The Pomp Podcast - Why The Fed Can't Ignore Bitcoin Anymore | Caitlin Long

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Starting point is 00:00:41 questions you've actually been thinking about. Hit play on the Upside Ticker Talk and elevate your ETF investing IQ. Now we've got the money leg being able to move at the speed of light at the same time as being able to move the data leg at the speed of light. That's what Bitcoin opened up for us. It is digital gold. And I think over the long term, more and more, especially younger generations who are more comfortable with the concept of crypto are migrating in that direction. Sixth network effect, which is financialization headed towards world reserve currency. And I believe we will get there with Bitcoin. What is going on with stable coins? It feels like the government wants to put the little greasy hands in the cookie jar now and say, hey,

Starting point is 00:01:22 we should have a part of this. Well, just to set the stage for folks who don't know, Custodia had stable coins in our business plan, as you know full well, since 2020. And we were going to do it inside the banking system. Of course, you know how that turned out. And obviously, the incumbents have been able to catch up while the upstarts have been restrained, which is just is uh we can make value judgments about whether that should have been uh and the regulatory capture implications of all that but it just is so to answer your question everybody's coming now and custodia is working with the community banks which have not been investing in this technology and with our bank partner vantage as you know last year we issued the

Starting point is 00:02:12 first bank issued stable coin with Vantage, which is out of Texas. And we are very close to launching our tokenized deposits platform. It was endorsed by the Texas Bankers Association last week. When I see the debate that's going on around yield and rewards and all this stuff, do we have to get some sort of no pun intended clarity on what the rules are here? Or do you think that there could actually be two different systems and just let people kind of choose, do you want to offer the rewards or not? There are two different systems right now, right? Inside the banking system and outside the banking system, which is where stable coins live because of the regulatory choices of the Biden regime. But I think those are converging. And

Starting point is 00:02:56 you also see that tokenized deposits can pay yield. So we don't really care. I've been very quiet about that whole debate. There's really, it's been, everyone's been beating around the Bush is really one company that cares a lot about it. And the rest of the industry has just been pretty quiet about the regulatory fight over whether stable coins can pay yield. Here are the numbers to set the stage. There are $5.7 trillion of demand deposits in the banking system. There are about $300 billion of stable coins outstanding. If the $5.7 trillion of tokenized deposits get tokenized. I'm not sure that the stable coin market becomes that meaningful because if it's inside the banking system and you can use tokenization technologies, which is the critical

Starting point is 00:03:48 piece of what we're doing, the infrastructure is built to be able to link a account-based system to wallets inside the banking system. That's the aha. And we're doing it in such a way, we're delivering it via a widget so that the banks don't have to completely rip and replace their old technology. They can just create some geography on their online banking landing page and directly deliver this to their customers. Then the other piece that we've built is the ability for a tokenized deposit. When it's moving around the banking system, it stays in deposit form and can pay interest just like any deposit. When it leaves the banking system, so it goes to self-custody or goes to a crypto exchange or goes overseas, it automatically programmatically

Starting point is 00:04:35 converts to a stable coin. And that happens within the same smart contract. Nobody's done that yet. That is the definition of building a bridge between traditional finance and stable coins. So is the idea that I sign up for a bank account, I get a traditional bank account with electronic QSIP based assets, et cetera. And then I also in that same interface will have a wallet Correct. It may just be presented as another account, but the infrastructure is a wallet. And now I basically have one foot in the traditional world, one foot in the digital world. Bingo. And it's seamless. You don't have to. One of the problems with moving money, as you know, between TradFi and the crypto world is bringing it back from crypto to TradFi. and the hard part about that is it's there's a lot of friction of course but it's also the bsa piece the bank secrecy act piece jp morgan did a study two years ago with their own data of what happened

