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- [00:01]
A
Welcome to Galaxy Brains. An infinite amount of cash. Cash. I'm your host Alex Thorne. The US banking system is sound and resilient. Bitcoin made a new all time high. If you're not long.
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B
If you're not long, you're short.
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A
Satoshi is going to come on there,
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B
laugh hysterically, go quiet. All bitcoin's gonna be erased. Bitcoin. Bitcoin's the best crypto. Bitcoin is going to zero.
- [00:26]
A
Welcome back to Galaxy Brains. As always, I'm your host Alex Thorne, head of Firm Wide Research at Galaxy Bitcoin. Not Zero. We have a great episode for you this week. Scott Shea, co founder of Signature bank, chairman of Next, a new Wyoming bank, is our guest and talk with Scott about, you know, what happened during operation choke point 2.0. You know, you recall the sort of three banks that we paid a lot of attention to In March of 2023, Silicon Valley bank when it collapsed, sort of set off the regional banking crisis. But before that, Silvergate bank voluntarily unwound under pressure it appeared, but didn't. Nobody lost a cent there. But that was sort of the crypto bank at the time. The other the crypto bank was Signature bank which was forced into receivership and closed on a Sunday. No one quite knows why. Scott's going to tell us what he can about what he thinks happened and he's going to tell us a lot more about his new bank, which is, I'm just gonna say, highly technology forward. I'll leave it to the interview coming up. Great conversation with Scott. If you're interested in particular about how banking works in the United States, of course we'll check with our good friend Bimnet, a BB from Galaxy Trading. As always, talk about equity risk performance, Bitcoin's lack of positive performance, the odds of a deal between the United States and Iran to end the conflict there, and a little bit more. Before we get to that, I need to remind you to please refer to link to disclaimer in the podcast notes and note that none of the information in this podcast constitutes investment advice or an offer recommendation or solicitation by Galaxy or any of its affiliates to buy or sell any securities. Let's hop right into it with Bim that ab. Let's go now to our friend Bimnet Abibi from Galaxy Trading. As always, Bim, welcome back to Galaxy Brains.
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C
Thanks for having me.
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A
So things are looking kind of, maybe it's just the post Memorial Day weekend. It's a little on the east coast in general here In New York, it's a little humid. Things are feeling a little soggy in the market too. Bitcoin's sort of languishing around, not really showing any signs of wanting to move higher back to 80 at this point. What are we at 70? Below 75 now, but stocks have continued to do well week over week. Like, give us your lay of the land.
- [02:40]
C
Yeah, I mean, I think the equity story is still kind of based on one factor, which is AI, the related supply chain dynamics, power chips, et cetera. That theme is very strong right now. The most notable are the RAM companies have been doing really well. Micron had a huge kind of upgrade from UBS the other day and it rallied 17 plus percent yesterday. Know, SK Hynix, you know, had a huge move as well. And you know, by some measures, like those companies are still reasonably priced. And so that's been a big boon for the equity market as well as some, some optimism around Iran and, and the U.S. yeah, but what's concerning, at least for, for folks in crypto is even with kind of the relief kind of market price action that you had where, you know, oil moved a lot lower, fixed income rallied, equities went up.
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A
Headlines about there being a deal.
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C
Correct?
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A
Yeah.
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C
You know, bitcoin made a shot up to 78 and got firmly rejected. Yesterday you had, you know, the largest IBIT print I've ever seen of, you know, about $1.2 billion traded in one clip.
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A
Block sale. Block sale, yeah.
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C
And taking a look at like the ETF flow data, you've had two big outflow weeks back to back. And if you incorporate the data from yesterday, you're almost talking about almost no new net inflows into the Bitcoin ETFs this year. I think the number is going to be plus 300 million, which is next to nothing. And so it seems like the institutional retail bid in crypto is disappearing, called
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A
the Tradfi bitcoin bid.
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C
The Tradfi bitcoin bid has disappeared. And I think that's symptomatic of an asset that hasn't been trading well, that's underperformed this year. That doesn't grab attention anymore because there's just so many other things that folks are interested in. I want to trade space stocks, I want to do levered DRAM stuff. There's just so many things that take away from crypto's spotlight. In addition, I think clarity is important, but the timing of clarity is still pretty unclear. And the odds of clarity passing have, at least in betting markets, moved Lower
- [05:22]
A
since the successful hearing two weeks ago. Correct.
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C
And so I think poly market's around like a 55% chance right now. So you're in a market that is trading poorly, that doesn't have any catalysts coming up. And I still believe in kind of the bitcoin cycle thesis. And if you think about prior tops in bitcoin and where we're at on a relative performance basis, there's still plenty of room to go if you're a believer in the bitcoin cycles like myself. And so, you know, I think, I think lower is the path of least resistance. And I think you're, you know, I think first stop is like 72k target
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A
though is at least the yearly low of 60k. Yeah.
- [06:12]
C
And I think you could get there probably in the next 60 days. So you know, 60k and 60 days campaign slogan.
- [06:20]
A
No Bimet the bear 60k in 60 days.
- [06:24]
C
No, but, but it just, again, you know, it's one of those things where it, there's just going, it just looks soft. Looks soft. Right.
- [06:33]
A
Clarity doesn't. I've long argued that if clarity doesn't happen, it's likely to die with more of a whimper, whereas if it succeeds it would be a bang. Yeah, but you know, whimper also is negative. Like, you know, it's not giving you a lot of reason to be excited.
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C
You know, I mean when you think about like stocks and like, you know, the, the AI theme, it's like, well, every quarter these companies make a ton of money and they raise their forward guidance and the prices of their assets like that they're selling like you can see that live in real time, like compute prices, ram costs, etc, and, and so like every couple of weeks you get a new reason to be bullish.
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A
AI, it's a general generational bull run in AI.
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C
Right. And again this in bitcoin, it's like what are we waiting for?
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A
Right.
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C
And I think the fiscal responsibility angle, monetary debasement side, well you're getting a Fed president that wants to reduce the size of the balance sheet right now. So that's a little bit concerning. Things like gold have started to trade poorly. And in terms of, I want to caveat this all by saying that the underlying trend of crypto adoption is only increasing in my eyes, in internally here at least. Like we see more institutional engagement than we probably ever have.
