We Study Billionaires - The Investor’s Podcast Network - BTC236: Stablecoin GENIUS Act & Bitcoin Policy Update w/ Matt Pines (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On this week's show, I have the super thoughtful Matthew Pines on the show to talk about all things Bitcoin policy related. Matt is a part of the Bitcoin Policy Institute. And as you'll see in this interview, he has an incredible beat on everything happening within Washington, D.C. And he makes sense of all these different pieces that seem to be all coming together.

Starting point is 00:00:24 We talk about the Genius Act and what that means for stablecoin legislation, the Bitcoin Strategic Reserve, the U.S. sovereign wealth fund, and much, much more. This is a show you won't want to miss, so we're going to jump right into it with Matthew Pines. Celebrating 10 years, you are listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. I'm here with Matt Pines. Matt, welcome back. We've got a lot to talk about. Oh, my God, so much to talk about. But welcome back, sir. Thanks, I'll be back. Yeah, just a quiet spring. Just a very quiet spring.

Starting point is 00:01:14 The Genesis Act, that went, it seems like it's a done deal. Let's talk about that just in a little bit. Where I want to start this off is just the current administration dealing with, there seems to be like this battle happening between the treasury and the Fed. And I'm kind of curious to get your just overall take on this setup, what it means, kind of where you see this going in the coming year or two. Do you even agree with that statement? Take it away. Yes. I mean, this is a kind of history rhyming, but with a bit of a different twist, right? When you have large debts for a large government, they are preoccupied with ensuring they can finance themselves at a sustainable rate.

Starting point is 00:01:58 That's like the borderline boundary constraint. And it is the primary constraint that Besson is facing here. And so he is there to essentially sell treasury bonds and support the administration's strategic policy objectives. And so those are somewhat intended. Define that from a very high level, very simple standpoint with respect to what we're talking about as far as funding the government. Yeah. So they, well, one, we have a lot of legacy debts.

Starting point is 00:02:26 We have to refinance. And then we're committed as far as we can see to about seven plus percent of GDP in terms of deficits. So just the kind of stock of debt, we have to refinance as high. And then the flow of debt that we're projected to issue is also high. And that's just kind of like the baseline condition. But that's running up against the fact that the administration has particular policy priorities and objectives that they want to achieve in a short period of time.

Starting point is 00:02:51 These are strategic shifts that they want to put in motion to change the balance of trade in the world, to ensure domestic resilience of their supply chains, to make sure the U.S. dominates these strategic industries and technology. And they're also budding up against the fact that the global system is quite volatile geopolitically. So these are just like the boundary constraints that Besson has. He has to ensure that Trump at all can achieve these objectives while ensuring the government can finance itself at a reasonable rate. And a lot of the policy objectives that the administration wants to pursue reshoring, restructuring of the global trade and monetary and security system is reflecting back on the treasury market, right? Adding to the,

Starting point is 00:03:30 term premium, and generally speaking, changing how a lot of countries in foreign capital polls view the United States. And so that is ultimately the boundary constraint that is putting a lot of pressure from the federal government onto the Federal Reserve. Federal Reserve has a particular official mandate, but ultimately, like they exist, like all central banks exist, to ensure the national government by whose remit they operate can finance itself, right, under all conditions. And they don't make policy, right, beyond the remit of meeting their dual mandate. But when the federal government decides to throw the table over and restructure the global economic and security system, the Fed has to kind of cooperate, but they can't be seen too objectively to be queuing

Starting point is 00:04:10 to the party line. So they have to play this double game where it, for all intents and purposes, they maintain independence. But if you look in the microstructure, right, and maybe certain types of debt issuance, that seems to be disproportionately taken up out of the Fed. It looks like, okay, they're not helping objectively the sort of yield curve control, but they're accommodating sort of treasury issue events in a way to sort of mitigate potential gaps along the demand for certain treasuries. And so this is the constraint that we're seeing that's that kind of operate within. And he's arrogating more power to himself and other tools that the treasury has to sort of manage the curve, especially on the long end. So treasury buybacks, jawboning, right?

Starting point is 00:04:49 Probably lots of cedarer conversations with other governments, Japan, et cetera, about, hey, like, could you help us out here, right? Like a lot of the discussions are references, sort of foreign exchange policy. And so I think there's an attempt to try to keep a cap on the long end, but at least without having these volatile spikes. I think when they have the move index go like past 130 and 140, everyone fixed out because that can lead to contagion. This is where the trend lines are going to converge with the next six or 12 months, for the end of Al's term next year. I just expect that will encroach more and more and more on the Fed's sort of territory, so to speak. There aren't taking away the banking kind of regulation. They want to separate out

Starting point is 00:05:28 those two key functions, the monetary policy function, the banking regulatory function. And then the monetary sort of function, they're also going to start to E away and then use rhetorical pressure that Trump has not shied away from to push the Fed to reduce rates on the short end, especially as we get to this refinancing cycle of the next six, 12 months. I don't see it as a crisis right now, but I see it as like these structural trends moving in this particular direction and fiscal dominance, the sort of de facto subsumption of the Fed to an administration that wants to achieve pretty dramatic restructuring of the global system. And at the end of the day, like, the Fed does what all feds do. They'll have to accommodate

Starting point is 00:06:03 what the hedge them on wants. But how much friction and how much happens in the public versus behind the scenes remains to be seen. What do you think the Trump administration's point of view is with the Fed in general? I know he's, he has his comments about Powell and how he's always slow to cut rates and all that kind of stuff. But I guess my question is more pointed towards like long term. How do you think the Trump administration is going to continue to look at the Fed as far as their role in the government and what it is that they're doing? Are they almost on the Ron Paul side of things where they need to end the Fed or are they more, we just don't really like Powell in the job and we want somebody else there? I think they want to chip away at some of the Fed's powers. I don't

Starting point is 00:06:50 think they want to eliminate it entirely. I think they want to sort of knock it down, take it down to a certain, very, very circumscribed remit, and then install like a pliable chairman, right? And so it could be either Kevin Warsh or Hacet. Those are kind of the two names that have sort of been floated around as potential fed chairs. And those are obviously like very Trump loyalists as probably like a little minor differences between the two of them. But could they even do that? My understanding is that it's very independent and that the existing different, this isn't the correct terminology, but the different branch offices within the Fed, that's where the governors come from that would replace Powell. At least that's what we've seen historically. Help me understand and address how this could potentially be changing and how they would even go about doing something like that if they were able to do it.

