The Banks are Wrong on Stablecoin Yield with Omid Malekan

Summary

Galaxy Brains Podcast Summary

Episode: The Banks are Wrong on Stablecoin Yield with Omid Malekan
Host: Alex Thorn (Galaxy Digital Research, Head of Research)
Guests: Omid Malekan (Columbia Business School), Bimnet Abibi (Galaxy Trading)
Date: February 19, 2026

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Episode Overview

This episode dives deep into the ongoing debate over stablecoin yields, especially focusing on the banks’ position regarding restrictions on yield for stablecoins as part of the Clarity Act negotiations. Alex Thorn is joined by Omid Malekan, a professor at Columbia Business School with extensive experience in both banking and crypto, for a robust discussion critiquing the traditional banks’ views on stablecoin risks and competition. The episode also includes a timely macro and bitcoin market update from Bimnet Abibi of Galaxy Trading.

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Key Segments & Timestamps

• [05:42] — Bitcoin & Market Update with Bimnet Abibi
• [20:51] — Omid Malekan Interview Begins
• [23:15] — Regional Banking Crisis & Deposit Flight
• [31:53] — Stablecoins, Genius Act, and Payment Innovation
• [38:39] — Stablecoin Yield Debate & Bank Arguments
• [55:07] — How Stablecoins Might Affect Community Banks
• [72:31] — Education & Crypto Adoption at Columbia
• [75:54] — Closing Thoughts

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Market & Macro Update with Bimnet Abibi

[05:42 – 20:45]

Bitcoin Market Outlook

• Cautious stance on Bitcoin: Bimnet sees value in the 59k (“200 week moving average”) area, expecting potential bounces but warning that further downside is possible, especially if broader equities correct.
• Historical context: Bitcoin bear markets often retest previous support levels multiple times and sometimes break below them with patience recommended for investors.
• Quote:

  "I'm very cautious still. I think in terms of safe buy area, it's still kind of like the 200 week moving average at that 59k level." — Bimnet [06:28]

• Capitulation not seen yet: Despite liquidations, Bimnet notes we haven’t seen the full capitulation typically associated with durable market bottoms.

  "It didn't feel like everyone's throwing in the towel on crypto. And that's normally how markets bottom..." — [11:32]

• Adoption still strong: Optimism for crypto rails in traditional finance, with stablecoins prominent and legislation progressing.

Macro & Geopolitics

• Rotation into 'real world' sectors: Industrials, hardware, and non-US equities are outperforming as capital rotates away from big tech/software.

  "There's generally a lot of rotation into industrials and energy and like real world." — [13:31]

• Geopolitical risk: Discusses impact of potential US-Iran escalation, expecting a short-lived risk-off move in markets if a strike occurs.

  "Maybe S&P down like a percent and a half to 2.5%. That probably gets bought. Vix probably spikes to like high twenties..." — [15:32]

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Main Interview: Omid Malekan on Banking, Stablecoin Yields, and Policy

[20:51 – 76:13]

The Regional Banking Crisis & ‘Deposit Stickiness’ Myth

[23:15 – 31:53]

• Deposit flight is not a crypto problem: Fast deposit flight at SVB and First Republic was due to fintech, not crypto.

  "Clearly deposits were a lot less sticky than everybody had assumed." — Omid [21:57]

• Misplaced blame: Regulators and politicians attempted to frame crypto as a key risk, but the real problem was systemic; pressure on crypto banks like Signature and Silvergate was politically motivated.
• Operation Choke Point 2.0: Regulatory pressure forced crypto industry deposits into just a few banks, amplifying fragility.
• Unprecedented regulator conduct:

  "This is one of the most irresponsible things bank regulators in this country have ever done. Because... you publicly never, ever talk about deposits being risky." — [27:10]

Stablecoins, Genius Act, and Payment System Evolution

[31:53 – 38:39]

• Genius Act as "narrow banking":

  "Genius is a remarkable bill... It drastically expands [options] and makes available something... a narrow banking option." — [31:53]

• Stablecoins replace legacy banking: Legacy banks had ‘always-on’ networks for payments (SEN and Signet), but stablecoins—moving over global, permissionless rails—have fully replaced such systems for the crypto sector.
• Public blockchain innovation: Permissionless, trustless payments and self-custody are the true advances, not simply faster payments.

  "The core innovation is the changing nature of the trust assumptions." — [36:04]

Banks' Anti-Stablecoin Yield Arguments Debunked

[38:39 – 62:31]

Bank Claims

1. Deposit Flight

• Banks claim stablecoin yield will drain deposits, destabilizing traditional banks—especially community banks.

  "Banks... say there will be stable coins will result in all this deposit flight out of the banking system... which is hilarious because that's not actually possible." — Alex [43:01]

2. Loss of Cheap Credit

• They warn a reduction in cheap bank funding will raise loan costs and reduce credit to small businesses and households.

3. Systemic Destabilization

• Yield-bearing stablecoins could, they argue, create new risks for the broader economy.

Omid’s Counterpoints

• Minor role of banks in credit:

  "Banks in the US create a minority of credit. They only account for approximately 20% of loans to the private sector." — [44:11]

• Cheap funding = bank profits, not cheap loans:

  "When banks have access to cheap deposits, they just make more money." — [49:52]

• Credit terms not improving for consumers: High consumer loan rates (credit cards, auto, mortgages) are near all-time highs, even while deposits pay very little.

  "Credit card interest rates are on average over 20% ... and credit cards are the most widely available type of bank issued credit in America." — [47:23]

• Excess cash parked at Fed, not lent out:

  "A substantial portion of the balance sheet of banks... is going into things where there's zero underwriting. ... Like if you park your money at the Fed and... the Fed will pay banks 3.6% to take money out of circulation." — [51:45]

• Stablecoin adoption’s actual effect: Stablecoins “recycle” dollars through the banking system, rather than pulling them out, especially since underlying collateral is held in bank accounts or treasuries.

Quote of the Segment:

"The argument that they'll be deposit flight... I think I'd say eviscerated across a couple vectors. One, they're not the biggest source of lending. ... Two, they're not actually doing the cheap lending really ... they're just clipping it as NIM [Net Interest Margin]..." — Alex [52:25]

Community Banks: Victims or Human Shields?

[55:07 – 62:31]

• Banks invoke community banks but act against them: Big banks claim stablecoins will kill small banks, all while expanding into their markets and taking deposits.

  "Big banks are using the community banks as human shields." — Omid [60:49]

• Community banks already pay more interest; have sticky deposits: Local relationships, older demographics, and higher yields mean they’re less vulnerable to competition from stablecoins than large banks claim.

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Policy and the Fight Over Stablecoin Yield

[62:31 – 71:56]

• Yield restriction: A last-ditch lobbying stand: The bank lobby is pushing for absolute bans on any yield (even beyond what the Genius Act enforced), out of self-interest, disregarding consumer benefit.

  "The banks put out... a one page set of principles which said, ban all stablecoin yield." — Alex [65:53]

• Risks of giving in to banks:

  "If the tradfi world gets what it wants on this issue, it will come for things like defi and permissionless systems next." — Omid [67:28]

• Potential for backsliding via must-pass legislation: Analogous to previous 'broker rule' sneaking into other bills, giving way once could open the door to further restrictive measures.

  "[T]hey will continue to innovate roundabout ways of trying to kill [DeFi]." — [69:23]

• Patriotic irony: If Americans are forbidden to earn interest on US stablecoins but foreign holders do, it’s paradoxically anti-American.

  "...Americans hold a dollar stablecoin... get no interest. Foreigners hold a dollar stablecoin, they get 2%, 3%. Meanwhile, where does the yield come from? It comes from treasury bonds. Who pays the interest on treasury bonds? Americans." — Omid [64:11]

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Education & Crypto Adoption at Columbia

[72:31 – 75:54]

• Crypto never more popular with MBAs:

  "Interest is actually at an all time high... as measured by how many people sign up for my class, the waitlists, ... It's literally been up only." — Omid [73:19]

• Students now see crypto as part of their future careers: Shift from skepticism to broad acceptance (with 10-20% outright ‘believers’ and would-be crypto professionals).
• Hands-on approach: When prices crash, students watch trading activity live as class material.

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Notable Quotes

• On banking fragility:

  "Eliminating bank runs and banking crisis to me is an unsolvable problem... Maybe we should move to a less levered banking system." — Omid [22:53]

• On the real innovation:

  "The core innovation is the changing nature of the trust assumptions...all of the cryptographic features...are almost irrelevant, if you permission the validator set..." — Omid [36:04]

• On the lobbying position:

  "They say stablecoins will kill community banks. That's our job." — Alex [62:31]

• On legislative risk:

  "If we're gonna lose it, I wanna lose it on genuine grounds... Don't give me this song and dance about small business lending." — Omid [71:56]

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Episode Takeaways

• Stablecoin yield restrictions are primarily a move to protect bank profits and market dominance, not consumer welfare or financial stability.
• Community banks are less threatened than big banks claim; the biggest risks to them come from big bank expansion, not stablecoins.
• The core innovation of crypto is not speed but trust minimization and openness; private permissioned efforts by banks miss the point.
• Education and interest in crypto among MBAs is at all-time highs—adoption is increasing structurally.
• Policy fights over stablecoin yields are likely to set precedent for future clashes over DeFi, developer rights, and self-custody.

