Caitlin Long Stablecoins, Bitcoin & The Fed

Hi, you're listening to Stephan Livera podcast, a show about Bitcoin. Today for episode two hundred and ninety-one, Caitlin Long of Avanti re-joins me on the show, and we're talking about stablecoins, Bitcoin, and the Fed. So stablecoins, obviously they're not directly Bitcoin, but as part of this whole move into Bitcoin, there are people who wanna- use this thing as a bridge, as a way in or out of the Bitcoin world. So we're talking a little bit about this and what it might look like if there is this coming regulatory crackdown, as well as the potential of getting direct access to the Fed for some Bitcoin companies and banks out there. Now the lead sponsor of this podcast is Swan Bitcoin. Swan is the best way to accumulate Bitcoin with automatic recurring buys and instant buys. So if you listen to my recent episode with House, you've gotta set up your DCA plan and automate that. Swan have a really fast setup and it's cheap to automate your stacking. Swan has a focus on education and content. The more you know, the more you buy, and they are Bitcoin only, there's no confusion with altcoins. So they're a great place to send pre-coiners and new coiners. So for those of you who are looking to buy a lot of Bitcoin, if you're a high net worth individual or you're a business or a corporate, there's Swan Private. Swan Private gives you direct one-to-one calls, more personalized service, self-custody guidance, as well as wire support with no limit on purchases. If you're interested in Swan Private, go to swanbitcoin.com/private, and if you wanted to sign up with Swan, go to swanbitcoin.com/Livera. Lend at HodlHodl is a peer-to-peer Bitcoin backed lending platform, so you can lend out your stablecoins to get interest, or on the other hand, you can borrow against your Bitcoin globally and anonymously. There's no KYC required. So with HodlHodl, it's done with a two-of-three multi-signature escrow, and when you take part in this, you still hold one key in that two-of-three, so you can see the funds there and make sure that there's no rehypothecation. And the cool thing is, this is all happening peer Yeah, it's a platform. So you go on there, you set your terms, you put up offers depending on how long you wanna borrow or lend and the interest rate. Go to lend dot hodl hodl dot com. And now, while Bitcoin mining difficulty is low, if you wanna get involved with Bitcoin mining, Compass Mining are there to help you mine Bitcoin. So you can use Compass's arrangements and relationships with Bitcoin mining companies or manufacturers to buy a mining machine, and you can also use their relationships with facilities to go and- And have your machine sent there. Now they've got a special deal on right now, it's the VIP bundle. You get twelve machines, these are Antminer S19J ninety tera hash units, and you get one unit online each month from December through to November. It's thirty-two thousand four hundred upfront, eighteen hundred dollars a month plus hosting, and it's a big discount relative to if you were purchasing these twelve machines individually. So go to compassmining.io to start mining Bitcoin today. Caitlin, welcome back to the show.

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

Yeah, that's right. I'm a little closer to where you are though, but, we'll, we'll get to that later. But, it's been really interesting, hey, this, it's been a while since we last spoke in, 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, it

Excuse, right? So in twenty thirteen, they were like, "Oh, it's Willybot pumping on Mount Goats." And then in twenty seventeen, "Oh, see, it's, it's Tether pumping the coin, and therefore Bitcoin is, you know, it's 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 'cause of Tether and these dodgy stablecoins." And, you know, it's funny,

isn't

And to hearken back to our pal Trace Meyers, was it the seventh network effect or sixth network effect? Yeah, financialization. I can't remember which one was financialization, right? And I remember he and I had serious debates. 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 the, the Bitcoin twenty-one, twenty twenty-one conference just played a, a At Bitcoin twenty twenty one over whether leverage was good for Bitcoin, and, I, I, the, the clip that they, that they played is "Go back and read your Mises," that, you know, circulation credit is bad by definition, commodity credit is fine. You know, Mises wasn't opposed to credit, he wasn't opposed to leverage. There was a type of leverage that was fine. It was, 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 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-- don't have to sell an appreciating asset, I get it. but, but anything that goes above one to one leverage falls into that, into that circulation credit bucket, and that is creating more claims than there are real things. It is a fra-- a form of fractional reserve banking, and oh boy, have we seen that in spades. So it's interesting, I, I know your point is You know, certainly the press is portraying that stablecoins are the thing, in this Bitcoin bull market, but I, I would disagree with that. I, I would say it's more what's happening with leverage and all the speculation, that, that's, that's the characteristic of this bull market. Stablecoins were there back then too, although it's, it's funny to, 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, b- In 2017, there were nine point nine million dollars of stablecoins outstanding, it was nothing, and now it's a hundred one billion and growing very fast. it's very interesting, I also compared it to PayPal, because PayPal's the largest fintech, at year end it had thirty three billion of customer cash, that it was holding for customers, the total stablecoin market was twenty seven billion, and the total stablecoin market is now a hundred one billion and PayPal is, PayPal is now thirty five So the stablecoin market has grown more than two Paypals in six months. It's, is the punchline. It's crazy. It's staggering. Yeah, absolutely staggering. And, no wonder why the, why, 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, on the systemic risks of stablecoins. and there's a lot of history we can go into here. I, I think, basically this is changing the money markets, and there was a big

