We Study Billionaires - The Investor’s Podcast Network - BTC247: Bitcoin's evolution with Traditional Finance w/ Jon Melton (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. Do you guys remember all the drama with FTX and how numerous traditional banks went under during this period of time, which was the start of this whole choke point to auto, which was debanking everyone in the Bitcoin and Crypto space? Well, today's guest, John Melton, had a front row seat at Silvergate Bank. During our conversation, he explains how this entire thing went down, what the solvency actually was at the bank and how the company was forced to liquidate despite still being very solvent and actually having solid operations. This episode also gets into a broad range of topics, which is why I titled it Bitcoin's Evolution with Traditional Finance. And I think the historical context and lessons

Starting point is 00:00:46 are a great place for many people to study and understand. There's no better teacher than John to tell these stories and the lessons. And with that, I hope you guys enjoy this fun conversation. 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've got John Melton here with me.

Starting point is 00:01:22 And we're going to cover a whole host of topics here. And you've got a lot of experience in finance and the Bitcoin space. And we're going to get into some really interesting topics. So, John, welcome to the show. Thanks so much, Preston. I'm looking forward to it. And I appreciate you having me. So I want to start off just kind of.

Starting point is 00:01:38 covering where you have a lot of experience, which is in currency markets, working at Morgan Stanley for like 13 years before you even came into Bitcoin. I guess my question for you in that, because I've never really had conversations on the show with people with that experience. I'm just kind of curious, what is that like? What's the day to day? If you were going to describe it to like a family member, what's that experience in currency trading like? Well, based to the question. And it's really an interesting multidisciplinary area, which I prime me a little bit for Bitcoin in terms of macro. So it's changed a lot over time as markets have become more electronified. But sometimes it can be a pretty almost kinetic environment in terms of

Starting point is 00:02:20 trading activity. But at other times, you know, it's a little bit more cerebral in terms of structuring when you think about derivatives and options and how do you create a hedge for a client. But on a real-time basis, you really have to be abreast of central bank policy, what's going on in different countries. You're not just looking at the currency market. You're just in the commodities market and equities and risk sediment. So it's a mix of having a conversation about markets all day long, but really intense focus on execution and help clients. I don't remember what interview or when I heard this, but I do remember Stanley Drucken Miller

Starting point is 00:02:53 talking about how currencies move in like these seven year kind of three to seven year cycles. And I would imagine a lot of the job is just you got a client. they have some type of exposure through a commodity or whatever in said country, and they then have the currency exposure there as well. And you're just trying to cover that with some type of derivative if it's being sent here back to the U.S. or whatever to make sure that that's offset. And it's almost looked at like an insurance policy to make sure that you don't have any type of risk there. Is that really how most people in the currency space think about it or are using it an application as opposed to just people speculating on the direction that it's going to go.

Starting point is 00:03:37 Yeah, I think there's a lot of both. And, you know, sort of which first item that you described, I would consider more a real money application or a risk management tool where you have a structural flow. You're an importer, but you're based in one country. So you've got to send euros every month somewhere. And you know you're going to be new of that for months on end, but the euro keeps on going up because Trump's hammering the dollar because we're trying to get exports going here. That's something you might want to hedge and there's different ways you can do it. But it's also a super liquid, very deep market with a lot of leverage embedded in it. So a guy like Stanley Druckeneller, who's a very opportunistic global macro-oriented investor,

Starting point is 00:04:16 could find it a really interesting and convenient way to express a more macro view with a multi-year time horizon just because there's so much levers with the way things are charged. You can kind of get a specific sort of payout or exposure you're looking for. Yeah. So you did this for many years, over a decade. And in 2018, you told me that you had this no turning back moment where you came into the Bitcoin space and really just felt like you had to do something in this space. Walk us through what was that?

Starting point is 00:04:51 Sure. Yeah. Just tell us the story. Yeah. So in September of 2017, I think Bitcoin was $4,000 or $5,000. But it was the year where I went from $1,000 at the start of the year. I had no idea of existed. And then it got up to 19 or 20,000 that year.

