On The Brink with Castle Island - Omid Malekan (Columbia Business School) on Private Money, Financial Systems, and Crypto in Geopolitics (EP.724)

Episode Date: June 9, 2026

Wyatt sits down with Omid Malekan, a Professor at Columbia Business School, author of several books, and "Explainer-in-Chief" of blockchain technology. In this episode, Wyatt and Omid discuss: Why do stablecoins carry a persisent sense of being "dangerous" or "ungovernable? Are stablecoins truly private money? How do we define private money? Who owns our current banking and payment systems? Why do banks vocally oppose stablecoins? Who will own and control digital money networks? Are blockchains the right medium for digital finance over the long term? Is digital trust a problem?

This is Wyatt, and on today's episode, I sat down with Omid Malekon. Omead is an adjunct professor at Columbia Business School, having previously spent more than a decade in the asset management and finance industry. In 2017, he started to take a deep interest in blockchain technology, and since then, he has become a leading thinker on blockchains, stable coins, and their relevance to global money and power systems. In our discussion, we touch on the requirements of digital money in today's digital era, the current scale of private money across our economic system,

the banking industry's stronghold over payments and consumer deposits, and far more. Without further ado, I hope you enjoy our conversation. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy,

but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy

with a new round of quantitative easing. print a couple trillion dollars and all of a sudden people started to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Omid, thank you for joining excited and we're recording this in person, which is fun to sit down with you. My favorite title I think you've garnered among many others is the explainer in chief of blockchains. So I'd love to hear about how you got into the world of blockchain finance and stable coins generally. Sure. First, thank you having me. A long time listener, first time caller, as it was. big fan of the podcast, so really excited to be on here.

And yes, my self-given title is Explaner in chief. But that came from the fact that when I stumbled into crypto early on, like the 2013, 2014 period, I was very interested in it. I was very curious. I wanted to learn a lot. And as the years went by and I became a bigger believer of the transformative potential, there was this question about, what value do I have to add to this overall idea? or movement, and almost by accident, I realized that explaining, educating, writing, teaching,

this is my primary value ad of trying to stay on the frontier of the newest ideas, digest them, have some kind of a mental model and rubric that I process them through, and then explain to other people what I think is happening here and what's going to work and what's not. So you've been doing this for quite a number of years now, and I'd say, if you look at the generation of people who took an interest in blockchains and Bitcoin from an early stage, you had people like Nick. He was a philosophy meets political science background type who really had an interest in geopolitics and money. You had cypherpunks. You had people who maybe spent time on niche corners of the internet. What were your interest areas previously that

drew you into taking an interest in this? The cypherpunk ethos definitely appealed to me. Long before crypto, I had another accidental career, which is a critic of central banks and the Fed. One of my claims to fame is that in his memoir, former Fed chairman, Ben Bernacki, refers to a YouTube video that I made as hilarious, but misinformed. But for me, because I had a TradFi background in another life, I was a trader, worked various roles in financial services. I had a pretty good idea of how the plumbing of finance and money works. And when I first learned about Bitcoin, I was very intrigued by how fundamentally different it was. Because the one

thing you know, if you spend enough time on Wall Street, is that you never actually own anything. It doesn't matter who you are. You could be a retail individual. You could be a multi-billion dollar hedge fund. At the end of the day, there are multiple layers of intermediaries between you, your money, and your assets. And I was very intrigued by this idea that, that what we call now self-custody, but not so much from the actual practice of it. I think actually, like, especially now, everybody has to be very careful

when you're practicing self-custody. And I have no problem with there being new intermediaries, like custody providers, whether they do it technologically or legally. What was always interesting to me is this idea of the optionality of self-custody. What that means for the design of the infrastructure for the business model of the companies who build on top of it,

and ultimately for the rights of the owners like me, you and everybody else. And that being a finance plumbing nerd, even to this day, is one of those mental models that I use a lot to see if some new application of blockchain actually makes sense or not. It seems like self-custody should be a sovereign right if you take the stance that cash is legal. Do you feel differently or do you agree with that? No, I mean, not only is cash legal, but the idea of property rights is fundamental to any successful liberal economy.

Even some of the less liberal ones, you could argue about how liberal the government of Singapore is, but they have very strong property rights. And I think that goes hand in hand with capitalism, which I believe in, hand in hand with democracy, and hand in hand with human success and flirt. And one of the concepts that has intrigued me since I literally did my first on-chain transaction with a little bit of Bitcoin 12 years ago, maybe longer, was this idea that something I had never even thought about, which is by the time Bitcoin came out, so many of the world's assets, their property rights now were in the hands of various third parties and intermediaries,

financial and otherwise. Fast forward to today, we can now say that people's, you know, intellectual property, their reputations, their follower account on social media, these are all very valuable assets that exist on very troubling infrastructure. It's not transparent, it's rickety, you have very few rights, it's not transferable. A lot of it's not even regulated. So to me, this idea that for most of human history, the societies that allow people to own things and have laws that adjudicated, like who owns what, when, they've done well. and once the world went online, that all fell apart.

