Bankless - The U.S. Banking System, Federal Reserve, & USDC Post-SVB Collapse with Ram Ahluwalia

Starting point is 00:00:04 Bankless Nation, we have a special state of the nation for you today. Got to talk about the banking crisis that happened last weekend. I think, David, this week, we're in a whole new world. A lot has changed. We want to dissect what happened and what's changed, what this means moving forward. And we brought on an adult in the room, someone that understands the financial system and the banking system much better than you and I do, or maybe than we ever will, and also understands crypto. What are we getting into today, David?

Starting point is 00:00:36 Yeah, the really, the big question is, are we in a new market? Did something change fundamentally? This throws me back all the way back into, I think, January of 2022, where I remember Jim Bianco tweeting out that we have entered a new paradigm. And that was the rising interest rates of the Federal Reserve. And I didn't really understand the significance of that phase change of markets. yet Jim Bianco called it like nail on the head all the way back then. And so now I'm wondering, and now I think the market is wondering is, are we entering a new type of phase change in the market? Bank stocks were down across the board yesterday.

Starting point is 00:01:15 Crypto started responding in like a logical fashion, which is like even though it's logical, still new and different. And so I think this is the big question that we really want to to really ask is what has changed? Is there a structural? difference in the world of investing these days. And David, it's not just you and I in this episode. Who do we have on to tell us that story? Yeah, we are bringing on Ram Alawalia, who's the CEO of Lumita Wealth Management.

Starting point is 00:01:45 We will introduce Rom shortly in a little bit. But I asked Matt Walsh, our friends over at Castle Island Ventures podcast, who should we bring on? And so Matt suggested Ram. And so Rom actually had a Twitter space this last weekend during the middle of of this confusion that was very insightful for me and put a lot of perspective into my brain. So shortly we will be bringing ROM on here in a second. Guys, before we get in, I want to tell you about our friends and sponsors, Rhinophie.

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Starting point is 00:03:20 these days. That's why we're all here, isn't it? To go bankless. This is a way to do that. Go check that out.rino.fi. David, what should folks get out of this episode? What should they pay attention to as Rom speaks today. Yeah, so there's a bunch of big overarching headlines. And I think we're going to try and touch on one by one by one. One is bank runs in the internet age. Is that the new arena that we have stepped into? Was Silicon Valley Bank a special case? And in what ways was it not a special case? Signature Bank, why was it targeted? What is the impact on crypto? How is this changing the landscape of banking? All together. Yields are down. Fear is up. Is that a temporary blip? Or is that a complete and utter phase change in the market? I think these are all very big, important questions. And the answers to these things are really going to determine what the world of investing is like going forward.

Starting point is 00:04:16 As always, guys, we are learning as we go. We are on the journey with you. Okay. And if this is a phase chain, we need to know change because we need to know about it. We start every episode. This is front running the opportunity. So what is the next opportunity we need to front run? And what do we need to watch? for. That's what we'll get into right after we hear from the fantastic sponsors that made this episode possible, including Cracken, our number one exchange for 2023. Guys, these folks have been with you since 2011. Go start an account with Cracken. Cracken has been a leader in the crypto industry for the last 12 years. Dedicated to accelerating the global adoption of crypto, Cracken puts an emphasis on security, transparency, and client support, which is why over 9 million clients have come to love Cracken's products. Whether you're a beginner or a pro, the Cracken U.S. is simple, intuitive, and frictionless, making the Cracken app a great place for all to get

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Starting point is 00:07:28 assets and start building your first app. With Arbitrum, experience Web3 development the way it was meant to be. Secure, fast, cheap, and friction-free. We are back with Ram Al-Ala, who is the CEO of Lumina Wealth Management, which is an investment advisor specializing in investing in digital assets. He's a self-professed elder millennial. I subscribe to that title as well. Ram, we've got to keep the younger millennials in line from time to time, as you know. mean me. Yeah, not at all. But it's great to have you on, Rom. Thank you for joining us. Can you help us make sense of what just happened in the past five days? Happy to lay it out. And thanks for having me. Longtime bankless premium subscriber, big fan of the work that you do week in and

Starting point is 00:08:15 week out. So let's take a step back. What we've seen is the demise of internet banks. These are banks born of the internet and destroyed by the internet through social media, the speed information contact and digital withdrawals. So those banks started with, of course, Silvergate, Silicon Valley Bank, which were highly indexed to technology in the crypto sector, and of course, signature bank. So three banks in one week that are either in liquidation or in FDIC receivership. And to put in context, like the last time we had a major bank run, it was in 2008, and it was in the UK, it was Northern Rock Bank. They had lines around the block, physical lines. And in today's world, you have digital bank runs that are enabled by better UX where you can put a wire transfer online.

Starting point is 00:09:09 And the fragility that the public has confidence in their bank can help to accelerate these bank runs. I'll pause there. So, Rahm, you're saying that this is maybe the world's first large example of a digital bank run. That's how you see the events of the past five days to week or so. That's correct. These are digital wire transfers. Now, there's some other special circumstances around this. So the three banks were primarily commercial banks as opposed to retail banks.

Starting point is 00:09:40 And that matters for a few reasons. One is, as you know, the FDIC insurance cap is up to $250,000. and commercial deposits from a crypto venture fund, a hedge fund, protocol, VC, etc., is well in excess of that. So there's a higher propensity for depositors and commercial depositors to panic if they believe their bank is not going to be safe and sound. And, Rom, commercial just means not retail, more business focus. So larger account holdings in general, usually above 250K because they're trying to meet payroll, that sort of class Exactly right.

Starting point is 00:10:16 Bank user. Business startups, venture funds, hedge funds, exactly. And part of the crazy story that we're going to be talking about is the multivariate nature of it. There's like interest rates. There's Elizabeth Warren to talk about. There's all these things. But I really want to just carve out and silo off this topic of conversation of internet banking in the age of the internet era and social media. Right.

Starting point is 00:10:40 Just the connections that I've been seeing being made here is that the, pipes for fitting a bank run through are larger than they've ever been before, as well as the virality of social media is larger than it's ever been before. So forget crypto, forget inflation, forget interest rates, forget political targeted sectors of banking. We are simply just talking about the modern day technology of banking is probably the most susceptible to a bank run that they've ever been before, ever, just by the nature of that's what. what happens when technology progresses. That's like one big pin in the story, correct, Rob? You nailed it. These are banks born from the internet. They were destroyed by the internet.

Starting point is 00:11:24 And banks rely on public confidence in the United States and across the world. We have a fractional reserve banking system. No bank can survive a full-fledged bank run. By design. By design. Banks are one of the few entities that deliberately engage in borrowing short, lending long and have the backing of a centralized authority, in this case, the FDIC and the Federal Reserve. Banks are doing liquidity, credit, and duration transformation. It's a kind of a financial alchemy. And you've talked about aspects of this in your prior podcast around money and the history of money and all the rest. But maybe I can just walk through a quick contrast of what banks do, and then that'll tease up the kind of multivariate issues that you laid out, David.

Starting point is 00:12:09 So let me contrast a securities brokerage account from a bank account. When you have a brokerage account, let's say Charles Schwab, let's say you own some stock, Tesla, Apple, et cetera, those securities are custodied by Schwab or maybe BNYMell and the DTCC. And they're not in general being lent out. In fact, you can have those securities deliver to you to your door if you want. On the other hand, when you make a deposit of the bank, the bank reports to you that you've got, say, a $10,000 cash deposit. Now, the reality is banks and these custodians are very different. Banks behind the scenes are re-hypothicating. What that means is they're taking your deposits and, of course, they're lending out. And what the banks are doing is you're giving you instant liquidity. You have a demand deposit.

