Unchained - Why Caitlin Long and Meltem Demirors Are Worried About Crypto’s Future in the US - Ep. 470

Episode Date: March 21, 2023

Caitlin Long, founder and CEO of Custodia Bank, and Meltem Demirors, chief strategy officer of CoinShares, share their concerns about crypto in the U.S. following a wild week in the banking sector. With Signature Bank’s takeover looking like a targeted takedown and crypto-friendly upstarts like Custodia being shadowbanned by the Fed, the two longtime experts look ahead at the fights to come. Is USDC next to land in regulators’ crosshairs? Listen to the episode on Apple Podcasts, Spotify, Overcast, Podcast Addict, Pocket Casts, Stitcher, Castbox, Google Podcasts, TuneIn, Amazon Music, or on your favorite podcast platform. Show highlights: how crypto is viewed as a “big, scary, and strange” industry how Signature and Silvergate became so important for the crypto industry with SEN and Signet why Caitlin says it’s “crystal clear” that we are now in Operation Choke Point 2.0, with U.S. regulators pushing to debank the crypto industry why Caitlin says the Fed’s vote against Custodia’s application was preordained whether Sen. Elizabeth Warren had an impact on the current crisis how everything comes down to game theory whether VCs are responsible for causing the bank run whether the rollback in 2018 of certain provisions of the Dodd-Frank Act played a role in the recent collapse Caitlin’s hot takes on what happened with Signature Bank the unique characteristics of Custodia’s business model as a bank how stablecoins challenge the current financial system why it’s so important for crypto to improve its public perception Thank you to our sponsors! Crypto.com Halborn Guests: Meltem Demirors, Chief Strategy Officer at CoinShares Caitlin Long, founder and CEO of Custodia Bank Links Previous coverage of Unchained: Jim Bianco on Why the Banking System Has Always Been Broken The Fed Is In Checkmate: What Will Powell Do? The Fall of SVB: What Happened and How It Affects Crypto NYT: Congress Approves First Big Dodd-Frank Rollback NYMAG: Barney Frank Talks More About the Surprise Shuttering of Signature Bank WSJ Editorial Board: Signature Bank’s Crypto Execution Unchained: FDIC Denies Asking Signature Buyers to Give Up Crypto: Report Was Signature Bank Actually Insolvent? Circle to Bring On New Banking Partner for USDC Minting, Redemption Circle Clears Backlog of USDC Minting and Redemption Requests Regulators Close Signature Bank Following SVB Collapse ​​Silvergate to Wind Down Operations in ‘Voluntary Liquidation’ Learn more about your ad choices. Visit megaphone.fm/adchoices

Give us your theories on what happened with signature. Scandal. Outright scandal. This is theft of private property by regulators who did not have the authority. To take a solvent bank and put it into receivership. Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians.

I started covering crypto seven years ago, and as a senior editor of Forbes, was the first Main Tree Meteor to cover cryptocurrency full-time. This is March 21st, 2023 episode of Unchained. Web3 projects lost nearly $4 billion of crypto assets in 2022,

but nothing is more expensive than losing trust. Secure your company with Hallborn's best-in-class security advisory solutions. Visit halborn.com for more. Buy, earn, and spend crypto on the crypto.com app.

New users can enjoy zero credit card fees on crypto purchases in the first seven days. Download the Crypto.com app and get $25 with the code Laura. Link in the description. Today's topic is the recent bank closures and how they impact crypto. Here to discuss are Meltem DeMirres, head of strategy at coin shares, and Caitlin Long, founder and CEO of Custodia Bank. Welcome Meltem and Caitlin. Great to be here.

Hi, Laura. So we're recording after a dramatic few weeks. First, Silvergate Bank closed down. And then Silicon Valley Bank failed and had we taken over by the FDIC. And then signature bank was closed by regulators. And other banks have had their stocks pummeled and depositors at some of them have been withdrawing funds. And I think the causes of each of these incidents are a little bit different. And also the significance of each of these events for the crypto community is also different. But before we get into like all these recent events, I just want to set a certain backdrop because there's a huge history around.

banking crypto companies. And I actually thought, Melton, you could start us off with that. I think you're quite familiar with what the problems are that crypto startups have traditionally faced when it comes to banking. So why don't you just give us your perspective on that? Yeah, absolutely. So first of all, when you said it's been a dramatic few weeks, Laura, it's been a week, one week, which is insane to me that we could have three bank failures in the span of basically four days. It shows you how quickly our federal government can move when incentivized or when motivated. But I'll let Caitlin talk about that. Okay, so just going back to the landscape for banking and crypto, when I started in the industry professionally in 2015,

no one would bank our portfolio company as a digital currency group. And in fact, this is how we met Alan Lane, the then CEO of Silvergate Bank, which was a little known bank in La Jolla, California. And Alan and his team had learned about Bitcoin, gotten interested in it. And they kind of took a step forward and said, okay, we're going to try to bank crypto companies. Now, the issue is if you bank a crypto company, what starts happening, nobody is explicitly forbidden from banking crypto companies. But we'll start to happen to use a bank is your auditors will start visiting you more often. And the way that the risk at your bank is monitored, right, it starts to change because crypto is viewed as this big, scary strange. sort of industry. And so banks have always been really reticent, really hesitant to engage with

crypto companies. Now, it's also important to distinguish between the two different types of bank accounts that crypto companies will have. The first type of account is an operational account, which typically is if you raise money or you have cash to fund operations, that typically goes into an operating account. So there's not a ton of flows usually in these accounts. And typically the flows are with well-defined counterparties. So you're paying payroll. You're you're paying your vendors, you're paying your service providers. The other type of account, a transactional account, is much more challenging. It's accounts that engage with transactions with the actual day-to-day of your business,

and particularly if you're in the business of interchange or exchange, right, which many crypto companies are. This is magical internet money after all. Then you have something called a transactional account. And as you can imagine, there are the requirements are much more cumbersome, particularly in light of all of these fun. acronyms we have KYC, AML, OFAC, all of these things that have to do with the risk of where your money is coming from, who your customer is, where their money comes from. And so just to delineate,

in the history of crypto banking, operational bank accounts have historically been fairly easy to open, not super easy, but there are dozens of banks last year. And maybe Caitlin will disagree with me, but there were dozens of banks that would willingly open an operational account for you, including some of the larger banks in the world and some of what we call these SIFIs are systemically important financial institutions. And Silicon Valley Bank, SVB, to be very clear, did not engage in any transactional crypto banking. They were heavily engaged in operational banking, focused more on startups, who'd raised venture, and were using these bank accounts to help fund operations. Then along came Silvergate, right, in 2015, Alan and Co,

are friendly bankers in La Jolla. And they really started to get into the nuts and bolts of transactional banking. Metropolitan Bank notably started banking Coinbase in 2016, offering a similar service. Signature banks started to get involved. But most importantly, what Signature and Silvergate did for crypto banks that are so important is they enable dollars to settle 24-7, 365 in near real time in the same way that crypto settles. And so if we look at the way liquidity and market depth in crypto has grown and what has made it possible for this market to grow and gather so much momentum is the fact that you now have connectivity to the traditional dollar banking system, not just via stable coins like Tether and USC, but you could

actually move cash between accounts in real time on weekends, on nights, on holidays, using Silvergate Exchange Network and CigNet, right? And so the fact that these two core pillars of crypto banking are now gone, yes, we can send wires, yes, we can send ACH, but the real issue, the real crux of the challenge with crypto has always been, how do we reconcile the fact that crypto settles with near instant finality, right, 24-7, 365? And dollars don't. Wires settle from 9 to 5 Monday through Friday, except for bank holidays. And that's not adding in the T-plus 1 to T-plus 3 days of settlement. It might take, particularly if you're moving money across banks that aren't on the same network. And so crypto banking has,