Starting point is 00:05:06 And it's intemperate that year. So I was working at Morgan Staley. And in the midst of this big run up in Bitcoin, they had an event focused on crypto. So they had, I remember Joey Krub was there. Ted Rogers from Zappa, which at the time was probably the biggest Bitcoin custodian of the world, also gave a talk. And that really resonated. And he essentially gave the very well-known Winston-Casaurus framing of Bitcoin as

Starting point is 00:05:30 the best money that humans have ever come across, or in this case, you know, engineered. And as somebody who had been sort of grounded in macro investing, that was really, really interesting to me. So I went home and listened to a lot of Andreas, listened to everything I could find from Wentzis, read every blog post from Zappo, and ultimately quit my job about nine months later in May of 2018 and joined the institutional team at Zappo, where I marketed custody and in trading, but essentially Bitcoin, to institutional investors. So some of the largest college endowments in the country, hedge funds, high net worth folks.

Starting point is 00:06:10 And it was a really interesting time, just given what was going on in terms of forts and a bad bear market. But to your question, it was absolutely the calculation that if Bitcoin is for real, and it's a once in a 5,000 year opportunity, and I have the opportunity to join a great company with somebody like Ted, who I respected immensely, I would kick myself. stuff, but all worked out. So yeah, I just left. You mentioned this name Wences Casaris. And for people that I think are casual observers of the space, they may not know who Wences is. For people that have been in the space, they know he's a very big deal. And somebody that,

Starting point is 00:06:47 for instance, it's my understanding that he's the one that Orange Pilled Bill Miller back in 2015, you know, is a very high net worth individual and has had a massive impact on the space. You've worked with Wences. Tell us a little bit of his background for the general audience. Just tell them who he is, like what he's built, how he became who he is, and then what key role he kind of plays in the space, and then we'll go from there. Sure. So, Lexus, I think I would agree with, as you said, some of the people have been here really

Starting point is 00:07:15 early on in class of 2017. So everybody feels like they're late. There was a lot of history before 17. But a lot of people are coming into Bitcoin, obviously, all the time. And I do think that Wences is one of the most important figures in the history. the history of Bitcoin because of what he built and also for the credibility that he brought to the space. So went to his background. This is a very talented entrepreneur, you know, founding a company called Patagon in Argentina, which, you know, has been described with the E-Trade of

Starting point is 00:07:45 South America. Previous to that, he had the first internet service provider in Argentina. So somebody that was around and saw the birth and participated in birth of the internet. And because of his personal background in Argentina. It's a very different economy, obviously, than the United States, where we take things like a stable and free currency for granted, really had a deep appreciation for what Bitcoin could mean for the world. And I think most specifically for folks in emerging markets. And that stuck with me. I remember sitting in meetings at Zappo and sharing with folks my view that I think Bitcoin for the first time allowed everybody in the whole planet access to a GEO D7 currency. Whereas if you had been to Morocco before and he wanted Swiss francs, that was

Starting point is 00:08:32 really hard. But everybody could get Bitcoin. But back with the went to this, ultimately, he found Bitcoin went deep down the rabbit hole. And with his knowledge of financial markets and technology, brought a lot of credibility, but importantly, he built what at the time was and continues to be an incredibly secure custody solution far ahead of its time called Zappo, with multi-sit, multi-continent, dispersed keys, a really next level custody solution that was very safe that folks, I think, would even have a hard time thinking about. What timeline for it? What timeline was this that Zappos came up?

Starting point is 00:09:08 2000, I believe it sounded at 2013. 13. Okay. And the way I think of it is the network of people that once this in Zappo was connecting with, he really lowered the barriers. So if you heard about Bitcoin, you thought it was interesting. Your next question is, well, if I want to buy it, where am I going to store it? I don't want to keep it on a thumb drive under my self-custinies is an important aspect of Bitcoin.