Starting point is 00:07:39 Yeah. So there's like, it is a federal open market committee. The FMC is the sort of the critical group that. makes the monetary policy decisions. And then the Federal Reserve system consists of these regional Fed banks that have their own regional membership. And they do a lot of economic analysis and business engagement. And they kind of support that regional economy. But the true power lies with the FOMC, which is in D.C. And then in New York at the New York Fed, which manages the SOMO, the system's open market account, which is effectively like the portfolio, the balance sheet of the Fed. And so you can change

Starting point is 00:08:13 the leadership, but ultimately it's a vote, right, that the FFC takes and they have their dot plots that they forecast what they think their vote's going to be for raising and lowering interest rates. Importantly, what's happening now, in fact, last week, I think, was a big conference. Every five years, the Fed goes through this framework review where they get all the nerds together, all like the high clergy, the high clarity of the Fed, and they sort of figure out what the next sort of canonical doctrine is going to be that they issue to the lady. It's like, here's our guiding principles for managing our mandate here. The previous framework review created this acronym called FATE, the flexible average inflation

Starting point is 00:08:48 target, that they would be flexible in targeting an average inflation rate of 2%. And so basically, they would kind of go above and below that target and they would try to make sure that the average would be 2%. The Scalibati is they're shifting just to like flexible inflation target. They're doing the average. That means that they can sort of maintain like an overshoot more than you would expect, right? And so generally speaking, they'll accept higher inflation, but we'll see how that cashes out in practice. But I was talking to an economist who was at those meetings, right, and just getting a sense of like the vibe, right?

Starting point is 00:09:22 And it is very much like an elite in-group club of tenured professors, Fed staff that get together. They're all PhDs from a handful of the same institutions. And they've all kind of breed the same air growing up in terms of the mental models of the world. And they see themselves as kind of this insulated technocratic cohort that essentially, The high table comes together, comes up with the model, communicates that to the rest of the world, and then they can manage the dials of the global economic system. And I was talking to this gentleman who was there, and he's one foot in, one foot out of that world. And he recognizes there's a massive dissonance between the kinds of conversations happening inside

Starting point is 00:09:57 that little bubble. And then, like, massive changes taking place in the external environment. And it's like they're kind of a bit in denial. Yeah. It's like, if we just kind of pretend that the world is the way it has always been, then everything will be just fine. and we can just keep going through these motions. I feel like there could be like a roadrunner situation at some point in the near future

Starting point is 00:10:14 where just things get out of their control, right? These are geopolitical kind of once in a century slash. These are national leaders arrogating to themselves the power to make these structural changes. And the Fred is just a tool that is in their way or will be hijacked to accommodate those purposes. Yeah. And these people viscally resist that, right? They have assumed for themselves a certain status, certain, group kind of through hierarchy and that they are the technocrats who know better and that political

Starting point is 00:10:43 interference is an imposition on this independent institution. And I think that's they're in for rude awakening. I think something that's lost on the public that maybe doesn't really pay a lot of attention to this stuff is when the country's being fiscally responsible, the Fed has this ability to kind of juice the markets and I mean, they have that ability at all times, but especially when, let me just finish the thought here. I guess what I'm trying to say is that fiscal that is the primary driver and the Fed is just along for the ride if it gets out of control. And I would argue that where we're going and where the numbers are pointing is that it's getting out of control.

Starting point is 00:11:20 And so, like, their decisions that they have to make are completely a function of basically papering over the out of control spending that we have from fiscal appropriators coming out of Congress. So these decisions to spend and spend and spend way beyond what is being brought in from a standpoint has put the Fed in this situation where they're going to look like total idiots because of what they have to offset from the fiscal policy side of everybody that's been elected in the office for decades on end that just keeps spending at will. Do you agree with that? If so, they're kind of in a catch-22 at the Fed because there's nothing they can possibly do

Starting point is 00:12:02 to offset the decisions that are being made that are, in my opinion, upstream of them with fiscal spending. Yes, the Fed has designed itself and its frameworks around managing the business cycle, essentially. That they're a characteristic business cycle, the certain periodicity where you get credit expansion, you get sort of animal spirits, you get contraction, you get defaults. And they give themselves as sort of smoothing out those cycles. So that there isn't like a runaway media and there isn't like a major bust.

Starting point is 00:12:33 That's sort of the normal business credit cycle essentially is buffered. and there's a certain degree of safety kind of a margin imposed on the economic system. When you go through the cycle we're going through now, which is a geopolitical cycle, which is a kind of a world historical cycle, like the Fed doesn't have the tools to manage that. They're not institutionally capable of smoothing out those sorts of curves, which are the world historical curves, where things like the Fed come and go, right, and those sorts of shifts. And it's just above their capability set.

Starting point is 00:13:03 But more practically, right, right, we are going to see the Fed, I have to manage an environment where it looks like the U.S. government is, the federal government is basically given up on, you know, Doge cuts, right? The idea of austerity or efficiency is out the window now. Like, the budget that they're going to pass is going to juice the economy. It looks almost like they're doing nominal GDP targeting. Matt, this is really important. I really want to go down this path because it seems like Elon rage quit because I think he realized that no matter how hard he tried, he wasn't actually on the controls. He was not able to steer the ship in a direction.

Starting point is 00:13:36 because his target was this trillion. I mean, he first came out swinging that he was going to do it two trillion. Then he backed it back to one. And when you go out there and you look at some of the numbers that are being reported, it's actually minuscule of the dent that he's actually been able to make. I've seen numbers as low as like $40 billion. I'm curious, what numbers have you heard? Has he rage quit?

