The Pomp Podcast - #1177 Caitlin Long On Bitcoin & The Banking Crisis

Episode Date: March 23, 2023

Caitlin Long is the co-founder & CEO of Custodia Bank. In this conversation, we talk about the current banking crisis, short-term & long-term solutions, what should happen to the US dollar, inflation, FedNow & CBDC, traditional finance, bitcoin, and Caitlin's effort to create a safe bank. ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. We have no advertisers on this podcast, so it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Caitlin Long is the co-founder and CEO of Custodia Bank. In this conversation, we talk about the current banking crisis, who's responsible and was it

preventable? We also talk about the short-term and long-term solutions, how everyone is sudden clamoring for safe banks. What exactly should happen to the dollar? Will inflation get hotter? will there be hyperinflation? Is Fed now a CBDC? How exactly is the traditional financial world waking up to the problems in the banking system? And then we get into Bitcoin, Chokepoint 2.0, what is going to happen with Bitcoin moving forward? How hyperbitcoinization could happen? And of course, we then end with a conversation around Custodia Bank and why Caitlin's efforts to create a safe bank in the United States has something that everyone should pay attention to. I always enjoy talking to Caitlin and I hope you guys enjoyed this as well.

Here is my conversation with Caitlin Long. with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. If you pull a muscle, all of a sudden you realize how often you use that muscle. So the bladder is exactly like that. When it's working well, we don't think about it. But when it's not working properly, you're getting up at night, or in the cases of many men, you may have some leakage.

If this is something that's affecting your quality of life, there are really good solutions these days. Depend makes the guard and the shield. The shield would be if you have some leakage on occasion, if you have heavier leakage, you could use the guard. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, guys. Bang, bang.

Caitlin, I thought a great place to start this conversation would just be, what the hell is going on? What has happened with this current banking crisis? Well, where do we start? It all traces back to the Fed. It all traces back to Fed policy and U.S. government policy during COVID, where almost $5 trillion was put onto the U.S. commercial banks' balance sheets. And to give you a sense, there's $18 trillion of deposits right now. So that went up by a staggering percentage just in the last three years due to COVID.

And what ended up happening during COVID is that nobody in the private sector, really, except for large corporations, were borrowing. So what happened in the segment of the banks that serve small and more rural and localized businesses, which is the backbone of America? The answer is they weren't borrowing unless they were doing it through PPP loans. So what happened, here's the punchline, is about $5 trillion of U.S. treasuries got purchased by the banking sector right before the big increase in interest rates that started a year ago. OK, so to say that this is the origin of this really is Federal Reserve policy is 100 percent accurate.

What I don't understand and am staggered by is how the bank regulators missed this. They just I guess they just took the assumption that even though the U.S. treasuries on those community and regional banks balance sheets were marked to market at huge losses due to the increase in interest rates that have happened over the last year they just looked the other way and assumed that the world wouldn't figure out that there's a solvency hole in the banking system especially at the community and regional banks that has exploded into the consciousness right now because of social media information. You can't hide something like that anymore. Everyone is now understanding it. And ironically, it was the citizen journalists

who really revealed it all. And then the mainstream media picked it up. But the staggering speed with which we've seen these bank collapses, you and I were watching Silvergate, which is not a bank that most of the world was watching. But it wasn't even a week after Silvergate announced that it was liquidating that Silicon Valley Bank happened. And by then, the entire VC world was on to this whole bank run issue and telling all of their portfolio companies, get your cash out of these small banks and either put it in U.S. treasuries or put it into the large banks. And so that's, in a nutshell, what happened. It, in retrospect, is obvious that this was going to happen when you realize that information travels at the speed of light. And we're not in these old, it's a wonderful life, analog type bank runs anymore. You can literally move billions of dollars at the speed of your phone from a remote location. So I saw Janet Yellen over the last couple of days talk about the fact that they never anticipated the speed at which these bank runs could happen.

And I think she was specifically talking about these kind of – I call it a digital catastrophe, right? It's a negative event that happens in the real world, but it is accelerated and caused by the speed of information and action online. Phones have been around. Computers have been around. Right. Is it just like it had never happened before? So like it was hiding in plain sight? Was it something where people just thought like, oh, online banking isn't nearly as popular as it actually became?

Like, what was the disconnect between the technology existing, people using it, but actually them not preparing for it? Well, so this is where I can get into the fact that the bank regulators are oftentimes engaged in groupthink. OK, and they have an incredible level of detail in the regulations. And everyone naturally assumes that the regulations are going to prevent bank runs. And frankly, in the last decade, the regulations have been so strict that virtually no banks have failed. It's also true, therefore, that virtually no innovation has happened in the banking sector. Right. Capitalism, of course, is creative destruction. And so when you have no banks failing, that tells you something. But to use the Nassim Taleb analogy, that if you don't let a forest fire burn and burn the dead stuff at the bottom of the forest floor, when it finally burns, it turns into a conflagration.

So that's that's definitely happened here. But I think the bank regulators just assumed that they that there was not ever going to be a bank run at the speed. I mean, you just you just saw Yellen, who's a former Fed chair, admit that the challenge, though, is that I think also part of what is going on here, As I've heard from insiders in D.C., is that the bank regulators wanted to take down some of the more tech forward banks because they were not necessarily healing to the bank regulators the way that the bank regulators who have tremendous power have wanted them to. And those banks are the banks that have especially fast systems. OK, Silvergate, Signature and Silicon Valley Bank all had APIs. Both Silvergate and Signature were operating 24-7, 365 ways, just basically ledger entries within the bank. So if you had two customers within the bank who wanted to move money to each other after banking hours or on weekends, they could do so at the speed of light through those APIs. Those APIs scared the bank regulators, and there was an incredible piece in the Wall Street Journal yesterday which laid out what happened at Silicon Valley Bank.

The Silicon Valley Bank tried to get money through the Fed, through Bank of New York, and the window had closed and there wasn't an ability for the Fed to move the money that quickly at 4 p.m. OK, this is not, you know, at 11 p.m. Is that 4 p.m.? And the reason is because they had to do a test trade. OK, and the Fed wouldn't wouldn't do the test trade after hours. And it turns out that the money arrived the next morning. But by then, the FDIC had already closed the bank down. That was on Friday, a week and a half ago. So here's the punch line. The systems have not been updated and that scares the bank regulators. So what did they systematically do? They went out and proverbially shot the most tech forward banks. Now, stop and think about that. People are voting with their feet to use better, faster, cheaper ways of moving money. And what did the bank regulators just do? Shut down some of the most tech forward banks in the country who can move money better, faster and cheaper.