- [07:56]
A
Yeah.
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C
And so in terms of, you know, tokenized assets, stablecoins and you know, that broad based adoption like that story is not slowing down. It's just a story of like why do I want to own bitcoin right here, right now? Yeah, that is, is kind of languishing and I think it's, I mean we're
- [08:14]
A
what, like two, 300 days into a. Not 300. What, 200 days into. From cycle. All time high.
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C
Correct.
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A
You know, like, and you were sharing this chart earlier internally and you've mentioned it a second ago. That's pretty early. Like that's not quite there on the, like, if the cycles continue, then we would have ways more of a bear market to go. You had continued to say, by the way, like at the end of last year that Q4 is when you start to maybe like, you know, sit forward and lock in on wondering about bitcoin reversing the trend. That would sort of fit with the cycle theory as well.
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C
Correct.
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A
That's where it's born from.
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C
And I think like one of the things that people say is like there's not that much leverage in the system. You know, when you look at like open interest and you know, funding rates. And I think that's, that's a reasonable point. But what I think gets lost on a lot of market participants is like there's a lot of, of on balance sheet leverage. What I mean by that is just like direct lending versus Bitcoin assets or lending in a margin account versus IBIT balances. And so there is leverage in the system. And just because you had a crazy liquidation event earlier in the year doesn't mean that that leverage doesn't exist and could cause kind of these tail scenarios.
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A
I think we just published our Q1 lending report and you know, like the total global loan book is down quarter over quarter, which makes sense, but it's still pretty massive.
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C
Yeah, no, I mean, I think in terms of like how to play this, like it's really tough to you know, play bitcoin from a short side like that. That, you know, it's random, you know,
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A
it could go up, you can get
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C
your face ripped off. And so in terms of what we're seeing here on the desk is, you know, vols are really low. Right. And so if you wanted to hedge a long position, like the puts are actually very cheap. But yeah, in terms of like, you know, the dynamics that are like really important to the market going forward, it's obviously, you know, Iran resolution. And right now I think there's a trade off being negotiated that's just like we will open the strait and we will get rid of nuclear weapons. You unfreeze like a good portion of our assets, maybe a little bit of
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A
maybe, maybe some of the nuclear material gets sent to China. That's a possibility people haven't talked about. Maybe that's was negotiated between Xi and maybe.
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C
But I think, you know, it's pretty clear that that's like a huge ask of the administration and that's probably something that will happen. Yeah, but the way I see it, I think you're like, nearing like the end game of this situation where, like, both sides clearly know what it takes to end it, and both sides want it to end.
- [11:06]
A
They're kind of like internally fighting their own battles to get their decision makers to that decision. It feels like it sounded briefly over the weekend, it seemed like the deal was literally about to be inked. And then it was like, oh, we're pulling back a little. And it's like, clearly there's some internal disagreement maybe on our side. It sounded like. That's the reporting I saw. I'm not seeing a lot of reporting inside whatever building in Tehran that they're debating this. But, you know, there was probably like some last minute pushback from, you know, hawks or doves or whatever. But it does. We are materially. The reporting makes it seem like we're materially closer here.
- [11:41]
B
We're.
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C
I think we are materially closer. I think the keys to, like, getting a deal done is just having enough in the deal that saves face for both sides.
- [11:52]
A
Yeah, right.
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C
The Iranians can't look too weak and neither can the U.S. and so having some face saving, like, measures, like, imagine
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A
like letting Iran and I think Oman jointly technically control the Strait, even though everyone can go through it for free.
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C
Correct. Yeah, you know, stuff like that. But again, like, you know, I was actually just talking to a former colleague of mine who's, you know, a former Marine and, you know, into the kind of geopolitical military, you know, game theory stuff. But it's crazy to think about, like, in terms of, like, the global, globally, like, relevant sea passages. Right. Like, you know, South China Sea stuff. Like the Chinese have Panama Canal. Like, we only really control, like, one of them now.
- [12:38]
A
We control the Panama Canal probably de facto. Yeah. Yeah. But South China Sea is totally disputed by, like, everyone. Yeah. China, us, Japan.
- [12:48]
C
So you've got the Red Sea and the Strait of Hormuz. And it's like, I mean, it's crazy to think about, like, the Iranians, even after this deal, still have significant control over. Right. They could just come in and be like, we're going to close the Strait again.
- [13:03]
A
They could close it.
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C
Is that an acceptable outcome?
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A
I mean, could Egypt close the Suez Canal? They could, yeah. Well, if they did though, might that cause regime change there? Right? I mean, we would care a lot if they did. Remember was that boat, it said Evergreen on it. But this is actually, in retrospect, like a. It's pretty funny. It's not funny. You know, the fact that it's a war in the Middle east that caused the strait to be closed. Not funny. But the boat, like just. You remember those pictures of it just stuck like horizontally across?
- [13:34]
C
Yeah, completely. Yeah.
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A
There's like, there's like, there was a picture of like a, like a front end loader or like an excavator, like just trying to like push it off
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C
the thing, but, you know, take taking a step back, like.
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A
But that caused this enormous disruption. Yeah, yeah.
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C
But like, you know what I'm hopeful for is the deal. I'm hopeful that that continues to like, buoy risk markets in a healthy way.
- [14:00]
A
But you're right, the thought of there being a deal barely did anything for bitcoin over the weekend. In fact, it's really just been a straight slide since we made that 82.5 near term high, just looking anemic. And I think clarity is the clear near term catalyst. But yeah, I mean, I was going to say it feels a little squishier than it did two weeks ago. You point out the polymarket. I don't want to get too deep on that. We're going to have some updated thoughts on clarity next week once Congress is back in session.
- [14:29]
B
Okay.
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A
That's the other thing. Congress. No one's in the Capitol.
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C
I mean, so it's the summer. They get more like anyone.
- [14:35]
A
Everyone's like tired from the long weekend and they're not working Congress. Easy for people to feel a little down on clarity when that happens. Still a lot of trickiness to whether clarity can actually happen, timing wise. But we'll talk more about that next week. We'll get a better idea when senators, Congress people actually come back to work next week. This has been great. Bimnet Abibi from Galaxy Trading, my friend. Thank you so much.