Starting point is 00:13:58 Why did he rage quit? What does it mean for you're talking about this pressure that's on the treasury? I would imagine this just kind of 10x is it because of his inability to get some of the spending under control. Yeah. Well, I actually think that those things from the beginning, the whole idea that they're going to cut a trillion dollars was a smoke screen for just getting access to kind of the inner workings of the government and getting just people. That's interesting.

Starting point is 00:14:24 Yeah. And access to critical information on contract, whereas we're going, mapping out the sort of the dark matter of the federal government, seeing who was winning, who was losing. when it connected to the federal teat, right? That's sort of knowledge was that that was getting access to that information. And I think the Doge efficiency cuts were mostly just cosmetic. And I think, yeah, it was a political economy. Kind of like we need to get dirt or information on our opposition in the power structure

Starting point is 00:14:50 in the U.S. system. And our opposition is principally connected to the technocratic management of the federal government. And so we need to understand, like, what their points of vulnerabilities are and try to choke off selectively, right, our adversaries access to funding and financing. So that was going after USAID, going after part of education. It was a politically driven activity, not like we need to hit a certain efficiency cut. And I think he's got 500 things that to do.

Starting point is 00:15:14 I think he got what he wanted out of that. And then he was like, all right, we're done. But I also think structurally was probably impossible to get the trillions of dollars of savings that they were looking for. Like the nothing stopped this train meme is true. And you can see Investant last year when he was articulating his vision for if he was going to be picked, like he had this sort of his version of the three arrows plan, which he was going to target bringing deficits down to 3% of GDP. They're going to pump 3 million more

Starting point is 00:15:37 barrels of oil. And they were going to, I think, target the third was. But he's sort of given up on that. And it was like 3% interest rates 10 year. It's sort of given up on that. And now they're sort of accepting that they need to sort of run the economy hot, that they'll grow their way out of this debt. Then if we just push the accelerator button down and we have a G above R, right? then we can accept essentially a higher inflation rate, but as long as incomes are growing, as long as the allocation of those gains is distributed across society in a way that we're down

Starting point is 00:16:07 to the Republican Party's benefit in 2026, then it's an acceptable outcome, right? I think from their view now, it's like, all right, we're clearly not going to be able to do this austerity program because it's not going to work, especially when you have a system that's so highly lowered to equity prices and federal government spending, you're going to go into a recession.

Starting point is 00:16:22 Yeah. That's what you're going to get. And I think they realize that, And they're like, uh-oh, now they're doing a 180. And now I think this is like where all the deals in the Middle East are. It's like, okay, how can we basically goose the economy? But do it in a way where we control the marginal direction of credit, right? I think Besson originally wanted the banks to become the funding channel for this domestic reinvestment.

Starting point is 00:16:40 I think that's running into a bit of issues now. They haven't done the SLR exemption. And banks don't just take instruction from the White House. So you go to Saudi, you go to Qatar, you go to UAE. The deal is explicit, right? You invest hundreds of billions of dollars into these specific industries. And that's the way, again, of central planning to a certain extent, a strategic allocation of credit into these priorities.

Starting point is 00:17:02 And the fact is where twin deficit country, and you're not going to like flip that on a dime. And so I think they're sort of feeling their way through. I think there was like the Chinese sort of idiom, which is like crossing the river by filling the stones was like Deng Xiaoping's idea. It's like there's no master plan. They have no, I think, real sense of like, which stone is next. I think they're feeling their way across the river here, maybe dunking a leg or two along the way. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:21:45 of control inputs you're trying to provide to get them to run. And they're looking at the timeline and they're saying, well, we need to start making these markets talk or else we're going to have some issues here coming midterms. I guess my very generalized generic outsider take, but yeah. Yeah, and it used to a 12-month rolling correlation, I think, between our trade deficit and our equity markets. Yeah. Yeah, very.

Starting point is 00:22:10 That's the system we have, right? We run a deficit, those dollars go overseas, those dollars run, trip back into our equity markets. Yeah. And what they did now installing a toll booth, where we will install a toll booth, or we're going to be doing soft capital controls now. I think they're shifting way from trying to use tariffs. I think they're still going to have those as like a baseline.

Starting point is 00:22:27 I think they're more likely going to use capital controls in a very kind of marginal way first, kind of make people pay for the privilege of owning U.S. assets. And that's a big bluff because it's like, all right, well, we have some desirable assets. We have desirable real estate. We have a really desirable max of inequities that are dominating certain technology. areas. And we have quote unquote the safe and liquid sovereign debt market and the Treasury security. But of course, a lot of other governments around the world are putting pressure to kind

Starting point is 00:22:53 of repatriate capital, right? To help them out. Everyone's facing bond market issues from Japan to South Korea to the Germans to the French. And they all have the same sort of strategic challenge, which is how to support an aging population, a more risky world where they have to invest more defense, where they all realize that they're going to be behind the technology curve. So they need to make sure they get access to the cutting edge AI chips and this epiconductor supply chain that's like resilient for their own strategic industries. So they're all realizing they need to borrow and spend money. Right. And looking around and being like, hey, pension fund, hey, you know, start a wealth fund. I need you to maybe take some of that out of Navidia or the NASDAQ and pull it home

Starting point is 00:23:30 to invest in German buns or oats. Yeah. And it's like, well, you have to ask nicely or you have to use carrots and sticks. And so everyone's sort of fighting over where the capital flows are going to be reapportioned here. And it's a world where essentially geopolitical and strategic product, and it's not just in the US, but around the world, are now supervening on market dynamics. And it's not like they can just dictate to the market where those capital flows go, but now there's a new kind of strong force that's

Starting point is 00:23:56 more explicit. It was always kind of implicit, right, the kind of monetary dynamics and setting up favorable conditions to pull capital in and out of certain countries. But now the kind of mask is off. And it's like, no, no, no, no, you will invest here. No, no, no, you will do this or else. And it also is kind of country specific. All right.

Starting point is 00:24:11 Let's talk about the Genius Act. This is Stablecoin regulation that went through Congress yesterday. This is a really big deal, I think, for traditional Wall Street banks. But give us your take on all of it, where you think this leads, what this means long term. Lay it on us. Yeah, we passed a critical kind of procedural step in the Senate, and then we're going to be moving shortly to a series of votes. And then ultimately we'll have to be reconciled with a House bill.

