The Genius Act and the stablecoin shift in finance

Transcript

GM. Good morning. Welcome to the Milkroach Show, the daily crypto show for anyone who thought I could turn this $800 into generational wealth. I'm your host, Jay Hamilton. It's Monday, August the 11th. Just a few weeks ago, the Genius Act passed. It is now signed into law and overnight, it is starting to rewire the entire stable coin market as well as impacting the entire financial sector and banks in particular. Now, some projects and some institutions and some incumbents will thrive, others will vanish. And investors, you know, you're all asking one thing. What's next? So, today we're joined by Mike Belshi, CEO of BitGo, to cut through the noise and find the signal. He's one of the

sharpest minds in crypto, and he's going to walk us through where stable coins are right now, who wins, who loses, and how to position yourself for the next big move. Now, before we jump in, if you are making moves with your portfolio right now, I highly recommend that you check out Milk Road Swap. Not only because it's our product, and obviously I want to endorse our own product, but more so because it has some of the cheapest fees in the space, and it is incredibly easy to use. You can swap on Ethereum, Bass, Arbitum, and Salana all in one place with much lower fees than most of the exchanges out there. So, check it out today. Today's episode is brought to you by Figure Markets. Grow your cash like a bank. No lenders, just real returns. It's also brought to you

by Nexo, the platform that grows your crypto without locking it away. Without further ado, Mike, welcome to the Milk Road Show. >> Hey Jay, nice nice to see you. Great. Thanks for having me. >> Yeah, pleasure to have you. Got one of the best backgrounds we've ever had on the show. I wish uh I wish I was sitting in front of palm trees like you right now. For everyone not watching, make sure you check out the video to see Mike's face. It's looking good in the background. Uh, okay, Mike, let's just set the stage. Um, before we jump into the Genius Act and the impact and stable coins, you know, over 270 billion now at an all-time high. Incredible to see the growth that's happening with stable coins. But before we do, I just want to set the set some context. Can you just give us a little brief background on

yourself and what Bitco does and how you have involvement within stable coins? >> Sure, absolutely. Um, so my name's Mike. I'm co-founder and CEO here at Bitco. been doing this for about 12 years now and uh we are an infrastructure provider for digital assets. Uh so we've been providing you know self-custody wallets of course custody wallets services on top of that we have a stable cocoin as a service product crypto as a service product. These are all different ways that companies and businesses we have the largest client base of institutional clients in the world bar none and uh uh we have a number of different ways that that folks can interface with us. A little bit about me I'm uh not a finance guy. Uh I'm a technologist. Started my career as a engineer at Hila Packard

here in Silicon Valley. I uh I had you know classmates in college. I went off to work in finance. I was never interested in finance because you know to this day I still believe and in fact maybe now that I know a little bit more about it. You know finance you know leeches off of those that actually build stuff and takes money kind of takes some of the cream at the end which is an interesting uh dynamic. But I do find myself in finance because you know after having had a career in Silicon Valley for 30 years you know like I said first at Hila Packard but then I found this company called Netscape before it was a public company did a bunch of startups sold into Microsoft was part of Microsoft for a little while then I went to to Google just as they were starting

a browser which was later named Chrome. When I found Bitcoin I was excited about money inside of our computer. So I was excited about it from a technology perspective and in fact you know like a lot of people we call it you know jumping down the the the rabbit hole um which is you start to think about wait what is this money stuff that you know I haven't been interested in in my entire life um and you know we're pursuing it every day and we don't really understand like how it works how it came to be whether it's a good tool for the job in front of us or not. So anyway, as we talk about stable coins and finance and like what should markets look like, I'll say this to uh to folks that come from Silicon Valley, money and markets are a systems type of

problem. Um actually I think computer scientists are extremely well suited for figuring out what the financial markets of tomorrow should look like. Um the markets that we have today, uh I'll give you a quick question after this. and Jay funny funny one but you know the markets we have today you know primarily built off of you know the securities act in 1933 the exchange act in 1934 I'm pretty sure we didn't have computers in that era so if you're designing a system with computers versus without you're probably going to come up with some different answers and uh here's a funny question for you Jay who do who do you think was the first commissioner commissioner of the SEC >> I don't know >> so it was a it was a guy named Joe

Kennedy uh aka JFK's father. And you know, here in America, there's a funny, you know, story about Kennedy and, you know, they made their money off of bootlegging. Well, little known is they also made their money off of being, you know, fantastic front runners, pump and dumpers, inside traders, etc., all through the teens and the 20s, the 1900s. And it was not illegal. Um, so, you know, there's nothing, you can't criticize them for it. It's that you're allowed to do this. And then we had the stock market crash in 1929. And then there's a bunch of people saying reform, reform, reform. And they said, "Okay, we're going to build this thing called the SEC to help help give us some uh oversight and prevent like, you know, bad information being out there." Who knows how to build this thing? Joe

Kennedy. Let's call him up. And he did a great job, by the way. I don't want to dismiss any of the the great work that they did. Uh I think uh actually the the framework that they put in place has created the greatest capital markets in the world, bar none. Uh the US is way ahead here. It's not even close. Um, but all right, can computers uh change things a little bit? Yes, they can. >> And I I think everybody listening to the show is going to agree with your overall statement that it is time for a change within our financial system. Uh we don't we don't need to dive deep down.