Starting point is 00:05:34 during the crypto bull market in 2020 and they found that 88 of the deposits that went into coinbase did not come back into the banking system now let's face it a lot of us have had bank accounts closed because we tried to send money from a crypto exchange into our traditional bank accounts. So there's a big piece of that, that part of the reason that folks who move money into the crypto space don't want to bring it back because they don't want to risk getting their bank account closed. But it's also very difficult from just a pure friction standpoint. And we're abstracting away all of that complexity by enabling the tokenized deposit and the stablecoin to convert back and forth based on what the user's preference is and abstracting away all

Starting point is 00:06:24 that complexity. It's really cool. I don't think I've ever said this publicly. I got a better one for you. There's a major financial institution. They knew not to shut my accounts because I get on Twitter and act a fool. So instead, they just asked me to take all the assets out of the account, but the account stayed open. Yeah. And I will tell you also, Custody is kind of a barometer, Anthony of this because we see a big spike when banks start closing accounts and people contacting us now we're not opening new accounts so unfortunately we can't really help but I will tell you operation chokepoint 2.0 never ended and it has there's been a real uptick recently in people who have been debanked looking for new bank accounts this is not over

Starting point is 00:07:04 how do you think about tokenization and all of this because you know tokenized deposit it, but obviously there's other assets. Love it. Yeah. As you and I know from when we first started working together, I don't know, 10 years ago or so, I was working on tokenization in the security side. Why did I pivot over to work on the banking side and payments? It's because I figured out that trying to tokenize securities isn't going to work if you don't have tokenized dollars. You've got to be able to have the tokenized leg of the securities trade, the dollar leg trade in tokenized form as well in order to have tokenized securities work. We're going in that direction, obviously. The DTC is working on this, the New York Stock Exchange, all of those big entities

Starting point is 00:07:46 working on tokenization. The other piece is from the work that I did at my prior startup, Symbian, we were the partner back then with the Delaware Blockchain Initiative. Delaware, of course, back then still is the state where most corporations are registered. We were trying to be able to have Delaware run a node on a blockchain in 2015, that long ago, to be able to natively register corporate shares on a blockchain rather than what we do today, which is really analog. Yes, you get a PDF of your corporate registration, but it's really just analog data. If we can natively register the shares on a blockchain, game changer. That has not happened yet. But and I'm still I'm waiting for it. I think it will happen. There will be a secretary

Starting point is 00:08:33 of state, by the way, my native Wyoming, where I moved back after 30 years in New York, I think might be the first state to do it. If you can get natively blockchain registered shares, that's the game changer that then enables the securities markets to be able to to tokenize. But that dollar leg piece is is also important. We're talking about taking assets that existed before crypto, blockchain, Bitcoin, and making them tokenized. Bitcoin, on the other hand, is a tokenized net new asset. It's a crypto native, Bitcoin native asset. How do you see that playing a role? We've obviously seen people try to pull that into the legacy system through ETS, public companies. But what are your current views there? Yeah, obviously, not your keys, not your coins,

Starting point is 00:09:20 right? We've learned, a lot of people have learned a lesson, including even yesterday, Right. Where where some of the lenders, you know, if the lenders get overextended, turns out there they may not be solvent and you may not get your money back. And we've learned we the collective Bitcoin and crypto industry have learned some painful lessons with the bankruptcies of not just the lenders, but also trust companies that you thought were just holding on to your assets and they were outside of their estate. but it turns out big haircuts, right? I think the haircut on the custody piece of the BlockFi, or was it Celsius? I think it was Celsius, was 21 cents. These are assets under custody that you think are outside of the estate, but in a Chapter 11 bankruptcy, guess what? Because of preferences and the like, the cram down that can happen means haircut on assets under custody. And that is also

Starting point is 00:10:20 happening in prime trust. I don't know what the actual haircut is going to be, but it's probably in that zip code 20 cents or so. So a lot of folks are starting to learn or relearn lessons from TradFi about counterparty credit risk in custodians and not your keys, not your coins. We're just back to the same. Gold has worked really well. There's people in Wyoming love gold. There's also people in Wyoming that love Bitcoin, but Bitcoin's not working as well. What are your thoughts there? I mean, Bitcoin is digital gold, right? Lynn Alden obviously has done a really great job explaining the history of why we have all these layers of complexity and layers of intermediaries in the financial system. it's because we were dealing with a very fundamental problem, which that when money was gold, it was very difficult to move the money leg. The data leg of a transaction could move at the