Starting point is 00:12:56 You've actually made a loan to the bank that's a perpetual loan that's priced at par and has the perception of no credit risk and a zero-divation loan. But on the back end, what is the the bank doing. The bank is making longer derated loans. Those loans are illiquid. And therefore, the banks are engaged in this kind of like a financial alchemy of liquidity transformation, maturity transformation, meaning longer term loans, and credit risk transformation. You have the perception of no credit risk, but in fact, they are taking on some risk. And the way this financial alchemy or this kind of magic works is you need two things. You need to prevent bank runs.

Starting point is 00:13:40 And the way we do that United States is FDIC deposit insurance. And we learned this from the Great Depression when there were a number of bank runs that caused the Great Depression. If you can stop a bank run by guaranteeing deposits, then the magic show can go on. And the second thing you need is a central bank like the Federal Reserve that can provide liquidity

Starting point is 00:14:01 to the asset side of the bank's balance sheet. If you have those two things, then the banking system should work. And I'll say one of the comment. What you saw in crypto the last two years was non-banks pretending to be banks. If you want to explain the failure of Voyager Celsius, blockifying Genesis, what were they doing? They were taking short-term deposits.

Starting point is 00:14:22 They were lending long. It's great to be a bank, but it doesn't work if you get a bank run. So, for example, Genesis couldn't sell their illiquid assets in time. They also got caught up in this duration mismatch. So with all the insolvencies, whether inside in crypto or now that we're seeing them outside of in crypto, you're saying it's the same underlying pattern through and through. So the insolvencies of Celsius, regardless of the mismanagement of Celsius, the insolvencies of Celsius, genesis, et cetera, all the crypto firms that have already happened. Now we've seen them in three banks. But you're saying the underlying structure is still the same.

Starting point is 00:15:01 there's people that had instant obligations while they were also taking long-term stances in the market. Yes. When non-banks pretend like banks, watch out, because when the cycle turns and liquidity leaves a system, you're going to see who's naked. Now, obviously, there was fraud in the case of Celsius and other actors as well. Can I ask a question, clarifying question about this, Rahm? So, all right. So fractional reserve means if everyone tries to withdraw their funds at the same time, it breaks down,

Starting point is 00:15:31 because there are assets there that have kind of longer maturities and kind of the money's not there because it's being lent out. And that's how the banking business model works. I got it. And that's true whether you're Celsius or whether you're Silicon Valley Bank understood. All right. But can you tell us about the assets that these banks are actually investing in? Because it's got to be different than Celsius. And it's got to be different than BlockFi, right? So in the case of a Celsius or a BlockFi, they're investing in these highly volatile crypto assets. I hate to call them risky. In some cases, they're very risky, but definitely volatile, right?

Starting point is 00:16:06 They could lose 80% at the snap of your fingers. You never know. I got to assume a Silicon Valley bank is not going and buying defyed tokens and going levered along. They have to have much less risky investments here that are like similar to dollars, much more similar to dollars than, a volatile crypto asset. Can you tell us about that side? Because that does seem like it's different.

Starting point is 00:16:32 It should be different in the U.S. banking system versus a Celsius or a blockfire of wager. That's absolutely right. So let me talk about what banks generally loan to or invest in and then SVB, because SVB is a very unique animal. So community banks, and about 4,000 plus of them, generally loan against commercial real estate. And that could also be financing commercial industrial loans or construction loans. And that's the bulk of loans for community bank. Now you have these megacenter banks and these other regional banks that also offer credit cards. So they take those deposits and they finance credit cards or auto loans historically in the past student loans. And banks will also finance mortgages. Now generally banks will make a mortgage and then sell

Starting point is 00:17:18 it to Fannie Mae and Freddie Mac, but to the extent that, for example, First Republic makes mortgages that Fannie and Freddie will not buy, and they'll just fund that with their deposits. So that's what they do. And in general, you'll notice that banks finance real assets that have cash flow. If you're financing a mortgage, you've got a collateral. It's called a house. If you're financing an auto loan, you've got collateral. It's called a car.

Starting point is 00:17:40 Citizens finances Apple cell phones. And if you're financing a student loan, there's human capital behind it generating cash flow. So banks are conservative. In fact, the average return on an asset for a bank is around 2%. Silicon Valley Bank is a bit different. Silicon Valley Bank not only had primarily commercial depositors and 90% of those deposits were uninsured because of that concentration. They also did venture debt. Uninsured, sorry, Ron, by FDIC, uninsured because they're above the 250K limit. You got it, exactly. FDIC uninsured. And they had two types of lending programs. They had

Starting point is 00:18:16 venture debt financing. And they also provided credit facilities to VC funds. I'll explain that briefly. So in venture debt, let's say you do a series A round and you need some additional capital. You want to do a quick bridge. Silicon Valley Bank could underwrite you and give you a loan. They might take some warrants for that. And Silicon Valley Bank gives you cash flow and you pay back Silicon Valley Bank in the next round. It's a very unique business. Silicon Valley Bank does. No other major bank does that, much less a community bank. The other product they had, of course, is financing venture firms. So, for example, a venture firm might have a hot deal. It takes three weeks to do a capital call. They want to provide an investment now so they'll borrow from Silicon

Starting point is 00:19:03 Valley Bank. That's called a credit facility. And so we're starting to what sounds like mix the world of banking with the world of venture and just normal financial services apply to these various different venture firms. But just at a high level like spinal refrable. response, banking and venture seems to go hand in hand a little bit less just by the nature of the risk that the venture industry does have. Is that a fair intuition wrong? Banks have an important role to provide bank accounts and enable payments to businesses. Banks aren't the business of payments, lending, and custody. That's what a bank is. So, you know, making venture debt loans, look, the jury's out. There's a reason other banks don't do that. And Silicon Valley Bank

Starting point is 00:19:53 had an edge in that business. And that edge was the implicit backing of Silicon Valley to refinance or have a new equity around so that they wouldn't actually have loss. This is one of the reasons I believe that you haven't seen a major bank acquire Silicon Valley Bank. Because if that venture debt portfolio is $70 billion, and they're going to experience defaults as we go through a cycle, then they don't want to be stuck holding the bag. Right. So Silicon Valley Bank specifically engaged in banking and financial services for a particular industry because it had edge, as you said,

Starting point is 00:20:30 that made that activity probably less risky than other banks. But other banks still won't touch it just because it's new and novel and potentially more risky because they don't have that edge. Is that a fair summary? It's risky, right? So what Silicon Valley Bank was doing was making loans to unprofitable tech companies. That's what it is. So when you're taking a loan, you're taking credit risk.

Starting point is 00:20:51 You expect to get paid back more than the equity shareholder. If you make a loan to an unprofitable company, arguably, you're actually taking equity risk. And now we had 14 years of QE, we had valuations, we had easy money, it was easy to refinance, and the risk was low. And it was a great growth engine for Silicon Valley Bank. But of course, in addition to that, Silicon Valley Bank had a grievous investment. they did with long duration treasuries when you get into that, which led to their demise. Okay. So they have a different portfolio of assets that are protecting the deposits in Silicon Valley Bank than almost any other bank. And those are skewed towards like credits towards these kind

Starting point is 00:21:34 of startups and VC firms. I'm wondering, Rom, if you could kind of explain this to us. So this is a tweet. You said, one of these banks is not like the other. And then you're showing this chart of impact of unrealized securities losses on capital ratio. And apologies for the podcast listener, but there's a visual here that if you want to catch that, you got to tune into YouTube for this particular part. But what we're seeing here is SIVB, which is Silicon Valley Bank, I imagine. It's like kind of an outlier dot. You see all by a little bit. It's a lot. By a lot. You see all of the other banks and they're kind of like, you know, up to the, I guess, six to 14 percent range. You know, the trend line looks like it's between like eight and 13 percent or

Starting point is 00:22:20 something like this. And then you have this outlier bank. So what is this chart showing us? So what this is saying is that Silvergate effectively had no equity. This is Silvergate. This is not Silicon Valley Bank. Okay. This is Silicon Valley Bank. Correct. So banks, by law, are required to hold capital. So what is a bank? A bank's got about 10% on average of what's called tier one capital. That's the equity of the bank. And then 90% of the balance sheet is financing, primarily from depositors. And in general, those depositors are insured by the FDIC. So you can see why government actually has a key risk on banks and they supervise and regulate banks. So we talked about the lending side of Silicon Valley Bank. Those are those illiquid loans. But Silicon Valley Bank and other banks also have a securities portfolio. And by regulation, these securities portfolio consist of what's called HQLA, high quality liquid assets.