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 what-- but they're SEC registered, they're not registered as banks, they are SEC registered, so that they are regulated. but, the-- there's a, there's a, there's definitely a, a split in the, in the economist community over whether everything should be in the banking system or whether, or whether everything, it's okay for- Everything to stay out of the banking system in the so-called shadow, shadow banking system. Money market funds are in the shadow banking system. Same thing with stablecoins. And, and you know, this, I, I think this debate is, given what hap-- has happened with stablecoins, there was, there was a very, very, very vi-vigorous debate about whether fintechs should be allowed to get as big as they are, including PayPal at thirty-five billion. Well, stablecoins blew past that in the span of six months. And so, I don't think Anybody should expect that, that regulators are gonna be sitting on the sidelines, and I think it's a replay of that whole nineteen seventy-seven years long debate, which Merrill Lynch, sparked Over whether money market funds needed to be inside of the banking system or not, we're gonna replay that again here, except now we've got the SEC at the table in the US as well.

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 wanna go straight away. They're not ready to

Now, it's interesting because I think to some extent people maybe they're understating the level of the risk, right? Like, there's a reason-- Oh, yes. Egold 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 use it more permissionlessly. And yet, nevertheless, stablecoins have grown massively, right? The, the, the Tethers of the world, the USDC, the GUSD, you know, these different stablecoins

have grown, People want these stablecoins.

Well, it's, 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 fifteen minutes, sometimes it takes even more than a day. it's not perfect, right? And whereas with, with crypto, you can trace it and it goes fast with, 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, it's in the offshore exchanges for the most part, and, and that's where there are just a lot of speculators. It's both institutions and retail, and that is what's new. So coming back to your first question, stablecoins were around in the last bull market, right? Tether went from nine point nine million to one 2017. So it obviously had a huge, run up in 2017, but it never, unlike Bitcoin, it never went, it, it, it never went back, it never looked back. it, it, it plateaued a little bit after Bitcoin peaked, but it never actually declined, and even, even net of treasury, of coins held in treasury, it never actually declined. and, and so, Tether's been around, this is its, this tr-- this is truly its second bull market,

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 onshore futures markets will let you-- it's been a while since I looked, but let-- last I looked in the US, you could lever Bitcoin two and a half times. You can lever Bitcoin a hundred and twenty-five times in the offshore exchanges, and this is where, you know, the debate we had at, at Bitcoin twenty twenty-one with Sam Bankman-Fried about, I, you know, I, I came right out And said, "Look, that's not good for Bitcoin." And, and also, I, I've, I've said in Twitter, Twitter, you know, something that w-where your customer is stopped out and loses their Bitcoin collateral to you in only a seventy-five basis point move in Bitcoin, or if it's a hundred to one, a one percent move in Bitcoin, that happens every day, right? So, what, what I, what I challenge the exchanges who are offering the high leverage to, to do is to publish the profit expectations on their contracts, because I think if They did that and took, 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.

Yeah, it's a really fascinating argument there around leverage and is it really- Really good for Bitcoin, right? So the argument might be something like, "Oh, see, it's pa-- it's all part of price discovery, and, you know, you need a speculator to take the other side of the trade for the, you know, for the person who's producing, and theoretically in this case, it's like a miner." But the, the reality is there's a lot of, let's, let's say just d-gen traders who are just, you know, getting wrecked on high leverage, and, you know, it's not really like some grand serving the

Bitcoin isn't hedging. you know, people that, the miners who are interested in, in locking in a forward price, which is why the futures markets evolved in the first place, there were, you know, farmers who wanted to lock in a price, and they were hedging. that, that hedging activity is, is typically very low leverage. and, 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 Is not in the hundred, in a hundred twenty-five to one levered contracts, most of it is in these lower levered contracts because most folks do understand that they, there's, there's a pretty high probability of losing, of losing their collateral that they're posting to the exchange when they're, trading with hundred to one contracts, and the probability that, that a hundred to one contract ever pays out in the favor of the customer? Is probably far less than five percent, right? So you have a, you know, a greater than ninety-five percent give or take expectation of loss on a contract like that, because it's, Bitcoin's gonna move one percent and you're gonna get stopped out in the wrong direction before your contract matures, right? So, if you stop and think about it that way, yeah, yeah, it's no wonder why many, don't use them, but, but the fact is, onshore, they're illegal, right? There are a lot of things happening offshore. That are, 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, versus offshore. And I think, you know, we're, we're wit-- we're witnessing some crackdowns right now. That part of, part of my tweetstorm 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 It goes well beyond just the China, Chinese miners and, and the Chinese crackdowns on, on crypto. It, it, it is getting at the US dollar endpoints or the, or the fiat currency endpoints 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, I, I must underscore all this- This FUD we're talking about has nothing to do with Bitcoin. It has everything to do with intermediaries, everything to do with, you know, stablecoins, that kind of thing. It's not Bitcoin itself, and so, you know, if you're, 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, you know, turkey necking at the, at the car accident as you, as you, as you drive by it, right? But, to 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, of, of, of the conversation on crypto Twitter for sure.