- [14:58]
C
Thanks for having me.
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A
Let's go now to our guest, Scott Shea, founder at Next Bank. Next.
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B
Yes, Scott, welcome. N3XT.
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A
N3XT. A new bank. A new Web3 enabled bank in Wyoming.
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B
Yep.
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A
Scott, you also were co founder and chairman of the board at Signature Bank.
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B
Absolutely. Very proud of it.
- [15:19]
A
Yes. And so we're going to talk with Scott a bit about certainly about Next and what they're building in Wyoming. I am assuming And I think I'll find out during this interview that it's a very interesting tech enabled forward thinking. Bank Signature was that as well. Because of your role at Signature, I want to talk to you about 2022 and the crypto meltdown. You guys had operated Signet, which was one of the basically the two major instant dollar settlement networks that many people used, including crypto industry entities and also of course closed or forced into receivership in New York during the banking crisis in March 2023. The regional banking crisis, Is that what we call it?
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B
I think now I could give it some harsher terms.
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A
SVB actually screwed up and had a big duration mismatch issue. Silvergate is thrown in here all the time. They actually just voluntarily wound down after the. I would argue the government made their business untenable. You guys, one of your board members, Barney Frank of Dodd Frank infamy or fame, I should say very publicly, like the day after that Signature was closed. Said they were solvent. So I want to ask you a bit about choke point 2.0 and where are we now in the, in that. And then finally want to ask you a little bit about the future of banking and regulation. And you know there were 10,000 banks like 20 years ago. Now there's what, 5,000, less than 5,000. What does that mean? But yet you're opening a new one
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B
and absolutely going to be the best one yet.
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A
I'm excited to hear about next. Let's start first with a little bit at Signature and in particular let's pick up the timeline and it's 2022. It's after what we now know then obviously was the 21, then Bitcoin all time high. But 22 was going okay until the spring. You had the Luna Terra Luna breakdown and collapse. Then you had Three Arrows Capital. We later learned that Genesis basically went under shortly after 3ac. And of course in early November of 22ftx went down. And of course this brought all of crypto prices down and plenty of other collateral damage. As one of the key banks for crypto, what did that crypto collapse look like from your perspective at Signature?
- [17:32]
B
Well, actually as an A rated strongly capitalized bank with tons of liquidity, we were getting deposit inflows. As a matter of fact, on March 9, the morning of March 9, we had more deposits. We were up in deposits for the quarter. So people were looking for a safe bank. And Signature was a safe bank. Yeah, as I've, you know, I've, look, I've testified. We could have opened the next.
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A
Yeah, you testified before Congress.
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B
Yeah, House and Senate.
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A
That was in 2023, March 9th. And that was like the, this was. The people kind of blamed crypto or tried to. In the. Certainly the banking industry kind of tried to blame crypto. The regulators, even more so than regulators. Some members of Congress and the Senate tried to blame crypto for that collapse. I guess the hook for them being that, well, even though Silvergate didn't actually collapse, they had a lot of crypto clients and SVB had what, a bunch of dollar deposits for usdc. But actually that isn't what caused their collapse either. It wasn't true that crypto caused that collapse, right?
- [18:32]
B
No. And look, in my opinion, it was. And there's been a lot written about it, you know, and I think that, you know, we do all vaguely recall that there was a time when the US Government really hated crypto and policymakers.
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A
Vaguely. We vaguely recall that in the fog.
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B
And, but no, and when you say caused the collapse, it was, you know, look at my view again, it was wrong and unnecessary. There was no reason for Signature not to open the next morning.
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A
Let's, let's talk about Signature a little bit because, well, specifically, what exactly happened there was. I think it was, what, a Friday morning that the run on SVB really started to happen. And then by Monday, Signature was closed, enforced into receivership. Right. On Monday open, like over the weekend.
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B
Yes.
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A
What exactly was done? I'm forgetting. Was it the state regulator that closed it or the fdic?
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B
Like, well, I don't, you know, look, I'm not, I don't want to get into all sorts of details, but I will say this, it's public. There was a press release on Thursday. Signature had $34 billion in cash and liquidity at the FDIC and federal homo Bank. And it's also public that we had an $18 billion run. You can do the math. That sort of says that there is 16ish billion dollars of liquidity.
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A
Yeah.
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B
And then it's also public that the bank sold $10 billion of assets over the weekend.
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A
It raised more liquidity.
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B
Raised more liquidity and came up with all the tons of other collateral. So what happened is a mystery to me.
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A
Yeah, it's a mystery to many people. And I just remember, first of all, it literally wasn't known unless you were probably either the regulators or Signature at the time. And then like I said before, Barney Frank came out and said, this doesn't make any sense. We were ready to open as a going concern. And I was like, you know, it's not just like XYZ person on their board. It is the architect of the most consequential financial regulatory overhaul and framework in decades. Saying this like Barney knows banking.
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B
Yeah.
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A
And so I, that was like an alarm bell that Monday when he gave that quote of I forget which outlet. We were like, well, literally what happened.
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B
He also testified to that effect before the New York State legislature.
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A
Very bizarre.
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B
I mean his testimony is public and his, his surmisals are public too.
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A
And there's a lot of investigative reporting and I understand, especially as a founder of a. Of a new going concern in bank. Why. Why it's sensitive for you to talk about but I would encourage our readers to read Nick Carter's work on this. He's done a great job investigating not just on Signature but also on Silvergate, on choke point 2.0. Here's a question though. Is choke point 2.0 over
- [21:22]
B
until January 20, 2029? So what really got me into my crypto journey started 2013 and it was like I was like so far out. I was a banker, I was chairman of Signature bank. And what got me worried about crypto was cbdc Central bank digital currency. And people were just starting to talk about it and it just occurred to me how dangerous this would be. And I thought we really need to create a private alternative. And I didn't have the vocabulary. Stablecoin wasn't even a word.
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A
It wasn't.
