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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
BTC247: Bitcoin's evolution with Traditional Finance w/ Jon Melton (Bitcoin Podcast)
00:41:54
Jon Melton shares his journey from Wall Street to Bitcoin, diving deep into banking evolution, Bitcoin custody, and the future of crypto finance and lending.
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- [00:01]
Preston Pish
You are listening to tip.
- [00:03]
John Melton
Hey everyone. Welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. Do you guys remember all the drama with FTX and how numerous traditional banks went under during this period of time, which was the start of this whole choke point 2.0, which was debanking everyone in the bitcoin and crypto space? Well, today's guest, John Melton, had a front row seat at Silvergate Bank. During our conversation, he explains how this entire thing went down, what the solvency actually was at the bank, and how the company was forced to liquidate despite still being very solvent and actually having solid operations. This episode also gets into a broad range of topics, which is why I titled it Bitcoin's Evolution with Traditional Finance. And I think the historical context and lessons learned are a great place for many people to study and understand. There's no better teacher than John to tell these stories and the lessons. And with that, I hope you guys enjoy this fun conversation.
- [00:58]
Preston Pish
Foreign celebrating 10 years. You are listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish.
- [01:19]
John Melton
Hey everyone, welcome to the show. I've got John Melton here with me and we're going to cover a whole host of topics here and you got a lot of experience in finance in the bitcoin space space and we're gonna get into some really interesting topics. So, John, welcome to the show.
- [01:34]
Preston Pish
Thanks so much, Preston. Looking forward to it and I appreciate you having me.
- [01:37]
John Melton
So I want to start off just kind of covering where you have a lot of experience, which is in currency markets, working at Morgan Stanley for like 13 years before you even came into bitcoin. I guess my question for you in that, because I've never really had conversations on the show with people with that experience, I'm just kind of curious, what is that like? Like, what's the day to day, if you were going to describe it to like a family member, what's that experience in currency trading like?
- [02:02]
Preston Pish
Well, thanks for the question. And it's really an interesting multidisciplinary area, which I think primed me a little bit for Bitcoin in terms of macro. So it's changed a lot over time as markets have become more electronified. But sometimes it can be, you know, a pretty almost kinetic environment in terms of trading activity. But at other times, you know, it's a little bit more cerebral in terms of structuring when you think about derivatives and options and how do you create a hedge for a client. But on a, you know, real time basis. You really have to be abreast of central bank policy, what's going on in different countries. You're not just looking at the currency market, you're interested in the commodities market and equities and risk sentiment. So it's a mix of having a conversation about markets all day long, but really intense focus on execution and help clients.
- [02:48]
John Melton
I don't remember what interview or when I heard this, but I do remember Stanley Druckenmiller talking about how currencies move in like these seven year, kind of three to seven year cycles. And I would imagine a lot of the job is just you got a client, they have some type of exposure through a commodity or whatever in said country and they then have the currency exposure there as well. And you're just trying to cover that with some type of derivative, if it's being sent here back to the US or whatever to make sure that that's offset and it's almost looked at like an insurance policy to make sure that you don't have any type of risk there. Is that really how most people in the currency space think about it or are using it in application as opposed to just people speculating on the direction that it's going to go?
- [03:38]
Preston Pish
Yeah, I think there's a lot of both. And you know, sort of which first item that you described I would consider more a real money application or a risk management tool where you have a structural flow, you're an importer but you're based in one country so you've got to send euros every month somewhere. And you know you're going to be doing that for months on end. But the Euro keeps on going up because Trump's hammering the dollar because we're trying to get exports going here. And that's something you might want to hedge. And there's different ways you can do it. But it's also a super liquid, very deep market with a lot of leverage embedded in it. So a guy like Stanley Druckenmiller, who's a very opportunistic, global macro oriented investor, could find it a really interesting and inconvenient way to express a more macro view with a multi year time horizon. Just because there's so much leverage with the way things are structured, you can kind of get a specific sort of payout or exposure you're looking for. Yeah.