Starting point is 00:11:14 speed of light ever since we created the transatlantic telegraph in the mid 1800s. But the money leg still had to move at the speed of matter. And now we've got the money leg being able to move at the speed of light at the same time as being able to move the data leg at the speed of light that's what bitcoin opened up for us so ultimately gold is is atoms right you it's physical matter that has to move bitcoin can move so much faster it can move at the speed of light not the speed of matter and that's why ultimately i think uh over time especially obviously this recent period from a investment performance has been a an exception but uh but bitcoin will it is digital gold. And I think over the long term, more and more, especially younger generations who

Starting point is 00:12:04 are more comfortable with the concept of crypto are migrating in that direction. 2026 and has already hit the milestone of 4 billion dollars of daily volume just days later users can now trade 79 instruments across global macro assets such as forex precious metals indices and commodities directly with usdt all within their existing bet get account this experience is designed to feel familiar crypto native traders while opening the door to macro driven strategies without the need to switch platforms users can also enjoy high liquidity and low slippage while trading these assets with up to 500x leverage the big get ecosystem is committed to helping users trade smarter with its ai agent to execute trade orders as a co-pilot

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Starting point is 00:15:09 at the Fed. It's been a long odyssey and we're not done, but I'm still actually optimistic that we're going to get there. Obviously, the Fed announced their skinny master accounts proposal in December. If any of you are watching that whole thing, I actually think that what we did prompted that because we sort of forced the issue. Fed Governor Waller gave a speech two days ago where he actually said that the Fed had to deal with the notion of non-traditional banks applying for clearing accounts because of the legal risk. There are multiple lawsuits. We were the first one, but there have been others since us that they just keep getting sued, right? So it's more than just embracing innovation the way he apparently described it, according to the

Starting point is 00:16:01 article in Central Banking. So that's one, is breaking down the Fed barrier for us. And then the other is getting natively digital corporate shares registered at a secretary of state. That is going to be a game changer for the securities markets. Fed policy seems to be the talk of the Bitcoin world now. Interest rates, what are we doing on a monetary policy standpoint? The president obviously has very kind of strict views on what he thinks that the economic policy should be Bitcoiners historically, at least, you know, a decade ago, we didn't care about any of that stuff. It was just kind of like, is this thing going to survive? We hope so. We think so. Let's go, you know, focus on Bitcoin. Is this good or bad that now Bitcoin is, you know, kind of

Starting point is 00:16:44 operating within this bigger environment? So great debate. It's the answer is both. It's a double edged sword. And it goes back to, for those of you who have been around for a while, Trace Mayer, one of the OGs of this space, created, I think in 2011, an approach called the seven network effects of Bitcoin. And the sixth network effect is financialization. And the seventh is world reserve currency. He ran the traps. It was an incredibly prescient model that he created. We've run through one through five. We're in the sixth network effect, which is financialization headed towards world reserve currency. And I believe we will get there with Bitcoin. We're in the financialization phase now. And this is where Trace and I always had a big

Starting point is 00:17:32 debate because he loved financialization, loved the fact that Wall Street was going to come in, start creating derivatives, start bringing liquidity, collapse bid offer spreads and the like. And my response was that is not healthy because all of a sudden we're going to create the same issues that would have been created in other markets. We're going to create paper versions. We're going to have derivatives throwing the spot price around, the tail wagging the dog. That is exactly what seemingly happened last week. If you believe some, Jeff Park, by the way, shout out to Jeff, some great analysis on the iBit options causing the spot Bitcoin price to collapse, right? We see these things in TradFi all the time. You see, it's not a regular