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B
There were a whole bunch of things. I actually wrote an article and I read it now and I almost chuckle because I didn't have words for a lot of things. And so the government from the get go during the Obama administration didn't really like it. Then the Trump administration took a sort of hands off approach, but wasn't sure, just wasn't sure. And then at a certain point in the next administration, in the Biden administration, you had a whole bunch of folks who said, you know, who really were. Yeah, they were persecuted is the word that I would use. I mean I've had exchange chairman. I mean I'm not gonna mention any names, but people who told me, well, they knew how to kill you. They really tried to kill us. But they weren't sure they could just keep suing us. They could just keep having the SEC investigate. They weren't really sure how to do that.
- [22:58]
A
Yeah, yeah, I think that's right. And this went to the highest levels in the White House, particularly like Bharat Ramamurti and the economic advisers to the White House and others. And then also in the Senate, some very hostile Things I recall even Elizabeth Warren kind of encouraging runs on crypto related banks like on the floor of the Senate, very hostile attitude. Then you say 2029. I'm assuming that's because under this administration you're not worried about chokepoint 3.0, but it could always come back in your mind.
- [23:33]
B
I think, look, I think that's part of the reason, in all candor, There's a great push toward people getting federal charters. Mindfully, we decided not to get a federal charter because the way it works in the federal regulatory environment is basically one person, one vote. Whoever's in charge of the OCC can do whatever they want. If you remember, Brian Brooks was giving out charters at the end of the Anchorage. Yeah. A whole bunch of them. That was like January 15th, January 30th, they faced cease and desist orders.
- [24:12]
A
Yeah.
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B
So it was very important to me in thinking about how to go the next step to do, to build a bank that was as robust as possible and as impervious as possible to a change in administration. Because one thing's for sure, you can, you know, whatever the markets are saying, nobody knows who's gonna be the next president. And if they decide that they really hate crypto or they think CBDC is the way to go and they wanna shut down the private sector, you need to be prepared for that. And I think the crypto industry is under indexing that risk, by the way. That's why the passage of clarity is so important. I think there are some people in the, and I talk to them in the, in the crypto industry, think, well, we've got genius act and everything's okay. And market regulators are, market regulators are writing all these regulations. Just as we've learned, market regulations can be rescinded on January 21, 2029.
- [25:17]
C
Yeah.
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B
Unless you get it into law, it didn't really happen.
- [25:25]
A
Yeah. Codifying it in federal statute, much more durable. One example you mentioned is that now comptroller of the currency at the OCC, Jonathan Gould, he rescinded Mike Sue's interpretive letter 1179, which itself had basically rescinded the positive interpretive letters that Brian Brooks had done. Those have now been rescinded, thank goodness. And in fact they've also put out affirmative permissibility interpretive letters and with the FDIC had a joint final rule on April 7, prohibiting reputation risk as a supervisory tool. Did the banking regulators, to your point about the national charter, do they have God powers over banking? Is banking really a private industry? If they do, is it the most regulated Industry in the world.
- [26:11]
B
Yes, they have. And bankers know that. They know that if they don't come, you know, nice bank you got there. But you know, you're dealing with this fellow or that industry really. Do you want to do that?
- [26:27]
A
Yeah. They don't come in and say debank these people. Right. But they say, oh gosh, the risk. Right. And then it's sort of like, you know, wink and nod, like you're going to have a really hard time with your examiners.
- [26:39]
B
Right.
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A
Is that how they don't have to,
- [26:41]
B
you know, the power of the regulators, what people also under index is, I mean they can decide to do, you know, unfortunately I'm sitting here as living proof.
- [26:52]
A
Yeah.
- [26:53]
B
They can decide to do whatever they want to do whenever they want to do it because there is no appeal. They are the final decision makers. And bankers, what's most important is bankers know that. They know that they have to comply. They know that in the end there is no court of appeals and that's just the way it is. That's because, by the way, and I've thought about this really quite a bit, that's fundamentally because we live in a fractional banking system and that's what crypto came to overturn. The true revolution of crypto is that when you move a block of Bitcoin, Ethereum, whatever it is, even you know, alt stupid coin.
- [27:39]
A
Yeah.
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B
I won't use the, the other term. It's a whole block of something. When you move dollars in a bank, you're moving a promise to pay. I mean if we, if I deposit $10, you deposit $10, your producer deposits $10. If you know someone else out there deposits $10, we all think we have $10 in the bank, but actually they've lent out $40. And so moving something, moving a tokenized deposit on the chain that is not, that is from a fractional bank is really a promise to pay. And as long as the regulator can control that promise, because you're a fractional bank, so you are reliant on them, they have ultimate power. And it's one of those things. It's an open secret. Everybody around the table knows that.
- [28:38]
A
And that means that even a wink or a nod can be deterrent from doing certain type of behavior. Right. Because they know that they have those powers. So I'm assuming then, and we'll transition here a little bit. I'm assuming then that's one of the reasons why next is in Wyoming as opposed to going for an OCC charter.
- [28:54]
B
So starting from scratch, saying, okay, we now have the chance to reinvent a bank. How do we want to do that knowing everything we know. And you know, I'm a believer, so I think everything happens and you know, we're on a path and I'm saying, okay, how can we actually build a better bank? And the truth of the matter is there was one thing I was certain of. I wanted to start a non fractional bank.
- [29:27]
A
Yep, you guys are fully reserved.
- [29:28]
B
Fully reserved. So there's only really five states in the union where you can create a full reserve bank. And we went to all five of them, more or less. And the most friendly was Wyoming with a fixed periods, statutory periods of time by which one can get a charter.
- [29:50]
A
So it wouldn't be like an unknown, indefinite, never ending process.
- [29:54]
B
It's not short, it's not like the drive by charters that some people are getting these days. But it's. We look, we filed our original, we started April, we started the process in April of 2024. We got our charter at the end of 2025. We really opened this year.
- [30:09]
A
Really? Still, like, it still takes a while.
- [30:11]
B
Because if you're going to really build a bank and you want to build a bank. Look, as you said, I've started three banks before this. So you want to build a bank and you don't want to do it off the shelf. So we did one other thing, which I'm super thrilled about, and it's going to pay dividends for decades, is every other bank is on some legacy system. We built the cooperating system of the bank on a blockchain, which means things that take weeks and months and years to do it. Another bank, we can just do so much better. You can do a whole bunch of things. You can create forks, you can just add a whole bunch of different functionality. And the interesting thing about being at sig, so I was the creator of Signet.
