Austin Campbell (3:17)

So without further ado, let's get started with the Fed and inflation. So for those who are unfamiliar, every so often a group called the Federal Open Market Committee meets. This is 12 people, seven fed governors and presidents from regional banks across the United States. They're the ones who vote on interest rates. They're meeting this week. They are expected to cut interest rates by 25 basis points, but this is not the only thing they do. These are also the leaders of the Federal Reserve and have many other topics on their mind. So starting with the macro backdrop, we have a cooling employment market. Unemployment claims are rising today. The news is out that Amazon might be laying off up to 30,000 people per Reuters and inflation remains above trend at 3%, above the 2% target, but not catastrophically so. And according to Deutsche bank economists, Powell is likely to keep options open and not pre commit to a particular action through year end. So starting there, Rahm, let me throw it to you. What are the implications of what's going on with the Fed and what should we expect from the market?

Rahm Alawalia (4:25)

Sure. So first off, I would have characterized the backdrop differently.

Chris Perkins (4:29)

Right.

Rahm Alawalia (4:29)

I I'll share my screen. We'll look at initial claims like these are just seasonal fluctuations that happen as the economy transitions from a summer economy to a back to school economy. We've seen this last three years in a row. There's a spike in initial claims, there's some softness in the labor market. People call for the Fed to cut and then you see unexpected economic strength in Q4. That's going to happen again this year. I believe against that backdrop you have productivity growth increasingly driven by AI levels we haven't seen since the late 90s. You got unemployment rate at 4.1%, sky's not falling. We're seeing strong earnings growth again from the regional banks last week, the mega banks before that and the S and P and the indices just hit all time highs today at 6,800. The Fed doesn't Need to cut. They didn't need to cut last year as well. When they cut last year, the 10 year went out, stock market's ramped. It's okay, I'm not going to fight the Fed. The fact that the Fed is cutting into Goldilocks, this is Goldilocks. I think I'm the only one saying this is a Goldilocks economy. Objectively look at the data. It's. People just don't feel like it's Goldilocks in their head. They feel bad because of headlines and geopolitical risk and they don't like what Trump is doing with the East Wing. But fundamentally this is Goldilocks. So when that happens though, you should be owning risk assets. And so look at initial claims. This is initial claims. You can see there's some noisiness around the data. You know, don't forget like data series like the non farm payrolls which was supposed to come out the first Friday of the month or didn't because there's a shutdown. It's extremely noisy. Like the confidence interval is like 100,000 plus or minus. It's just noise. And the most valuable reliable data subject to audit is company earnings data. Company earnings data. And every week during earnings season my team and I go through the companies that report to the day and we compile highlights in our newsletter. Oh yeah, we don't see weakness, you don't see weakness.

Steve Ehrlich (6:31)

So it's a.

Rahm Alawalia (6:32)

There's company specific weakness. Okay, Tesla missed on new order. That's eosyncratic. But credit is good, economy's fine, earnings is good, Capex is strong. So that's the story.

Austin Campbell (6:44)

This is Goldilocks.

Joseph Shalom (6:47)

I would take the other side of that in that you saw Fed Reserve Governor Chris Walker in July dissent and focus on the fact that yes, looking backwards, the labor markets have been actually really robust and resilient. The American economy is consumer driven. But there's a fear that when AI starts to materially disrupt, potentially have once in a generation interruption of white collar markets and knowledge workers. The Fed may want to get ahead of that labor market potential significant downturn. Because when the labor market turns, it turns very fast and very hard and it's very hard to reverse. You know, I think over the last period, as long as we've remembered, the Fed has prioritized price stability, obviously their primary concern and they've been very, very hawkish. But the labor market is coming to a moment that matters. Anecdotally, lots of companies are slowing down hiring and you know, anecdotally lots of people I know with really, really good educational backgrounds graduating top universities are having a very, very hard time finding white collar jobs. And I would bet that they're more worried about that hard shift on labor and the dislocation coming from AI that is just harder to reverse. So while you look backwards, it's been Goldilocks. You can make an argument there's a labor demand cliff coming.

Chris Perkins (8:26)

I don't know. From my perspective, I was just checking out polymarket and now I can access it on the World app for the first time, which is pretty cool. We're investors in World, not in polymarket, but polymarkets make it clear that the rates are coming down. And I think we know that that's absolutely going to happen. This is a government that's very focused on expanding our gdp, both real and nominal, and they will do whatever it takes to do so. They're also looking to put assets in the hands of retail. Like they opened up Trump opened up this retail account for kids that are born now. And we're trying to make sure that they're sharing in those assets.

Austin Campbell (9:05)

So.

Chris Perkins (9:05)

So that's what this government's thinking about. I had the opportunity to go to the payments conference at the Federal Reserve last week and I couldn't believe what I heard. Started with Chris Waller. Governor Chris Waller, who I have an incredible amount of respect for, got up on the stage and he's like, everybody, it's time to embrace the disruption. And like to hear that coming out of a Fed governor who is positioned potentially to be the chair, and I'd be thrilled if he is, is nuts. He talked about opening a Skinny account. And what is this Fed trying to do? They're trying to make sure that we lead, that we innovate. Stablecoins are everywhere. I sat next to him at a private lunch and he's just like, I recognize the opportunity with stablecoins. Four years ago. No one was listening to me at the time, but now they're listening and we're going to be all in on this. And so you have an entire government that's focusing on growing the pie, growing the gdp. I don't know if they're going to be successful or not. It feels like we're in a very good, good macro environment for asset prices, particularly in crypto going into the end of the year because of, of the de risking and the stimulus that they're looking to, to inject.

Austin Campbell (10:15)

I mean, I'll go a step further than Rahm and jokingly call this the check market, which is to Say you can kind of take whatever you want from the picture that's being painted right now if you feel like there's room to cut. It's because of the employment story that Joseph just told and fears of disruption in this market due to replacing many forms of labor and also maybe some of the impact around geopolitics. Like certainly there's a narrative there. If you want to be hawkish, you've got labor sort or I'm sorry, inflation sort of above trend and you're looking at that and saying, wait, wait, wait, we need to be concerned with that one. I think we need to be hiking. And so one of the things that I would expect is that it's going to take a dislocation in one of those two things to cause anybody currently at the Fed to change their mind as from where they currently hold it. So I think the current path of cutting will continue because the votes seem to be there for that. Rahm, I agree with you. That's very good for risk assets right now in the current backdrop. But to me the thing we're watching for to change this path is does unemployment really crank up? Because that would be a sign that many of the hawks are going to flip or does inflation really crank up which would be a sign that many of the doves are going to flip. But in the current state, I think we're just kind of living where we are. The thing to me that's news out of the Fed and I'm going to pile on with Chris here. I was at the Chicago Federal Reserve Payments Symposium a little bit back and the number one and number two topics of a symposium that historically has been around instant payments were stablecoins and AI. Right. We were looking at a full scale modernization not just of US Banking Rails, but an acknowledgment that the line between retail payments know business to business payments settlement and global money transfer is now blurring. And at the same time a lot of both optimism and concerns about what AI is going to do. There was one presentation that was on screen that only afterwards was revealed that no, that was entirely fake. This was completely AI generated and even though the real person it was based on is sitting right there and it looks identical, none of that was real. So there are a lot of questions around how are we going to handle these things? I think and Rahm and Joseph, I'd be curious to hear your view. This may be the first time the Fed's really been front footed on innovation, not just leading in like a rate cycle, but trying to truly lead at transforming that system.