>> It's a controversial statement >> of of why, but where we are right now, but it's certainly it's certainly we are there. So, let's let's let's let's use the Genius Act as sort of a jumping off point into the stable coin market. So, let me ask you this. What how did how did the Genius Act passing change the conversation? And maybe actually I almost wonder feel free to go back a little bit further to uh the other big stable coin milestone that happened which was circle's IPO and and if you want to to use that as the launch off point feel free to do that as well.

>> I think if you want to talk about stable coins you really ought to go a little bit farther back. Um, you know, Tether deserves a ton of credit for having pioneered uh stable coins through the the 20 2010s and they did so during a zero interest rate environment. Um, which means that, you know, they weren't making any money off of the Treasury at the time. In fact, if you go back just a few years, there were worries about having negative interest rates. We had negative interest rates in a number of countries around the world. What do you do with a stable coin if the interest rates go negative? Um, of course, I don't think there was ever much danger of negative rates in the US. Uh, the economy is a little bit stronger, but nonetheless, so Tether pioneered this thing. And we also had uh a complete

lack of help from regulators saying like, what do you do with this thing that's a stable coin? Um, and how do you regulate it and is it safe or is it not? So, one of the core features that that te Tether created was they ran it completely outside the US. They completely avoided US companies and they said, "Hey, we're going to create a really stable dollar that's digital, that's usable everywhere and we're going to make it so that it's completely safe in case the US uh banking industry kind of goes crazy and and somehow lobbies a strange law." So, all right. So, they pioneered it. They got in early. There was no money to be made. And then all of a sudden over the last you know five six

years as the interest rates have have climbed on the dollar obviously they're looking at at a really really pretty spot. Circle came along uh I don't know exactly when they came along what 2018 2019 u actually circle pivoted a couple times. Uh, initially Circle was doing some completely different work um, brokerage type work. They bought an exchange. They did some things there. Eventually they settled in on stable stable coins and hit their groove and you know Jeremy Lair over there uh, a fantastic innovator technologist uh, building payment systems uh, very good at it and uh, and and they've grown to be a bit of a juggernaut. All right. So then over the last couple years prior to the new administration again kind of you know not not a lot of regulatory mo

movements uh banks are being uh forced uh or strongly encouraged by their regulators at the OC at the FDIC thou shalt not touch digital assets and crypto. Uh, of course, Senator Elizabeth Warren, very negative, along with a number of others, um, started to become a little bit of a political thing. The Biden administration, Maxine Waters, you know, shared Brown, uh, Brad Sherman, like all these guys, super negative on crypto. We've never had technology or an asset class persecuted like this before.

So, stable coins looked like they ought to be the easiest thing for regulators to get their heads around. and and yet it was being lumped in with all digital assets and therefore bad. Um no explanation of what you should do with it, how it should work or not. Almost like they just want to block it. All right. Well, we have a new administration and of course uh you know BO myself uh a number of people from the crypto industry were were pivotal in the in the campaigning this last year. I look I strongly believe business and politics don't really mix. Um you know there's some overlap when politicians are coming after your business. Um but in general you try to stay away from politics. We're here to build a great business. We're not here to you know

fight about you know how the the government should be run. Everyone should have their own opinion on that. But we had a very unusual case and while everyone was looking at Gary Gendler at the SEC last year and you heard a lot about him. He's very public. He sued a lot of lot of good crypto companies. People didn't hear as much about what was going on in banking. Now now Bitco saw it. So we're our our regulatory framework is we center around custody and as a qualified custodian in the United States, regulated under New York DFS, regulated under South Dakota Division Banking, um bunch of other regulators also, but it's clear we can hold securities. So this was never an issue. We never had any run-ins. I met with Gary a few times. Uh you know, all all as part of trying to promote crypto.