Yeah, yeah. it reminds me of a post I saw by Arthur Hayes recently, or you might have 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're-- you've got your DCA plan, yeah, swanbitcoin dot 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? It stayed really small, it might not be worth their while, but as these things get bigger and bigger and bigger, well, then it starts to become, they're gonna, they're going to start cracking down. So what does the current state of governments cracking down look like in your view?

Well, there's, let me come to that in a minute, but there's one of, a, a brilliant, take away that I had from Bitcoin twenty twenty-one, which was Nick Szabo's speech, where he said, "Liquid markets are nice to have, but they aren For Bitcoin to, to play the most important va- 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, when you do, versus having a lot of liquidity so there's no bid offer spread every day and 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 twenty twenty-one. It Indoors of my memory from that conference is what Nick said. He's, he's, he's in this same camp that all this leverage 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, to then answer your question, we do need US dollar on and off ramps, right? Or fiat currency on and off ramps. Bitcoin wouldn't be what it is today if we didn't have them, and it won't be what it will be tomorrow if they get I don't think they'll be, they'll be shut off. I, I, there are people like Senator Elizabeth Warren who are calling for that here in the US, but, but that's, I don't, 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, my ears is, ears are very close to the ground because of the business that, that I have here at, at Avanti.

small number of people in Washington, DC, and the best that we in the, in the industry can do is work with the people that, that we know in Washington, DC who can help, to, to guide that, and that's not me. So, I'm, I'm, I'm an observer just like you are, but I'm watching it maybe more closely than the average person. And, a-and it's very clear that there, there is some crackdown happening. Like I said, I don't wanna call out names, just go on crypto Twitter and you'll Get money out of certain exchanges right now. and I, and, and I, I don't know how far that's gonna go, honestly. I don't have any sense. the, the, the most significant, piece of information that I've read recently is that Janet Yellen, the Treasury Secretary, who's the former Fed governor of, chair, chair of the Fed, she, she, she wants FSOCK, 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, is, alright, well, what's the probability of that happening fast? Can they do that without, needing congressional action? And, for those of you who aren't 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, to use a polite term, and, you know, I, I'm not sure we want congressional action about Right now, but, I don't, the-- as I look at the landscape, it's not clear to me that, that FSAK 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 WDT 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, I'm confident we're gonna 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, in the tweetstorm. We want this, we need US dollar access, and having crypto native companies that, that actually can, can bank directly at the Fed Is a big deal for the industry. Not only do we, 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, at the Fed directly because that path has been closed. The ones that are closest to opening that pathway are these three Wyoming speedy banks, Kraken, Avanti, and WDT Financial. And the Fed doesn't 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 Grant, grant us the, the opening. and if we do, then, then I think, you know, that's a big signal because it's basically saying, that, 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 Come and apply for bank charters as well.

It'll be like a dam breaks moment.

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 twenty seventeen, when the whole banking industry in the United States started debanking everybody, and a very small number of banks, Silvergate and Signature, Metropolitan back then, stuck with the industry, and, we, we owe, we all owe them a debt of gratitude for having done that because- Because almost every other bank in the United States abandoned us, you know, whether, whether legitimate business, whether scam, whether in one case a trade association that wasn't even touching crypto, the, the banks de-banked them. And this is a trade association that was only handling US dollars. Come on, right? That's how bad it got in twenty seventeen, and so the, the whole idea is if we can control our own banking relationships, then we're not at the whim of some faceless, you know, compliance person. way far away who doesn't know us and doesn't wanna take the, the time to get to know us and doesn't understand the risks and doesn't wanna invest the time and effort to manage those risks appropriately. If we, if we can take responsibility to meet all the, the laws and, and regulations to get our own US dollar banking services, then we should. And that's, we're, we're at the end of that, that long pathway. I don't know how much longer it's gonna be, but we're down to now the very last thing that has to get done, which

Yeah, gotcha. So let me just summarize a bit, those 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 wanna translate their fiat currency into Bitcoin, well, you need an exchange, a 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 have had similar issues. Essentially, it has fallen down to the silver gates and the signatures of the world to bank these Bitcoin companies. And I think it's also arguably true that, you know, 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," but the reality of it is also that, you know, the reality of it is that there were very few banking, solutions available to Bitcoin companies, and that's why they've had to go for stable- 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, you know, we're talking about financial inclusion in terms of like, you know, people who are from like a lower SES, you know, Yeah, 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, you know, there's behind

us, yeah.

Yeah, then, then it might just mean that, you know, there's gonna be more and more stablecoin use and there's just gonna 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

Win, well then we're gonna require X, Y, and Z compliance. We need you to have this kind of capital requirements, Basel requirements, this and that, on top of, you know, the normal AMLKYC stuff you're doing, the sanctions regulation stuff you're doing. There might also be some other kind of payments system, supervision and monitoring requirements, and it's sort of 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?