Rahm Alawalia (12:43)

I 100% agree. I've never seen in my life a regulatory climate that's been this permissive and this constructive. Fed Governor Waller to Chris's plank. Fed Governor Bowman about a month or two ago, SEC Chair Paul Atkins. And you've got also of course Bessant leading the charge here. This is extraordinary. I mean this is a bigger deal than Glass Steagall. I was trying to think back in history, like when's the last time we saw something this is a bigger deal than, than Glass Steagall and then before Glass Steagall, you have to go back decades.

Austin Campbell (13:17)

It's.

Rahm Alawalia (13:18)

It's actually been more regulation, not less since then. So I agree. I'm not worried about this labor market dislocation. You know, labor market's clear in a competitive free market, open economy and labor becomes more productive with AI, we're seeing that in measured higher productivity growth. And employers are going to hoard labor they don't cut when their earnings are going up. They can actually make more money with talent when commingling that talent with labor. So this is a good story. Labor growth is slowing down because you have less immigration. That's it. So the supply of labor is going down. Therefore you'll see job creation come in at a more measured pace. It's a normal thing.

Austin Campbell (13:58)

All right, so moving on to our next topic to get to global money flows and modernization. The world's first yen stablecoin launches in Japan. So JPYC became the first fully backed stablecoin denominated in yen backed by JGBs and domestic savings. The stated goal there is to issue 10 trillion yen. So roughly 66 billion in current numbers over three years. No transaction fees initially. It's monetizing via the interest on the reserves. All three of Japan's mega banks appear to be jointly involved in the launch. The bank of Japan is saying stablecoins could partially replace bank deposits and global payments on the back of this. But there, to be honest, is uncertainty around domestic adoption. Global use is definitely targeted for trade flows. And also I want to say in particular congratulations to Naoto San and the JFSA as well as Ushida San and the previous team. There are many people there who have been working on clearing the path for this for a long time. As Ram said earlier, it's a remarkable regulatory environment as we've turned the corner here. So I want to start with Joseph. I believe you have some views here. What do you think the impact of this is going to be?

Joseph Shalom (15:14)

It's interesting if you take a look back six months, the narrative coming from Washington and globally was the US was at risk of potentially losing its reserve dollar status. You had China and others threatening not to buy U.S. treasuries. So clearly, Secretary Besant, the Trump administration believe that US dominance in crypto markets, US dominance in tokenized assets if backed by US denominated stablecoins is a double positive. One is you'll have more and more of the world's financial transactions, not just global trade, denominated in stablecoins like Tether, USDC and others that are overwhelmingly USD based. But second, people forget every single stablecoin needs to be backed by a U.S. treasury. And if you look at the likes of Tether and Circle, I think collectively they're a top 15 creditor of the US government. So if you can believe that the world is tokenizing all financial assets, they're going to be paid for and transacted in stablecoins which are US dollar denominated. And that creates massive demand for US Treasuries. This is a win, win, win for the US It's a win for Washington. And I just spent three weeks in Asia and the UK and there's real fear that these local currencies are going to lose their vaulted status. So I'm not surprised that Japan is doing this. I am surprised that Europe and the UK seems to be very, very far behind in solving this but smart move by the Japanese government. And I think there's enough global trade and enough intra company trade in Japan to support this, what you call a 60 to $100 billion stablecoin effort. And I do think it'll be successful. I just think the US dominated stablecoins are going to actually bring the US dollar back to strong reserve status in global financial services. So this is a win for Washington and you' see others trying to chip away and, and preserve their own reserve status.

Chris Perkins (17:37)

I'll chime in. Joseph, I agree with you. I think that stable coins are going to, we've talked about this before, really extend US dollar reach. It's pretty ironic. Like when I was in Wall street and I was running derivatives businesses, Yen used to scare the bejesus out of me because I was uncollateralized for so long, I'd have to wait for the stuff to come in and settle and, and I was like, gosh, if I could settle this stuff quick, where is the yen stable coin? Because that is going to give me the most utility of anything because I would, you know, I would pay Out I'd be waiting and waiting, waiting because my client of course would make me just take that risk. And I hated that risk. So with stable coins, that goes away. We call that risk in Wall Street. We call it her stat risk. And the reason why we call it her stat risk is because in 1974 there was this German bank called her stat and it blew up because it paid out and it didn't receive and it went and it went bankrupt. And it's ironic because after that the bis, which sets global capital rules for banks, they set up bcbs which, which helped address that issue. And what the irony is is that you have the BIS now that's been really anti stable coins. Even though like these stablecoins are literally going to solve the problem that brought them into existence, we're going to eliminate settlement risk. So I'm excited about that. I'm even more excited about the FX markets. FX is a 7.5 trillion dollar a day market. You can't trade FX if you only have dollars like this gets me super excited. I want to see that type of real time trading. I think it's gonna be great for the economy. It's gonna be great for the Japanese. Look Joseph, you're also right. The Europeans are behind. Why are they behind? I think it's because of the way they calibrated the regulatory capital. If you have to reserve 2 or 3% for every single euro and you're only making 2 or 3% on that float, it's really hard to scale. I think that that jurisdiction is going to have to figure it out pretty quick, otherwise they're going to be left behind.

Rahm Alawalia (19:33)

Do you think, Chris, that the stablecoin.

Steve Ehrlich (19:35)

Market.

Rahm Alawalia (19:37)

Replaces or disrupts the FX market? Like do these converge? I thought it was a great claw.

Steve Ehrlich (19:43)

On first at Risk.

Chris Perkins (19:45)

Yeah, of course, we talked about this, I think in the past where. Let's just talk about the equity markets.

Austin Campbell (19:50)

Right.

Chris Perkins (19:51)

I have a choice. Do I buy an equity as I do today or do I buy a tokenized equity? If I'm a fiduciary, I have to buy the tokenized equity assuming liquidity stays the same. Why? Because if something happens on a Saturday and there's a risk issue, I have to manage my risk. How do I settle them? I settle that in stablecoins. Right. So all things being equal, the tokenized product is a better product, FX the same. Do I want to have an FX product that settles T plus 2 or do I want to have an excess FX product that settles real time? If I'm a Fiduciary, what do I want? It's just a better product. So again like I used to run the largest FXPB in the world. I was managing that Hurst that risk and people say oh cls, we solved everything CLS handled, doesn't handle every currency. Austin's shaking his head, I want to hear his take. But these innovations drive better markets and I'm sure the CEO of Sharply is going to talk about where many of those stable coins live today. But yeah, it's a better market, it's a better system. And the fact that some regulators are pushing back, especially the guys sitting in their ivory tower, the BIS saying this is going to be a problem. I think they have to get back to first principles. Stop. Stop trying to defend your and create moats. Move forward and understand the risk mitigation that you, that you achieve through stables.

Austin Campbell (21:13)

Yeah, I was, I was shaking my head about CLS because cls, although useful, is a very limited purpose entity. Chris, like you and I have both been derivatives traders, right? And like there are many forms of settlement that need to happen, some OF which are 24. 7 across global venues, potentially in different currencies where CLS is at best a very small part of what's going on. And to your point about everything being on chain and preferring the tokenized version, if I could have call it a 24. 7 global omni ledger. Joseph, if you know one of those, let us know right where I could put everything on it and then be able to transact. I'm going to be able to do things like clear our global interest rate derivative framework 24. 7 Eliminate like the double margining problem. These are very real structural financial improvements. And to pile on with what Joseph was saying, one, I do think this is a huge win for the $$. Stablecoins are the leader. As more things move on chain that reinforces their power. But I would also say I think it's going to be a big win for anybody who's a fast follower. So I think Japan has done something very smart here. You want to get into this game. You want your currency to be used for things like trade settlement. You want it to be used on chain as collaboration collateral. You want to start building those reps early. And to their credit the JFSA has been early to a lot of things in crypto. Like I will remind people they were one of the best at regulating exchanges. So FTX Japan is one of the few entities that survived. So there is a track record here. But moving early is going to matter if I was a smaller country with limited state capacity, had no intentions to do a stablecoin, I would be existentially worried even about the continued existence of my currency right now.