Starting point is 00:18:18 occurrence. But it's not a Six Sigma event either, where you see a huge divergence between the spot price and an ETF price. It happens. And it certainly has happened in Bitcoin. And the more derivatives, it's not, let's put it this way, it's not an accident that Nasdaq increased the iBit options limit. And all of a sudden, then we had kind of a market crash, right? Because the derivatives became the tail wagging the dog. This is exactly why I think this is a double-edged sword. Yes, it brought in new liquidity because a lot of folks just aren't comfortable with self-custody and they finally could buy a version of Bitcoin. It's a claim on Bitcoin when you buy an ETF. It's not the actual thing, but it's just easier. And the network effects of all the broker

Starting point is 00:19:04 dealers and all the RIAs who were out there bringing their clients into Bitcoin through the ETFs for the first time, that was clearly positive. But it also was the prerequisite to what happened last week and we will see more and more of that i miss trace in the public world yeah yeah he's well for those that don't know trace is uh like one of the ogs of ogs and uh created the seven steps he also created the uh mayor multiple i mean multiple contributions that are really good i think he got into bitcoin when he was a teenager um he was there very very very early yep he uh he helped me yes a lot of us he helped me as well yeah um let's talk about uh these large banks they show up they probably don't care about bitcoin they probably care about making money

Starting point is 00:19:55 getting new clients getting new assets all that kind of stuff we talked a little bit about the financialization but i do wonder at what point do they have to start to upgrade their own infrastructure and start to use stable coins or bitcoin or tokenized assets like it's one thing to sell it to everybody else? It's another thing when you start to realize, wait a second, this is a threat to my business and I need to upgrade. Yeah, that's a great question. And, you know, the headlines came out just yesterday about Goldman Sachs owns, you know, 1.5 billion of Bitcoin. And then you read, it's actually just the own iBit, right? So that fits within their old existing infrastructure. They're not, from what I can tell, adopting self-custody yet.

Starting point is 00:20:38 And this is something that I've been warning about. For those who don't know my background, I was managing director for a long time at Credit Suisse and Morgan Stanley here in New York. So pretty familiar with the way that the very large banks work. And I think one of the reasons I actually when I was at Morgan Stanley, I was the one who signed Morgan Stanley's contract to enter R3, just to give a perspective for those who've been around the industry. That was one of the industry consortiums. And what I learned from that process was just how hard it was going to be. This new technology of shared ledgers does not fit well in the back office of traditional finance. And it is rip and replace, not incremental upgrade. And that's part of the reason why those consortia like R3 did not work, because it's just a massive paradigm shift for TradFi. And most have not made it yet. Some are moving in that direction. But I think this is a multi-year upgrade process. In the meantime, if the banks haven't upgraded their risk models, especially for an asset like Bitcoin, they've got some big surprises coming because in the past there are a lot of fault tolerances built into the securities markets, even into into payments. Right. The discount window, daylight overdraft at the Fed. These are things that are fault tolerances built into the payment system that if something goes wrong and you don't have a settlement, you know, before market before your books close that night, you can always roll it to the next day. That happens in ETFs, right, with the market makers having the ability to create a certain amount of more units, right, it's an over allotment option. These are sort of fault tolerances that are designed to deal with that complexity that Lynn Alden speaks about so well that the systems don't really aggregate, are not always in sync with each other, rather. And so the fact that that can happen and the systems can get that out of sync with each other is going to take somebody down if they don't really upgrade their risk models and have the ability to do real time monitoring, which most financial institutions to this day still do not have.

Starting point is 00:22:57 What should people here do with Custodia? Where do you want them to go? What's your pitch to them? Well, we're we're we're the back end of this system that Vantage Bank, our partner in Texas, is the front end. So right now we're not opening new accounts. It's just keep an eye on us, though, because I think this is going to help the the smaller banks that don't have the, you know, multi-billion dollar budgets to fund skunk skunk works where where their skunk works. So keep an eye on it. We'll be we'll be making some announcements soon. Thanks, Pop. Keep it long, everybody.

The Pomp Podcast - Why The Fed Can't Ignore Bitcoin Anymore | Caitlin Long

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