always been chaotic, has always been messy. The one silver lining is many firms in our industry as a result would maintain one, two, three multiple bank accounts in a form of redundancy. But what I think is so interesting and what is going to be really challenging to resolve is this ultimate incompatibility between the dollar and the way a dollar settles and the way that crypto settles. And that really here is the fundamental challenge. And as we've seen, the Fed took some drastic actions, the FTIC took drastic actions, that is now gone. There is no way to replace that easily. So it'll be very interesting to see, particularly with the Fed launching its own Fed Now payment system in July, how that landscape shakes out. So a lot of words that I just said right there,

but crypto banking has always been a mess. As an industry, we have learned to become very creative when it comes to banking. We've created stable coins with hundreds of billions of dollars of market cap as a result. So innovation has certainly been at the forefront here, but the fundamental issue we need to reconcile is how do we allow dollars to settle the same way crypto settles and be available and liquid in real time and within the banking system so their wires could settle in real time. So that's really the crux of the issue. That's where that challenging intersection is. And as we've seen, our government can move very quickly if they don't like what's happening. Yeah. So one quick question. And actually probably Caitlin could also answer this. But I've always wondered, so you know,

you talked about Silvergate Exchange Network or Sen and then CigNet, which is basically the same thing. It's the 24-7 real-time settlement on the banking side. I always wondered, were those blockchain-based networks? Because otherwise, how do you get dollars to settle so fast? I don't, I never understood that. Yeah. So my understanding is it's more like IOUs on their internal ledger. It's like an internal database. I don't believe they were using a ledger on the back end. I mean, again, if we talk about tokens or using a blockchain, right, like the Visa Network, which is the world's largest payment network, is just a network of tokenized IOUs. It's just little pieces of data. It happens to be a private ledger that's owned and maintained by Visa. But I think these functioned in a similar way. And again, to participate in Sen and CigNet, you had to have a certain amount of assets at the bank.

There were obviously limits to what you could do based on your bank balances. But in my understanding, it was really just internal data entries, right? And then eventually those wires would settle. So it's hilarious because when you say that, I'm like, oh, basically it's like Venmo, but for crypto companies. Yeah. Okay. Okay.

Which is hilarious. And actually, just one other comment I want to make on what you said is that, like, I know people like to kind of make fun of Coinbase or say it's like not crypto native anymore or whatever. But that was actually what was so revolutionary about it was that this was such an intractable problem. And then even though it's so simple, like it seems simple or it sounds simple. But actually, yeah, like taking a side that moves as fast.

is crypto and then matching it so it actually works well, even with all the volatility and prices on the other side where the money moves slowly, like managing that and also doing it in a way where like fraudsters won't completely eat away like any of your margin and all that. Like that is actually a really hard thing for companies to do or it was back in 2012 when they got started. I mean, and even now, I think just for context also, fraud in payments is huge, right? Payments companies lose an insane amount of money to fraud and that number is only going up every year. So I think it makes it even more challenging for companies who want to offer their

customers great service and the ability to engage with crypto in real time because there's a huge issue with fraud on the other side with counterparties. So I'll just add that data point because there are trends outside of crypto that I think are also impacting the risk environment when it comes to real time payments. Okay. So Caitlin, let's turn to you because the other bit of backdrop that I think listeners need to understand is the rumors about this Operation choke point 2.0. which was directed at Crypto, and that became public in a post by Nick Carter that was published on February 8th. So can you kind of summarize what that is? And I feel like you're going to have a very particular viewpoint into this. Well, Operation Choke Point was an Obama era program started by the FDIC and the Department of Justice.

And one of the people who started it is Marty Grunberg, who is now the head of the FDIC. So the people are the same in that particular case. And what it was was it started with payday lenders. And the FDIC essentially pressured the banks through, as Meltem said, the auditors will just start visiting you. You're deemed to be a higher risk bank. Your management score goes down, which means your FDIC insurance rate goes up or something called your cap rate at the Fed goes down so you can't be overdrawn as much. or you're limited to your M&A opportunities or new business expansion opportunities if you're not deemed to be a well-managed bank. Okay, so those are the sort of qualitative things that the regulators can use to turn up the pressure on the management team of a bank if they're banking industries that are not politically favored.

Now, Operation Choke Point started in around 2011, and it ultimately expanded beyond the payday lenders to 30 different industries. And our industry is one of them. Now, it was stopped officially, during the Trump administration. But what's so interesting is that the political leanings of the federal bank agencies have always been more left. And now with one of the people who had started Operation Choke Point in charge at the FDIC,

they understood what their powers were because there's so much subjectivity that goes into this. And it is crystal clear that we, are in Operation Choke Point 2.0. And I'll share, I don't know by the time this episode comes out, if we will have revealed some of the details about what happened to Custodia. But there were leaks by the Fed and the White House two days before Custodia's application was voted down, that the Fed vote was preordained and that we were going to be voted down. And we have that in email. And I will be releasing that email, not not, not.

doxing the reporter who sent it. But the reporter actually asked us by email, said, we have been told that the Fed and OCC applicants have been all asked simultaneously to withdraw your applications. And that's indeed what happened. You've seen Paxos and Protigo who had applications at the OCC and the custodia who had an application at the Fed, all basically being shoved to the side. The applications clearly were not being reviewed on their merits individually. There was a political decision, and I will reveal a lot of information about the politicization of what happened. There is no question, and I've known since January 27th, because Custonia was the tip of the spear here, that Operation Showpoint 2.0 was in full swing. And again, we were having

those conversations with the reporters that were being leaked to by the White House and the Fed a few days before our application was voted down by the Fed on January 27th. It's also very interesting because if you go back and look at what January 27th was, it was Fed Blackout Week before the FOMC meeting, which was the next week. The Fed governors are told by Fed staff nothing that's not related to the FOMC happens during Fed Blackout Week. So it's interesting that the vote on our application took place on the Friday of Fed Blackout week for an application that had been pending for two and a half years. So what was the rush? Well,

the White House wanted to do that blitz on January 27th, where both the White House and the Fed simultaneously put out anti-cryptopolicy statements that essentially killed the stable coin. We'll come back and talk about that. And simultaneously announced the denial of custodious application. And then that afternoon, the Kansas City Fed came over the top and announced the denial of our membership application and filed to dismiss our pending lawsuit, which subsequently the judge denied. However, the point is there was, what was the rush on January 27th during FOMC Blackout Week? That there was a big coordinated blitz with the White House that had to happen. Now, I'm revealing a lot that I couldn't reveal back then, because back then it wasn't clear what

was happening to us, right? We were in the fog of war. We were the tip of the spear. It is now crystal clear in retrospect that there's been a massive attempt to debank this industry. There are some credible allegations that both Silvergate and signature, that interesting things happened there, interesting in air quotes. In the case of Silvergate having its federal home loan bank advances called early, and in the case of signature, it's still breaking. But there are two things. Representative Barney Frank was on the board of signature, and he gave a New York Magazine interview. He actually gave a few interviews. views this week, but in particular the New York Magazine interview where he said that signature

was a solvent bank, and it may have been the first bank in the United States history that was put into receivership despite being solvent. And last night, it was leaked by two different sources in a Reuters article that the auctioneers for signature have specifically told the buyers that they will not be allowed to restart the CigNet network that Meltem talked about earlier and that they will not be banking crypto. So it's crystal clear that there has been a massive coordinated debanking effort and we do have a smoking gun in the form of that email to prove that. So all of that is correct except one little correction was CoinDesk reported that Silvergate actually voluntarily repaid its federal home loan bank, which...