Joseph Shalom (22:55)

Yeah, and I think it goes beyond currency. People forget that most assets today trade on a venue specific basis. Like if your stock is listed on nasdaq, you're trading on Nasdaq. If you're on Deutsche Bors, you're trading on Deutsche Bors. When you end up getting a global sediment layer that's decentralized and I'll posit I'm an eth in tokenization maxi that's going to reap real repercussions on global capital markets in Europe and the UK and areas that are already struggling to list innovative companies and retain innovative companies. And when you start getting that decentralized settlement layer where pretty much anything can trade with anything programmatically, composably across borders, and I know there's a lot of regulatory hurdles, I think it's going to wreak havoc on those secondary and tertiary markets who've relied on the venue moat to keep capital markets in their jurisdictions and in their, in, in their native currencies. And I think Europe and the UK will be the biggest losers in this regard.

Chris Perkins (24:04)

This also makes like tokens like Ethereum, Solana, the layer ones where these, where these assets live very strategic suddenly, right? Like if you have trillions of dollars of stablecoins living on Ethereum or layer one of your choice, how can you not as a government have an arsenal in that? Like what commodity is more strategic? Like I guess oil is very strategic for sure. But this becomes a core important strategic commodity that you have to have.

Austin Campbell (24:32)

All right, on that note, we do have to flip to an ad, but then we're going to come back and argue more about stablecoins.

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Austin Campbell (26:25)

So let's keep talking about stablecoins Chris Araf Former employer Citi has announced that they're partnering with Coinbase to test stable coins for cross border payments for corporate clients. The goal there being to simplify crypto to fiat conversions to speed up settlement times and targeting what they said was 247 institutional demand for programmable payments. What impact do you think it's going to have that the big banks are now getting into this game?

Chris Perkins (26:53)

I'm happy for my old colleagues at Citi to be leaning forward. If you know anything about Citi, the crown jewel is something called tts. It's treasury and Trade system. I think I'll murder it. But it's the payments business of the world. They pay DoD, they pay the world and they've leveraged. When you become a managing director there, they'll pull you aside and say it's the network, it's the network. We been here for hundreds of years because it's the network. And the network they refer to in their moat is the correspondent banking system. And so it's I'm really happy that they're now leaning forward and saying, well wait a second, you know, we need to be able to, to to settle and pay in real time using this new technology. I wish them all the luck. But there's also this other debate going on and this was at the Fed and this is the debate around tokenized bank deposits. And a lot of banks are like no, no no no no. Tokenized bank deposits are better. They pay, yield, you know, we're all about tokenized bank deposits. And like Mike, I've been trying to get my head around this thing. I don't understand it. I don't understand the utility. I understand money markets, I understand stable coins These tokenized bank deposits. I was literally sitting next to Waller at lunch and Governor Waller, I'm like, explain. And I guess the consensus at the Fed payment center was like, this is going to be an internal tool for the banks to move assets through their ecosystem. Maybe that's it, but I'm still struggling with that one. Personally, I wish I was a little smarter on that subject. But look, great news for Citi. Congrats to them. And, and it's again, it's a better product. Like you don't have a choice. So good luck.

Joseph Shalom (28:28)

I, I think it is interest with JP Morgan who've really been leaning into those bank deposits. And Chris, they don't pay interest and it might be that J.P. morgan has a big, big enough walled garden. They have, you know, one of the large, is the largest bank. They believe, you know, crossing and moving across accounts and netting with tokenized deposits is better for them in the long run. City obviously is going in a different strategic direction, I think a more forward direction. So I do think it's worth contrasting with what you've seen at J.P. morgan to date. Bam. I think I might have interrupted you.

Rahm Alawalia (29:06)

No, no, I think that was great. You know, briefly, Citi invested in bvnk, which is a stripe competitor focused on merchant acquiring. That was a very thoughtful move. They partner with Coinbase on this. So the incumbents are responding swiftly. The CEO talked about the stablecoin initiative on the earnings call. This is a CEO led objective. I wouldn't underestimate Citibank around this as much as I'd love to see them disrupted actually in Long City have been for a while around this. And I think Austin, I think you and I spoke around this a few months ago. You thought that some of the big banks would have a natural advantage here. I think that's true. Would love to get your take on this.

Austin Campbell (29:46)

I think one, the banks are going to be forced to evolve. As Chris said, it's just a better product. Right. Like take international wires which are kind of a broken space right Now I have T plus 5 and huge fees versus a couple of seconds to send Chris or Joseph or Rom money on chain. Right. The just commercial weight of that improvement will drag the banks along kicking and screaming or they'll die. Right. This is a sort of like the Internet hits book selling moment for payments in that regard. Now on the form factor, I've been a little bit of a skeptic around tokenized deposits being the ultimate settlement thing because I think we kind of got to bank deposits being used for Payments at scale accidentally, right? If you rewind to like the 1970s, the majority of payments being made were made cash and cards were only starting to come onto the scene, right? Like banks were not integral to like buying coffee. And as a result, I think they've sort of stumbled into a digital monopoly that was not deserved. But the problem with bank deposits is these are incredibly not fungible items, right? Like maybe a little while ago we'd feel very differently about deposits at JP Morgan versus deposits at Silicon Valley bank as an example. And so when the deposits themselves are not fungible, because to move between banks you're moving credit risk and balance sheet assets around, it does beg for a simpler solution and you end up at sort of a least common denominator of acceptable, which is like a box full of T bills or overnight lending secured by Treasuries, which everybody will take. And so I think what we may end up is a slightly different layer cake in the future, which is to say banks probably should start thinking right now about taking well designed stablecoins as deposits themselves.

Joseph Shalom (31:33)

I think we've been speaking to the institutional and commercial side of these banks, but there's a massive generational shift where especially outside the US there are more and more young people who are about who about to inherit tens of trillions of dollars from our parents and from us, who are more likely, especially outside the US to have a crypto wallet than they are to have a deposit checking account at Citibank. And I think on the retail side you're going to see money movement almost entirely denominated in crypto to crypto wallet movement, instantaneous, low gas fees, easy to handle. I think we've been more focused on this idea of commercial and institutional banking. But I think on the retail side you're going to see lots of people who've never walked into a bank who may not even have an atm. They get their credit relative to the collateral in their crypto wallet. And I think the crypto wallet is just going to end up being the form factor for how people store and move money on the retail side, especially outside the US and in developing, developing countries.

Austin Campbell (32:45)

I mean, I'm going to pile in there and say I've got some students who have bank accounts who have never walked into a bank branch. Joseph. Right. Like they've got SOFI or something like that where everything was done online already. And like, if you ask them, their like personal nightmare is what do you mean? I have to go somewhere physically in person to do it. Like, this is great. I've got a phone right here. Right. And so I think this digital nativeness, right. Of people who grew up with the technology, who are used to using it, who understand it, who trust it, not say the current 75 year olds who are like, I don't know about this PayPal thing, I can't open the phone up and take the money out. Is going to be a generational shift that forces people in this direction. I don't know if it's just stable coins. Like honestly, I think for retail, obscuring the difference of what they're using and just making it easy is probably the winning play. But to your point, being interoperable with everything brings you there.