And the beauty of crypto is we can actually return to the past of having a model where your default state is you own your asset. You have the decision-making ability of what to do with it when and how, but you can always use that ability to exercise the option of having somebody else help you protect that asset. or having somebody else just hold that asset for you. You can opt out. And even now when people talk about like,

oh, what about the institutions and the ETFs and Coinbase custodies, however many billions of dollars in crypto and sailor and blah, blah, blah. To me, as long as the optionality is there, all the disruptive potential is alive and well. It's funny because if you think about decades or hundreds of years ago, that's why these banks and financial products emerged in the first place was initially you stored your cash,

you stored your grain, whatever it was, and then you had the creation of banks or financial intermediaries that were like, okay, we'll hold it for you and you operate on this trust basis. Indeed. And this is one of the things the extra hardcore cyphra punks get wrong is even if you study history, societies that relied on different kinds of bearer assets,

whether there were gold coins or even like security certificates, people would still opt to pay some kind of a professional to protect those assets. for them, which I think is mostly just a scale issue. If every single one of us, as we're confronting now, has to go and think about and invest both the attention and the money to protect our assets, that's very inefficient. If we pool all of those resources inside what back in the day might have been literally like a money-changer service with a bench in the plaza. But today, in Tradfi is a bank. And then crypto could become a wallet provider.

then it's just a lot more efficient for them to protect everyone's assets or the assets of a lot of people. The problem with TradFi plumbing is that because there is no option of self-custody, there's also very little competition among the kinds of institutions of trust that exist to protect people's assets. So they end up having a lot of power over us, whether it's pricing power or refusing to innovate and stay with the times because they don't have competition. So what are we going to do? we can't leave. And then they also become too big to fail. They become politically influential. And this goes back to why I think the optionality of self-custody is very powerful. Because at the end of the day, my stock broker does not fear my ability to just push a button and withdraw all of my

assets to my own wallet. My crypto broker, custodian, does. So there, I think, just going to be cheaper, better, and more trustworthy in the long run. Yes. I think we should, share a lot of alignment thinking about this. But one thing that's, I'd say concern to me recently, which I'm curious for your view, is Bitcoin emerged around the financial crisis, which makes sense whether that was coincidental or not. I think probably wasn't in the sense that you had this reaction to third parties becoming less trustworthy or seeming less trustworthy. And then you had this self-custy asset. And then you had another blip of this in 2022, I think it was, where you had another episode where you had insolvency or temporary insolvency among financial institutions. And

over the past, call it five, six years, I've personally had this view that I think we share, which that self-custody might not be where you want all your assets, but it's a very compelling alternative and it's something that is aligned with property rights. I am admittedly concerned in the past year or so because of the progress of AI and digital technologies. that I worry they might render digital self-custody less safe, at least at this point in time. Whereas previously, I would have looked at trust as a bug if you can create perfect self-custody in the sense that periods people have trusted a bank, they've lost their money at times. Now, if the digital world is becoming a little bit less safe, is digital self-custody unsafe,

and trust is a feature where you want to be able to have the money physically safe, sitting somewhere. This gets into the stable coin conversation will have where bearer assets like Bitcoin, Ethereum, very different than stable coins because someone can take USDC. They don't actually have the underlying money if it's frozen or if they're sanctioned, whereas if someone steals your Bitcoin, they've stolen your Bitcoin. Do you think that this new digital era makes trust more of a feature than a bug and does it make digital self-custasy more dangerous? Or do you think it's a temporary thing and we won't be challenged by it. I agree with you that we're going through this intervening period where it is more dangerous.

And I actually don't know how much of that comes from AI as opposed to the more vanilla practices from the attackers. And we also have to remember, as crypto assets generally appreciate in value and more and more people own them, there is more of an incentive for bad people to do bad things. I would also say, though, that just basic personal best practices, even for the people who continue to exercise self-custody, will alleviate a lot of this. But the overall point stands, and I think it's a question of who we're talking about. So if we're talking about, say, the adoption of Bitcoin for nation-state-level kinds of money, which is my mental model. I think I call Bitcoin a form of money insurance. And it's just Bitcoin is insurance against censorship, inflation, and

of fiat money, which I think is something eventually everybody will want a little bit of. It's insurance. It doesn't mean you should put all your money in it. But if your country start adding Bitcoin to their foreign exchange reserves, they're going to do some version of self-custody at the other. They might partner with a local bank or tech vendor or whatever to do it. But it would be somebody that they have total control over. It's just like a vendor or contractor to help them. As for individuals, I wouldn't want my mother self-custody in her own coins. So there'll be some equilibrium there.

I also would not underestimate the ability for smart people to develop new models of what is closer to self-custody, but has a lot more protection built in, whether it's like multi-sigs, smart contract wallets with certain ties to biometrics or whatnot. So sort of like the history of the world, their periods where the bank robbers get good at robbing banks and then the banks get much better at preventing the robbers from robbing them. But the stable coin thing is very interesting for many reasons, because the center of gravity of the industry has clearly moved from the pure bearer assets like Bitcoin, et cetera, to what I call, I hate the term RWAs. I hate the term stable coins. Yeah, we need a better one.

We need a better one. So I just call them off-chain assets. They're on chain, but they ultimately, at least part of their source of value comes from off-chain, whether it's a reserve or if it's tokenized equity, it's whatever the company's doing. I am actually probably in the minority that I believe in the long run, the stable coins and off-chain assets that scale and succeed, they'll be closer to bearer than they will be to like what a bank account is today. Many people, including friends of mine, disagree with this. They seem to almost celebrate the fact that like,

oh, well, the stable coin is centralized anyway. So why do we even need a non-custodial wallet to hold it? What's your response to that? My response is one, the off-chain assets are most useful when they're interacting directly with the on-chain assets. So I think Bitcoin is a powerful form of collateral. I think ETH will actually in the long run be an even more powerful form of collateral only because Ethereum has native smart contract functionality. So I wrote a piece, well, how long has it been now, over a year ago now,

that I think ETH might be the HQLA high-quality liquid asset of crypto in the same way that U.S. treasuries are for the global financial system today. Just the thing that everybody trusts that is going to be very liquid, and then you could do things with repo, use it as collateral and borrow against. in all of these contexts, if you say, well, the stable coin doesn't need to be very bearer-like, then defy is not really defy. Defy works best if you have the bearer native asset like Eith. And then you also have the close-to-bearer money asset or numera or whatever you call it,