So this is interesting. Okay, because in the bank world, right, again, I told you that the bank supervisors can just turn the dials on the management team. Why would they voluntarily do something like that that puts them into an illiquidity situation? Politically, the fact that you have all these banks, all three of the banks that failed, Silvergate, then Silicon Valley Bank, then signature had huge borrowings at the federal home loan banks. Those are supposed to be there. to support mortgage lending. And in fact, what happened is the banks used them as backup liquidity facilities for any type of bank run. And that created a political firestorm because what was happening was the federal home loan banks were being used to provide cash advances to banks that were banking crypto, banks that were banking tech startups, right? This isn't mortgages.

It was beyond the remit of the federal home loan banks. And it created a political firestorm. So don't be surprised if I, I'm just speculating here based on what I, you know, based on, you know, informed speculation that they got pressure from their regulators to do just that. They would not voluntarily have been suicided, so to speak. Interesting. Okay.

I guess, yeah, I guess I just wonder why they wouldn't either come out and say that or hint at it in some way, but. Lots of politics. You know what's so interesting, Laura, is that bank regulators don't sue their regulators. bank regulators have a lot of power over the management teams. Or sorry, bank management's rather don't sue their regulators, right? But the things that really happen never come out. And this is one of the reasons why bank regulators are so rarely sued, so rarely challenged

when they overstep their regulatory authority because the regulators almost never sue the regulators. And that is what is so interesting about custodias situation because the Fed shoved us to the side. essentially left our board with no choice but to continue to pursue our remedies for the wrongs that the Fed did to us. And there were many. We have a list of a couple of dozen procedural irregularities, big, big important procedural irregularities that took place in the custodious situation. And so because we're not a regulator, but that's what it takes, by the way, to get standing to sue the regulator. You've got to be a harmed party. You've got to be the regulator, but operating regulators,

rarely sue their regulators. So I'm not surprised, actually, given all the litigation pressure on the management teams of these banks that have failed, I'm not surprised that they're not telling you what really happened. It will come out, though, eventually. Okay, okay, wow.

The bank regulators have extraordinary power. And it's not that they were granted that extraordinary power. They just took it, and nobody challenged them. Okay. Yeah, it feels like there's a whole rabbit hole we could go down there, which we might later if we have time. But let's now actually just go to the incidents themselves. Let's start with Silvergate. And we've talked about this a little bit. But I want to just go into like each one because like I said, the causes of the demise of each of these were a little bit different. So let's start with Silvergate.

I was just curious for each of your opinions. What do you each think took Silvergate down? I mean, in my view, the Silvergate situation is duration. mismatch on assets and liabilities. They had, and Silvergate had been in trouble, quote unquote, or had had issues for some time. The issue was Silvergate, at the peak of the market, bought a bunch of assets and took on a bunch of debt at rates that were not sustainable in the current environment. By the way, this is the same issue our own federal government has.

Like our own federal government is very much insolvent at a 5% one-year treasury rate, right? banking does not work when you own a bunch of long-dated debt that you are holding at 1%, right, or 2%, but the one-year rate or the risk-free rate, quote-unquote, is now 5%. Like, that doesn't work. So Silvergate, to me, and frankly, all of these banks, just a classic case of risk management, not being fine-tuned. They owned a bunch because when you take in deposits, right, that's a liability. You get cash on the asset side of your balance sheet and you take on the deposit as a liability

on the liabilities and equity side of the balance sheet. You then take that cash asset, which doesn't yield any income, and you turn it into an income generating asset by buying debt, by buying securities, by investing, whatever it is. And as the CFO at a bank, as the risk manager at a bank, as the portfolio manager at a bank, it is sort of your job to make sure that balance of assets that you're diversifying that deposit cash into meets all of your regulatory ratios,

right? You're required to have a certain amount of short-dated security. securities for slong data securities meets your risk requirements, but also fits the nature of your operating model. The issue with Silvergate is crypto is a hot ball of money, right? Crypto deposits are very volatile. They move a lot. And particularly over the last six months, people who may have historically held really large cash balances on deposit are now looking to draw down those deposits, move those deposits during December and January when we saw a lot of lows in different assets people may have been wanting to deploy. And so they call the deposits.

The bank depletes its short-term assets, but has a ton of long-term assets that are now rated below par, or price below par, where they bought them. And so they're forced to sell these assets at a loss. In fact, Silvergate had to sell a bunch of debt it had on its balance sheet at a loss in December of last year, which became clear in their filings, right? Which is why, again, publicly listed companies, so important to the health of the crypto ecosystem, read financial statement. looking at the Silvergate financial statements, I think it became very clear in late January when those were published, right, when they published their full year results for 2022, that there were fundamental issues with their balance sheet. So the issue is just when you have something like crypto or tech, hot ball of money, assets moving around, particularly in the market climate we're in,

people need that cash. People want to spend that cash. If you don't have it on hand and you can't rely on, as Caitlin said, the FDIC and you can't draw more loans to meet that backstop, right? You're going to have a fundamental issue with your liquidity. That's what the regulator steps in. Because as a bank, I don't know if it's every day. Caitlin, I believe it's every day like close a business. You're required to file your liquidity report, right? Is it end of day every day? No. Well, it depends. The big banks have a very different regulatory regime than the regional and small banks. And that's one of the big issues that's being discussed right now. Yeah. Yeah, because I'm familiar with the Basel 3 regime, right? Where it's it doesn't apply to regional and community banks. Yeah.

Yeah, sorry, go ahead. Bank nerding out. Sorry. No, no, so that's all I have to say about Silvergate. And frankly, it's the same for all three. But I think at Silvergate, the issue really was, like, people wanted their money. The money wasn't there. They had to sell assets that were now worth much less than when they bought them.

And they just looked at the situation. I actually think Silvergate management did make a good decision because their wind down was very orderly, right? The story of Silvergate was, hey, we're winding down the bank. this is going to happen in an orderly process. We have enough assets to cover all depositors. So I think the communication there was exceptionally well managed. So kudos to that team for just there was no panic. There was no bank run. It was just we're insolvent. I don't know. Caitlin, maybe you have a different read on Silvergate. They were solvent, but they were illiquid. So, I mean, they did, they definitely did have a bank run. But in the end, they had enough cash

to pay off the depositors. It's their shareholders who took it on the chin. And the stock I noticed very recently is still trading at $2, so it's not at zero. And that does tell you that there's some expectation. Again, it gets back to the allegation from Barney Frank, that signature was put into receivership because the regulators wanted to force the debanking of crypto. And actually, when it all shakes out, what you might find is that both at Silvergate and signature, there was positive equity value. In other words, the banks were solvent. It's just that they had the liquidity problem, which caused them to have to run to the federal home loan bank to get the advances, and that caused the political issue. One of the interesting

things about Silvergate, I had been warning regulators that there was bank run risk all over this industry because I noticed that as their deposits grew, and one thing at all three of those banks is that their deposits just exploded in size. And it was, of course, the crypto bull market in 2020. But it was also in Silicon Valley Bank's case, just the tech bull market. And so in Silicon Valley Bank's case, their deposits quadrupled in the span of a couple of years to a $200 billion bank, they were clearly getting to be systemically important. It was the 16th largest bank in the United States at the time when it failed. And so the impact of that is all this cash was coming in.