Yeah, great summary. really That's a 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." It's 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 chart So if the Fed says, "Yes, come on in," then, I, I think a lot of things happen. It's really, it is good for our industry, and, and again, it's a little bit strange for a Bitcoiner to be talking about working with the Fed. and again, Trace Mayer, just to, to bring up his name again, is, he was the lead investor in our Series A, for Avanti earlier this, earlier this year, and yet we also have a lot of mainstream investors who are part of our cap table as well

we're, we're, we are basically 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, and Bitcoin. but, so I, I just wanna make it clear, I don't know that stablecoins are gonna end up being, being, told to go down the bank pathway. If they are, then there is a bank pathway charter, and I do expect that That if this pathway is opened, a number of crypto companies are gonna follow, because people have been watching it and saying, "Well, we don't know if it's real," and, and once the Fed approves it, then it is. If the Fed doesn't approve it, then, then, you know, it, then it wasn't. but, 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 gonna come out, we just don't know what.

This being good for, for Bitcoin, yes, it, it cuts out the layers of intermediaries, that, that, 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 a, an intermediary and their customers pay an extra layer of fees. and, and, 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, you know, once the regulators kind of catch on that this is how it's done, that, that you're likely to see some, s-some, some reduction in the, in how often those re- those particular models are used. I'm not gonna say anything more than that, but, there's a, there's some aggressive regulatory posture in, in some of the intermediaries. I think we all know that, that's not a, that's not a shocker. and that's also gonna It, it, you know, 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. And, that's why this bank thing has been a big issue, and it's hurting both sides. The reason that it, it's hurting-- We just talked about how it's hurting the, the, 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 aren't 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, ten minutes. a lot of intermediaries will make you wait until there are six confirmations, so on average, sixty minutes, but you've gotten, you've got settlement 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 it, can get an exposure that builds intraday 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-- you know, we've got a problem." and so the banks need to up their game if they're gonna get into Bitcoin. And I, I made the point in our, 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 gonna have no problem handling the traditional legacy payment rails.

Right. Yeah. Because every Bitcoin exchange has already had deal-- 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 bank, yeah.

Yeah, yeah. In, in the US, ACH is, is the most common platform. It typically takes overnight, sometimes can take three days. But here's the kicker, a, a consumer can re- Reverse an ACH payment for up to two years after it's taken place if they allege fraud. Now, not many payments are reversed, and the bulk of payments that are reversed get reversed in the first forty-eight hours or seventy-two hours after, after a payment has taken place. But these clawbacks, it, it, 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, that's paid for in crypto And then all of a sudden, because it, it went through a card network, the payment gets clawed back, the merchant's out both the good and the payment. So that's a huge risk issue for them, right? It's, it's, it's one of the things I consider to be a feature, not a bug, of crypto. It's irreversible. That's, you, you don't necessarily wanna 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 wanna use it. So high value payments, To go within a nanosecond, and that's the beauty of Bitcoin, you, you do know that, and, and it's not reversible. But in traditional fiat, the 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 irreversibility, and they match those settlement characteristics of our industry, and so our industry has adopted them, much faster than, than US dollars, and of course, with the US dollar issue We all remember what happened in twenty seventeen, 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.

Yeah, that's really, confronting in some ways, 'cause you might have done everything right, but you-- on this one thing, if you didn't have a US bank account, well, you know, you're, you're up, you're up the creek without a paddle, right? so the other interesting development, and I think this is a really interesting

Terrible 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-- You know, is it to do with the velocity?"

the velocity. This is my favorite, characteristic of stablecoins, and again, that, you know, the guys at Tether really, truly invented an amazing financial innovation there. Hats off to them for, 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, you learn about fractional reserve banking. A dollar of monetary base typically got lent out ten times, nine times, so that you'd actually have ten dollars of M2 outstanding, right? So the M2 multiplier for decades was ten. A dollar of monetary base equals ten dollars of M2. So w- but what is that? As we know with fractional reserve banking, we're, we're basically creating money ex nihilo, to use the Latin phrase, from thin air, right? that nine dollars got created on the back of one dollar something real, and so, as a result, that was small i inflationary. what's-- but that's how they got velocity, right? The velocity, the money multiplier was ten in that example. You had ten dollars of M2 off one dollars of mon-- dollar of monetary base. What's so interesting? Is that we're getting five hundred times multipliers in stablecoins off an M1 monetary base of a hundred and one billion. now I noticed when I did the, the, the math, the velocity's gone down recently, trading volumes in the last month, as we know, have, have gone down, but it's still twenty five trillion dollars. The annualized velocity of stablecoins is two-- US dollar stablecoins is twenty five trillion dollars right now. And so to put that in perspective, I think all- All of Fedwire and ACH is something like eight hundred trillion dollars in total payment volume. So it's small, but it's not insignificant, and when-- 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? And so it, it's, it, it is starting to become meaningful in overall payment volume. It is also fair to say, and 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, with irreversibility, and you don't have, therefore, somebody carrying an unsettled trade overnight. and if somebody's carrying an unsettled trade overnight, in their risk management models, they've got to hold capital against the potential that they- 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, 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.