That should scare every American because and you saw it in the White House. By the way, this has been all coordinated. The White House report that came out the day before was dunking on financial innovation and talking about how we should basically just stick with our banks, which are safe and sound. that was a hilarious observation because of course we all know the banks are not safe and sound it's now very clear that there is a solvency hole by the way there always has been it's just that now everybody's realizing it and so the so the next point is that when the white house is out there saying basically taking an anti-innovation stance and you see what the bank regulators have done to shut down some of the most tech forward banks they want to retrograde technology back to the analog world. And it's fascinating as a political move, because there are more moderate people in the Biden administration, and I've been waiting for them to raise their head. There's a new person

who hasn't been announced yet, who I know is a cooler head. And I hope that when that person gets in their seat, that they're able to have an impact and walk some of this back, because you cannot stop the march of technology. And what will end up happening is that if the regulators are trying to force everything to slow down and to go back to the analog world where you have to go into a bank branch to be able to move your money, then people that will accelerate the move to to crypto and other payment rails that are outside of the system. They're going to get at what they actually fear, which which actually happens so often when people make decisions on the basis of fear, you get what you feared. So part of this insolvency issue is this like

held to maturity. You know, some people will call it an accounting trick. Some people will say, no, it makes sense. Can you unpack your view as to taking these assets, putting them in a certain part of the balance sheet and basically saying, hey, we can just evaluate these at par, not marking them to market and why that's become such a big issue now? Well, that was a way for the regulators to basically, it is an accounting trick because the regulators could look at that and say, well, the bank is solvent because they haven't marked these unrealized losses. I like to point to Tom Honig, the former president of the Kansas City Fed, who correctly points out that the risk-based capital approach of the banking sector,

this gets into a little bit inside baseball, but here's the plain English version of it. The capital regime missed something big, which is that U.S. treasuries attracted no risk weight. So what did the banks do when this $5 trillion of extra deposits suddenly shows up? Again, from $13 trillion to $18 trillion in three years, there's this huge deposit influx. And what did they do? They bought the risk-free asset that didn't require, because they hadn't raised additional capital, so they bought the risk-free asset. They all reached for yield and got greedy, though.

And that's where they took on the interest rate risk. And the capital models for the smaller banks did not reflect the capital charge for that interest rate risk. And so the banks are all going to point fingers at the bank regulators, which is why, by the way, you have seen, this is incredible, you have seen a number of people on both sides of the political aisle and in places like the Washington Post, of all places, really criticizing the Fed and the FDIC, to a lesser degree, the OCC. These were untouchables before, these agencies.

And now they're getting incredible criticism. That is a sea change, folks. The Fed has historically been able to sort of stay above the fray. Not anymore. Boy, oh boy, have we seen direct criticism coming from both sides of the political aisle of the bank regulators for having missed all this. And it was because the capital model didn't apply to the small and medium-sized banks that picked up the capital that should have been required from the interest rate risk,

and here's what Tom Honig pointed out, it might have looked like these banks were well capitalized because of that accounting trick. But if you really mark to market the losses, they were very thinly capitalized and if not insolvent. When we try to unpack who's responsible for this, is it the Fed and the interest rates, you know, kind of hiking and kind of going against the guidance they had given? Is it the FDIC or the OCC who maybe didn't oversee this as much? Is there maybe blame to be put on the actual management teams of the banks who didn't have good risk management? Is it all of them? Like, how do you kind of, you know, pin the tail on the donkey and say, okay, here is who is at fault for this? It's all of them. And the politicians

too was the other group that you missed, right? For overreacting and, you know, basically just throwing all this, all this debt onto the U.S. economy when people were literally sitting at home watching Netflix and gambling with their STEMI checks. So that's part of it too. But yeah, I mean, at the end of the day, the management teams did not have to accept the extra deposits. They did not. And they did not have to take those deposits and roll the dice with them by investing in long-term assets. Silvergate had a huge influx of deposits. And the numbers that I have off the top of my head, because I looked at this right before the crypto bankruptcy started in Q2 2022, Silvergate had $13.3 billion of deposits that could be withdrawn within the span of minutes.

And it had $1.4 billion of cash, $13.3 billion of deposits that could go poof, and $1.4 billion of cash. It's not rocket science. What happened there? It's not. But what we are now seeing is that that same issue could happen at any of these banks that have these big unrealized losses and are not sitting on cash. Very, very interesting editorial in the Washington Post again this morning. They've been very critical of these bank regulators, which have historically been Teflon, and they're not now. In the Washington Post editorial page this morning, they came out and said the FDIC should not guarantee all bank deposits, but they did call for guaranteeing the deposits for payroll, okay? And there was a really interesting Harvard Business Review article that came out on Friday that said we need safe banks, okay? Because, you know, if anybody's got more than, say, 15 or 20 employees, their payroll that they pay is probably more than $250,000.

OK, and so there's there's literally no reason why businesses who are paying payroll should have to take counterparty credit exposure to their bank. The bank should be sitting on cash for those payments. And that is exactly what these non-lending bank charters were proposed to be. And you've seen that the Fed blocked them. And again, I, you know, my own bank custodian with whom you're familiar. Six weeks before the bank runs, the Fed blocked Custodia's business model, which was exactly that, a payment bank that was sitting 100% in cash. And now we're seeing calls from all kinds of mainstream places for exactly that. So the idea of a safe bank, right? I've been Googling around, and there ain't that many of them that claim to be actually safe in terms of not following the fractional reserve system.

The word safe, the word kind of deposits, all these things now are bubbling up, and the average American is kind of looking for where is the safe bank. I think that we can split this conversation into two pieces. There's the big banks versus the regional banks, and then there is fractional reserve banking versus non-fractional reserve banking. I'm an investor in Custodia. Obviously, kind of the pitch and approach that you guys have taken is something that I think is needed in the banking system. Explain fractional reserve versus non-fractional reserve and why that potentially could be the safe bank that everyone is seeking. Okay, so fractional reserve banking, when you put your deposit into a bank, the bank turns around and lends it out. It's a classic borrow short-term and invest long-term.

So the banks are investing in loans or they're buying securities like we just talked about. So they're taking – it's the Silvergate numbers I just said. They're taking in demand deposits that could literally go poof and turning around and investing 100% in long-term assets. And in Silvergate's case, they had $1.4 billion of cash against $13.3 billion of demand deposits. But I've seen an analysis of all the publicly traded banks. Only a handful of them have enough cash and available-for-sale securities to meet demand deposits. That's the way fractional reserve banking works. The banks are just not sitting on cash.

They're basically, you know, the best analogy is if you parked your car at a valet parking garage while you were having dinner and the valet garage rented out your car to an Uber driver and pocketed all the money and you didn't know you had risk because that car was out being, you know, driven around. And heaven forbid, if the Uber driver crashed your car, guess what? You have an unexpected financial loss and you would feel pretty angry. But that's exactly how banking works. And that's the fractional reserve model. The banks are taking risk with your money and not sharing the rewards with you and not being transparent about it. The challenge in the United States is that that is exactly legal. And that is how the banking system has worked for decades. But you can see how it's fundamentally unstable. When you deposit your money at a bank and the bank turns around and lends your money while you think your money is there.

the whole business model rests upon the confidence that not everybody will go and withdraw at the same time and when we see a bank run happening where everybody goes and withdraws at the same time the insolvency that was always there becomes revealed when we then look at the big banks versus the regional banks it seems like the regional banks have been exposed more and i don't know if that's like a psychological and confidence thing where people are saying oh this small bank probably has less assets. It probably isn't as big as the JP Morgans and others. Or is there something that is structurally different in the regulation, their capital balances? What is the difference here? It's the latter, because the latter are subject to the Basel III requirements,

where they have something called a liquidity coverage ratio, and they're required to sit on liquid assets to pay off their volatile deposits that could be withdrawn in a short period of time. And so the regional and community banks have not been subject to those same requirements. And that's exactly the issue that we're seeing. That's why you see a lot of people are saying this particular issue is a U.S. specific issue, because in most other countries, there are only a handful of banks and they're all subject to the Basel III requirements and therefore they're required to sit on more liquidity. So the impact of this is that this is one of the reasons why a lot of people have been predicting, and indeed we've seen, I just was looking at a J.P. Morgan report this morning, since this banking crisis began, $1.1 trillion of deposits have migrated from community banks. And again, the total is just under $18 trillion. So this is not small, okay? Big, big money movement happening right now. $1.1 trillion of deposits have migrated out.

