impacting Bitcoin, but if you have your own coins, you’re immune to it and you get to just whistle past the car wreck and say, gee, I’m sorry to the people who got stuck in it, but you can protect yourself if you do your own homework.

Stephan Livera:

Yeah. I’m also wondering as well, like when the crackdown as well, like it could also be like regulation coming in that takes away the fun parts of stablecoins. It could be that stablecoins are used right now because it’s so frictionless because yeah, there’s kind of KYC AML on the exit and entry points. But once you’re inside that stablecoin ecosystem, it’s relatively frictionless and free. And so then who knows it could be the case that government clamps down and says, no, you’ve got to do even harder, harder AML KYC, even for those intermediary steps. And they sort of make it, they take away that frictionless aspect of it. And then at that point maybe people will then would have to find other ways right

Caitlin Long:

I’m an optimist on that. I mean, you’re right. A lot of things could happen. We don’t know how this is all gonna play out. And again, there are people in Washington, DC who just want crypto to go away and are willing to do everything they can to try to make it so they will lose and they’re not gonna win. But they’re out there, right? The voices are out there. But I’m often optimistic because the way cashier’s checks work in the US is the same way. The on and off ramp is KYC and AML OFAC, all those compliance requirements, but the intermediate transactions are not. And now the regulators probably take some comfort in the notion that it’s a physical paper check cashier’s checks have to be paper by law, and you write your signature on the back. But in theory, you can endorse that check to a new payee, an infinite number of times, and each time it hops, you’re not going through KYC/AML.

Caitlin Long:

And so by the way the New York DFS stablecoin issuers they that’s how New York got comfortable with exactly that the NYDFS, stablecoins are, are done the same way. They’re not put through the intermediate AML hop. And so we’ll see. I mean, certainly the FinCEN proposal that came out at the end of the Trump administration would have done that and our industry pushed back rightfully so and said, we’re holding us to a higher than you’re holding even the banks on cashier’s checks. So what this is a digital cashiers check and, oh, by the way, with that paper, cashier’s check, you can’t monitor where it is and who’s hands it’s passed through, but with a stablecoin, you absolutely can. And chain analysis and elliptic and all those compliance firms that specialize in data analytics for compliance, they absolutely know.

Caitlin Long:

And they blacklist, right? We’ve seen that with some of the stablecoin issuers, they’ve blacklisted when stablecoins got in the hands of sanctioned individuals or sanctioned countries, they just get frozen permanently, and that can happen absolutely with a stablecoin. So I’m optimistic on that front. I don’t think it’s going to be that bad. I actually think what’s going to happen more likely is that there’s going to be some regulatory enablement that will finally take place. And most of the companies in the industry will make the judgment call that it’s better for them to go down that path than to stay unregulated, especially given the opportunities that are out there to bring all of this mainstream.

Stephan Livera:

Right. And I think in that scenario, then it might also be that it becomes less and less of a crypto trader quote, unquote crypto trader thing. And more like just other companies who you just want to use the stablecoins for those reasons you were saying whether they are some company helping facilitate the trading of shares internationally, and they want USD stablecoins for that reason. And so it might actually become a really big market in a regulated world. Yeah. And I also wonder it is. And so this came up as well in my discussion with Nick Carter another mutual friend on stablecoins as well. It was this idea that even if governments and regulators do crack down on them, the market might evolve new defenses or new ways of doing stablecoins in a DLC technological way. So DLC discrete log contract. So it’s like possible to do these sort of DLC stablecoins. And I know that there are versions of these things out there right now. But it may, let’s say the demand for stablecoins rises. The government also tries to crack down on it, but that demand is still there. People will use these more technological solutions and still find a way to have a DLC stablecoin that’s not as regulated if you will, or regulatable.

Caitlin Long:

And to be fair, I probably should have said when we talk about stablecoins earlier, I’m talking about US Dollar backed stablecoins that have an issuer. I’m not talking about the DeFi like makerDAO and those kinds of projects that create a dollar tracking instrument, but don’t actually touch US Dollars So, and again, this gets back to the tweetstorm it’s the US Dollar end points where the regulators can regulate. But to your point, there are, if you’re not touching a US dollar end point, it’s just code, it’s kind of like Bitcoin it’s not touching a US Dollar end point itself. Yes. Maybe an intermediary is doing that, but Bitcoin itself is not touching the US dollar ever. So so it just keeps right on going. There’s no way they can shut it down. And the same thing is true with the algorithmic versions because there’s, there’s no end point, it’s the end points that get regulated the intermediaries in the US dollar access points or Fiat currency access points that I think will get regulated. They already are, but a lot more.