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And hold a lo- a transactional reserve for, for payments that get clawed back, yeah? Absolutely. That's part of the reason why bid offer spreads are so wide. Yeah. In, in our, in our industry

So they have to deal with all of these as-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, what's with that dynamic?

Well, high quality 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, it's government, it's cash and T-bills, and also the government-sponsored enterprises in the mortgage market, that have an implicit US guarantee. So it's a lot, it's a-- these are huge markets, and they're, they're what I'd call the, the base money, the monetary base of the shadow banking system, because the shadow banking system works on-- it, it, it, 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 rehypothecation, where the same collateral gets pledged again and again and again and again and again every day to different parties. There's really only one T-bill at the base of that pyramid, but there are, you know, 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, a dollar of debt against it. So what you really have when you Consolidate all the, all the parties down is you've probably got ten dollars of debt and one actual T bill, right? Ten dollars 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, 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, and it wasn't because, Bitcoin suddenly, you know, 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 it-- those were gonna touch the US dollar, and in particular, it was Facebook. And what it-- what was it in particular about Facebook that they, 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 gonna be rehypothecated because one of the fundamental premises of stablecoins is that the collateral is supposed to be backed, the, the liabilities are supposed to be backed one for one with assets. And so if you're rehypothecating your T-bills, then it's not backed one for one with assets. And so there's, you, you a- and, and by the way, with proof of reserves and, you These attestation, attestation we have now, but, but, but, everyone assumed they really, truly had to be backed 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, that goes through the New York Department of Financial Services regulatory regime. i-it's very different than the regulatory regimes of USDC, which isn't subject to that, and Tether, which isn't subject to that either, to my knowledge, in both the case of Tether and USDC, but definitely Paxos and, Gemini Dollar are subject to that, restriction. So, so they're cash and T-bills, the others, obviously, we all know there's a, there's some questions about what exactly is backing, backing them,

but, long If they, if all those assets go in to those roach motels and don't come back out, then they suck away all, 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 M zero to M two multiplier, but not much credit is created in traditional banks anymore. It's created in securities markets, and there they need that base money, the, the, the T- T-bills to act as, as collateral that gets multiplied to ten T-bills and, or whatever the number happens to be, and if that T-bill is siloed away in, in some collateral silo and can't come back out, then you can start to see how that is gonna gum up monetary policy. That is the reason why central bankers started focusing on, on crypto two years ago. It was Facebook, and ever since then, they've been hyper focused on the stablecoin market. all, 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.

Yeah, 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 those stablecoins must hold some T-bills as the underlying collateral, to-- you know, as an example, if they've issued one billion Tethers, then theoretically, you know, have they, you know, held some, T-bills in reserve, In the bank, i-in, in, in relation to that, or have they got cash in the bank in relation to that, right? And so the, 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 have sort of, maybe they've taken a sort of similar view as well, that they, they almost view Bitcoin like, you know, or whatever, Gold, you guys can have your little digital gold coin, we don't care about that.

Doesn't really touch us. Yeah, but

stable coins--

That touches fiat.

Whoa, hold on. We view stable coins as a threat to our financial system, so you better, you know, you better like follow all of our regulations and all of this. And so it's, it's actually starting to p-cause more of a real question now because these things aren't growing like a weed. And the world needs to find a way to deal with it. You know, you can't just, you

can 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 PayPals worth of, of, of assets, right? And so it is starting to become material when, 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, but he specifically called out Tether by name. That's the first time I've seen a Fed Name, before it became a systemic problem. so, so a lot of Fed watchers I was talking that weekend with, "Have, have you guys ever seen anything like this? The Fed is so careful with what it says, a-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 will have-- That was signed off by everybody probably all the way up to the top. There were-- That wasn't just, the Boston Fed president going rogue, so to speak, and mentioning it. That was by design. those slide-- Those slides, you know, went through a lot of review inside the Fed. Okay, so what message are they trying to send? it's exactly what you're talking about, right? That, that, that they're seeing that this is starting to become-- There's some spillover risks to use, to borrow the phrase that the