But here's the punchline in March of 2022, right before the crypto crash started and all the bankruptcies came in May 2022 or started. Silver Gates had 13.3 billion of demand deposits that could be withdrawn in the span of seconds and 1.4 billion of cash to meet the 13.3 billion of demand deposits that could be withdrawn. It is not rocket science what happened there. The real question is, why did the management team sit with that kind of liquidity exposure and why did the regulators not force them to sit on a lot more cash? One of the interesting questions that keeps being asked is, why aren't banks just money warehouses? We all think that our deposits in our bank accounts are ours. They're not. They're technically loans to a leveraged institution. However, we all want

those deposits to just be ours and we want our money to be there when we want it back. And so the whole concept of in a world in which information moves at the speed of social media and technology has sped up settlement cycles, right? We now have APIs. You can actually just write software to move money around from your bank. That didn't used to be the case. You used to have to go line up at a bank branch and fill out a paper form and then at best hours later, more likely days later, you'd get your money. It doesn't work that way anymore. Everything is a lot faster. And so, what that means is the banks are going to have to sit on a lot more cash. I am very curious why regulators have not told the regional and community banks that in the face of Fed now coming online, as you

pointed out, Melton, this summer, which is a 24-7-365 settlement system, why are the banks not sitting on a lot more cash? Money's just going to start moving around a lot faster. Now, Fed Now is initially going to be limited to $100,000. But right now, the most you can get out of your bank account in real time is $10,000 of cash. Now you're going to be able to electronically move $100,000 at a time in Fed now beginning this summer. It's obvious that the banking industry has liquidity problems. Yeah, one other thing that I wanted to ask about, because I keep seeing this when I look up what happened with Silvergate, especially on social media, is that a lot of people will either tweet at Elizabeth Warren or, you know, whatever they'll comment, that she kind of fomented

the liquidini crisis at Silvergate. Well, her and short sellers, or generally the senators who sent the letter to Silvergate, scolding them after the FTX situation. So I was curious what you thought of that theory, which I've seen floating around everywhere. She definitely had an impact, and it's her acolytes who started this whole thing. It's so interesting because in both the current presidency and the previous presidency, there were anti and pro-crypto camps within the administrations, and they were warring with each other. And that's why. And that's is absolutely happening here. And that anti-crypto, anti-tech crowd, because they want to break up big tech and are just generally a lot more suspicious of tech. And it is the same crowd. And they're the

ones who got this whole thing started and they own the outcome here. And one of the interesting questions is when will the more moderate faction of the Biden administration rear its head? Because it's been that more progressive anti-crypti anti-tech crowd that did get this started. And Laura, you're absolutely right. I noticed a couple of those progressive senators, including Senator Warren, within a minute of the Silvergate announcement that it was liquidating, the progressive senators had statements prepared that they released. So obviously they'd been tipped off by the bank regulators. And again, the top brass at the bank regulators are all part of that. same anti-crypto faction, and they're using their power to try to pressure the banks to stop

banking this lawful industry. Okay, interesting. All right. So in a moment, we're going to talk about the other big collapses. But first a quick word from the sponsors who make this show possible. $3.8 billion of value was stolen from crypto projects last year due to compromised private keys, exit scams, flash loan exploits, and other preventable causes. Hallborn offers preventative security solutions for every stage of your software development life cycle. From smart contracts, layer one, and DevOps audits, to advanced penetration tests, risk assessments, and incident response. With over 150 industry partners, including Anamoka brands, Salana Foundation, and Ava Labs, Halborn's best-in-class security advisory solutions ensure the safety

of company assets and user trust. Visit halborn.com for more. With the RBC Avion visa, you can book any airline, any flight, any time. So start ticking off your travel list. Grand Canyon? Grand. Great Barrier Reef? Great. Galapagos? Galapago? Switch and get up to 55,000 avion points that never expire. Your idea of never missing out happens here. Conditions apply. Visit rbc.com slash avion. Amazon presents Jamal versus the Shih Tzu.

Descending from the gray wolf, Shih Tzu's live by their own untamed primal code of not giving a single Shih Tzu. But Jamal shopped on Amazon and bought dog treats, chew toys, and 32 ounces of carpet cleaner. Hey, Jamal, you've been promoted to pack leader. Save the everyday with deals from Amazon. Join over 50 million people using crypto.com,

one of the easiest places to buy, earn, and spend over 250 cryptocurrencies. New users enjoy zero credit card fees on crypto purchases in their first seven days. With crypto.com earn, get industry-leading interest rates of up to 14.5% on over 30 coins, including Bitcoin. Earn up to 8.5% on stable coins. With the crypto.com visa card, you can spend your crypto anywhere. Enjoy up to 5% cash back instantly, plus 100% rebates for your Netflix and Spotify's subscriptions, and zero annual fees. Download the crypto.com app and get $25 with the code Laura.

Link in the description. Back to my conversation with Meltem and Caitlin. So there's been a lot said about what caused Silicon Valley Bank to fail. It seems to me maybe it's multiple factors. I was curious to hear how both of you see it. I mean, I don't have anything new, quote unquote, to add, same story, $42 billion of deposits in one day. That's close to 25% of their deposit base in one day, trying to raise money via a stock sale, really poor financials, I think, were the canary in the coal mine. There was some analysis that was done.

There was a newsletter that was published at a substack. Like, we are in the age of citizen journalism, by the way, which is so fascinating to me, because it was literally a substack article that someone wrote that I think the guys who do the all-in podcast saw, they done talked about it. Then a bunch of VCs on Twitter started getting concerned. I started getting calls. Everyone started talking to their portfolio. Big hot ball of money, Laura.

The theme of this show is big hot ball of money. Tech, crypto, anything where the velocity of money is high. anything that's digitized, right, have all of money. It's just inevitable that deposits are going to move very quickly. And at the end of the day, you know, there were some investors that were like, oh, leave your money at SBB, leave your deposits there, support an institution that's worth. How no, this is game theory. This is game theory, right? If you are wrong, the worst thing is your money is another bank account and you go through a couple weeks of headaches just to move your money back and deal with the operational sort of mess. But if you're right, you know, who's going to risk

losing millions of dollars of cap, billions of dollars of capital that makes you an incredibly poor fiduciary? So I think what people forget is we live in this age where anytime you're in an industry where you have this incredible velocity and money. And by the way, this is happening in every industry with the digitization of everything and crypto to kind of the theme of what Caitlin and I have both been touching on just amplifies this to a degree that is really incomprehensible. I think fundamentally challenges the business model of banks, right, because of this tremendous demand for liquidity in times of duress, this velocity and this sensationalable demand for dollars when I want them through the click of a button via API in real time just exacerbates this problem.