- [04:31]
John Melton
So you did this for many years, over a decade. And in 2018 you told me that you had this no turning back moment where, where you came into the bitcoin space and really just Felt like you had to, to do something in, in this space. Walk us through what was that? Sure, yeah, just tell us the story.
- [04:53]
Preston Pish
Yeah. So In September of 2017, I think Bitcoin was 4 or $5,000. But it was the year where it went from a thousand at the start of the year I had no idea if existed. And then it got up to 19 or 20,000 that year and it's in temper of that year. So I was working at Morgan Stanley and in the midst of this big run up in bitcoin, they had an event focused on crypto. So they had, I remember Joey Krug was there, Ted Rogers from Zappo, which at the time was probably the biggest bitcoin custodian in the world, also gave a talk and that really resonated and he essentially gave the very well known Wences Casaris framing of bitcoin as the best money that humans have ever come across, or in this case, you know, engineered. And as somebody who had been sort of grounded in macro investing, that was really, really interesting to me. So I went home and listened to a lot of Andreas, listened to everything I could find from Wences, read every blog post from Zappo and ultimately quit my job about nine months later in May of 2018 and joined the institutional team at Zappo where I marketed custody and trading, but essentially bitcoin to institutional investors. So some of the largest college endowments in the country, hedge funds, high net worth folks. And it was a really interesting time just given what was going on in terms of forks and a bad bear market. But to your question, it was absolutely the calculation that if bitcoin's for real and it's a once in a 5,000 year opportunity and I had the opportunity to join a great company with somebody like Ted, who I respected immensely, I would kick myself, but all worked out. So yeah, I just left.
- [06:34]
John Melton
You mentioned this name, Wences Casaris. And for people that I think are casual observers of the space, they may not know who Wences is. For people that have been in the space, they know he's a very big deal and somebody that for instance, it's my understanding that he's the one that orange pilled Bill MILLER Back in 2015, you know, is a very high net worth individual and has had a massive impact on the space. You've worked with Wences, Tell us a little bit of his background for the general audience. Just tell them who he is, like what he's built, how he became who he is and then what key role he kind of Plays in the space and then we'll go from there.
- [07:11]
Preston Pish
Sure. So wences, I think I would agree with, as you said, some of the people who've been here really early, early on in class of 2017. So everybody feels like they're late, but there was a lot of history before 17. But a lot of people are coming into bitcoin obviously all the time. And I do think that went, this is one of the most important figures in the history of bitcoin because of what he built and also for the credibility that he brought to the space. So went this is his background, this is a very talented entrepreneur. You know, founding a company called Patagon in in Argentina, which you know, has been described at the e trade of South America. Previous to that, he had the first Internet service provider in Argentina. So somebody that was around and saw the birth and participated in the birth of the Internet and because of his personal background in Argentina, the very different economy obviously than than the United States, where we take things like a stable and free currency for granted, really had a deep appreciation for what bitcoin could mean for the world and I think most specifically for folks in emerging markets. And that stuck with me. I remember sitting in meetings at Zappo and sharing with folks my view that I think bitcoin for the first time allowed everybody in the whole planet access to a G7 currency. Whereas if you had been to before and you wanted Swiss francs, that was really hard. But everybody could get bitcoin. But back to win this, ultimately he found bitcoin went deep down the rabbit hole and with his knowledge of financial markets and technology brought a lot of credibility. But importantly, he built what at the time was and continues to be an incredibly secure custody solution far ahead of its time, called Zappo with multi state, multi continent dispersed keys, a really next level custody solution that was very state that folks, I think would even have a hard time thinking about what timeline for it.
- [09:05]
John Melton
What timeline was this that Zappos came up?
- [09:08]
Preston Pish
2000, I believe it was founded in 2013.
- [09:10]
John Melton
13.
- [09:11]
Preston Pish
Okay. And the way I think of it is the network of people that wet Justin Zappos was connecting with, he really lowered the barriers. So if you heard about bitcoin, you thought it was interesting. Your next question is, well, if I want to buy it, where am I going to store it? I don't want to keep it on a thumb drive under my, you know, self. Custody is an important aspect of bitcoin. But for some of those early institutional type investors like you mentioned of Bill Miller, the Famous Leg Mason, money manager. Trusting Wences and Zappos to hold their keys was a really big benefit for Bitcoin early on. Yeah. Okay.