Starting point is 00:23:17 Those are generally treasuries and mortgages. So what this is saying is that if you mark to market the treasuries and mortgages on the balance sheet for Silicon Valley Bank, that Silicon Valley Bank has zero equity. What? What? How? So how is that possible? That's because the mark to market of the securities that they purchased is just a lot lower than the par value of them? Right, versus the purchase price of the bond. Right. So in Q421, now this is peak crypto. This is peak venture funding. Record funds raised. Silicon Valley Bank had record inflows of deposits. It's like tens of billions of dollars record inflows. And in a short interval of time, what they did is they bought the longest duration treasury

Starting point is 00:24:13 bonds. And duration is when you expect the average time you expect to receive a cash flow. So the longer the duration, the more interest rate risk you have. So this is before the Fed started raising rates, although the Fed was talking about raising rates then and inflation was going up. So this is what that seems dumb because. Because they were essentially betting that the Fed wouldn't raise rates. I don't know that they were conscious.

Starting point is 00:24:38 In my view, it was grossly negligent. They took tens of billions of dollars of deposits and they bought long duration treasuries. Now, what happened last year, of course, we saw 6040 didn't work, right? The stock had been properly to work. Well, the 40s bonds, those bonds were down 20%. And here's what happened. So here's one way to think about a bank that people don't appreciate. I mentioned earlier, if you look at the bank's capital.

Starting point is 00:25:01 stock, meaning the bank is financing assets with the mix of liabilities, deposits, and equity. That equity component is about 10%. It borrows 90% through deposits. That means on average, your bank has 10 turns of leverage. A bank is borrowing short. They're lending long. They have 10 turns of leverage. So now your securities portfolio goes down 20%.

Starting point is 00:25:23 Imagine you've got $50 billion in securities. And now that $50 billion is worth $45 billion. You've lost $5 billion, but now you've got 10 turns of leverage. That is why you have this unrealized loss in the securities portfolio. By the way, this was known by regulators. Regulars have talked about the issues in the HTM portfolio for some time. In fact, the Federal Reserve has about a $1.5 trillion unrealized hold to maturity loss. The difference is that the Federal Reserve can hold to maturity, and the regulators hope that these other banks can hold to maturity, in which case they'll actually make money on the bond.

Starting point is 00:26:02 And I just want to clarify for people who you said bonds fail 20% in 2022. Bonds aren't supposed to fall 20%, right? That's correct. Unexpected. I mean, for the crypto listener, they'll be like, just 20%. That sounds fantastic. Sign me up. But this is supposed to be a less volatile.

Starting point is 00:26:23 The foundation of the entire global financial system. It's an important asset to not fall. And it was obviously a core asset. that Silicon Valley Bank was betting would not fall by anything close to 20%. You nailed it. So bonds prices drop when rates go up. They're the same thing, right? So we had 14 years of ultra-low interest rates.

Starting point is 00:26:44 We had the Federal Reserve by about $9 trillion in Treasuries and Mortgage Back Securities, $25 trillion in quantitative easing globally. Other central banks, in fact, had negative interest rates. Think about the banks that bought those negative yielding bonds and holding maturity for a loss. So that's the backdrop. And then we saw inflation increase. Of course, that was partially driven by $2 trillion in COVID stimulus, which is multiples of what we've ever seen in any other recovery package.

Starting point is 00:27:13 So you had inflation. And now rates are going up at the fastest rate since 1981. And there is a new regime. And that regime is called higher real rates, which is what, as you mentioned, Jim Bianco has talked about. Yeah. So we often talk about this idea of going. further out on the risk curve.

Starting point is 00:27:32 And that's actually a really easy thing to visualize when we talk about bonds and bonds yields and what you said, the longest term maturity bond yields. I can't remember the actual specific name of the correct asset. But just like they are buying the longest dated bonds possible. SVB is, Silicon Valley Bank is, because that's where they get the most return in interest rates. But they also take what you said is the highest interest rate risk. because they are so far out on the risk curve, but that's what you must do in an era of zero interest rates

Starting point is 00:28:06 in order to have any margins whatsoever. And so one part of this equation is like, I think everyone agrees Silicon Valley Bank totally mismanaged their risk. And also, we also had the fastest interest rate hikes in history or in my lifetime. And so these two things have collided. And so that's really what I think we're seeing here on this chart. And Ram, I want to check my understanding of this chart. We're seeing two different lines here.

Starting point is 00:28:31 One is a line of blue dots and one is a line of yellow dots that are scattered in below the blue line. And the blue line is titled Common Equity Tier 1 Capital Ratio. I don't really know what that means. My gut is that this is what it would have been like if the interest rates hadn't been yoined to infinity really, really quickly to be hyperbolic. And so all of these bank, all of the yellow dots, all of the banks, individual banks, you see JPMorgan there, you see Bank of America, et cetera. You also see Silicon Valley Bank at the very, very bottom.

Starting point is 00:29:06 The gap between these two lines, am I correct in my understanding that that is the interest rate hikes? And so people who are further down fall falling down are people that have taken further risk than other banks that haven't taken as much risk. Am I interpreting this truck? That's exactly right. You nailed it. Cool. Okay. So again, so now we've pinned.

Starting point is 00:29:26 I want to re like go through other conversations. so far. Mobile banking and time to withdraw is the fastest it's ever been. Finance is moving fastest it's ever been. So bank runs are more susceptible regardless of conditions. Then we have this one bank, Silicon Valley Bank, that serviced a higher risk end of the spectrum in terms of financial services, which was the venture world. And then also it happened to just take more risk itself being inside of that milieu that it was. And then also interest rate. got jacked up faster than it's ever been before. So these are the big parts of this multivariate story. I don't think we're done yet. Rom, where should we go from here? Well, let's do Ma for a moment.

Starting point is 00:30:10 What you're seeing is the unwind of carry trades. Let me define what a carry trade is. So a carry trade is when you borrow short in a currency, it used to be the Japanese yen, low interest rate economy, economy and then you make a loan in a higher interest rate economy and you capture that spread. And that hedge fund strategy works so long as the policy rate environment is stable. So in this period of ultra low interest rates, all sorts of carry trades were created. One of them was the great scale Bitcoin trust trade, which you guys have talked about in your show. Another is in the convenience of brokerage account, you could have borrowed and bought muni bonds.

Starting point is 00:30:48 You could have levered muni bonds and get a nice equity-like return. And that's also taken place across these non-banks that have had issues. And that's what's happening now. So think about Silvergate, for example. Silvergate, in a way, is a carry trade. It's not a critique of the business model. They're responding to incentives. They paid out 0% to their depositors, and they're earning that spread.