Starting point is 00:24:38 And I think the writing on the walls is that it'll whatever passes, to the president's desk will reflect more about what the Senate's thinking here than what the House is thinking, but there's a lot of politics in between now and then. And the upshot is, they had to sort of telegraph this early in the administration, there was going to be a sequence of digital asset legislative priorities. And it was basically stablecoins first, then market structure. There was a bit of debate about whether they should do both at the same time, certain players wanted to put one in front of the other, or merge the two. It settled out, this was the order of operations. Of course, we came into the year being like, Bitcoin, guys, Bitcoin is pretty important. Bitcoin may be the most important part of this whole

Starting point is 00:25:13 industry here. Yeah. Chemical is great. Market structure, great for token holders and VP, sort of VCLPs. But Bitcoin is the thing that floats ever this entire industry here. It's 65% of the total market. So we put on this event in March, trying to raise this deal in so the distribution of Bitcoin Reserve. And so now it's still tentative, but we're trying to bring the SBR codification of the executive order into sort of third place, at least, as like a sequence of operations here. There was a bit of a stumbling block with the Democrats kind of putting on this big show, walking out, and then not voting for the first round for the Genius Act, but they met over the weekend. They squared away all this

Starting point is 00:25:48 differences. It was mostly politics. It was the fact that the world will be financial, which is a Trump family associated. Their crypto fund is going to issue its own stable one part with finance. I think the Democrats wanted to make Haya out of the president's involvement in this industry. Ultimately, I think they settled that out. Now that, that is on a glide path to passing, at least I think That's what the industry read is, which is a good timing because I think actually just today or yesterday, Hong Kong, the Hong Kong Monetary Authority just approved its own Staplecoin framework. Yeah. Right?

Starting point is 00:26:17 To Stable Coins is essentially this pretty flexible regulatory and farmers. So like a lot of countries are now kind of put in place their own regimes here. This is a, from the U.S.'s perspective, a lot of the commentary has been interesting. You know, BPI is written about for years now, which is like there's a strong strategic synergy between Staplecoins and the United States, but also between Bitcoin and Staplecoins and the United States' interests. And it actually was interesting to see a Treasury Barrow Advisory Committee report that was commissioned by the Treasury Department that they produced at the end of April. Very detailed report. I think I've tweeted out some screenshots where they forecast that if the

Starting point is 00:26:50 Genius Act passes, they expect by 2028 the total amount of stable coins in a circulation to be $2 trillion. So right now it's about 240, 250. So 10 X from here. Yeah, exactly. And importantly, they note that that would correspond, given the nature of the balance sheets involved, a trillion in demand for T-bills. Yeah. And it's a total size of T-Bel market is about $6 trillion. Tether alone is like 2.5% of the T-bill market. If they 10x, they're now a quarter of the T-bill market almost.

Starting point is 00:27:17 So now you move from Sablecoins kind of being this interesting, emerging, but somewhat marginal new player in the global monetary system to being like a core pillar of how the government kind of finances itself. And then on the other hand, also dollarizes parts of the world that don't have easy access to hierarchical correspondent banking services in dollar. So it's kind of a win-win. in from their perspective, but it also implies like pretty large movement of Bitcoin, right? I mean, there's probably endogenous demand for dollars itself, but just the historical

Starting point is 00:27:45 correlation between Bitcoin and stablecoins is the higher the dollar price of Bitcoin is, the more stable coins that you need to intermediate Bitcoin transactions in the crypto economy. Yeah. Obviously, there's exchanges where you're using like bank money to buy Bitcoin. There's also lots of exchanges that use stable coins to buy Bitcoin. And so the bigger the size of Bitcoin in Stablecoin terms, the more stable points you have in circulation. And so if you take a conservative sort of back implication of what that forecast, it means that Bitcoin is somewhere between 200 and 300,000. If you take a more aggressive, more optimistic, it's like 6 to 800,000. Just in terms of that, 10x in the total stable coin market. But I think this is being seen by,

Starting point is 00:28:21 it kind of moved up the chain from being blog post being like, yep, crypto dollars, crypto, euro dollars. These are the same thing being like senior senators, the Treasury secretary, all saying like this is in our strategic interest here. It's been memed into reality. I mean, it really has. This was something I remember we started talking about maybe in 2021 as kind of a community as like, hey, like the government you would think would really be interested in this because they don't really have real buyers of any type of long duration treasury issuance. And when I saw Senator Haggerty, I think it was yesterday, went on CNBC and was I think

Starting point is 00:29:00 one of his talking point was stable coin issuers are going to be the biggest buyers of U.S. treasuries in the future. And I think he even maybe put out a date like in the next four years or something like that. I was just watching this clip. And I'm thinking for people that don't know, Senator Haggurdy is intimately involved in all finance matters in Congress. And I remember seeing this. And I was just like, oh my God, this is crazy. This is moving at a pace that I don't think any of us had really anticipated. And like, what does this mean for banks? And the question I have for you, Matt, do you see the traditional Wall Street banks really wanting to play in the stable coin space to issue their own stable coins and start competing with Tether and things like

Starting point is 00:29:42 that? And what does that mean if so? Yes, I mean, this is where there is a deal of a large amount of contention. Obviously, the banks want to get in on the seniorage here, right? Like, Tether's been basically had a monopoly on this offer dollar crypto token senior age where they don't pay interest on the Tether that they create, but they earn a ton of interest on their reserve holdings, right? Mostly short-dated treasury bonds that are four to five percent. So they're just liking that spread of like $13 billion net profit every year, right? And it exists basically only because of regulatory arbitrage, right, in geographic arbitrage. Yeah. And so a lot of people, right, in different positions in both onshore and offshore banks that would love to try

Starting point is 00:30:19 to get in a lot of game. Tether has a lot of network effects. There's a lot of brand trust, has a lot of penetration to the ecosystem. And so it's been very interesting to see how the domestic banks, the typical G-Sibs, decide to issue stable coins because there actually isn't a demand for it onshore, right? Most people have PayPal or Zell or, you know, Venmo to do kind of pretty easy payments. The real kind of demand is offshore, right? And that's mostly where the Treasury Barbar and Advisory Committee sort of forecast the expansion of stable coins, especially because stable coins, if they're properly regulated in reserve, can themselves function as collateral, right, in the offshore system. Whereas right now, like an IOU claim from a bank is not

