B (2:34)

Okay. Do you want to. That's fine. Let's do it. Yeah, that's good.

A (2:38)

It shows you where my brain is at.

B (2:40)

Go for it. We'll start again.

A (2:42)

Resets or something. That's a rare one for me.

B (2:44)

It's so good.

A (2:47)

We're recording this on October 1st, which of course is the first day of October. And magically, bitcoin price at $117,400 as we're recording and it was under $114,000 at the end of September. This is supposed to be a meme. It's a joke. But here we are. Bitcoin magically rising on the first day of October.

B (3:11)

Yeah, it's amazing. It's October and it seems like it happens every year. You were just pointing out that there was one year where there was a 10% up day on October 1st. And yeah, I spent some time after the podcast that you just released with Mike Alfred, who's one of truly the best investors in this space. I mean, just magic touch. And he had a tweet yesterday that said, God, there's so much market manipulation for quarter end. You know, just hold on. Some things were, you know, probably being kicked around, around so that, you know, asset managers could show certain returns. That always happens for tax reasons in Q4, if people have losses, they tax loss, sell. But apparently it's also happening in Q3. And he was, he's, he's been just so bullish and he's been right. So, yeah, it's. Here we go. I took a look at, because one of the big questions that nobody really knows the answer to is why hasn't all this bitcoin treasury company activity pushed the price up as much as people expected it to, given all the buying volume that was coming in and giving that the miners aren't selling. And I think a lot of the answer is these old wallets. Just yesterday, a 2010 wallet with $44 million worth of bitcoins woke up and everything had gone into that wallet from a mining. From mining. But you know, every. It's not every day, but, but there's a lot of that going on. The CDD measure has been trending up, which tells us that that older long term Hodlers are, you know, have awakened and when they do tend to awaken, they tend to do one thing when they move their coins, which is sell them for obvious reasons. Otherwise they're not going to move them because they're long term hodlers. And so we're just seeing the handoff from the, the long term Hodlers who bootstrapped this network to The Wall Street, a lot of it is boomer money that is more actively trading and we're just seeing more and more of that happen. But so much as you well know of Bitcoin is still held in wallets that haven't moved in years. This is still a very concentrated asset among those who were here early.

A (5:41)

It's interesting because it's one of those glass half full, glass half empty scenarios with the long term holders. We obviously know very transparently because this is bitcoin, as you said, exactly which wallets are moving coins and selling. And we've had very transparent sales, like 80,000 executed by Galaxy. That was very public, huge tranches, hundreds of thousands of coins at this point. So the glass half empty part is the hold forever crowd is giving up. Right?

B (6:09)

That's one narrative that they were supposed.

A (6:11)

Right. They were supposed to hold forever. They don't believe in bitcoin anymore. And anecdotally I have had conversations with Yago and Bruce Fenton, some of the very early bitcoiners who have said that they know guys and gals who now it's so much money and they don't like the institutionalization and government adoption of Bitcoin and therefore have said, listen, I've got billions of dollars and bitcoin isn't what I thought it was going to be, so I'm out. But the other side is if bitcoin is going to become what we need it to be, then coins always have to go through those transitions from, we won't call them weaker hands, but from older holders to newer. And you have to set a new floor of demand and have a new class of interested buyer to keep that floor rising. I don't know which side of that argument you stand on or how you view it, why you think these people are selling. I think it's just so much money.

B (7:04)

Yeah, that's what it is.

A (7:05)

15 or 10 years.

B (7:06)

Right. And their concentration of wealth in one asset class, that still, let's be honest, it's still largely experimental. Right? It's institutionalizing. I don't think that we have much risk of a zero day exploit. But that's an asymptote that never reaches zero. Right. And so is it just people saying it reached a magic number. I am a partner in a venture capital fund that just that made distributions of both bitcoin and ETH that hit their price target and that happened relatively recently. So there's just some liquidations of, of. Of people who were in relatively early and they're just taking profits. I Don't think that that is fundamental. Nothing has changed fundamentally. But the other thing I was thinking about as I was preparing for this is just how much these bitcoin treasury companies have crushed bitcoin volatility. It's very unusual that bitcoin, it's historically been the most volatile asset. And the way that asset managers think about volatility is they want returns that are not correlated with everything else but the Fed.

A (8:21)

Idiosyncratic asset.

B (8:22)

Exactly. The Fed was able to crush volatility in pretty much every asset class that's happened since the 2008 financial crisis. And bitcoin was different. So that's one of the reasons why hedge funds were so interested in it in the early years, because it was trending upward with very little correlation. Well, now, here can. Here come all the financial engineers, which is the Bitcoin treasury companies who are monetizing volume. And the price of bitcoin has not gone up very much. Hasn't gone down much either. It's kind of traded sideways pretty much for the last quarter, give or take. But it has. But volume has been crushed. The daily changes are not as high as they once were. So this is. It's become less interesting to that crowd. But it also means that those who had a business strategy to monetize the volatility. What I mean by that is you can basically, this is. This is the. This is what MicroStrategy perfected. It's just a way of describing the financial engineering that they've perfected in the early years, which is they had a very volatile stock because it was. The stock price was trading with a high correlation to the bitcoin price, which meant it was volatile when Bitcoin was volatile. And in finance terms, you can sell off that volatility. There are in the derivatives markets, people who can monetize that. And if they sell it cheaply, then money can be made. And that was what was happening. But here's the problem. When too many people were pursuing that strategy, markets worked, volatility got kind of crushed because so many were pursuing the same strategy. I mean, Scott, I've never said this publicly, but three different companies recruited me to run Bitcoin treasury companies, or tried to. Right.

A (10:11)

I think we talked about this in Vegas because it was right after Nakamoto launched and you and I sat down in Vegas in person, and I said this to every guest. I was like, I've been pitched 20 bitcoin treasuries in the last four hours. What's going on? Because I didn't realize how big of a bubble this was going to be.

