Bankless - The Unbundling of Banks: How Stablecoins Change Everything | Charles Calomiris

Episode Date: September 22, 2025

What happens when stablecoins break apart the traditional business model of banks? Economist Charles Calomiris explains how the “unbundling” of payments and lending reshapes finance, why politics matter more than technology, and what this revolution could mean for the dollar’s future. ------ 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24  https://bankless.cc/spotify-premium ------ BANKLESS SPONSOR TOOLS: 🪙FRAX | SELF SUFFICIENT DeFi https://bankless.cc/Frax 🦄UNISWAP | SWAP ON UNICHAIN https://bankless.cc/unichain 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 🎩DEGEN | JOIN THE COMMUNITY https://bankless.cc/degen 🌳KGEN | REQUEST A DEMO  https://bankless.cc/KGEN-podcast 🏄 SURF | UPGRADE YOUR CRYPTO RESEARCH https://bankless.cc/surf ------ TIMESTAMPS 0:00 What Are Banks? 7:56 Chartered Banking 30:44 The Unbundling 51:48 Stablecoin Yield Concerns 1:01:42 Death of The Dollar? 1:15:45 Stablecoins Abroad 1:20:52 Future of The Dollar 1:24:38 Dollar as a SoV 1:32:10 Are Stablecoins Winning? 1:36:30 Closing & Disclaimers ------ RESOURCES Charles Calomiris https://x.com/cwcalomiris  Fragile by Design (Charles' Book) https://www.amazon.com/Fragile-Design-Political-Princeton-Economic/dp/0691155240/ref=sr_1_1?ie=UTF8&sr=8-1  ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠

What are banks? Like, what function at their core for society do banks perform? Wow, I love that question. I have to put a plug in before I even answer it for the book that I wrote about a decade ago with Steve Haybroke called Fragile by Design, which is about the modern era from the perspective of banks. That is, understanding the history of the world from the perspective of something that started about 400 years ago, which is the chartering of banks. So the first thing in answering your question that somebody has to do

is decide whether they want to talk about a generic thing called financial intermediary that does some kinds of transactions involving lending, maybe, or maybe payments transfers, or maybe both, or maybe managing a portfolio, or maybe, you know, who knows what financial transactions. So, you know, by that sort of definition, the Rothschilds were clearly a bank. They were a private bank. Lots of other, the Medici were a bank.

But when I use the term bank generally, that's not the way I use it. I use it to talk about a modern element. That is, when I say modern, I mean something about the modern world starting around 1600 that distinguishes this world from its prior worlds. And the reason I focus on that way of thinking is, is that the nation state created by the modern world, charters banks. And it's the chartering of banks that makes them, in my mind, so interesting,

not just as an economic function, but as a political reality. And I want to really emphasize every nation state charters banks. By the way, not every nation state taxes. Kuwait doesn't tax. Not every nation state has an army. Costa Rica doesn't have an army. but every nation state charters banks. Banks are the sine qua non of the nation state

because it tells you something about the way of organizing the world with power that a nation state creates rules for the existence of banks that it regulates. The chartering of banks is all about deciding as a nation state that the functions of banks have to be ruled by the political nation. Those, that is what a bank is. So that bank has done lots of different kinds of transactions. Economic theory can illuminate why banks combine different transactions.

But if you don't start from the political reality that the modern nation state charters banks and regulates them for its political purposes, you're never going to get really very far in understanding how banking systems evolve. Because banking systems don't evolve through some sort of automatic process. They evolve under the restrictions and under the opportunities that are provided by the nation state. That can be an opportunity if the nation state charters a bank like the Bank of England, whose sole mission when it was chartered was to help organize the finances of the state so that it could fight France. That was the point of chartering the Bank of England. It wasn't so you, Ryan, could do something that you wanted to do. And by the way,

that bank was given a monopoly in England and Wales over note creation, that is, you know, printing money. And so that wasn't a coincidence either. That was a coincidence either. That was a part of the partnership between the people who operated the bank and the sovereign. There's no way to understand the history of banking in England without taking into account that banks weren't allowed to exist in effect, except as small private entities, very small. They were restricted in their size if they weren't the one the state chartered. So a bank, yes, okay, we can now talk about all the functions that banks may or may not do, depending on what the sovereign allows.

And we can also talk about shadow banks, the banks that aren't chartered by the sovereign, which just do any kind of financial transactions that they can get away with if they're not prohibited. But we don't start off, if you start off talking about banks as some kind of natural abstract idea, you've really missed the boat. In the modern era, banks are either,

and this is the most important one, chartered entities of the state, or things that operate in the shadow if they can get away with it and aren't prohibited by the state. All of them do financial transactions, but if you don't start with the state, you don't have a prayer of understanding what's going on. In the wild west of Defi, stability and innovation are everything, which is why you should check out Frax Finance. The protocol revolutionizing stable coins, DFI, and Rolex. The core of Frax Finance is FRAXUSD, which is backed by BlackRock's institutional biddle fund. FRAX designed FRAXUSD for best in class yields across DFI, T-Bills, and carry trade returns all in one.

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And you don't really get a modern nation state without a bank to the extent that all nation states, some may or may not have armies even, but they all have some sort of chartered bank function. Exactly. Using this term chartered bank, is that effectively? a license that the state provides is basically regulation and it will give you. It's almost like a taxi cab medallion, let's say. If you operate a taxi cab in New York, you have to have this medallion, is that what a charter actually is? In some literal, sort of strict and narrow sense,

the answer is yes. But to answer that way misses a big point. A chartered bank is the outcome of a bargain. That's the more interesting thing. A chartered bank is something that's the outcome of what Steve Abram and I called the game of bank bargains. So there's always a coalition, whether it's an autocratic regime or democratic regime, populist versus liberal democracy, different kinds of regimes that are going to strike a bargain. There's going to be a coalition formed coming out of the power of the individual entities within that nation that's going to decide what they want to achieve with a bank charter. And the bank charter is the answer to that question. It's not just a license. It defines the powers of the entity and the limitations on those powers. It also defines

things like what will happen when the entity can't fulfill a contract. Does it get bailed out or not? some of those contracting provisions are explicit. Some of them are implicit. So if you really want to understand what's going on, you don't just look at the letter of the law. And of course, a bank has to function under the law. And so if it writes contracts, those contracts are only going to be as good as the legal system, which is another political outcome. So the nation state is going to create laws governing creditors' rights and debtor's rights generally. But it's also going to create as part of the licensing of the banks, limitations on powers, opportunities for powers for the bank, and then also policies that are either explicit or implicit about bailing out that,

that call that a law sharing arrangement so that the bank is set up with a certain explicit or implicit law sharing arrangements like all chartered entities. It's so helpful when you're starting to think about this to go back to 1600 when this whole idea was created. Because then you remember that chartered corporations were special privileged corporations created by the state. At that time, special corporations, not general incorporation acts that allowed anyone to apply to be one, special corporations. And, you know, our own revolution is caught up in some of that and also caught up in some of the loss sharing arrangements. So let me just take us a little bit out in the weeds for a minute. What was the Boston Tea Party about?

And I'll bet you you'll get it wrong. What was it about, Ryan? I'll give you this civic answer, which is taxation without representation, right? Completely wrong. Completely wrong. That's what the Stamp Act Congress was about in 1765. And some of that still fed into some thinking about the revolution. but the Boston Tea Party was about special monopoly privilege that the East India Company was given

because it had fallen on hard times. It was suffering losses. And so the Crown and Parliament decided to change the Navigation Acts, which were Acts governing transport to British Empire, to give a special privilege. I won't go into the details. To give a special privilege to the East India Company for transporting, tea, which ended up having the effect of sideline the New England merchants who were acting in trafficking the tea. It cut the price of tea dramatically. My recollection is about in half.