Starting point is 00:30:58 collateral itself. The underlying Treasury security that the bank or that shadow bank holds to kind of backstop its IOUs, that's the collateral. We've been moving more from an unsecured global dollar system that was using Ybor to a more secure dollar system using SOFER. So they've been trying to push more collateral into the system to make it more of a secured lending shadow banking system. There's still a lot of leverage in there because you can re-hypothecate the Treasury securities. But if you could regulate and have a high amount of institutional trust in stable coins in the global dollar system, you get the point where you actually just need, like the stable coin itself could become the clodder instead the Treasury security. And then you can add to these things merging,

Starting point is 00:31:34 BlackRock's whole business is tokenization, right? When they want to tokenize, and the first sort of tranche of assets they want to tokenize is Treasury securities, right? It's like, all right, we're going to be creating a lot more debt out there. We need to create more demand for it. And the traditional demand and sort of the dealers that intermediate on the run and off the run treasury market, and that has had plumbing issues and there's all sorts of things with central clearing and different repo facilities that they're trying to put in place and SLR relief to make sure the banks can buy more tri-through securities. But you can tokenize that those securities. Then, oh, boom, there's a bunch of other new demand and use cases to use your debt as collateral

Starting point is 00:32:09 in these different use cases. Yeah. That's why the big fight now is over whether you can issue interest-bearing stable coins, which is directly threatening the bank's monopoly, right? It's like the bank's kind of cartel where they're the only ones that get to issue, you know, But I don't get really paid anything on my checking account. I don't know about you, but I get paid nothing, right? Whereas the bank is using that and they're lending out an interest, right? And they're collecting what the collateral that they bought. So like the banking system is basically collecting a big off of the checking deposits.

Starting point is 00:32:38 And to a certain extent, if there was a interest-faring stable coin from a high-trusted, high-regulated entity, I might shift most of my checking deposits out of the bank and just hold the stable coins. Yeah. That should use them just as much. And you see Stripe integrating stable coins. I think you're going to see a lot more kind of traditional things. in tech players get in the stablecoin business. And if you do that, play up, then like a stable

Starting point is 00:32:59 coin in like a PayPal or a cash app wallet is just as useful as like your dollar claims in your Bank of America checking account. And so then you can have a big sucking sound come out of the banking system. And that is really what the banking system does not want, right? Those like the other BPI, the bank policy institutes definitely does not want to have that threatened. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for

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Starting point is 00:36:39 back to the show. Matt, what I find really ironic about this is you have traditional banking. It's all fractional reserve. There's like nothing actually there behind the scenes. They just go and basically tap the Fed to come up with real monetary units to then push in. I'm saying real. They come up with monetary units to push in the thing. And it's a giant Ponzi, the whole way that it's set up.

Starting point is 00:37:03 This is literally the opposite of everything is actually back and collateralized. and interest bearing for anybody that wants to play in this dollar stable coin issuance. What I also find interesting is comparing these two models, you would think that the Ponzi scheme model would be super lucrative, and I mean, it is if you're big enough, if you're JP Morgan, it sure as heck is, but I guess I'm saying it relative to look at Tether. Look at Tether versus BlackRock. They were more profitable than BlackRock, okay? and they're playing a fully collateralized game versus one that is not.

Starting point is 00:37:41 So what I find so ironic about all of this is the banks are now incentivized to become fully collateralized and not play the fractional reserve game. They're all wanting to play in this space because they're looking at the profits that are being realized by a player that is fully collateralized, or at least we suspect they are. Isn't it just ironic? Isn't it just strange how this is all playing out? Yeah, I mean, our banking system has done through a whole bunch of twist and turns in the financial crisis structurally shifted it, right? Obviously, the required reserve ratio is now basically

Starting point is 00:38:16 zero, but we operate on a corridor system managed by the Fed, where the Fed ensures that the banks have sufficient liquidity to backstop themselves under almost any that do all these stress tests, et cetera. They've kind of been moving in this direction anyways. They have to maintain certain amount of collateral to backstop their books. At the end of the day, they're like government in franchises, right? Like they're- You couldn't say it any better, yes. Yeah. And so then this is a question of, okay, how much on the spectrum do you go from that

Starting point is 00:38:42 to like a narrow bank where all you is issue stable coins? You don't do actually, you don't take on any credit risk. Yeah. And you know, you want to have banks exist to take credit risk because you need to have that entrepreneurial engine in the economy. But the banking system has become, and some of the critiques of the banks is they become so tightly regulated because they're more useful to the federal government as like a place to stuff treasury securities.

Starting point is 00:39:05 rather than as a means of ensuring a dynamic economy, it sort of has a sufficient liquidity. And that's why you've seen the rise of private credit, right? The rise of kind of shadow bank like entities, Black Rock, Blackstone, big private equity companies that are now providing private credit, right? And those are shadow banks, right? They're not G-Sibs. They're not regulated like those. There's some regulation, obviously, but it's like nature finds a way.

Starting point is 00:39:29 And so if a Fortune 1,000 company wants to borrow, right, they can go to one of one of these private credit facilities, because Bank of America is like, I don't want to touch you. This is the more of the financial stability risk that's lurking in the system is if you do have a large amount of debt in the private markets that was fine for the last few years because they all refinanced at those really low COVID rates, but they're like usually five-year terms. And so we're kind of coming up on that period where they're going to have to refinance, and they're going to just adjust up several hundred basis points. And a lot of those businesses can't sustain that.

Starting point is 00:40:00 And to me, that's like there's this other pressure to make sure that you can keep short rates down or do other things. Let's talk a little bit about the SBR, the Strategic Bitcoin Reserve, where that's at with respect to just the appetite on the hill, and then also the sovereign wealth fund. And what that means because, I mean, anybody that's been following Howard Lutnik and Cantor knows they're super insanely bullish on Bitcoin. And he's been the guy as the Commerce Secretary that's been charged with the sovereign wealth fund. I would imagine they would take a pretty sizable position in Bitcoin inside the sovereign wealth fund. But I just don't know where it's at with respect to it just being executed and then like acting on all of this. Yes. So there's two pieces. One in one is the executive piece. One is the legislative piece.