Stephan Livera:

There might be more to come. Yeah. And I guess the other question as well, and in fairness, if we’re talking about some of the more algorithmic stablecoins and the non USD I mean, you could even think of the example of BitMex here, right? So a BitMex ran a business with having literally zero Fiat and it was Bitcoin in and Bitcoin out. And even they were still getting you know, sued by the government and all these things and it remains to be seen whether that kind of approach like the zero fiat stable client approach would even be sustainable because maybe the peg breaks, or maybe there’s some other problemE every week it seems that there’s a break in some kind of DeFi smart contracts somewhere. So listeners, caveat emptor, be ware, I think that’s one of those things where people talk about stablecoins and things, but I think maybe people are underestimating the platform risk of these things.

Caitlin Long:

I think that’s a great way to put it. And I think the regulated side of the market that has access to US Dollars is going to diverged from the unregulated side of the market that doesn’t, and your point is well taken. There have been successful businesses. But the, where they got hit, the ones that had deliberate dollar avoidance dollar end point avoidance strategies the way that they got hit is that there were US customers actually breaking through using VPNs and breaking through their geo-fencing and what they proved. And this has been alleged in the case of BitMEX, it’s been in the settlement in Bitfinex and others that the exchange knew that they were serving a US customer, or in the case of New York, they were serving a New York resident.

Caitlin Long:

Even though they didn’t have the license to do so. Yeah. So, so the regulators can always go after companies for doing that, but if someone really, truly wants to avoid the US at all costs there is nothing the US can do if they don’t have any fiat end points, there’s really nothing, nothing regulators can do, except for the regulator in that jurisdiction. Whoever that may be. And yeah, I mean, that’s why I think there’s going to be a big, big divergence there already is, but there’s going to be an even bigger divergence. And not just between the exchanges that are kosher with regulators and those that are not and the one regulator that’s never opined on any of this is the fed.

Caitlin Long:

So everyone has some risk because the fed is ultimately the Prudential regulator in the United States like, or not, it is. And they have control over correspondent banks. And so even the offshore users of US Dollars that aren’t coming on shore they’re still an onshore end point, which is the correspondent bank, right? And so the fed has control over all that. And actually, all things considered, they’ve let this go a lot farther and let it grow a lot bigger than I think some would have expected if I told you at the beginning of the year, that by mid year the stablecoin market was going to be three times the size of PayPal, you wouldn’t have believed that, and they’re not a fast moving organization because they are a consensus organization, but when they move, they move big. And another example of that is the sec, the SEC has five years to go after securities law violators. And in the case of ripple, the SEC apparently asked ripple to sign statute of limitations, tolling agreements. And when they finally sued ripple over XRP, it was eight years later, eight years, right? And so think about that. A lot of the activity that’s going on today could show up in regulatory enforcement lawsuits five years from now.

Stephan Livera:

Yeah. So it’s a really long timeline there. So let’s bring it back to the direct access question and to Avanti as well, because I think you were saying, it’s sort of like having this direct access might enable products and services that might not be possible or don’t exist right now. Can you outline a little bit of what would that look like? And tell us a little bit about what’s going on with Avanti?

Caitlin Long:

We’re at the altar with the fed by putting out those those payment system, access guidelines revealed all that, or forced us to reveal all that because we had to make a comment letter on that. But that’s where we are. And we are, we haven’t announced the launch date because we’re waiting for that decision, but our goal is to be able to cross Bitcoin and US Dollars simultaneously with a bank that settles directly at the fed. And the impact of that is you don’t have to use a stablecoin. Everybody can trade with a bank directly that has an account at the fed. What does that mean? It takes the risk off both sides, this ACH clawback risk and credit card clawback risk we were talking about earlier.