And where are they going? they're mostly going into T-bills, into the U.S. Treasury market. So yes, there is something specific about the small and medium-sized banks in this country because they weren't required to sit on all that liquidity. And everyone just kind of sprayed and prayed that all the depositors didn't show up at the same time. But in an era of the internet where information moves at the speed of light, a bank run obviously can happen like that. The liquidity requirements that regulators have had is to assume that 35% of the demand deposits disappear in a run. So when you're doing your stress testing, that's typically what happens. That's typically what the regulators

will focus on. But what we've seen is that essentially 100% of those deposits, not 35%, could disappear intraday. 25% of the deposits at Silicon Valley Bank disappeared within hours. So I want to separate out the idea of a bank run. I think most people, whether it is the analog world, like go stand in a line and wait for your money or kind of this digital catastrophe. Hey, I just opened a new tab. I click some buttons and I move my money. That is one component of a bank run.

And I think that is the acute, like 42 billion flows out of Silicon Valley Bank in hours, right? There's a second version of a bank run that is occurring. It is very slow and it is very stealth. But this bank run is essentially this move from deposits into treasuries. And a lot of this, again, has to do with the interest rate, where if the interest rates continue to increase, then naturally I can earn more yield on my assets. So I go and I buy treasuries rather than leave it and get paid my 0.03% or whatever the bank is offering me. And so talk a little bit as to like what stress is that putting on the system as well?

Well, it's putting enormous stress, right? Because the reason why your small and regional banks have not paid interest on that even remotely rises to the level of what you can earn in T-bills is because they know their capital constraint. And so they're trying to pocket that spread to rebuild their solvency. And so unfortunately, now that the world has figured out that there's a solvency problem as a whole in whole segments of the banking industry, when you mark to market those assets, then what does it mean? It means that the assets migrate into T-bills or it migrates into the large banks. And we've seen a degree of both. The movement has come out of the small and medium-sized banks into the large banks, and then there's money moving from the large banks into T-bills. And a lot of people don't think the large banks could be in trouble, but here's one of the challenges. The U.S. government fiscal policy is requiring the issuance of staggering amounts of treasuries.

That's how the U.S. government finances itself. It's through something called the primary dealers. All of the large banks, for the most part, are primary dealers. What does that mean? It means the banks have to buy the treasuries that the U.S. Treasury is auctioning off. They bid for them at market prices and they turn around and resell them at some sort of a spread. That's the business model. But there's going to come a time when we're not going to be able to sell additional treasury debt. And the impact of that is that these large banks are going to get stuck with treasuries that can't be sold. OK, so I am looking ahead and thinking, you know, all this money that's going in this flight to safety into the very large banks. I'm not so sure that that's so reliable either. So everybody just, you know, do your homework and start thinking about what's going to happen two or three steps down the road in the future. And, you know, it's always going to it was always going to be that if the U.S. had a failed Treasury auction, that that turns into a huge problem.

And I just walked you through one of the mechanisms where that could happen at some point in the future. We don't know if or when it will. So I'm going to use the government as a kind of overarching term for the Fed, FDIC, Treasury, et cetera. They are bringing out a bazooka in the sense of backstopping these banks. And some of it is direct where they are saying explicitly here is, you know, $100 billion. There's a $300 billion increase to the Fed's balance sheet. There's all sorts of lending programs that are propping up. We also see internationally the Swiss National Bank stepping in and helping Credit Suisse.

But then there is kind of this indirect language that's being used that like your deposits are safe. And so all of the assets, all that firepower that they're throwing towards the banks, I think it begs two different questions. One, what happens to the dollar and inflation? And then the second is, by proxy, are we actually all just creating bank accounts with the government and naturally we could erase the banks and just have Fed-based bank accounts? Or is that pushing us towards this surveillance world that we don't actually want to go down? Okay, two questions there. Let me answer the first one really simply. Watch what they do, not what they say.

Okay, to your point, they have fired a bazooka. they are so much money being thrown at this problem to try to restore confidence. And they're telling everybody your deposits are safe, but what they're actually doing indicates that they are panicking. Now, to your next question, this is the crux of the matter. There are some who think that the whole tear it down so you can build it back better is that there might be some purpose to what has happened here. I don't have any evidence of that. And I'm not advocating for that. But in that scenario, the notion that the banking system was that unstable in the first place does lend some credibility to the people who are worried that that might actually be the case. And essentially

that the government steps in and rescues the entire banking sector. Now, if that were to happen, who gets the blame is really important. You and I know the banking sector is not a free market animal, never has been, and since hasn't been for more than the last century. Okay. We had free market banks that actually did fail and there was a lot of fraud and there were a lot of problems. There were a lot of bank runs during the wildcat bank banking era in the mid to late 1800s. Okay. But that also, these private banks that had no government backstop, no FDIC insurance, no Federal Reserve, because neither one of them existed at that point, and the banks were chartered by the states. Yes, there were a lot of problems, but here's the punchline. That banking system that was truly free market funded the greatest increase in the middle class literally in any part of human history, okay, through funding the industrialization of America.

So despite all the problems, there were absolutely huge benefits to having a true free market banking system. And then what happened is in 1913, the Fed was created. In 1933, the FDIC was created. And all of a sudden, you had government backstops. And then what ended up happening? The banks moved away from their simple model that they had in the 1800s of being money warehouses. Remember back then, money was gold. And so you would literally put your gold coins into your bank, and they would store them in a vault as a money warehouse. They moved away once they had a government backstop from that far less risky model towards the more risky model of, well, let me take in customer deposits, turn around and lend them right out and pray that not all of the customers show up at the same time. And they got away with that because it was not an information age. And of course, some didn't get away with that because some were outright fraud and some were massively leveraged and blew up. But the most honest banks back then, their warehouse receipts traded as money equivalents because people had a knowledge and understanding and confidence that those banks really did have the reserves in the form of gold coins to cash people out if everybody showed up at the same time. So you had market forces that worked. Now, since then, of course, the government has stepped in and it's encouraged these privatization of profits, socialization of losses type business models where the banks are borrowing short term and lending long term. And basically, you know, the bankers are on the golf course by three is the proverbial proverbial joke about the banking industry, because it's it's it's it is essentially a risk free business where the government will step in and guarantee deposits.

But again, I think the world is changing. Look at the mainstream media calling for safe banks and look at the Washington Post calling for not guaranteeing all bank deposits. This whole idea of a put back to the government, there's real pushback coming from places you wouldn't expect this time around. When we see them stepping in, as they have done now for a very long time, the idea that they take more risk because they know there's a backstop being the banks, take more risk, that seems to make sense. But now that they are stepping in with that bazooka, there are folks like Balaji Srinivasan, many other folks who would believe that all of this kind of monetary stimulus, all of this backing of the banks is going to lead to higher inflation on the low end or potentially hyperinflation on the kind of most extreme end. Do you subscribe to that thought process? Do you think that there's critiques there that maybe they're missing? How do you look at it? Yeah, so that is a very good question.