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For a deeper understanding, listen to Omid Malekan’s segment starting at [20:51], where he methodically unpacks each of the banks' arguments in the stablecoin yield debate, and to Bimnet’s tactical bitcoin and macro commentary at [05:42].

Transcript

[A]

Welcome to Galaxy Brains.

[B]

An infinite amount of cash. Cash.

[A]

I'm your host Alex Thorn.

[B]

The US banking system is sound and resilient.

[A]

Bitcoin made a new all time high.

[C]

If you're not long. If you're not long, you're short.

[B]

Satoshi is going to come on there, laugh hysterically, go quiet. All bitcoin's gonna be erased. Bitcoin. Bitcoin's the best crypto. Bitcoin is going to zero.

[A]

Welcome back to Galaxy Brains. As always, I'm your host Alex Thorne, head of Firmwide research at Bitcoin Not Zero. We have a great episode for you this week. Omid Malaykan, professor at Columbia Business School. He joins us, he's a repeat guest and we talk a lot about the banks and stablecoins. What will be the impact of stablecoins on bank deposits? We assess the viability and reasonableness of the bank's negotiating position over stablecoin rewards in the Clarity act negotiations. Omid very critical of their position. I think it's a really quite fair, fascinating discussion. A nice long discussion with him. And again, this is a very intelligent finance professor who has worked in the banks, is deep into crypto and I think he's got a very deeply informed and intelligent viewpoint on the state of banks deposits, stablecoins. We didn't even get into some other good stuff with Omid, but we'll have him back to talk about L1s enterprise blockchains and tokenized securities and things as well. Great guest and I know you'll enjoy that interview. We'll also talk with our good friend Bimnet, a BB from Galaxy Trading. As always, we'll get an update from Bimnet on the current state of his bitcoin thesis. Obviously being bearish at 110 is a lot more risk reward when it goes to 60 than being still bearish at 66. I think BIM. Net described his current view as cautious, so we're nearing a good value area. We also talk with BIM about macro and geopolitics and what might happen to markets if the US strikes Iran, which it looks like it might be preparing to do. Before we get into all that, I need to remind you to please refer to link to the disclaimer in the podcast notes. 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. Phineas, my friend, it's no longer zero degrees in New York. That's a positive.

[D]

It's a positive. It's getting warmer.

[A]

It's a positive. Did you watch the Super Bowl? We talked about this already.

[D]

But I did watch.

[A]

Are we about the Patriots? Are we supposed to be upset?

[D]

No, we were.

[A]

We were early.

[B]

It's.

[D]

We weren't supposed to be there, so I think we're feeling good.

[A]

But did you see the Coinbase ad that they ran with everybody and you see the backlash about that?

[D]

I did.

[A]

People were like. Even I actually was like, oh, what is this? Really effective in that way. Got everyone to look and sing and possibly even sing along and actually brought joy to the world. Until some normie saw that it was Coinbase. And there's a famous photo going around that was from a video of people being like, no go, like, holding up, flipping the bird.

[D]

Because it's maybe the catchiest song in the history, certainly in our lifetime.

[A]

Yeah, they kind of tricked people into seeing it. And then, I guess, you know, crypto's reputation at the moment being what it is, people were not.

[B]

There was a few sort of crypto

[D]

and crypto adjacent ads. Not as heavy as I remember, maybe last year. A lot of AI represented this year,

[A]

I think Coinbase, you know, they did a good job. People saw their name in that sense, but they could have done. They had these other great ads about upgrading the system last year, how it's hard to buy a home. One ad where they had a visual representation of the amount of dollars that have been printed that were much more fundamental to the bitcoin use case that I really would have loved to see them use their megaphone for that with such a big audience. But if you remember, they had that ad in 22 that was the QR code bouncing on the screen, like the DVD thing. And it was like, they have this idea that for the mass market, I guess they're not supposed to get too intellectual. They got to make it fun and silly.

[D]

And I remember that ad being quite effective. Like, they've had some really catchy, interesting ads.

[A]

Yeah.

[D]

A couple different years.

[A]

That's right. It was effective, too.

[D]

It was effective. I mean, you know, people didn't love that it was Crypto, but it was. It was a decent ad.

[A]

Well, I mean, I thought the ads

[D]

generally were horrible this year. Not interesting. A lot of, like, flops.

[A]

There was that one with, like, Ben Stiller and stuff. He was in the band and like, I love Stiller, but that one just kind of sucked.

[D]

Like, you know, the John C. Reilly one where he's, like, trying to park.

[A]

It was just like, I got to say straight up is Jesus is for everyone. You know that campaign to, like, Christianity. Yo. They had an incredibly based ad that was like one of the. It's like that Founders Fund video or like these mashups that are, like, really slick edits. Like, there was one about Trump after he won the election. It made it seem like he was like John F. Kennedy.

[D]

Yeah.

[A]

You know, all these historical clips and stuff. And I don't know if you saw that.

[D]

I didn't see it.

[A]

Absolutely legendary ad. That was the same one where I was like, what is this ad for? And I love what, you know, they're giving you. It's cool music and there's like, these slick edits of, like, historical statements and you're like, this is sick. And then it was like, no way. That was for Jesus. I loved that. I thought it was so good for them, you know, some good creatives. Yeah. Well, we had this long convo coming up with Omid. What do you think about that?

[D]

Because, yeah, Omid is brilliant. He's an academic as well as somebody who's plugged into sort of like the street at the same time, which I

[B]

think is kind of rare.

[D]

He's. We've had him on. I think this is our third time having him on. He's, you know, we're a show, I think that is. Appeals to somebody who's well informed in crypto.

[B]

He.

[D]

Because he teaches young people, he does such a good job of synthesizing these ideas in a way that's understandable.

[A]

That's right.

[D]

And I really appreciate that. And so I just enjoy listening to it.

[A]

I did, too. It's a really good one and I think you'll enjoy it. But let's. Let's hear from Bim. Net first and let's hop right into it. Let's go now to our friend Bimnet Abibi from Galaxy Trading. As always, Bimnet, welcome to Galaxy Brains.

[C]

Thanks for having me.

[A]

Well, we're still down here in the 60s for Bitcoin, I think. Let's start with bitcoin, because I know you've been getting asked and I've been seeing it in my mentions, and you were very prominent, and we ran that great clip show of you. I mean, if you've been watching the show, you're not surprised. You recall that Bimnet was bearish when I was even challenging our audience to prove them wrong. We were all too poor to do that, apparently, and bitcoin kept going down. But people are asking now at these levels, what is your Bitcoin thesis. Now we ostensibly wicked to basically your level. The 200 week is at what, 59k? We hit 60. But where are you now?

[C]

I'm very cautious still. I think in terms of safe buy area, it's still kind of like the 200 week moving average at that 59k level.

[A]

That still feels like value.

[C]

That feels like value. From a tactical basis, I'm fairly confident next time down there you'll bounce again. And normally in bear markets you do get 20% bounces and a coupled.

[A]

Coupled, but multiple tests.

[C]

Multiple tests as well. And normally in bitcoin cycles you do eventually end up breaking below the 200 week move average.

[A]

But not super long historically, but that's right, yeah.

[C]

And so I think you saw that

[A]

in 2018, you saw it in 2022.

[C]

There's been a ton of carnage in the crypto market between octenth dats. The recent correction we've had, there's a lot of carnage and it takes time for that to kind of make its way through the market. And so my stance is cautious and I think wherever the bitcoin bottom is, you'll have multiple opportunities at it within like call it 5,000 points. And so I think investors can afford to be patient. This is not a market where you need to fomo in after like a 10% bounce. Like there's nothing that's changed from like the catalyst perspective. I don't think there's anything that's going to take bitcoin like to 90, 100k anytime soon. And so I think right now it's probably a range trade with the potential that, you know, as we've mentioned the last two episodes, like if you do get a correction in broader equity markets like that I think is probably what could take bitcoin below the 200 week moving average. And I think a break below the 200 week moving average probably gets sold into.

[A]

So it accelerates a bit.

[C]

Yeah. But my thought process is if you're a long term investor, the difference between 50 and 60k I don't think really should make that much of a difference. And I think in terms of the best long run approaches to an asset class that you're fundamentally bullish, bullish on is just a dollar cost average. But I don't quite think the bottom is in yet. I do think that the 200 week moving average will serve as good short term support. But ultimately when you think about Bitcoin in the four year cycles, you do see 70% corrections and a 70% correction from the highs gets you to about 37,500. And so that is the bare bottom. Bottom that I think we can get to. Maybe. But that is contingent upon equities having a meaningful.