Starting point is 00:09:30 But for some of those early institutional type investors, like you mentioned, Bill Miller, or the famous Lake Mason Money Manager, trusting Wednesdays and Zappa to hold their keys was a really big benefit for Bitcoin early on. Yeah. Okay. You also have this interesting background where you were at Silvergate. And for people that experienced this last bare market, they know that Silvergate was like right front and center of that bare market got very political. There was a whole lot to unravel here. I've never covered this on the show, and I would love to get into as much detail as you're

Starting point is 00:10:06 willing to talk about. But I think this is a really core and important point is that Silvergate was instrumental in Coinbase, Cracken Circle, having liquidity 24-7 that was never there prior to them kind of coming into the scene. And I'm more curious for you to kind of give us the story of Silvergate, kind of the founding of it, how it kind of found itself in the space of the founding of that in Bitcoin and specifically. And then maybe some of the story of like what went down as far as there during the bear market. Yeah. Go ahead. Absolutely. So Silvergate was for a time a small commercial bank in San Diego. It was down to it in 1988. And And the CEO really the visionary behind the Bitcoin and ultimately did the asset strategy at Silvergate

Starting point is 00:11:00 as a gentleman named Alan Lane, who joined Silvergate in 2008 or 2009. And at that time, Silvergate had sidesteped a lot of the pitfalls of the great financial crisis, that it had a clean balance sheet, and Alan was brought into, you know, help the bank with his next chapter. If you fast forward to around 2013, Alan is a very tech curious, non-true. traditional banker who came across Bitcoin and said, Bitcoin is a way to be your own bank, and I run a bank, I should look into that. So we did as curious people do. And at that time, it was only Bitcoin, and there were only a handful of name brand companies

Starting point is 00:11:37 that it raised serious venture money, like Zappo, Genesis, Coinbase, just some of like their early sort of first generation service providers. However, it's hard to contemplate now with names like JP Morgan and BlackRock and Fidelity. These companies had a hard time getting a bank account. And bank accounts are your access to the Fed and to the wire system. And the other side of Bitcoin, if you want any liquidity out of it, if you want any productive uses, you need to get access to dollars. And the credit bar comes later, but early on, it was simply, can we provide an operating

Starting point is 00:12:11 account to these first generation companies, which was interesting as a banker in terms of a source of deposit. Yeah. the first chapter. After it went along for a few years and they had gotten regulators and educated the Fed on Bitcoin and kind of brought everybody up to speed, got a little bit more involved in terms of what problems can we solve. And Bitcoin trades 24-7, but the Fedwire system does not trade 24-7. So because Silvergate ultimately had a critical mass of digital asset clients, they connected the pipes and created a system called the Silvergate Exchange Network,

Starting point is 00:12:47 where participants could facilitate trading 24-7. And I think this was really, you know, as flawed as the Fiat system is, it's really important to have access to Fiat system for Bitcoin to progress and to mature and to go from being a $10 billion to $100 billion to trillion dollar asset. So the SEND was very successful, ultimately transferred over a trillion dollars of value.

Starting point is 00:13:10 So we gave it public in 2019. The ecosystem was growing up. Fidelity came in in 1718, intercontinental exchange. It was just growing up. And ultimately, Silvergate had 1,600 digital asset clients. It had the industry. And it had gone from, can we raise deposits from this niche industry to we can be a better

Starting point is 00:13:31 bank for these clients if we slowly focus on this strategy. So ultimately, the whole deposit base was digital asset clients. It was a very liquid balance sheet. And we had, when I got there in 2020, it was just the start of scaling up a Bitcoin collateralized lending strategy. Only against Bitcoin, all over collateralized, never realized any loss. But that was sort of the next chapter of the Silvergate strategy when I got there. So late 2020, think about Tesla, Sailor, like these material allocations from the space

Starting point is 00:14:08 that continues to mature. Yeah. The Bitcoin back lending business takes off as well. We ultimately had a billion and a half dollars of commitments. We did multiple $100 million deals with Marathon, a large facility, a large loan to micro strategy. It was a great business. FDX, Luna, 2020 was a very interesting timeline from Luna in May to FTX in November. And there were widespread fears throughout the industry and the price obviously performed very poorly.

Starting point is 00:14:39 Yeah. There was a run on multiple banks because Silvergate was so liquid in terms of its high quality securities and pretty low duration of securities on its balance sheet, it survived the biggest bank run in recent memory. I think Continental Illinois had a 40-ish percent drawdown in 84 and Silvergate was far greater than that. Ultimately, in early 2023, Silvergate made the decision to voluntarily wind down, which is, as I understand it, very rare in banking and completely different.