Starting point is 00:31:10 And that game works in a zero-interest rate world. But what happens is when you raise rates and you have an inverted yield curve, the incentives change. So remember we talked about before, what banks are doing is they're borrowing short and lending long. The expectation is that they borrow at a very low interest rate. J.P. Morgan today is still borrowing around zero percent in deposits and they lend long. And there's an expectation that that yield curve is positive and they make that spread. Now this yield curve. I just really want to for once upon the time I remember when I did

Starting point is 00:31:41 not understand a yield curve. What this really means is a yield curve means is that as you take more, that as you go further out on the time, go from two-year maturity to 10-year maturity, you get paid more. That is the normal course of events. An inverted yield curve is actually when you are paid to take less time. And so the two-year treasury pays you more than the 10-year treasury. I just wanted to place that on the ground there. That's right. Exactly. So the yield curve is a, it's a plot of the duration or time axis and then the yield. So for example, the 10-year bond is at 3.6 right now. And the Fed is expected to raise rates to call it 5%. So now, what are the motivations and incentives? So first off, if you're a bank, why would you lend long if you can just lend in short duration treasury securities

Starting point is 00:32:28 and take zero risk? Or are you taking the risk on the federal government less inflation? So you're starting to see that happen. And that also, you know, that's what drives a slowdown in the economy, of course, right? So credit card rates, auto rates go up and that starts to lower demand. But there's a, there's a challenge that's happening here because as the Fed raises rates, what's happening is it's creating a $600,700 billion whole to maturity, unrealized loss across the banking sector, because those banks are now underwater. So the more the Fed raises rates, the more the banks have these unrealized losses on their balance sheet. And also the Federal Reserve has losses on their balance sheet and the Federal Reserve will continue to pay out more

Starting point is 00:33:13 than it brings in. We can come back to that later. But here's the other side. Here's the other challenge. So the capital markets, meaning like money markets as a product, are paying out more than the deposit, than the yield you get from your local bank. So if, for example, you buy Vanguard money market fund, we're helping protocol treasuries do this now. They're saying, hey, how do I get yield? We put them in an ultra short duration bond fund that pays off four and a half to six and a half percent. So why would you park your money at a bank? Again, these banks, they don't offer that kind of yield. And for them to hold on to deposits, they have to raise their interest rate.

Starting point is 00:33:53 But now what happens? Now, recall, the average return on assets is around 2% for a bank, maybe 3%. Okay. So if they raise the deposit payout, they're not capturing as much spread. And they can't really raise it above 2% to 3%. and it can't really compete with the money market fund. So this is why, if look at signature bank, over the last year, we saw about $20 billion in withdrawals from signature bank.

Starting point is 00:34:22 It's kind of, it's not a bank run, but it's a slow moving bank run, because commercial businesses are responding to incentives. And arguably, you could say Silvergate was subject to that, and to some extent, SVB as well. But that's true for other banks in the land as well. So in some sense, the Fed is like in this checkmate position where if they raise rates, things go bump in the night. We see those lagged effects. They lower rate. They get inflation. And that's the conundrum we're in. And really quick, Rom, a money market is not the banking system. That is sort of a separate

Starting point is 00:34:59 ETF. It's like a separate pool of capital that is basically competing against bank deposits. So the question of why would you keep money in your Wells Fargo account, right, when it's giving you like 1% interest versus putting it in a money market ETF in Vanguard, which is giving you 3%. All the capital is going to flow to the 3% money market, which is a different pool, and out of the banks, which kind of causes the slow motion bankground. Is that right? What's happening now? There's a chart in the document that shows there's about like a high single digit drawdown in deposits in the banking system. So right now it's mostly corporate treasures that conducting that behavior change, although the headlines from the last week created awareness

Starting point is 00:35:44 in households across consumers. It created also some urgency and some panic maybe, and that's causing them to shift their portfolio, but it's still early days. Is this the graph chart? No, it's another, it's another chart. Yeah, scroll down. Let's see there. No, it's not there. I can send it to you. I can send it to you later. Okay. But yeah, so real quick, like, And this has like policy implications too and economic implications. So what's on money market? Let me define that real briefly. So a money market consists of investment-grade bonds that are just about to mature and pay

Starting point is 00:36:19 off their last payment principle, right? So those bond issuards of those companies can access the capital markets. Google, Apple, IBM, Ford Motor Company, there you go, that chart. So look at February 22. You can see, sorry, there you go, about two and a half percent, sorry, drawdown from the bank deposits at peak, right? So that where's it going? What is this chart here? This is this is cash getting withdrawn. Remember when we talk about stable coin outflows out of crypto exchanges, Ryan? This is like the trad version of this where. Yeah. So this is a stable coin, aka dollar,

Starting point is 00:36:53 outflows out of banks and into money market funds, which is kind of like investing in the spread of compound or something like this. Is that, is this a fair? Oh, yeah. That's my God, banking is making sense to me now that I understand it in my terms. Just like, just like higher rates withdrew funds from defy because people want to get to T-bills now. It's the exact same thing. You nailed it. Is this what TradFi feel like, by the way, when they're trying to understand crypto? They have to go the opposite direction. Yeah, it's pretty similar, actually. What is crypto? It's payments, it's lending, it's settlement, it's custody, and that's what banks do. Okay. So this chart is super interesting because we can see this big spike down in February of 2022.

Starting point is 00:37:35 We haven't seen a spike this large since 1981, which that was a bad year, right? Well, you're right. That's when you had record rate increases by Paul Voker. And of course, you had a bear market. It ended the year following. And that set in motion of 40-year bull run in equities as well. So, yeah, we're doing kind of a playbook there from 81. Is it okay if I put this Google Doc in the YouTube chat?

Starting point is 00:38:02 Yeah, go for it. This is another question I have. for you, Ram. So, okay. So you mentioned that the problem is this carry trade and you explained the carry trade. And you say that meta pattern is the reason Silvergate died. It just happened earlier because it was involved in this super risky category of assets called crypto. And you saw basically the carry trade playing out in GBT and Bitcoin spot price. And that was that. And then the symptom of that eventually like dominoes are falling. And then the, the Silvergate domino fell. But it's the same Fed raising rates carry trade type problem. And now the

Starting point is 00:38:42 dominoes have collapsed. And now we're in Silicon Valley Bank. My question to yours is, the virus has gotten to Tradify now. Right. So like, so, so like I feel like maybe it's a meme of like bankless, not bankless, but everyone's saying maybe bankless too, David, to be honest. Like, oh, that was the last domino to fall. It's good. We're good. And like we said that at the end of last year's like FTCs. And okay, if we only get through this DGC thing, then that's the last domino to fall. But now the dominoes have, and maybe it was in crypto, maybe that was the last domino to fall in crypto. Now the dominoes are falling into the banking sector in the traditional finance world.

Starting point is 00:39:19 And we had Silvergate. And then very shortly after, just days later, we have Silicon Valley Bank, the same symptom. It's the carry trade problem. What's next? Who else has the carry trade problem? It's a great question. So, yeah, first off, the positive yield. curve motivates credit creation and it creates leverage and that boost asset prices. That's the simplest

Starting point is 00:39:40 way to think about it. 14 years of that and people are equilibrium to these low rates. They condition their behaviors, human psychology around that and they planned around that. Now, inverted yield curve and that leads to credit destruction because people pull in. Banks are slowing down the pace of lending, for example. Now, here's what's going to happen in Trite Fight. It really will turn on policy. And there are two policies you got to look at. What is going to happen with monetary policy and the behavior of the Federal Reserve? They have to make a choice. Do they want to stamp out inflation at the risk of creating more risks? Or do they want to reflate the banking system by lowering interest rates? And of course, now market is starting to price a lowering of interest rates. That's one

Starting point is 00:40:25 policy. The other policy is what will the bank regulators do for other regional banks? that apparently have liquidity issues. Will they intervene to protect depositors? Those are the two things to wash to understand what happens from here. But wrong. Okay, here's why I want to understand it. So we've been in crypto since the early days of this kind of crisis, right? This yield curve inversion and the carry trade collapsing.

Starting point is 00:40:55 We've seen all the dominoes fall. We've been tracking it up to here. Now the dominoes have fallen. wasn't the action on Sunday the Fed actually putting its foot down imagine this row of dominoes falling in it basically ends the the end point is the end of all finances we know it like the world is burning like the rest of the dominoes yeah it's armageddon it's like terrible right um but didn't the i'm saying the fed but i don't mean the fed didn't um basically the u.s government the treasury the fed collectively just on sunday put their foot down

Starting point is 00:41:28 in top of the dominoes, send some dominoes scattering, but they put their foot down in the middle of the sequence of dominoes falling and say, this stops here. And they said basically Silicon Valley Bank, equities wiped out, but deposits are secured. Signature bank, equities wiped out, but depositors secured. This contagion is not spreading any further, and therefore it can't spread.