Starting point is 00:40:46 The executive piece we got established the executive order back in March. And that executive order created the strategic bankerserve and then laid out kind of this timetable at until 100 days for the president's working group on digital assets to. do a number of things. The most relevant to SBR was instructions to the Commerce and Treasury Secretary to identify, quote, budget neutral ways of requiring additional Bitcoin for the SBR in a manner that didn't pose any marginal taxpayer burden. That policy development, those ideas have been developed and they are being reviewed by Bill Hines and the folks on the president's working group. And they range, I don't know, like all the ideas, I have a sense of what's on the table, though. They range from pretty trivial like couch cushioned money, right? Let's just sell off some of our coins and sweep them into Bitcoin or take maybe obviously the additional holdings that we've seized,

Starting point is 00:41:36 right, that we have clear and final title to move those into the SBR. And all the other end of the spectrum, you have like gold evaluation. Yeah. Yeah. Talk that in detail so people understand like how all that work. That's like that's the big cahuna and that was the idea that we sort of fleshed out last year as like an option for the federal government to acquire Bitcoin without legislative action and without borrowing new money, right? It's the mechanism that's inside the Bitcoin Act, but the upshot is the government has gold certificates that are still marked at the 1973 value. That was sort of when we went off the gold standard, we're like, going to pretend that gold is not a monetary middle anymore. And so we're just going to pretend that gold maintains

Starting point is 00:42:13 it's $42.22 an ounce value, right? So all the gold we have as a federal government is marked on the books at the Fed for the Treasury General account at its 1973 value. And so you, you You could imagine a swap where the Tritius Secretary retires those certificates, creates new certificates, just like an accounting maneuver, values those, like marks those to market, and then goes to the Fed and says, I want you to accept this as collateral for my checking account effectively. And the Fed could say no, but I don't think the Fed would say no. And they already have the legal authority to accept this collateral by law. And so this actually gets around changing the gold price, which you actually have to have a

Starting point is 00:42:49 law to pass to change the official gold price. This, we actually retire the old certificates that are anchored to the 973 value, and then you create new ones that are just valued at the market price. And then you have the Fed except those are collateral and then credit the Treasury General account with the difference. It goes from, let's say, $11 billion value to $850 billion.

Starting point is 00:43:07 Yeah. And that goes from the gold kind of certificate account to the Treasury General account. And now the Trade Secretary now has $800 plus billion dollars of dry powder to spend on whatever he wants. And then we interpreted the Gold Reserve Act. This is getting a bit legalese, but the Gold Reserve Act says, the Trade Secretary may deal in gold, foreign exchange,

Starting point is 00:43:26 or other instruments of credit insecurities. And it's not gold, Bitcoin's not gold. It's not foreign currency, right? By the definition of the statute, even if it's used as legal tender, it's not considered foreign currency. But you can structure a transaction, say an overnight note that is denominated in dollars,

Starting point is 00:43:41 but redeemed in Bitcoin as an other instrument of credit insecurity. And so if you wanted to, there's a will as a way for the federal government right now, do this swap and use some portion of the $800 billion dollars to per dollar. purchase Bitcoin. They could also use a portion of it to defray future debt issuance, to seed the sovereign wealth fund for any government expenditure, basically. And so that's an idea we put on the

Starting point is 00:44:02 table. We've been talking lots of folks in Congress about it. There's certain executive actions that you could do that execute it independently. But ideally, right, you'd want to have legislative authorization to make it endure past one administration. And so it's both ends, right? Like, the administration should pursue the most aggressive path, acquire as much Bitcoin as possible in a prudent fashion. but we should also codify that program, the SBR in law. So that's the sort of two pincer movements here. One is on the executive side. Make sure that they're aware of this as an option.

Starting point is 00:44:32 This checks a lot of different boxes for them. But then also educate members of Congress that like this also checks a lot of boxes and also as a matter of strategic urgency. The president has stated how publicly in the executive order that this is a strategic finance supply asset that's digital goal for the 21st century. And Bo Heins has said we want to acquire as much as we can. Yeah. And then Trumpters goes to the Middle East and is basically telling people, hey, we're

Starting point is 00:44:56 going to run the economy hot. Treasury bondholders are going to get hosed. We're going to have a special deal for our friends in Saudi, Qatar, the Emirates. We're going to let them get equity, right, and access to these frontier GPUs. And so the treasury market ultimately is going to get hosed here, but we have other strategic priorities. And that means hard assets are going to run. Yeah.

Starting point is 00:45:14 I mean, it's going to run. We've scared gold on shore with the tariff threat on mostly London gold, and we emptied that into New York vaults. And so if I'm like a master planner here, I'm like, you scale the market, but you bring gold on shore, you then do this accounting maneuver where you do this sort of certificate swap. The higher the gold prices, the more kind of like essentially extra reserves, you just get to like invent on the government balance sheet. Yeah, you just print it. You just like, this is the value now that collateral is worth. Treasury Secretary now can spend it on something. And then global run, obviously. But if I was advising them, I, I'd,

Starting point is 00:45:50 I would say, well, listen, China has a lot of gold, Russia has a lot of gold, India has a lot of gold, basically a lot of the bricks in the Middle East has a lot of gold. We probably have about 8 to 10% of the above ground gold stock. River just did a great analysis where we have roughly 30 to 40% of all the available Bitcoin. So we'd at least a three to four to one, like asymmetric advantage from seeing Bitcoin monetize relative to gold in a world system that's going to be fragmenting where these hard assets are going to run. And we know that Bitcoin is going to run much faster than gold. This is the play you're committing to it. I love this frame. I love this framing.

Starting point is 00:46:21 Yeah. Then we can sort of, I wouldn't think we rug gold, but like you can sort of do both. And then we have this extra bit of octane in our tank. And I think maybe the market sniffing something like this out could be just general market sentiment shifting. But I suspect the US government's going to acquire a meaningful position in Bitcoin soon. So you're saying the definition of when is soon. Without legislative action.