Starting point is 00:15:09 from receivership where the executives are replaced and the bank assets are sold. The Silver Cape ultimately gave all the money back to depositors and, you know, been in the process of an orally wind down. Subsequent to that, but in very close proximity in terms of a timeline, the bank term funding program was put in place. So there was a amnesty and lifeline to the banking community only realized after, you know, distressed of the banks that serve the digital asset that community. We're going to get into that. There's a lot there, but that's sort of the arc of this. No, that was from infancy to maturity.

Starting point is 00:15:46 That was amazing. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history.

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Starting point is 00:20:00 now that you have fed now or fed wire that's like basically processing wires within an hour now, do you think that what you guys stood up there at Silvergate was inspirational to the Fed realizing that they're going to have to start processing wires a lot faster and that the liquidity really needs to be there? What do you think was the impetus for this change? You know, knowing how slow government moved, I wouldn't be surprised that this is something that they've been thinking about for a long time and it just took them 25 years to do something about it. At the same time, it's absolutely certain that Silvergate pushed the baking envelope. I know that on the credit side, we were far ahead of other bankers and, I think, put pressure on

Starting point is 00:20:41 others to get into Bitcoin collateralized lending in the last cycle. And it wouldn't surprise me at all if, you know, sort of the business that we were doing and the technology that the team at Silvergate put together was a bit of a blueprint for others in the market. But, you know, for upstate the Fed. Yeah. You had made the comment that you guys have short duration fixed income on the books, on the balance sheet of Silvergate, and that's why you were in a better position than a lot of others like Silicon Valley Bank that had a bunch of long duration. And that was the whole reason that they blew up. When we're looking at that scenario and you're looking at this idea that it just wound down, I think everybody looking at this from the outside end is like kind of raising an eyebrow saying, come on. Like, why was this bank wound down? It seemed like it was politically motivated or that there was almost like a political threat that that's what was going to happen because of how involved they were in this crypto economy. Do you seem like you might not be able to comment, but I'm kind of curious if you have an opinion on that. Yeah, I think from a financial perspective, and I'll get to your question, but you mentioned in terms of high quality

Starting point is 00:21:46 low duration assets. Yeah. It's important to note as well. I mentioned a billion and a half dollar loan book by commitment. We had an extremely low loan to deposit ratio. So in addition to not being the business of extending 30-year residential mortgages. Yeah. We had a book of highly over-collateralized, short-term, generally one year, sometimes a few years. But our Bitcoin Back loan book was a very small portion of our balance sheet. It was very low duration all over collateralized, super safe.

Starting point is 00:22:14 The rest of it was high-quality securities that we could pledge as banks do for liquidity that three years in duration. It was an extremely conservative boundary. And why was that? is because the CEO Alan Lane, who's a bitcoiner, and has seen this asset grow up and seen the industry grow up, knew that with the inflows and the volatility in the market, you had to be extremely liquid. So it was purpose-built for volatility. Your question about politically motivated and what's come to light, I'm very grateful that Nick Carter has done some excellent

Starting point is 00:22:46 reporting on this. Yes, he has. Because of bankruptcy proceedings and things that have come to light, there's a Wall Street Journal op-ed by our former chairman, Mike Lepra's. It's Silver is another industry that are in ultimately is clear, you know, to those in the industry, that the regulators are not comfortable with above a certain threshold of concentration to this industry. So I mentioned insurgating on from, let's try to banks of these companies to this is a real industry. We can build a business and serve these clients better if we just focus on them. Yeah. So even though regulators as a Fed regulated bank are meeting with you on an ongoing basis. Again, I'm not in all those, certainly not in all those meetings, but I do think that

Starting point is 00:23:27 there's a sense in the market that allowing a bank totally focused on digital assets one day, and then quickly saying, we're not okay with the business model that has existed with consultation with them. That was the decision. We couldn't run the business model any further at a high level. Yeah. Like I said, like there was all the cash was just given back to the possible. Yeah. And this industry still need banks. Yeah, Nick did a fantastic job covering this. We'll find the articles that you're referencing and have them in the show notes so people can read up on it. But it's really quite fascinating. This Silvergate was such an instrumental player there, especially in this timeline that we're talking about in particular for getting liquidity,