[A]

Correct. We have a major down year in equities this year then. Sure.

[C]

But if you're constructive generally, I think you'll have another opportunity at 60k. I think if you're trying to deploy over the next year, like if you start your DCA program now, it's not crazy.

[A]

Right.

[C]

But I do think that normally it just takes time for the market to heal and you'll have plenty of opportunities if you're looking to stack sats in the next six months.

[A]

Yeah, I think that makes a lot of sense. What I'm hearing as a summary is you're not really bearish, meaning that you're not at this level. Risk, reward. It would be.

[C]

Yeah, it'd be hard to go short.

[A]

That's right. Because it would be very hard. That trade was 100.

[B]

Yes.

[A]

Correct. Yeah. So it's not. But it could go lower. And you're saying, you know, historically, even without necessarily a macro rollover. I think both kind of did have a little bit of one in those priorities.

[C]

They did like 2022 with the rate hikes.

[A]

Yeah.

[C]

But long story short, it normally takes like a full year.

[A]

It could, it could take a long time.

[C]

So October to October is kind of that time series.

[A]

I see.

[C]

Right.

[A]

So it could go lower. It's not like. And I, you know, the one thing I would say about. Although I don't think we've ever really seen a bottom hit in a bear that just hit once.

[C]

Correct.

[A]

Never.

[B]

So.

[A]

But the carnage, the capitulation and fear of February 5th did. Like if later we looked back on it and it was the literal bottom, we'd be like, you know, we were there during it. It was pretty panicky. Like that is the sort of the. Usually the nature of the scariest wick.

[C]

Yeah.

[A]

Doesn't mean that. But again, like, it's not a strong enough V shaped recovery here either. Not like April of last year where we really roared back pretty fast.

[B]

Yeah.

[C]

And generally I just think you'll be rewarded for having patience in this market and the setups will be clear. I also think that there was a lot of liquidations, et cetera. But just here at Galaxy, every client met their margin call.

[B]

Right.

[C]

And it didn't feel like everyone's throwing in the towel on crypto. And that's normally how markets bottom, where everyone gives up hope and it doesn't feel like that. I think there's a lot of optimism and I think that optimism is totally fair because from the traditional finance world there's still a huge push to adopt crypto rails. Stablecoins are still prominent, there's still legislation being proposed. And so the adoption narrative of crypto hasn't really slowed down. I would say it might even in fact be accelerating. But that doesn't mean that the value proposition of crypto Rails has to be tied to price. And so I don't think folks have quite thrown in the towel on price.

[A]

And you kind of in your mind you're saying for you to confidently feel like we have bottomed, you wanted to see more capitulation on price and narrative than you did see, even though there was a lot of carnage that February 5th.

[C]

But again we're looking at, you know, gold trading around 5,000, you're looking at S&P at 6,900.

[A]

Like you know, isn't there a meme coin called that?

[C]

I don't know, something. I mean Dow around 50K.

[A]

Yeah.

[C]

And so like we haven't really seen like a meaningful tape yet where equities are in proper like trouble.

[A]

Right.

[C]

And so I'm just curious as to

[A]

see if we see that, if we see that, to see a lot of other stuff role.

[B]

Yeah.

[A]

Okay, before we break, let's talk about equities and macro a little bit here. What are the current drivers risks? I mean we talked a little bit about the widespread realization of AI even though it's been prophesied for a long time that has gripped some of the market. What else is there out there that's driving market?

[C]

I think there's generally a lot of rotation into like industrials and energy and like real world.

[A]

So they said that instead of software, now it's hardware, right?

[C]

Hardware, yeah. And so you've seen like you know, industrials trade really well. You've also seen like a big move in non US equities. Right. Like the close B has had a huge run. I think like this is the biggest divergence between S and P and MSCI

[A]

all world in the anti dollar trade. Right. The dollar de dollarization. De dollarization trade as they say. Right. And so also partially driving gold probably.

[C]

Yeah, absolutely. And so there's been a big push to invest outside of the US and you've seen that in the performance of every other major equity market relative to the US and especially relative to MAG7. And so I think those are themes that probably continue would be my guess. But again that relative outperformance can happen in a downward moving tape in general or an upward moving tape or a flat tape. Right.

[A]

That's a relative trade as opposed to. Absolutely.

[C]

Yeah, yeah. And so those are kind of the big thematics. Industrials moving away from the US and generally speaking like the trades that are working are like things like memory stuff that benefits from Capex spending. Not the companies doing the spending, but

[A]

stuff they buy with the spending.

[C]

Correct. And I don't know if that slows down. And the only way that trade slows down is if the Mag 7 decide to spend less on Capex.

[A]

They're still guiding higher on Capex.

[C]

These numbers are amount of money same.

[A]

And then I wanted to add too, I saw there's been, it's going around. It's not been I think specifically acknowledged by the US government but a lot of open source intel analysts are pointing out that the US is currently moving enormous amounts of military hardware into the Middle Eastern theater. If the US strikes Iran, like what would you expect the market impact to be?

[C]

I mean I think it's like generally with these types of things it's like a quick risk off move that gets bought.

[B]

Yeah.

[C]

So you know, I'm thinking like maybe S and P down like a percent and a half to 2.5%. That probably gets bought. Vix probably spikes to like high twenties would be my guess but it's really tough to know. Like okay, you do these tactical strikes but what's the follow on what's the contagion risk?

[A]

It's really interesting because the president who controls the military has been moving these assets. But they also seemed to announce that they reached the framework of an agreement in Geneva. Now that can make sense by the way. Well, right. Whether or not that holds and I don't know details on it, I don't

[C]

think they reached an agreement. Essentially the Iranians were like we'll come back to you in two weeks with like after Ramadan. Yeah, well Ramadan I think it was a month.

[A]

Yeah.

[C]

So but point being is, you know there are still negotiations and so there is hope for a de escalation but at the same time like the magnitude of the military movement is one that is, it's substantial. It's substantial.

[A]

Now that can obviously even in the like that that can be posturing during negotiations. In fact it's is posturing.

[C]

I think it went past the point of posture.

[A]

Yeah, it seems, I kind of agree. It looks like something is probably imminent here.

[C]

And there was one US official today that was quoted by I think Sky News or somebody like that. That said, we're not sending people to all these bases to just sit around.

[A]

Yeah, yeah, that's pretty.

[C]

And all the equipment. And so, you know, and the other thing is, you know, I've heard some theories that, you know, know, striking during Ramadan or in, like right before, around it.

[A]

Yeah.

[C]

Might be a little destabilizing in the broader Middle east of, like, our Middle east allies.

[A]

That's right.

[C]

But at the same time, the game theory in me says that if you're playing to win, why would you give your opponent a month to prepare?

[B]

Yeah.

[C]

And so I think, yeah, it seems

[A]

like if the decision is made to make a strike, they're not. They wouldn't consider Rama. I wouldn't think, like, if you're playing a win.

[D]

Yeah.

[A]

The other thing that was interesting, you know, I talked to a friend of mine who's an Iranian expat, and he was talking to his relatives that are still in Iran. You know, to the extent those communications have been possible and they are periodically. The Internet has been degraded at levels never seen before. They actually straight up cut it off for a week or two. But also they can't do that for too long. That messes up the regime's own Internet. But also, they pointed this out and you can see this if you go to the Iran Monitor. I think it's iranmonitor.com they track this. They're tracking the most casualties by regime forces against Iranians, more than all other prior uprisings combined since the 1979 revolution. And this had been one of Trump's sort of red lines that he had promulgated was like, stop killing the protesters. Terrible stories coming out from there. So you could imagine the President wanting to back up his prior statement and striking, even in the case of a, you know, like a token strike. I'd hate to say that, you know, dropping.

[C]

No, I mean, I think they're going for the jugular here. Right. Like full regime change.

[A]

Like, surely it must be on the table. I just, you know, Iran is. No, I mean, if Geo strategically, like, very well ensconced.

[C]

It is, but it's like, you know, if you want to take out their nuclear capabilities and put in a regime.

[A]

Didn't we already do that? Didn't we? Maybe I have seen that show Tehran on Apple tv, which is quite good. Maybe I'll check it out. It's a very good show. But, yeah, they sponsored. Yeah, thank you, Apple, for the sponsor. Just for full clarity, I am not sponsored by Apple or anyone else except for Galaxy but there's a part with underground nuclear facilities, and the way they describe it in the show is like, they're very, very far underground.

[C]

No, I mean, the chatter is there's the potential of using tactical nukes instead of the bunker bus, because the tactical

[A]

nukes could actually reach it or something.

[C]

Yeah.

[A]

Well, interesting to hear your take on the last thing on that. Actually, the oil's not a big concern at this point.

[C]

So much Iranian oil, 5% already today.