Starting point is 00:46:45 Without legislative action. Okay. I think again, this is all just like finger in the air. Right. I think the market hasn't fully priced in my probability of that happening. Yeah. Right. Nothing's a guarantee. But I'd say my assessment situation is that is the probability that I have in my head is not the market's probability. What do you think the probability on them doing this with the gold is? And I also want to just kind of footstomp for folks that are hearing all of this and they're saying, but yeah, where does the $840 billion come from? Listen, they just print it. They do. They take the, his clock on some keys. They literally just.

Starting point is 00:47:20 print it. They put it in the Treasury General account, and that's the end of it. And then they can do whatever they want with the $840 billion that they just print it. That is simply as I can say it to you. And they're doing this by everything that Matt just said, legally, that's how they're going about this with the certificates. And then what they do with the 840 after it hits the account after they just clacked on the keys and made it, that's up for debate in how they're going to do it. It seems like I hadn't heard the comment that they could take a significant amount of that and seed the sovereign wealth fund. I hadn't heard that talking point, which would give them a ton of flexibility because

Starting point is 00:47:55 Lutnik is working directly underneath the president. That's where it falls. The concern, I think, is that easy come, easy go, you get a new administration in there and they could immediately liquidate it and sell it just as fast as they bought it and put it in there, where the SPR seems like it's much more long-term hold and something that is being overseen by all the members of Congress and would be a lot more. difficult to do. Yeah, go ahead. No, the Sarm Ruff Fund, it's interesting. There was also an executive order putting that on the table

Starting point is 00:48:24 instructing Lutnik to develop ideas. Although Trump down in the Middle East, sort of poured cold water on the idea of a Sarm world fund. He sort of said he wanted to handle the debt first. So I don't know if there's some behind the scenes issues with that. Maybe it's politics there where the Treasury Department didn't want. I mean, you can imagine like Besson doesn't want a sovereign wealth fund that's managed by Lutnik. He just doesn't want that. Right. That's a whole new power base that's independent of him. Yeah. That potentially drinks his milkshake, right, when it comes to these sorts of discretionary funds.

Starting point is 00:48:55 And so there's maybe a bit of personal rivalry there. Well, he was supposed to be the Treasury Secretary, remember? Yeah. And also, like, the deals that they're setting up here, like the Saudi was very, very important. That was a strategic pivot there because we basically said, we're not doing regime change anymore. We're not nation building anymore. We're here to do this deals in squash beef.

Starting point is 00:49:15 Right. Right. Yeah. Trump wants to squash the Eurasian peripheries collective beef. That's easier said than done, but that's like their high level foreign policy is to squash beef in Eastern Europe, squash the beef Israel, Gaza, squash the beef, Saudi, Iran, squashed the beef, Pakistan, India, squash the beef, and on the North Korea. Yeah, right?

Starting point is 00:49:33 Like, that's their objective, squash the beef and do business deals. And a lot of those business deals center around domestic investment, meaning hundreds of billions of dollars, trillions of dollars investment in these strategic technology areas, which are extremely capital intensive, mostly AI and energy. This is a bit, you know, left to feel. But I think everyone at the national leadership level is getting increasingly AGI-I-pilled, meaning they're increasingly coming under the belief that AGI, or official general intelligence will be a thing.

Starting point is 00:50:00 How do you define that, it will become economically and strategically significant, like in two to four years. And so this is now like a first-order function of these decisions that are being made for capital and for trade and for security deals. And the Sysabwealth Fund was an idea. The idea that would allow the OS government to kind of essentially leverage private capital with some public capital to do that strategic investment. And the idea was they would collect a lot of revenues from tariffs that could be funneled into that. But they're not really collecting much revenue from tariffs.

Starting point is 00:50:26 Right. Clearly, those are, they shift away from tariffs as being an actual financing mechanism. And it's more just like a negotiating tactic. So there can't be that many like new revenues coming in that will just be easily pushed into the Estabult Fund unless you do this gold evaluation trick. But the Treasury Department then has no incentive to like give any of that. up to some other down sheet at the government level, right? Especially when Besson says, oh, this is necessary to maintain stability at the long end. And then maybe they'll use it to finance some Bitcoin purchases.

Starting point is 00:50:54 So I'm like bearish on the several fund right now as an idea. It could reemerge. But I think a lot of these are going to be like direct investment deals. Even though you had the executive order, you're saying that. So create it, but it might be more of like a fig leaf, right, like a few billion dollars or something. Oh, wow. Okay. They already have like the defense department already has an office of strategic capital, which

Starting point is 00:51:13 to a certain extent is a sovereign wealth fund. We just don't call it that. Yeah. And it's not tens of billions. It's in the billions of dollars, but it has relationships and uses private equity and venture capital firms to sort of leverage up. Right. So they have a billion dollars of DoD capital.

Starting point is 00:51:29 They put that into a structure with some multiple of that of private capital. They strongly influence where those investments go. Yeah. Right. And AI into quantum, into fusion, into whatever. And so that's basically the same thing that's our wealth fund would do. I think about this from the perspective of political economy inside the U.S. Like, depending on has its priorities, pressure has its priorities, Lutnik wants to just take

Starting point is 00:51:51 on this thing and could mess with these other priorities here. I'm having a call next week, two weeks with Australian Sarmwell Fund. And yeah, it's very much like top of mind these structural shifts here. And we're trying to steer that capital into the U.S. And so you can have a Sarm World Fund at the top, but that's very expensive. And if it like takes losses, right? It's kind of politically, it looks weird. So I don't know.