Chris Perkins (33:38)

There's a post retail demographic that's coming on the scene too. It's called AI Agents. I'm serious. Like that's the next one after this. Right. And like you just saw a pretty interesting release with something called X402 standard that allows now agents to, to pay themselves micro to micropayment to micropayment. So like that's the other part of this economy that we haven't even, we're barely touching the surface and there's innovations every single day. But, but I imagine at some point in our lifetimes those micropayments are going to probably outpace the human ones that we're talking about.

Joseph Shalom (34:10)

Yeah. Chris, I'm going to geek out here for your audience which is read ERC8004. This idea of trusted trustless agents who understand boundaries and registries. I think it's going to be sooner than we all think that there's going to be some sort of digital wallet twin that understands our preferences, our risk tolerance, can help build portfolios for us, can help move money. We'll just do payments for behind the scenes. And over time I think that's going to start melding not only with your wallet, but your prediction markets. And I think there's a world that's coming much faster than we expect. And it's agentic money, a digital twin of your wallet. And I'm not exaggerating, I think most of us are going to have that in the second half of 2026.

Chris Perkins (35:03)

Somebody asked me a question today. How are they governed? How do we govern these agents? It's pretty tough because like we always talk in defi. In a way it's simple. Even though our politicians haven't figured it out yet. It's like leave the technology out of it. We're going to make sure that we enforce activities, institutions, individuals, behaviors, behaviors and activities Go after it, leave the tech out of it. So, like, what do you do when you have like the technology and behaviors in a vertical, you know, how do you govern it? Like that's going to be. Somebody asked me today, I didn't have a good answer.

Rahm Alawalia (35:34)

I think you're right on the mark though, Chris is. Yeah, you are going to see these agents. You're going to have the keep my fridge stocked agent, keep me fed agent. It goes and orders, Uber eats, it knows my calendar, which is another agent. You're going to have the agent that does the send $200 to that person in Manila, call it foreign remittances agent. You're going to have agent that does subscription optimization. I'm probably paying for things that I'm not actually using, so. I agree. I think you'd have all these micro agents which will have approvals and spend limit controls and some kind of orchestration agent, probably run by a big tech company or OpenAI. I hope it's not a big tech company. I'm just saying that's probably the base case. So yeah, it's still, you know, still exciting times. Still early in the use case adoption.

Austin Campbell (36:23)

All right, I'm going to bring this back around to the other side of the bank thing since Chris was talking about strategic assets earlier as well. Chris, JP Morgan has stated that they're going to start accepting Bitcoin and ETH as loan collateral, allowing institutional clients to pledge them by the end of 2025. Sounds like they'll be using a third party custodian to avoid directly handling the crypto. But it expands on some of the prior moves to accept crypto linked ETFs as collateral and JP Morgan's own efforts in the payments space. This is something of a symbolic shift. As we all know, Jamie Dimon has been one of the biggest bitcoin haters out there. But now his firm is starting to operate in this space. So Chris, how real is this? And then Joseph, I want to hear from you. What do you think the implications are of adding ETH to that list as well?

Chris Perkins (37:11)

I really want to hear from Joseph. I mean borrow lend seems to be like one of the first ports of call for like utility and really unlocking, you know, the value of these assets. Like we know that crypto, it's, it's, it's private property in the Internet. For the first time, it has value. How do you unlock that value? By borrowing and loaning against it. Right. It's a super important, just table stakes, foundational layer of finance. We Saw, you know, I think Ketchup Fitzgerald's been jumping into it. They were early. The fact that a confidentially regulated bank now is now saying wait a second, we're going to do this as well. It really got like caught my attention because when I was in the bank like we have these, these like regulatory capital rules where they treat different assets differently and it's really nerdy stuff but like you could barely start any business even if you wanted to with crypto because you had to hold like almost 100 collateral capital against it. It's really hard to make a profitable business. And so like my question is, are things changing? Because I haven't heard that. And then number two, if you're that guy like Joseph right now you have an equity, the equity rules are much more favorable when it comes to borrow lend than the native rules. So as I start thinking about the unlocked, the potential of DATs like SBET, to me this is like, wow, this is just so much more, much more utility than some of the native assets. But I'm really curious to hear what Joseph has to say.

Joseph Shalom (38:38)

Yeah, I think, I think that this is a watershed moment. What's interesting is for at least the last five years banks have not been able to touch Bitcoin or ETH. But what they've been doing is market making. The ETFs that we launched at BlackRock and Franklin Templeton and Fidelity, they've been in this room, they just haven't been able to touch it. I think it's a major signal for both Bitcoin and eth. I think it's legitimizing them and I think there's an investment thesis for people to have it in their portfolios. There's a reason why sharplink, where the second largest ETH dad has gathered basically over the summer, three and a half billion of eth, you know, as basically the highest powered money for the next generation of finance. And I'm talking about supporting trillions of stablecoins rwa, which is at the early stage. But I think the second message here is that everyone in crypto is looking for growth. And I think this decision plus the wipeout in the PERS market is basically going to start really differentiating between quality growth assets and non quality growth assets. And you know, you, you have this DAT phenomenon where basically Bitcoin, ETH and Solana are probably 99.9% of all DAT assets because they have the most utility and the most promise. But I do think this is going to be a further differentiation between quality crypto assets which have a use case, a business model, a mega theme and those that just basically are being used for either trading purposes or speculation purposes. And I think this is another watershed moment. I would just remind people that on October 14, when BlackRock was issuing its earnings, Larry made a statement, and he did in his, in his annual letter last year, that all assets will be tokenized. Most of it is happening on Ethereum, over 80%. And to date there's only been about 30 billion of tokenized assets. And this has been happening over seven, eight years. Wait till you see the largest financial firms in the world not only tokenize all equities, but tokenize the largest ETFs. You're going to see a boom for ETH and the Ethereum network. And that's why we're very bullish in gathering as much of this as we can at its current prices. But I think you're going to see a massive differentiation between Stablecoins, Bitcoin and ETH and everything else.

Rahm Alawalia (41:16)

Yeah, and I'll add to that. I agree it's a watershed moment. You have a couple trillion dollars that's now eligible for bank financing. So banks are going to lend against this. You're going to have high net worth and ultra high net worth investors and OGs and Bitcoin, Ethereum, and soon will be Solana too. Then I can get liquidity in their holdings without having to sell and pay tax less. Sell pressure you have. You know, you're seeing offerings like Raincard. Raincard has raised a couple hundred million dollars. They allow crypto natives to walk around, spend against their crypto assets on chain and live a life like Mark Zuckerberg. And Mark Zuckerberg isn't selling Meta stock. He's borrowing a 30% loan to value from a big bank against the value of holdings. So yeah, this is a, this is a big deal. And what's going to also happen is more of these assets are going to enter capital markets and the banking system, which is incredibly ironic, especially in the wake of chokepoint 2.0 where they were debanked, ostracized and JP Morgan would cancel accounts. If you disclosed you had crypto, you could get canceled. This was just two years ago. Now you're getting benefits in the form of liquidity if you custody your assets at a bank or if you contribute your capital in kind to an etf.

Joseph Shalom (42:35)

So yeah, and rom, wait, wait till we see creative ways not only to pledge your Bitcoin and ETH as collateral, maybe you're going to be able to soon pledge staked eth as collateral in some manner and then earn yield while you're, while you're using the asset as collateral that is extremely productive and also differentiated over Bitcoin. We'll see if that happens.