Why did the Boston merchants, why did people in Boston do this, what I think is a reprehensible thing, by the way. Most of our founders found it reprehensible except the people in Boston. the other founders found it reprehensible. Why? Because they were really just acting in a way to preserve their own interest and acting contrary to the well-understood principle that the sovereign England got to choose international rights and privileges as part of its sovereign power. And it granted special privileges to the East India Company. And when the East India Company fell into trouble, they tried to help it by changing the menu of privileges. It disadvantaged some people, but it was not viewed by most people in our country at the time as some kind of terrible action by the Crown. It was just part of the Navigation Act system, part of mercantilism, imperialism. And if you weren't one of those merchants in Boston, like the Adamses, by the way,

you didn't have a big problem with it. What you did have a problem with was the Stamp Act, which was in 17. 1965 tried to say that for the first time, the parliament was going to impose taxes on local domestic transactions, which should be under the purview of the legislatures in the colonies, because the colonies had their own legislatures. That was unprincipled. That was a violation of the rights of British citizens. And that's why we didn't like it in 1765. The reason I illustrate our discussion with that example is not to just highlight the widespread ignorance that Americans have about our own history, like the American Revolution. The Boston Tea Party was not popular outside of New England

and was viewed as unprincipled and wrong by most of our leaders. But that's not the way we learn it. But the more important thing is to understand the whole system that was taken for granted of the management of the interests of the nation-state had to do with creating charters, both for corporations and for banks, which were corporations, to try to be a kind of representation of and a way of executing the interests of the sovereign. And that wasn't viewed as somehow wrong. So the notion of general incorporation, the notion that you, Ryan, have the right to form a corporation, to act as an abstract entity to engage in transactions and maybe have stockholders in that corporation

and maybe even have limited liability in that corporation, the notion that that's going to happen as a matter of general right, what's called general incorporation laws, and also along the other side of that, that we're not going to do specially privileged corporations. That was not something that became part of the American way of thinking until the 1840s.

So what happened with banks to get back to them is, of course, they started off being specially privileged entities, just like the East India Company, chartered by the national government or by the states. And it wasn't until the 1830s in some states that we had general incorporation laws governing banks, giving anyone the opportunity to charter one under pre-specified rules. And then, of course, we have the national banking system created by Lincoln in the 1860s, in 1863, which then created a national government set of charters. Again, licenses, as you said, but not just licenses. Just like the East India Company, there are deals explicit or implicit about how losses are going to be allocated. And the reason I mentioned that is because you can't understand the modern state. of the 21st century without understanding the way that bank charters effectively create loss-sharing arrangements that are bailing out banks and that those are all about imposing losses on others to subsidize banks. So once you understand that banks have always served

from the very beginning, the interests of the state and are the result of the political game of bank bargains, then you really have some insight and you understand it's not just about their license, but it's about who supports them, who creates them, who will bail them out. And that's all part of the political gain that creates banks. And I know we've spent some time, we're taking time on this, but I want to emphasize, you can't have a prayer of understanding what the future stable coins is without coming to grips with this fact. If you think state, Stablecoins are technologically determined. The future of stablecoins is something that comes from my fantasies about the economic logic and empirical evidence of what works and doesn't work.

You're really missing the boat. Stable coins have to be, if they're going to work, they have to work within that coalition building game of bank bargains. And we've already seen in the Genius Act, the way that that coalition, tried to shape the way stable coins would or wouldn't happen. And Ryan, the most important fact is four years ago, the Biden administration wanted to kill this idea as best they could. And in fact, even before them, the first Trump administration, which I served as chief economist at the OCC with Brian Brooks as the act in comptroller, the Trump administration

didn't want this to happen either. They've changed their two. And so when Brian Brooks and I, I'm now going to tell tales out of school here, Brian Brooks and I were very eager to see the crypto future realized and see stable coins realized. And we recognized that would have to happen by chartering entities that were allowed to do stable coin transactions. There are a lot of advantages to come from that. And of course, what's the administration in U.S. history, the only one that since 1863 that did not, actually appoint a comptroller of the currency confirmed by the Senate. The answer is the Biden administration. Why? Because they wanted it to do nothing. They wanted the OCC to be a complete nothing, to not do anything to go down the road that Brian Brits and Jonathan Gould and others at the OCC and I had hoped to start, which was bringing into the game of bank bargains a formal crypto presence so that it could actually occur as a legitimized financial transaction that would have real legs.

The Biden administration, completely captured by the incumbent banks and by other political interests, they're part of a coalition of the status quo, did not want that to happen. The Trump administration, this time wants it to happen the first time it didn't. Can you explain that a little bit further, Charles? Yeah, but I just want to point out, what am I really? getting at. What I'm getting at is what we've already experienced. If we understand what we just lived through for the past eight years, what we just experienced is how much the political wins have affected the timing and capabilities of the empowerment of crypto. If you think crypto

is happening now because of some exogenous technologically driven reality, you really are just completely, you know, hopeless, right? I mean, because the technology has been there all along. It's been there for, and that's going to matter for what we're talking about today, because I'm going to point out the technology that exists today will predictably completely transformed, can predictably completely transform financial transactions. But the main obstacle to getting that to happen is the resistance that's coming from members of powerful, coalitions who have vested interest contrary to that. The incumbent banks finally saw that they were not going to be protected enough. So they needed to get, that's what happened in the

Genius Act. They needed to get the ability to make chartering the way that stable coins could happen. Notice, you can't run stable coins without a charter. Now, that's what the Genius Act did. The Genius Act, but notice that the incumbents changed their political strategy. Pay attention, listeners. Pay attention. The incumbents changed their political strategy from ignoring and stable coins and having Biden's report say, oh, risky, risky, risky, risky, but still allowing them, you know, they didn't have the power to stop them legislatively. They didn't have the coalition bill to stop them. So they just threw a lot of sand at them, said they were risky, risky, risky, and definitely didn't want to follow up on what

Brian Brooks and his team, including me, had been trying to do, which is bring them into the modern chartering of the banking system, legitimized them, allow them to be regulated, but regulated in a way that gave them a future. While the incumbent banks didn't want that to happen, they were very happy with the Biden administration's approach. But then as things started to change, and they realized there would be an inevitable growth of stable coins, which have grown dramatically over the past five years. Then what did they do? They said, well, we have to somehow try to limit stable coins

and allow them to be part of the chartered entity. I don't think that's ultimately a crippling limit. In fact, I think it's very helpful for stable coins to be part of chartered reality, especially if we have other ways for stable coins to exist. For example, they don't have to be just chartered by the national banking system. They could be chartered by the individual states or different ways. So there's competition.

So anyway, I think that it's a very positive step. But I really think you can't understand this as a technological phenomenon only. It is a technological phenomenon. But notice, the Federal Reserve is extremely threatened by stablecoins. because stablecoins can create a payment system network that completely sidesteps Fedwire. And they will. Eventually, it's so much better that it has to beat the Fed.

But the Fed isn't just sitting there passively. What are they trying to do? Oh, let's create central bank digital currency. It's going to be so great. And then what was the Biden administration's view? Well, they didn't beat up central bank digital currency. They knew it wasn't very popular, so they didn't push it too hard.

But then they completely just threw sand at stablecoins. So that what are the incumbent banks doing? Well, they're part of that same coalition. And by the way, there are a lot of other community and other sort of activist organizations that have benefited from their partnerships with the chartered incumbents, the big banks, which became big banks very recently in U.S. history in the 1990s in the 2000s. We didn't have big banks prior to that. That was the merger wave.