Starting point is 00:52:14 I'm not as bullish on the Starmole Fund as I am on the SBR. But the SBR does require a lot of political education, right? Like, we came into the year in SBR, legislative priority was like not even on the radar. And now we're trying to make sure that it's at least number three. Wow. And we're making the argument that it shouldn't be like next. Right? To a certain extent, after we get stable coins off the deck, this is going to be the market

Starting point is 00:52:35 structure bill and then the SBR. And right now, kind of like the 9. naive default is obviously market structure comes first than the SPR. And our argument, I was telling you who will listen has been, the N.PR is much simpler, right, has much more consensus across the industry, is actually aligned not just with the industry's collective interests, but the U.S. government's strategic policy, right? And it's much more matter of urgency that we acquire a meaningful position in Bitcoin

Starting point is 00:52:59 before the Saudis, the Emirates, and the Chinese, et cetera. That's where, Matt, this is where I'm at is, if you're right, about the U.S. is going to start buying Bitcoin soon. I just can't imagine the second and third and fourth order effects that are going to pop out all over the world that feel like they've got to be doing the same thing and that will start doing the same thing. Just look at it from a state standpoint. You now have states passing legislation to have their own strategic Bitcoin reserve and what that's going to do. I mean, I'll tell you, like, I know somebody that was in Hong Kong recently and they had meetings with senior officials from the Hong Kong government.

Starting point is 00:53:37 And these officials were very interested in the SBR and were familiar to a lot of that most folks that I talked to in the crypto policy world inside DC, we're not even familiar with with these, the whole thing I went through the gold certificate. Yeah, yeah. That like even people in Bitcoin, even people in crypto policy kind of go like, wait, what? How does that work? Well, these folks did Christians in Hong Kong were very red up on those mechanisms.

Starting point is 00:54:01 They were very closely tracking it, right? And I know there's also mainland attention being paid to these moves here. You have, the Hong Kong is kind of the sandbox for the mainland on all the crypto stuff, but they have an in-kind ETF already. They have large family offices with heavy bags. China has obviously took an anti-Bitcoin stance in 2021. They picked out all the miners, et cetera. But there's always been stuff happening behind the scenes there.

Starting point is 00:54:25 And I think they're now reassessing at a high-level policy. There's always like seven levels for these sorts of policies to get reviewed before the big bosses make a decision. But that's happening. And then the Middle East is like, Sheikh Dukh Noon, meeting with David Sack, he controls a whole empire of sub wealth funds that have already publicly disclosed their own significant Bitcoin ETF holdings. And so if they have half a billion dollars worth of Bitcoin just sort of on one of the more visible balance sheets, guarantee you they have multiples of that on non-visible balance sheets. I know Qatar's been mining Bitcoin. I'd say we haven't reached that state of the domino's tipping over yet. I know some folks

Starting point is 00:55:01 actually, well. Does that happen? I mean, well, to me, really interesting. In fact, there's a guy that I know is me flying to Middle East next week and will be discussing this exact topic with them. And I'm curious to hear what he comes back with in terms of a read, right, of situation, especially post this, you know, this big Middle Eastern visit where I'm sure there were lots of conversations like about, I was the AI was the headline dominating thing. But I don't think Bitcoin is not on the agenda. And then separately, we have conversations inside, quote, the bowels of DC, Defense Department, intelligence community, and these gears are clicking into place here, where the strategic sense of what Bitcoin represents and the shifts that could be

Starting point is 00:55:41 in motion that you're either riding that wave or you're getting run over by it. And so I don't think we've reached like the critical mass where everything starts to fall, but we're not that far away, I think, from that happening. And there's reflexivity here. A lot of BPI's job is like encouraging that reflexivity. Matt, I could talk to you all day. We need to do more of of these sessions. There's so much happening up in D.C. And there's nobody better to cover it than you. So thank you so much for making time. Tell people about this BTC policy summit that you guys have going on. And anything else that you want to highlight with the BPI. Yeah, no, I will famously chill our flagship event every year. We did this kind of pop-up event last minute that was really successful called Bitcoin for America in March.

Starting point is 00:56:23 And we brought some really interesting people to the table. We're going to sort of double down on that. This is basically an event designed to set the tactical agenda for America's Bitcoin strategy that has now been declared, but how do we operationalize that? And so this is a summit not meant to be like a bunch of jibber jabber conference panel sessions, but like policy presentations by and for senior government officials and sort of the policy ecosystem inside DC. The first policy summit we did was basically like a month after the FTX collapse. And its whole ethos was like, Bitcoin is still here.

Starting point is 00:56:56 Bitcoin is not that. Bitcoin is a serious thing, like, please pay attention to it. Just kind of like holding the line. The second year, we did it last year was like, okay, Bitcoin survived. Now what does it mean for the global system? And we're talking about geopolitics, human rights, energy, environment, etc. This year is like, the government has decided to be pro-Bitcoin. What does that mean?

Starting point is 00:57:16 How to catch that rhetorical check? And let's think about this from a whole different advantage point of the geopolitical significance of the moment. And so that's going to be in D.C. You can go to BTC PolicySummit.org. If you use code statecraft, you can get a free ticket. That code might not last that much longer. But for the loyal listeners of Preston's podcast, get in on the special deal if you listen to me,

Starting point is 00:57:37 Steve, for the last hour, you know, your reward is a free ticket. And we're going to be doing a full day of these, like, very tactical presentations. We're going to have multiple numbers of Congress, Senate, House. We're going to have White House senior officials to speak. We're going to have the SEC commissioner. We're going to have an individual that I think people will be surprised to see a present. we haven't announced yet. And yeah, so I think it'll be a pretty cool event in D.C. We're going to have a number of other kind of like parties and events that week as well,

Starting point is 00:58:01 and a day on the hill the following day. Was the dates again? June 25th. June 25th is the summit. And then June 26th is the day on the hill where we're going to organize and bring Bitcoiners to sort of flood the zone on Capitol Hill and make sure they're aware of just how vocal and significant Bitcoin is from their constituents. So we're all systems go.

Starting point is 00:58:20 We're expecting a pretty significant turnout. out. So if you are in D.C. or you want to come in the D.C., I would recommend getting a ticket now. Amazing. Okay. We'll have a link to this in the show notes. Don't forget the discount code. That's pretty awesome. And Matt, thank you so much for coming on. I love the chat. Learned a ton. So thank you, sir. Thanks for having me. Thank you for listening to TIP. Make sure to follow Bitcoin Fundamentals on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to the investorspodcast.com.

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