[A]

So is that, like, speculate? I mean, but how much could be. How much supply is Iran actually getting out in the market? Not a lot. Right. With sanctions and stuff.

[C]

I mean, I think there's still buyers of Iranian oil, but the questions are really around oil are kind of around, like straight or form moves.

[A]

Right.

[C]

Like, are they going to be able to close that off? The answer is probably not.

[A]

Yeah, but I mean, like, if they close. But even if we're engaged in an actual military conflict with Iran, presumably the Strait is not safe for cargo, even if neither side's formally trying to close it. Like, what are you going to do? Like, two guys shooting at each other and you're just like, with your, like, food cart coming by, like, don't mind me, I'm just going to deliver my groceries. Right. Like, seems unlikely. That's a fair.

[B]

Yeah.

[A]

So it's not Iranian supply as much as just disruption to the distribution that you'd be watching for.

[C]

Yeah.

[B]

Yeah.

[A]

All right. Well, my friend, this is great. Bimmet Abi from Galaxy Trading. Thank you so much.

[C]

Thanks for having me.

[A]

Let's go now to our friend Omid Malaykan, professor at Columbia Business School. Omid, welcome back to Galaxy Brains.

[B]

Great to be back.

[A]

Alex, is this your third or fourth appearance?

[B]

Third, I think.

[A]

Third, yeah. The first one was SVB collapse, which I think was my favorite rap that I did in 23.

[B]

Well, it was certainly my favorite rap because it was about me.

[A]

Yeah.

[B]

And I still play it for my students sometimes when I need to personalize.

[A]

I said the weekly podcast from Galaxy Research, the Chancellor's on the brink of backstopping reserves, which was the bailout.

[B]

Yeah.

[A]

What do they call that? Bailout? It was the btfo or it was

[B]

the regional btfp, which is just one letter removed from btfd, which is probably what you should do with all sorts of assets. Every time they say that they're going to paper over market problem. Yeah.

[A]

They stepped in and the bank's fragility was. The banking systems fragility was put to test and shown. I think one of the big takeaways that a lot of people had was the speed of deposit flight then. Right. And it was not because of crypto in any way, but because of fintech, because of the apps. You could just go into your SVB thing and instantly send the money out

[B]

or go to Zelle or whatever and social media. And this is very relevant today because there has always been a assumption in. In sort of banking academic circles that deposits are sticky, that people don't move their deposits from banks even when you could argue they should, or even though when you could go to another similar bank and it pays more interest. But the regional banking runs, which I still believe started with operation choke point 2.0 and the way they suppress the crypto banks. But nevertheless, to your point, clearly deposits were a lot less sticky than everybody had assumed. And then the other thing that was revealing to me is that that was what, 2023. So we're literally exactly 15 years after the great financial crisis, and we had two of the largest banks in America, SVB and then also First Republic. There was also signature fail, which sort of proved that eliminating bank runs and banking crisis to me is an unsolvable problem. And instead of constantly being like, well, well, it happened again, let's have even tighter regulations and supervision to prevent it. Maybe we should move to a less levered banking system.

[A]

Interesting. Yeah. And they were. They tried to blame crypto for SVB simply because Circle had deposits there, but of course.

[B]

Which they didn't get out.

[A]

Right. It wasn't them that sucked out the money. Yeah.

[B]

Yeah. I always find it kind of a ridiculous argument when there's any attempt to shame people who run from a troubled bank.

[A]

Right.

[B]

Like depositors don't owe banks risking their life savings. Banks owe depositors soundness and stability.

[A]

Right.

[B]

And when you achieve that, then no one will ever run, so you won't have a problem.

[A]

Yeah. I mean, it's like they think that they're all people who make that argument think they're George Bailey saying, like, you know, the money's not here in the bank, it's in Omid's house and Alex's Ferragamo sneakers.

[B]

Right. Which ironically, especially for the large banks, it increasingly is not. That's right. The money is at the Fed and the money is in treasury and Agency.

[A]

And we're going to get to this too, because the question of what deposits are actually used for, if anything, is an important part of the bank's argument in the Clarity act about restricting yield and deposit flight. But a few more, too on the regional banking crisis because that really was an exciting and dramatic time. Bitcoin performed very well around that, I think. SVP in particular, I think it went from like 20 to 30k, if I recall, which is a 50% increase at the time. But they did also try to blame crypto broadly. And you mentioned Signature and Silvergate, but it was so disingenuous. Silvergate literally wound down. They didn't lose a single dollar, which

[B]

is remarkable and almost never happen.

[A]

Unheard of.

[B]

Banks don't voluntarily shut down. Banks either collapse or are taken over. Taken over by the government. Yeah.

[A]

And they. And they were bullied out of existence.

[B]

Yes.

[A]

By operation choke point 2.0 stuff. And then Signature was effectively decapitated.

[B]

Right.

[A]

I mean. I mean, Barney Frank, the irony. The irony that like one of the named sponsors of the Seminole banking reform, Bill Dodd Frank was a board member at Signature bank and he said they

[B]

were solvent and he claimed political motivation, which ultimately we might never know. But I did think it was telling that the. Take the FDIC takeover of Signature, which was a New York state bank, so it began with the New York state regulator, was announced in the same press release where the Fed announced the BTFP for every other. So it's always telling when they say, well, we're gonna save all the other banks, but this one has to die. Which has since led to other kinds of speculation as to whether they sort of needed Signature to fail. But Chokepoint did play a part in it, I think for two reasons. First of all, it's always been understood that industry concentration in banking is a very bad idea because of the fragility of levered or fractional reserve banking. You want a diverse set of depositors. So in that regard, it was not good that the entire crypto industry was in one of two banks. However, why was that the case? That was the case because all the other banks, we now know were basically ordered by the regulators not to bank crypto. I'm sure. Well, I know as a fact, because I happen to be working at one at the time, circle would have preferred to keep billions of dollars of its reserves at the G sibs, AKA too big to fail banks. But they weren't welcome there. And regulatory pressure had something to do with this. And then the other thing is, I still think it's remarkable. In early 2023, the major federal banking regulators put out a joint memo explaining how they thought crypto deposits were risky.

[A]

Yeah.

[B]

And to me, this is one of the most irresponsible things bank regulators in this country have Ever done. Because there's a general rule you publicly never, ever talk about deposits being risky. Right. There's a reason why in the middle of every banking crisis, OA 2023, you have all these government officials and regulators say something like, our banking system is safe and sound.

[A]

Yeah.

[B]

We know they're kind of lying, but we also understand why, because can you imagine if they go to the public and say, well, actually, all the banks might fail.

[A]

They would cause it.

[B]

They would cause it. But in this case, I thought it was remarkable. Here you have regulators saying that a certain industry with concentrated deposit in certain banks is dangerous.

[A]

Yeah.

[B]

And then, sure enough, those are the banks that blow up six months later.

[A]

That's right. And there were politicians beating that drum as well. Sherrod Brown, Elizabeth Warren.

[B]

I forgot about that.

[A]

On the floor of the Senate, also like this, almost the same day. So there was that. I think it was January 3rd, which was auspicious from a Bitcoin standpoint. 2023 was that first joint notice from OCC, FDIC and the Fed. And then on January 27th, they had another joint one, which. And that was the same day they also denied Custodia's master account.

[B]

Wow.

[A]

Brian Deese, who worked at the White House National Economic Council, the nec, I believe, published a blog post at the White House the same day, ostensibly about crypto innovation, but was all about how risky it is. The joint statement was basically extending that guidance to capture state banks from January 3rd. And then the first time the Senate opened, which I think was like February 1st or something, because that was on a Thursday. Sherrod Brown and I think Dick Durbin gave a very long floor speech about how crypto's terrible, attacking Abby Johnson, talking about Silver Gate and Signature. And it's hard to think that's not coordinated.

[B]

Yeah. Either by some of them or all of them.

[A]

Yeah. I mean, I had fingered this guy, Bharat Ramamurti, who was, I think, the head of the nec, who we might

[B]

think might have been behind.

[A]

Yeah.

[B]

Choke point.

[A]

Yeah, I think. And in fact, it had been confirmed by other reporting and like, by reporters that he was the one that called Maxine Waters and told her to kill the Pat McHenry. Maxine Waters, stablecoin bill at the time, in, like, the summer of 22, I

[B]

think, which happened sort of like in the final hours. Right.

[A]

It looked like they were close.

[B]

Yeah.

[A]

And so, anyway, we've come a long way since Chopoint 2.0. One of the other things that was so damaging to crypto by the collapse of Silvergate and SVB was that Silvergate ran the silvergate exchange network, which was a real time dollar payment system internal to the bank. So if you were a client and I was a client, I could send you dollars like an internal Zelle or Venmo even when the bank was closed. And that was how crypto was moving a lot of money around to trade. These 24 7, 365 markets outside of bank hours and signature had signet which was a competitor to send. And these were the main two like dollar settlement networks that crypto was using.

[B]

Yes.