Markets. And the point that President, the Boston Fed President Rosenberg made is that, that, that now the stablecoins are about, I think he said twenty-six percent of the prime money market in, in the United States. Prime money market funds are a big place where corporate treasury, 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, as of, as of last week was, was four hundred eighty-five billion dollars. Okay, so we're at one hundred one 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 project that USDC will be a hundred ninety billion by twenty twenty-three. A hundred ninety billion by twenty twenty-three compared to the prime money market of four hundred eighty-five billion. And right now, boy, you're gonna start to squeeze the money markets, is, 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. and, you know, again, the big question nobody knows the answer to is, are they gonna require some sort of registration with the securities markets and let them kind of keep going and investing in whatever they wanna invest in, or are stablecoin issuers gonna be pulled into the banking system and set up? Alright, this is a whole new payment system, you-- but you've gotta become banks, and you've gotta comply with all the requirements you were talking about in your earlier question. Or is there some third, third way that they're gonna create, to, to try to get stablecoins inside these systems? But, you know, it's interesting, Ray Dalio g-- made a famous, multiple quoted state, comment about Bitcoin that its growth is gonna be its own, it, it, it's big, its own biggest threat to its success and I, 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- The sidelines, I, I don't think anybody should be surprised when they act. When you look at all these facts, it's, it seems pretty clear something's gonna give because, the Fed doesn't wanna have to bail out money markets, let's put it that way.

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, you know, interest rates rise, or would we see, you know, like more banks struggle to find the collateral that they need in order-- because they wanna 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're not gonna be able to make as much money, right?

Yeah. Well, and that's another great point. We've been talking only about the money markets

it's more than half is in the shadow banking system, including money markets, and, the other half, the less than half, but pretty big still, is traditional banks, okay? So that's your landscape. Let's call it sixty forty, just to pick numbers, I don't know the num- 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,

You're seeing all the DeFi projects that are offering pretty high yields on cash. 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 Circle's, announcement last week of, of its merger with us back, so it'll become a public company, and he was saying, "Are you realizing the implications of an SEC-blessed company offering three to seven percent yields on cash and lending fifty-three billion of that by twenty twenty-three?" that's, you know, let, let's put it this way, I, I'll, I'll let the, your listeners draw their own conclusion. If you're watching money markets, 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, it's essentially a, 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 three to seven percent yields. That's a three hundred plus basis point yield difference. And again, I mean, I, I, I'll let you draw your own conclusions about that. If, do, do we really think the regulators are gonna sit back and do nothing about that?

Yeah. Very good. Yeah, thinking, drawing out what's going on there, because essentially everyone's gonna be running for the three to seven percent. Who wants five basis points? But you can't- Yeah, they're gonna be running for that. They already are. And it'll, it's, yeah, it's, it's probably only gonna be a matter of time until we see more and more people go for some of these. Now, of course, I'm, I'm, you know, more on the, you know, I'm skeptical of the altcoin DeFi's and things like that, but hey, you know, people wanna, people wanna gamble, that's the, that's on them. I, I would avoid it,

but

I think it's- Yeah,

I

But

it, it is 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, that, when there was a paper that came out from the Fed last week that said the vast volume of this, of, of trading, is crypto, and they're right, the vast majority of, of, of stablecoin trading volume is in crypto trading, but it's not all there, right? It's now gonna be With El Salvador, and it's also, it, it's, it's also through the Visa network. And there's another, pathway that I'm aware of, which is, Wall Street firms wanna start being able to use it to settle US dollar transactions off banking hours. You have stocks now trading twenty four seven, three sixty five, somewhere in the world, right? The biggest companies in the world, they all have stocks, their stock trading on, on exchanges or, or other venues everywhere. In the world, in every time zone, essentially, you know, twenty-four seven, three sixty-five now, but you can't settle the US dollar leg of that. And so, s- again, somebody's carrying an unsettled trade. And so, the question then can b- becomes, and hedge funds are starting to do this, using stablecoins as a means by which to settle their stock trades off hours, because there's n- they're not, they're not carrying that unsettled dollar obligation, they're accepting a stablecoin instead. and so There's definitely pressure, you know, mainstreaming of, of all these, stablecoins. But I wanna get back, to your, to your point. You and I usually talk about Bitcoin. We've been talking almost entirely in this, in this segment about stablecoins and almost nothing that we're talking about actually has to do with Bitcoin. And, yes, you read the stories that, you know, two thirds or three quarters of the Bitcoin trading has a stablecoin pair. and so, I look at that and say, "Ho hum," I speculator, and I don't really care if, if stablecoin volumes go down, what happens to Bitcoin's price? I, 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, 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 wanna make Bitcoin more volatile, that's a shame. It does increase the For everybody in the industry, because Bitcoin becomes more volatile as a result of that, but they do create buying opportunities as well.

Yeah. So I wonder as well, is there a similarity now going back to Gox, right? So twenty thirteen, when there were questions, serious questions being raised about Mt. Gox's, you know, 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 fiat out, so they were trying to Bitcoin out, right? They were trying to buy Bitcoin. And get out. I wonder would a similar dynamic happen if there were to be, 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 the, the, it's just more gonna be like they're going to have to be regulated and come inside the regulated tent, as it were.