B (10:26)

Well, the bubble was in volatility is now what we look back at it. It wasn't in the price. It was in the volatility, which got crushed because everybody was pursuing the same strategy. Now, that said, some of the really smart people in this space who, whom I respect were. Were some of those people who were really excited about. About this prospect. I made introductions at their request. In some cases, I don't piled in. I dipped my toes in briefly and I look back at it and think, okay, yeah, this was. I should have. Coming from a Wall street background where the convert market, that's where the ARB is. It's in mispriced volatility. And bitcoin volatility was not mispriced at the time. That's what a lot of folks have had to learn the lesson the hard way. Now, nothing about the fundamentals of bitcoin has changed. Nothing at all. But some of these companies who pursued the bitcoin treasury strategy, presuming that bitcoin volatility would continue to remain high and they could use that as a financing technique to sell cheaply and earn higher returns, that strategy hasn't worked in the short term. That said, boy, has it been pretty much crushed. And so a lot of those investments may very well be cheap. You and Mike Alford talked about that. Some of them may very well be cheap.

A (11:49)

Yeah, I agree. So it's very interesting because I don't think people realized until this sideways consolidation period exactly what Michael Saylor was doing and exactly what strategy was doing. Dave Weisberger talks about this all the time. The fact that it's really the volatility that they need to continue to be able to offer the notes that they do and to continue to see the stock price go up. So it's almost like no volatility is worse than price going down for them who are.

B (12:20)

Yes.

A (12:20)

Who are executing that strategy. That said, we also know that historically bitcoin tends to do all of its fun and all of its huge games like 10 days a year.

B (12:31)

Well, right.

A (12:31)

So like there will be another day when maybe we see another bitcoin. Five to one.

B (12:37)

Right. It's. Yeah, yeah. I mean, obviously if you look at a lot of models, it's cheap or has been cheap right now. Right. But then it has an update like today and some of that underperformance, you know, gets captured. So as. As you and I have talked in the past, I think the price is the least interesting aspect of bitcoin. That is where most people right now are spending their time and efforts, though. And to your point, some of the early bitcoiners, none of us cared that much. I mean, we all knew that price mattered because think of the seven network effects of Trace Mayer, right? You were going to have to get to financialization before you get. Which is his sixth network effect before you get to world reserve currency, which is the seventh and final one. We're in the financialization stage pretty clearly now and Trace and I kind of disagreed about the value of that, which is so interesting because both of us came from the Austrian school of thought on leverage, that commodity based leverage is fine, but circulation credit, in other words, money created out of thin air, that's not backed by real savings. That's where you start to get real problems. And he didn't have as much of a problem as I do with that financialization of Bitcoin where people are creating leverage spirals in bitcoin that may unwind. I just saw a really interesting LinkedIn post. I can't remember who wrote it, so I apologize for not crediting the person, but it talked about Coinbase offering 10.82% yields on USDC. It wasn't on Bitcoin, it was on USDC. But they were pulling it apart. Where is that coming from? You know, you can make X percent on staking the underlying eth, but that doesn't, that's not all of it. And you know, a lot of folks were rightly saying, did we learn nothing from BlockFi? Right. Anytime you.

A (14:27)

I was just going to say that was, that was the baited hook that had me on Voyager. And I believe at that point USDC was 9 point something percent. So it was actually less there.

B (14:37)

Yeah. And now coinbase is offering 10.8.

A (14:39)

Of course, Luna was like 20% or something. I don't remember how high it was, but CEFI across the board floated kind of 9 to 12%. And I'm making no claims that Coinbase is doing anything unto it. I have no idea.

B (14:51)

It's just leverage.

A (14:52)

Like if your Spidey senses don't single, don't, don't tingle. At the same level yield on stablecoins now as well. Look, super simple.

B (15:03)

You can earn 4% risk free on short term treasury bills right now you can earn. You tell me what the percentage is on staking, what is it? 2 or 3%. Right.

A (15:14)

So yeah, I mean eth staking is 2 or 3%. Solana's in the sevens.

B (15:19)

So if you're doing eth USDC at 10.82%. Okay. You can maybe see where seven of it comes from. And that's part of the problem is I'm mixing apples and oranges there. Because if you're. Because there is not 100% correlation between the staking rewards, you can't earn both. Right. You've got to actually have some invested in the reserves as well. Right. But if you were to be generous and say, let's assume all of the reserves are invested in T bills and all of the eth is staked, now you're at 7. How do you get to 10.82? Right. So there's some, there's some alchemy going on. And again, not all of it's bad. You know, I like to point out when the tradfi people look at this and poke fun of it, they don't understand staking. They don't understand that. Yeah, I mean, you're taking protocol risk, but you're not taking the kind of counterparty risk that you take in a leverage structure. So there is a yield that can be earned in the proof of stake protocols. There's protocol risk, there's more protocol risk. I'm not a big fan of those. I still think that it was a mistake for ETH to switch from proof of work to proof of stake. But of course, if you look at it objectively, staking is a way for you to earn yield. And the risk that you're taking, you're being compensated for is protocol risk.

A (16:48)

Right. Smart contract risk. Protocol risk, which, by the way, I have literally no idea how to handicap.

B (16:53)

Well, I mean, to be honest, so far, nobody does. Right. This, and this is back to my point about zero day exploits. It's an asymptote. The older it's. It's what's. It's called the Lindy effect. I think the longer technology has been.

A (17:04)

Around, the longer it exists, the more likely it is to continue.

B (17:07)

Exactly. And the asymptote, you know, just keeps approaching zero every day, but it never actually gets there. So, you know, you get to the point where you can accept that there's not as much protocol risk. But to your point, there's more contract risk too. I should say, should have said that earlier. That's a good, that's a good call out.

A (17:23)

Because the idea that you could always sort of, you know, no matter how far you are away from a wall, you can always step halfway closer.