the stable coin that it trades against. If you don't achieve that view, then just imagine. You know, you want to have stable coin issuers like willy-nilly just freezing a Ave or morpho market entirely, which is a risk, obviously. Like, this is the thing DFI has to grapple with now. And we're starting to see small incidents as where it becomes problematic. Like there's a court order imposed on a stable coin issuer because there are some funds that are being disputed in a DFI pool and then they end up freezing the entire DFI pool because we both know

they can. But I actually think market forces more than anything will lead to the issuers of off-chain assets trying to make their assets as bare like as possible. Fascinating. I want to hit on this topic of stable coins, privacy, property rights, and self-custody, because you recently responded to a Wall Street Journal piece, which was talking about stable coins as private money and taking issue with that in the sense that broadly stable coins are risky and difficult to govern. And I'd love for you to touch on why you felt compelled to respond to this and why you think this narrative permeates the popular consciousness. It permeates the popular consciousness because of an anti-cryptal bias or a bias towards anything that's new or different. And I used to have

sympathy for people who felt this way, some of whom are my colleagues in academia eight years ago, when they didn't really understand how blockchain's worked or even how stable coins worked, when the only game in town was still Tether, and Tether has had a checkered history of what it does or it doesn't do. We know they've lied about their reserves in the past, but there's been enough time now for any intelligent person to go and educate themselves based on basic first principles of money and banking that go back centuries, if not longer. Some of the principles that really rambling piece by Greg Ip, who's the chief economics commentator of the journal, who's written critically about crypto before in an unfair way, he wants to compare Bitcoin to fentanyl.

You could think Bitcoin is worthless or dumb or a scam, but then to compare it to something that's just killing thousands of innocent people. That's the kind of thing. where I'm like, you're a smart, educated person. That's the analogy you came up with. You're not trying hard enough, even as a critic. But in this more recent piece, the headline says, oh, the stable coins are private money and that's what makes them dangerous or something like that. Most of the money in existence is private money. So that in of itself cannot be true. If private money is dangerous, banks are dangerous. Can you speak to that point? Yes. Let's take any fiat currency. This is true for the dollar, but it's true for literally any money today that a government issues. It has academically

two forms. There's central bank money and then there's private money. Central bank money, which is also sometimes called base money or reserves, is just a liability of the central bank because all fiat money is a promise ultimately. And what matters is who's giving you the promise and what are the chances that they break it. So with dollars, there are two forms of central bank money. There are the reserves of the Fed that commercial banks have to keep. And then there's physical cash. If you take out a dollar bill, it says on a Federal Reserve note.

That means it's a promise from the Fed. And central bank money is the safest kind of money in existence because a central bank cannot default. They can print money. So we don't worry about the Fed going, the way of Silicon Valley Bank or even FTX. That today with dollars is probably like $6 trillion worth. All of the other money in existence, including the money that you and I almost exclusively use in our day-to-day lives, is a private form of money. It is a liability of a private entity,

like a bank or a fintech or a fund, and they can fail. Banks fail, fintechs fail. They're regulated and their capital requirements and lender of the last resort and bailouts and reserve requirements, yada, yada, yada. But in theory, the Fed will never go out of business, but a bank can. So it is always understood that private forms of money are more dangerous, somewhat more than. I mean, now central banks bail out everybody. So I think that academic distinction has actually gotten diluted a lot. But private money is what makes the world go around.

So there's $5 to $6 trillion in central bank money, but there's well north of $20 trillion in private forms of money. So if you're Greg Gip had saying, well, this is private money and it's dangerous, why are you worried about the $300 billion stable coin market? You should be worried about the $20 trillion M3 of, yeah, it's micro. It's micro. So that can't be right. And then the other thing that drives me crazy is that a genius licensed stable coin

issuer is both one of the most regulated and safest issuers of private money possible. Just because, one, they can't do fractional reserve banking. They will have no leverage. And once we're done with the regulatory rulemaking process, the things that they can invest the assets out of their balance sheet in, very limited, short-term T bills, repo, deposits at insured banks, and highly underrated, financials. Financial Regulation 101 is the government goes to anyone. It could be a stablecoin insurer, but it could also be a bank or a fintech or a fund

and says, I need to make sure that your assets match your liabilities, that you're not lying on your accounting. And then the government says, please give me the data I need to make sure you're not lying to me. One of the magical properties of a stable coin is half the balance sheet, the liabilities, which are the tokens, are on chain. And you can verify them trustlessly. So now if you're regulating a stable coin issuer, you go and say, well, I know you know, you have $50 billion worth of token outstanding. I don't need you to show me that. What I need you to do is now tell me where the reserves are. And because these are going to be very safe liquid assets, it's not going to be hard to get an accounting from them and then they're custodian

and whoever. So just from a first principles of financial services point of view, this is an unbelievably safe product. In fact, that's why the banks are freaking out lobbying against them, because the bankers understand better than anybody that if you have a really safe dollar and a slightly less safe dollar during periods of crisis, there might be massive capital flight from one to the other,

which actually makes banking even more unstable. So just it drives me crazy that otherwise intelligent people, like Greg I'm sure he's a brilliant man, decided some years ago that crypto bad, and then like a decade later, they continue to stupefied themselves, to make that argument, as opposed to just breaking it down, first principles of banking and financial

services, as I'm sure he knows, and then analyzing stable coins that way. It's interesting because I don't think it will actually only be the stable coin issuers who challenge this monopoly that the banks have had on money for a long time. It seems like this conception around maybe it's FDIC driven, but that people, society, we've really erred towards, okay, money resides with banks. they're going to have control of the active money supply and system. And to your point, it both gives them this massive deposit base that they earn a lot of money on and safety because there's really no other game in town besides cash.

And even aside from stable coins, it feels like that's potentially bound to change at some point? Yes. And why shouldn't it? One of the things I love about crypto is that it shines a mirror on the rest of society and gives you an opportunity to ask the question, Why is it the way that it is? And as you know, I've been very much involved in this debate about whether stable coin issuers should be able to pay yield.