Austin Campbell (42:58)

That is essentially the liquid staking art. You right. Like I recently helped some folks write a comment letter on that for the SEC where it's like you could almost have the best of both worlds here, right? You have an asset that is productive, contributing to the governance of a network, generating some sort of return for the holders and is liquid at the same time. You know the funny part is like people act like this is an alien thing, but we have a whole market where you can like hold the asset and earn something and then trade it. Right now it's called the bond market, right? So like this is not an alien concept for people. But I think as Ram was saying, all of this is now breaking to the mainstream in a way that's going to be transformative for the assets that achieve it.

Chris Perkins (43:37)

One of the most bullish things as well is that traditional finance hasn't caught up. Like if you look at accounting standards, for example, on LSTs, they're intangible assets. So if you're holding those on your balance sheet, you have to mark them down to the lowest level over the reporting period as these things get sorted. And they're going to because we've got a government that wants innovation to happen. We have so many unlocks that are, that are coming on, that are coming along, that are on the horizon, that are inevitable. And that's a very bullish place to be.

Austin Campbell (44:05)

Well, speaking of potentially being available in the U.S. at some point, the founder of Binance, CZ was pardoned by Donald Trump. As a reminder for everybody, CZ pled guilty. It was a plea bargain, not a trial to one count of willfully violating the Bank Secrecy act by failing to maintain an effective anti money law laundering program at Binance. He served four months in federal prison for this. And as a longtime banking person myself, I will point out this is not unique to the crypto industry. There are countless banks that have engaged in similar conduct. And even though in the Binance case there were allegations that CZ knew about this, again the same has been true in the banking space. So if you were to look at the history of like TD Bank, Deutsche Bank, Citibank, hsbc, many others, I'm not sort of picking and choosing favorites. This is a common problem. And in all of those cases, while there were large fines, people largely did not go to jail. So Trump granted a full pardon to CC after Binance had already paid a $4.3 billion fine. As part of the settlement, the White House framed the pardon as support for crypto innovation and stated that SISI had been unfairly targeted. CZ said that he was grateful and pledges to help make America, quote, the capital of crypto. The critics on the left would say this points to a possible conflict of interest, given Binance's ties to some Trump linked projects. But I want to start with, what do we make of this? What do we think of CZ's pardon? What does it augur for Binance and the regulatory landscape?

Rahm Alawalia (45:36)

Look, I think a lot of people misread cz. I know I did. And I think now he. He will go on history as one of the most incredible fintech entrepreneurs of. Of all time. And somehow he's not on the Forbes list, which makes no sense. He should be like, top 10, you know, it's one of the most valuable exchanges globally. I think you actually hit the nail on the head, Austin. There's a disparate treatment here between him and what others did. Now, you know, there was an early exchange that was founded by these Microsoft dropouts, and they were bigger than Coinbase back in the day. I'm trying to remember the name of it. But they also had BSA AML infractions. They just shut down due to that. So I think in the case of cz, as was the case with those entrepreneurs too, they were focused on building a business and just did not understand the compliance obligations that go with launching a business that moves money and touches money and touches the banking system. I think there's an interesting question around. Is there a political angle here? You know, is. Was there any donation made? You know, we got to ask ourselves that question, right? Is there any potential link between the World Liberty Financial, stablecoin, NCZ and Binance? Binance, the best exchange for distribution, but they already have their own native stable coin. Will we see announcement there? If we did, that would be. That would look a bit funny, right? But I don't know. Austin, what's your take on this? Do you think there's a political angle or.

Austin Campbell (47:09)

Well, I'll, I'll pause you to say Binance no longer has their own stable coin. As the guy who used to manage the reserve before it was shut down.

Chris Perkins (47:17)

DFS put it into this.

Austin Campbell (47:18)

Yeah, which, you know, I'll. I'll maintain, by the way. That was an own goal, both politically and like a geopolitical level for the United States. You know, Joseph was talking earlier about the importance of, of stablecoins for the dollar. And here we had one of the fastest growing stablecoins onshore. It was a top three stablecoin. It was in New York. It had reserves that were fully sufficient, fully disclosed, by the way. I know this because I was managing them. And then when they had to liquidate it, they took it from 23.5 billion to zero and it did absolutely nothing to the market. And everybody got their money back. Right. Like we had it. And probably the biggest beneficiary of shutting that down is tether. Right. Which is offshore and not nearly as transparent. So I think that was a huge mistake. And then it just leads to this overwhelming sort of pressure by at the time, the Biden administration on crypto in ways that were fundamentally unfair. Like I've been critical of CZ's pardon not because I think he shouldn't have been pardoned, but because I kind of think it's a half measure. Without stepping back and asking why. Why are we doing this disparate treatment thing like what is going on with the Bank Secrecy act, that it's okay for HSBC to launder tens of billions of dollars for the cartels. And if you read that case, there were allegations like literally having boxes specifically made for the exact size of the teller windows to like shoot them through there. Right. Nobody raising red flags about this. Nobody went to jail. But of course in crypto you go to jail. I think there needs to be bigger and deeper reform to prevent these issues. And also ram, to your point, when people are starting up a business, helping to educate them and get them up to speed on what is going on with anti money laundering compliance and why that matters rather than just chopping people's head off with an ax immediately.

Chris Perkins (49:07)

Right, right.

Rahm Alawalia (49:08)

No. So the coin they had was Binance USD was shut down under choke 1.0 with Paxos. That gap is still there there. Couldn't they do a deal with World Liberty Financial?

Austin Campbell (49:18)

Let's say I'm, I, I will speak here on this one and say I'm not sure Binance wants a single specific stable coin going forward. They may now see that as a single point of failure problem. And this is an own goal geopolitically by the us we could have had a US stable coin on there. Joseph, you've been trying to buck it. I'm sorry.

Joseph Shalom (49:38)

No, I just, I, I'm less focused on the pardon angle as I am on the implications, which is, I would anticipate weekly held opinion that in the first half of next year you're going to see Binance US reinvigorate. My sense is you're going to get a lot of advertising on this podcast and it'll no longer have the disclaimer not available in all jurisdictions. The real interesting thing is, will they find some way to link the order books? Because the order book overseas dwarfs anything you would see in a US crypto exchange. And if they're able to find ways to link order books legitimately, I'm not suggesting they would do it illegitimately. You're going to see a lot of pressure on us and other crypto exchanges who've had that regulatory moat and barrier. And I would anticipate they will be very aggressive to take advantage of this pardon and the clean slate. It's harder to do when you start seeing turnover at the SEC and CFTC later in administration, I would assume they're going to be extremely aggressive and I think that'll put a lot of pressure on other participants here and I guess.

Chris Perkins (50:57)

I'll just chime in. So I think it's really important to distinguish Cefi from DeFi. The DeFi argument is completely different. This is technology and it's the way people use it that needs to be regulated. Binance is a cefi. It's a centralized entity and it really should be following the laws that apply to it, full stop. Austin, love your take. The thing that really got me back in the day was when I saw that, I think it was a CFTC court document that said, hey, you could barely even buy an AK47 with that 600 bucks or whatever. It was like that set me off, like to the moon. I got so angry because I was in Iraq and I was on the receiving end of those AK47s and it's not fun and it's like totally inexcusable to have that type of approach when you have buddies who were killed next to you. That is no bueno. And so, long story short, we go back to 2004. We didn't have crypto. It wasn't going to be invented for another four or five years, you know, then you start thinking and you're like, wait a second. Before I joined crypto full time, I really had to come to Jesus with myself. And I'm like, listen, I cannot be involved in any kind of money laundering. It's so core to what I, what I think about. I went into the OFAC website, I looked at every single fine. And to your point, Austin it was all banks. And I'm like, what is going on here?