[A]

Both of them killed by the takedown. And for a while there, it wasn't just that you couldn't get a bank account easily like your own business bank account, if your business was crypto. It was also that there was almost no way to like get dollars to and from an exchange in size because we'd all been using those systems, which

[B]

might have forced a lot of the crypto industry to adopt stablecoins even faster than they would have.

[A]

That's right.

[B]

Which is a fascinating reflection of what I would call sort of the whack a mole nature of good technology.

[A]

Yeah.

[B]

You can't kill it. If it's a good idea and it solves important problems, people will figure out how to use it.

[A]

That's right. It's kind of like it's like cigarettes in jail, you know, like whatever the best money is is going to emerge to be used as money. Right. And you can't always control that or engineer it. It's very emergent. So stablecoins is a great pivot because it has. Stablecoins did ultimately emerge, and they certainly have now. No one really quite needs Sen or signet the way they did then, partly because the safety of the major stablecoins is really widely believed, at least by crypto market participants. So we're all comfortable settling in stables which also of course move on permissionless rails360 247 it is the successor. But how do you view then that they'd already been adopted, but then we got Genius act passed into law. How do you view that as a milestone in the stablecoin story? The passage of Genius.

[B]

Genius is a remarkable bill because you could argue it is the most transformative piece of financial legislation in the US in decades. It's certainly the biggest since Dodd Frank. But Dodd Frank was a restrictive legislation. The point of Dodd Frank was to curtail what financial institutions could do. Genius drastically expands it and it also finally makes available something that me, I would guess most ordinary people, if you actually explain to them the dynamics and certain respected academics have wanted forever, which was a narrow banking option. This idea that we have to force people to save money or make payments via highly, highly levered financial institutions that are run prone just strikes me as a bad idea. I think I would have said that if I was around 50 years ago, 75 years ago. But we now have that much time and history of increasingly catastrophic financial crisis which always start and end with the fragility of highly levered financial institutions. And look, we work in crypto, we know the dangers of leverage. Almost nothing good ever comes of it.

[A]

That's right.

[B]

So this idea that you couldn't give savers a safer option. The Fed would refuse to give narrow banks charters and access to their payment infrastructure. But genius changed all that, right?

[A]

It does, it moves or creates not only a fully collateralized payment option, it is on permissionless open rails as well. So it's actually. You're right, it's revolutionary from a banking and payment standpoint.

[B]

Yeah. And going back to what you said earlier about Sen and Signet, I always thought it was funny at the time that the exception in banking was being able to make 247 payments to other customers of the same bank.

[A]

The same bank.

[B]

Like databases don't turn off at night, right? Like there's no. They don't get tired, you don't need to like oil them overnight. It's just the archaic architecture of banking. Or it's like, oh well, even if you're sending money to another customer, we can't process that in real time because it's a weekend.

[A]

I always laugh about like when the major securities exchanges like NYSE said that they're going to do build a token as a tokenized securities exchange and it will allow 247 trading. And I was like, but couldn't you just leave your normal servers on? Like, I don't know, I'm not quite sure. I mean I. We could get into settlement and stuff and now it is better with token. But like surely you could just not turn off the server at 3:59:59 second.

[B]

Like you could just running almost every single benefit that Tradfi ascribes to crypto is wrong. Meaning it's not a crypto thing. Right? Like you don't need crypto to do even smart contracts. Attaching a line of code to how a transaction happens is not hard. We already have databases. You can have software that results in change entries in databases. That's what all of Tradfi is, just ledgers and databases. It's just a question of the trust assumptions like do you trust who's running the database? Can they turn it on and off at will? Is it open or censorship resistant and who gets to run it? Which ironically, almost all of these private permission tokenization efforts, they have all the same pitfalls and trust assumptions, right. So they don't achieve anything.

[A]

I think that's a great point. We're going to get into this too, because what is the actual value proposition? You have a great book re Architecting Trust about blockchains and how and that book's really interesting because it's not primarily about the technology, it involves the technology, but it's really a a history of trust and what it means to have a system like a public permissionless blockchain or defi that totally re architects it Is that the core innovation, it's not sending money fast. I mean, if Sen and Signet showed they could send money fast, yes, the

[B]

core innovation is the changing nature of the trust assumptions. I've actually gotten to the point now where I will no longer call a private network a blockchain because as part of my own learning I've come to realize that all of the cryptographic features that an actual permissionless system like Bitcoin, Ethereum, Solana, et cetera has are almost irrelevant. If you permission the validator set hash functions are useless, the database is not immutable. Public key cryptography as a method of authentication is useless because you could just censor who the users are. So it doesn't matter. The fact that you have a private key is not what gives you true property rights over your Bitcoin. What gives you property rights over your Bitcoin is that you have a private key that nobody could prevent you from signing a transaction and having that transaction be approved. Banks could give us private keys, but then they could also debank us, or you can send them assigned requests for a payment and they could just say no. So it's such an interesting time whether we're talking about stablecoins, tokenization, real world assets, et cetera, where we've now crossed past the point where people in power question the appeal. And the debate now is the how. We're not debating whether we're going to have stablecoins, we're debating what kind of stable coins will they pay interest, how will they be regulated? We're not debating whether we're going to have tokenization, but amazingly enough we're debating whether the New York Stock Exchange and the DTCC and all the brokers, they do business with today if they deploy a fake blockchain, whether that's tokenization. So progress but still a long way to go.

[A]

Yeah, I agreed. Let's talk about stablecoins more. Let's talk about the Genius act and this current debate that's happening on the Clarity Act. The Genius act very clearly prohibited issuers of stablecoins that are licensed under the act from passing on rewards to token holders of their stablecoin. It notably said nothing about third party intermediaries doing so. And since Genius passed, Coinbase and others have continued to pay rewards or pass on rewards, whether the. You know, I'm not an expert in Coinbase's business, but my understanding is some of the rewards they'll pay to a USDC depositor there are derived from some revenue share with Circle, right?

[B]

Well, certainly not from them lending it out.

[A]

That's right.

[B]

Which is an important distinction to make

[A]

because the rewards otherwise that it is so interesting because to get to your point, if I deposit in a savings account at a traditional bank, let's say they do pay me some yield. Reality is most don't pay much, but let's say they were. They're deriving that from what the lending and other financial activities of the banking activity with my deposit. Whereas a collateralized stablecoin sharing rewards is passing on treasury yield from the underlying collateral, which is fully collateralized. So inherently safer. And this is your point about it being a narrow banking option for payments,

[B]

it's safer and it pays more interest. So it's superior for the end user.

[A]

That's right.

[B]

It's not superior for an intermediary that hopes to get cheap capital to deploy to make money.

[A]

We're going to get to that too, because you had a great article today on X about that, about whether this cheap capital deposits at banks, for example, really does create good credit for the economy or whether they're just doing something else with it or keeping it for themselves. But let's talk about the banks and clarity. So now we have this. The second major legislative effort in crypto is the market structure bill. So we legalized stablecoins and created a framework with Genius for certain types of really high quality safe stablecoins in the US and then the other big thing the industry wanted was to not be railroaded by a future SEC chair like a Gary Gensler. And so we wanted cloud clarity on which market regulator regulates which type of asset and intermediary under which circumstances. But by the way, I desire that there be a market regulator to do so.

[B]

Indeed.

[A]

And that that role be codified in federal law so that it can't be rolled back easily by some intransigent chair of a market regulator or president.

[B]

Which by the way, is the kind of thing that I would say if you're for or against crypto, ultimately you want Congress to create rules that address it, not this political process of the political appointees at regulatory agencies making the decisions.

[A]

That's right. And with Lauper Bright to the Supreme Court ruling, I think, again, not a lawyer, although our audience knows I sometimes pretend to be one.

[B]

I think you make a very good lawyer.

[A]

Thank you. That Supreme Court ruling also restricts, like independent agencies ability to use interpretive guidance versus, you know, beyond what they are directly authorized to do in the statute. So I don't think any of us want to wait for Supreme Court cases to play out as a way to protect us from, you know, a market regulator who reaches beyond their authority especially to hurt us. So we want this in federal law. Now, all that stuff's great. How to handle defi like, you know, which types of things are decentralized enough to not be regulated versus a business like Galaxy. If it's trading digital commodities, should it have a digital commodities license? Right. Stuff like that all makes a lot of sense. And it seemed like we got to a pretty good compromise on almost all of these issues. But at the last minute, Coinbase and mostly the stablecoin issuers, I think they raised that the emerging compromise on this yield question wasn't palatable to them. And it's true, it's not palatable to them. Right. Because the banks, literally the banks, I don't know, this monolithic group. And they are. It's like the Bank Policy Institute and the ICBA and the American Bankers association all decided they were very mad and wanted to effectively retrade the stablecoin rule about yield from genius in clarity. And they've been making a few arguments about why policy arguments. We know that they have their own arguments. Right. They really just don't want to give up their control over the payments systems.