I actually think they should be directly able to pay yield. Forget this clarity debate about third party arrangement. I see no justifiable academic, economic, or social reason not to let the owner of a USC get 3% interest from circle. But the reason why so many people are opposed to that is because society today, is constructed under a series of increasingly questionable assumptions. One of them is that banking and payments need to be married. So the way we make payments is through banks.

This is actually more of an American assumption than in other places. And as proof, I submit the fact that until literally the past year, America has gone out of its way to exclude fintechs from government-run payment infrastructure. Even like Fed Now, which most other countries had something like that decades ago, it's a real-time bank-to-bank payments. It's amazing how far behind we are. Yeah, Fed Now is like government runs L. And the reason why people, including a lot of other banks, wanted it,

is because the big banks own the company that runs Lel and the smaller banks would rather not rely on their competition. Fed now, when they built it, they excluded fintech from direct access. So if you're a Square or PayPal or Revelo, Although Revolut's interesting because it's technically has a banking license. But the fintech that young people increasingly prefer, for them to use Fed now, they have to have an account at a bank like JP Morgan. This isn't stark contrast to many other places where they're celebrated for successful payments rollout, India, Brazil, etc. They went out of their way to include the fintech.

So one of the assumptions that we have, particularly in the U.S., is that payments have to be run through banks. And credit cards mostly, by the way. Yes, credit cards, but also like wire transfer, the ACH payments and stuff. So this is like a marriage of lending and payments that does not have to be. It does not have to be that if you and I need to receive a direct deposit, ACH payment for our salary,

or we need to maybe even write a check to pay our rent, that that needs to then fund bank lending on the other side. It could just fund government lending. if that money is put in T-bills. So that's a weird assumption. The other assumptions are that a very false one, that banks account for some large percentage of lending. They do not, certainly not in America.

Banks account for only 20% of credit creation total in the U.S. Thanks to our capital markets, large non-bank lenders, like private kept credit, insurance companies, et cetera. And maybe the most interesting one is that the optimal amount of credit in the economy is more. And what I mean by that is zoom out for a second. All this debate about stable coins and yield is always about, well, deposits at banks. If there's less deposits at banks, which it's not clear to me that stable coins would have that effect. But even if they did, to me, it's like, so what? But people say, well, if there's less deposits at bank, then they can't

create as much credit, so there's less lending. Who said that's a bad thing? It doesn't have to be less lending. Maybe the cost of lending goes up because there's an equilibrium between the availability of credit, the demand for it, and the interest rate that regulates this. But let's say that hypothetically, because of changes in the financial system, banks do have less deposits in a way that leads to less lending, which, by the way, is also unlikely because banks make an insane profit right now from having basically free deposits. Quick segue, the net interest income for American banks last year was $700 billion. That is more than the max $7 made in earnings.

So even if stable coins competed for deposits, the most likely thing that would happen is banks would have to pay a bit more to keep their deposits, as opposed to zero. And make $500 billion. And make $500 billion. And it's like, who cares? Like, who decided that the job of me and you and every other person

who needs to pay rent is to subsidize bank shareholders? But even if you look at, if the banks, they're actually credit unions in the U.S. that do run as nonprofits. So they have to possibly pay more for deposits. Again, I actually don't think stable coins will have this effect, but if they did, okay. And then they have to charge more for mortgages.

Okay. Who decided that that's a bad thing? We have to be living in a period where a lot of Americans are starting to economically crumble under the pressure of very, very high interest rate credit cards. Might it be better for society if that was a less available product because the banks that issue them have fewer deposits? Maybe. I remember when I was young, I never wanted one.

I was like, why can I not just spend money from my cash balance? Like, I understand you want to get a mortgage someday, but it still seems to your point in the era we're living in a relic and just a way that we're caught in this system that you have to have a credit card. You have to essentially be in permanent debt if you want to be spending money in the world. Yeah, I wonder if you and I,

because we come from actually a similar immigrant background, I was raised to believe that the only time you borrow money is when you don't need it. We hate borrowing money. Right. If you do need it, don't borrow money. Just save or spend less or work more. But this idea of a credit card is over a trillion dollars in credit card debt in the U.S. now and 25% interest.

And a lot of people end up getting caught in this credit card death spiral, whereas the fees and interest just compound. They can't possibly keep up with it, even though they plow more and more of their hard-earned money to just try to stay afloat with the debt. It's like the government. Yeah. But who decided that a bank, and I don't mean to single out JP Morgan, there's all the big banks, who decided that they have like a God-given right to

borrow from you and I at zero, which is what they pay now on a checking account or even a savings account, and then lend that money at a 20% to somebody who maybe shouldn't get a loan in the first place. Yeah. I love this frame, by the way, because I think most people just look at stable coins and say, okay, people are skeptical of them because they are adherent to the old system. but I like the framing that people just have a misunderstanding of what our current system actually is and how much private money there is currently. They have this fallacy of safety. And it's interesting

because with younger people in particular, I think the traditional financial system has even convinced people that cash is dirty or not to use cash. Like young people don't use cash very much. They're convinced that credit cards and digital money, there's this, they advertise the luxury of it. So they've really created this society-wide understanding that. that that is where personal finance happens. And I think it is slow to unlearn that, I guess, is my best answer as to why people still 10 years later, to your point, express this real distaste towards stable coins. Yeah, it would actually be fascinating for somebody more qualified than me to do an intense sociological study of how our current financial system is marketed to us.

because, for example, I have this obsession with credit card network TV ads, like Visa and MasterCard. First of all, it's weird that they advertise because they're not consumer-facing businesses. Visa and MasterCard's customers are the banks that issue cards. They are not you and I. You and I might have a Citibank or Chase credit card, but we are a customer of the bank, not a Visa and MasterCard. And second, these credit card ads are always these really deeply moving, aspirational, ads about athletes with disabilities overcoming and willing medals and people achieving their life dreams. And when I watch them, I'm like, well, this is fascinating. What does any of this

have to do with me using a credit card to buy shoes? And don't use cash. And don't use cash. I'm sure there are very good reasons why business for a profit thing. It works for them. And I don't knock that. And then there's a whole rewards thing, which is also a part of this story. We were supposed to have a God-given right to get 2% airline miles or something with every purchase, even though basically what's happening is that our local bodega pays us to be loyal to some combination of, I don't know, Bank of America and Delta Airlines. But Dega should be paying for us to be loyal to them. I'm very curious to see if eventually stable coins will break this model.