And you asked it before. I didn't get back to that. But here's the thing. The debt gets created in different places. And so when the debt gets monetized by the Fed, what they're trying to do is keep the system inflated, keep the total amount of debt in the non-financial sector growing. And I looked it up. The Fed has data in something called the Z1. You can go find this yourselves. Non-financial sector total liabilities were $70 trillion at the end of 2017, the $94 trillion at the end of 2022. Okay. In just five years, it went from $70 to $94 trillion. Okay. That is the biggest acceleration of debt of all time. Now, we started to get inflation due to supply chain issues, and the Fed is trying to reduce demand in order to bring inflation down for something that is fundamentally a supply chain problem. So if I were the Fed right now, I would be screaming at Congress, deregulate, deregulate, let's get these supply chains back up and running. And instead, what's happening is due to the geopolitical situation and due to sanctions and due to relations between nations, trade has been clipped in its wings. And you're now starting, this is part of the reason that

this is a supply side issue, not a demand side issue. But the Fed is trying to deal with it by reducing demand. And you're seeing that it's not having that big of an impact. And instead, what it's doing is causing real problems in the banking industry. So the punchline is, I don't think this is the big one yet, so to speak. And Balaji obviously does think it is the big one. He might be right. Because when you look at the instability of the banking system, you look at it and say, how can this thing possibly go on? But what those of us who have been watching it for years have recognized is none of this is new, folks. And so what he's basically saying is a lot of folks are waking up and realizing that this is the case, even though

it's been the case all along. It's really the end of the confidence in the system is what he's calling for. And I don't think we're there yet. I really don't. But to answer your question directly, I do think we're going to have hot inflation because the government has decided that they have to save the banking system, especially the Fed. The Fed will always step in and save the banking system. Folks, that was what it was created for. Go back and read The Creature from Jekyll Island. And you'll see that that was a historian written book about the corrupt bargain that created the Fed in the first place. It was six bankers and a U.S. senator and an assistant U.S. Treasury secretary that got together under the guise of a hunting trip to figure out after

the panic of 1907 how the banking system could basically have a taxpayer backstop. And that's exactly what we've had. Ergo, we have not had free markets in banking since then. And this is this is how we get all these bailouts. But you're seeing calls from both the left and the right in this country saying, enough, we can't keep doing this because it is privatized profits and socialized losses, and it is angering people. And it is, here's the punchline on inflation, it is going to keep inflation running hot because they can't raise interest rates high enough without bankrupting the banking sector. So there seems to be this trade-off, save the banks save the dollar i don't know if that's just hyperbole or that is actually kind

of the trade-off but if they are guaranteed to step in and save the banks and they are going to have to do it with these kind of monetary bazookas then the dollar will likely run hot which you know i agree in terms of the the inflation the question becomes how severe is that move right and hyper inflation kind of being you know 50 year-over-year inflation uh we got up to nine percent like we're 20 of the way there which again nine percent is very different than 50 obviously but also i think that people have already kind of forgotten that we were at nine percent and if they had not stepped in and raised interest rates and conducted quantitative tightening who knows where we would have gone and so is your thought process that when we talk about inflation running hot

like 10 12 do you think it's like a 20 could it go higher like understanding you can't predict the future but like what is the severity of what your expectation is at least given the information we have today. Yeah, I'm not an economist who makes economic forecasts, but it's definitely going to continue to be above the 2% level, shall we say? I mean, at some point, the Fed is going to have to acknowledge that its target of 2% is not going to be reasonable for it to reach any time in the next probably decade, given the situation where we are right now and given the debt levels. So that's the punchline. That's my guess, but I acknowledge Balaji could be right. and this all could come crashing down tomorrow.

I don't think it will. And if it does, boy, I don't wanna live in that world. Part of what you and I are working towards is moving towards a more stable financial system so we don't have the risk of that sort of Damocles hanging over our heads. It has been hanging over our heads all along. And most people just have been blissfully ignorant of it.

I kind of wish I were as well, but it's funny. I've been watching it and you've talked about this you talked about this with Bob, you asked him how many mainstream traditional finance people have woken up to the insolvency of the system and are looking for ways out, including buying Bitcoin. And he said a lot. And I have experienced the same thing. And I'm seeing a lot of people waking up from the traditional finance industry, just like I did in 2008, saying something's wrong. This is fundamentally unstable. Something's wrong. I'm going to go get curious and dig in. And when they dig in, they're going to get orange-pilled into Bitcoin in most cases because they're going to realize that there is a fundamentally more stable system out there.

Right now, Bitcoin's price is incredibly volatile. But as a system, it's sound because there's no debt in the system. Bitcoin is no one's IOU. If you own the on-chain Bitcoin, it is not issued by anyone. It is something that organically arose between people, and there's no issuer. Unlike fiat currency, where there's an issuer, every dollar is actually an IOU. Go look at the piece of paper in your wallet if you still carry physical cash. It says it's an IOU.

It's paid to the order of from the Federal Reserve Bank. It is an IOU. And what's backing that IOU? It's turtles all the way down, so to speak. It's just the full faith and credit of the U.S. government. Well, what does that mean? Is that anything more than a confidence game? Is that more than the confidence game that Bitcoin or gold or real estate are?

Everything is subjective. The whole concept of money is ephemeral. And once you get your hands around that, then you realize, wow, I would rather store the fruits of my labor in an honest ledger that no one can manipulate. And you pretty quickly come to hard assets like Bitcoin as being something that you want to have in your portfolio. And then you start to realize, wow, I can move Bitcoin better, faster, cheaper as a payment system, especially using a layer two like Lightning Network. Then you're in a whole different paradigm than the traditional banking system. And again, I cannot underscore just how important it is that the bank regulators moves against these tech forward banks and the White House coming out and criticizing financial innovation. they are trying to retrograde, regress the technology of the U.S. financial system because

they're afraid of it. And it's just like the taxi and limousine commissions with Uber. They're going to get overrun. And I really wish that cooler heads would prevail. So we spent a lot of time talking about the United States economy, the U.S. banking system, but there's many places around the world where people have no confidence in their national currency. They have no confidence in their banking system, et cetera. Are there lessons to learn from some of those international markets that either the U.S. kind of current regime could learn from to prevent this from happening or individuals could study and say, hey, let me take those lessons away so that I'm prepared in case something catastrophic does happen? I am so glad you asked that question because

we tend to be so America centric and non-Americans who have had direct experience with this absolutely get Bitcoin off the top of their heads because they've lived in many cases with inflation or hyperinflation in some cases during our lifetimes. And so they intuitively get the idea of a non-government money that a dictator or an authoritarian government cannot manipulate, period. And so, yes, if you look at the price reaction in Bitcoin, it still is trading as a risk on asset. But the correlation with equity markets is breaking. And I think that that is an interesting sign. Is this a short-term thing or is this a long-term thing? We don't know. And I tend to think that the price of Bitcoin is the least interesting aspect of Bitcoin, as you know, and I don't trade it myself. But it is it is the price action is telling the regulator something and it is global. And I think, you know, to the extent that we've got some trad five people who are getting orange pill then starting to buy it, that's helping push the price up. But most importantly, it's these offshore folks who have direct experience with this, that in the developed world, most people, because we haven't lived through through inflation or hyperinflation,