Starting point is 00:41:53 It can't get through Jerome Powell and Janet Yellen's foot because they have their foot placed on the row of dominoes here. Is that effectively what happens? Like how they stamped it out? That's their goal. That's what they want to happen. They did, as you pointed out, they insured all uninsured. They're going to make sure all uninsured depositors are made whole.

Starting point is 00:42:12 What they did not do is provide a system-wide guarantee to deposits. Wow. Well, they cannot. Right. So the FDIC, in terms of their authority, it's beyond their limits. By the way, the FDAC has $125 billion in their insurance fund, and there's $20 trillion in deposits. So it would take an act of Congress to put a system-like guarantee. That said, they did roll out a program to create confidence.

Starting point is 00:42:36 So I think in broad brush checks, you're right. That's their goal. They're saying to the public, hey, banks are safe, work with banks. And I believe they will do everything they can to stop a bank run. Okay. So I, so the letter of the law for FDIC is if you have a deposit of the bank, it's only insured up to 250K. And above that, it's not insured. What they basically said is for Silicon Valley Bank and for signature bank, we are breaking that rule and we are ensuring all depositors up to

Starting point is 00:43:07 infinites. My impression is like de facto, they're signaling to the rest of the entire banking system that we will ensure your deposits up to an unlimited amount. But you're saying maybe they implied that, but they actually don't have the power to grant that ability because that requires an act of Congress and you actually have to go vote on something and change laws. I think you got it right. And look, I'm betting, that's correct. I think everything you said there is correct. And I'm betting on that. I think I bought financials yesterday, for example. I'm betting that the regulars will do what they can to safeguard the public's confidence in the banking system and stamp out runs. So overall in broad restrictions, you're correct. That said, they haven't issued a system-wide guarantee,

Starting point is 00:43:53 which is what Bill Ackman has been arguing for and keeps arguing for. But they don't need to. I guess if they can stop it here, they can just say the signal that we're prepared to do this is the signal in the market. And as long as that stops bank runs, they'll never need to actually get to the point to put a new law in place and increase FDIC's mandate. That's right. They're trying to stamp out the fire before it becomes a force fire. And by the way, no taxpayer funds put to work. The FDIC fees are assessed against.

Starting point is 00:44:23 the banks. The banks will pay for this, which is great. However, here's the other thing, and this is outside the control of the FDIC, which is, it goes back to the other issue about higher interest rates. So if you continue to see a movement from banks to money markets, not because of fear of banks, because consumers are responding to incentives, then it doesn't matter if you've got a system-wide guarantee. Ah, so if the money market trade continues to exist, that may not stop the forest fire. That's correct. There's a slow burning, right? Go back to like signature. They've had a $20 billion year-of-year decline in their deposit, which is about 20%, this flow that we have to see, does it accelerate or not? Now, I don't think consumers, retail households by and large,

Starting point is 00:45:16 had much behavior change. We know that because JP Morgan's deposits are still grown. and they're paying out 0%. But the commercial treasures have started to adjust. And last weekend was a wake-up moment for the household, for some households that read periodicals like what we do, more forward-looking. And they're saying, gee, inflation's at 5%. I'm earning 1%.

Starting point is 00:45:43 Why don't I get a Vanguard money market fund? If that happens, what are you going to do? System guarantee is not going to help that money movement. So that's not quite a bank run, but that's what you're calling as a slow motion withdrawal that's happening just because there's this arbitrage opportunity, basically. And I guess how does the banking system Yellen and Powell stop that? It's hard. It's very, very. The way you stop it is you lower interest rates. The Federal Reserve lowers interest rates. This is the conundrum. But then how do we fight inflation?

Starting point is 00:46:18 Exactly. Exactly. And this is the, you got it. This is the aha moment. Now, what can a bank do to stop deposit flight? They can raise interest rates to create an incentive to be with money market funds, but it's not mathematically possible for a bank to offer a four and a half percent interest rate. They would be unprofitable. And so that would impair their equity. So one way or another, you can see how the banks are in a bad position. If rates go up, that hold maturity portfolio with declines in value. If Federal Reserve raises rates, the whole to maturity portfolio declines in value.

Starting point is 00:46:52 If they raise rates, they lose money. Silvergate went through this as well. They issued CDs that they're paying money out, and they have to pay an interest rate on that. They're going to lose money on that. I want to ask about one last thing. And then I know we want to get to sponsors, and we've got a lot more to cover, though. You said something that that perked my ears, which is taxpayers aren't responsible for this, right? or this is not going to cost taxpayer money, I think, was the word you used.

Starting point is 00:47:20 That's also what I saw in kind of Biden's tweetouts and that sort of thing is not going to cost. But didn't they do something else? Didn't they also effectively say that long-dated treasuries would not be marked-to-market value for banks, but would be par value? Wasn't there some move of treasury to sort of, or whomever's responsible for this? kind of reset the value of this collateral on the banking balance sheet. And isn't that in net effect, not a direct tax on taxpayers, but a tax by way of money printing, by way of quantitative easing, by way of supply issuance,

Starting point is 00:48:05 seniorage, whatever we want to call it, isn't that in effect a tax, a sneak attacks on taxpayers, or at least kind of money supply, inflationary pressure? Well, it's really, I look at it differently. I mean, the existing laws of the land already in terms of how banks account is allow us for hold to maturity accounting. Right. So banks can hold a bond at cost. And that's what SVB did. That's what all the banks are doing. But it's all disclosed to the public. So if you go to the 10-Q or the 10-K of a bank, you can see what the unrealized losses on that bond portfolio. You can do the math and ask yourself,

Starting point is 00:48:44 if they had a bank run, which would force them to liquidate, which of course will happen with Silvergate, then you can calculate what that loss would be to the bankholder equity. So that's existing law of the land. I did not see any change around that. You could send me a link. I can take a look at that. The regulators did introduce a new program. It's called the BTFR program.

Starting point is 00:49:07 Essentially, it's like a fund that's meant to step in to have. help the banking system. And again, the fees for that fund are assessed against the banks. Rum, I just want to check my understanding. You said that it's simply just like not profitable for banks to be offering a sufficiently high yield to maintain deposits. Is that what, and I'm going to show her on my screen here, this is a tweet that we showed out yesterday. This is already 24-hour old data, so I don't know what the banking sector did today. But to me, this is that being reflected in the market where the smaller and smaller banks are getting hit with a repricing event because the market has understood that the long tail of banks, and here's my question to you,

Starting point is 00:49:52 is that like the zero percent interest rate paradigm has created a long tail of banks. It's allowed for banks to exist, many, many more banks to exist because they never had to pay out interest rates. They had no costs for deposits. And so now I think perhaps what is happening here is when we talk about a phase change in the market, the long tail of banks are being made unprofitable. And is that what is being reflected in the market in the banking sector? The banks are still making money. The banks, they can hang on to deposits if they raise interest rates, but increasingly savvy deposit are starting to migrate to money markets.