But it does seem like the system is right for disruption. And the other thing that we need to remember, I'm going to take this. back to the Gregory Ips of the world for a second. Our current banking financial system is highly unstable. We're just three years out from the latest crisis, the regional banking one. But it wasn't just a regional banking crisis because it took down credit suisse, which was literally a GSE, a global, systematically important bank. In other words, a too big, too failed bank actually failed.

And this is after 15 years of laws and legislations and new rules and agencies and the regulatory compliance department at every bank ballooning its size. And the regional banking crisis was like the most predictable crisis ever because every high school student knows that when interest rates go up, the value of a bond goes down. But somehow our brilliant bank regulators didn't think about all of the treasuries that are on the balance sheets of the SVBs of the world. So this is the other thing that drives me nuts. When so many people criticize stable coins and they literally say things like, you know, banking is regulated and safe. I'm like, no, it's not. We just three years ago had a G-SIP blow up. At what point do we say

that this approach to financial intermediation and payments has failed? Like, at what point do we say that the cost of all of this chaos and the bailouts and the political pushback and populism that they inspire is a reason for us to build a different kind of financial system? And you've spoken a lot about what stable coins look like in that light and how certain blockchains work and centralization and decentralization, which is all to say when you look at the hopeful disintermediation of that, is it stable coins on decentralized blockchains? Is it just digital money? Is it just digital custodians of some sort?

Is it stable coins on any blockchain? Or what do you think will actually be the thing that steps? in and what works or doesn't work? Why stable coins? Why not stable coins, et cetera? My mental model of the future is something like a pyramid where at the bottom of that pyramid, the core infrastructure is some kind of a highly decentralized public permissionless blockchain that you can do tokens and smart contracts and other things. Right now, Ethereum has the lead. It's still early. We'll see on top of that, that also leads to having a very very, very highly trustworthy new kind of financial asset, which is the native coin of that chain,

because it's, again, like, Bitcoin. I mean, this is all true for Bitcoin. I'm first you can't do much else with Bitcoin because there's no tokens or smart contracts on that blockchain, not really. But now you have a new asset. So you have the bottom layer of the pyramid. The next layer is the native asset, which is going to be one of the most trustworthy assets on Earth that you can do different things with, savings, invest, stake, borrow, land, et cetera. Then on top of that, you have all the other assets that people issue, some mix of assets that exist almost entirely on chain, like maybe you have the governance coin of a D5 project, but also ones that are off-chain assets like stable coins and securities and whatnot. And as you go up the pyramid, things can

be less and less decentralized or more and more centralized. But I still think my future model is that the equilibrium state is everything skews more decentralized than people think. Why? Because the market will force it this way. Because at the end of the day, the stable coin that censors less will be preferred by defy. And if you believe that defy is going to be a big deal, then you must also believe that stable coins in defy are going to be a big deal. Which you do believe defy is still going to be a big jealousy implication. Oh yeah. I think defy is going to be the wholesale part or the core financial system in the future. Maybe you and I don't access it directly like I do today. Maybe we prefer to do it through an intermediary of some kind. But I actually think

the default state is eventually the world's largest financial institutions will prefer to only interact with each other through defy. And in that world, they will also prefer to use the stable coin that censors the least because it is the least likely to screw anybody. And this is why I this model of decentralization will win. And I think one of the reasons so many people disagree with me on this is one, the status quo bias, that's so far from the world that we live in today that people have a hard time imagining it. Two, they think my vision is utopian. I actually think my vision is deeply Machiavellian. I think the reason why everybody will find their way to decentralize blockchains and assets is because the world will be a ruthless

cutthroat place where nobody trusts anybody. And in that world, you will just trust code cryptography and economic security. So unfortunately, this is somewhat of a bearish view of the period that humanity is heading in right now for various reasons. But it's not some like la-dida wouldn't it be great if everything was decentralized. It's more like in a world where you don't trust your counterparty, because you don't trust any counterparty. Then you do not want that counterparty to have the ability to freeze and seize your stable coin. In a world where you don't trust your counterparty, you do not want to use a defy protocol that has a multi-sig where the founders could freeze your assets or break it or upgraded without consent from the broader community. This is actually a cynical view of how

humanity will evolve, but then the availability of decentralized solutions will make it better. Lastly, just a pure economic point, this is an argument I've had with friends. You hear this argument all the time. Oh, well, tokenization of real old assets and securities is going to be a thing. Companies are going to issue equity and debt, but they're not going to want North Korea to own their shares. All else equal, the lesser company cares who owns their shares, the lower their cost of capital. I was thinking the same thing as you were saying that. I think Maple is a great example, where, to your point on trust, the fact that smart contracts are programmatic, you can now trust a much wider audience. Apollo and the major private credit firms can't tap into what you would call

global South liquidity because they can't establish a trust relationship with that end user. They don't know if it's North Korea, but someone like Maple, who's created this wonderful on-chain system now can tap into a cheaper cost of capital. They've now created a sticky user base there, which, as you know, is the whole game when you're doing something like lending. That's right. And we happen to be living in an era of abundant capital, but that pendulum often swings back and forth historically. If you can get endless amounts of money from the sovereign wealth funds that you like or pension funds or retail or whatever, then yeah, you can have the luxury of saying, I want to have strict view and control over who owns every share of my stock or is an LP in my

fund. But if the pendulum swings to a world of scarce capital, then the entity that says, I don't care. I'm not making a moral argument here. Although I have a hard time with when people make moral arguments in favor of like how the BSA and AMLKYC work because they don't actually work anyway, the data is abundantly clear. I find some of those views are patronizing too. Towards the rest of the world, people who think that U.S. equity should be owned by certain people or that their stock should be in a certain place or talk about stable coins as putting down local financial systems. I'm like, you shouldn't disenfranchise people who want access. the U.S. dollar because you're so fortunate to live in the strongest economic society in the world.