And when we got those big banks, the way they got big was to avoid political opposition from activist organizations, they gave the activist organizations money in order to testify for them in support of their mergers. I bet your listeners don't know that either. Do you know how much activist organizations were granted contractually for merging banks from 1995 to 2007? Take a guess, Ryan. Total contractual. These are explicit financial contracts. You, Ryan, come testify at the Federal Reserve Board to say, I'm a good guy. That's it. I'm a good guy and my merger should be approved. And if you do that, I'm going to give you a contract

that gives you some money. Some of that money is to pass through to your friends as subsidized loans. Some of that money is outright grant to you, 10% of it. How much? How much? much do you think changed hands? When you want to understand the politics of what charters mean, this is crucial. The entire creation of the big banking system since 1990 was the result of a bargain among several parties. But in fact, a lot of those parties were community activist organizations. So let's just get your listeners to learn something. What's the total dollar amount of those contracts over the period 1995 to 2007. What do you think? Let's be clear. These are contracts between who? Merging banks. Let's say Bank of America is going to merge with a bank. Or let's say

when Fleet and Bank Boston merged in 1999, I think it was, they entered into contracts with local activist groups. So this is how Jesse Jackson. What's a local activist group? Think Jesse Jackson. Oh, okay. Interesting. Yeah. Yeah. So how much did those groups get, either to keep for themselves, 10% or 90% of it, to pass through to their members? By the way, how do you get to be a member of the group? Show up for a political protest, then you get access to a subsidized mortgage. You understand now how political coalitions are built? I see.

How much money are we talking about? I'm going to guess tens of millions because it was a more innocent time. Tens of millions. I think for something like this. No, from 1995 to 2007, two and a half trillion. of contracts. Wait, what? Trillion.

Two and a half trillion. That's what you guys don't know. That's why you don't get it, right? That's why nobody gets it. Can I, let's talk to you. Isn't that like all the money? Yeah. I mean, that's, I guess, the total value of the contracts.

You know, I mean, I guess various stakeholders would skim off the top in various ways. I actually think, Charles, so a few things that you're communicating to us, bankless listeners, that that's important is that stable coins in particular aren't just a technology. Of course, they're not.

they're a political banking mechanism. It's always infused together. I actually do think that crypto has somewhat learned this a little bit in the small over the last couple of years because crypto has become incredibly politically engaged and involved. I think in no small part that led to the passage of the Genius Act. If you look at kind of the political crypto fintech lobbying that the industry has done over the past couple of years, I mean, it's been spectacular. There's been a lot of money pouring into kind of the political games in order to get this legislation through. So we're starting to learn those lessons. It's not easy, right?

Yeah. It's not easy. I'm not trying to be a jerk, right? I'm just trying to tell people that they're stupid, not that or ignorant. But I am telling people that it's not easy. And the reason it's not easy is, so first of all, if you don't understand the political equilibrium, then you can't oppose it. You can't change it. You can't try to build your own group.

And yes, they have started to build their own group. But the point is, these things exist within a legal framework, within an engineering framework, and within an economic framework. What I found when I was involved in crypto is those are three different minds and they rarely come together. And then that's too limited because then there's the political framework that allows the bringing together of these three minds. And so what I found when I was working crypto is there are people who know one of the three ways of thinking, engineering, economics, or legal, very, very few who understand the combination.

And almost none who understand the political contingency of actually being able to succeed. And I hope we're going to talk about the distant future because, you know, I think crypto, but especially stable coins, everyone understands that they have. extraordinary promise as a medium of exchange, right? But I want to go a lot farther and point out that the amazing thing about the blockchain, distributed ledger technology, is that it can allow not just the best medium of exchange system the world has ever seen, but it can also allow the best unit of account system. It can basically create a substitute, or I wouldn't say a substitute, let's just say a new definition of the dollar. And of course, when you start thinking that way, now we're talking

about not only replacing all the incumbent banks and all their entrenched allies who have gotten so much money from them, but also the Federal Reserve. And let's remember that chartered central banks, which weren't called central banks, they were called banks of issue when they were chartered in the 1600s, but central banks like the Fed, which are really something that's only been around and called the central bank since about the middle of the 19th century, they're very young. They're not likely to be a permanent feature of our economy. In fact, my own work suggests that this is a technology that's, you know, really it's time to get rid of it. And they're not going to go easily, right? Those people aren't going to go easily.

Before we get into the far future of what this technology is capable of, let's talk about the here and now. So we have the Genius Bill signed, of course. You have a presentation talking about the stable coins are here and they're going to transform banking. It seems like you're making the case that they're going to unbundle some of the services that banks offer today. What pieces are stable coins going to unbundle from the banks? I mean, there has to be a reason that the existing incumbent banks are threatened by the. this, that no progress was made during the Biden administration, that they've thrown sand in the gears at every corner. Why? What are they scared of? What's going to be unbundled? What do they lose? Great, great question. Okay, so first, a confession. I made my reputation largely off of the

theory of bundling of bank services. My most cited article, it's a theory article that explains, and there's another theory article using slightly different logic that explains why banks do and have historically bundled payment services with lending services. Why do banks lend and clear payments? Why do they do both? Because there are entities historically that have done just one or the other. For example, the world's most successful intermediary of the early 17th century was something called the Riesel Bank. the Bank of Amsterdam, it's also called. And it was initially entirely about clearing bills of exchange in international merchant commerce. But then I mentioned, you know, the sort of merchant banks, the Medici, the Rothschilds, well, they weren't operating clearing systems.

They were lenders. So banks can do one or the other. But if you look at chartered banks, what you realize is the history of chartered banks has been the combining a payment system services with lending. So we as economists have developed a few different theories about this. I'm happy to go into the weeds on it. But the theories really have to do with some kind of mechanism design advantage generally related to some kind of information cost or information problem that encourages banks to do both so that the competitive equilibrium isn't that banks do one or the other because it's

more efficient to do them together. Now, that idea has a lot of empirical evidence behind it and a lot of theory. But let me just point out, because it's grounded in a theory of information cost, it's contingent. The idea that bundling is efficient depends on some kind of information cost argument. If one of the things that modern information technology is doing, is changing the cost of information and reducing the cost to. If that's happening, it might undermine the logic that creates bundling. That's exactly what I believe. That bundling made economic sense for banks and no longer does.

And bundling specifically, Charles, you're talking about the bank's existing business model is to bundle both what you're calling payments and also lending, those two together. Right, exactly. And I think when you say payments, you also mean basically, the checking account. So deposits. Is that correct? Yeah. That's the mechanism in the U.S. that we're using for making transactions through Fennwire. So it's all the centralized payment system operating through the central bank. You know, you might think, and your listeners might think, well, wait a minute, I use PayPal or I use VEDBO or something.

All you're doing is going, that's just, you know, stuff up here. It still is all going through the centralized payment system of deposit checking account. at banks that work with each other through Fedwire typically. There are other ways, but typically. If stable coins take off in the way I think you predict, maybe Secretary Scott Besson predict, certainly bankless, we predict at bankless, right, the checking account and payments,

that becomes unbundled from the bank services. So your checking account is basically, as an individual, you know, in U.S. society, becomes basically a stable coin account. And the banks are just left. with lending, and they don't like that very much, because I've got to assume they make a lot of money on the checking and payments side of things. Is as simple as that?

Not quite, but yes. I mean, you got it, but let me just complicate it a little. Let me point out that there are shadow banks, not just chartered banks, shattered banks that specialize in lending, just as there's shadow banks or shadow payment services to specialize just in payments. So, yeah, the shadow payment provider is tether.

They have more than 90% of the market, right, in stablecoins. But then there are all these lending services that are done online. They don't fund themselves with deposits, and they're not connected to stable coins. So the first thing for us to notice is in the shadow banking area where only market competition and efficiency governs the structure of the intermediaries, what have they chosen to do? What have they chosen to do? They specialize. They don't combine services. They're not doing lending and stable coins.