Um but uh uh we did see a problem in the banking sector. Um, you know, so the OC was run by this guy named Michael Shu and he went to all the federal banks and said you cannot touch crypto. They passed a thing called SAB121 at the SEC which created a bunch of confusion and was a sideshow but you know that held things back and then the other one was FDIC and you know I think maybe some of the people on this podcast might find this interesting. You know we think in the US that we have a separation of federal and state powers and of course we do. But when it comes to banking, you know, look, there's federal banks and there's state banks. There's a bunch of great, you know, state banks. You might have heard of them. Bank of New York Melon, you know, that are not chartered

under the OC necessarily. They're chartered instead through the states. All right? But FDIC, Federal Depository Insurance Corporation, pretty much every bank, whether you're state chartered or federally chartered, has to have FDIC insurance. You're not a very good bank if you don't have that. But what FDIC is is essentially it's an uncapped insurance policy. People say, "No, no, Mike, it's capped at 250k per account." Yeah, yeah, yeah. I get it. But it's uncapped on the number of accounts. You can't go get a commercial insurance package which is uncapped on number of accounts or dollars under the accounts etc. So every every bank in the US is subject to needing FDIC practically. And when the FDI comes along in 19 uh in uh 2022, sorry, and

says, you know, if you touch crypto, we are going to scrutinize your business, well, half the bank, half the state banks dropped out, right? So, you had all the federal banks out from the OC. You had half the state banks at least out because of FDIC. And so, this led us to a place where we just like, we need somebody new in charge, man. These positions are all filled by one guy, and that's the president of the United States. And so, we need a new president. Um, it's uh it it was as simple as that. All right, so finally getting to a long-winded answer about like where are we now? Everyone recognized that stable coins ought to be easier for lawmakers and regulators to get their heads around uh because it's dollars, right? It's it's a relatively simple wrapper around dollars. They ought to be able to put

some together. The previous administration did start to work on it. We started to see uh some proposals coming through the house, the Republican side um in the previous administration, but then finally we got this through and then the Genius Act is is is super enabling. All of a sudden, we now have a clear guidance in the US for how do you touch digital assets? I don't think Tether has finished making their moves yet. I was I suspect that they will be able to come into the United States finally either with a a US product or their existing product, one or the other. every bank in the country is now drooling um at how do they get in on this. Um interestingly, I think the banks don't quite get it yet. There's some fights that are happening. All right, I'll stop there because I I talked for a long time. I'll let you you

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>> Yeah. Yeah. That and that's that's exactly Let me tee it up, but you're you're leading perfectly into my next question, which is okay, we've we've fought to get to 270 billion in stable coins, right? which is you know you when you consider all the things that you're saying all the mountains we had to climb all the the pressure pushing us down it's it's remarkable in a way that we have gotten to this point without there being clear regulation so I think two things to break down one is let's talk about the banks and what happens next you know over the next five years are we going to get to the trillions what does that look like do the banks play ball what are they fighting about let's let's

break that down Yeah. Well, look, so stable coins turn out to be just better banks. Um, and we are on a path which is going to completely dismantle the way you think about banking today. Um, and we're going to have different services around it. And stable coins are the key key first step. Um, in particular, what I'm talking about is, you know, when you think of a bank, and a bank is a depository. That means they can take your assets, they can hold your assets, and they can lend them out. The depository is allowed to lend them out. Um, stable coins are purely better. Stable coins, they're one to one backed. um 100% by you know short-term duration T bills. T- bills of course are cash that's risk- free. Number two, they can generate the risk-free rate 4% right now. Banks on the other hand, you

fractional reserve and they give you 0.1%. Meaning they take risk to give you way less. And then number three, uh you of course stable coins are so much better at payments 24 hours a day, seven days a week, almost no fees and global banks. Banks are so bad at payments that PayPal exists. They're so bad at payments that Cash App and Zel and Venmo and the list goes on. Plaid and Stripe, like none of these guys should exist if the banks were just doing a decent job on payments. So, we all know they're not doing a job on payments. All right. On the the middle one, the can they give you a a risk-free interest rate? Well, you know, this is a place where we we saw a little bit of fighting. You know,

the banks came in at the very last minute on Genius and said, "We need we need a little provision in there that says these stable coins can't give interest rates because if they do, it's our business." Oh, no, no, wait. If they do, it's going to break the banking industry. There's going to be a run on the banks. It's going to hurt the economy. They always have to say it's going to hurt the economy because otherwise you wouldn't you wouldn't care. But I believe very strongly it's it's just a matter of time before we have like real interest rates directly on stable coins, on chains, etc. So we we we have a little bit more fighting on that one to do. By the way, there's an analogy and you should look back at what happened with T- Bill money markets that came to life in the early 1970s. The

exact same pattern happened. So back in the early 1970, just to give a little more history, um there was this thing called regulation Q. It no longer exists, but regulation Q said that banks had a limit on how much interest they could give back to retail. And as we started to have inflation and uh the risk-free rate on T- bills exceeded the limits that banks could give for interest via regulation Q, these smart guys came up with this thing called a money market and they said what we'll do is we'll have a TBO back money market and we'll give an interest rate which is better than the banks and everybody's like oh my god no there's going to be a run in the banks. Everyone's going to pull their deposits out of the banks.