So that's Silicon Valley Bank. And there have been a lot of bad takes on Silicon Valley Bank, a lot of good takes on Silicon Valley Bank. I'm not a banking expert. I spent a year on Basel 3 regs, which made me, you know, really depressed. And frankly, I know way more than I want to about thin cap rules. But Caitlin is a banking expert. So I'll let her up high more on SCB. But to me, like, the big takeaway on SCB was, holy crap, news moves fast. It's citizen journalism. It doesn't take much to look at financials and figure shit out. And this is game theory, right? At the of the day, like the risk of being right, better to be wrong and safe than to be right and to put your livelihood, your assets at risk. And again, big hot ball of money. Just never forget

the big hot ball of money when it's on the move, if you're a bank and you're on the wrong side of that move, it's not going to work. So Caitlin, you're the actual banking expert. So what's your take on it? No, Meltem's absolutely right. You nailed it. This is the way the banking industry used to work. It was designed for people all not showing up at the same time and getting their deposits out at the same time. And fundamentally, the business model cannot work in an information age where information flows literally at the speed of light across social media. No traditional bank can do the traditional borrow short term and lend long term maturity transformation game in that environment. You either have to explicitly lock up your deposits so that they can't be

withdrawn on demand and pay higher interest to your depositors if you're a bank, or you literally back all your demand deposits in cash. And I saw an analysis from one of the regional bank analysts at one of the big brokerage firms, virtually no bank has 100% cash to back its demand deposits. The ones that are the best, that have the highest liquidity, as Meltem implied, are those that comply with Basel 3. But a political decision was made years ago in the United States, not to apply Basel 3 to the community and regional banks, whereas in the rest of the world, there are really only one or two banks in each country, whereas the U.S. has 4,236, of which, by the way, only 13 are women owned. I happen to know those numbers off the top of my head.

It's really staggering. And only five are African-American owned, by the way. These are really staggering numbers. But the point is we do have a lot of banks in the United States, And that's the reason they chose not to apply Basel 3 to those banks because they didn't want to put them out of business. And so they let them run in a inherently risky way, borrowing short term and lending long term. And in this information era where bank run rumors can be sparked and can happen very quickly, you can quickly see how that maturity transformation turns into a problem for the bank. Yeah, I also wanted to call out what Meltem talked about earlier, the game theory, because it totally makes sense.

If the only way this is going to work is if everybody agrees to not pull their money out of the bank, then every single person is going to be like, oh, but what if not everybody does it? Then I'm going to be screwed if I like try to be the good citizen here. And so, yeah, there's just no incentive. So that's what this. But I did want to ask because like so much has been made about the role of social media and VCs. And like some people kind of like, quote unquote, blame them. And so I was curious, like, you guys.

feel they were just doing their fiduciary duty? Correct. Yeah, I wanted to hear your thoughts on that a little bit more. Well, I mean, the fundamental instability of the banking system is the issue. So to your point, I mean, everybody is incentivized to do what's best for them. And in that case, in the VC's case, it was fiduciaries or the companies themselves who were trying to protect their operating cash so that they could make payroll. They were fiduciaries.

They had to get their money out. So this notion that they're that they're somehow at fault is upside down. Yeah. And I also wanted to just call out what you were saying about how they had to make payroll. Because I just was seeing like random comments on, you know, different articles online by people who maybe aren't super familiar with this industry. And it's very clear they think it's just like everyday people who are super wealthy. And it's like, no, no, no, no.

These are companies that have to pay their employees. So it's just like a totally different. mindset. It's like, you know, people are relying on that. It's not just like wealthy fat cats who have nothing to do, you know, nothing better to do than buy like a private jet or something. So another thing that I have seen a lot of discussion about is the rolling back of some of the aspects of the Dodd-Frank law in 2018. And some people are saying that that is another cause of this crisis. So can you explain what was rolled back and how much you think that that had to do with this situation? Yeah, I saw an analysis from the Bank Policy Institute, which essentially said that if

the stress test that applied to the systemically important banks had been applied to Silicon Valley Bank, it would have passed. And yet the bank still failed. Right. So that's the point. And basically what they're saying is that the rollback in 2018 of the, and what that did was essentially said that, that again, this political deal that got cut is we got to save the community banks in the United States because that's where so much credit goes into the manufacturing industry, the agricultural industry, the mining industries, really sort of the hardcore operating industries, non-financial industries. That's where a lot of debt, including real estate lending, comes, is out of these community banks. And so to preserve the credit impulse, the deal that got

cut was that they wouldn't have to be subject to the same requirements as these systemically important banks. And so they, they reduce the threshold. Well, it turns out that that threshold wouldn't have mattered. So it's a it's a canard. It's a red herring argument. Oh, interesting. Oh, my gosh. Okay. Because, yeah, you know, you're right that their assets did, or rather their liabilities did increase to 200 million or billions, sorry, but that would be still under that threshold because the the rollback raised the limit under which, you know, these banks would have to undergo those stress tests from $50 billion to $250 billion. Yeah.

And if I might, I just want to add in one thing here, Laura, that's the very conversation we're having, right, is eliminating the fact that most people do not understand anything about banking. And that is not, it's not a criticism, right? I did not understand it. And I would never have understood it if I wasn't tasked with one year, like, working on Basel three compliance for. a European captive bank. Caitlin would not understand it this intimately if she wasn't trying to build a bank.

And so I think one of the challenges is that, again, and this also goes back to like broader finance, a lot of people just don't understand or really get what's going on. And then you have reporters, you have people on Twitter who are like looking for, you know, likes or whatever. You have bloggers. You have all of these really, really bad takes out there. And the issue is, is nobody can really give you a straight story. But it's very simple.

They're like very simple ratios and banking. And as Caitlin has highlighted what's so interesting about, oh my God, they need different bank names. Why do all of these bank names? It's so confusing. Why? It's a conspiracy against the letters, S and I. Okay. So Silvergate, Silicon Valley Bank's signature, I think one of the things they all had in common is if

look at traditional bank metrics. And if you look at some of these things under Dodd-Frank, thin-cap liquidity rules, right, these other ratios that matter for banks, they would have all passed. And that's what's absolutely freaking insane. And so as Caitlin alluded to, I think what's so interesting to me is like what happens next because this is going to keep happening, right? First Republic is happening right now. Credit Swiss, happening in real time, right? This is not going to go away. And the reality is I'm going to keep saying it. big hot ball of money. It's only picking up velocity. It's only picking up mass, right? It is only a matter of time until the majority of the world's banking is fully digitized, accessible at the touch of a button

and wants to move 24-7-365. That is just the reality. And so it's really fascinating to me because banking is one of those things that so few people really understand. It's easy to say a few words and sound smart. I still don't really understand it all that well. And arguably, like, I know a little bit. But it is really interesting because there's just a lot of bad takes out there. So I'll just say, like, this conversation in and of itself, I think, is highlighting some of the really interesting nuances and, like, really granular detail that I think makes what's happening here in the U.S. so much more interesting. And you wouldn't really be able to get that nuance unless you really have spent time, like, deep in the bowels of this really, frankly, sometimes dry and

boring subject matter. But very, very financially. It's, for it. foundational important. Yeah. But also, so I, like as a storyteller, I actually view it as quite juicy. So a couple of things I want to call it. So first of all, like, and again, like you, I know even less about banking. So thank you both for illuminating me. But what I'm hearing, and you tell me if I'm wrong, is that essentially two kind of really

long-term trends have come together to foment these crises. So one would be, you know, the change in the interest rates, which, especially after a period of low rates, which now has completely, yeah, upended the way banks typically invest in order to keep their business model, you know, in the black. So that's one. And then the other is,

you know, the fact that, yeah, like our traditional banking rails move very slow. You know, they were built in the 70s or whatever. And then now with like social media and with like our digital apps where we, yeah, don't go into bank branches anymore, but we can just move money. on our banking apps seemingly on demand, those two things and have come together to create sort of this unsustainable. So essentially what we're saying is that business models,

the business model for banks is kind of coming to a place where it's probably not sustainable. Yeah. Correct. Okay, which is just kind of crazy. And then to the point of signature, which I don't want to skip over, I think the reason I point out it's so challenging to understand and untangle what's going on, is I think that the Fed, the FDIC, and other people who were appointed, not elected, they were appointed and have declared themselves, right, Supreme Emperors of the underlying liquidity in our financial system just anointed themselves with these powers, right? If we look at what's going on at the SEC, same thing. Like Gary Gensler has just decided to anoint himself with these powers. And everyone's like, whoa, nobody voted for you. Hello.