Well, it depends, to be honest, it depends on how, Right, you know, you're seeing people who are saying they're having trouble getting, getting, funds out of exchanges. And so, what does that mean? I don't know. I mean, you, you, to your point, is, is, is that- I remember all that in, in Gox, and I remember it in Quadriga as well. What you started to see is the Bitcoin price traded at a premium on those exchanges. now sometimes Bitcoin prices do trade at premiums, for reasons having nothing to do with the counterparty risk or the, the potential that there's gonna be a, you know, a loss of banking services or something like that. but we have seen Bitcoin trade at premiums on exchanges, in, in the past, and, and that is one of the things that, tends to be a The reason that you're, you're alluding to. So, you know, I, I, I think, the, 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, you know, 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 Exchanges, right? So, you know, I, I'd encourage everybody, invest in yourself, learn how to self-custody your coins, and then ju- use the, 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. you know, to, to, to quote another one of our mutual friends, Andreas Antonopoulos, people You know, up six percent yields today, down a hundred percent tomorrow. there's, there's that, that's the downside of what we're seeing in this market right now, is this whole concept of speculation and yield 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, you know, whistle past the, the car wreck, and say, "Gee, I'm sorry to the people who got stuck in it," but, but you can protect yourself if you do your own

So 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, right? So it could be that, you know, 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, you know, government crackdown, you know- clamps down and says, "No, you gotta do even h-harder AML KYC even for those intermediary steps." And, you know, they sort of make it, they take away that frictionless aspect of it, and then at that point, you know, maybe people then would have to find other ways, right?

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, D.C. who just want crypto to go away and are

Voices are out there. but I'm opti- optimistic because the, the way cashiers' checks work in the US is the same way. The on and off ramp is KYC, AML, OFAC, all those compliance requirements, but the intermediate transactions aren't. and now, you know, the regulators probably take some comfort in the notion that it's a physical paper check. Paper, cashiers' 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 PE an infinite number of times, and each time it hops, you're not going through KYCAAML. And so by the way, the New York DFS stablecoin issuers, they-- that's how, and that's how New York got comfortable with exactly that. The, 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, the, FinCEN proposal Administration would have done that, and our industry pushed back, rightfully so, and said, "You're, you're holding us to a higher standard than you're holding even the banks on cashiers checks." so what, what this is, is a digital cashier's check, and oh, by the way, with that paper cashier's check, you can't monitor where it is and whose hands it's passed through, but with a stablecoin, you absolutely can, and chainalysis and elliptic and all those, all those compliance firms that specialize in In, in on-- in, in data analytics for compliance, they absolutely know, and they've blacklisted, right? We've seen that with some of the stablecoin issuers. They've blacklisted, when stablecoins got in the hands of, of sanctioned individuals or sanctioned countries, they just get frozen permanently. and that can happen absolutely with a stablecoin. so I, I'm optimistic on that front. I, I don't think it's gonna be that bad. I actually think what's gonna happen more likely is that it's gonna end up being Some regulatory enablement that will finally take place, and, most of the, 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.

Right. And I, 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 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. I think it will. yeah. Yeah. And I also wonder, it, it is, and so this came up as well in my discussion with Nick Carter, another of our mutual friends, 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- A DLC technological, so DLC, Discrete Log Contract, so it's like possible to do these sort of DLC stablecoins, and I know 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 regulated bull.

Well, and, and to be fair, I, we, I probably should have said Or, I'm talking about US dollar backed stablecoins that have an issuer. I'm not talking about, the DeFi, you know, like MakerDAO and those kinds of projects that create a dollar tracking, instrument but don't actually touch US dollars. So, a-and again, this gets back to the, to the tweetstorm, it's the US dollar endpoints where the regulators can regulate. But to your point, there aren't-- If you're not touching a US dollar endpoint, it's just code. It's kind of like Bitcoin, it's, it's, it's not touching a US dollar endpoint itself. Yes, maybe an intermediary is doing that, but Bitcoin itself isn't 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 endpoint. It's the endpoints that get regulated, the intermediaries and the US dollar access points or fiat currency access points that, that, that I think will get regulated But a lot more, there might be more to come. Yeah.

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, you know, I mean, you could even think of the example of Bitmax here, right? So Bitmax ran a business with having literally zero fiat, and it was Bitcoin in and Bitcoin out, and even they were still, they're still, you know, getting, you know, sued by the government and all these things,

But stablecoin approach would even be sustainable because maybe the peg breaks or maybe there's some other problem. There's some smart, you know, every, you know, week it seems that there's a break in some kind of DeFi smart contract somewhere. So listeners, you know, caveat emptor, be aware. It's not, I think that's one of those things where people talk about stablecoins and things, but I think we, maybe people are underestimating the platform risk of these things.