B (17:29)

Exactly.

A (17:30)

And never reach it. So there's always some sort of, some sort of risk There. I want to go back a bit to the treasury conversation because you made a really interesting point. These are all very smart people, obviously, but anyone who knows markets knows that any inefficiency like what we saw Michael Saylor take advantage of for so long with the volatility will eventually be arbed away by an efficient market. Right. I mean, it just at some point enough people realize it that the opportunity disappears. Right. The arbitrage never lasts forever. These opportunities never last. We've not really seen that many enter the market versus how many, I expect. So do you think that the finding creative ways to take on leverage or debt to buy Bitcoin part of the treasury strategy has been somewhat proven to not work beyond strategy and maybe one or two other players? Do you think the treasury trend ends as a result of that? Or you just think that maybe we see a better and more responsible treasury trend? Because in my mind, taking cash flow from a company and putting Bitcoin on your balance sheet with your profits instead of holding cash makes so much sense.

B (18:44)

Exactly. Right, yes. If that's how you define treasury companies, then there are.

A (18:48)

Shouldn't that be a Treasury. Because it feels like what we call treasury companies are actually hedges.

B (18:53)

Yes, well. Right, yeah. So as with so many things in this space, the terminology isn't exactly accurate and means different things to different people. So I look at Bitcoin, treasury and digital asset treasury companies as those that take their operating cash flow and hold it instead of in T bills or bank deposits or money market funds, which is typically what a corporate treasurer would do, they diversify that into crypto of some sort. And I'm on the board of a company that announced they were doing that in. They were looking at it in May and made the announcement last week that they're doing it. Nobody picked up that it was a Treasury play because to your point, they're doing it with operating cash flow and they are unrolling. They announced, they're unrolling it in their payments gateway as well. So you can pay with, with crypto in. Instead of just paying with US Dollars and they're bringing stablecoins, et cetera. So all that got announced last week. I didn't see that get picked up in the bitcoin press. And I think part of the reason is that, well, it wasn't really new because they announced they were looking at it in May, which was when the news occurred. And it did get picked up in the, in the crypto press. But also it's what you're talking about that, that's like a pure play treasury company where a corporate treasurer is taking operating cash flow and making investments with it, as opposed to a hedge fund that is trying to play the volatility arb and borrow cheaply and invest dearly. That's what that play is. All that said Saylor did stumble on that Arb. Stumble is the wrong word. That doesn't give him enough credit. It was deliberate.

A (20:32)

He definitely created the space.

B (20:34)

He created it, but he also is helping the space in one regard, which is that he's creating a bitcoin yield curve. And we really, truly need a bitcoin yield curve that's not driven just by the derivatives markets because I think we all know the derivatives markets are odd. And I'd much rather have a secured lending curve for bitcoin that is more of a pure play and not driven by all the Greeks in derivative land, Delta gamma, et cetera. I'd much rather have something that's pure play for borrowing. And he is creating that. Now it's got the counterparty credit risk of MicroStrategy associated with their strategy. Associated with it as well. It's funny, it's like I still call Twitter. Twitter can't call it X. It's still called strategy.

A (21:25)

MicroStrategy forever be MicroStrategy. And it's not only because the name is so permanently stuck in my head, because I can not say strategy. Strategy. Yes, I've tried it so many times. Microstrategy strategy rolls off the tongue better than the strategy strateg.

B (21:39)

If you think about the timing of when he would have named the company MicroStrategy. Microsoft was the gorilla. It still is in many ways in the software business. But I get why he used that name 25 years ago when it was hot. But anyway, your point is well taken. Hats off to him for being the one who's doing the price discovery and for using the cap table of the company to use the. To create that price discovery for different tenors of bitcoin secured lending. And that's going to have a broader impact. I suspect, Scott, that that's the lasting impact of all this. That the.

A (22:20)

Yeah, I think what he's. Yeah, go ahead.

B (22:21)

Well, it's the short. In the short term, the bitcoin treasury thing was everyone realized that it wasn't the big. It wasn't fundamentally bitcoin, it was fundamentally financial alchemy. And yet what comes out of it is not a complete deflation of that bubble. What comes out of it is a true bitcoin lending, secured lending Market where we know the different tenors of interest rates for term loans, not just overnight, but going out, I wouldn't say 30 years, but going out at least five years.

A (22:54)

Yeah. If we want to take a favorable view on all of it, at least they're doing financial alchemy to own Bitcoin. So there's a very stable underlying value to what they do.

B (23:04)

That's up and to the right.

A (23:05)

I've had a lot of. Yeah, I've had a lot of conversations with Mark Moss about it. I know, you know, he's very, very passionate about bitcoin treasury companies. And I was sort of always voiced my concerns and he would just say, scott, listen, at the end of the day, even if it goes bad for shareholders now, if you believe bitcoin will be at a much higher price in four years and they just hold, maybe they would underperform bitcoin, but it still should go up dramatically and you should see value because they're holding a lot of bitcoin.

B (23:30)

Correct. But that's also part of their strategy. That's the financial alchemy. To your point, though, it may very well underperform Bitcoin in bear markets, but that allows them to reload because that's when volatility will go up and they can start monetizing it through the convert market. Right.

A (23:47)

I just wonder how many of them can monetize it when you have a gorilla in the room as big as strategy. Because Michael Saylor is clearly never going to stop. And is there thirst for strategy number 27? Yeah, well, like their notes, that's what's always worried me about this trend. And it's not a concern anymore for bitcoin. I've been, I've been talked off that ledge. I had the, this is bad for bitcoin, gut wrenching reaction at first because I figured they would all just be forced sellers at some point. But that might just be a 10% bigger drawdown.

B (24:19)

Yeah, some will be. They might be the blockfis.

A (24:23)

I just don't understand what kind of risk, you know, company 27 doing convertible notes is going to have to take on or offer to compete with the bigger ones in the room. And so maybe my concern should have been more directed at shareholders, which we've obviously seen already with a number of these.