- [09:43]
John Melton
You also have this interesting background where you were at Silvergate and for people, for people that experienced this last bare market, they know that Silvergate was like right front and center of that bare market, got very political. There was a whole lot to unravel here. I've never covered this on the show and I would love to get into as much detail as you're willing to talk about, but I think this is a really core and important point, is that Silvergate was instrumental in Coinbase, Kraken Circle having liquidity 247 that was never there prior to them kind of coming into the scene. And I'm more curious for you to kind of give us the story of Silvergate, kind of the founding of it, how it kind of found itself in this space of the founding of that in bitcoin in specifically and then maybe some of the story of like what went down as far as there during the bear market.
- [10:44]
Preston Pish
Yeah, go ahead, Absolutely. So Silvergate was for a time a small commercial bank in San Diego. It was founded in 1988. And the CEO really the, the visionary behind the bitcoin and ultimately digital asset strategy at Silvergate, as a gentleman named Alan Lane, who joined Silvergate in 2008 or 2009. And at that time Silvergate had sidestepped a lot of the pitfalls of the great financial crisis. It had a clean balance sheet and Alan was brought in to help the bank with his next chapter. If you fast forward to around 2013, Alan is a very tech curious non traditional banker who came across Bitcoin and said bitcoin is a way to be your own bank. And I run a bank, I should look into that. So he did, as curious people do. And at that time it was only Bitcoin and there were only a handful of name brand companies, you know, that had raised serious venture money like Zappo, Genesis, Coinbase, just some of like their early sort of first generation service providers. However, it's hard to contemplate now with names like JP Morgan and blackrock and Fidelity, these companies had a hard time getting a bank account. Bank accounts are your access to the Fed and to the wire system and the other side of Bitcoin. If you want any liquidity out of it, if you want any productive uses, you need to get access to dollars and the credit part comes later. But early on it was simply can we provide an operating account to these first generation companies, which was interesting as a banker in terms of a source of deposit. Yeah, so that was the first chapter after it went along for a few years and they had gotten regulators and educated the Fed on Bitcoin and kind of brought everybody up to speed, got a little bit more involved in terms of what problems can we solve. And Bitcoin trades 24,7 but the Fed wire system does not trade 24,7. So because Silvergate ultimately had a critical mass of digital asset clients, they connected the pipes and created a system called the Silvergate Exchange network where participants could facilitate trading 24, 7. Yeah, and I think this was really, you know, as flawed as the fiat system is, it's really important to have access to the fiat system for Bitcoin to progress and to mature and to go from being a 10 billion to 100 billion to a trillion $2 trillion asset. So the send was very successful. Ultimately transferred over a trillion dollars of value. Silvergate went public in 2019. The ecosystem was growing up. Fidelity came in in 1718 Intercontinental Exchange. It was just growing up. And ultimately Silvergate had 1600 digital asset planks. It had the industry and it had gone from can we raise deposits from this niche industry to we can be a better bank for these clients if we solely focus on this strategy. So ultimately the whole deposit base was digital asset clients. It was a very liquid balance sheet. And we had, when I got there in 2020, it was just the start of scaling up a bitcoin collateralized lending strategy only against bitcoin all over collateralized, never realized any loss. But that was sort of the next chapter of, of the Silvergate strategy. When I got there so late 2020. Think about Tesla Sailor. Like these material, you know, allocations from the space that continues to mature. Yeah, the bitcoin backed lending business takes off as well. We ultimately had a billion and a half dollars of commitments. We did multiple hundred million dollar deals with Marathon Large facility. A large loan to MicroStrategy was a great business. FTX Luna 2022 was a very interesting timeline. From Luna in May to FTX in November. And there were widespread fears, you know, throughout the industry. And the price obviously performed very poorly. Yeah, there was a run on multiple banks because Silvergate was so liquid in terms of its high quality securities and pretty low duration securities on its balance sheet. It survived the biggest bank run in, in recent memory. I think Continental Illinois had a 40ish percent drawdown in, in 84. And Silvergate was far greater than that. Ultimately in early 2023 Silvergate made the decision to voluntarily wind down, which is, as I understand it, very rare in banking and completely different from receivership where the executives are replaced and the bank assets are sold. So Silvergate ultimately gave all the money back to depositors and you know, been in the process of an orderly wind down subsequent to that, but in very close proximity. In terms of a timeline, the bank term funding program was put in place so there was a amnesty and lifeline to the banking community only realized after, you know, distress of the banks that serve the digital asset community.