What I think is so interesting is the fact that the general public and even experts in tech and other parts of finance and crypto in particular do not understand some of these very complex, like tiki-tackey, very detailed aspects of bank rules, bank regulation and these processes and these important capital ratios and these business models are what makes it possible for things like signature to happen. Because when someone from the FDIC comes in and says, Oh, yeah, yeah. Signature, yeah. Because when someone from the FDIC comes in and says, oh, yeah, rules were violated, this happened. And you're like, oh, yeah, yeah, they're the regulator. I'm going to go along with it. But they have publicly stated financials. There is data. There is information. And as Caitlin alluded to, when you look at the facts and you look at the rules, one plus one does not equal to. So I think the fact that this is so difficult to understand is what is allowing regulators to get away with it, right? Because to the outside observer, it's seems normal. And you can obfuscate a lot of this with complexity and terminology. And people will say, oh, yeah, yeah, but they're the FDIC. They're the experts. They're the Fed. They're the experts.

I'm sorry, what experts do we see the absolute shit show state of banking in the United States of America right now? So that's why I think the signature case is so interesting, because here you have Silvergate, SVB, all of this backlash against banks, all of this like hot money moving around. this is the best time possible to execute a strategic killshot against signature. And so there's this perfect setup almost. And Caitlin, I'll let you lead this one because I find it fascinating. I still don't know what happened, but it's wild to me. Yeah.

So I'm glad that you moved us there because this was my next question because this to me is definitely the outlier and we need to unpack. And this is the one I think has the most significance for the crypto industry going forward. So one thing, and, you know, Caitlin, you alluded to this, but I just want to pull out these quotes from that New York MAG interview that Jen Vietchner did with Barney Frank. He said, so he basically, he's the Frank in Don Frank. And he also, however, was a board member at signature. So, you know, some people might say he is biased toward them. But, you know, given his background, I think he probably is. somebody who understands all of this stuff super well. And what he said to her was that the bank was solvent. And then he said, now the question is, why did the regulators react so harshly to what they said. Oh, and sorry, he said that the regulators had blamed the fact that they couldn't get the data

they wanted from the bank as the reason why they decided to close it down. So he said, now the question is, why did they react so harshly to what they said was our inability to give them the sufficient data? I believe it was probably to send the message that even, Even though we were doing crypto stuff responsibly, they don't want banks doing crypto. They deny that in their statement, but I don't fully believe that. I think sloppy data is not a reason to close a bank that you have not decided was insolvent. So, yeah, so I just wanted listeners to hear that. But go ahead, give us your theories on what happened with signature.

Scandal, outright scandal. This is theft of private property. by regulators who did not have the authority, is to take a solvent bank and put it into receivership. And I do suspect that there will be litigation over that. Did the regulators have the right? Again, finally, you're having some of the regulators be in a position where they can sue the regulators for overreaching.

But that's what it takes. And the fact that these regulators have not had anyone sue them for decades, they've just grabbed power that they didn't actually have. They've way overstepped their bounds. And if this is correct, and I don't have any reason to doubt Barney Frank, because he did have inside information. He was a director of the company. And he himself admitted that he was a bit of a crypto skeptic. So for him then to say that the regulators put a solvent bank into receivership, I think the stock was trading at something like $40 before it was put into receivership. This was not a stock that went to zero or close to zero.

So that is theft of private property. And it's going to be challenged. And Melton, did you want to add anything else on this is definitely the most irregular situation? To me, what's interesting? So I started hearing rumors about signature on Friday afternoon. People were saying, oh, they're not processing outbound wires. I happen to know a few people who work at signature.

I shot a quick text to one of them and he said, oh, must be like a tech glitch. We're operating just fine. But my understanding is they did get hit with some deposits, request deposit withdrawals on Friday. But again, as Caitlin alluded to, like, these regional banks are not required to report liquidity in real time. So kind of interesting.

And then Friday, I went to bed, feeling fine. Saturday. I was like, what a week. Couldn't take a breath. Go for a nice hike. And then Sunday, you know, going through emails, doing some some ketchup. All of a sudden, signature is seized by the FTAIC. And I'm like, what in that? On a Sunday. On a Sunday night at 6 p.m. That doesn't happen in the history of the FDIC. The FDIC usually receives banks on Friday at 5 p.m. So irregular, right? So irregular. And then on top of that, it was bundled into, it didn't even get its own press release, right? Which is also like bananas because signature is a really important bank in New York. It's not a crypto bank.

Signature's business is like 15% crypto. The majority of their business is New York real estate and commercial banking. So it's absolutely bananas, right? They don't even get their own press release. It's bundled into a press release about Silicon Valley Bank. And it's two lines in a very small paragraph, zero detail. zero context. It is now Thursday. It is five days later. There is still not much more clarity other than general allegations against management, right? So allegations of mismanagement,

allegations of misconduct. It's crazy. Like in what universe do we live where a regulator can walk into a business, seize that business, give no reason as to why that is being seized. and not 24 hours later take over operations of that business and then put it for sale, but demand that in that sale, it wind down a core component of its. It's like it's banana republic stuff. It's absolutely insane. It's banana republic level shenanigans. And what's wild to me is when you tell people there is something foul happening here.

This is not due process. This is not what happens in a democratic country that respects private, property and the right to form private enterprise. When you tell people that they're like, oh, conspiracy theory, you're biased because you're in crypto. Like, what are you smoking? If you think they're just coming for crypto, you're on something because it's crypto first and everything else is next. Again, banana republic level moves. I just, I am, I'm appalled. And what's even worse, Caitlin, as you pointed out, is nobody's holding these people accountable. Nobody. There is zero due process, zero accountability, zero of people.

So like the question is, what do you do in this situation? Well, people are voting with their feet. Half the people that I work with are contemplating moving to a different jurisdiction. We bank in seven different jurisdictions, right? We're like effectively looking around and we're saying, okay, we got to de-risk from a regulatory exposure perspective. But if the U.S. is going to do this, like this is banana republic level shenanigans. I'm just going to go ahead and say it. I think it's insane. And I would say that whether I worked in crypto or not, because there is zero due process, there's zero clarity, there's zero transparency, there's zero legitimate reason given, there's zero data or evidence that anyone can point me to that would necessitate drastic actions

being taken at 6 p.m. on a Sunday evening. I don't know, Caitlin, like, you've been dealing with this with custodia. Like, it boggles the mind because for so long, people have believed U.S. is like the bastion for capital formation, innovation, forming free enterprise, where private companies can enjoy property rights. Like, this is seizure of property. It's, it's correct. Absolutely. I'll just stop there, but it boggles my mind. Yeah. So I think it's great that you brought up custodia. So why don't we have, Caitlin, why don't you describe the business model that you had proposed for custodia? Yeah, custodia was the business that a lot of people have come forward and said, why can't Can't banks just be money warehouses? That is exactly the business that Custodia proposed.