Caitlin Long:

We’re going to be able to offer institutional customers are serving businesses only. But to take those clawback risks away. So the industry is going to like that by us being able to deal directly with the fed, we can cut some of the layers of intermediaries out that we know some of the players in this industry have to pay because of the lack of banking services. And then frankly, just having more banking services for the industry. We are growing and the vast majority of our services are still performed — banking services are still performed by two, relatively small banks in the grand scheme of things. They don’t have the gigantic balance sheets of the big globally systemically important banks. And so and I have definitely heard some customers talking about needing diversification and needing bigger balance sheet sizes, bigger deposit capacity in terms of the US dollar capacity serving this industry.

Caitlin Long:

But on the flip side also our comment letter focused a lot on solving risks for the fed because this is a headache for the fed. I’m sure they wish this whole crypto thing and stablecoin thing would just go away, but it will not. And they know that. And so having someone who actually has that direct bridge that is directly regulated by them is a value for a lot of reasons. It helps them understand where there might be latent risks building up in the financial system. It helps them get a direct view into the solvency and the transaction volume of the industry. So their Prudential regulator macro regulator job is easier if they actually have a direct view. And right now they do not have a direct view into what’s going on.

Caitlin Long:

And so they’re doing the same thing. We’re looking at all the on chain data and looking at what the exchanges reports and they do have the ability to talk to the correspondent banks because they regulate the correspondent banks directly, but they’re putting puzzle pieces together with information that’s disparate and all over the place. They don’t have a real time view into what’s going on in this industry. And I’m one thing I can say with confidence about the fed is I know they wish they did have a real time view into this and where the buildup of potential risks to the traditional financial system might be coming from the cryptosystem. They really do want to understand that. And I mean, there are factions within the fed. It’s not a monolith, there are lots of different views, but I do not think that they’re going to try to block this. Like I said, I think they’re going to create an enabling regulatory path that those who walk down it are going to have to comply with a lot of restrictions. But I’m more optimistic than the worst case scenario. This is not black and white.

Stephan Livera:

Yeah. So I think you’re right to point out that Bitcoin isn’t going anywhere and the demand associated for it is not going anywhere. It’s not going to go away. And so they’re going to have to deal with this sooner or later, and for people who have to play inside that regulated world, well, it’s better that they have that access and who knows, maybe there’ll be a lot more Bitcoin companies signing up to get a bank account with Avanti if it all works out.

Caitlin Long:

Yeah we’ll see, one thing I did reveal that I’ve never revealed before about the history of this bank charter is originally the way that I had proposed it is this was a mutual, in other words, would be owned by all of its customers. It would not be a for-profit entity. It would be something that the end that served the industry as a utility and the Wyoming legislators did not agree to that because they wanted there to be for-profit entities and that’s great. That’s fine. But that ethos is definitely how I’m thinking about Avanti. And if we deliver something of value to our customers, then our shareholders do well as well. It’s really that simple. But very much I do expect us to be what is effectively a utility for the industry where we control our own US Dollar access.

Caitlin Long:

And if we lose it, it’s because of something we did wrong, as opposed to some Dilbert office you know, manager sitting in the corner office who doesn’t have any idea how our industry works and thinks we’re all a bunch of drug dealers and terrorists and the like, right? And you just know that that’s exactly what’s been happening in some of these big banks. Who’ve decided not to do business with our industry. So those who are willing to roll up sleeves and work with the regulators. I know not everyone in this industry is, but some of us are. And I think we are adding value like it or not. Even the Maxis, I think have to have to agree that there is value to a Fiat on and off ramp. You gotta be able to get in to these ecosystems, even if you never decide to get back out. Somehow you have to be able to get in and move money from whatever your medium of exchange is that you’re storing it in now into the new media of exchange. Which in my case is almost almost exclusively Bitcoin and I suspect yours as well. But the two ecosystems cannot they don’t exist in a vacuum. There do have to be bridges between them. And that’s what we’re building.

Stephan Livera:

Fantastic. So Caitlin, where can listeners find you online?

Caitlin Long:

Twitter @caitlinlong_ avantibank.com, Caitlin-lung.com. I just wrote a piece for Forbes for the first time in a long time as well. Probably be doing that a little bit more frequently as well and also LinkedIn as well.

Stephan Livera:

Excellent. Well, thank you very much. I really enjoyed chatting with you and I thank you.

Caitlin Long:

Oh, it’s my honor is always a pleasure to come on your show. Thanks so much!

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