B (24:40)

Yeah, for sure. Right. It's in the, in the stock prices. It just makes them. It's kind of like the gold miners. Right. There's a very clear cycle to gold miners, to the mining stocks. They're just leveraged Plays on the underlying right. And that ultimately, I mean, that's kind of what the bitcoin miners were. Although the bitcoin miners, of course in a number of cases have become HPC companies. So they have broken that trend in a number of cases. And again to Mike Alfred's point, he was ahead of that. He really was. He was banging the table on a couple of stocks and boy did they.

A (25:13)

That was very unpopular.

B (25:14)

Yeah, yeah.

A (25:15)

When it was very unpopular.

B (25:16)

But he said something to switch gears a little bit that also resonated with me and I'm sure you thought of it at the time when he talked about Bakkt having been the slow and steady that went and worked with regulators and was never willing to do anything outside of the four corners of what they were permitted to do because they were owned by the parent company of the New York Stock Exchange ice, which was not going to allow them to be cowboys. And that so many in the past few years of the companies that were cowboys and did play in the gray zone and did not go up the middle of the fairway to mix all kinds of sports metaphors there won in the last few years because the Gensler, Gruenberg, Barr, Biden Operation Chokepoint 2.0 tried to kill the whole industry for Elizabeth Warren strategy failed. And so it worked out for those companies that they could be swashbuckler risk takers. But the backs of the world, and by the way, I put Custodia in that same category, Slow and steady tried to work inside the boundaries of what we knew we were approved to do. And Mike said that's part of the reason why he joined Back's board is that he sees that the pendulum is swinging, to paraphrase him, that those who actually did play inside the boundaries, we know how to work inside the regulations. All the kinks that are going to be faced by companies in this space who are getting regulated by the first time and examined for the first time, there's going to be so much that they're going to have to learn. And those of us who have just quietly clearly not made the right choice short term in the past few years for trying to work inside the regulatory perimeter that our day is coming. And that really resonated with me when he talked about it in Back's case. I don't know that company. I've never met the people there.

A (27:13)

But I think the sad part is how many backs in the world didn't make it to this. Yes, because they got crushed during the last regime and aren't here to oh, 100%.

B (27:23)

You're right about that.

A (27:24)

Collect the spoils. Right. I mean Custodia accounts as well, but we don't. We all know the stories of the banks that got crushed as a result. But there's probably 100 other companies that were on the fringe that just didn't make it through that four year period.

B (27:36)

Yeah, absolutely. And it's not over yet. Right.

A (27:40)

That was going to be my first question, by the way, if we hadn't have had October and something to talk about that was so exciting. I was literally just going to ask you, is operation choke point 2.0?

B (27:49)

No. I just talked to a CEO yesterday who called for advice because they had just been debanked. Again.

A (27:58)

I keep hearing that it's happening and I keep hearing that it's happening. So listen, I know that these things take time to wash their way through the system, but still very concerning that there's debanking happening for crypto companies in the United States and worse things.

B (28:13)

Yeah. And this was an egregious one because I'm not going to reveal who it was or what the facts were, but they did everything right in getting pre approval to do something and then got rug pulled and their account closed. So it raises an interesting question. There was the Sam Bankman Fried Cowboy swashbuckler criminal approach, which is I'm going to call Alameda, Alameda research. So no one knows it's crypto when I open bank accounts. And I'm going to deliberately try to, you know, obfuscate to, to the people that I should be disclosing to and I'm going to commit bank fraud, which is what Sam Bankman Fried did. Okay. He should. They, they could have gone after him for bank fraud for all that. They didn't. But they could have. They still probably could. They're still inside the statute of limitations if they wanted to go after him for more. And I wish they would because man oh man, did he cause a lot of problems including, and especially for my own company. But people who are open and honest and try to make sure that they have durable relationships end up getting rug pulled. And it's one of those things where one person at a bank says it's okay and then it goes all the way up to the top and the top says I don't want to have to have an explanation of this to my bank examiner during my bank exam. Close the account and then of course the bank has to go sign up.

A (29:37)

Well, I thought they wouldn't have to answer those questions. Apparently they do have friendlier bank regulators a fear. Okay, so is that at the highest level, do you think that that's disbelief that things have actually changed? Is it a fear that Democrats take the Senate and Elizabeth Warren's right back on top of the Senate Banking Committee in it in a year, year and a half and you know, we all got too excited too early? Or is it those people haven't kept up and don't know that times have changed? Welcome to the party. I don't really understand it. Like, what are the last vestiges of operation choke point 2.0? I guess question is it still the Fed?

B (30:14)