They're doing lending or stable coins. I think that makes perfect sense. And in my articles recently, I've talked about why unbundling is so illuminating. So when you look at the shadow, you're seeing that the modern solutions are unbundling. Now, that's partly because if you're a shadow bank, it's very hard to do. you can't be involved in the checking system. But there's more to it than that because people aren't choosing. Tether is finding itself strongly driven toward what,

trying to create a kind of payment system without a lot of risk on the asset side. So that is very important that whatever those old bundling advantages were, I would argue that they've been undermined by improvements in information technology that no longer required these two things or really are benefited from doing these two things together. That's a complicated and fairly deep economic argument, but I think people can get the basic gist of the jive

that what we're talking about is look at the shadow banks and you see stable coin providers aren't trying to do lending. Lending providers aren't trying to do stable coins. That's very interesting because if there were big synergies as there have been in the past between combining the two, they would be trying to do both, but they don't. So the future, I think, is now coming back to your statement, which I agree with. The future is that the incumbent banks see that they no longer are going to have this basically

chartered bank subsidy of having this kind of oligopolistic control of a deposit-based system that then funds and subsidizes their lending activities. That is not going to be, that is not a permanent feature of our financial system. But it's not going to go away easily. It's because the banks have huge power. By virtue of their political influences, they are extremely powerful organizations. And they even operate through the organization that today is the most evil organization in the United States. I wonder if you've ever even heard of it.

I'll guess your listeners haven't. It's called the Bank Policy Institute. It sounds so objective. It sounds so scholarly. It sounds so wonderful that someone who is out there doing the public good of talking about bank policy. No, no, no, no, no. It's the worst. It's Darth Vader on steroids, okay?

Darth Vader on steroids. This group is not just about colloquium. not just the biggest banks colluding, but using their power to try to stop things that will help citizens in favor of themselves. And they are, they're really evil. I can tell you, when I was chief economist at the Office of the Comptroller of the Currency, I would read their statements, you know, whenever we had a regulation. They were the most excruable things I ever read. The idea that an economist working for the Bank Policy Institute could write such things. Must be so alienating for them and so miserable their existence that I don't see how they can stand it.

But that's what power is all about. These aren't just operating individually. They're operating collectively through this collective action entity. And it funnels, it sponsors conferences at universities, like where I used to be, Columbia University. and controls professors through the money that it provides for sponsoring those conferences. You've got to understand politics to understand banking. Yeah. Charles, one thing we want to explore, I think it is on the same thread.

Ryan and I, and probably the vast majority of our listeners, anecdotally, understand the trend shift about where money and banking is going. Like, Ryan and I use Ethereum as our banking layer. I write a monthly check to my landlord because that's the only way I can pay him money. And that is the only activity that is left in my Wells Fargo account is like my monthly rent payment. And over time, as this bankless thing that we have tried to encourage evolves and becomes more mature, I think that's probably true for just a larger and larger percentage of the population. Our banking activity is done in our Ethereum wallets on stable coins and is coming at a loss to our account. activity in Wells Fargo, our deposit base in Wells Fargo. And that's because of the hundreds of

billions of dollars that are now available on Ethereum. Now, is the Bank Policy Institute that you just named as Darth Vader, which I'm a huge fan of. I would like to learn more about that, but I'm already a fan of calling it Darth Vader. Is that what we are up against? Is that what we are doing they don't like? They're a coordinating entity just as, and I'm not trying to be partisan here, the Democratic National Committee is another coordinating entity. The Democratic, Party is all in on this. A lot of the Republican Party is too, but the Republican Party isn't in agreement against this future, as we can see now. And in fact, you even saw the Genius Act had bipartisan supports. You're seeing cracks in the coalition. That's what's so interesting.

This coalition that had decided not to even appoint an OCC comptroller, they had decided to just block all the progress Brian Brooks had tried to do. All of a sudden, Now we have legislation allowing this with bipartisan support from this Congress. They can't even agree on what day of the week it is. That's pretty interesting. That tells you that there's been a political shift and it's worth analysis. And I don't claim to be fully understanding every aspect of that. But that's where we need to go.

And of course, you're right that you're seeing it with Ethereum. And by the way, my understanding is, I think you said it, that you have your stable coins in a wallet on Ethereum. And you can also, my understanding is Tether can be both in Ethereum and in Bitcoin. You can either put it on the platform of an exchange or you can put it within the blockchain. And I think that's really interesting. So, yeah, that's where we're going.

We have, of course, we have a long way to go because, as you pointed out, you still pay your landlord with a check. Right? So we have to get it so that you can buy coffee off your cell phone with stablecoins. And that means that we have to create a decentralized network for stable coin retail transactions. So it's not just about buying and selling crypto mainly, using tether mainly for crypto transactions, but using them in the real world. But this is easy. This is just creating a little box on retail.

just as they have credit cards, where they're doing it with stable coins. The technology is already there. In fact, the technology is already there, not just to completely sidestep the bank incumbent payment system with stable coins, but to actually change even, I know this is very futuristic, we'll get to it, to supplant the dollar, to create a new concept of transacting a new unit of account. But I want to emphasize that can't happen without politics. Under Article 1, Section 8 of our Constitution, Congress has the power to control the money. And they have used that power and interpret that very much as their own right to decide what a legal tender is. That means something that can actually be used as a payment mechanism legally to satisfy debts.

if Congress doesn't want the new unit of account to happen that I have in mind, creating this new synthetic dollar out of the blockchain and get rid of the Federal Reserve dollar, then it doesn't have to happen. So until the politics, what we see with the Genius Act is the beginning of the cracks in the anti-stable coin coalition, now we have a bipartisan agreement to allow chartered banks to do stable coins. By the way, this is huge because when I was at the OCC, I can tell you the one thing the OCC has done right for the last 160 years has been examining as a credible third party. So you want stablecoin issuers, because let me tell you something, a lot of your listeners aren't going to like it. I think tether is kind of sleazy.

They have been, right? They're kind of, let's do it. Let's do. use the word that your generation likes, sketchy. They're sketchy, right? They're a little sketchy. And imagine now instead, you've got some boring bureaucrat who's paid just to examine the algorithm, make sure that the algorithm is what the stable coin provider says it is, and examine the reserve balance held at some fiduciary and make sure that it is what they say it is. And that examination is pretty much the entire role that we need the regulator to do. And what we really need is for the regulator to somehow commit, not to let the political compromises of the future lead it to try to control stable coins.

And that's tricky because I'm not telling you I got the magic bullet for that either. So the Genius Act cuts both ways, right? Once you stay stable coins have to be part of a chartered entity, you open up the possibility. that that thing can be regulated to start giving subsidies to Jesse Jackson, just like our chartered banking system decided to do in the 1990s. So it's all politically contingent. So if you guys think that because we are forward-looking people who like technology and want to see good technologies happen, that they will automatically happen,

it's not true, you have to be a political force to build a coalition that represents the public's interest. If the public isn't informed, like you guys weren't informed, the $2.5 trillion dollars had been contracted from merging banks to these activist, local activist organizations, that's why they succeed, right? So the political coalition doesn't always represent the common interests of the public. In fact, it almost never does. So this is where the real, you know, problems are we can talk about how, yes, of course, we can circumvent this whole centralized payment system run by the Fed, and we can have immediately a medium of exchange done more securely, more quickly, in ways that allow you to combine messaging with payments, so you can enrich

the whole process of the payment system. All of that can happen at the speed of light in a decentralized network that can't be hacked, unlike Fedwire, which will definitely be hacked. All of this is true. However, it's all contingent. And then going beyond that to use the data that's in the blockchain in some kind of anonymized way to create information about what the consumption bundles are so that you can then construct a new unit of account that's more optimally configured than the dollar is using economic theory that we've had for 150 years. So, yes, that can happen, but not if Congress decides that that definition of the dollar won't be a legal tender. So we have to get mobilized to educate ourselves and to therefore

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Sign up now and use code bankless to get a seven-day free trial to Surf Pro. Click the link in the description for more information. I want to get your take on a current political battle that is happening right now on the back of the Genius Act. I'm going to throw some things out there just to set the landscape and then allow you to comment on it. So this is on the element of yield from staple coins. Sure. Okay. And so it's an active issue right now.