Steve Ehrlich (52:20)

So.

Chris Perkins (52:21)

So, like, we really got to step back. This is much. We have much bigger issues than going after a CEO. And, like, why aren't the other CEOs thrown in jail? Double standard, for sure.

Austin Campbell (52:30)

Yeah. I would say, in many ways, I regard finance as a symptom of the problem rather than the problem itself. If we're thinking about what's going on. And by the way, back to the value of a blockchain, like, consider how compliance works in the traditional financial system, right? Like, let's say Rahm owns a bank and he's got a bunch of customers and he's trying to figure out, can I do business with these customers? Well, what he's got available to him is basically the information those customers have given him, what he can verify in government records and other sources like that, and then the transaction data that he's got. So if we have a chain of events, right, like to construct something that actually happens in the market where Rom's got a customer who sends money to a bank that Chris owns, and Chris's customer receives it, they spend money with a card that goes to a business that Joseph is servicing, and then that business pays a dividend to an owner in a bank that, say, I own, and then that owner is the one who sends money to a terrorist organization. How the heck would any of you guys have known about it? You wouldn't. Everybody is kind of looking at their own feet with a flashlight. And then we're expecting this to be an effective situation for policing money laundering in many ways. Chris, you raised part of the answer, which is when you get to decentralized systems that have a lot more metadata attached to them, even if it's pseudonymous, right? Like, I'm not saying, docs, everybody here, that's crazy, but the pattern recognition gets much better, and as you unmask the bad guys, you can start to see flows. And if you were to have, I don't know, something we've discussed earlier, a US stablecoin with freeze and seize capabilities, now you might have the ability to reach in there and take that money out. While again, having created a system where in the first place we didn't have to kyc everybody to make that work. So. So to me, sort of the thing that I would hope to see come out of this, and I'm going to say so far we haven't seen much indication of it, which I find disappointing with the current administration, is that if we really want to move in this direction, we can build a much better platform to stop the actual crime part of this from happening. Because one end of the disparate treatment, Chris, as you said, is exactly that. CZ was punished. Bank executives were not profoundly unfair. But the other problem is we have one system where we're constantly critiquing it for money laundering, which is crypto, and another where far more of that is probably occurring, which is banks, and we just seem to be ignoring it, which I personally find to be a bit of a problem. All right, Chris doesn't want to dunk on that, which is a good sign. So final quick topic here. Back actually to what Joseph was just saying about the importance of the government and their operations here. So there was a whole brouhaha around Brian Quinten becoming CFTC chair and his nomination being opposed by certain figures in the crypto space that led to it being withdrawn. But I have good news. Our long national nightmare is finally over. We have a nominee for the CFTC chair and it's Michael Selig. He was previously the head of the SEC Crypto task force, was also at the CFTC with then Commissioner and Chair Giancarlo, and he has pledged previously to help make the United States the crypto capital of the world. Also had a long career as a private lawyer, was involved with the Digital dollar project. Like Chris, I'll say you and I both know Mike and think very highly of him. But I want to punt to the group, maybe actually starting with Joseph on this one. How important is it to have a pro crypto CFTC chair for enacting some of the things that we want to as an industry?

Joseph Shalom (55:55)

Very simple. Two reactions. One is bullish. This is really, really important. You're not going to have that internecine warfare that we've seen between the SEC and the cftc. They can essentially coordinate. But at the same time, I also think we need there to be beyond regulatory clarity. You still need to have supervision because I think this industry has proven they can't necessarily always police themselves. I do think you need to have clarity. You have to have a pro crypto leader, but you can't abdicate the responsibility to enforce those clear laws. I think what's more important to me personally, and this is a personal opinion, is to have a separation between the SEC and cftc. The idea that the SEC chairman would run both, I don't think would be the greatest precedent unless we want to have a unitary regulator like you have in other jurisdictions. So clearly bullish. And I'm also Glad we have a precedent of having two independent chairmen for both SEC and cftc.

Chris Perkins (57:04)

The one criticism I've heard of Mike Selig is that they said, oh, he's too close sidecar of Chairman Atkins. Take real offense to that. I mean, Joseph, I totally appreciate we've got two different agencies here with two different remits, but they're focused on the same principles and they have to be coordinated like we want them to be coordinated. They used to have a joint CFTC SEC committee that was supposed to come together to address novel issues. It was disbanded in 2014. Like what the hell? And so I don't think that should be a criticism. I think that should be an incredible tailwind and something that he should underscore during his confirmation hearings. I'm a person who's going to work across, across agencies to get this thing right because it's really hard. It's really complex. I mean I've, I've met with both Chairman Atkins and Mike Selig in the same room talking about the same principles. I'm excited about the path forward. This is a missing. Like I think the big question now is how fast can we get them confirmed? Who are going to be the other commissioners? And then let's get to work guys. We're running out of time. We got a lot to do.

Austin Campbell (58:08)

I'll pile in to say I don't think those issues are even unique specifically to just cross crypto. Right. Like the call it discoordination between the SEC and the CFTC has been a problem writ large, certainly under like Gensler's SEC with regard to how crypto was handled. But even if you just look at some of what happened with Dodd Frank and sort of the brouhaha around swaps and who governs security based swaps and where's the dividing line and how do we have coherent frameworks for these. Some of these even remain unanswered to this day. Day. Like I will remind everybody there was a stable value study that was supposed to be completed by 2011 that still is literally not complete partially because of these coordination issues between the regulators. I'll also say, speaking to Chris's point, I think what's important for our regulators, and it's something we failed at recently in the United States, is having independent, thoughtful regulators who are going to listen to all sides on an issue. And I think Mike is one of those people, knowing him personally, you want the critics in the room, specifically the informed critics, right? Like not the hysterical sky is falling. Using the Internet will kill Us all. But there are many deep critiques of this space, Joseph. I think you've had some of them about some chains in the past. And on the other hand, I think we need the proponents in the room and we need to get to a good outcome. And thus we really do need the SEC and CFTC at least talking with each other respectfully. They don't always have to agree, but they need to be willing to communicate.

Rahm Alawalia (59:39)

Yeah, no, agree. I agree with all that takes. I mean, these issues are legitimately difficult. How do you classify these assets? What's the taxonomy they have trace sometimes with derivatives or securities, ultimately you need congressional action, and we have that coming also with Clarity Act. So I think the backdrop, you know, back to where we started, is very constructive.

Chris Perkins (60:00)

I believe it when I see it on the Clarity Act. I hope. I hope you're right.

Austin Campbell (60:04)

Yeah, I think going back to Dodd Frank, that's going to be incredibly difficult to get all of that right in one shot. But one, hopefully perfect is not the enemy of good. And two, if you can't do the whole thing, guys, there is the whole idea of breaking it up into parts and passing each one.

Steve Ehrlich (60:20)

So.

Austin Campbell (60:21)

All right, on that note, we have been rolling for an hour. So this is where I'm supposed to say thank you to my co hosts and especially thank you to Joseph Shalom for coming on. This has been fantastic.

Chris Perkins (60:31)

Thank you, Joseph.

Austin Campbell (60:32)

Really enjoyed it.

Joseph Shalom (60:33)

This was super fun. The most conversational podcast that I've been on in a very long time. So thanks for having me. I'd love to come back again.