- [31:06]
A
Yeah.
- [31:07]
B
And I knew we wanted to build it on a blockchain. Not criticizing or you know, Silvergate was built on a different system. I wanted this built on a blockchain so it could be native to our clients.
- [31:19]
C
Yeah.
- [31:20]
B
But the thing that really I was painfully aware of throughout is that creating Signet and putting it in a fractional bank system that used a legacy, a legacy core. It was like stapling a piece of paper to cardboard.
- [31:40]
A
Yeah.
- [31:41]
B
So yeah, it works, but it's more fragile than you would like. It's not really compatible. I mean, I don't want to take the whole podcast to talk about the incompatibility. Cigna Was great. I mean by the end of 2022, we had a trillion dollars floating on this.
- [31:58]
A
It's crazy.
- [31:58]
B
It was immensely valuable.
- [32:00]
A
Yeah.
- [32:01]
B
But it did require a lot of gerbils in the background.
- [32:07]
A
And all candor you were connecting modern public blockchain infrastructure to the. I don't know what COBOL written back ends of the. Yeah.
- [32:17]
B
So even if you look at the so called immediate payment systems within banks, I'll tell you a secret. They're really debits and credits until they run the batch once or twice a day. Yeah.
- [32:31]
A
So they're not instant.
- [32:32]
B
They're not. They are instant. The way you, it appears to you because you get a debit or a credit, but it's not really. It's like Venmo where it says you've got you paid but the guy getting it hasn't received the money. Now banks have the power to provide credit against that. Right. So you can feel like it's all good until everything isn't good.
- [32:58]
A
Right.
- [32:58]
B
And then you have the, you know, you have the hazard risk and you have the fact that it's still a promise to pay. And in the middle before that batch actually settles, I mean it's like a very short version of Synex evolve.
- [33:16]
A
Yep. If you think about Signet, which by the way, I will say after Signature was closed and I think its banking assets and bank later acquired by NYC B which became Flagstar. But strangely this technology, which was well known in crypto to be pretty good blockchain tech that you guys had for Signet. Not sold. In fact, as far as I understand, killed, disappeared. Why was that?
- [33:45]
B
To the best of my knowledge, you're right. It's another mystery.
- [33:48]
A
Mystery. So are you building it sounds really cool by the way. So maybe you're building a new Signet. Among other things. Actually it sounds like the whole bank is built on this from first principles up rather than stapling it to the cardboard.
- [33:59]
B
Yeah. So the stapling. And here's what I love up against me is I'm sort of a bank nerd. Obviously there's nothing I can do about it at this, at my, at my advanced age.
- [34:10]
A
You're pot committed.
- [34:10]
B
Yeah, I like. Yeah, I'm there. So on a good day, Signet could do 10, 15 transactions a second. We can do 3,000 transactions a second because we're built native. It talks directly to our systems and I love that. So in terms of, I mean again, we pushed Signet as hard as we could and we created a successor to the signet 1.0 that was percolating signet 2.0 and it would take. We had to run. When you're a bank you have to run KYC AML before every transaction settles, which is, you know, part of being in a regulated banking system. I embrace that. Yeah, but whereas a transaction would take 25 seconds, 30 seconds, we now do it in five. And if you look at the functionality sort of the, the wallet, the wallet is much prettier. The, the, the ability to do delivery versus payment have is just so much. It's on a different scale and I mean it's definitely 10x better. So I'm really happy with it. But the bank nerd part of me says and once that couldn't have happened if we hadn't built the bank on crypto Rails and on crypto blockchain technology, you just can't do that. And so what I think the thing that. And look Galaxy is part of embracing this too is you go to conferences, we try to have all these kumbaya moments with tradfi and crypto and everybody's sort of trying to put it together like putting Betamax and VHS together. And fundamentally it doesn't work. We need, at certain point we need to say, okay, those barely 20th century rails need to be retired and we need to move on to Rails which are fundamentally different, fundamentally better, fundamentally less vulnerable. And that's what we're trying to. That's why look, what really makes me excited is what we're doing in terms of if the, you know, this will work and we will revolutionize banking. I mean I really believe that fundamentally, I mean even what we're doing with allowing clients to be able to show their bank accounts on the Ethereum chain, which we just, we announced recently.
- [36:45]
A
Yeah, what was that announcement? This goes hand in hand I think with building natively on the blockchain your bank. What is that announcement?
- [36:52]
B
So no one, you can't even signet. You couldn't have even, you couldn't have done that with that technology. I mean there was other technology we were clearly thinking about. Again it would have been stapled. But here you can have your private bank account and the parties can communicate without anybody within the bank walls, within the four walls of the bank and nobody sees and it's bank secrecy act, et cetera. Or you can choose to actually put your deposits on the Ethereum chain. Now you can still only interact with people who we've KYC KYB'd at this point because. And they'll get an NFT. You'll have NFTs and we can control that. But there are folks like exchanges. There are folks like, look, first brands. And the other thing that's critical. I'm interrupting myself. The other thing that's critical is to get this out of the crypto world. I mean, first brands could have never happened had payments been visible on the chain. Where if you're in a network of shipping and logistics and you want to say, see, yeah, I want to know that you're paying people. I don't want to just take your word for it. And if you're doing trade finance, you're going to say, yeah, okay, now I can follow the chains. I can't interrupt that chain, I can't get money from that chain. But I can see that you're paying your suppliers.
- [38:13]
A
A lot of people recently have been highlighting the privacy needs of blockchains. You're extolling the benefits in some cases of the transparency benefit of the public blockchain.
- [38:25]
B
I think it's both ways. Again, it's going to this attempt at tradfi and you know, crypto, you know, trying to say kumbaya. There will be some people that will want privacy who are, by the way, currently in crypto. I mean we're banks, they'll still be aml, kyc, but they don't want, you know, they don't want to net. Nobody should know from them as far as they're concerned or their trades, they want to keep quiet. But other people, really the ethos of crypto was a certain amount of radical transparency. And if you're doing your trades radically transparent, there is a benefit to that in terms of market trust. I definitely can imagine public exchanges wanting to put their clearing on the Ethereum blockchain. You want to take a look at it. And I think this is going to be very important for emerging market and other exchanges that don't have the necessarily the credibility of, you know, sort of developing country exchanges say, okay, take a look at us. We're all, it's all here.