So the Genius Bill prohibits issuers, so an entity like Tether or Circle from USC, from actually providing yield to their consumers. However, there is a loophole, let's call it, which means any other entity sort of in the value flow can actually provide that interest from treasuries back to the state. Cable Coin recipient in the form of rewards. So, for instance, you keep your USDC on Coinbase and you actually get the 4% from Treasuries and a bank doesn't get that. Okay, so this is an active

fight right now. I actually read, I don't know if you've seen this, but there was a article in Brookings from Aaron Klein this week. Okay. And I don't know if this is the influence of the BPI and Darth Vader. Sure. Or if Aaron Klein is a huge defender of the status quo. Okay, let me let me give you what he says. And then I want you to poke, like, tell me what you think about it. What stands up from an economist's perspective? He basically says rewards are a dangerous loophole. He says it's, you know, if you look at what happened to money market funds, okay, so money market funds through history, 2008, et cetera, had to be bailed out by the government. And he's saying the same is going to happen to stable coins. He also highlights the deposit flight concerns. Basically, it's going to bleed

bank deposits, checking accounts dry, that is going to hurt lending and financial stability for the entire banking system. So he says, Congress should actually go back to the genius bill and close the loophole, make it such that consumers, individual citizens, the staple coins, do not get that interest under any circumstances. And he argues that it's pivotal. So, Ryan, I mean, you've mentioned four fallacious things in a sequence. So you have to go. a little slower and let me point out why each of them is fallacious. All right. Well, take them all.

Take them all. Okay. So, first of all, money market funds, bailouts were not economically inevitable. They were a political outcome. So to say that the fact that money markets were bailed out when they broke the buck was somehow had to be true is wrong. If instead the government hadn't bailed them out, the world would just, be fine.

Okay? So, so then now let's give them a little bit of a credit and say, well, what he's saying is that the realpolitik will be that stable points will, that path of least resistance will lead to bailing out of stable points when they have losses. Okay. So I don't believe that's true either because one of the things that we can do with stable coins is we can require them to have automatic resetting algorithms so that if they suffer a loss, Now, we have a couple of alternatives.

One is to restrict what the assets can be so they only hold short-term debt, treasury debt as assets, in which case there's no real possibility of loss. Or we can allow them to have broader set of assets, but then to have an automatic reset algorithm that then when there's a loss in assets, has an automatic thing happening in the stable coins. So that people, when they buy stable coins, know exactly what they're getting into. My own view would be to allow both, to allow both the riskless stable coins and the risky stable coins with the reset.

And I think that my understanding of political economy, which is fairly deep, is that if it's done that way, there won't be bailouts of stable coins. So the notion of stable coins will be risky. If no, that's not true, if they're examined, and if they have either the algorithmic adjustments with full transparency or if you don't believe. believe in that, you could say, well, I want to initially restrict them to only hold treasury bills. Again, chartered and monitored. I can understand that. That argument makes sense. But no, he's wrong. Of course, this is what the advocates of the incumbents are all about doing,

whether they're BPI or Aaron Klein. What they're really about doing is they operate in organizations who pay their salaries to make up arguments like this. So I'm sorry, go ahead. Tell me more. I just wanted to deal with it. That's great. So that's the first one. Let's get into the deposit flight concern. Okay, so it's going to bleed the bank's deposits dry and that's going to cause. So first of all, of course, no, no, the deposits banks should in equilibrium because

there's no longer an advantage from bundling. So equilibrium should be that banks raise their money, their money from outside market sources. So you can think of it as securitization, which is a well-known banking source of funding, or outright debt issues by banks that aren't part of the transacting medium. Why shouldn't banks do that? Finance companies do it. Finance companies have been doing it since the 1960s.

Maybe because it's harder. It's more expensive. They don't like it. And Aaron knows they're paying his salary at Brookings. Believe me, they are. Believe me, they are. Can I ask you? I know, Aaron.

He's a nice guy. But I know where his salary comes from. I know where Brookings. I know what Brookings is all about. And so, yeah, of course, they don't like it. They don't like competition. They're going to fight it and they're going to hire people at the BPI or the Aaron Klein's of the world or they're going to have politicians like Maxine Waters say risky, risky, risky, risky, or Joe Biden, creating his white paper from his little commission. It's all risky, risky, risky, risky, no, it's not risky, risky, risky, if it's designed properly.

And I think, you know, as a historian and a theorist of bank runs, I don't think there's anybody who knows them as well as I do. That just doesn't have to be the equilibrium. Let me also point out stable coins should not be debt obligations, in my opinion. They should not be constructed as debt obligations. They should. So in my papers about this, I pointed out, why not take advantage of some existing law and make them perpetual preferred stock? So, I know that this isn't necessarily the way people are all thinking, but if it's perpetual preferred stock, then notice you could have dividends in principle. And I'll come back to your question on that because, of course, when I asked the person at Circle before they announced their IPO, how they were going to deal with the Genius Act, the answer was you can create a securities wrap for owning the stable coins. And the securities wrap can pay interest. Think of it as perpetual preferred stock. So perpetual preferred stock never has a maturity date. If you don't pay the coupon, you're not in default.

You don't go into bankruptcy. So you could have an algorithmic readjustment if there were a problem. But think about perpetual preferred stock with a dividend that actually owns the stable coin. So that you, when you buy the stable coin, you also buy preferred stock that owns the stable coin. Preferred stock pays you is a perpetual preferred stock that pays you a dividend. And let me tell you another reason this is so potentially advantageous. Have you ever heard of the global dollar network? Yes, that's a stable coin as well, right?

Is it Paxos behind that? It's a joint venture, yes. It's a joint venture by Robin Hood, Anchorage, and Paxos. And what their vision is there are billion economies of scale to having a single stable coin, But there are all these economies of relationship, of consumer relationships that mean that they need to partner with Amazon, Walmart, you go down the list, right? Why not let those individual entities who partner with them, who bring the relationships, the consumer relationships to the stablecoin network? Why not let them retain the customer relationship? So you could imagine that you, Ryan, you want to get global dollar network because it's going to build itself as a rail, as a kind of infrastructure of stable coin to be able to compete with tether through high scale.

Great. I really think they will. And when they do that, though when Walmart brings someone to that stable coin, Walmart maybe could construct their own perpetual preferred stock that owns the stable, the global. the global dollar network stable coins that are its customer relationship and it can decide the interest it pays on that perpetual preferred stop. Yeah.

So of course, you know that the only way you could have gotten the incumbent banks to be part of this is to try to limit it and to think. But then the other people in that political bargain had already figured out before the Genius Act was passed, the person at Circle I talked to told me this,

that this was their strategy. So it's kind of like, you know, of course this is not going to work. Limiting the interest on stable coins is so stupid. And it's so contrary. It shows you how the incumbents hate you. They hate the American public. They have only contempt for us that they don't want any product that can compete for our business to be able to pay us interest so that they can keep us.

How disgusting are these incumbent banks? Wow, Charles, you might hate banks more than bankless does, which is absolutely saying something. I think I know more about them than you do, which is one. I know you do. Well, can I ask you a broader question? If this is fully realized, let's say we win this political battle, let's say it's inevitable. Let's say basically we talk about it in terms, you're talking to perpetual preferred stocks. We talk about that in terms of yield, right?