have no idea that the dollar might not be stable. And so when the dollar ultimately isn't stable, which notice I said when, not if, it is when, when that happens, then it's going to be a cold shower. It's going to be a big shock to a lot of people. And the same thing's true in much of the developed world. The last thing I want to talk about in terms of the dollar-based system currently

is this geopolitical risk. It's kind of how I characterize it. So obviously, when Russia invaded Ukraine, the United States, NATO and other allies around the world put a sledgehammer in terms of financial sanctions, both on the government of Russia, but also private citizens. They literally confiscated assets and kind of did things that we had never really seen a country do before. I've had individuals on literally from the economics department of Harvard all the way down to your average Bitcoin pleb who have talked about, wait a minute, there are countries that are going to wake up to the fact that now there needs to be assets that you own, have sovereignty and custody of that could be a sanctions hedge. We also recently have seen both President Xi from China and Vladimir Putin from Russia getting together, having all sorts of conversations that seem very friendly and a proposal of like this like BRICS type currency regime. How do you just evaluate geopolitical risk and like the U.S. dollar's role in all this? Well, it's all part of the de-dollarization that has been happening and the weaponization of the U.S. financial system that has been happening.

Ironically, a lot of people look at this being as more of a democratic. thing. I look at it as more of a Republican thing. It's the neocons, which exist in both political parties that want to weaponize the U.S. dollar system. And the impact of that is to push people out of it that may come crosswise. And your point is well taken, that the U.S. chucked out the rule of law. There were a lot of people who may not have been associated with regimes who got caught up in those sanctions. And if you go back to, but by the way, this is also not new.

If you go back to the 1950s, when the Cold War began between the US and Russia, the OPEC, the deal that was cut with OPEC was that OPEC would only sell oil in dollars. Okay, Russia is an oil rich nation. And so it was getting all these dollars, but the US banks wouldn't bank them. Sounds familiar, right?

What did they do? the British banks said, well, we'll bank you, we'll open up U.S. dollar accounts and we'll create an offshore market that is not within the direct reach of U.S. bank regulators. And lo and behold, this offshore market, which is which which is confusingly called the euro dollar market, just means U.S. dollars transacting offshore. That offshore market is actually bigger than the onshore U.S. dollar market. And so that that is ultimately been where where a lot of the activity has gone and it was because the russian basically a u.s policy pushed the russian banks into the hands of the british bank the russian oil producers into the hands of the british banks

in the 1950s and then ultimately it just exploded and now it turned into these you know global trade and global banks that have u.s dollar exposures interestingly credit suites the failure of credit suites over the weekend is it is an interesting case because 20 years ago i worked in zurich reporting directly to the co-CEOs of Credit Suisse in one of the other times when Credit Suisse almost went bust. And the stock had gone from 90 to 19. It was the insurance subsidiary that imploded. And I got helicoptered in as part of a team to go work on the restructuring of the insurance subsidiary. And I was in touch with the team that was working on the restructuring of the parent company as well. I was reporting directly to John Mack and Ozzy Grubel. These are very,

very well-known and respected names in banking. And that team, I remember distinctly a conversation that Credit Suisse was so big relative to Switzerland. If you looked at Credit Suisse and UBS back then, so big relative to the Swiss economy that if either one of them went down, that it would become the Fed's problem. And what have we seen? That's exactly what we just saw, right? So UBS was forced into rescuing Credit Suisse. And I'm very glad that Colm Kelleher, the guy who hired me into Morgan Stanley in 2007, he's now the executive chairman of UBS. The executive chairman is really in the Swiss structure, the CEO, as we would think of it in the American structure. In other words, the guy in charge. And he said, this was an emergency

rescue. Make no mistake about it. He's absolutely right. And I'm glad he said that out loud. But the impact of that is, if you look at what the bank regulators did, again, they panicked. You saw what's called swap lines open up among five of the global central banks. Now, they had been open since the 2008 financial crisis. You go back to the 2008 financial crisis. Most of the increase in the Fed's balance sheet from $800 billion to $3 trillion back then went to foreign banks. But if they had actually said that this was a rescue of the offshore banks, then there would have been enormous political blowback back then. OK, and so it's happening again, though, folks. And I don't think that that that because, again, we're in the Internet era, I don't think they're going to be able to keep the lid on it this time that the bulk of what we'll see at the Fed's balance sheet is is they disclose their balance sheet on a weekly basis. And we'll see what those swap line usage numbers are. But I have a feeling they're going to be very large. And when the Swiss National Bank gave a $100 billion backstop to Credit Suisse, well, really to UBS to create liquidity for the Credit Suisse acquisition, look at the GDP of Switzerland,

folks. It just dwarves the GDP of Switzerland. Where did that money come from? It came from the ECB and most especially from the Fed. So we're going to see that play out in the next few weeks. So during all of these banking crisis, one other thing that's been happening that I find fascinating and somewhat concerning to a degree as well is there's equity holders, there's bondholders, and there's depositors. And so when people talk about a quote-unquote bailout, what we have seen so far has been a bailout of the depositor, a protection of the depositor. We have seen in most cases equity and bondholders lose.

If there's a bad bet, they're losing. As well, they should. Yes. Except in the Credit Suisse situation, it appears that the bondholders, which normally would be able to recoup their investment or or kind of have first in line in terms of the waterfall, they actually got skipped over for the equity investors and about 17 billion dollars of bonds got wiped. Now, I asked a friend what his view of this was, and he gave me a grin and he said, that's the European waterfall. But how do you how do you look at the bondholders and the equity holders and the treatment, you know, both here in the US, but also in this situation in Europe as well? Yeah, well, that is an interesting situation because the rule of law got chucked out the window again. Right. You know, in emergencies, the rule of law seems to disappear. And in these countries where the rule of law is supposed to be reliable, and Switzerland is, of course, one of those, when you see them chucked out for, you know, emergencies, you should get curious and dig in and figure out what really happened. Here's what I think really happened.

UBS's equity value was only 46-ish billion. Okay. And the bondholders of Credit Suisse were 17, to your point. if they had made the bondholders whole, then the control of UBS would have transferred to the bondholders of Credit Suisse. So I suspect that what was how, I don't know this, but I'm just looking at the math. Like this is a huge number, 17 billion when UBS's equity was only 46. Okay. And so ultimately by wiping them out, UBS kept control of its own company. It was probably one of the deals that got cut in order for UBS to agree to be forced into this. Now, the other thing

that they did was change Swiss law. Again, rule of law gets chucked out the window, change Swiss law so that neither side shareholders got to vote on this. This kind of stuff, boy, it just goes to show you that when you have this kind of instability, it feeds into the more authoritarian instincts of both political parties, right? We have to chuck out the rule of law to save ourselves, right? And those kinds of things ultimately do come back to haunt the governments and the people who rely on them. There was a famous Thomas Jefferson quote, those who would give up liberty for some temporary

safety deserve neither liberty nor safety. And I think that's right. Let's talk about Chokepoint 2.0. And I think this is a name that kind of the internet has given a series of events. It doesn't seem that there has been kind of official confirmation. I don't think anyone's expecting official confirmation of this type of effort. But really, Chokepoint 2.0, it references a Obama-era program that used the banking system as a way to essentially implement political views or kind of legislation without actually having to go through the legislative process. And I would say that the people who were pro-Chokepoint 1.0, they said, oh, look, the banks are able to do whatever they want. So what? They got pressured, but they're free actors in the market. They decided to make these decisions.