- [39:33]
A
The stablecoin issuers under the GENIUS act framework, the permitted payment stablecoin issuers, ppsi, they now have a regulated path to offer something kind of similar to what you're offering, you know, fully collateralized proof of reserves, one to one backing. What does a chartered next modern sort of narrow bank offer to a client that they can't simply get just with a stablecoin?
- [39:58]
B
So first of all, I think, you know, I'm a big, and I've historically been a big proponent of stablecoins. I think there's a lot of use cases for them. What we're doing is I think sort of a little bit next generation in the sense that you're not actually getting a receipt for a dollar. When you transfer among us, you're actually getting a full US dollar. Remember I was talking about fractional banking?
- [40:19]
A
Yeah.
- [40:20]
B
Because we're fully reserved when you transfer a dollar. We keep all of our money on a T 0 environment. So if everybody wants all their money any day, we just give it to them. So those dollars change hands whole on the chain. You're not worried about. You don't have to think about gas fees. You don't have to think about redemptions or, you know, minting and burning. You are getting a dollar and that's actually in advance. Plus we have to have bank capital so stable.
- [40:54]
A
You're over collateralized.
- [40:56]
B
You're over collateralized, but you don't really. We have protection against things going bump in the night. At which if a stablecoin goes bump in the night, it works just like a money market fund.
- [41:10]
A
Right there. Right now, I think they're mostly closed until the next day they're closed and
- [41:14]
B
then they run it off and you get 98. Look, I think stablecoins are not gonna have huge. I'm not saying they're gonna have a huge loss or anything. Again, I don't wanna. But it'll work just like money market funds.
- [41:25]
A
They can trade below par briefly until they rebalance and sell.
- [41:28]
B
Well, circle traded at 88 and you know, briefly.
- [41:31]
A
Yeah. And it's very. So if I understand what you're saying, it's the way you've built from the ground up from first principles using the blockchain. It's kind of like your deposits are tokenized on the blockchain. But the difference between when you hear the tokenized deposits from the banks today, they're tokenizing a fractional reserve deposit, which is a liability to the bank. You're tokenizing the actual dollars themselves and you're not lending. So there's. They're not fractionally reserved, so they're. They're there. It's a better tokenized deposit.
- [42:02]
B
It's a better tokenized. It's the best one. Yeah, it's the best one. Thank you. Because it's actually a dollar.
- [42:08]
A
Yeah. And it's not a promise to give you a dollar in the future.
- [42:12]
B
Right.
- [42:12]
A
It's not a dollar. Synthetic dollar created by owning treasury bills.
- [42:16]
B
And look, you know, this goes back to the January 2029. 2029 risk that I talk about is that in a future administration, the reason we, we thought about this deeply, how do we want to structure this? Because if you had a, you know, a hostile administration in the future, and I hope we don't have a hostile administration, I hope that this really gets embraced in a bipartisan manner. I really do. I talk to Democrats and Republicans and I think there's a segment of the Democratic Party that really embraces this. But who knows. And I don't want to be in a whole nosed environment.
- [42:48]
A
You don't want to roll the dice,
- [42:50]
B
don't want to take a chance, don't want a non zero risk on this.
- [42:53]
A
We might not get Kirsten Gillibrand as president. We could get Elizabeth Warren or something. And that's. Those are very different.
- [42:59]
B
That's a bingo.
- [43:01]
A
Yeah.
- [43:01]
B
So you could get an environment in the future where, you know, we're going to protect deposits. But you know, if you're in a tokenized deposit, you take a haircut, even
- [43:12]
A
though it's literally fully there and better
- [43:14]
B
in many ways for, for fractional bank, I'm saying.
- [43:17]
A
Yeah. Oh, right.
- [43:18]
B
Whereas for us, that's right. So I'm saying a fractional bank that's on a tokenized, that's tokenizing their deposits. If you really don't like crypto, you could say in a future environment that in a future administration, well, deposits are guaranteed up to $250,000 and we're going to pay X if you're, you know, a regular deposit. But if you're a tokenized deposit, you're going to take a haircut above X
- [43:42]
A
because of the risk of the blockchain, whatever it is. Yeah.
- [43:45]
B
You can make it up. Whereas with us it is all there in cash because we make no loans ever to anybody. So what is the penny?
- [43:58]
A
I know one of the arguments that Caitlin Long from Custodia, also in Wyoming has been making. There's all these interesting paths with these fully collateralized Wyoming SPDIs, Kraken Financial, Custodia next. I'm sure there's a couple others I don't even know about, but she took a path of asking for the Fed master account. Rightly, basically, you're not quite a bank in the traditional sense of you don't have one or you have to operate through another correspondent bank that does have one for most of your stuff. Right. And one of the arguments she had made on this show before about I said why this sounds so good, a fully collateralized bank, most people were not getting the yield anyway from lending our dollars to the bank, almost none. Right. So most people really just want to know their money is safe. Wouldn't a narrow bank, quote unquote, be the safest? Why doesn't the banking system like that?
- [44:52]
B
So the two things, first of all, we're using the charter a little different than the custodian. Kraken, a lot of respect for them. So it's Again, but we're a pure bank. We don't. We are a pure bank. All we're doing is banking. We're not an exchange. We're not doing custody in the same way. So we think we're. And even when we made our presentation to the Commission of Banking, they said, yeah, you're really the first ones using the depository charter as a pure depository.
- [45:20]
A
Yeah.
- [45:22]
B
Fractional banks really, really don't like the idea of a non fractional full reserve bank because it is a better. It is a better alternative. And they know that. Right. And so they really don't. They'd prefer that that not exist. Now, there was an attempt to create something called the narrowbank. You may have read about it. It was a Connecticut institution, another state that does allow fully reserved banks. And it took a very different tack that we're not taking. It was actually just a middleman for the Fed and the Fed. Fed didn't like just being, you know, arbitrage, because they weren't gonna keep all the money at the Fed and use only the Fed master account for payment system. They didn't want it. They didn't have their own payment system. They didn't wanna have their own anything. And so people and the banking system really didn't like that. We're doing something that is, we think in advance on that too, being a pure bank.