It's like, let's say the yield goes back to the end customer. My question is like, here's something I don't understand. So maybe put your monetary economist hat on for this, which is I don't understand then in that case why we actually need dollars. So here's what I sort of mean, basically. Okay. So if David and I, and David was talking about paying his landlord, let's say he can pay his landlord with a stable coin that's wrapped in yield. Okay. So we could totally do this from a technical perspective.

There could be some sort of stable coin that effectively gives David the Fed fund rate of 4%. Then he gets that as a dividend. And let's say all the intermediaries are pretty much cut out. The margins are compressed so that mostly David receives that. He'd rather hold that 4% yield stable coin thing rather than dollars. And so would everybody like on the planet. Everybody would rather use the yield thing rather than dollars. But doesn't this just cut dollars out of the equation?

Everyone's using these sort of, you know, treasury type instruments? So not completely. Okay. So now this is really important. We have to distinguish the role of the dollar is a medium of exchange. from the role of the dollars a unit of account. Notice Tether and almost all stable coins are denominated in dollars. Some are denominating euros and yen,

but more than 90% are denominated dollars. I think the short term, the growth of stablecoins will actually strengthen the role of the dollar in global markets. It will allow people in countries to have really bad currencies to switch some of their liquid balances to dollar denominated accounts. So the first thing to note is the short-term effect of using stable coins as a medium of exchange will actually be probably to strengthen the role of the dollar

as a unit of account. There are only a couple trillion of these actual physical dollars that are being handed back and forth, mainly by criminals. I have some in my wallet too. I'm not a criminal. But mainly by criminals. So the dollar doesn't serve a very big function right now as a medium of exchange in physical dollars.

But then there are other dollars that are called reserves that banks hold that are basically what is the backing thing, the sort of small piece that allows deposits to work. So that's another medium of exchange. So the Federal Reserve not only creates, it creates two media of exchange effectively. One are reserves, the other is dollars. And that's a medium of exchange use. But it also, the dollar as a valuable thing that's exchanged in the market that has a value relative to your commodities and services and other currencies, that's a valuable unit of account. Stable coins are denominated in dollars. So the dollar doesn't disappear just because stable coins displace deposits and currency as medium of exchange because the dollar still retains

its role as a unit of account. But it doesn't have to. Why? Because what is a unit of account? unit of account is just how we denominate all of our transactions. We could decide to create. So let me give an example. Suppose that we lived, we all of us lived in Champaign-Urbana. In Champaign-Urbana, pretty much the whole local economy, other than the university, is soybean and corn. That's what's produced there.

And in fact, even the stores that sell other things, you know, if soybeans and corns do badly, They do badly, right? So think of it for a minute, like, let's get rid of soybeans. It's just corn. They grow corn and eat corn. Let's say it's a really simple life. That's all there is to it. All that we do in this one location is we grow corn and eat corn.

And when we work, we work to grow corn. So when we work, should we be paid in dollars? Should we denominate wages in dollars? should we denominate prices and dollars? Wouldn't it be just simpler? Yes, the answer is yes. If we just pay people in units of corn and we denominate everything in corn

because there's only one commodity called corn, why should you, if you lived in Champaign or Bannardt, you wouldn't want to, if you were only eating corn, I'm not saying that's true of people in Champaign or Bounder, but suppose it were, then they wouldn't want to denominate things in dollars. They just denominate them in corn. They'd be paid in corn and they'd eat corn.

They'd grow corn, eat corn, get paid. in corn. That's it. You wouldn't need a dollar numerina. Okay, now let me generalize that point. Jevins, one of the great founders of modern economics in the late 19th and early 20th century, developed the theory of the unit of account and what an optimal unit of account is and basically showed us something very intuitive, which is the optimal unit of account that we want to be paid in would be our consumption bundle. Because then if we know, so if you can consume 10 different things in certain ways, you'd really like your payment to be denominated in that, because then when you get paid, you know you get, you know in advance, you're going to get a

certain amount of consumption. So your pay contract translates directly into your consumption. And that means that when there's no like slippage coming from variation in the value of your payment relative to your consumption preference, right? So that's what Jevins realized. Now, here's the amazing, miraculous thing. Blockchain records and allows you to extract in an anonymized way what the consumption bundle is. Once it becomes a network in which services and commodities are all transacted through the blockchain, we actually can know in a particular location what the consumption bundle is. So we can get a lot closer to an optimal unit of account. And we could even, now it gets really interesting. Maybe some locations will have their own specialized unit of account.

So we don't just have one unit of account, but we have subunits of account. Now, they'd be aggregated to create the national dollar that would be trading with other economies, but that they could have separate units of account so that people could have their own value of the sort of New England dollar and the South Eastern dollar and the Western dollar and then allowing those to all be legal tender and then having a national dollar that's a weighted aggregation of that would allow us to all be paid in ways that would be much more optimal for us as a as from the perspective of consumers. Is this really practical?

The answer is yes, because blockchain allows the recording of all that information in perpetuity, which we know we can access in an anonymized way. It's not trivial, but the technology already exists to do that. Selective anonymity is what it's sometimes called in blockchain transactions. And so, yeah, of course you can do that. Physically, it's not problem, but then will the political game of bank bargains allow it? How do we get that to happen? The other thing that's an important wrinkle of that is to actually transact in something that's this sort of basket, you're going to need reserves that the different stable

coin issuers transact with each other, basically bundle of the consumption good. And how do you do that? Well, you have, believe it or not, you would have not everyone, but some finite group. You denominate the bundle, let's say, as a steak from Rootschrist's Steakhouse, a filet mignon from Rootschrist's steakhouse, plus a bag of laced potato chips, both sold by particular sellers. Okay? And then those, so how do those sellers create a reserve bundle that combines the two? They issue, instead of issuing these little cards that allow you to buy, you know, at Roots Chris, you issue a filet mignon IOU. So the really interesting idea is to tokenize IOUs that are linked to specific commodities provided by or services provided by particular local firms.

This sounds really far out, but actually technologically, it's trivial. The tricky thing is to actually create how somebody comes up with what the optimal bundle should be. And in my papers, I talk about the different tradeoffs there. There's going to be a tradeoff where you want to have some, you don't want everyone in the economy to be producing these tokenized reserves, but you do want it to be a small number who kind of span the consumption bundle reasonably well, but who have very low default risk. We're going to have to have algorithms about what to do with the tokens.

when you want to go to Ruth's Chris to redeem your filet mignon, but they're out of business. So we're going to have to, there's a fair amount of algorithmic kind of complexity to creating these reserves. But the promise of it, the reason it's worth doing is that it will create so much better outcome in terms of making the unit of account much closer to what we consume. So right now we have this compromise unit of account, the dollar. It's a one-size-fits-all. No matter what location you're in, you have to deal with it. Now, there are going to be lots of other issues like, well, should this, whose consumption

bundle, should this be? Should it be kind of an aggregation of the whole region? That would be my preference. But you could also imagine that this could be a political football where we use poor people's consumption bundle. Some people advocate that because they think of it as. It's a form of trying to subsidize or help the poor. So I just want to keep emphasizing all of these economic ideas have to be filtered through the political system because politically, Congress decides what the legal tender is.

And then finally just point out, once we get this great system, it's still contingent. I mean, Congress could decide to start tax and stable coins. Congress could decide to require stablecoins to give subsidies to particular targeted individuals. But I think from the standpoint of economic theory, we can see clearly that getting rid of the Federal Reserve, getting rid of the incumbent banking system in terms of the payment system, forcing the banks to fund their loans through securitization and other kinds of market means, getting rid of the Fed, not just as a clearing mechanism, but even as a creation of the unit of account, would be hugely beneficial.