Again, that is their argument. I think the critiques of Chokepoint 1.0 would be, hey, you basically are going after law-abiding businesses, and you are not using the legislative and democratic process. You're basically weaponizing the banks and doing so via threats versus that democratic process. It seems like that's what we're seeing again here, and there's coordination or maybe it is just great serendipity, which would be very hard to wrap your head around. No, it's coordination. Okay, so explain kind of how you viewed Chokepoint 2.0, what's happening, and what you think the ramifications are. Well, let me start with some evidence of the coordination. We didn't talk about this when it happened, but we've now shared it with the people who need to know.

We have a smoking gun. We have it in email from a reporter who was told that the Fed and OCC applicants for bank charters were asked simultaneously to withdraw their applications or they would be voted down. And Custodia did not withdraw our applications, and the OCC, you've seen what's happened to the pending OCC applicants. Okay, so that was the tip of the spear. Custodia was the tip of the spear. We have that evidence and we have more than just that. But that is the smoking gun that proves there was coordination. Both of both of those agencies are supposed to be independent. They are required to abide by due process requirements in the Constitution and in the Administrative Procedure Act. Act. And by the agencies coordinating, and by the way, we do know it was coordinated with the White House as well. Again, now that six weeks have passed and you've seen the magnitude of the

coordination, it's pretty obvious that it was coordinated. But back then, there were a lot of people saying, prove it, prove it, prove it. Well, we had the proof. We just weren't in a position to talk about it publicly. And what happened is that two days before Custodia's application was voted down by the Board of Governors, we were getting calls because they had leaked to the press that our application was about to be voted down. And thank goodness we didn't respond, because then one of the reporters put it in email, okay? I'm going to defend the identity of the reporter, the reporter was just doing their job, but multiple reporters were involved in this, okay? So they know, and by the way, we were able to confirm it was both the White House

effectively and effectively confirm it was both the White House and the Fed. And one of the reasons we knew it was the Fed is because within hours of us sending a letter to the general counsel of the Fed, a reporter was recounting it back to our PR officer. Okay, where's the due process in that? Now, what happened with Custodia on the 27th of January is the White House released simultaneously with the Fed, anti-crypto policies, at the same time as they announced that Custodia's application had been withdrawn. That was all at 11.30 a.m. Eastern on January 27th, or not withdrawn, I've denied. All three coordinated to release the press releases in the Big Bang. And then with precision timing hours later, the Kansas City Fed denied our

master account application, and then both parties moved to dismiss our pending lawsuit. All that happened with precision timing that day. But here's an interesting aspect a lot of folks didn't realize. That was FOMC blackout week. The Fed never does anything during FOMC blackout week. And all of a sudden, there's this vote that happens on this very, very, very, very, very rushed timeline during FOMC blackout week. what was going on. At the time in the fog of war, we didn't realize it. It was all just this coordinated start of Operation Chokepoint 2.0. Since then, it has been, and by the way, insiders have come in. The Washington is a sieve. We've been told exactly what happened and who it was. And by the way, then Senator Dick Durbin came over the top and attacked custodial. We're not even an operating bank yet. How is it that we were even on the White House's radar screen and Senator Dick Durbin's radar screen. This was all this very coordinated effort by the Biden

administration to push crypto into the shadows. And now it's clear, crystal clear. We've seen it with all of the actions against Paxos, with the actions against the stablecoin producers, issuers, with the actions against Kraken between the IRS and the SEC. Most of the crypto exchanges got Wells notices in early February. And then you saw the SEC change the custody rule, proposed to change the custody rule. And then lastly, yesterday, last night, Coinbase announced that it had gotten a wealth notice. They have blanketed the entire industry with enforcement actions. And again, the White House said the quiet part out loud in the economic report to the president, essentially dunking on all financial innovation, especially crypto.

They want to bring us back to the 19th century. And I am floored by that. Again, I'm not making a political statement. I reject the politicization of what has happened here. What I'm floored by is that the cooler heads, the more moderate Democrats in the Biden administration have been steamrolled by the anti-crypto, anti-tech group. And what's really going on here, I don't know. There are a lot of people who think that it's, you know, tear it down to build back better

so that the government ends up with more control and more surveillance and that this is all a precursor to a central bank digital currency. I don't have any evidence of that. Is it plausible? Yes, but I don't have any evidence of that. However, I will say for the first time, a CBDC, a retail CBDC, where every individual has a bank account at the Fed, that is a hill I will die on. When you see the destruction that is happening first,

kind of this like blocking the exits, if you will. Is there a path to Bitcoin, cryptocurrencies, this entire industry, kind of threading the needle and finding a way to continue to thrive? Or do you think it is catastrophic? It is this big external risk, and it ultimately will stop the growth of the industry? Oh, it's not going to stop the growth of the industry because of what you just talked about. It's a global industry, and most of the adoption curve is happening in places like El Salvador and Nigeria and Zimbabwe, right? So it's not a U.S. thing, and the industry is going to just keep on ticking. It is stunning to me that as the U.S. is closing off this new technology, China is opening it up again.

We have Hong Kong now, with the approval of the Communist Party in China, starting to recruit Bitcoin businesses to come over as they're being kicked out of the U.S. And the Middle East, my gosh, what's happening in the Middle East is very positive. And Europe is embracing it with, of course, European-style regulation, but embracing it. So it's the U.S. that is the real outlier here. So I have absolute confidence that this is going to continue. The question is, will Americans be able to participate or are we all going to be forced offshore? And one of the interesting things that you see right now is, you know, Coinbase has decided to build an offshore exchange. exchange, they're essentially acknowledging, because of the hostility of the U.S. regulatory

regime, that they might need to move offshore. You just saw Kraken lose its ACH access. The debanking that's happening in this industry is staggering. As we start to see debanking, chokepoint 2.0, there is Signature Bank, which I think is the big one that everyone's pointing to. What do you think happens there? Barney Frank, who's the board member, he said, hey, look, I think that the bank wasn't insolvent. Obviously, the FDIC, the Fed, others thought it was. How do you think this plays out? And you mentioned fog of war. Does some of this just get lost? And even if things were done incorrectly or on accelerated timelines or kind of, as you said, the rule of law kind of gets thrown out of during an emergency situation like that ends up just being forgotten in hindsight? Oh, it's not going to be forgotten. That's going to be investigated. And I think, you know, that had a $7 billion equity value on Friday and got received on a Sunday. But that tells you something right there. When the FDIC takes over banks, they take over banks at 5 p.m. on a Friday, typically. And then by Monday morning, first thing, a new bank has taken over the deposits. But the takeover of signature, according to press reports, didn't happen until Sunday afternoon. So that tells you something odd happened right there. It was also the New York Department of Financial Services that put them into receivership. There is a real question whether a solvent bank can be put into receivership. There have been people who have pointed out correctly that it is in the regulation that a bank can be received for what they pointed to, which is that they didn't get appropriate information. and why DFS didn't get appropriate information from the management team. That is a fact.