[B]

Probably they don't want competition.

[A]

Right.

[B]

That's what it comes down to. Right.

[A]

But the arguments they're making, I think it's two primary arguments, maybe three if we throw in a third one, one is that there will be stable coins will result in all this deposit flight out of the banking system. Or in fact, they've even said that out of the banking system, which is hilarious because that's not actually possible. That's not how dollars work. But. But at least so Then they say, as sort of a corollary, the second point, well, maybe not out of the whole system, but out of community banks, which is a hilarious way to. It's like a backhanded compliment to the community banks. They're saying, look, you're so important, we got to protect you. But by the way, you suck so bad that stablecoins will kill your business if they're allowed to pay even like 1% in yield.

[B]

Right.

[A]

And then I would say the third argument that they've been making is that like it'll generally destabilize the financial system if non bank payment stablecoin issuers are allowed to pass interest to depositors.

[B]

Right.

[A]

Do you want, let's talk about these arguments. So the deposit flight you've written about, you just wrote again sort of about it. Is this a genuine threat? Because there was this like what are the banks? What is their argument? And like, is it real?

[B]

So the truth is nobody knows exactly how stablecoins are going to impact bank deposits. I actually think at this moment in time, regardless of what happens with this legislation, there's a 50, 50 chance that they actually just increase bank bank deposits. When it comes to private forms of money, which both a stablecoin and a bank account are, it's really, really, really hard to take money out of the system. Just in academic monetary terms. There's inside money, which is money that's issued by a private entity, and outside money that's either money issued by the government like the Fed or gold and Bitcoin. It's really hard to shift the balance of inside money. And we have data points because we went through the same exact debate in the ninet money market funds. Fast forward to today. $5 trillion in money market fund, more deposits in banks than ever. And when you throw in the fact that for now and probably for the foreseeable future, most of the stablecoin demand is coming from offshore from people who are not substituting from dollar bank accounts but substituting from other currencies or other assets. It's quite possible that bank deposits just go up. But let's steel man this, right? Let's say that there is a future state in which some stablecoin adoption domestically leads to less deposited banks. What does this mean? Because the arguments that all of those trade groups have been making is one, you just get less credit creation, two, the credit creation that you do get is more expensive and three, the more vulnerable parts of our economy, whether it's regional banks or for example small businesses that require small business loans, Those are the people who stand to lose. This is something that big banks will say, well we'll be fine, but it's really like the first bank of Nebraska that I'm worried about or whoever, we get a loan from them. Yeah. So let's go through all of this. First of all, we need to acknowledge that banks in the US create a minority of credit. They only account for approximately 20% of loans to the private sector. We're blessed in that we have very sophisticated capital markets, the bond market, and we have large and sophisticated non bank lenders like insurance companies, private credit, et cetera. And there's a whole argument that actually that's safer because they don't face runs in the way that banks do. So one, banks create a minority of credit. They would still argue that, yeah, sure. But because we have access to deposits, we provide cheaper credit. So the 20% that we contribute to cheap deposits equates to cheap loans. And if we're forced to pay more to compete with a yield bearing stablecoin, then we won't be able to make cheap loans anymore. Right. But of course today there is virtually zero domestic stablecoin adoption.

[A]

Right, right.

[B]

And what there is doesn't actually pay yield anyway. So if their math is correct, we should be living in an era of abundant and cheap bank credit. So I actually went and looked at the numbers Deposits we know are cheap. The FDIC data shows the average demand deposit in the US which is a checking account or savings account pays just a little bit more than 1% which is very low because the fed funds rate is 3.6% t bills pay that, money market funds pay that. Banks are paying a fraction of that for whatever reason. So they have access to cheap credit. Does that translate to. Sorry, they have access to cheap deposits, so does that translate? Well, credit card interest rates are on average over 20%.

[A]

Right. It's like an all time high. Right.

[B]

Near an all time high. The rate that banks charge for credit cards over the prime rate, which is supposed to take into account the cyclical variables, has been steadily climbing for a decade now. And only banks could issue credit cards. So the same banks that borrow money from Jane and John Doe at 1% will turn around and lend it back to them via a credit card at 20%. And credit cards are the most widely available type of bank issue credit in America. Right. Most people can get a credit card even if they can't get a mortgage or a car loan. So it doesn't translate there. If you look at auto loans, same exact phenomenon compared to the average over the last 20, 25 years. Auto loans are very expensive. They're a little cheaper than they were a couple of years ago. All rates spiked post Covid. But nevertheless, the last time auto loans were this expensive, banks paid depositors double to triple what they do today. Wow. Right. So once again, same thing. And then this is also true for mortgages. Banks don't issue most mortgages. Right. They're securitized. But the mortgage market is so massive that banks hold several trillion dollars in mortgage debt on their balance sheet. And there too, right. 30 year mortgage as of this week is 6%. If you go all the way back to before the financial crisis, the last time mortgages cost this much, deposit rates were significantly higher. And there is another way we could look at this. Because if cheap deposits don't translate to cheap credit, then they translate to bank profit. Right. It's just their cost. Right. So we can look at banks net interest income, a widely reported, easily calculated number. And According to the FDIC and the Fed for last year, US banks made something like $750 billion in net interest income. And to put that number in perspective, I believe that's more than the Mag 7 made in net income combined. So this is a wildly profitable activity, which would not be the case if what banks were doing with the cheap deposits that they have exclusive access to was passing it on in terms of cheap credit.

[A]

That's right.

[B]

And look good for them. I'm all for profit, but it just shows how disingenuous that particular argument is. Because it turns out when banks have access to cheap deposits, they just make more money.

[A]

Yeah, they're not actually creating all this credit they claim will go away if the deposits aren't cheap right now.

[B]

Right. Nor are they passing on the savings to consumers. Now people will push back to this argument and say, well hold on a second. Banks take risk and they need to be compensated for that risk. That's why there's a net interest income in the first place. And it's true to the extent that credit underwriting is risky, people default on credit cards and car loans and mortgages, then you do need to compensate the lender, otherwise they just won't bother giving that loan in the first place.

[A]

That's right.

[B]

But this is sort of a misunderstanding of how banking works today in America, Particularly the very large money center banks. They're not underwriting 5,000 $10,000 loans. Small business. What they often are doing is taking the money and they are either parking it in Treasuries or agency Debt like mortgage backed securities or parking it at the Fed. And combined right now the largest banks have about I believe $5 trillion or all banks have 5, $6 trillion, which is something like a third of the M2 money supply in the U.S. so a substantial portion of the balance sheet of banks on the lending side is going into things where there's zero underwriting. If you buy T bills, you buy T bills and there's very little risk. Right. Like if you park your money at the Fed and for absurd monetary policy reasons I won't get into the Fed will pay banks 3.6% to take money out of circulation.

[A]

That's right.

[B]

To not lend that money out.

[A]

Right.

[B]

Leave it at the Fed, which does nothing as far as like economic growth is concerned. Right.

[A]

It's not being invested.

[B]

No, but it's profitable. Right. So the simplest thing that when you give your money to a bank in a checking account and they pay you zero interest for checking accounts, the simplest thing they could do with that money is just deposited at the Fed. And the real irony, the irony of this calculation is whether it's T bills or interest on reserve balances at the Fed, where does that money come from? Comes from taxpayers.

[A]

That's right.

[B]

So banks pay very little interest to taxpayers when they open accounts, but taxpayers pay a significantly higher interest to the banks.

[A]

Yeah, very, very bizarre. And so if I summarize that the argument that there'll be deposit flight you've I think I'd say eviscerated across a couple vectors. One, they're not the biggest source of lending at all. Two, they're not actually doing the cheap lending really mostly that they claim they won't be able to do if they are competed against. And that's the core of it. Right. I mean they aren't. And three, you pointed out that by the way, if they were doing that, they would already have faced this competition. And by the fact that they're just clipping it as NIM rather than actually giving out the credit or seeing deposit flight, which they haven't, they didn't even see it from the money market funds is that by the way people take money market fund balances or AUMs are also at all time highs.

[B]

Probably there's a lot of money in the system.

[A]

But when you buy, when a fund or a stablecoin issuer buys the Treasuries that then go into the money market fund, don't they buy them and then give the cash they use to buy

[B]

them to a bank to somebody else who it's going to their bank account.

[A]

It's usually a bank.

[B]

Right.

[A]

Because my understanding is for a dollar to exist the only place the dollar can be held is in your pocket like as physical cash or in a Safe deposit box etc. At the Fed or in a Fed master account or tied to one or at a bank that has access to one or at the treasury general account basically at the US Treasury. Like there is no other place where. That's why like banks that don't have master accounts have a correspondent bank that where they actually keep their cash at that does have a master account. So like there wouldn't be deposit flight out of the banking system because every stablecoin issuer when they go to buy the treasury to put, you know when I come to circle and I say I want USDC and I send them cash, they take the cash and buy a treasury with it.