Starting point is 00:50:30 So if that accelerates, then the banks have an issue because they cannot compete with the money market fund. They have to raise rates. So far, the banks are making money, to be clear. But there's this issue where the more the Fed raises rates, the more incentive there is to shift out of your depository institution into a money market. Why do we have money markets in the first? Like, couldn't you just like delete money markets entirely and then have some sort of a central bank digital currency and like provide everybody who is a holder of U.S. dollars digitally some sort of return directly from from Treasury? Well, so treasuries are part of the money market. Corporate bonds, investment grade bonds,

Starting point is 00:51:14 you know, asset-backed securities, these are all part of the money market. Money market is the collection of bonds that are about to mature. So when you say, why do we have money markets? Like saying, why do we have capital markets? And capital markets play an incredibly important role in driving capital formation, right? There's equity capital markets. Think about as an IPO, but they're also initial debt offerings. Those initial debt offerings create the bonds that eventually work their way into the money. Maybe I mean more, why do we need, why do we need banks as a middleman to depositors funds is probably more what I mean. I do we need banks. Appropos question. Apropos question from a bankless co-host and I never would have we're going bankless by taking

Starting point is 00:51:57 three banks out in a week. Here's why. So the capital markets are open to large institutions, right, an S-1 filings when you go public, an IPO. It's an incredibly high standard. We cannot access, the three of us cannot access to capital markets. Apple, Google, Microsoft, tech overlords can access the capital markets. So where does Mom and Pop or Joe Sixpack or the farmer access funding? They get it from their banks. And by the way, the top five banks, including JPMorgan, Bank for America, they're on the coasts. So you're talking like Middle America and rural America and the population not benefited from the growth on asset price inflation, it's that population. So banks play an important role in extending credit.

Starting point is 00:52:43 By the way, bank loans are cheaper than equity cost of capital. They're the cheapest source of funding, in fact, in the land. And so they play a very important role. You know, if you want to look at a world without banks, there's a wonderful book by Hernando de Soto called Mystery of Capital. Like David, you're not in your head, right? And his basic headline is, you know, one is you need property rights entitled to property. But the second message is once you have that, you can liquefy that.

Starting point is 00:53:10 So if you, there are people in Egypt, let's say, that have a home. They, the convention is they own it, but it's not recognized as such. And they can't invest in their home. So you'll see them put a roof on one year. Two years later, they paint the house. You ask them why because they can't get a mortgage. Or, you know, a farmer can't invest in a plow. They're trying to make an economic decision.

Starting point is 00:53:32 but they cannot finance the productive growth that investment because there's not a bank. So instead, what you have are de facto equity markets. Those are called like loan sharks. So banks play an important role in credit intermediation. Right, right. Rom, there's a bunch of other topics that we have to get into that I want to ask you about what's your opinion on whether or not silver signature bank was targeted. I know we've got to talk about the impact on crypto and the impact on USC.

Starting point is 00:54:00 and then we also, I want to get your take on yields and interest rates, whether or not this is the pivot moment that we've all been holding our breath for or not. So we're going to get into all of these subjects and more, but first a moment to talk about some of these fantastic sponsors that make the show possible. Uniswap is the largest on-chain marketplace for self-custody digital assets. Uniswap is, of course, a decentralized exchange, but you know this because you've been listening to bankless. But did you know that the Uniswop web app has a shiny new fiat?

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Starting point is 00:57:33 Can we talk maybe first about the story of USDC? So what happened there? Was USC the stable coin ever at risk here? And also note that we are talking in 24 hours with Jeremy Aller. Oh, we'll ask him the same questions. We'll ask him the same questions. Well, as you know, we replay last week. So USDA broke the peg, traded down as low as $0.88 in the dollar on reporting that $3 billion

Starting point is 00:58:01 plus of the USDC reserves outstanding were held at SVB. Then on Sunday, the FDIC announced an action to make uninsured depositors whole. USC closed the peg. I think it's like 99.9 cents on the dollar. It's there, effectively. And Circle has shifted their banking relationships to BNYMellon, which were the deposits are. and they shifted their fiat ramp to cross river. That was my old shop.

Starting point is 00:58:28 I built the crypto business there. So the biggest irony of this whole thing is that USDA is now custodyed at a systematically important financial institutions called a SIFI. USDC is too big to fail. USDC is held in a institution that is branded known to be too big to fail. It's designated by the regulator as a G-SIP. B&Y Mellon not going to go anywhere. So U.S.TC, one of our guys cracked the code. They're in the Emerald City.

Starting point is 00:59:01 They co-opted the defenses of the banking system. Right. So USC is ensconced behind BNY Mellon and we're protected from bank runs. So basically, we got someone inside on the inside. We did it. The Ewox took over Endo. So U.S. D.C. only fails if the U.S. banking system fails, basically. Exactly.

Starting point is 00:59:22 That's right. That's right. And that relationship is hard to get. And we like, USC had to go through these smaller banks like Silvergate First and signature. And now somehow, like how are they able to get this big, too big to fail type banking relationship? Well, Germany can elaborate more, but they had a prior relationship with BNY Mellon and

Starting point is 00:59:43 Circle has a number of banking relationships. They have five to seven. They try to diversify across that. But the principal institution is BNY Mellon. And you're right. You had to start somewhere. was the pioneer and then other banks like signature got in there as well. And so, but now those deposits are at a G-sub institution.

Starting point is 01:00:05 So was they happy about this? We're happy about this, right? I don't know. Tell me how I should feel about this. It's, it's, I'm, I have, my mind is blown. I'm trying to process this myself. It is, look, we need a, we need a centralized table coin and a decentralized table coin is one take. C.5. C5, censorship resistance on the one hand, regulated C-5, but make it bulletproof on

Starting point is 01:00:29 the other. And USC was never going to be the decentralized one. We know this. Correct. Correct. And arguably, USC is the first CDBC. Maybe. I totally think it is. It's perplexing to me that regulators and those in D.C. haven't realized this. I think they're going to connect the dots real quick now. And by the way, you know, the American banking system does rely on private markets. Like Americans as an ethos in terms of bank, I know it might not seem like this in terms of banking regulation, they do lean on private market infrastructure. The idea that USC is our first CDBC is not a, it's not a crazy idea. In fact, JPMorgan has a stable coin called JPM coin as well.

Starting point is 01:01:08 And in the 19th century before the creation of, you know, certain banking regulation of past that created the national bank system, you had wildcat banks. banks issue their own form of currency. So it's not a, it's not a crazy idea. It's familiar to the history of the banking system. I am totally waiting for like, um, the Fed to just be like, oh, yeah, we're researching a central bank digital currency and like whatever, we'll do it. And then them basically to co-op, co-op something like USDC and be like, this is mine now. I think they could. I think if you were at US Treasury, which is like the policy think tank, the brain for the US government, I believe, I haven't heard this from them, but if at U.S. Treasury, their thesis is probably, hey, we need big mega money center banks like J.P. Morgan and Citibank to issue these stable coins. I'm not saying that's what they should do. I'm saying that's what I would expect them to have the few out.

Starting point is 01:02:01 This event just fast-tracked us towards that, do you think? Well, yeah, in a certain way it did. It did. And maybe, you know, J.P. Morgan acquires USC or Circle. That could be an interesting acquisition to. complete the loop. Interesting. So I'm not saying it will, but that's a logical conclusion, right? And, Rom, was USC ever under threat, like over the past weekend? Well, you know, breaking the buck is one thing. But as you know, there is rumors of Wells notices that SEC Cher Kensler has issued. And, you know, the unknown is will Gensler consider stable coins unregulated money market funds? and if so, that could put stable coins at risk.

Starting point is 01:02:44 So we don't know. Amazing. Because money market funds are securities. Right. Money market funds are securities. Tight, tight, tight, tight. Part of the USC story is, I'm ignoring that, by the way, I'm moving on. I'm glad you're ignoring that.

Starting point is 01:03:01 You talk to Hester about that tomorrow? Yeah, we'll talk to the agenda. We'll record with Hester Perth tomorrow as well as Jeremy or there. One part of this USC story, Rom, is this thing called, Cignet, which was a product out of signature bank. I think it stands for signature network or something like this. What was it used for? Is it dead? And what should we think about this? So Cigna is still operational. The FDIC is running a global 24 instant settlement crypto network. That's what it is. Cignet 24-7 settlement for crypto banks or crypto? Or exchanges and institutions and hedge funds. So it's used

Starting point is 01:03:39 to settle the transaction. Let me give you an example. Let's say I'm Coinbase, David is Wintermute, and Ryan is jump. Wait, can David be jump? No, no, no.