Absolutely. This is my joke that every critique of Bitcoin makes sense if you add on the upper west side to the end of it. So when people say, like, why do we need Bitcoin or even stable coins? We have credit cards. I'm like, yeah, on the upper west side, not in half the world. My mental model is more one of that we're entering a period of technological transformation of everything, least of all from crypto with AI and whatever else is coming. people are increasingly losing trust in existing institutions. You think that's increasing today, your recent periods? Oh, yeah.

I see it everywhere. I saw it firsthand in academia where I work and teach. You just see it in the data that average Americans' opinion of major universities has gone way down. That's a good data point. Do you think that's because we know more now, or why do you think that's happening? I think there's a couple of things. One, it's just a lot of these institutions have not kept up with the times. Two, for better or for worse, there is the widespread access to information.

I do think the misinformation problem is a problem. I don't think the solution is censorship. I think the solution is we have to move on to better models of social curation of information and where we get information from and who we trust and who we don't. And maybe get away from the ad-supported internet model that leads to the gentification of social media and radicalization of people. But the older I get, the more I think any major trend that's happening does not have one reason. It has multiple.

So a lot of our institutions have not kept up. A lot of them have become lazy or corrupt. Demographic change of the generation that grew up on the Internet sees the world fundamentally different than their parents or grandparents. Part of it is just we're all blessed because we have it much easier than any other generation has had before us. but that has also other kinds of unintended consequences. Like people are more likely to ask existential questions when they're not going hungry. So there's a lot happening.

World is changing. But if trust in institutions break down, I don't think it's going to be like a forever period of just endless chaos. We're not returning to tiny fiftims of people. It just means that new institutions are going to have to rise. And my favorite thing about crypto is I think it's a great, model of what's possible, the kinds of new institutions. I say this about Bitcoin. I think Bitcoin is

one of the, maybe the most interesting new institution that humanity has created and has scaled in the last 15 years. Like, whatever one's opinion of investing in it, the coin goes up and down in value. But this idea that we now have a multi-trillion dollar asset that rides this novel plumbing that nobody's in charge of and relies on some combination of economic security and math. And it works. That's a great example

of what's possible and I'm really looking forward to when we have a lot more of that with Defi. And also I agree with the people who say like everything that the crypto industry has tried and failed, NFTs, Web 3, DPN, etc.

will eventually come back but in a better, more sustainable form. I agree with that. I think that will happen. and then we will have new models of human interaction that'll just be fundamentally and more trustworthy. To your point on Bitcoin, I think relatively speaking,

the volatility of Bitcoin is vastly overstated, by the way. If you compare to purchasing power, if you compare to global currency performances, if you compare to certain reliable, massive businesses in S&P 500, the volatility is certainly there, but from a real world perspective, I don't think it's that high compared to the market.

things compared to private credit, compared to private equity. It's a great point. And we now live in the age where, like, micron stock is far more volatile than Bitcoin is. Or silver. Yeah. So I do think that in retrospect, many years from that, people will look back at a lot of the early critiques of Bitcoin and other digital assets and recognize how much those critiques came from a place of ignorance and fear, as opposed to being an accurate

description. And I think certainly the volatility thing. One way to explain it is what we saw with Bitcoin is the birth of a new currency, which doesn't happen often. What we've seen in our lifetimes is a lot more the death of an existing currency than the birth of a new one. And if the death of a currency that was once trusted is a violent, volatile thing, then almost by definition, so must the birth of a new currency that takes its place. I want to touch on because you've made this strong point that there's growing distrust of institutions, and that happens both in the financial system, but certainly more broadly. And I agree could certainly be a catalyst to push people towards using digital money or decentralized money in the form of cryptocurrency or otherwise,

that there's anything we don't know. But decentralized blockchains as a principle to date, at least still have an element of observability, which you could argue are in some ways compatible to what feels like a digital surveillance society that we've now gotten into, where there's a lot of social media where there's AI record that probably knows both of us very well, and people in the crypto and let's say the now cypherpunk community are talking a lot about privacy and whether privacy around blockchains should or needs to be a feature based on that digital society we're now in. Do you agree with that? Do you think that the call it final form of digital money or this next form will have that privacy built in beyond

what we've seen on blockchain so far? Or do you think it'll be something more adherent to like an Ethereum today? I think we will definitely need more of it. How much more might depend on going back to my pyramid mental model, where on the pyramid that you are. But I think of financial privacy as there are different equilibriums that you can have. The equilibrium that we have today in banking is that literally nobody has a global view of what's happening, but somebody has a perfect view of what each individual is doing in that context. So there is no ether scan for the global banking system, but your credit card company knows a shocking amount of information about you or your fintech.