- [15:38]
John Melton
We're going to get into that or at least I want to get.
- [15:41]
Preston Pish
There's a. There's a lot there, but that's sort of the arc of the silver. No, that was from infancy to maturity.
- [15:46]
John Melton
That was amazing.
- [15:47]
Preston Pish
Let's take a quick break and hear from today's sponsors.
- [15:50]
John Melton
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- [19:52]
Preston Pish
All right, back to the show.
- [19:53]
John Melton
Okay, the first question I have out of that is now that you have Fed now or Fed Wire, that's like basically processing wires within an hour now, do you think that what you guys stood up there at Silvergate was inspirational to the Fed realizing that they're going to have to start Processing wires a lot faster and that the liquidity really needs to be there. Or what do you think was the impetus for this change?
- [20:18]
Preston Pish
You know, knowing how slow government moves, I wouldn't be surprised that this is something that they've been thinking about for a long time and it just took them 25 years to do something about it. That's at the same time it's, you know, absolutely certain that Silvergate pushed the banking envelope. I know that on the credit side we were far ahead of other bankers and I think put pressure on others to get into bitcoin collateralized lending in the last cycle. And it wouldn't surprise me at all if you know, sort of the, the business that we were doing and the technology that the team at Silvergate put together was a bit of a blueprint for others in the market for update. The Fed.
- [20:54]
John Melton
Yeah. You had made the comment that you guys have short duration fixed income on the books on the balance sheet of Silvergate and that's why you were in a better position than a lot of others like Silicon Valley bank that had a bunch of long duration and that was the whole reason that they absolutely blew up. When we're looking at that scenario and you're looking at this idea that it just wound down, I think everybody looking at this from the outside in is like kind of raising an eyebrow saying come on, like why was this bank wound down? It seemed like it was politically motivated or that there was almost like a political threat that that's what was going to happen because of how involved they were in this crypto economy. Do you, you seem like you might not be able to comment, but I'm kind of curious if you have an opinion on that.
- [21:38]
Preston Pish
Yeah, I think from a financial perspective and I'll get to your question, but you mentioned in terms of high quality low duration assets. Yeah. It's important to note as well. I mentioned the billion and a half dollar loan book. By commitment we had an extremely low loan to deposit ratio. So in addition to not being in the business of extending 30 year residential mortgages.
- [21:57]
John Melton
Yeah.
- [21:57]
Preston Pish
We had a book of highly over collateralized short term, generally one year, sometimes a few years. But our bitcoin backed loan book was a very small portion of our balance sheet. It was very low duration, all over collateralized, super safe. Yeah. The rest of it was high quality securities that we could pledge as banks do for liquidity that three years in duration. It was an extremely conservative balance sheet. And why was that? Is because the CEO Alan Lane, who's a bitcoiner and has seen this asset grow up and seen the industry grow up. Knew that with the inflows and the volatility in the market, you had to be extremely liquid. So it was purpose built for volatility. Your question about politically motivated and what's come to light. I'm very grateful that Nick Carter has done some excellent reporting on this. Yes, he has. Because of bankruptcy proceedings and things that have come to light. There's a Wall Street Journal op ed by our former chairman. Mike lepres at Silvergate is another industry veteran. Ultimately it's clear to those in the industry that the regulators are not comfortable with above a certain threshold of concentration to this industry. So I mentioned that Silvergate had gone from let's try to bank some of these companies to this is a real industry. We can build a business and serve these clients better if we just focus on them. Yeah. So even though regulators as a Fed regulated bank are meeting with you on an ongoing basis, again, I'm not in all of those, certainly not in all of those meetings. But I do think that there's a sense in the market that allowing a bank totally focused on digital assets one day and then quickly saying we're not okay with the business model that that has existed with consultation with them, that was the decision. We couldn't run the business model any further at a high level. Yeah, yeah. Like I said, like there was. All the cash was just given back to deposit. Yeah. And this industry still needs banks. Yeah.