Oh, yes, it's definitely still the Fed. And I keep pointing out the obvious, which is that the the most anti crypto regulation of the Fed has still not been rescinded. It was voted on 7 to nothing by the Board of Governors on January 27, 2023 and released at the exact same time as Custodia's denial. And it says that banks can't touch digital, can't touch digital assets as principal and can't issue stablecoins. And it says that using permissionless blockchains is presumed unsafe and unsound, which is a banking term for you can't do it. So all that's still in place, Scott. And part of it is, I've talked about this recently. Part of the why is Trump going after Jay Powell? Well, that Fed Board of Governors is majority anti Trump people. Okay, so why is it that the Fed Board of Governors hasn't rescinded that when it's pretty clear that at least two of the seven people who voted for it wouldn't be voting for it today they would want to rescind it. The answer is because it was 5:2 against Trump and now it's 4:3 because he got Steve Myron confirmed. But it's still 4:3 against him. Right. Why is he trying to fire Lisa Cook? Well, because he thought that might work. We're recording on October 1st when the Supreme Court just said that oral argument on that case is set for January. Well, that puts Trump in an interesting bind from the perspective of what he was trying to accomplish, which is to flip the board of governors 43 in his favor because he needs one more seat. Okay, so if firing Lisa Cook didn't work, and now that's going to get delayed till January, can he wait till January? Here's the reason why I don't think he can. The fomc, which is what he's really focused on, consists of seven Fed Board of Governors which are Senate confirmed. That's the group we were just talking about, which is now three, four, it's three pro, four against Trump. Okay. And then five rotating Federal Reserve bank presidents. There 12 regional Federal Reserve bank presidents, like the New York Fed, like the Richmond Fed, like the Minneapolis Fed. Right. 12 of those. So the FOMC consists of five rotating ones and one permanent, which is the New York Fed. Okay. So if you go look at who are those 12 Federal Reserve bank presidents, and you go through AI tools, it's pretty easy to figure out what have their political contributions been in the past. In one case, Austan Goolsbee was a Obama administration official. Pretty obvious he's not going to vote with Trump. So a majority of that group is not going to vote with Trump. And frankly, there's been some academic studies, it's probably 80% are anti Trump. Right. So what is Trump trying to do? Why did I go into that governance stuff? Because it's all about governance here. Trump is. On February 28, the Board of Governors is going to vote whether to reappoint those 12 Federal Reserve bank presidents who were nominated by the banks in each of those districts. So Jay Powell's term's not up until May 31, but February 28 is the key date. Because if he really wants to flip the FOMC to not having a majority anti Trump, it's going to happen by February 28. And the Supreme Court just this morning just said it's not even going to have oral arguments on the Lisa Cook firing until January. So I think that the probability that Trump fires Powell just went up because he's gotta find another way, otherwise.

A (33:48)

So he just needs to find somebody of those four to get out. And Powell is the easiest one from.

B (33:54)

So he gets a majority of that board. Yeah, yeah, no, interesting. I think he could make cause cases to fire more than just Powell. Michael Barr, I've called publicly the Fed's debanker in chief. He's the one who pulled the trigger on Silvergate. Okay. So I mean, there's, you know, it could, if he wanted to, he could make cause cases for more than just Powell. So it's going to be interesting because Trump now, as a result of the decision that just came out, is going to have to take action. And he keeps, he keeps hinting that he's going to do something with Powell Right. Over the weekend.

A (34:30)

He's trying.

B (34:30)

Yeah. He sent out a meme, you're fired. A cartoon. I think Barron must be having fun with Trump's, you know, with AI and.

A (34:40)

Trump Barron's made 60 million, by the way. I think I've seen. I just saw that Barron's made like 60 or 80 million dollars in crypto.

B (34:46)

Yeah. I mean, but, you know, he's a degen crypto trader. Right. And he's the one who told Trump to go on Joe Rogan and some other, you know, digital media, which turned out to be right, because he was able to reach an audience of younger folks that don't watch cnn. Right. And it helped. It clearly helped. And so, yeah, I mean, let's put it this way. I think there's a definite increase in the tools, the electronic digital tools that Trump has used in his own Twitter account and his own, you know, Truth Social account. All the AI stuff. He sent, like, four memes out last night on his Twitter account and clearly using AI. Right. So where's that coming from? That's probably not coming from him, you know, happen to just play around. I would guess it's probably coming from bar and having some fun. And then his dad thinks, hey, this is great, and then tweets it out. So. And, you know, most people get a laugh. I'm sure it pisses a lot of people off. But he's, He's. He is definitely the troller in chief.

A (35:51)

Just to check back in, I guess, on this topic, since we've now kind of gone there, we always have this endless debate on whether the Trump presidency is a net positive or net negative for the crypto space. I obviously believe net positive, regardless of what his family does. If you look at the last four years, talk to someone like you at Custodia, forget all the speculation and meme coins and all of that, the pendulum had swung so far in irrational hatred and oppression of this industry that it's swinging back is a huge net positive. But at this point, having seen what they've done on the government level, which I would say is deliver on almost all of their promises, or at least make massive progress towards that versus how much the Trump family has been enriched by involvement in this industry. I mean, how do you put that on the spectrum at this point?

B (36:40)

Well, I point to what Senator Lummis says, which is that what the Trump family has done has made her job harder. And I think that's right, because there are a lot of people who have objected to it. And so I've stayed away from all that, as you know. But, yeah, of course, it's, It's. I acknowledge that it has made those who have been trying to work through it. And, you know, I stayed neutral after what happened to us, I'm less so. I'm much more. You probably picked up in my own Twitter. I'm much more. I'm moving in one clear direction because as the longer this goes on, where just the absolute unethical, immoral and probably illegal things that were being done haven't been fixed yet, the longer I'm taking more of a clear position in one direction. But I tried hard to work with both sides. I really did.

A (37:41)

Yeah, I watched and we talked about it. You and I literally sat and interviewed a presidential candidate. You said, I'm not taking sides. So I know where you stand and how hard you tried to remain that way. But I think what you described for you probably applies to a lot of people in this industry. And as we were sort of discussing operation choke point 2.0, I wondered if we're still maybe a little bit too complacent about the pleasant changes that have happened, because I think a lot of people see how much it's changed and take for granted or believe that it will always be that way. And there is a real risk that things could go, I won't say all the way back the other way, but certainly reset back in the other direction depending on how the next election goes. So it's very hard. I would remain, I would imagine, in a position like yours where maybe you're finally starting to see some wins, to remain on the sidelines and just say, let's see what happens.

B (38:39)

Yeah, well, you know, also a lot of what Trump did is administrative, so that if and when, well, when the Democrats eventually come back in, executive orders could be reversed pretty easily through executive orders. Right. So this is what's so fascinating about October 1st, which is the first day of the government shutdown, with the OMB director saying he. About a little over a week ago, it came out that he directed all the agencies to create plans to permanently eliminate the non essential jobs. And I'm not an expert in this, but I saw a podcast this morning, a very brief from Peter St Ange, saying in order to do that, in order to lay off the furloughed government employees, they have to have a 61 day government shutdown. I don't know the details there, so I would encourage folks to go listen to his work as he's been all over this. But my point is that I think that this one is different because Trump, you know, frankly, a lot of us, including those who haven't been political, are just appalled at some of the things that have happened culturally in this, in this country. And it's just enough. Right. The whole. All these senseless murders of people, it's just enough.