[B]

Yeah.

[A]

And the person from whom they bought the treasury gets the cash and puts it in a bank account. Right. So there is no deposit flight from like X the system. That's not a thing. Right.

[B]

Well a first I would say that a genius chartered payments stablecoin institution is a bank. They are a part of the system. Well.

[A]

And they're now under genius. They would be. Right. It's like an OCC license or I think a you know, state pathway to be a state bank. Effectively.

[B]

Yeah. It's just this system. Yeah. But let's let me steel man myself. I do think the one thing we don't have today that we never had is we can't make payments with a money market fund. Right. Like I use money market funds. If I want to pay my rent I have to cash out a little bit of that security, wait a day or three if there's a weekend and then transfer the money to my bank account and pay my landlord.

[A]

That's right.

[B]

There is a future state in which with stablecoins if they become widely adopted enough and this is me arguing against myself now.

[A]

Yes.

[B]

The circular nature of you I will just have a stablecoin that I hold to earn, yield and save in dollars and then when it comes time to pay pay rent I will just send it to my landlord's wallet. Yeah. And my landlord will just sit on it until my landlord needs to buy groceries or pay taxes and they'll just send it to the municipality who'll sit on it until they need to pay off their debt. That flow might reduce deposits in what today we understand as the banking system. This is very, very hypothetical would take

[A]

decades at this Level the cash that was used to create the stable is still sitting at a bank somewhere. Right.

[B]

Or in Truman T bills, you and he.

[A]

That's right. But. Well, and even then in the. It is in T bills. But again like to buy the T bills, the issuer buys them with cash. Yes. I guess theoretically they could buy them directly from the treasury, but my understanding is they mostly don't.

[B]

Right.

[A]

They buy them from the big banks, basically.

[B]

Oh yeah. Well, you can't buy direct. Only the primary dealers are allowed to be Treasury.

[A]

Yeah. Like if you were. So they buy them from the primary dealers and so if anything, the deposit in your scenario is going to still end up at a point primary dealer at the worst case scenario, which is a big bank.

[B]

Right.

[A]

It's not going to. So is the community bank thing real though then? Like would they just. Because like in the scenario I'm describing, the deposit does eventually flow, but most likely to like a G sib. It's most likely not going to the first bank of Nebraska, by the way. If that's a real bank, we apologize. Purely hypothetical. We don't know anything about it, but seems plausible that it could be called that. Right. Like it's most likely going back to the G SIP or the primary dealer's bank and not to like some random small regional bank.

[B]

Yes.

[A]

And then those people, if you're in Spokane or some random place.

[B]

Peoria. Peoria. That's usually the place where spoiled.

[A]

You know, maybe you as a local person pay your rent from your stablecoin wallet to their stablecoin wallet. And now you don't need the first bank of Main street for payments.

[B]

So let's talk about community and regional banks. For those who don't know, the US is exceptional for having thousands and thousands of small banks. And the cost and benefit of this gets debated. Small banks are more fragile. Small banks have a harder time keeping up with infrastructure and technology upgrades. However, small banks are more innovative. Small banks are far more likely to take a chance on a young person or up and coming small business owner who wants to borrow 20 grand than bank of America. Like bank of America can't be bothered. It doesn't move the needle for them. So this is an interesting debate. And then it falls into also the general debate about federalism. In the US Community banks are regulated at the state level. State regulators have always been more innovative. Right. Shout out nydfs. Despite my annoyances with the bit license, they were the first major American regulator to say yes, stablecoins are fine. We just need rules about the reserves and bankruptcy remoteness and great go ahead and issue them. So that's the lay of the land. And what we keep hearing now suspiciously from the big banks is that stablecoins will really harm community banks. Right. So let's look at some stats. First of all, community banks already pay more interest than the too big to fail banks. Why? Because they're not too big to fail. They don't get that taxpayer subsidy and they are riskier. So if stablecoins pay yield, community banks are already in a better position to compete with them than a Bank of America or Citibank account. Second, the demographic of small bank customers skews older. Third, a lot of times the reason why somebody in a more rural part of America has an account with a small bank is because of a personal connection. It could be a family member or friend who works there.

[A]

All three of those, the higher yield, the skewing older demographic and their personal relationship, they make the deposit stickier.

[B]

Yeah.

[A]

As opposed to the faceless G sib.

[B]

Yes. So when I think of a farmer in Iowa that has an account with a local ag bank where the assistant manager is his brother in law and this is also the bank that gave him his first mortgage for his farm. And then do I think that's the person who's going to sign up for a digital wallet to switch to some weird thing called a stablecoin because it pays more interest?

[A]

Again we're talking about maybe a percent or two more, not even that much.

[B]

Right. Certainly has lower gap than if you're a large or SME middle market business in an urban area that today banks with a G sib because you have to rely on them for payments and other services and they pay you nothing. So I think ultimately I think the payments use case for stablecoins are far more attractive than the yield use case. If all you want to do is park your money somewhere, you have a money market fund. Right. Or there are many banks that like the Goldman Sachs Marcus account pays like 3 point something percent. If you just want to park your money there for the next two years, that's already taking money out of the deposits that create credit.

[A]

Right.

[B]

So I think, and I think you came up with this line that the big banks are using the community banks as human shields. And the irony of that is that all of the largest banks in America are currently executing a expansion plan to take more deposits. Or JP Morgan, bank of America they've explicitly stated we want to grow our deposit base. This morning in the FT there's an article of all the new branches that the Chases and bov's of the world are opening in new markets. So let me ask you, Alex, who does Jamie Dimon think he's taking deposits from when he's doing this? Yeah. So the real irony is that it's actually the big banks that are trying to kill the community banks by taking their deposits, which we also saw during post svp.

[A]

That's right.

[B]

Massive deposit flight, which has led to. There's a alternative proposal out there in Congress that has nothing to do with stablecoins, as far as I know, which is to expand significantly, expand the FDIC insurance limit at community banks to prevent the kind of deposit flight that happened post svb. And the idea is we should make the big banks pay for it because ultimately they get a taxpayer subsidy that small banks don't.

[A]

Yeah.

[B]

Which I think is a very reasonable argument, which of course, the bank lobby, the big bank lobby is vehemently against. They're also trying to kill credit unions by getting rid of their non. Well, making them pay taxes even though they're nonprofits. I'm not a big fan of the lobbying position of the largest banks, as you can tell, because I do think, and I don't use this word common, they operate from a place of privilege. And what they're doing in the stablecoin debate is really abusing that position.

[A]

That's right. I think that's right. And it is, I think, very clearly more about protecting their profits and preventing competition. The point you're making about the big banks expanding to Main street at an extremely expanding rate is so ironic and disingenuous. Right. They say stablecoins will kill community banks. That's our job.

[B]

The. The CEO of PNC bank, which is like a tier below the G6.

[A]

Yeah.

[B]

But it's.

[A]

It's a big one.

[B]

It's a big one. Super regional bank was in another podcast not that long ago saying that there's apparently some percentage number that's understood in banking, that if you get branch concentration, you didn't get deposits. Yeah. For some. So.

[A]

Well, like if you're one of two in a zip code or something like that.

[B]

Some number. Yeah. And I'm like, well, yeah, again, if. Okay, he knows it. Jamie Dimon knows it. Brian Moynihan of Bank of America. They all know it. It's a banking industry thing. Well, who do they think? Where are they going? Where they're easily going to become a significant percentage of branches. Right. Again, it's not a. Wells Fargo is a West coast bank. It's not them taking market share in New York City by opening more branches than Chase. It's them going in other parts of America where it's really the community banks and the regional banks that have the bulk of the deposits and opening a bunch of branches because they can afford to.

[A]

Yeah, they can operate at a loss for a while just to open them and capture share that too. Plant their flag.

[B]

Yeah, yeah.

[A]

It's really something, though.

[B]

It's something.

[A]

But meanwhile, if we let a person while they're holding a stablecoin capture just a couple percent.

[B]

God forbid.

[A]

God forbid. And it's apocalyptic.

[B]

And the point you made when we were talking before we started recording is that ultimately, whatever happens with Genius and Clarity will apply to US Issued stablecoins that are held by Americans. They do not apply to foreign issued stablecoins held by foreigners, even if they're dollars. So imagine a scenario under which Americans hold a dollar stablecoin, they get no interest. Foreigners hold a dollar stablecoin, they Get 2%, 3%. Meanwhile, where does the yield come from? It comes from treasury bonds. Who pays the interest on treasury bonds? Americans. So Wall street is now arguing for a position where a citizen in Hong Kong who holds a dollar can get the interest from middle class Americans, but middle class Americans can't get the same interest. This is a very unpatriotic position for them to take.