I think that's a great way to put it. and I think the, the US dollars is going to diverge from the unregulated side of the market that doesn't. And your point is well taken, there have been successful businesses, but the, the, the, where they got hit, the ones that, that had deliberate dollar avoidance, dollar endpoint avoidance strategies, the, the way that they got hit is that there were US dol- US customers actually breaking through using VPNs, and breaking through their geofencing, you know? And, what they proved, and this has been- And, alleged in the case of BitMEX, it's been, in the settlement in, in Bitfinex, and others that, there, that the exchange knew that they were serving a non-- they were serving a US customer, or in the case of New York, they were serving a New York resident, even though they, they, they didn't, they didn't have a 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 There is nothing the US can do, if they don't have any US, if they don't have any fiat endpoints. There's really nothing, nothing regulators can do, ex-except for the regulator in that jurisdiction, whoever that may be. And, yeah, I mean, that's why I, I think there's gonna be a big, big, big, divergence. There already is, but there will-- there's gonna be an even bigger divergence, a-and not just b-b-between the, the exchanges that are kosher with regulators and those that Regulator that's never opined on any of this is the Fed, so everyone has some risk because the Fed is ultimately the prudential regulator in the United States, like it or not, it is, and, and, and they, they have control over correspondent banks, and so even the offshore users of US dollars that aren't coming onshore, they're still an onshore endpoint, which is the correspondent bank, right? And so the Fed has control over all that, and, a-actually, all things considered They've, they've let this, this go a lot farther and a lot, let it grow a lot bigger than I think some are, would have expected. I, if, if I'd told you at the beginning of the year that by mid-year, the stablecoin market was gonna be three times the size of PayPal,

Yeah, I wouldn't have-

Yeah, you wouldn't have, you wouldn't have believed that. And they're not a fast-moving organization 'cause they are a, a consensus organization, but, you know, when they move, they move

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, all, a lot of the activity that's going on today could show up in regulatory enforcement lawsuits five years from now.

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, 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 what, what- What would that look like? And tell us a little bit about, what's going on with Avanti?

Well, we're, we're at the altar with the Fed, the Fed by putting out those, those payment system access guidelines, you know, 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 a launch date because we're waiting for that decision. But,

but our, our goal is to be Fed. And the impact of that is, you know, you don't have to use a stablecoin, everybody can, can trade with a bank directly with the, that, that has a, a, a, 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, we're gonna be able to offer institutional customers, we're serving businesses only, but, but, but to take those clawback risks away. so the industry's gonna Being able to deal directly with the Fed, we can cut some of the layers of intermediaries out that, 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, we've, we are growing fast, 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, the gigantic balance sheets of, of the, of, of the, the big globally- systemically important banks. and so, a-and I've definitely heard some customers talking about needing diversification and needing bigger balance sheet sizes, bigger, but-bigger deposit capacity, in terms of the US dollar capacity serving, serving this industry. but on the flip side also, our, our comment letter focused a lot on solving risks for the Fed, because this is a headache for the Fed, I'm sure they, they wish this whole crypto thing and stablecoin thing would just go away, but it won't, and they know that. and Having, 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, of the industry. So their, their prudential regulator, macro regulator, job is easier if they actually have a direct view. And right now- Now they don't have a direct view into what's going on, and so they're doing the same thing we're doing, looking at all the on-chain data and, looking at what the exchanges report, 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 real-t-- a real-time view into what's going on in this industry, and I'm, one thing I can, I can say with confidence about the Fed They did have a real time view into this and, and, and where the, the, the buildup of, of potential risks to the traditional financial system might be coming from the, the crypto system. They really do wanna understand that, and I, I mean, there are factions within the Fed, it's not a monolith, there are lots of different views, but I don't think that there's, that they're gonna try to, to block this. Like I said, I think they're, they're gonna create an enabling regulatory path that those who want- Walk down it are gonna have to comply with a lot of restrictions, but, I'm, I'm more optimistic than the worst case scenario. If this isn't black and white.

Yeah. Yeah. So I think you're right to point out that Bitcoin isn't going anywhere and, the demand associated for it isn't going anywhere. It's not gonna go away, and so they're gonna 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 With Avanti, if it all works out.

Yeah, we'll see. I, I, one thing I did, reveal that I've never revealed before about the history of this bank charter is originally, the way that, that I had proposed it is this was a mutual. In other words, it would be owned by all of its customers. It wouldn't be a for-profit entity. It would be, something that the ind- that served the industry as a utility. And, the Wyoming legislators didn't agree to that because, they were, they wanted there but that ethos is, is definitely how I'm thinking about Avanti and, if we d-deliver something of value to our customers, then our shareholders do well as well. It's really that simple. but, 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, and if we lose it, it's because of something we did wrong as opposed to some, you know, 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, you know, terrorists and, 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-- those of us who are willing to roll up sleeves and, and work with the regulators, I know not everyone in this industry is, but some of us are, and, and I think we are adding value, like it Have to agree that, that there is value to a fiat on and off ramp. You gotta be able to get into these ecosystems, even if you never decide to get back out. somehow you have to be able to get in and, and, 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, in my case is almost, almost exclusively Bitcoin, and I suspect yours as well. but the, the two ecosystems can't, they don't exist in a vacuum There do have to be bridges between them, and, that's what we're building.

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

Twitter. At caitlin long underscore, avanti bank dot com, caitlin hyphen long dot com. I just wrote, 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.

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

Leave a review on iTunes or whatever podcast platform you are listening on so that other people can find out about the show. That's it from me, thanks, and I'll see you in the citadels.