- [23:48]
John Melton
Nick did a fantastic job covering this. We'll find the articles that you're referencing and have them in the show notes so people can read up on it. But it's really quite fascinating this Silvergate was such an instrumental player there, especially in this timeline that we're talking about. In particular for liquidity, getting access to traditional Fiat Rails that would touch the bitcoin Rails and yeah, what an interesting historical place to work and kind of see that all unfold. You had mentioned this idea of borrowing and lending and being over collateralized and that's exactly what you're doing with Unchained. Now let's talk about this a little bit because I think this is something that I'm super passionate about because there's been so much pain, so much pain in this space with borrowing and lending and people thinking that they're over collateralized only to find out that they aren't because they're dealing with, you know, a centralized entity that's commingling funds and some of them are over collateralized, the other ones aren't. So do this for us, John. Just give us a borrowing and lending 101 over collateralization. What does that even mean? Why it's important? Like really kind of just lay it out there for folks and maybe even throw out like what are some things that should make you be like almost like a red flag was just raised, like pay attention, you're about to be bamboozled if people would hear certain things.
- [25:15]
Preston Pish
Yeah. And it's an important duration because bitcoin is this financial asset and we equate it with other sorts of services that we get in the world of fiat. So everybody's familiar with interest on your dollars in a bank account if you're lucky enough to find it, or just returns on your portfolio or borrowing against your house. But if bitcoin is a still maturing industry, you know, you really just, you do have to be careful and you have to diligence, you know, who you're working with in the sorts of transactions that you're involved. So the only business that we did it at Silvergate and then we actually do it on chain is the most conservative style of lending. We lend dollars over collateralized by bitcoin. And all that means is that if you're looking for a $200,000 loan, then you have to post $400,000 in Bitcoin. So if you think about that in another more familiar asset like your house, it's the same thing as pledging your $400,000 house and getting a $200,000 mortgage against it. No bank is going to give you more money than the asset that you pledge. So that's the structure, lending dollars backed by bitcoin. I'll tell you why it's an appealing strategy for some. A lot of bitcoiners ultimately come from the view that bitcoin is the right investment. And it might not be a 10% allocation, it might be a 50 or a 60 or more percent allocation or portfolio. And they believe that it still has years and years of a really attractive CAGR compound annual growth rate. Maybe it's going to 10x. I listen to your show with Jeff Booth and Hodl. Those guys are really smart, but they also have a long term constructive outlook that a lot of bitcoiners do. Yeah, but we've all got to live in the fiat world. So as I said, there's only two ways to get liquidity. You can sell it for dollars, pay taxes on it, totally fine. You can also borrow against it and that has the value of you maintain access to your collateral. It can grow over time and sort of do the work for you if you're conservative and you know, careful with your risk management. Now he mentioned sort of what should you watch out for? It's really important for us at Unchained to deliver transparency and note rehypothecation or repledging. These are technical terms, but they're really, really important. And I think it might be helpful to kind of like break it down by degrees. In terms of what is rehypothecation At a high level, rehypothecation is you giving your lender bitcoin collateral and they take your bitcoin collateral and give it to somebody else. It unchained. We have a policy in the strictest sense of never giving your bitcoin to anybody else or another party. We use multisig, which is a native part of the bitcoin protocol. And all collateral is held in a two of three multisig vault. Our borrowers have a private key. They participate in the creation of the collateral address. They can verify that their key is tied to that address. And once they send the bitcoin there, they can monitor it and make sure that that address still holds their bitcoin collateral. Strict no rehab application. You may hear others in the lending market, in the bitcoin backed lending market talk about funding partners or they'll take your bitcoin. Your bitcoin will be with a partner and they might even say things like drawing liquidity against that. I would call that soft rehabilitation. We're all non bank lenders.