So my current model of how crypto works is that it's a different equilibrium. You have a global view of everything that's having. happening. You just don't know who anybody is until you do some work, which is like this whole on-chain forensic industry. And we can rightly expect that with people becoming more sophisticated than AI, soon it'll be a lot easier to unmask most of us. And also just if you want to do things like use stable coins from day to day, it's problematic. You owe your friend 50 bucks. You pay them. Now they know your wallet address and can watch trauma. Like they can go look at them. I am a big advocate for much more privacy solutions, and they could come from having things done at the protocol layer, at the smart contract layer, at the asset layer. I'm not smart enough to know exactly who should do what, where. I'm bullish new kinds of cryptography, like zero knowledge proofs. And I think eventually we will find the new equilibrium where the default state is,

a lot more private than it is today, but it's fairly easy for people to opt out of that in situations where it's beneficial to do so. Because it's not always nefarious, Orwellian. One area where all of us at some point want to have less privacy is if you're applying for credit, a mortgage, and you want to demonstrate that you have a good credit record. If there is no credit scores, Ned, there's want to be less lending or more expensive lending because the lenders don't know who's a good credit and who's not. So is there a future state where we're all doing a bunch of our day-to-day activities on chain? It's encrypted, but it's fairly easy to use things like zero knowledge proofs to demonstrate to a potential lender that you have a good credit history without doing what

happens today, which is there is a database somewhere that is the world's greatest honeypot that has every piece of information about who borrowed how much when and paid whom. Yeah, I think that's possible. It's just a question of when and how we get there. You've laid out a lot of pieces, which I think are spot on when it comes to consciousness, at least of people who are probably very financially or technologically forward-thinking, which is to say that centralization is concerned. We were talking about surveillance, the concern, digital money has these principles,

stable coins are accelerating. I wanted to ask, I am curious first on your view, so maybe touch on this, if stable coins are even geopolitically important or not yet, or that there's still some scale. And to that point, if you are a well-intending government or policymaker who probably agrees with this concept that people will want to self-custody money, that their merits to that, that privacy will matter both digitally and when it comes to money, but at the same time, you need to avoid money laundering, you need to avoid terrorist financing, you need to protect consumers.

How do you approach this? I think we're at the point where stable coins as they go from here will be geopolitically important. And how we approach it is that question of where is a new equilibrium, which I'm not sure. What I do know, however,

is most people have the wrong mental model of this because they assume that what is done in Trafi actually works. They assume AML, KYC, CFT, sanctions actually work. And I think from a cost-benefit analysis, it's abundantly clear that they do not work. Do you think that's because they're malfunctioning or is it performative? A combination of the two. Ultimately, there's a point at which if you want to have an effective banking system, you cannot do Orwellian surveillance on it. If you want to have a currency that other people

trust, never mind the global reserve currency, you need to afford a lot of freedom for what they do with it. So that's a given. And then the other thing is I think much of it is performative. Look at what the data is on the sheer amount of resources that Tradfai invests in things like anti-money laundering, the shocking ineffectiveness of it, because somehow trillions of dollars get laundered through every year. And then the broken record repetitive nature. Like once a year, regulator comes out, big press release, we caught so-and-so bank massive money laundering or terrorism financing. We find them some crazy amount of money like $3 billion.

If that actually works, it wouldn't happen once a year. Yeah. They would have done it once 18 years ago and no other bank would be caught with a major money laundering violation. And this is partly from my conversations with people who work at these places whether the regulatory agencies or the banks, it is generally understood that it doesn't work, but that you have to go through the motions.

Everybody plays their part. If the bank got fined a billion dollars for AML violations, we can just business one-on-one assume that they made a lot more money from not having super tight AML in place. And importantly, all of these rules are major modes for incumbents. This is one of the other reasons you hear literally like this week, the Jamie Diamonds of the world, decrying how stable coins are not going to be BSA compliant.

One of the biggest moats in any highly regulated industry is the regulation, because the cost of complying with it is massive. So I'm just making out numbers. But if it costs a billion dollars a year to run a compliance department at a financial institution, If you're an incumbent that makes many times that every year, you're fine. If you're a startup raising VC funding and the thing you have to do first is to plow a bunch of money into a compliance department that does not generate revenues, it actually reduces your revenues and is a massive cost.

It's a big disadvantage. So for all these reasons, I think this broken system perpetuates itself, but I'm very bullish of the brand new paradigm of tokens on chain, just breaking this model and hopefully we'll find some better. We didn't even touch on how much it requires both from a cost and access respected to get an OCC charter or something like that too when it comes to even trying to compete in the banking space. Yeah, and one of the things, even now with things like Stablecoin genius licenses or the new kinds of trust licenses and bank licenses that the U.S. regulators for the

first time in a long time are willing to roll out, they're going to look to see, well, what are you doing for compliance, and what is your AML program, and how you comply, lying with this or that. Part of it is people do mean well. And just to be clear, I don't want terror organizations to get money. I generally think people should pay taxes and it should not be a voluntary thing where you could just launder your money out to foreign banks or something and not pay any taxes. I think that's bad for everyone. Yeah. Because then us honest people end up paying more taxes. Yeah. And the government's underfunded and you've all sorts of problems. Yeah. But this concept that this is another one of those crypto shines in the mirror and exposes people's false assumptions, maybe the financial

system should not be the primary line of defense for law enforcement. And certainly not surveillance data collection. There's also data on like the rate at which banks now file suspicious activity reports has gone parabolic, because why not, especially now that it's electronic. But how much of those are actually looked at and used? There's some crazy data that the IRS caught 700 people tax evading, even though there's millions and millions of suspicious activity reports filed every year. But maybe there's other ways to catch people not paying their taxes. Good old-fashioned police work is what it takes. Yeah, agreed. So to touch on some of the things we've spoken about, now we're at this point where stable coins are growing. Brian Armstrong and