Starting point is 00:24:09 getting access to traditional fiat rails that would touch the Bitcoin rails. And yeah, what an interesting historical place to work and kind of see that all unfold. You had mentioned this idea of borrowing and lending and being over collateralized and that's exactly what you're doing with Unchained now. Let's talk about this a little bit because I think this is something that I'm super passionate about because there's been so much pain, so much pain in this space with borrowing and lending and people thinking that they're over collateralized only to find out that they aren't because they're dealing with, you know, a centralized entity that's commingling funds and some of them are over collateralized. The other ones aren't. So do this for us,

Starting point is 00:24:55 John. Just give us a borrowing and lending 101 over collateralization. What does that even mean? Why it's important, like really kind of just lay it out there for folks and maybe even throw out, like, what are some things that should make you be like almost like a red flag was just raised? like pay attention, you're about to be bamboozled if people would hear certain things. Yeah, and it's an important situation because Bitcoin is this financial asset, and we equated with other sorts of services that we get in the world of Fiat. So everybody's familiar with interest on your dollars in a bank account if you're lucky enough to find it, or just returns on your portfolio or borrowing against your house. But if Bitcoin is a still maturing industry,

Starting point is 00:25:41 you know, you really just, you do have to be careful and you have to diligence, who you're working with in the sorts of transactions that you're involved. So the only business that we did it at Silvergate and then we actually do it on chain is the most conservative style of lending. We lend dollars over collateralized by Bitcoin. And all that means is that if you're looking for a $200,000 loan, then you have to post $400,000 in Bitcoin. So if you think about that in another more familiar asset like your house, it's the same thing as, Legend your $400,000 house and getting a $200,000 mortgage against it. No bank is going to give you more money than the asset that you pledge. So that's the structure, lending dollars backed by Bitcoin.

Starting point is 00:26:27 I'll tell you why it's an appealing strategy for some. A lot of Bitcoiners ultimately come to the view that Bitcoin is the right investment. And it might not be a 10% allocation. It might be a 50 or a 60 or a more percent allocation or portfolio. And they believe that it still has. years and years of a really attractive cater, compound annual growth rate, maybe it's going to 10x. I listen to your show at Jeff Booth and Hoddle. Those guys are really smart, but they also have a long-term constructive outlook that a lot of Bitcoiners do. But we've all got to live in the fiat world. So, as I said, there's only two ways to get liquidity. You can sell it for dollars, pay taxes on it, totally fine. You can also borrow against it. And that has the value of

Starting point is 00:27:10 you maintain access to your collateral. It can grow over time. sort of do the work for you if you're conservative and careful with your risk management. Now, he mentioned sort of, what should you watch out for? It's really important for us and Unchained to deliver transparency and note re-hypothication or re-plegic. These are technical terms, but they're really, really important. And I think it might be helpful to kind of like break it down by degrees in terms of what is re-ipotification. And a high-level re-hypublication is you're giving your lender Bitcoin Collateral and they take your Bitcoin Collateral and give it to somebody else. It Unchained, we have a policy in the strictest sense of never giving your Bitcoin to anybody else

Starting point is 00:27:54 or another party. We use multi-sig, which is a native part of the Bitcoin protocol, and all collateral is held in a two of three multi-sid both. Our borrowers have a private key. They participate in the creation of the collateral address. They can verify that their key is tied to that address. And once they send the Bitcoin there, they can monitor it and make sure that that address still holds their Bitcoin collateral. Shrits no reaff application. You may hear others in the lending market and the Bitcoin back lending market talk about funding partners or they'll take your Bitcoin and your Bitcoin will be with a partner and they might even say things like drawing liquidity against that. I would call that soft reaff application. We're all non-banked

Starting point is 00:28:39 Lenders. Say the term again. What was the term that you just said? I would call it as my own term. I would call it soft re-hypothication. Okay. And what would the people normally say when it's a soft re-hypothication? Your Bitcoin will be with a partner. Okay. There you go. So like, and this is important because unless you're a bank, you're not lending out deposits. You're what's called a non-bank lender. Yeah. And I can kind of like explain, you know, what that means. But it's highest level, all it means is that you need to go raise capital to facilitate your loan. We have capital partners and funding partners. The difference is they don't hold your Bitcoin. Some of them would like to hold your Bitcoin. They might give us a lower rate if we gave them your Bitcoin. But that's something, and again, it's not a pernicious,