Finally, I want to emphasize that doesn't mean that you couldn't do countercyclical policy. The way that the Fed affects the economy during recessions to try to counter recessions is that it all operates through an interest rate spread, basically by exchanging reserves for treasuries, it really, that's his whole mechanism. It's affecting the yield on treasuries by exchanging reserves for treasuries. That's what the Fed does. That's it in a nutshell. Well, you could imagine a fiscal authority constructed in the same kind of independent way as the Fed that would instead just tax and subsidize loans to affect loan spreads. So you could just say, oh, you know, we're in a recession.

from now on when you're paying a loan on your consumer debt or your mortgage, you're paying, let's say, X percent. We're going to now tell the government's going to pay five percent of your X. And then that will make economic activity happen more. And then if we think the economy is going too fast, the government taxes it. The interest rate adds to the interest you pay by five percent. So we could imagine using just as we operate on the interest rate spread between treasuries and cash, we can operate on the interest rate spread in loan contracts with a fiscal device. So I just want to emphasize there is no real need.

In fact, it's kind of strange. These central banks that have been operating for the last in the world, let's say, about 150 years, there's just no reason to think that this is the technology we need for the payment system or for countercyclical policy or for lending for that matter. Of course, they are an entrenched interests and all of the decisions about what our financial system can be, our political decisions. We can't fool ourselves. This is not about technology. Technology is required, but not sufficient. I think what's fascinating about everything you just said is just on the back of mass tokenization and stable coins where basically the entire U.S. economy has converted to, you know,

blockchain and crypto like for this. What sort of new unit of account types of things you could dream up? That's what's fascinating. You're also making the point that from a monetary policy perspective, there might actually be more tools at the disposal of monetary authorities than there were previously. these kinds of political like notions, these ideas, now that stable coins are here in the U.S.,

do you have any sense for how they'll play out in other sovereign countries, other nation states, let's say? So like, what's Europe going to do? What's China going to do? It seems like Europe has been moving in direction. Let me make a recommendation.

If you haven't had Luis Garicano on your program, Luis Garacano is a professor at the LSC, and he is the authority on the European political struggle over stable coins right now. And so you should have him on to talk about what they're doing. My understanding, so in Europe, the incumbent banks are even more powerful within the state than they are in the U.S. And they are very much blocking progress. Trying to create a banking monopoly of stablecoins too is kind of the way it's heading in Europe.

What would that mean? Just like one issue? Yeah, I mean, in the U.S., you don't have to be an incumbent bank to run the Cable coins. But in Europe, that's kind of the way it's being done. That's my understanding. So have Luis come and talk to you. He's more knowledgeable than anyone on this topic.

But I think that here's what my training and knowledge from history tells me. Countries are all different from each other. So let me give you an example. How many countries can you name in the world that have managed for the past 30 or 40 years to not have a banking crisis and to have a very rich sort of credit to GDP ratio? That is, they have a very highly functioning banking system with a lot of credit available and no banking crises. I would say at least Switzerland is one that probably comes to mind.

Okay, Switzerland has had a banking crisis. Oh, they have. Okay. Yeah. Yeah. So, yeah. Now I'm out of ideas. Yeah.

My second go-toes would be something like Singapore. But you were close. Malta would be one. Malta would be one. Singapore would be one. So I'm just going to use those couple of examples. What do Malta and Singapore have in common? They're very small.

They're small, but it's not just a size thing. But the size creates the more important characteristic which is homogeneated. banking systems are political footballs. The coalition of the winning coalition of the game of bank bargains is all about taking money from the losers. But if you're homogeneous, you don't play the banking game that way so much because there isn't an identifiable group of losers to steal from, which is what bank charters in the U.S. have always been, a mechanism to build a coalition that takes from someone else and preserves our society. stability at their expense. Now, and that's what we've done. That's what most countries do. So there are going to be some countries that are going to figure out, hey, we're a small, homogeneous country. We don't use our banking system as a way to build a coalition that takes from others within our

country. And so maybe we should be like a global player in stablecoins and create all the advantages of a chartered stablecoin system with international access, it challenges these backward corrupt countries like the United States and Western Europe. So that's where it gets interesting. And then will the United States and Western Europe then try to put pressure on those countries not to do that? So it's a question like, why isn't Singapore more active in trying to create a mechanism that could work in the U.S., but would somehow, I mean, so the Genius Act kind of prevents some of this already, but I think you can see what I'm getting at, that there's going to be different countries that are going to have different strategies, depending

on their own political economy. And I haven't got a great forecast for how all that's going to play out, but it's going to be interesting to watch. You're going to see in the mirror of stable coin legislation and chartering, you're going to see the mirror of that country's political economy. Charles, how do you think this all plays out maybe for the dollar? So as we bring this episode to a close, let's talk about the powerful network effect that the dollar has today, which is it is the world reserve currency. It's used by the vast majority of payments above 70%. And then And treasuries are the World Reserve asset, at least right now. There's maybe some move to other harder type assets.

And we see ebbs and flows of that throughout history. You said in the short run, this is going to help the dollar. I can't help but agree, right? This is going to dollarize economies around the world that basically have a subpar local currency and they'd far rather use the dollar and we're starting to see some of that. But long term, how does this play out? I think it plays out. It depends, of course, on how the dollar is constructed.

You could even imagine creating something called a global dollar. So, you know, there have been such things. Like, again, the Bank of Amsterdam, you know, created abstract units of currency. We could create a domestic dollar and an international dollar. Like a global dollar, like an SDR type of idea? No, but it's more like trying to be based in a global consumption bundle. So suppose that this future that I'm, I'm talking about happens where we use the recordation of transactions in the blockchain

to create a better unit of account than the Fed's liability. Treasuries will be denominated in that account. International transactions will be. The dollar, it'll still be called the dollar. It'll just be a better dollar. So you can even imagine constructing not just a New England dollar, a Southern dollar, a U.S. dollar, which is a weighted average of those, but you can imagine creating a global dollar as a unit of account, which would have appeal by virtue of the fact that it is more linked

to the global consumption bundle. Or maybe you could create a dollar for each major region of the world. So if you really wanted to compete, how does Amazon compete for business in another country? It tries to do something that people in that country might find beneficial. So maybe if we want to compete to preserve the role of the dollar, maybe one way to do it is to make the dollar better. I know that never occurred to a damn politician, but it does occur to people in the business community, right? Stable coins are better dollars because they have better payment rail. So in that sense, we're making it better.

That's a better medium of exchange. Okay. But I'm talking about a unit of account. I'm saying, sure, in the short term, as we go to more stable coins, that will strengthen the dollar because stablecoins will find that by denominy in dollars, they will spread more, right? And more countries and people. But the longer term issue is, what about this unit of account? I know a lot of people wonder, well, if we got rid of the Fed, would we even have a dollar?

Of course we would. Would the dollar be competitive in international markets? Would people still want to hold treasury as their reserve assets? Yes. In fact, you can make the dollar better. You could even create a dollar. By making it legal tender in the U.S., you can create an international dollar. You can even create a European dollar that's legal tender in the U.S.

For transactions between Europe and the U.S. That would be more attractive to the Europeans than the current dollar. So the point is, if you really want to strategically build on this reserve currency advantage that we have, why not actually try to create a better product? Well, can I ask you on this because you're emphasizing a better unit of exchange, basically, medium of exchange, sorry, with stable coin payment networks, better unit of accounts and innovation there. But what about the other function of the dollar, which is store of value?