Jamie Diamond are publicly fighting about where that will go and where certain rules around tokenized assets around stable coins will land. Or in one large geopolitical conflict and there are others that are ongoing. What's top of mind for you in the next 12 months? Or what do you think happens? What are your concerns? What are you excited about? The concern right now is that the vibes and the mood across the crypto industry is very negative because some people are actually like losing their job and having a hard time finding work. There's some of that in tech broadly, I would say for me at least, I think. Yeah. But the other problem with crypto is the coin prices are down and AI is sucking all the attention and capital. So I have a minor concern that we're going to lose some good

people just because people have bills to pay. And if they can't, if they're a crypto project that I make it, they can't find another one, they'll go elsewhere. Other than that, though, I actually think we're at the point now where we're ready for important non-speculative adoption. I think everybody knows about the stable coin bit, which is also very exciting for me, but we don't need to dwell on it. But what we all, I think, I speak for me, you, your colleagues, and a large swath of the crypto industry, that we will love it if all these debates that we get into with our friends is, what's crypto good for? We can say, well, actually, trillions of dollars in payments that wouldn't happen otherwise.

And money savings and efficiencies and new paradigm. Financial independence for people, yeah. Yeah. But I would also love it if we had some interesting non-purely financial applications. I think NFTs will make a comeback, not as, oh, it's the 836, 10,000 PFP collection, like, give me money for it. It's completely derivative of the 800 that came before it. But I think this idea of a programmable, traceable, self-custodiedable, one-of-one, it's very powerful for a lot of different applications like credentialing, identity. And these ideas have been around forever.

And there was a point in the two cycles ago where a lot of money was invested in startups trying to build it. It just was too soon. I think a lot of what was tried out in crypto was too soon. But I think we're at the point now where we're going to start seeing

entrepreneurs build cool solutions that use some element of a blockchain somewhere, not because they set out to build a crypto blockchain solution, but because they set out to solve a problem. And in doing their research and due diligence stumbled on some feature of our world that was just useful to them. I say, oh, you know, this token thing or this smart contract

thing, that actually solves a problem. I'm going to use it for no other reason that it's just one of the tools in my tool chest, along with Claude Code and APIs or something. I used to make fun of this Gartner hype cycle because it just gets quoted and miscoded. But I'm realizing now, like, this is the trough of despair, but this is the point where you expect actual useful solutions to arise historically. So I think in the next couple of years, we're going to see more of that, and this will fundamentally change the conversation. I also think we're at this point. The internet comparison is so cliche, but that said, I do think we'll see value accrue to businesses that are already large or existing businesses the way that we did post.com bubble,

where initially you had internet native businesses that were harnessing the technology, and a couple of them are still around, like Amazon, which became a Titanic business, obviously. But you fast forward to call it 10 years after that initial growth curve it started, and it wasn't startups for a period that were accruing the most value. It was businesses like Domino's Pizza and Vail Resorts and Apartments.com that had these existing businesses, and they were not internet businesses. They were a real estate business and a pizza business. And I think that this next period of people using stable coins and blockchains might look similar to the sense of enabling these kinds of businesses and that you have this almost hangover of the previous period where it was all entrepreneur based. It was all fast and new. And there's a lull and then we'll come back to this vibrant wide era.

It sounds very compelling. And it's funny, the internet analogies that we all make, one of the things I got wrong, is I underestimated the required relationship between how disruptive blockchain and crypto ultimately would be and how messy the process is of getting there. There's many things that I have been wrong about. Most of them, though, fall in the bucket of, if you asked me five years ago, it's 2026, you have regulatory clarity, institutional adoption, where are we now for like day-to-day usage? I would think we're way ahead. I would also think there would have been less chaos and frauds and scams and shenanigans

that there have been. But what I'm realizing now is in some ways it's possible that blockchain and crypto will actually in the long run be a lot more disruptive than the original internet was. Obviously, the stuff runs out of the internet, so they happen together. But there is funny stuff that like the data on how much productivity the internet unleash is actually pretty weak. the internet did not turn out to be a great tool of unleashing human productivity and prosperity. Did you hear that AI conversation is happening now, by the way?

I read an article the other day where Uber's had a couple announcements where earlier in the year it was they blew through their credit budget. Then it's they adjusted their credit budget. I think now it's they're trying to assess whether their token budget, you mean. Their token budget. Right, exactly. Sorry, thank you. And now they're trying to assess whether they can tell that engineers, individual level are more productive and that they ship more code and they query things, but whether the output of the teams and the company is actually materially advancing the business at all. Yeah, so maybe it needs to be a different company that does a better do. I don't know.

I still am struggling to wrap my arm around the whole AI thing myself. But to your point, the outputs are difficult to quantify even when it feels like things are moving very quickly. Yes. One thing I will not do is I will never go to some AI evangelist five years from now and say, well, you said this would have happened by now. And it hasn't happened yet because the number of times we've all heard that about crypto's like, oh, well, Bitcoin's now been around for more than a decade. Why isn't it more blah? You promised me, right? Yeah. Who decides what is the reasonable timeline for a technology to be impactful and adopted? Also, who decides what the genesis was? Crypto, as we understand it, I think is actually

rare that we can say 2008-9 was the start of it. When did they? AI industry launch. 1940s with Alan Turing. Who decides what that star point is that the race was on? But there is some unmodelable relationship between the disruptive technology that shows up and then the human society that it aims to transform, I think. It's like this recursive back and forth. We've seen our version of this in the crypto world.

Maybe there'll be a much bigger version in the end. AI world, but I have learned the hard way that a technology being ready to do something and society being ready to accept it doing that thing are two very different things. I agree. We'll get there. Omead, thank you for joining. I had a great time. So did I.

Great conversation. Thanks for having me. Come back sometime soon. Would love to. Thanks for listening to another episode of On the Brink with Castle Island. To learn more about Castle Island, visit castle island. vc. And to listen to all of our podcast episodes, please visit castle island.vc slash podcast or just click on the tab on our website. Thanks for listening.