- [46:25]
A
So Fed Governor Waller has talked about the skinny master account. Yeah. Kraken just got something kind of like that. I guess technically it's not that, but it's something like that. What did they get?
- [46:36]
B
They got a pilot account.
- [46:38]
A
Yeah.
- [46:39]
B
So it's different, but it's kind of like that.
- [46:42]
A
It's a payments only kind of thing.
- [46:44]
B
So just for full disclosure here, we have applied for a Fed master account. And I think, you know, I think we, you know, in my opinion, will, you know, check all the boxes.
- [46:58]
A
Yeah.
- [46:58]
B
And I think, and I think, look, it's a different environment.
- [47:03]
A
Yeah, yeah. You talked about clarity and I think you've made pretty clear the. We call the January 21, 2029 risk. I've called it rollback risk, basically. I mean, just as fast as, for example, Chairman Atkins has solved and corrected course at the SEC and done some great things that you look at the delta between Gensler and Atkins like surely someone could come and just as aggressively spin it the other way. And that could happen to the banking regulators as well. What about the argument the banks and crypto have been having on stablecoin rewards? I'll sort of paraphrase it in a humorous, although I would argue accurate way. The banks are basically saying stablecoins with their full reserve, their near instant settlement and transfer ability to self custody, et cetera. That's just too damn good a product. Especially if it pays yield so good that no one might want their crappy deposit product and that, that if everyone doesn't want their deposit product it could collapse the banking system and therefore ruin the economy and cause a nuclear holocaust. Right. Basically in collegiate debate terms where you always end with the end of the world, I think that's overblown. One of the arguments they've when we've put out a bunch of research showing that net credit creation can improve by stable coins, that foreign inflows into the US banking system will exceed any interbank deposit migration. But they've also argued along with the icba, which is the community bank trade, that small and mid sized banks could be harmed. Okay, fine Alex, if you're right that it's net better for the banking system, still there could be all these losers inside the banking system that don't benefit and perhaps are truly harmed. What's your view on that?
- [48:43]
B
So it's a very complicated question in that and it's also the topic of a whole podcast because I do think that the small banks and the mid sized banks in particular are the most vulnerable. Some of them have tried to take some rear guard actions and create their
- [49:03]
A
own
- [49:05]
B
collective communal stablecoins. But I think the risk is that they will pale in comparison to the big five creating their stablecoins. Let's not forget before the financial, financial crisis the six big banks were less than they were in the 30s in terms of percentage market share. Now they're at 60% of market share. It's not that long. And if you go back to before the passage of Graham Leach Bliley, before the repeal of Glass Steagall, they were I think just above 10% in those six banks.
- [49:41]
A
So we've seen incredible concentration of the big banks.
- [49:43]
B
Incredible. And the question I think you have to ask in the banking system, look, as you know I used to be at one point vice chair of the mid sized Bank Coalition of America that's why I asked. I'm sensitive to these interbank.
- [49:55]
A
Yeah.
- [49:56]
B
Questions because behind the facade of where all they're, they're all holding hands and complaining, the big banks will be disproportionately
- [50:08]
A
benefits beneficiaries by genius X stables and stuff like that.
- [50:12]
B
Yeah, yeah, disproportionally.
- [50:14]
A
I've read that JPM has already over the years and we know they've been working on blockchain stuff with Connexus and I think was previously called Onyx and whatever. They've spent hundreds of millions of dollars on blockchain tech development. How do they, how does you know Alex's bank of East Dog Patch compete with that?
- [50:31]
B
It's a real issue. So I think that you will over time see interbank sort of combat on this. And the truth of the matter is the big banks have lots of power.
- [50:50]
A
Yeah, I think it's interesting though because I forget the exact dates on this but 20, 30 years ago we had 10,000 banks in America. Today I think it's less than 5,000. You pointed out that concentration at the big banks has increased dramatically just since 2012. Isn't this fear of little banks getting squeezed out by big banks actually just a long term trend that frankly the big banks are a big part of and that this genius act Stablecoin is kind of a red herring for that. Like isn't the biggest threat to small and mid sized banks the big banks?
- [51:23]
B
Yes. I don't think there's any question.
- [51:26]
A
I've described their, their strategy in the Clarity negotiations as sort of using the community banks as human shields. Right. Look. Oh my God. These poor small banks. It's the bank that banks your barber and your local mechanic. You wouldn't hurt them. While meanwhile they've been opening tens of thousands of branches in small America competing directly with them for years. But let me get back to this to next because who will be the ones in that environment? With the new technology percolating and the regulatory frameworks allowing it, how will a small or mid sized bank stay relevant? What do they have to do? Or a new bank?
- [52:09]
B
So we're really trying to do something new under the sun being a full reserve bank. And I can tell you, talking to clients now that we're out there, we were really stealth but talking to clients now the idea of a full reserve really resonates. The idea of, you know, I don't have to worry about another administration. I don't have to worry about deposits only being insured up to some level or taking Haircuts really resonates the idea of, I mean we've had people just. It's not that our AML KYC is any strong as anybody. I mean we basically follow OCC standards but it's being able to onboard in a technological way. It's being able to interact with people on an API. So our APIs, if you're working with us on an API it feels just as good as working with and actually better than working with a big bank using their API. So technology can help new entrants too in the same way that I think it's helping us. But if you are a legacy bank in a, you know, mid size using someone else's core operating system and relegated to being on their user committee and hoping which meets in you know, Palm beach every, you know, twice a year and hoping to you know, get something moving, it's a tough haul because you're so far behind what is going to need to be done. And I think that there is a risk that the mid sized banks end up being turned into something like the
- [54:02]
A
thrift industry squeezed too by both the
- [54:06]
B
bigs and the lower returns still viable. Because they have franchises, it's not like they're going to right. Disappear. They have franchises.
- [54:14]
A
Bank deposits at the like local business and local level are very sticky. Right. People have the same bank they've had for my, my wife has the same bank account she's had since she was like 12 years old.