[A]

It is. It's truly shocking. I don't know how close you've been following. Do you think we get a compromise here? Because right now I think the state of this clarity negotiation, it's very clear from the meetings they've had twice now at the White House, literally between the banks and crypto representatives and trades, that it's this yield issue. And the banks put out a principle. They finally did some homework. And the White House, Patrick Witt. Shout out to Patrick Witt for, you know, pushing this ball forward diligently and working hard on this. After the first one, I guess it was sort of a meet and greet. And he said, listen, literally come back with actual concrete substance. And of course, they didn't come back with new language for the bill, but they came back with a one page set of principles which said, ban all stablecoin yield.

[B]

Not just that.

[A]

And that's clearly unpalatable to the crypto position.

[B]

Not just to the crypto position. Ordinarily, I would have guessed my gut would have been, I don't know nearly as much as you do about how things work in Washington, but my gut would have been that because the Administration wants a bill and the industry wants a bill and you say, well we get of the eight things we would love to have, we're getting six and that's pretty good. The stablecoin yield thing would just get sort of thrown under the bus. And to be clear, I don't have a dog in the fight. I don't have any financial interest in any of this. I don't work for anybody. It's just like from the principles, like when people make bad faith arguments using demonstrably wrong data, it upsets me. But the funny thing about that principles document that the banks put out, it is so unbelievably reactionary that if that goes into the law it's going to cause a lot of other problems because one of the things that they say is no one will ever be able to pay rewards for using a stablecoin in a transaction. So does that mean if Delta Airlines wants to give me airline miles and I pay in a stablecoin it's illegal. Like you open up a whole can of worms that basically negates the reward system of credit cards. So they're being, I don't know if they're, they're, this is their like place of negotiation or they're just being very arrogant about it. Yeah. So I don't know what will happen. But my fear is that if the trad fire world gets what it wants on this issue, it will come for things like defi and permissionless systems next.

[A]

I see. That's interesting because the state of the negotiation is that it seems like the other issues there were compromises in the Senate banking ans amendment and the nature of a subsidy which is their latest draft that was from early mid January. There were compromises in there on defi front ends, what is decentralized enough, et cetera. Dev protections for open source developers were in there explicitly clarifying that money transmission laws don't apply to non custodial services is in there. Some great stuff. And it seemed like those were settled. But even in this debate, and this isn't quite what you're saying I think, but I'll get to your point about it. But even in the debate it's not actually clear if they are settled because the whole debate has now been diverted on yield. Let's say tomorrow we get a big giant handshake blue ribbon deal on yield that everyone agrees is good and now it's off the table as an issue. It's possible those other issues could be raised in this clarity debate. We didn't quite get to that point. But I think your point is even bigger, which is let's say, okay, they're settled in the law and it passes and yield is given away or compromised on to get that passed. You're saying like what says they don't come back during the farm bill next year and try to add a defi provision to retrade again.

[B]

And for evidence of that I would submit the fact that we thought genius settled the stablecoin issue and here we have a market structure bill which is generally have nothing to do with nothing yield. No, but they raise it. So yeah, it's always possible they come back down the line. And my fear, because I believe in so much in the value of permissionless systems, but they do make. They are very major competitive threat for Wall street is that they will continue to innovate roundabout ways of trying to kill that. Right? So maybe in some future unrelated bill they sneak in somewhere in there that bitcoin miners and ethereum validators have to do.

[A]

Kyc, this is what they had too in the. What was it called? The inflation, Sorry, the Biden's bill in that summer, what?

[B]

The oddly named reduction act, the highly inflationary inflation reduction Act.

[A]

And they slipped in this stuff about the broker rule. The broker rule into that and. And we briefly thought maybe we could get it out. And there were some allies in the Senate who gave speeches and tried to get it out. But eventually, like this very restrictive terrible rule which has been now revoked by law also for defi was just added into some random bill and it was must pass legislation too. So everyone was like, guys, we gotta save America. We can't be held up with this arcane like tax question for defi. So we just. You have to swallow it.

[B]

Right?

[A]

That risk is always there.

[B]

Yeah. And if I may end with a warning because I believe you have a large tradfi audience for this podcast. If I were advising the banks, I would tell them to be very careful here because they keep going back to this argument that Wall street should be thought of as a utility, that it provides this fundamentally needed service, that that's why they deserve protection from competition. The problem with that argument is that it opens up a whole can of worms on everything else that Wall street does. And what you end up with is people like me saying, well, if you are a utility, the thing with utilities is that they're highly regulated, including what prices they charge and how much money they make. So if you're a utility, I think we should have a cap and credit card swipe fees In America, like many other countries have implemented, if you're a utility, I think the big banks should be forced to pay for infinite FDIC insurance at community banks. Right. And even the idea of a windfall tax on net interest income. Right. Utilities. The power utility here in New York can arbitrarily raise the price. They have to go to the regulator, say, here are my costs, here's the market, here's how much I want to raise. And then the regulator says, well, what's your profit margin? Because it can't be too big. Why your utility.

[A]

That's right. Very interesting. And it sounds like too on your point on the. What I'm hearing is that perhaps defending and winning the fight on yield, one of the reasons that might be important is because it's a beachhead for the longer term battle. And if we lose the yield issue to the banks, they'll be emboldened and come back to take away our defi issue or our other dev protections issue or et cetera.

[B]

Exactly.

[A]

So it's kind of like you gotta fight the battle now because winning it now will help you win it later. Losing it now will risk losing it later.

[B]

Yeah. Or if we're gonna lose it, I wanna lose it on genuine grounds. I want somebody in Congress to say, we just wanna make sure that Wall street can keep operating. Operating the way it has.

[A]

Yeah.

[B]

Don't give me this song and dance about like small business lending. The simplest way small businesses get a loan is by having a credit card that charges them 20% interest.

[A]

That's right. The vast majority. This has been fascinating. Omid, before we wrap, I want to ask you about Columbia. You've been teaching a core blockchain class there at Columbia Business School for years now. You've graciously had me there to speak a few times now, I think three. Three times maybe.

[B]

You have historically been one of the more popular speakers, but you have great speakers.

[A]

You had Rob Haddock there, I think shortly after I was there this year.

[B]

That's right.

[A]

You've had people from government come, you've had regulators. Our friend Nick Carter has spoken there multiple. It's a great class, by the way. Great.

[B]

Thank you.

[A]

How has the interest in blockchain and crypto evolved over the time? And I should clarify too. This is a business school executive MBA program class. These are working and core MBA, but these are business school. They're not 18 year old college freshmen.

[B]

No. And they're not computer scientists and cartographers.

[A]

So. Yeah. How has it evolved their interest and what is the State of their interest today. Are the youth gonna be all right?

[B]

Yes. Interest is actually at an all time high and people keep asking me basically not impacted by price action over the last six months. Price action is actually great. Crypto prices were crashing two weeks ago during class I was actually put up the chart of the perps trading in real time. It's like let's look at what's happening on Hyper Liquid and we can talk about it. The students increasingly just see this technology or this industry as a part of their futures which is why their interest as measured by things like how many people sign up for my class, the wait lists, etc demands to audit it. It's, it's literally been up only. Yeah.

[A]

That room is packed and you didn't have any when I was there in December. Maybe there's no room. Like every seat is filled.

[B]

Yeah. With 75 students and lots of people begging to get in because they didn't make the cut.

[A]

Yeah.

[B]

And me having to say no because there's no room. Yeah. And I have every student submit a one paragraph answer before the start of each semester saying why they want to take the class. And the evolution of that has been super interesting because six and a half years ago when I started teaching, some curiosity, tons of skepticism. I would literally have people say like I think the whole thing is a scam. But I figured I should learn more. Yeah.

[A]

Reasonable position by the way, if you're willing to learn more at least.

[B]

My favorite kind of student is the skeptic. If you're skeptical of something and you're willing to take a semester long class. And by the, my class is hard and there's a ton of assignments, a very tough exam, et cetera. Now I don't get any of that. I would say 80% of the students say that they want to take this class because whatever future they envision for themselves, it's a business school, so we're talking about banking, consulting, tech. They just think blockchain, crypto, tokenization is going to be a part of it. And also very exciting. A minority but like 10, 20% of every class now is students who say I want to work in this, I believe in it. I'm excited about DeFi, about stablecoins, about NFTs, all of the perennial ideas and I want to learn more about it. And I would say not investment advice, not a price prediction. But to me the most bullish thing about crypto in general is getting to experience firsthand how the utility of it is just becoming more and more a given to a wider group of students.

[A]

I agree. I think adoption and knowledge of crypto and stables and bitcoin and defi is one of the clearest signals. Right? And you can see it in so many ways. Omid, this has been fantastic. Thank you so much my friend, for coming back to Galaxy Brains, my favorite

[B]

podcast to be on. Thank you for having me.

[A]

That's it for this week's episode of Galaxy Brains. Thank you to our guest and friend Omid Malaikhan from Columbia Business School and our friend Bimnet Obiwi from Galaxy Trading. Everyone have a safe and happy weekend and we will see you next week. Foreign. 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 GLXY Research. Read our written [e-mail] 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.