Starting point is 00:29:23 it's just something that you have to be careful. If your Bitcoin is pledged with somebody other than the person you're getting a loan from, maybe it's a credit fund, maybe it's an asset manager. You should diligence and understand who that party is, what the custody technology, is where your Bitcoin is sitting. It just makes it more complex. Well, I think that your point on the yield is because you're dealing with higher risk or they're dealing with higher risk because you got such strong custody of your coins and they don't have 100% assurance that they're going to be able to get it back because you still got control of the key there. And therefore, you're going to pay a different rate where you're going to, yeah, on the Bitcoin that you're depositing.

Starting point is 00:30:04 you're going to pay a higher rate than if you are doing it this other way where they're basically holding the keys. So that seems to be a really important, like, footstomp kind of thing for people to think about when they're looking at the spectrum of interest payments and why some are higher than others, right? That's absolutely valid. And that if you're three types of free application, shirk no re-hyp identification, your Bitcoin's on the blockchain. It doesn't go to a lender or a partner. the second one where somebody's pledging it to somebody say, it's not going to move.

Starting point is 00:30:37 They just need to pledge it to get the capital or to get a better rate, but it's still with somebody else. You have to underwrite that risk. And the third, you know, there are four stories about is they're taking your Bitcoin collateral and they're lending it out to somebody to generate interest. And maybe that comes in the form of backseat, the borrower in the form of a lower rate, but it comes with the highest amount of risk. So I think what we're describing here is sort of a continuum of super conservative

Starting point is 00:31:02 security conscious model of a more, you know, maybe traditional model in terms of we're going to pledge it with somebody else to raise lending capital and then a very risky model. Unchained clients tend to be really long-term, probably very concentrated, security-focused bitcoins. So we just surpassed a billion in originations. We've been doing this since 2017. You know, there's lots of clients who simply trust us because, you know, we've been to the market through cycle and we have unique infrastructure that allows us to deliver multi-sig loans at scale.

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Starting point is 00:34:43 the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. I'm curious about how you see the real estate plus Bitcoin collateral borrowing and lending kind of maturing. So let's say we're like five, ten years out into the future. So many of these ideas are, have progressed in, I mean, it's look at where we were in 2020 or even back to 2015. And like those five year movements in this space have been, you're in a different galaxy as far as like what's happened. So five years from now, I kind of suspect we're going to look back at this moment and be like, wow, it has changed so

Starting point is 00:35:28 much. And I think one of the things that's going to be part of that is you go and buy a house. Let's say you buy a house for a million dollars. That house just has the inherent value of the million dollars so that if you would default, they can take the house back and that million dollars for all intents of purposes is still there and there's not a lot of risk to the bank because you can always repossess the house. I kind of suspect, and I'm curious if you would agree with this, that you're also going to be able to pledge some Bitcoin along with the loan on the house to lower your interest rate because there's this kicker or there's this guarantee that even if the house went down by 20 or 30 percent in value, you put up 20 to 30 percent of that value right from

Starting point is 00:36:10 the start, let's call it $300,000 of Bitcoin along with the loan on the house. And so the risk to the bank is really, really small at that point. So you should get a much lower interest rate. Is that how you see this playing out? Is it going to be the same? And then I guess my next question is you're getting into this weird hybrid scenario of not being over collateralized, but somewhat being over collateralized because you're mixing it with something that is super illiquid, which is real estate, with pretty much probably the most liquid thing on the planet in five years from now, which is Bitcoin. Right. And I think that there are two considerations. For me, when I think about sort of the dual collateralized structure, number one is in

Starting point is 00:36:52 five years, who knows where we're going to be in terms of capital. And you need capital to sort of to underwrite that. And I think that right now, real estate is obviously a government-sponsored market. You know, rates are certainly artificially low because lots of that supply of loans can be offloaded to Fannie and Freddie. Either banks are going to have to come. What do you think those rates would be if that wasn't the scenario that it was subsidized so much by the government?