A (39:59)

And Charlie Kirk obviously swung a lot.

B (40:01)

Swung a lot.

A (40:02)

Like outside. I don't get political here. That's not worth discussing. It just as like, like objective fact, if you paid attention or talked to people, a lot of sidelined people became.

B (40:13)

Spoke out for the first time in the game. Yep. And. And Irina Zutskaya, I think, is how her name was pronounced. It's just. And those two things happening one right after the other, it's just, you know, a lot of fathers saw their daughters potentially being in that position. Right. And it's just. It just made folks really angry. And so, yeah, I do think it's different this time. I do think that some of these things that have, you know, the pendulum over the last 20 years has swung toward just the government having. Just accepting that the government has all this power and can do whatever it wants. And then we all watched it be abused. And I know that there's. I'm not making a direct connection between these murders and the abuse of government power, but. But there is definitely a zeitgeist where the government can do no wrong. And then folks like me watch as the government power was abused against us. And because of sovereign immunity, there are questions whether there will ever be accountability against it. Now, let me point to something that nobody really in the crypto press picked up. I'm on the board of a company called Public Square, which has a subsidiary called Cordova that finances firearms. And that company was targeted by the Biden administration. The cfpb, which is Elizabeth Warren's pet agency, opened an investigation into it in early 2021, right after Biden took the presidency. And then it was going, going along, going along, going along. Public Square bought the company, I think, about a year and a half ago, knowing that it was under investigation by the CFPB. Well, then Don Jr. Joins the board of Public Square right after the election. And it is public because the CFPB de facto apologized and admitted to wrongdoing. Here it is public that the CFPB suddenly, after months of inaction on that investigation, within hours, ratcheted up the pressure and put that company in a vice grip. But what had also come out to try to get them to admit wrongdoing and settle before Trump took office, before this crew lost power. But what is also interesting is that they were making settlement demands that would have caused that company to violate federal firearms laws. So that put that company into a catch 22. Now step back. Where's the accountability for something like that? Is anyone in jail for abusing government power against a company that the now CFPB has said there was no wrongdoing, they closed the investigation, exonerated the company, and de facto apologized, saying they've never seen a weaponization of government power to such degree. This is all on CFPB letterhead. Okay? So if anyone out there is saying there was no debanking, there's exhibit A, there's the government admitting that it happened and de facto apologizing for the wrongdoing. So now the question is, all right, there were basically one of the social tenets that we have in this country is the assumption that government employees will be honest and will apply justice blindly and not target political appointees on either side of the aisle and not be ideological about applying their government power. And when they are dishonest and they use their government power as a cudgel to achieve social policy that they believe that they want, but not that Congress ever enacted or the president ever enacted, because the voters never voted for that, what do you do in that situation? And that's part of the challenge, is no one's in jail for having done that. Right. Because of sovereign immunity, even if the DOJ went after them. There are some things, I think, that were illegal in some of these instances, but because of sovereign immunity, the individuals who abuse their government power aren't going to ever be held accountable. So how do you fix that? Scott? This is what's so interesting coming back to the shutdown and why I think this time is different because there is a pathway. The Trump administration has said we're going to tear down this whole apparatus of power in so many words. That's what they've said. And so I do think that it is different this time precisely because they don't want it to ever happen again. And that's, you know, I think people should be steeled for a longer shutdown this time because of what the Trump administration itself has said it might do.

A (45:09)

61 days long. I mean, that's a long shutdown to get to that finish line, if that's the point.

B (45:14)

Yeah. Get to the airport earlier. That was the. One of the pieces of advice that I heard this morning.

A (45:18)

I mean, all of that. But also, you know, you put that in context of markets and the fact that that means no. Whether you believe the data or not, that means no data. Right.

B (45:30)

It does mean no data.

A (45:32)

Yeah. The markets hold their breath jobs numbers today and CPI tomorrow and PPI3 let bird you can come up with.

B (45:39)

This is so interesting.

A (45:40)

Maybe we get a free market.

B (45:41)

This is interesting, Scott. Exactly right. We're going to realize that there are private sources of that data and we're going to realize that markets are going to go right along. And this whole notion that the Fed is data driven, data dependent, well, when there's not data or they, they only have, you know, non standard data sources because it's private data, they're going to have to rely on that. So it's going to reveal a lot of things. It'll be fascinating to see if the Trump administration has the guts to do it. But I think it is different this time. I don't think that they're going to just back down. I think that there are so many people who are disgusted by the abuse of government power, in especially the Biden administration, that they just want that whole apparatus that was abused against industries that the Biden administration disfavored. They want it torn down, they want it gone.

A (46:37)

So I definitely can't let you go without getting a Custodia update and talking about all the exciting things that you've been doing. Obviously we've talked at length about the tokenized bank deposits and the fact that that should be just you who's able to do it because of obviously your patents there. Where are things for you? Has that progressed further? And also just, you know, is Custodia having any luck now with these more favorable regulators? Are we still stuck with the same garbage?

B (47:06)

Good, good questions. I don't want to get ahead of announcements. We're working on things. It's fascinating. What I would step back and say is that folks are looking at the stablecoin market, which has just been on fire. It's, I think last I looked, 289 billion outstanding. But the more interesting data point is Visa's dashboard showed that the last 30 days transaction volume for stablecoins was 5.4 trillion. If you annualize that, it's 63 trillion. And the ACH network in Q2, if you annualize that was 93 trillion. So I know that the data is not reliable. There's wash trading and you know, a lot of that stablecoin use is in crypto trading and it's not really apples to apples to oranges. I concede all that. But the stablecoin volumes are off the charts and anybody who thinks that this is not going to fundamentally transform the traditional financial system is just praying for regulatory capture to bail them out. And it's not going to happen. So what do I mean by that?