That is a question of fact. Did the management team give the appropriate information to the regulator? We don't know the answer to that. But it's also a question of law. Is that constitutional? Just because it's on the books doesn't mean it's constitutional. It very well could be, and I think will be, challenged because that is a taking of private property if there was positive equity value.

Now, the next thing I pointed out in a tweet yesterday or the day before is if they had waited one day, not even one day, 12 hours, because that thing got taken over on a Sunday afternoon, the Fed's new facility was put into place. There were plenty of securities on Signature's books. They would have been liquid and would have probably, I don't know for sure, but pretty good chance that they would have survived had they been allowed to open the next day, which is exactly what Barney Frank had said. They were solvent and they were liquid. And I'm adding that they would have had access to this new BTFP Fed facility. So the interesting thing is these three federal banking agencies have been doing a lot of acting in concert in the last couple of months. but historically they have not gotten along. And the FDIC insurance fund took a two and a half billion dollar hit on signature. By the way, they didn't sell the deposits for their crypto industry

if they had. How much of the two and a half billion dollar hit would have been recoverable? That is something that will be investigated into. Because why did the FDIC insurance fund take a two and a half billion dollar hit on a bank that might have actually been solvent and the next day would have had liquidity from the Fed. Okay. So there was something unusual that happened there. Now, what are the remedies? A, judicial, right? The shareholders, some of the shareholders have said they're going to sue. I don't think they have yet. B, congressional investigations. But American Banker reported that the FDIC's inspector general always reviews every single receivership of a bank. That fund, which is only $128 billion, took a $2.5 billion hit on a bank that might

have actually been solvent. Watch that inspector general report. It might take a year, but it also, Elizabeth Warren just sent a letter to the three inspectors general of the three federal banking agencies asking them for preliminary reports within 30 days. I think there is a scandal there. And I think and I and I think the inspector general, who's kind of like an internal auditor, absolutely has the power. They are law enforcement agents. They are deputized. They have subpoena power. They actually have arrest power as well. They have the power to get to the bottom if something untoward happened. And then the other the other piece is, of course, the GAO, which is the external auditor. OK, so what are the remedies? It's the judicial system. It's congressional investigations.

It's the internal auditors, which are the inspectors general of the agencies, and it's the GAO, which is the external auditor. I think all four of those are going to be looking into what happened here, and I do believe that it all will come out eventually. As we watch Chokepoint 2.0 continue to kind of get executed, one of the things people are looking forward to and saying, hey, is the timing interesting? Because FedNow is this new system that the Fed is going to put out this summer. Is it a CBDC? Is it something else? Are you concerned with it? How do you look at FedNow? Okay, so FedNow is a 24-7, 365 real-time payment system. And there is some allegation that part of the reason the Fed has gone after Custodia and stablecoin issuers together, and again, Custodia was going to issue a digital dollar as a bank called Avid. We have the patent granted to us in July for a tokenized U.S. dollar deposit tokenized at a bank. There is some sense that by going after all the stablecoin issuers that they are clearing the runway for FedNow and that they viewed stablecoins as a competitor to FedNow.

FedNow is not a CBDC. I actually don't agree with Balaji that that is a CBDC. However, what he's really getting at is that there's going to be government surveillance of our payments because FedNow obviously is a 24-7, 365 real-time payment system that the Fed is running. However, it's still going to be done through a bank. So you do have a third party, not a direct account at the Federal Reserve. Your Fed now is something you access through your bank, not by you banking directly at the Fed. Now, all that said, a lot of folks think that there are privacy rights in financial transactions right now. The fact is that if the government asks the bank for all of your financial transactions, the banks have to comply.

And they will because of the way the bank regulatory regime works, right? You're either compliant or you're not. And so there's really not much financial privacy. I hate to reveal it to folks. There's not much financial privacy right now. There is that layer of your bank between you and the government, but it's a thin layer with a pretty transparent, you know, layer in between. So this whole concept of surveilling our financial transactions and basically debanking us is already real. And it is what we're talking about, Operation Chokepoint. I know a lot of individuals who have lost access to bank accounts for having transacted with Coinbase because the banks just don't want to deal with anyone who's touching crypto. They're so afraid of the regulators coming after them.

And they have reason to believe they have reason to be that afraid because the regulators behind the scenes have done some pretty crazy stuff. And I hope all that comes out. Bankers have been telling me that people I have never met have contacted me to tell me about what their banks are going through from the pressure that they've been getting from bank regulators. And it's really crazy stuff. Before we talk about Bitcoin and kind of where you think that's going, I wanted you to flip around the table and make the argument as to what is the Fed done well? what is the argument for why you think the U.S. dollar could remain the global reserve currency and kind of not be debased away? Like, how do you think about maybe the pro argument for the other side, right? And really kind of the Fed's actions and a lot of kind of the dollar bulls, if you will. Well, I'll give you one thing the Fed has done really well. They've taken back the

power from the non-U.S. banks in the euro-dollar market by changing to SOFR, the Secured Overnight Funding Rate, from LIBOR. There's an analyst, Tom Luongo, who's done some really good work on this, hat tip to him, and a lot of others have been watching the transition away from LIBOR. LIBOR, the London Interbank Offered Rate, is basically when I said in the 1950s that this euro-dollar market got created because the Russians needed a place to put their U.S. dollars and the British banks stepped up when the U.S. banks in the 1950s during the Cold War would not. Basically, the London banks have controlled the LIBOR rate. Now, here's the issue. In the 2008 financial crisis, this is a London-based interest rate that the Fed had no control over. And it's the

floating rate interest rate on which trillions of dollars of U.S. dollar debt is priced. And the Fed has no control over it, the Fed stepped up and took control of the floating interest rate back by forcing a change to the secured overnight funding rate, which is a rate that the Fed itself controls. Okay, so that is basically the Fed stepping up against the sort of the Davos crowd, if you will, the international, the global crowd that is controlled out of Europe. And through the control of LIBOR, Europe had control over the Fed. And that caused real problems in the 2008 financial crisis, the Fed has been making aggressive moves to take that control back for itself. Because the U.S. is the global reserve currency, there have been,

there's a, I can't remember who said it, but the dollar is our currency and it's your problem. Basically, that's what Powell is moving back towards, that they don't want the non-U.S. interests to control monetary policy. They want U.S. interests to control monetary policy. We want to go back to that. I can't remember who said that, that the dollar is our currency, but it's your problem. That's exactly what Powell is trying to do. And that is one thing the Fed has done well. The rest of it, they have been in reactive mode. And again, it is so fascinating to me that you see both political parties, you see bipartisan efforts to get transparency into the Fed, to get, you know, there was just a bill introduced by both the Democrat and Republican yesterday to

change the Fed's governance structure so that Congress has more authority over it. This is, I put out a tweet asking if any other Fed watchers have seen this much pressure on the Fed as an institution and having it on the run and playing defense as much as it is today. And nobody else stepped forward and said that they knew of any other time when the Fed was under this much pressure as an institution. When we look at the current situation, it seems nearly impossible for them to solve. There's a brand new article that's out in Tablet mag uh by um uh rinsberg and what he talks about is you know this has echoes of 2008 financial crisis it's the response to that but it could be way worse there's kind of not a svb you know kind