- [54:24]
B
Yeah. That's why they love to get you know, college students to sign up.
- [54:28]
A
Right.
- [54:29]
B
No question about it.
- [54:31]
A
One last question before we end. What's something in the last year, I don't know or two years recently that you've changed your mind about?
- [54:43]
B
I have, I've changed my mind about stablecoins and the proliferation of stablecoins. I think they're going to be fewer than people recognize fewer individual stablecoins. Yeah. I think the genius act I thought it was going to be let a thousand flowers bloom and I think they're going to be some more flowers. But if I give you if your supplier, I mean if I gave you a Target gift card or a Target stablecoin and a Walmart stablecoin and a Costco stablecoin and you know, come up with whoever else cvs, any big buyer and you're the supplier, like that's gonna be annoying. What are you gonna do with. You can't pay anybody in these stablecoins so because you've got too many and so you're going to be swapping them back. And I do think that the predictions of 1000 stablecoins, fundamentally they're not interchangeable. And that's basically fundamentally why, like transacting in USD. Because USD is really the bottom layer.
- [55:54]
A
Yeah. I think part of the, the argument that treasury would make and that, you know, real big Genius act proponents would say is that the, the prudential standards for the underlying collateral, the risk management, the examinations are so uniform, even the state pathway has to basically be the same as the federal, that they should be interchangeable. But I think you're sort of saying that even if that were, even if that is true.
- [56:22]
B
Yeah.
- [56:23]
A
You just don't want to have like USD 1, USD 2, USD 3, USD 4 is just like a pain in the butt.
- [56:28]
B
It's a pain.
- [56:28]
A
Yeah.
- [56:29]
B
People have under index.
- [56:30]
A
Yeah.
- [56:30]
B
That entirely. And I, you know, talk to shipper. Oh, we're going to create our own, you know, we're going to our manufacturers, we're going to create our own. We buy so much. We're going to make our own stablecoin. Well, yeah, you're going to create your own stablecoin. People are going to want to dump it the minute they can. And so unless you get to a certain level of reserves and like, actually it's not economic to have a stablecoin. And I really talk to a lot of people who I think are making that error. There will be some, don't get me wrong, and I'm rooting for them. I'm happy, totally. But it's not going to be what people are predicting with the Genius Act.
- [57:07]
A
I think the stablecoin industry or whatever, maybe not the industry, the new entrants or people who think it'll be a thousand flowers blooming. They're not looking at the recent last, you know, eight years of crypto, where, you know, a big thesis for a lot of 2017 ICOs and crypto protocol tokens and app tokens was that like, you know, you'll use a, you know, VR token to like operate your Oculus and you'll use a, whatever token to operate that blockchain and you'll use this token to play this game. And basically the one of the main ideas at the time was the unbelievable proliferation of bespoke currencies. One token for this, one token for that, one token for that. Now on Etherium, the biggest collateral is eth, and the second biggest is basically wrapped bitcoin.
- [57:51]
B
Yeah.
- [57:51]
A
Right. So it's not thousands of tokens that actually matter. It's really a couple, just a sort of a It's like you know, the telco companies conglomerating into one giant conglomerate. Right. It's just natural, right? The three big TV companies, right. It's like each of them has like 33% share. It's kind of the natural in network effect businesses. It's sort of, it's probably in nature.
- [58:16]
B
IPhone and you know Samsung, you don't have that many because it ends up being a pain in the rear for people to use. And yeah, I think there's going to be, I think there's going to be a few and I look, I think there's going to be next and I think, you know, I'm really heartened to be, you know, part of this journey.
- [58:36]
A
Very interesting. Well okay, one final question. Where can people find out more about next? And you know what's, what should we be excited about for the next six months that you guys are doing?
- [58:47]
B
So first, please find us at N3XTIO you can onboard. We're only by the way, I should say we're only B2B so you get it. It's only entities and businesses but we are friendly to US entities, we're friendly to foreign entities as long as they're not in a prohibited country. So we're doing, we're onboarding lots of folks. Europe, Asia. Latam. Latam is ending up is, is a very popular site for us and we're, you know, we're happy to embrace that. So what are you going to be looking for from us? So I think actually the next six months is going to be pretty exciting. We've got some things that you know are behind the, behind the curtain understood that we're working on but I think you're gonna, I think we're gonna find people really happy to be able to show, to be able to do well. There's two things I'd highlight, I was debating in my head which I'm just gonna say both.
- [59:50]
A
Okay, okay.
- [59:51]
B
One, I think being able to transact with NDD on Ethereum and having USD actually pass on the Ethereum blockchain, I think that's like a little bit revolutionary. And the transparency, I think people are going to find lots of use cases for that. And then the second thing is shipping and logistics and what we've really create, what we really launching is the ability to do self service letters of credit. Now crypto people may be less interested in that than shipping and logistics but I am super committed to bringing crypto out of, to bringing these technologies. Not necessarily crypto but crypto technologies. I'M a blockchain maximalist to busting out of this little crypto world that we're in and breaking into the whole galaxy, as it were, and allowing people to ship goods and services by creating a self service letter of credit, essentially delivery versus payment at a fraction of what banks are charging. And I mean, I remember it's signature how much we charge for letters of credit and there's frankly no need for it. And we are going to like, you know, really allow people to be creating the same, literally the same functionality for like 10% of the cost. And it's, that's like a radical reduction. So I love being able to help goods and services move, cheapen, you know, products, make things more trustworthy because in that case, the only people really losing out are the big banks that are just, you know, putting in their profit margin.
- [61:42]
A
Scott Shea, founder of Next N3XT IO, thank you so much for coming on Galaxy Brain.
- [61:48]
B
Scott, it's a pleasure.
- [61:55]
A
Thank you for listening to Galaxy Brains, the weekly podcast from Galaxy Research. I'm Alex Thorne, head of Firmwide research at Galaxy. Follow me on X at Intangible Coins. Follow Galaxy Research on X at glxyresearch. Read our written reports@galaxy.com research and don't forget, if you like Galaxy Brains to like and subscribe on your favorite podcast platforms like YouTube, Spotify, Apple Podcasts and more. We'll see you next time.