Starting point is 01:03:50 It's too late. Your jump. Fine. So let's say David is borrowing from jump, Ryan, and David

Starting point is 01:04:01 is at risk of gaining a margin call. I send David some funds because I'm contractually obligated to deliver that. If you've got a wait time. If you've got like say T plus three settlement, which is standard in U.S. markets, and you cannot make Ryan whole on, let's say your DFI smart contract, you get margin called, even though technically you're solvent. That's called settlement risk. You just can get the

Starting point is 01:04:24 cash in time to deliver. The cash is there. It's on the way, but because of T plus one or T plus time, you get liquidated even though you have all the money. It's just not in the right spots. Checks in the mail. Exactly. So you need a 24-7 instant settlement layer to match a 24-7 crypto market, Silvergate-Send played that role, Cigna played that role. Without that, it creates settlement risk, operational risk, unforced errors, mistakes for the category. This is like a shadow Ethereum. Right. A shadow instantaneous payment rail, right? It's like a layer 0.5 or something like that. Yeah, okay. Sure, sure. Well, it's like its own bank inside of its own ledger, right? So all of these customers,

Starting point is 01:05:09 have to be customers of the same bank in order to use a side chain it's a side chain yeah that's that's right that's what what is what happened to signet is it now that signature bank is gone where so so let me so signature is in receivership that means management's not in charge the fdic run signature bank has a new name uh and silver bank silver SVB excuse me is also being run by the fdIC okay so signet is still running today so the fgIC so the fgIC is currently running Cigna. Which is mind-blowing, again. So the federal government has nationalized.

Starting point is 01:05:48 The federal government has nationalized mission-critical crypto infrastructure. I don't think they realized, obviously they were not. That was not their objective. But we need to get a meme talking about how we federalized mission-critical crypto infrastructure. We're behind the wall. Right. And it's a Trojan horse, this receivership.

Starting point is 01:06:09 here's what's going to happen. The FDIC is going to auction off an attempt to find a buyer in a hole for signature and failing to do that, they'll auction off the assets and then the liabilities. So the buyer of signature or their assets will look at the deposit base and say, do I want that depository customer? And if they do, then they have a second question of the CigNet network. My hope is that they want the depository customer and they maintain Cigna. But right now, the federal government is running instant 24-7 crypto network. By the way, this is important to add because there's been so much thud against Silvergate about, and I want to get into that topic, not looking at that later, but around how it's this alleged anti-money laundering network, it's nonsense. If that was the

Starting point is 01:06:54 case, the regulars could have shut it down before. They had oversight over Silvergate. And allegedly, the federal government is running an anti-money network now. Clearly, that's not the case. So, Ram, this gets into the question that David was asking before our last break, which is, was signature targeted? Maybe you could answer that. But the wider context is, crypto is, like, we're kind of reeling about this because we don't know who are friends and the government are and who are kind of the enemies, anti-crypto, people who just don't want this new financial system at all and are trying to squelch it. And so my worry is like, we're kind of laughing, yeah, FDIC controls, now manages a crypto side chain without them knowing it.

Starting point is 01:07:38 But what happens if one of the large banks acquire this signature thing and acquire CigNet along with it? And then the regulators or the anti-crypto government people are like, well, you got to stop doing that. We're going to put an end to that. Let's squelch that. We'll kill it. We're wondering, is crypto being targeted in this? And what do you expect after? There's a lot of rhetoric. I mean, Elizabeth Warren put out an op-ed piece, an opinion piece yesterday, and named crypto, Control F-Search, named crypto as being responsible for these bank failures three different times. Is there any concern there? What should we be worried about? We're going to learn a lot about the regulators' intentions. It gets back to Nick Carter's

Starting point is 01:08:20 Operation 2.0. So the fact that signature was put into receivership was a surprise. It was a surprise even for the hedge funds that were short signature. It is, it's a concern. We need clarity. We will learn over time through FOIA, through investigative journalism. Foyas Freedom of Information Act. Correct. I imagine the House Financial Services Committee, led by Chair Patrick McHenry,

Starting point is 01:08:45 will also learn more. And I'm sure you may have seen already, Senator Frank, who co-author Dot Frank was on the board, and he said he believes that it may have to do with crypto. But that's his interpreter. We don't know, just to be clear. we really don't know. It was a surprise, you know, there are allegations that there are credit risk issues around signature. They certainly had a deposit run, which could be caught, which would

Starting point is 01:09:08 be caused for receivership. So we really don't know. If CigNet keeps running with a new acquirer, then that's evidence that the regulators aren't trying to kill crypto. If Cigna is shut down, it's not evidence the regular is trying to kill it. Because it could mean the acquire doesn't want that. We won't know. So we'll have to find out. It does raise. a concern. On the other hand, Cignet is running today, and it's run by the FDIC. So we don't yet know, but it could be a bad sign about the intentions of the regulators and those in power. We're unclear on why Signature Bank was put into receivership, and it could be a bad sign for crypto if it was targeted because it's.

Starting point is 01:09:57 a crypto bank and they wanted to knock it out. And my presumption, yes, my presumption is that it was bank run driven. The regulators have to abide by rule of law as well. Because that would be illegal doing that. To target a specific bank industry because it services a population, that is not something that rule of law in the US permits. That is against the law. Right.

Starting point is 01:10:19 It's like it would be my interpretation of the law, not a lawyer, not giving legal advice, is that it would be a violation of the Administrative Procedures Act, which requires regulators to treat like scenarios likely. Meaning, if you put a bank in receivership, you've got to look at the facts, apply to the law, and say those criteria are met. And the regulators have to hold themselves to account to that.

Starting point is 01:10:39 And again, I have a presumption of good faith here. Let's see what happened. Let's learn more. And we will learn more in the coming weeks and months. My presumption is that it was bank run driven, but I don't know. Yeah. I think we're just getting mixed signals on both sides,

Starting point is 01:10:56 Right. Like if there was true actual risk of contagion, it's actually not that crazy to think that a second bank beyond Silicon Valley Bank was also at risk. That would be actually kind of the indication that you would see, right? Correct. And look, if the regulators really wanted to kill crypto, is there any better moment than post-FTX? Right. Right. Gensler could declare ETH a security, which would be horrible. Coinbase would be forced to delist it. He could declare a Coinbase and Cracken and unlicensed securities exchange. right and they haven't so and this is why we need clarity interpretive guidance that we need Congress so we don't know i just go back to like barney frank saying this that was a direct quote that they're targeting signature because of crypto um he is no fool i mean he knows he knows how this system works inside now he also doesn't care to defend crypto just because it's crypto i don't crypto positive or supportive he's on the board did he have a privileged point of view we don't know. My read of his statement was that it was his interpretation as an observer of the facts.

Starting point is 01:12:02 But I don't know. Wow. So I want to get into this last topic here, which is interest rates. The market has signaled that this is something breaking and it's time for the Fed to pivot. Yields are down the most that they've ever dropped since the aftermath of Black Friday, it says. the biggest one day drop in yields for 12-month T-bills since Black Friday, indicating panic buying of treasuries. The Vick's fear gauge has become elevated. So fear is up, yields are down. The market is saying, hey, the Fed's totally not going to continue to raise interest rates.