of tech bro venture capital problem this is a global debt crisis that we're seeing here and we've got to be able to to fix it there are a lot of people including you and myself who believe that Bitcoin is a potential solution to the problem, right? Some people believe that it is the only solution. Some people believe it is one of many solutions. Talk a little bit as to how you see Bitcoin in the current system in terms of like the short term. And then how does what's happening right now change or kind of reiterate your view over the long term as well? Well, you know, right now, the folks in control in the US are trying to shove it all offshore. And they've done a lot of damage to the U.S. industry. But again, the price of Bitcoin going up in their face tells us that

they don't have any power to shut down Bitcoin, which they don't. It's just code. Anyone with a phone can run the code, right? And I would underscore anyone with a phone, including the 8 billion people in the world, can actually create and transact in U.S. dollars right now if they download the Lightning Network open source code, right? So the bank regulators are absolutely going to lose control over this. And the sad thing, to answer your question, is they don't understand that. They're more afraid of it and trying to shove us back into old technology and to the analog world than recognizing, okay, the world has changed

and we're going to have to update the way we think about it. And I lament this, Pomp, because I've spent just the last two and a half years of my life trying to work with them. And when I saw Brian Armstrong's tweetstorm about it, they had 30 meetings with the SEC just in the last six months or something like that. And these were one-way meetings, and Coinbase was actively trying to help find an answer to the question, what is a security within the digital asset space? That's not my fight. Coinbase has obviously been taking that fight. What I've been working on is how do you get the bank regulatory regime to recognize that the world has changed and there is a safe and sound way to plug these two technologies together in a way that they don't hurt each other. I don't want the traditional financial system to be hurt by the digital assets, especially Bitcoin.

and I don't want Bitcoin to be hurt by the traditional financial system. And to be honest, the traditional financial system has really hurt Bitcoin. It's not the other way around. But these two are going to coexist. And the sad thing is by shoving it all offshore, they're going to be playing whack-a-mole. And frankly, there are going to be exposures that are going to show up probably through correspondent banks that they didn't even know existed because they're trying to shove it offshore and not really understand it.

And what I like to point to is that January 3rd interagency statement that kicked off the whole Operation Chokepoint 2.0 in retrospect, it had something absolutely hilarious in it. It discouraged the banks from using open, public, and or decentralized protocols. TCPIP is an open, public, and or decentralized protocol. SMTP, Voice Over Internet Protocol. Okay, these open source internet protocols that make up the internet that we all use every day are open, public, and or decentralized protocols. And the bank regulators just told the banks they don't want them using open, public, and or decentralized protocols. Put that in the context of that White House report that questioned the value of financial innovation. The bank regulators are trying hard to stop the banks from adopting new technologies, folks.

it's there in black and white right there and at first when that came out I laughed and said well this is what happens when lawyers write uh who aren't familiar with how technology works you know are writing policy and then it's not put out for public comment so that they can't be told hey you massively overreached here you effectively just banned the internet maybe that was what they meant to do all along right because look at what they just did they went after the banks that were using the most tech forward infrastructures in their in their banking stacks. And so, you know, I don't know where we're going to have to see how this all plays out. But this anti tech crowd is very real. And they're in control right now. I find it fascinating from a political perspective,

because we got an election coming up in, you know, in November, basically 18 months away, we got a presidential election. Is that really what the Biden administration wants to be seen as anti-tech and as regressive in financial technology, trying to push us back into an analog world, especially given the demographics of who uses digital assets, I'm really floored because everybody's going after the 20 and 30-something voters. And if those 20 and 30-something voters are being, you know, told they can't use something that they've been comfortable using for a while, you know, how are they going to react? It's just an interesting political question, And I'm asking it rhetorically because I keep thinking that the cooler heads in the Biden administration are going to prevail and reverse some of this.

Let's hope. My last question before I let you go, Bitcoin as a solution to the problem, the Fed obviously has high degree of confidence that they can solve the current problem, but there's always a tail risk that they can't. Are we now at a point where the public conversation needs to turn that the Federal Reserve would benefit from putting some Bitcoin on their balance sheet as a way to create insurance in case they can't actually quell whether it's this crisis or the next one? Yeah, look, I'm not going to advocate for that. But what I would advocate for is people who really do know what they're doing in the digital asset industry being within their fold. OK, that was us. That was Custodia spending a lot of time helping to educate. And I'm hoping that a lot of what we did ultimately gets made public through the production of the administrative record, which will be coming down the pike in our pending lawsuit to the extent that, well, I can't talk about what's next, but just watch.

Because a lot of what Custodia did to help educate the Fed, boy, it would be eye-opening. Because then when you realize how the Fed, you know, treated us in a vicious way, it's, boy, is it going to reflect poorly on them, I think. Because we were a friendly, and we were trying hard to help them figure out the challenge that they face. It is a challenge. But it's also not going away. It's like the taxi and limousine commissions with Uber. How do you deal with the fact that the technology industry is just going around you? OK, if you want to stay relevant and you and you want to deliver what people are voting with their feet to use, which is the better technology, then you need to figure out a way to bring it inside the regulatory umbrella instead of shoving out the people who are actually actively trying to help you. That is my message to all the regulators. And they absolutely did the opposite. As Coinbase said, those who came in and tried to help and try to educate and tried to get under the regulatory regime were the ones who got skewered the hardest. It is incredible to kind of think how all of this is happening at once. And I wrote it last week, but I still keep going back to the Lennon quote, which is just, you know, there are decades where nothing happens and there are literally weeks where decades happen. And it feels like we're in one of those times right now. Caitlin, thank you so much for taking the time to do this. I always learn so much when I talk to you. Where can we send people to find you on the internet or find out more about Custodia?

Yeah. Caitlin Long underscore custodial bank dot com. And I would also say for those of you who are new and are listening to this from TradFi, go look at Jameson Lopp's Twitter account because he's got he's a Bitcoin core developer and he's got a lot of of the basically how to get started in Bitcoin. It is a daunting thing, especially for people who have lived in the traditional world your whole lives. The whole idea of how do I buy it and then how do I self-custody it? And how do I self-custody it in a way that if we are really getting to the point where the off ramps are being closed down, frankly, you can memorize what's called your seed recovery phrase in Bitcoin and walk across a border with it. And there's no proof that anybody could make you prove that you had Bitcoin, right? If you don't have it physically written down anywhere, you don't have it on a device. Okay, start thinking about, start playing forward those ugly scenarios in which you want to try to protect your own wealth against authoritarian governments, be they from the

right or the left in any country in the world. You can memorize your seed phrase and walk across a border to a place that's free and then download your Bitcoin next time you get an internet connection. And this is pretty powerful stuff. This is the reason why, ultimately, the bank regulators and the politicians who are trying to regress the United States in financial technology are just wrong. And they're not going to win. And that's, again, I very much hope cooler heads will prevail. Thank you, Satoshi, whoever you are, for creating Bitcoin. It was created for exactly this environment. And good luck everybody on your orange pill journey. There's no better way to end this conversation

than that. Caitlin, thank you so much. We'll do it again in the future. Awesome. Thank you.