Chris Perkins (60:41)

Thank you, Joseph.

Austin Campbell (60:42)

We look forward to it. So thanks for joining us on this episode of Bits and Bips. We'll be back in a week to discuss more about the worlds of crypto and macro are colliding. Until then, take care, everyone. Ram. Have fun in Vegas.

Chris Perkins (60:59)

Hi, everyone.

Lara (60:59)

I'm here with Unchained executive editor Steve Ehrlich. Welcome.

Steve Ehrlich (61:03)

Steve Taylor.

Lara (61:04)

You wrote a really interesting article recently about how Dax are using locked tokens in what I will just call creative ways. Why don't we first start with, you know, what are some of the common mis perceptions about locked tokens?

Steve Ehrlich (61:20)

Yeah. So this was an important place to start the story because one of the things that we both know is that in crypto they try to sort of appropriate traffic terms to make the industry seem more decipherable to people. And oftentimes I've seen this over years and years, and I'm sure you have too, Lara. The terms lock tokens and vested tokens or Vesting become conflated to the extent that most people use them as synonyms, but that's very much not the case. Anyone that's ever held stock options in perhaps a private venture backed company knows exactly what vesting means. Typically it means you get a certain allotment of shares, often with a one year cliff, and then perhaps quarterly or monthly vesting through four or five years. And the key part here is that with options, perhaps that are going to vest, they can be forfeited. They could be forfeited if you leave the company of your own volition. They can be forfeited if you're terminated either for a cause or just downsizing. That has nothing to do with your actual cause, nothing to do with your actual performance at work. Lock tokens. What I learned in the course of this reporting, and it was kind of a suspicion I had as I went about the story, is that they can mean a lot of different things and it really just depends on the person that you're asking. Typically lock tokens are presented as like these tokens are behind some sort of vault in some sort of smart contract out of circulation. And they're not supposed to move, or I guess the perception is, or misperception is that they're not going to move until some sort of quote unquote vesting schedule has been met. But what I found out in the course of this reporting, and this isn't even just related to dads, but lock tokens, they can move, they can move between holders, they can move between custodians. Lock tokens can often be staked. And really it seems like the only, only common denominator between all the different ways of using locked tokens is that they don't enter sort of circulation to the extent that you can buy them on spot markets. But there's a lot going on behind the scenes that falls under the, I guess the term locked tokens.

Lara (63:43)

So what did you find out about how DATs are using locked tokens?

Steve Ehrlich (63:46)

So DATs are sort of following the playbook first started by VC firms that would often buy sizable allotments. Eight, nine figures of these tokens, often at a discount. And this discount can vary from 15% I think, to as much as 60% is what I found in one of the companies I investigated. And obviously that can be very profitable for these firms because they're buying at a discount. And then because of a lot of the hype surrounding DATs, it, especially in the late spring, early summer, they still traded at a premium despite what could have been Despite a potential illiquidity discount that was applied to the purchases, investors in the actual stocks seemed to ignore it. That was all part of the, all part of the hype. But then what really was, I guess, doubly beneficial for these companies is that not only were they buying the lock tokens, they were able to get those tokens and then issue shares that would become liquid much sooner than the tokens that then they could be sold on the public markets. So they got the benefit of buying in bulk at a discount, but then were able to basically sell these shares at a premium that were backed by locked tokens to retail investors. So it's a really terrific way to juice earnings if you're able to buy at sizable discounts in bulk. But retail investors don't seem to care about that when they're pricing these assets.

Lara (65:16)

Oh, actually there was. So, so I understand what you're saying, but also I thought that another group that was benefiting is the insiders who like, if they had been allocated locked tokens, then they put them in this dad. And then they get liquid shares back that they, that are trading at higher, you know, mnav than one and then they can get liquidity faster and also. Yeah, like a much higher valuation. Is that.

Steve Ehrlich (65:46)

Yeah, that's true. I mean, that, that's part two. Because with some of the companies that I looked at for the story, I mean, I looked at Sue Group, which partnered with the Suite Foundation. I looked at stablecoin X which partnered with the Athena Foundation. I mean, there, there's, there's others too, they partnered with the issuers or the insiders of, of these tokens. And when they got, so when those foundations, they put those locked tokens into the exchanges, they then would get liquid shares back. I mean, swe group, for instance, they, in the SEC filings in the 8K when all this was announced, there was language to the, to the effect that tokens put into the debt were going to be locked for two years from, I guess, the finalization of the business combination agreement. And to me, that immediately led to some questions because clearly they're changing whatever lock schedule was prior to these tokens. If they're going to say there's going to be a new locked schedule from here on out, then what I also saw in the filings is that many of those shares backed by the locked tokens that will, and the tokens will be locked for about two years will become unlocked after one year, some as early as six months. So that's clearly benefiting some of these Insiders. Those aren't even the most egregious examples. I mean, I wrote a story a few weeks ago about an AI focused blockchain called Zero Gravity. And in that case, and this is a example where virtually everyone in the industry I've spoken to said this is the exact example of what not to do, the founders of that blockchain put about $300 million of locked tokens into the stat and then they got liquid shares immediately. And that's the most egregious example. But this is certainly a way for some of the foundations to get liquidity against illiquid assets. So there's a few different opportunities for insiders in these groups to really benefit financially from. I don't know if taking advantage of is the right terminology, but being creative in how they're using these locked tokens.

Lara (67:47)

And you mentioned Suite Group and stablecoin X. And as you also said, there are other companies that are doing this. These are just the ones that you happen to write about in the article. How did they respond when you asked them questions about what they were doing here?

Steve Ehrlich (68:02)

So it's funny, both stablecoin X and Sweegroup, the rationale basically was, well, we looked at what everyone else was doing and we're the most conservative or something to the effect of this is within market trends. It wasn't necessarily like, well, actually, to be fair, I mean, stablecoin acts. They gave me a bit of a longer explanation. And they also said that look for some of these tokens, if there's not enough liquidity, that can lead to jarring price movements up or down and they want to try to smooth the market, seed it with enough liquidity. Almost like a market maker to an extent. I'll leave it to people reading the story and listening to this interview to judge for themselves if they think that's a good enough reason. But it was funny, when I spoke to people, they basically said, well, we're not being as egregious as everybody else. That was primarily the rationale. So, I mean, that's kind of what I heard. I mean, there's nothing ostensibly illegal about this, from what I can tell. It's just again, being very creative. And there's lots of information like this hidden in SEC filings when it comes to these tokens.

Joseph Shalom (69:10)

And.

Steve Ehrlich (69:13)

It comes down sometimes to the information asymmetries between the insiders who are putting all these deals together and then the retail investors that either don't have the time or just don't know where to look to find out this information and it's important for people to have. So that's why we write about it. Yeah.

Lara (69:30)

One other piece of it that I thought about was that by those insiders who had initially been allocated the lock tokens by them getting liquidity via the DAD shares, they sort of, you could say, you know, they're kind of like cashing out early and it might decrease their incentive to keep working on the project and to like, it's almost like their incentives are no longer as aligned with the community. So that was like another kind of downside that I thought about.

Steve Ehrlich (70:00)

Yeah, absolutely. I mean, there's a reason why there's vesting schedules for key executives in venture backed startups. You want to keep them incentivized to work over a long period of time. And the same goes for token foundations and blockchain foundations. You want key people there. Long term interest alignment is critical. So if there are opportunities for early exits, sometimes they can be very difficult to, to say no to, depending on someone's financial circumstances, etc.

Lara (70:36)

Yeah. Okay. Well, that was super interesting. Thanks so much for sharing about your story.