Extremely simple. You deposit money into a bank. The bank holds cash to cash you out whenever you want it back, period. Very simple. How does the bank make money? Fees. The way Custodia's business model was set up is U.S. dollar accounts, all fee-based, no interest, because it's a non-lending bank. bank, therefore, can't earn any spread between the interest yield on the loans versus what is paying to depositors, therefore not paying cash to depositors. Therefore, if the traditional banks were so afraid of a bank like that, just do a better job attracting deposits and paying interest to your depositors. This isn't rocket science. This should not have been a threat to the traditional banking industry, but of course, they all thought it was. And then the other piece of the business

is digital asset custody. So it's a business model that essentially, was going to be a miniature version of the Bank of New Yorks and State streets that make most of their money off custody fees and then charge fees for accounts. And we have been deluged with desperate startups in the digital asset industry who have lost their bank accounts and are at risk of going out of business because they can't get bank accounts. And people are that desperate right now. This is a lawful industry that has been unlawfully debanked. Wow. And so, given what you revealed at the beginning, you know, you've been denied, but you have this evidence. So essentially, it sounds like you kind of hinted, are you suing the government or what's happening or the Fed?

Yeah, I'll keep this to factual information only because, of course, I can't comment on the lawsuit, but custodia filed suit against the Fed in June for unlawful delay on the decisions related to the applications. Then, of course, the decisions came in this coordinated fashion with the White House on this rushed basis on January 27th. And so custodia has filed an amended complaint. The original complaint, the Federal Reserve moved to dismiss the complaint. Then after it made the decision, it moved to dismiss the complaint as moot. And the judge has denied both of those motions to dismiss. So the lawsuit is still ongoing with the revised complaint. Okay. All right. Well, we're going to have to see what happens with this because it's almost like all these events are sort of proving that maybe that was a

good business model and it should have been approved. Yeah, because I saw that you retweeted, I think it was Matt Iglesias, the journalist who said, why isn't there just a bank that charges, you know, fees for restoring your money? And you're like, that was my business idea. And it got rejected at the beginning of this whole wave in a really heavy-handed and nasty way. Yes. Yeah, which is mind-blowing. Okay, so let's talk about USDC because obviously that got caught up in this turmoil. Circle had $3.3 billion of its $40 billion in U.S.D.C. reserves at Silicon Valley Bank. And so over the weekend, it depegged down to as low as 88 cents. There were some news articles saying that Vatelic Boutarin and others bought the dip, which smart for them. But I was curious,

like, what you thought all of this meant in terms of the general outlook for reserve-backed stable coins, given the general unfriendliness we're seeing of banking to the crypto sector. and also just the general instability of banks in general. What a saga. So I tried to enjoy my Saturday. Saturday night. I have my laptop out. I'm laying in bed.

I'm looking at USC. 93 cents, 90 cents, 88 cents. What's really interesting is dye, which is supposed to be crypto-collateralized stable coin, is now over 40% backed by USC. And it traded exactly in line with USDC. tether, right, the widowmaker trade continues. Somebody needs to check off on fur tree or whatever the firm is that is always shorting tether. Make sure those guys are okay because tether went to 101.

It's like the widow maker. It's unbeatable. There's every cycle. Someone wants to short tether in every cycle they get carried out on a stretcher. It's fascinating to me. But look, with circle, I think the really interesting thing is, again, big hop ball of money. USDC is part of this big hot ball of money that's running around crypto and is very soon, I think, going to be running around many other industries, right? I think the more people interact with

USC, whether it's firms like Visa engaging with it and realizing, oh my gosh, for real time settlement with vendors or people in our network, we can actually use permission or potentially even a permissionless version of USC to settle these tokenized IOUs on our network in real time. Like, wouldn't that be fascinating? So I think as stable coins become more and more integrated into the financial system, it only accelerates this big hot ball of money. And I think to Caitlin's point, it only accelerates the need for new thinking around how deposit taking institutions should function.

But again, the big issue with USDA, why did USC depag? Number one, Friday afternoon, 345 p.m. is not a great time, like 15 minutes before the bank wire window closes, is not a great time to communicate that you have, $3 billion of exposure to an insolvent thing. Like, that's just not great timing. So kudos to Circle for trying to communicate with clarity. But, like, doing that 15 minutes before being closed on a Friday, I think perpetuated some of the run.

Over the weekend, I think Circle dialed in their comms. And again, communications, by the way, crisis comms really important. I think SVB situation and Circle situation could have unfolded much differently if both had paid more attention to crisis comms. SVB kind of pooped the bed. Circle, I think Friday, not so great for comms, but over the weekend really dialed it in on Saturday, Sunday, restored confidence.

But the big issue is, Laura, when people are redeeming, bank wires can't be sent. So people are like, oh, why don't they re-peg? Why don't they re-peg? I'm like, bitch, there's no money to move. Dollars can't be wired on the weekend. Like, you got to wait till bank open 9 a.m. And so what's really interesting, though, is again,

a bankron basically happened on USDC because of this crisis of confidence. Tons of people in my DM Saturday night selling USDAC at 88 cents. I'm like, what are we doing, guys? Just like, look at the facts, right? Max exposure would depag USDC to maybe 98, 97 cents, but they're going to use their operating capital. They're going to use their access to equity capital to backstop that, right? There's no way USDC is going to just leave a hole on their balance sheet.

But again, it's this game theory, right? You don't want to be the last man left holding the bag or last woman left holding the bag. What I think is interesting, though, is now I do think we're going to see the battle around stable coins heating up. USDC has sort of long had the lead and maintain this sort of narrative around the most regulated stable coin. I think true USD, if they're still around, is also trying to go for that narrative. we're seeing, you know, crypto-collateralized stable coins like Liquity, U.S.D, L-U-S-D, which is fully collateralized by Ether and has an automated redemption mechanism. That's a lot of action over the weekend. Dye, I think at this point, unfortunately, is too backed by legacy finance assets to really be deemed

like a non-dollar collateralized stable coin. But there are all of these alternatives emerging. And again, I do think stable coins, which is so important to this big hop ball of money that is crypto markets. But yeah, the USC situation, I mean, I will be very interested to see the regulatory pressure that gets applied to USC. To me, USDC is the next choke point they're going to go after as the on and off ramp into dollars. And I would not be surprised if Circle USC, there was a joke tweet from Brian Armstrong over the weekend or like a fake tweet. Someone posted that was a Brian Armstrong, Coinbase CEO tweet that said, oh yeah, the IRS has asked us to implement. full KYC, AML, and on chain forensics on every USC deposit that gets sent in and out of

Coinbase. Something like that happening, I think in my view, is not very far from the reality of how like the next sort of choke point could come to U.S. onshore crypto. And so, yeah, just really fascinating. Crisis of confidence, transparency and communication can hurt you if not managed carefully. And yeah, big hot ball of money. When it wants to move, it's going to move. It's going to move in whatever way it can, whether that's Bitcoin, whether that's Tether, whether that's shit coins, whether that's Starbucks gift cards. When the money wants to move, it will move human ingenuity and the pace of technology and innovation are unstoppable to think otherwise, I think, is completely insane. And like the fact that this country is run by geriatric turtles

is just absolutely mind-boggling. I'm sorry, but it's like they're sticking their head in the sand and like withdrawing into their shell and pretending that we live in the 1930s. Like we do not live in the world that we lived in even five years ago. Like let's just wake up to the reality that there's this big hot ball of money. And when it wants to move, it's going to move. It's going to move any way it can. USDC, perfect illustration of that. Yeah.

Completely illogical, but in hindsight also so logical. I just, I find it fascinating, but definitely concerned about the ability for regulators to choke USDC. Maybe I'm overly pessimistic. But if they did that shit to Silvergate and signature, they're looking at USDC real carefully or it becomes the de facto Fed coin. There's only one of two ways it can go. Yeah.