- [28:36]
John Melton
Say the term again. What was the term that you just said?
- [28:38]
Preston Pish
I would, I would call it, it's my own term. I would call it soft rehypothecation.
- [28:42]
John Melton
Okay, and where, what would the people normally say when it's a soft rehypothecation.
- [28:47]
Preston Pish
Your bitcoin will be with a partner.
- [28:50]
John Melton
Okay, there you go.
- [28:51]
Preston Pish
So like yeah, and this is important because. Yeah, unless you're a bank, you're not lending out deposits. You're what's called a non bank lender.
- [28:58]
John Melton
Yeah.
- [28:59]
Preston Pish
And I can kind of like explain, you know what that means. But it's highest level. All it means is that you need to go raise capital to facilitate your loan. We have capital partners and funding partners. The difference is they don't hold your bitcoin. Yeah, some of them would like to hold your bitcoin. They might give us a lower rate if we gave them your bitcoin. But that's something. And again, it's not a pernicious, it's just something that you have to be careful. If your bitcoin is pledged with somebody other than the person you're getting a loan from, maybe it's a credit fund, maybe it's an asset manager. Here's your diligence and understand who that party is, what the custody technology is, where your bitcoin is sitting. It just makes it more complex.
- [29:38]
John Melton
Well, I think that your point on the yield is because you're dealing with higher risk or they're dealing with higher risk because you got such strong custody of your coins and they don't have 100% assurance that they're going to be able to get it back because you still got control of the key there. And therefore you're going to pay a different rate where you're going to. Yeah, on the bitcoin that you're depositing, you're going to pay a higher rate than if you are doing it this other way where they're basically holding the keys. So that seems to be a really important like foot stomp kind of thing for people to think about when they're looking at the spectrum of interest payments and why some are higher than others.
- [30:19]
Preston Pish
Right, that's absolutely valid. And that there are three types of reopensation, strict no re identification. Your bitcoin's on the blockchain, it doesn't go to a lender or a partner. The second one where somebody's pledging it to somebody, say it's not going to move, they just need to pledge it to get the capital or to get a better rate but it's still with somebody else, you have to underwrite that risk. And the third, you know, there are horror stories about is they're taking your bitcoin collateral and they're lending it out to somebody to generate interest. And maybe that comes in the form of backseat and the borrower in the form of a lower rate, but it comes with the highest amount of risk. So I think what we're describing here is sort of a continuum of super conservative security conscious model of a more, you know, maybe traditional model in terms of we're going to pledge it with somebody else to raise lending capital. And then a very risky model, unchained clients tend to be really long term, probably very concentrated security focused bitcoiners. So we just surpassed a billion in originations. We've been doing this since 2017. You know there's lots of clients who simply trust us because you know, we've been in the market through cycle and we have unique infrastructure that allows us to deliver multisig loans at scale let's take a quick break and hear from today's sponsors.
- [31:35]
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- [33:51]
John Melton
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- [36:52]
Preston Pish
Right. And I think that there are two considerations for me when I think about sort of the dual collateralized structure. Number one is in five years, who knows where we're going to be in terms of capital. And you need capital to sort of to underwrite that. And I think that right now real estate is obviously a government sponsored market. You know, rates are certainly artificially low because lots of that supply of loans could be offloaded to Fannie and Freddie. Either banks are going to have to come. But what do you think, what do.
- [37:21]
John Melton
You think those rates would be if that wasn't the scenario that was subsidized so much by the government? You think they'd be closer to 10%?