Steve Ehrlich (70:42)

Thanks, Lara.

Lara (70:43)

Steve, you wrote an article for the Bits and BIPS newsletter on how bitcoin mining stocks are soaring. But this may not actually portend good news for the bitcoin mining industry, particularly in the us. What did you find with your article?

Steve Ehrlich (70:58)

So this was actually a fun one to write because bitcoin mining stocks and bitcoin miners in general, they have a soft spot in my heart. I mean, they're sort of the unsung workhorses of the entire industry. Bitcoin doesn't exist if there's no miners. Yet they continue to play second fiddle, or have continued to play second fiddle to the ETF issuers, to the DATs, to strategy for years and years and years because of just some very challenging economics that they face, hash rate continues to go up. They have to keep raising money to spend 8, 9, sometimes 10 figures to buy new miners every couple of years in order to sort of maintain parity with this computational arms race to mine bitcoin. But they've caught a big break. They are right now smack in the middle of the, I guess the AI crazed AI bubble, depending on how you want to see it. And in a world where right now Sam Altman and Larry Ellison and all the like are scouring the globe to try to find ways to increase data center capacity to run all these LLMs, Bitcoin miners offer one of the few places or one of the few opportunities to have like turnkey facilities to immediately increase scale. So I spoke with, I spoke with John Tadaro, managing director at Needham Company, an investment bank, about how sort of the equities analyst world is now rerating or completely changing the way that they're looking at bitcoin mining stocks. And basically what he told me is that bitcoin mining stocks now are not even thought to be, or they're not being judged as mining stocks anymore. They are being rated as hpc, high performance computing type stocks, like these special cloud providers that can support LLMs. And what we're seeing is a dramatic change in the fortunes of the stocks which have just been soaring over the last few months while bitcoin kind of languishes, goes down a little bit, and that companies are crashing. So this is a really important moment for bitcoin mining stocks and for them. Let me just. For their shareholders, it's a very welcome change after a couple of years of having to sort of explain themselves a little bit.

Lara (73:17)

And actually I just, I just realized something. So Bitcoin miners use ASICs, and ASICs are computer chips that have been designed to specialize in a particular function. And I thought that bitcoin mining companies had ASICs that were designed specifically for bitcoin mining. So is it something that can actually be easily adapted to doing AI type computing?

Steve Ehrlich (73:42)

Good question. Not those machines, you're right. They use asics, that stands for application specific integrated circuits. Basically it's just a fancy word for a computer chip that can only do one thing. And in this case, they basically run the hashing algorithm that supports Bitcoin. So those machines can't really be repurposed for anything else. Some other proof of work, algorithms that might use GPUs, those could be repurposed a little bit, but the bitcoin ones can't. But what these companies really want, they want the power capacity, they want the rack space, they want the infrastructure. They will help pay for bringing in the Nvidia chips and all the other actual hardware needed to make this happen. But factories and warehouses and fiber optic cables don't just spring up all of a sudden. And that's what these bitcoin miners have in spades. And that's why they're, they're the bell of the ball right now.

Lara (74:36)

And how easy is it to switch from bitcoin mining to this HPC or high performance computing type of work?

Steve Ehrlich (74:43)

It's not as easy. I mean, turnkey might be a little bit of a hyperbolic term, but it's not as hard as you might think, there is investment that has to go into this because HPC computing is much more resource intensive than even bitcoin. I mean, sometimes it can cost 20 times as much money to create a HPC type facility as opposed to bitcoin mining one. But the trade off is that unlike bitcoin mining, where you don't know how many blocks you're going to mine in a particular quarter, it's a rat race and you never know what's going to happen. You can sign these 10 or 15 year contracts where you kind of have guaranteed revenue. I mean, you're seeing this with core scientific and core weave. So these companies now know that they don't have to play a guessing game, they don't have to hedge. They know what's going to come as long as they meet their obligations. But the flip side of this means that once these bitcoin miners make the decision to really turn into hbc, and at this point, John Tadaro, who I spoke before the article, told me that among all the major public bitcoin miners, the marathons, the riots, The Clean Sparks, Hot 8 Terror, Wolf, Iris, etc. There's not a single one that's a pure play bitcoin miner anymore. And there were even a few a couple of months ago, because of the long duration of these contracts, there is no, basically those facilities will not be able to turn back to bitcoin even if they wanted to for a decade, a decade and a half at least. And that means that this is a major sea change in how these companies are going to operate because there is the risk. I mean, we've all heard about the AI bubble. There's so much money, I mean, trillions of dollars potentially being raised to build infrastructure. And a lot of companies that are using AI haven't quite figured out how to implement them into their businesses across any industry, profitably. I mean, even we're experimenting with certain AI research tools and stuff. So there's a lot of checks being written, they're going to have to be cashed in the coming years. And if, for instance, the AI bubble pops, some of these bitcoin miners, they certainly could be left holding the bag and having these big infrastructure outlays where they have to raise debt, they have to do other things to get the money. And they may not be able, they may struggle on the back end of some of these deals. That's the risk. But right now there's tremendous opportunity for them.

Lara (76:57)

Okay, and so you said in your article that you feel like this could either send bitcoin mining out of the U.S. or just hurt the Bitcoin mining industry in the U.S. but why is this in the U.S. in particular? Why isn't this affecting the entire industry like even in other geographies?

Steve Ehrlich (77:16)

So it comes down to sort of the infrastructure that already exists in the US like we have these facilities, we have fiber optic cable laid throughout the entire country. So it's much easier to turn those, convert those facilities into hpc, like cloud facilities, than because, sorry, it's much easier to turn those things into HPC facilities than building it somewhere else around the world. Bitcoin mining, in a way, it's almost like water going through cracks or a river that finds its way alongside certain debris in a stream. Like bitcoin mining is something that doesn't need necessarily the same types of resources, I mean, still heavy ones, but it doesn't need the same type of fiber optic cable and all types of other things like this. So basically what Mr. Dinero told me is that bitcoin mining is going to continue to move elsewhere around the world where there's cheap power sources, but maybe not this very high tech infrastructure that HPC computing really needs. The implication for all this is that bitcoin mining, which I think about 15 to 20% of the global hash rate exists in the US that might fall a little bit, which is a little ironic given that President Trump back in July said maybe a little tongue in cheek that he wanted all remaining bitcoin to be mined in the United States and his two eldest sons are involved in a bitcoin mining company in the United States. But it certainly seems that the U.S. percentage of global hash rate could drop as bitcoin mining becomes a little bit more distributed around the globe. And these facilities in the US which can be more easily converted into hpc, they take that step because it just makes more financial sense for companies to do that. And basically the big picture takeaways here are one, as I said before, if the AI bubble bursts and these bitcoin mining companies have taken on billions of debt or have gotten over their skis a little bit, that could lead to financial problems a few years down the line. But then basically what's likely to happen is some sort of new equilibrium is going to be created between HPC computing and bitcoin mining, which is not necessarily a bad thing. And I don't expect hash rate to go down at all. I mean, maybe bitcoin mining becomes a little more concentrated or maybe becomes a little less concentrated. We'll have to see what that happens. We'll have to see how that all shakes out. But I mean, the big miners, the, the Bitmains, the micro bts, they're going to keep pumping out more powerful machines. So the hash rate is going to keep coming up. It just the actual mix of hashing power is something to watch as the years go on.

Lara (80:00)

Okay. All right. Well, super interesting article. Thanks so much for sharing, Steve.

Steve Ehrlich (80:05)

Thanks, Lara.