Starting point is 01:12:40 Ram, do you have a stance here? And how should we think about this? Right. So the Fed has nine days between now and March 23rd before they make a decision. And they will look at every piece of data between now and then. obviously we saw CPI come in and still, you know, warm. If not for the recent bank runs, which are deflationary, because it caused consumers to pull back and spous and, you know,

Starting point is 01:13:03 crouch a bit more. If not for that, you know, would have been 25 to 50 bibs. Right now, markets are pricing in a 25 dips increase. That's my base case as well. I'd expect that. If you continue to see a waning in public confidence in banks, then that changes. the only two things that will drive a Fed pivot are one is a significant weakening in the real

Starting point is 01:13:27 economy, which is what they're trying to engineer to lower inflation. They're trying to destroy demand. This is what Fed Chair Powell said when he says, we're going to have pain in the Jackson Hall sum in August. The second thing that will cause the Fed to pivot is a financial market dislocation. They're very concerned about financial market dislocations. They want markets and the public to be able to rely on their Visa MasterCard working, their banks to work, the ability to go bond, right? If you were calling COVID, financial market infrastructure broke down. You couldn't buy a muni bond. Credit markets were locked and that caused the Fed to provide it, you know, credit facility and liquidity to the market. So my base case, 25 biffs, but we've got to see what happens

Starting point is 01:14:06 between now and then. Yeah, I was going to say, isn't this financial market dislocation? It's not there yet. It's not there. Because it hasn't hit retail. Right. So the failure of these banks is not yet at the level of systemic. That's the view of the regulation. It's also my view too. These are these are banks that were indexed to technology and crypto. And, you know, when the tide goes out, those institutions that were the major beneficiaries that liquidated, again, SVB grew their deposits tens and tens of billions. But of course, those deposits went away quickly as well. And obviously, you know, we've seen what's happened. You know, you're seeing the tide go out. You're seeing who's naked, who's overconcreated,

Starting point is 01:14:45 too much commercial risk exposure. It's not systematic. However, if consumers are memetic creatures, we look at others' behavior, we imitate, we follow, et cetera. If there's a shift in consumer behavior, if consumers start to doubt their banks, I don't think we're there yet. You know, talk to people not in crypto Twitter. Ask friends, family, mom, dad, Joe Sixpack. Yeah. They're not there yet. It's not magazine.

Starting point is 01:15:12 They didn't go through 2022 of like Luna, Terra, FtX, like BlockFi, Celsius, and now this. they're not quite there yet. So you're saying that you think Powell and the Fed have some room still to tighten because this hasn't completely broken. I believe. I believe that they, well, do they have room to tighten? That's another thing. I believe that their base case would be to tie. That's their own dot plot. Their own projection is to tighten. They are on path to tighten two or three more times. Got it. But certainly this had to be a shot across the past this weekend. Oh, yes. Oh, yes. They're going to be running flag. Every day, they're going to be looking at. the integrity of the banking system, they're going to look at deposit flows, and they want an

Starting point is 01:15:56 all clear sign for sure. This is, you know, banking crises are extraordinarily deflationary. The Great Depression was not caused by 1929 crash. It was caused by a bank run. That's why Ben Bernanke, you know, won a Nobel Prize in economics and became the Fed share. It's also why policymakers, you could argue, overreacted to 2008 and slam the gas with quantitative easing and ultra-low interest rates. So in a way, this is the counter response to the significant deflationary shock of a banking crisis in OA. And the pendulum has come full circle. We're paying the consequences of that now with the central bank as well as obviously, you know, the U.S. government debt-to-GDP ratios at a very high level. Sure. Yeah. So.

Starting point is 01:16:46 I think what I'm hearing is that we were previously charging into high interest rates and now we are tiptoeing into a little bit higher interest rates. That's right. The Fed is they changed their gear shift from 75 bishth to 25 biffs. They try to be deliberate methodical. They're trying to lead markets. There's a question are arguably markets are now leading the Fed. The Fed was setting pace up till now, meaning markets were expecting a Fed pivot for three quarters in a row. And if you just looked at Chair Powell's prepared remarks, not the Q&A, don't focus on the Q&A. Look at the prepared remarks and the transcript. They're very deliberate every sentence. Now it's changed. We've seen the two year, as you pointed out, dropped substantially yesterday. By the way, we haven't seen these kinds of treasury market movement

Starting point is 01:17:32 since like 1987. The tightening and the pace of the tightening in, of course, that tightening is capital market's tightening, not the Fed, that flight to safety. And the 10 year, of course, dropped like 3.6 rapidly. So now the question is, are markets going to lead the Fed going forward? And there's that chicken and egg game. So the Fed so far has been leading the markets and the markets haven't puked when the Fed has continued their rate high campaign. Will, if the Fed stays the course and the markets are calling for a pivot or expecting a pivot, how does that disappointment translate into risk assets pricing. Ram, this has been fantastic,

Starting point is 01:18:17 and your wealth of knowledge and traditional finance and the banking system has been super helpful for us as we're kind of learning all of this through the lens of crypto, through the lens of DFI. And that's why the last question for you

Starting point is 01:18:29 as we close this out is, I know you are as familiar with crypto and DFI as you are with traditional markets and the banking system. Could DFI have fixed this? Is crypto the solution to these sorts of problems? How might we, rather than getting blamed for banking crises that weren't precipitated by crypto,

Starting point is 01:18:51 how might we paint the case to finance the banking system and Treasury and Powell and everyone else, that crypto can actually help with these sorts of problems? There's a positive story here for crypto. The 2008 crisis would not have happened if you settle securities on chain. You'd have the transparency, you'd have the liquidity. you wouldn't have the counterparty risk and you would have had the instant settlement. What does defy represent? It represents payments.

Starting point is 01:19:18 It represents lending, settlement, and custody. So there's an incredible opportunity for crypto to strengthen our banking and financial markets. I wrote an op-in on the Wall Street Journal in Q4. By the way, with former SEC chairman, Arthur Levitt, fun fact, he was on the board of BitPay, by the way, first crypto, Bitcoin. So not all SEC chairs are created equal, forward-looking guy. and there's an opportunity for crypto, but we need policy to advance, and we also need to invest in more institutional infrastructure. There's a reason why Genesis existed. Defi was an institutional grade, and so we need more engineering, more technology, and we need a policy environment,

Starting point is 01:20:02 as well as a positive vision for crypto. The values for crypto, censorship resistant, lower transaction costs, those are noble qualities, and they are. improve the quality of life for ordinary people. Rom, are there more of you out there straddling these two worlds? Yeah, look, I think there's a big flow of people from TratFi into crypto. Trotify people, look, we like technology. We're forward-looking as well, I promise you. You know, there's quite a few of us out there.

Starting point is 01:20:32 That's awesome. Tom, tell us a little bit about your company, Lumina, and what you do. Sure, I'll be brief. Thank you. Lumida is, we're building a Web 2.5 private bank. So we believe crypto grows, the more interacts the real world, as opposed to like a dragon eating its own tail with defy, expands and contracts like a cordial.

Starting point is 01:20:50 Look at like Maker, for instance. So we're building a private bank. We're focused on the top, you know, 1, 5% of the crypto market, and we're providing service and investment management. We're helping them manage how to generate yield securely and compliantly through traditional securities as well. And we're all helping them with alternative investments. The interesting about crypto is like the way you made money in crypto previously,

Starting point is 01:21:15 it's really investing in an early stage venture because those venture firms have a structural advantage due to securities laws because they can legally participate, whereas you can't do an ICO. So we're building a private bank. We think there's a gap in the market for a trusted institution. We come from crypto. We come from TradFi, you know, my investor base, includes regulators like SEC Chair Arthur Levitt, Raj Date, former Treasury Advisor, also

Starting point is 01:21:41 crypto natives like Mike Dutis and Ryan Selkis. We think that's an opportunity. We're excited about the promise and potential of crypto, and we want to play a role in leading in that area. Well, you are very well positioned. It's a perfect place to be kind of bridging those two worlds. And making sense of the banking system for crypto natives and for crypto natives to help kind of translate to the other side too. It's great.

Starting point is 01:22:08 Rom, thank you so much for joining us today. We appreciate it. Thanks for having me. Thank you, Ryan. Thank you, David. Be well. Of course, got to end with this bankless nation. None of this has been financial advice. Got to end with our traditional risks and disclaimers, but I'm going to change them up this time. Crypto is risky. But so are banks. All right? You could lose what you put in. You never know. We are 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.

Bankless - The U.S. Banking System, Federal Reserve, & USDC Post-SVB Collapse with Ram Ahluwalia

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