- [37:28]
Preston Pish
Why not? I mean like a couple of points in real estate and the wealth effect, I mean, you know, Luke Gromen talks about, you know, it's like how critically important is for asset prices in general, like the stock market, to be high to generate tax receipts. You know, a lot of folks in the country ultimately like aspire to own a house or have most of their wealth tied up in their house. But the second piece is that as you said really accurately, you have a piece of core collateral that requires upkeep, that if you just left it there, a house is going to decay. Over the case of a, I mean a 30 year old house needs a new roof. If you didn't touch it, you'd need to maybe working out of that requires, you know, a whole department of folks at a bank to work on those sorts of default situations. Whereas bitcoin, in a perfect world where all the money was flowing to all the right places, you know, should be priced much lower than that because it can be instantly seized, sold, you can get back to dollars very quickly. But like all things bitcoin, there's a reason why it's a $2 trillion asset class in a world of 40 trillion in equities and 40 trillion bonds and 20 trillion in gold. It's because that knowledge and that understanding of bitcoin is not diffuse, you know, in the economy and certainly amongst lenders and that's another reason why rates, you know, are still high. But I'm optimistic that banks have been a theme through this. But I think that bank market is loosening up and I do think rates are going to come down and banks are going to get more involved in the coming years. Yeah.
- [38:51]
John Melton
So in general, do you see that hybrid taking place?
- [38:54]
Preston Pish
I don't think it's going to be a near term phenomenon.
- [38:57]
John Melton
You think it's more than five years.
- [38:58]
Preston Pish
Out and there could be some specialty lenders like a credit fund or something that's really structured on an institutional basis. But I think that for, for banks, they have to get their feet wet in terms of are they comfortable custodying bitcoin? Do they know how to custody bitcoin? And having been in the market at a bank and speaking to banks now, I'm sure they're going to come up the curve. But I would be, I would be more optimistic of that. Something like that coming about through sort of private credit offering with somebody who's willing to take a little bit more perceived risk in terms of holding bitcoin trading. Bitcoin. Okay.
- [39:34]
John Melton
Hey, there's been a ton of discussion news policy with respect to stablecoins in general. Why is all this stablecoin stuff a big deal? Like what's the. So what for the person out there, if you were going to give the 101 on why stablecoins are such a big deal to the federal government, why they're passing things like the Genius act, what's your takeaway?
- [39:54]
Preston Pish
Yeah, so even as a bitcoiner, stablecoins are incredibly interesting. And I think that sort of digging back into my macro background and interest, I think that it's clear to me that the federal government is looking for any sort of buyer, you know, pocket that they can find for U.S. treasuries and whether that comes in, you know, sort of arcane, your regulatory ratios like the supplementary leverage ratio that allows banks to buy more treasuries with less capital, or the Genius act, which Scott percent says could be a $3.7 trillion market. These are ultimately the markets. Everybody's looking at the Fed and you've got to look at the Fed. But you mentioned the bank term funding program. These are different ways the liquidity of the economy can expand and assets can get marked up and liquidity can get pumped into the system that are just new enough. And I think that, you know, the banking system, for example, if bigger banks get involved with the stablecoin market, that could create an environment of, you Know, really easy money if they're not paying interest on those. That could make, despite the hesitancy of the Fed to, you know, to cut rates, that could produce another one of these moments where bitcoin just, you know, melts off, so to speak. You know, bitcoin's already proven that it can rally in the face of non zero rate. That was a question for a long time, given when bitcoin was conceived, so to speak. But to the extent that there's another explosion of liquidity, you know, the sort of nothing stops this train type mantra in the world of bitcoin, bitcoiners probably won't be surprised at what bitcoin does.
- [41:20]
John Melton
It almost seems like there's a butting of heads between the Fed and the treasury on this particular topic, because you see Bassett, he's out there just championing this idea of stablecoins, really seems to be excited about the entire space and doing whatever he can to support it. And then Powell seems to be literally the polar opposite and kind of emblematic of the legacy. Typical, like, I don't understand any of this and I don't want to support any of this and just kind of bucking the entire movement. So what's your take on that dynamic kind of playing out and how it relates to stablecoins?