And I think like people worry about that. I mean, look at our deficit this year, you know, $2 trillion and it's continuing to escalate and debt to GDP continues to go up. Well, that's a topic for another day. Yeah. So that's not about the dollar. That's about treasuries. assets are stores of value. So yes, the dollar, the physical dollar is one of those. But if you

had stable coins that were denominated in dollars, and if the dollar then becomes this inflated thing, then people might decide not to denominate stable coins. Isn't that kind of where we're headed? It is. Actually, I've written an article about this too. It's called fiscal dominance. That is the fact that our fiscal policy is inconsistent with low inflation. That's a separate issue. And what it tells you is, though, another advantage to creating a consumption bundle definition of the dollar. If we did that, suppose that right now I snap my fingers and my vision of the future can

happen. All of our transactions are denominated in our consumption bundles. There's no longer this physical thing called the Federal Reserve currency. Well, that means that we no longer, where do we get inflation from when the, The U.S. government has too much debt and the Federal Reserve has to print money to buy the debt because no one else wants to. That's where inflation comes from. Well, if you don't have a Federal Reserve, what happens when a government issues too much debt? It doesn't have anyone printing money under its thumb to buy its debt, right?

So what does it do? It defaults. That sounds scary. That sounds scary. Countries defaulting. Governments do it all the time. I mean, you know, and that's better in your, in your mind, you're like, mind than kind of the slow overtime default and de-leveraging that we basically see. I'm not saying that.

I'm not saying that I know it's better. I'm just pointing out that if you're worried about inflation coming from the government debt, and I am, and by the way, my estimate of the inflation rate, depending on accompanying policies, if we don't solve our fiscal problem, we're going to have at least, let's say, 10% rate of inflation a year. And I would say more realistically, it's complicated to explain it, maybe as much as 30%, 40%. Inflation per year, like CPI? Right, exactly.

That's what, you know, that's what the arithmetic tells you it has to be if you don't fix the government debt problem. Now, my St. Louis Federal Reserve, I have a paper. in 2003, published by the St. Louis Fed Review, it basically explains that. You have me on for another time. I'm happy to explain that. So, yeah, that's a pretty high inflation. You could say, well, which would I prefer having a U.S. government default on its debt when it runs out of room to issue debt, or being able to inflate its debt away? Well, that's the choice. I'm just pointing out that if you went to blockchain-based unit of account,

then you wouldn't have the government with the option to inflate away the debt. It would have to default. But maybe that would mean it's more likely for the government to do something different, which is called fix the problem. Maybe, you know. So your generation, of course, is going to be completely screwed. I mean, you guys are really idiots, if you ask me. Like, why you haven't been out there with,

pitchforks and torches, and you let these organizations like the AARP, by the way, if the BPI, Bank Policy Institute is Darth Vader, I think that the AARP is like Darth Vader's captain that was strangled, whatever his name, was general something, right? They are pretty bad too. And they make it sound like we older people have this all, oh, we've paid this money. No, no, no, no, no. Medicare benefits and Social Security benefits for this current generation that are getting them, far, far exceed what they've paid in. And because something doesn't come from nothing, what this means is the very generous welfare state that is created for me is not going to be available for you because I'm stealing from you. That is real. That is not just some of that is not, that's arithmetic. Right. How come you guys don't seem to know how to advocate for yourself? How does Donald Trump or the entire Democratic Party get away with just avoiding talking about this? How do they do that?

Well, Charles, I can tell you what we do, which is we buy Bitcoin instead. That's our protest. That's not good enough. This is the problem, right? I said this at the beginning. If you don't understand that everything is politically contingent, you can't isolate. You can't isolate. You live in the United States. You're earning a salary in the United States. You're like, you don't insulate yourself by doing some like tech bro nonsense. Okay. Sorry, David, I have to tell you. You have to organize and play the game. Engage. And you haven't done it. Your generation hasn't done it. And I'm really sorry. I won't be a member of the AARP under any circumstance. I regard them as a horrible or selfish organization, the worst example of the kinds of thinking that people of my generation and others are capable of because it's so selfish and so purposely mindless of others, thoughtless about others. So we need to start raising the level of our political discussion ethically. You know, we just had this terrible event of Charlie Kirk's death. I didn't agree with everything Charlie Kirk said, I thought he was too much of a Trump kiss-ass, to be honest, even though I loved so much of what he did. I'm being honest. I admire Charlie, and I also pray for him,

and I think very, very highly of him. But, you know, we need to think for ourselves. Neither the Democratic Party, which is a bunch of corrupt, you know, cynical losers, nor the MAGA sort of pretense that tariffs are good, don't worry about the debt. Like, what's going on with our country? You guys, you're the blame. If you want to know who to blame, look in the mirror. That's hilarious because I think a lot of people in our generation probably blame, you know, baby boomers for like where we are right now. No, but the point is this is a political game.

Engage. Engage. I won't be part of that. I agree with you. The baby boomers have selfishly stolen from you. You know, you don't just buying Bitcoin ain't going to solve that problem, Bub. I think that's a fair call to action, Charles. Thank you for that admonition as we in this episode.

I guess maybe my last question for you before we let you go is, do you think we have won sufficiently with the genius bill signed? Do you think we've won? I know there's going to be political battles ahead, but have we won enough such that stable coins, the horse has left the stable, they're going to keep running, we're going to get into the trillions of dollars. No.

No? You don't think we've won yet on stable coins. I think it's a great first step. But now you've actually put stable coins into the arena. Now what's going to happen once you put them in the arena? What will the next congressional bill about stable coins be? You think this is it? That would be like saying that when the national banking system was created,

that that prohibited Jesse Jatsy, from making so much money off of bank mergers in the 1990s. It didn't. You never sleep. Politicians and their coalition never sleep, and you better not be sleeping either. I guess the cost of freedom is ever-present. Vigilance, I guess that's the message at the end. My personal worry as well, in addition to that, is that some of the new crypto organizations around staple coins become more and more bank-like in the future. It is interesting that entities like Circle and Tether, they get to keep that 4% yield right now. And you sort of wonder, like, do they really want to give that up? So who side are they on? That's what competition will do.

Yes. That's what, and, you know, that's what we need. We need competition, which will get them to relinquish that yield. And that's the future that we're really all hoping for. You know, The little guy doesn't have a representative in Washington unless he insists on it by organizing and has clear vision, understanding of history. I don't say cynical, but I say realistic. And I don't trust any of those politicians. And I don't think the organized groups that are lobbying in Washington generally really are informed and have aligned interests with, you know, the average person. So you really, you know, you have to somehow convince people. It's very hard because we all have our own jobs.

We all have our lives. You know, how much time can you take out? So the answer is you have to come up with a credible delegation of this interest. And they have to have money. They have to have political power that comes from money and influence and having a great network of people who will pressure politicians. So I think we're already seen a little bit of that. But it's very fragile.

You know, this is not something. that you can say, oh, well, we've won the battle. Oh, no. You never win the battle. You have to be ever vigilant, as you just said. And, you know, I think, you know, in that's something, you know, in memory of and in gratitude to Charlie Kerr, who I think very highly of, I think that's a good way for us to be thinking. He was somebody who really went out there and did that and had a huge effect. But he had an organization, you know, turning point. And we need, we need to be thinking about, that. We need to think about how to really create intelligent organizations that aren't captured by incumbent interests and that really can put forward our collective interests. And that means

fiscal lobbying and that means protecting crypto from being seized by some other special interests. The whole history of banking is great ideas. Bank checking account for a great idea in the 19th century. loans were a great idea, lines of credit with the Scots, which the Scots invented in the 18th century, great idea. These are all great, but they all have to work through the political process, and then they get captured and transformed. Stablecoins are the same thing, great technology, blockchain is a great technology. Don't believe for a minute that you're immune to the government, that you can operate in the cloud or something. You don't know, you operate off of a machine, and that machine is governed by U.S. law.

You can't escape it. We need to really get engaged. Anyway, that's my view. Call to action then, Charles. I got to say, I didn't expect you to be so close to the bankless movement as you have been in this discussion. So it sounds like you are no fan of banks and are looking forward to their disruption by crypto.

So on that count, we're allies on that for sure. Completely. Bankless nation, got to let you. know, none of this has been financial advice, crypto is risky. You could lose what you put in, but we're headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot, and thank you, Charles. Thank you. Bye, guys.