Starting point is 00:37:16 government, you think they'd be closer to 10%? Why not? I mean, like a couple of points in real estate and the wealth effect. I mean, you know, Luke Groman talks about, you know, is like how critically important is for asset prices in general like the stock market to be high, to generate tax receipts. You know, a lot of folks in the country ultimately like aspire to own a house or have most of their wealth tied up in their house. But the second piece is that, as you said, it really accurately, you have a piece of

Starting point is 00:37:42 poor collateral that requires upkeep that if you just left it there, a house is going to I think, hey, over the case of a, I mean, a 30-year-old house needs a new roof. If you didn't touch it, you need to, maybe have working out of that requires, you know, a whole department of folks at a bank to work on those sorts of default situations. Whereas Bitcoin, in a perfect world where all the money was flowing to all the right places, you know, should be priced much lower than that. Because it can be instantly seized, sold, you can get back the dollars very quickly. But like all thinks Bitcoin, there's a reason why it's a $2 trillion asset class in a world of $40 trillion in equities and $40 trillion in bonds and $20 trillion in gold.

Starting point is 00:38:22 It's because that knowledge and that understanding of Bitcoin is not diffuse, you know, in the economy and certainly amongst lenders. And that's another reason why rates are still high, but I'm optimistic that banks have been a theme through this. But I think that bank market is loosening up. And I do think rates are going to come down and make sure to get more involved in the couple of years. Yeah. So in general, do you see that hybrid taking place?

Starting point is 00:38:45 I don't think it's going to be a near-term phenomenon. You think it's more than five years out? There could be some specialty lenders, like a credit fund or something that's really structured on an institutional basis. But I think that for banks, they have to get their feet wet in terms of, are they comfortable custody Bitcoin? Do they know how to custody Bitcoin? And having been in the market out of bank and speaking to banks now, I'm sure they're going to

Starting point is 00:39:10 come up the curve, but I would be more optimistic of that, something like that coming about through sort of private credit offering with somebody who's willing to take a little bit more perceived risk in terms of holding Bitcoin, trading Bitcoin. Okay. Hey, there's been a ton of discussion, news policy with respect to stable coins. In general, why is all this stable coin stuff a big deal? Like, what's the so what for the person out there if you were going to give the 101 on why stablecoins are such a big deal to the federal government, why they're passing things like

Starting point is 00:39:44 the Genius Act. What's your takeaway? Yeah. So even as a Bitcoiner, stablewides are incredibly interesting. And I think that sort of taking back into my macro background and interest, I think that it's clear to me that the federal government is looking for any sort of buyer, you know, pocket that they can find for U.S. treasuries and whether that comes in, you know, sort of arcane your regulatory ratios like the supplementary leverage ratio that allows banks to buy more treasuries with less capital, or the Genius Act, which Scott Masset says could be a $3.7 trillion market. These are all to me, the markets, everybody's looking at the Fed and you've got to look at the Fed, but you mentioned

Starting point is 00:40:25 the bank term funding program. These are different ways the liquidity of the economy can expand that assets can get marked up and liquidity can get pumped into the system that are just new enough. And I think that, you know, the banking system, for example, if bigger banks get involved with the stable coin market, that could create an environment of, you know, really easy money if they're not paying interest on those that could make, despite the hesitancy of the Fed to, you know, to cut rates, that could produce another one of these moments where Bitcoin just, you know, melt off, so to speak. You know, Bitcoin's already proven that could rally in the face of non-zero rate.

Starting point is 00:40:59 That was a question for a long time, given more. Bitcoin was conceived, so to speak, but to the extent that there's another explosion of liquidity, you know, the sort of nothing stops this train type mantra in the world of Bitcoin, Bitcoin probably won't be surprised at what Bitcoin does. It almost seems like there's a butting of heads between the Fed and the Treasury on this particular topic, because you see Bessett, he's out there just championing this idea of stable coins really seems to be excited about the entire space and doing whatever he can to support it. And then Powell seems to be literally the polar opposite and kind of emblematic of the legacy

Starting point is 00:41:33 typical, like, I don't understand any of this and I don't want to support any of this and just kind of bucking the entire movement. So what's your take on that dynamic kind of playing out and how it relates to stable coins? Yeah. So I think that the dichotomy between the Fed and the Fed and the whole apparatus of the executive branch and the legislative branch is really striking right now. And I think that there is a very unified agenda by, like I just said, the executive, the legislative branch, Treasury senators talking, really talking in a negative fashion about Powell. And I can't remember a time in markets when senators have cared so much about the Fed chair, but there's a lot of attention on Powell, and it's all very coordinated and very direct.