- [41:55]
Preston Pish
Yeah, so I think that the dichotomy between the Fed and treasurer, or even the Fed and the whole apparatus of the executive branch and the legislative branch is really striking right now. And I think that there is a very unified agenda by, like I said, the executive, the legislative branch, treasury, senators talking, really talking in a negative fashion about Powell. And I can't remember a time in markets when senators have cared so much about the Fed chair. But there's a lot of attention on Powell and it's all very coordinated and very direct. And the jobs number today, you know, it seems pretty hard with the stock market at all time highs to say that lower rates need to happen or else something cataclysmic is going to happen to the economy. So I think that Powell seems to be really kind of digging in on a traditional dual mandate, justified and sort of holding rates where they are. And the other side and the President has been outspoken about, we're just going to wait. We're going to issue a lot at the front end. And clearly anybody in America with any sort of debt, if they can lower their own interest rate, which is essentially what the Fed would do for the treasury if they lowered rates the 3% that Trump wants, anybody would do that. And it's just amazing at the macro level sort of how open it is. But as somebody who cares deeply about the future of America, it's hard to see another alternative given kind of where things are at in terms of interest expense relative to other allies in the government.
- [43:16]
John Melton
Yeah, it doesn't seem like they're ever going to be able to issue anything with duration in the foreseeable future it seems.
- [43:24]
Preston Pish
That's a really interesting point. I mean, yeah, came in as you know, I'm the chief bond salesman and you know there was Doge and that was quickly u turned and it really seems that yeah, executive branch is moving really fast and really aggressively and they're focused. If indeed there was a pivot and it was hey, we can't cut, we've got to look to the short end. What's the stable like? This is stablecoin playbook that we can run. Let's see if it can work and see if we can do that. They're very aggressive and very fast because.
- [43:50]
John Melton
It'S just pure gravy for the stablecoin issuer to squat and just sweep the coupons and then do whatever they want with them. If it's just kind of like one month money or where wherever they're issuing it at in short duration, it's kind of fascinating to see it all unfolding.
- [44:05]
Preston Pish
Yeah. And for me the use case for stablecoins has always been sort of Bitcoin is the best money ever. Anybody can get access to it. Yeah. If you're in emerging markets, the dollar is pretty good and tether's proven that there's ginormous product market fit globally for the dollar. But how do you induce US banking customers to flip into into stable coins? So you know, Arthur Hayes wrote a really interesting, quite colorful piece on stable coins recently talking about the sort of compliance savings big banks could realize if know stablecoins became adopted and mass. And it's really interesting. You know we talk about the days of zero interest rate policy. What if there was a way for banks to induce consumers to get into stablecoins that paid zero through some sort of rebates or fees? Because it just made so much more sense on the compliance side from the bank's perspective. And that's sort of, you know, Hayes's take on it, which is interesting.
- [44:56]
John Melton
It seems like the banks are going to be using the stable coins in and amongst themselves and they're going to be sweeping the coupons and then for the retail customers of the bank they're going to not even realize that that's what's happening behind the scenes. They're just going to continue to get some pittance of a interest income by having their funds on, quote unquote, on deposit.
- [45:17]
Preston Pish
Would you raise up? I mean, I would love to get up the curve more in terms of how these are going to be used on it. And the interbank market seems like that's kind of the easiest one to control and there could be lending against stablecoins. For me, bitcoin always been the most interesting thing in the room. You know, when it was $100 billion, when it's $2.3 trillion like it is today. So even though it's small, I mean that's really a bit grateful that I can continue to focus on that and then on chain, you know, serving bitcoiners with prudent products.
- [45:44]
John Melton
Yeah John, I've really enjoyed the chat. I thoroughly enjoyed the history lesson there on Silvergate that was really interesting. And we'll make sure that we get those into the show notes. We'll also have some links to Unchained and the borrowing and lending and the custody stuff that we talked about. Is there anything else that you want to highlight or give people a handoff to your social media accounts?
- [46:03]
Preston Pish
No, I appreciate that. Unchained.com Feel free to reach out. Would love to connect with folks. I'm on LinkedIn and on Twitter I'm J. Mel 21 mm, not super active. There's some high school football stuff and some stuff there. But appreciate what you do for the space, Preston, and thank you today.
- [46:19]
John Melton
Thank you John. Really enjoyed it.
- [46:21]
Preston Pish
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