A (48:17)

Banks are trying really hard.

B (48:18)

The banks are trying really hard.

A (48:20)

Yeah, the banks are trying really hard. Well, it's funny because they're really upset with Genius now, which is funny because they got the provisions they wanted and realized that maybe they weren't so good for them and now they're lobbying.

B (48:31)

Yeah. And I don't. No, if anything, let's put it this way. I don't think, I don't think there's any chance that the Genius act itself is overturned or that those provisions the banks don't like are going to be overturned. I don't think there's a. Well, let's put it this way. The Trump administration does not have a lot of patience for the banks because even though I don't think it's entirely fair, the Trump administration does blame the banks for the debanking that happened to the Trump family itself. I've said I think it's 90% the federal financial regulators, not the, not the banks themselves. But nonetheless, I don't think there's a lot of patience for the banks. So I don't think that'll be overturned. But back to your question. Tokenized bank deposits, the buildup that I gave you with that data is that all that stablecoin activity is happening before the banks even get here because they've been sidelined by Operation Choke Point and kept away. And remember, the Fed hasn't overturned that regulation yet. So the banks, I think, are still trying to figure out what to do. There is definitely a lot of activity and we, with our partner Vantage bank, are right there with a very, very compelling solution to the banks to be able to offer tokenized dollars without threatening their core deposits and doing in such a way that is immediately accretive and doesn't require a big upfront investment. So we will share details on how we're going to be doing that soon. I don't want to get ahead of folks because there's a boy. Is there a lot of work. Back to Mike Alfred's point about Bakkt, when you're working with regulators, they don't move at fintech speed. Bank regulators move at bank speed. But when they make decisions, they do tend to be durable. So I think the investment of time and effort that we've been making with Vantage since our announcement, since pre debate before our announcement in March is going to end up paying off, but it just doesn't move very quickly. We will soon. There is news, but we will soon announce it. And so the punchline for your listeners who don't necessarily care directly about what happens to Custodia as a company is the numbers are going to be big, the tokenized dollars are going to be big. Yes. There's a distinction between tokenized bank deposits and stablecoins. Yes. Right now all the activities in stablecoins, we're going to link the two in a safe and sound way. And when Citi upgraded its estimate to 3 trillion from 2.4, I think the high end of their estimate is 4 trillion of stablecoin activity by stablecoins outstanding. So that takes the 289 to 4 trillion market cap by 2030. Right. And by that point then the transaction volume, because they're high velocity, will, will exceed ach. What this is going to mean is those numbers are still too low. I think they're way too low. Scott.

A (51:26)

I was just going to say it sounds so concerning to me and they probably think they're outrageously understand who's going to use banks if they have stable coins and these actually become adopted and the banks are actually using the stable coins themselves. Well, using the test, you can already see this battle. Yeah, I mean you can always see this battle between our already existing public stable coins and who's choosing to like, you know, partner with Coinbase on something stablecoin related or who's choosing to partner with usdc, but also who's starting their own layer one, what banks are announcing their own stablecoins and then all of that is nothing compared to what you're doing.

B (52:07)

Well, because if someone can figure out, protected by intellectual property protections, how to deliver this technology into the core of the banking system, we're not talking about a bolt on, we're not talking about sort of a side idea. This goes straight into the core of today's. Right. If you get those primitives inside the banks themselves, then the banks can then go build on those primitives. And by the way, when Paul Atkins says that we're now going to start tokenizing securities, you know, I think the ACH system within five years is essentially just going to die on the vine because people will just be walking away from it and a lot of folks won't even know that what's happening behind the scenes is touching a blockchain. I think if the engineers do, that's.

A (52:53)

The only way it works actually. Yes, because they know we're not. We don't get there.

B (52:57)

Correct. And if the engineers do their jobs well, which I have confidence in their ability to do, so they'll abstract away all that complexity. And so, you know, just Like, I taught a class yesterday at the University of Wyoming and I asked people, how many of you use Venmo? Of course, you know, everybody's nodding their heads. Right. And everyone who I was teaching about payment systems, you think that when you send Venmo to your friend when you're splitting a dinner check and it immediately shows in their account that the money is there? No, it's not. It's an iou. What's going on behind the scenes is it's going through this very Rube Goldberg esque, spaghetti esque system of intermediaries and credit got extended from your bank to the other person's bank until the payment actually settles through what's probably going to be the ACH system two days later. So that's the kind of stuff that all of that complexity in the background is going to get abstracted away. It's going to help the average merchant who has a 2 or 3% profit margin, but they're paying 3 to 5% to the card companies. I don't necessarily think the card networks go away. I just think that margin's going to shrink. But the volume that's going to get put through all this, it's just like what happened in the stock market when stock trading went from fractions to decimals. Everybody was like, oh my gosh, the margins are going to go down. Because now you're defining profit margins in pennies, not eighths. But in fact, now what happened, transaction volume exploded higher and everybody made more money even though the margins went down because volumes were up. And that's what's going to happen here, too.

A (54:38)

Yeah. And I believe that blockchains, stablecoins, will become completely commoditized and as you said, abstracted away to the point where, listen, if a consumer needs to know if they're sending USDC or USDT or USD1 on TRON or Aptos or Ether, then it's not going to work.

B (54:57)

Correct.

A (54:58)

What's going to happen when this works is that you go to your bank or you do whatever and you say, I'm sending dollars to such and such. And that long Rube Goldberg process you described in the background is actually an instantaneous settlement on some stablecoin, some network.

B (55:11)

That you don't know, tokenized deposit to tokenized deposit, more likely.