Starting point is 00:42:17 And the job number today, you know, it seems pretty hard with the stock market at all time highs to say that lower rates need to happen or else something cataclysmic is going to happen to the economy. So I think that Powell seems to be really kind of digging in on a traditional dual mandate on justified in sort of holding rates where they are and the other side and the president has been outspoken about, we're just going to wait, we're going to issue a lot at the front end. And clearly, anybody in America with any sort of debt, if they can lower their own interest rate, which is essentially what the Fed would do for the Treasury if they lowered rates, the 3%, the Trump wants, anybody would do that.

Starting point is 00:42:53 And it's just amazing at the macro level, sort of how open it is. But as somebody who cares deeply about the future of America, it's hard to see another alternative given kind of where things are at in terms of interest expense relative to other outlets in the government. Yeah. It doesn't seem like they're ever going to be able to issue anything with duration in the foreseeable future. It seems like that's a really interesting point.

Starting point is 00:43:17 I mean, yeah. I'm the chief bond salesman and, you know, there was Doge and there was Doge and the And that was quickly you turned. And it really seems that the executive branch is moving really fast and really aggressively in their focus. If indeed there was a pivot and it was, hey, we can't cut. We've got to look to the short end. What's the stable point playbook that we can run?

Starting point is 00:43:37 Let's see if it can work and see if we can do that. They're very aggressive and very fast. Because it's just pure gravy for the stable coin issuer to squat and just sweep the coupons and then do whatever they want with them. If it's just kind of like one month money or wherever they're issuing. at in short duration. It's kind of fascinating to see it all unfolding. Yeah, and for me, the use case for stable points has always been sort of Bitcoin is the best money ever, anybody can get access to it. Yeah. If you're in emerging markets, the dollar's

Starting point is 00:44:05 pretty good and Tethers proven that there's ginormous product market fit globally for the dollar. Yeah. But how do you induce U.S. banking customers to flip into stable points? So, you know, Arthur Hayes were a really interesting, quite colorful piece on stable points recently talking about the sort of compliance savings. Big banks could realize if, you know, stable coins became adopted en masse. And it's really interesting, you know, we talk about the days of zero interest rate policy. What if there was a way for banks to induce consumers to get into stable points that paid zero through some sort of rebates or fees because it just made so much more sense on the compliance side

Starting point is 00:44:44 from the bank's perspective? And that's sort of, you know, hazes tape on it, which is interesting. It seems like the banks are going to be using the stable coins in and amongst themselves, and they're going to be sweeping the coupons. And then for the retail customers of the bank, they're going to not even realize that that's what's happening behind the scenes. They're just going to continue to get some pittance of a interest income by having their funds on, quote, unquote, on deposit. Would you, yeah, I mean, I would love to get up the curve more in terms of how these are going to be used on it. And the interbank market seems like that's kind of the easiest one to control.

Starting point is 00:45:17 And there could be lending against stablecoins. For me, Bitcoin has always been the most interesting thing in the room, you know, what it was $100 billion when it's $2.3 trillion like it is today. So even though it's small, I mean, that's really a bit grateful that I can continue to focus on that and then on chain, you know, serving Bitcoiners with prudent products. Yeah. John, I've really enjoyed the chat. I've thoroughly enjoyed the history lesson there on Silvergate.

Starting point is 00:45:41 That was really interesting. and we'll make sure that we get those into the show notes. We'll also have some links to Unchained and the borrowing and lending and the custody stuff that we talked about. Is there anything else that you want to highlight or give people a handoff to your social media accounts? No, I appreciate that. Unchained.com, feel free to reach out. We'll love to connect with folks. I'm on LinkedIn.

Starting point is 00:46:00 And on Twitter, I'm J.M. Not too, Brag. There's some high school football stuff that's some good stuff there. But appreciate what you do for the space president. Thank you, John. Really enjoyed it. Thank you for listening to TIP. Make sure to follow Bitcoin Fundamentals on your favorite podcast app and never miss out on episodes.

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