Caitlin, what do you think? Oh, I completely agree. There are Wells notices that have been sent out. Just, you know, every exchange got Wells notices. Got Wells notices for what? For being unregistered securities exchanges. Oh. Yes.

There hasn't been much. Did I miss that news? Well, it was never publicly disclosed. And when did that happen? Early February. Absolutely. Right. And look at the coordinated action that was taken against Paxos, which was the issuer,

is still the issuer of BUSD. I just looked it up. There's still $8 billion of that. Right. But it's obviously crashed due to redemptions. But there was a coordinated bazooka shot at Paxos. They got multiple agency actions all at the same time. Same thing with Cracken.

Cracken got IRS and SEC at the same. time. And there's, again, a lot that hasn't been announced that I happen to know about behind the scenes that people have confirmed. So absolutely, there is no question that it is going to, that they're going after it. Absolutely. And the bank relationships ultimately are a big, a big problem. I will defend Circle from a comms perspective. You're absolutely right, Melton, that there were issues on Friday, but they didn't know. And it's precisely because the banking industry is so screwed up. When you send your money in a wire, you don't know if the money actually settled or not until you get the confirmation from the bank. This is ultimately

part of the problem that these technologies are here to solve. And they got caught because, of course, there were massive wires that were sent in the Silicon Valley Bank final day last Friday. And no one, if you sent your wire by a particular time, you didn't know if it settled. And then if you, you didn't know when the wires were sent, when the ultimate cutoff time was going to be, the FDIC hadn't told anyone that yet. So if you sent the wires at 321 and the cutoff time was 325, then your wires should go through. But if you sent your wire at 326 and the cutoff time was 325, then, uh-oh, right? So they didn't know. And this is ultimately just a function of how screwed up the banking system is because

it does use 1970s technology. Yeah. Okay. So let's leave the audience with a few top line takeaways because I feel like people need to understand, like now that all this has happened, what do you guys think is the outlook generally for crypto companies going forward. And why not included in that? Why don't we just also talk about because the macro environment had something to do with this in terms of what the Fed was doing with interest rates. So if you could just bake in a little bit about that as well.

They're all going offshore. Wow. Yeah. I mean, I think diversifying your operations and getting coverage across multiple jurisdictions can be really important. I do think one really important message. And I know you have a lot of viewers who've been in the crypto space for a while, Laura, as well as newcomers. The biggest issue we have is an industry that also the tech industry has, as we saw from the fallout of SVV and just the Silicon Valley Bank in the response to that, we have a huge image problem as an industry, massive image problem, right? After the excesses of 2021 and just the insane behavior of our industry, which like is funny in some way. and I'm also guilty of contributing to this.

We have a massive reputation issue. And at the end of the day, this matter is partially going to be one in the court of public opinion. Because at the end of the day, governments, right, particularly the U.S. government, we're coming up to an election year. Governments are legitimized, right, by these elections that we have, whether or not they mean anything anymore, Td. But the court of public opinion does matter. And unfortunately for us, the court of public opinion, opinion hates tech and hates crypto. Why? Because we come off as arrogant, out of touch

assholes. And so I do think, and again, that's that's not casting criticism at anyone or anything, but I do think it's very important if we want to win this battle, if we want to win in the court of public perception, we need to make it popular for both Democrats and Republicans to fight for our industry. We need to make it popular for people who are good looking, to get elected to run on pro-crypto and pro-tech platforms. And right now, unfortunately, for most people, for most constituents, right, who remember, like, who goes out to vote? Twitter is not real life. Who goes out to vote? It's typically retirees who have free time, who can go to primaries, who can spend time in the polling booth, who can go to the voting booth.

It's people who have something to lose as well. And so I think we just really need to think carefully about who we ally with, how we present the narrative, and it needs to have mass populist appeal. How we do that to be determined. And I do think there are people in our industry who are telling that story of why crypto matters. But if all we're doing is like farming food coins to make crazy yields and talking about crazy exploits, like that doesn't really make the case for why we should have popular support. But the court of public opinion matters, public sentiment. matters. And so it's just, to me, that's a big part here is like, how do we get other people in the country? How do we align with other industries? How do we align with other sectors that are

politically influential? And Caitlin, by the way, like, kudos to you for being in Wyoming. I think Wyoming has done such a great job as a state, right, aligning itself with crypto. And there, there is support for the industry. But we need that, like, across the heartland of America. We need that in the Rust Belt. We need that in the Midwest. Like, popular. support is really important. So that's something I'm really interested in, number one. And crypto has a bad look right now. People don't like it. People don't like tech. So we got to think about that, number one. Number two, the other really big thing is like it's all about the money. And at the end of the day, crypto is a massive industry and there is a lot of money. Big hot ball of

money. And again, if we all move with our money, like capital is power in our world. So we need to use that financial capital as an industry to push for the things we want. We're already starting to see some larger banks looking at banking crypto businesses. They maybe wouldn't have touched in the best because there's money to be made. But I think as an industry, we just need to remember that collectively we do have a lot of financial capital at our disposal. And we can use that in really new and novel ways. And we're starting to see that. And again, you see firms like Coinbase and Circle and Uniswap and others picking up the mantle and really funding a lot of the efforts, particularly here in the United States to lobby and otherwise.

But I think we need to see a lot more of that. And at coin shares, we're certainly trying to do our part where we can. But those are just my two takeaways that are completely non-tech related, but they're big problems. Yeah. Just to wrap it up, there are huge swaths of this industry that need to burn on a raging funeral pyre and, you know, huge amounts of criminals and fraudsters. but what has happened is the policymakers have thrown the baby out with the bathwater. Those of us who were actively trying to get regulated, look at how we got treated. Virtually every company that came to the regulators to ask for permission to do something got skewered. And capital goes to where it's treated best, and it's not going to be in the United States for this technology, unfortunately.

Yeah. Sometimes I look at this and I feel like we're in maybe a historical moment because we have this like rise of, Silicon Valley and, you know, crypto is all about decentralization. And I didn't quite think that also meant that it would decentralize out, like tech innovation would decentralize out of the U.S. But it sort of feels like that's what we're seeing, which is mind boggling. But anyway, this has been an amazing conversation. Where can people learn more about each of you and your work? Custodiabank.com. And we're still, by the way, it's far from over for us, even though the Fed didn't let us in. We are still a Wyoming special purpose depository institution.

with a certificate of authority to operate. So stay tuned. Obviously, we've had to pivot. But stay tuned. We will have some news. And then at Caitlin Long underscore on Twitter. Yep. I'm a child of the internet at Meltz underscore Dem on Twitter.

Coinshares.com. Coin shares is not in the business of stable coins or banking. We're in the business of asset management, but you can learn more about us. Yeah, but Twitter, public citizen journalism, very excited about it. I think Caitlin and others in our industry are doing a great job. So shout out to them. And shout out to all the firms. I mean, we've been in this for almost a decade now and the fight is just starting. And it's going to be really interesting,

but big hot ball of money. Yes. Unstoppable. All right. Thank you so much for joining us today to learn more about Meltem, Caitlin, and the collapse of all these different banks and their effects on crypto, check out the show notes for this episode. Unchained is produced by me, Laura Shin, without from Anthony Youne, Mark Murdoch, Matt Peltcher, Zach Seward, Wanda Randavitz, Sam Shreram, Ginny Hogan, Ben Munster, Jeff Benson, Leandro Comino, Pamma Jim Dar, Shashonk, and CLK transcription. Thanks for listening.