A (55:14)

And it is actually instantaneous.

B (55:16)

Yes, you know, exactly. And it'll be bank to bank.

A (55:19)

Banks should want that.

B (55:19)

Yes. And the wild card is, will the U.S. treasury issue treasuries in tokenized form? That would be the ultimate leverage that the U.S. treasury Department has over the Fed because the Fed operates the payment system. They have famously kept out anyone that they didn't they don't like. But by the way, famously also given legally ineligible companies and even a state like Texas Fed Master accounts. So there's been a lot of hooey and corruption in Fed Master accounts. But the funny thing is if the US treasury decides to tokenize T bills, then would anyone bother with fedwire and banks anymore if they can just make a large value payment by delivering T bills? Right. Stop and think about that. There's always been this sort of, you know, friction between the U.S. trust CBDC by any. Well, that it is. And a lot of people are concerned about that. But the US treasury doesn't. Even though FinCEN is under the US treasury, they don't do KYC on T bills. Right. It's the banks that do that through the Fed. So Scott Bessant has a very interesting card if he should try to play it. If the Powell Fed continues to cause problems for the Trump administration, he's got some very interesting cards to play. A lot of people talk about the Treasury General Account and how you can de facto do Operation Twist through repurchases of long term Treasuries or do QE through the Treasury General account. These were things that Janet Yellen did. She's the one who sort of introduced those tools. The treasury could dominate the Fed. It's to use one of Lyn Alden's very famous quotes, fiscal dominance. There's nothing stopping this train. The Fed is kind of a taker on some of these things because they can't stop it. Which is part of the reason why I look back and think they were so crazy not to work with Custodia and get all this inside the banking system. But they didn't. And instead it's now developing outside of the banking system. The horse has. Horses have left the barn. They're running just like the horses behind me, running away as fast as they can. And U.S. treasury is in a position where if it decides to pull that trigger and start issuing T bills on Ethereum or Solana, just like the SEC chair Paul Atkins is saying, they're going to start letting securities be issued. Holy cow. One of the big problems, by the way, keeping securities from being truly tokenized is that the corporate registrations are still done in analog form. I'm still working on this. I think you and I've talked about this before. My very first work with a government was with the State of Delaware in 2016. The Delaware Blockchain Initiative trying to get the Delaware Secretary of State to run a node on a blockchain to allow people to have a choice whether to register their corporations, that is all their shares of stock in analog form or in blockchain form. And Delaware has resisted that classic regulatory capture. The registered agents loved having analog pieces of paper or digitized pieces of analog paper to pass around. They don't want natively digital securities. But once we get to natively digital securities, man oh man, do we just wipe away all that complexity in the back office of Wall Street. But you got to get tokenized dollars in the banking system first because you can't really get the benefits of tokenized securities A until they're natively digital issued, but B until the dollar leg of a securities trade can be settled in tokenized form as well. It's still true that stablecoins are pretty much their own external financial system. There's not a lot of connectivity because again the Fed hasn't rescinded that regulation yet that says banks can't own digital assets and can't. I mean it's presumed unsafe and unsound if they are engaging with permissionless blockchains. Right. So that pretty much explains why you haven't seen the big banks yet really participating in the stablecoin market.

A (59:30)

You always make me think 10 levels deeper than I already was about all of these topics. It's about to get so crazy.

B (59:36)

It is though, Scott. I think the next five years are going to be so much fun because the amount of change that's coming is just staggering. And it's great. It's great for the end user, it's great for the end consumer. It's going to be bringing down the cost of financial services. There's going to be a massive consolidation wave in the banking industry because those that don't future proof their business are going to have to sell out to those that did. So it's an incredible opportunity for the really tech forward banks. And I love working with Vantage in part because the top two guys are IT guys. And so when you actually have a bank run by IT guys they look at things quite differently. And that's how we've conceived of the idea of delivering tokenized deposits in the way in which we're going to do it and connecting them to stablecoins. And I think a lot of as we've had conversations, everybody's said whoa. When they see what our idea is, it is unique. It is not something that has been talked about in the market before. It is going to be different, but I think when we can talk about it, folks will realize it's something really special and it brings tokenization into the core of the banking system. For the Maxis who might be questioning why am I doing this? Because I think once you get those primitives inside the core of the banking system, it's not very far for the banks to then say, okay, let's start offering Bitcoin. And this is an on ramp into Bitcoin.

A (60:59)

Maybe we've always thought of Bitcoin as the Trojan horse, but maybe the stable coins and tokenized bank deposits are the Trojan horse for Bitcoin.

B (61:05)

I think they are. That's how I, I've always thought of them that way. Scott. It's funny, it's. Do you realize we're coming up on the fifth anniversary of Kraken applying for its Fed master account, which I think is October 12th? So it's next week and ours was October 28th, 2020. We're coming up on five years, but in Custodia's case, we had it as part of our business plan since early 2020. It's always been, always been what? Our plan was to use this as a pathway to where we think the financial system will ultimately go, which is towards Bitcoin. But that's a long term, that's a very long term play. There's a lot to be done in the meantime with stablecoins as the, as the most important infrastructure, I think.

A (61:49)

Another incredible conversation. I can't believe, as usual with you, that we've cooked through an hour so quickly, but thank you so much again. We'll have to catch up much sooner hopefully than last time. It's only been a couple.

B (61:59)

Yeah, that was Vegas. So much has happened.

A (62:02)

And then we had. But then we did the live one with Tillman where you blew his mind.

B (62:06)

Right.

A (62:06)

And Andrew. So, yeah, you know, I guess we.

B (62:09)

Boy, those guys have been right too, you know. So congrats. You've had some great conversations, you've delivered some great content and we'll be back.

A (62:18)

Happy October.

B (62:19)

Yes, Happy October indeed.

A (62:20)

And see you next time.

B (62:21)

Take care.

A (62:22)

Thank you, Caitlin.