They're going to put them into these things to get more interest and like the world's going to end. Of course, that didn't happen. And today, there's lots and lots of money money markets you can get that are T- billillbacked and and it's all just fine. Um, the same thing's happening right now. The initial reaction is that like, hey, here's this this change and people are worried that there's going to be a run on the banks. I don't think there will be a run on the banks. Uh, even if they were there were we have better ways to deal with banks now than we did in 1970. But the banks have a slightly different worry. They're not really worried about a run on the bank. What they're really worried about is just losing deposits and they want the money and they want your money and they want to be able to give you 0.1%

interest and call themselves a fiduciary when they could have literally just put it at the Fed and made 4% and given it to you. Like, okay, they just did a bad job. It's as simple as that. >> And you know, they've gotten addicted to having free, easy money. Um, they take it from you, give you nothing. Uh, they don't give you good service, they don't give you good payments, they nickel and dime you even when you want to go to use the ATM. Um, all right. So, uh, we are now in the the first phase of the fighting and and, you know, maybe the sad news for everybody on this podcast who's probably very excited about, you know, disrupting banks. This is probably going to take more than a decade. Um, you know, the banks are not going to just sit down and say, "Oh, well,

there's a new technology. I guess we're done." No, no, no, no. They're going to fight and they're going to fight for a long time. Um, now by the way, the first thing that they always pull out is is not how do we fight by building great products and like delighting our customers. Instead, the way they want to fight is they want to go to their regulators and the people that they pay politically and they want to say, "Build me some better regulatory moes. I need more moes. They're getting across my moes." Um, and that's exactly what they're doing. That's exactly what happened in the first uh the first uh salvo that was sent across with the the Genius Act. Um there's been others.

There's uh CEOs of banking companies are proposing that you shouldn't be able as a private company to buy short duration T bills and bypass the banks. You should be required to put your stable coin reserves in banks only. Um and by the way, this is not not just US. Remember, this fight's going to take place globally. So in the EU, if you want to get an EMI license, an electronic money license, um for stable coins, which is required if you want to be traded as a stablecoin issuer in Europe, you're required to keep like 60% in banks instead of in uh treasury type products.

Um so this fight's going to continue for a while. The banks will initially pull out the how do we fight just based on give it to us please um rather than how to make better products. But look, how did stable coins get to be, you know, 270 billion or whatever size it is? Because the product's good. People want the product. Um, and you know, there's an opportunity here for the US and US lawmakers to really recognize >> if you embrace stable coins and you allow interest back to retail, which is, you know, you absolutely should. It's their money. Of course, you should give them back the interest. Um, but if you allow this, you will be able to export dollars across the globe and this will

be the beginning of the US becoming the the last the US dollar becoming the last remaining fiat currency. I strongly believe this. You know, I know that China will be kind of the last one to to to give up. You know, all of the other fiat currencies are weaker than the dollar. Um, and they will start to fall. And all you have to do is if we give risk-free 4% interest back to people around the globe via stable coin, we make their lives better and um and the US dollar wins. Does your mention of um uh this opportunity that stable coins presents for the US dollar to continue its dominance as the global reserve

currency. Uh I I see that. I think all of our listeners see that. I've heard Scott Bessett say that he says that. Does everybody in Washington and the banks see that? Well, the banks don't care if that's true. They just want to preserve their business as they've done for a long time. So, they're in a different position. By the way, it's pretty much innovators dilemma but with regulatory wrapped around it. You know, the innovator's dilemma deals with this case we've seen in Silicon Valley for decades of why is it that this big company that has all the money, all the resources, all the abilities, all the knowhow can get beat out by smaller companies that

are innovating. Um, and it's because initially the innovation is at the small scale and so they have to iterate and iterate and iterate and by the time it becomes big enough scale to be interesting to the banks or to the incumbent, it's too late. The the small guys have have iterated and learned learned too much. Um, I think the real thing to focus on though is not what anyone thinks, but let's just talk about the data. Um, so we had, like I said, a zero interest rate environment and we started to peel off of that in like 2022 and, you know, the reserve rates on the dollar started to climb and as soon as that happened, of course, the dollar gets stronger globally against other fiat currencies. And so you immediately saw, you know, early elements of hyperinflation, but massive inflation

spikes in Turkey, in Venezuela, in Argentina. Basically, the folks that had weak currencies, all of a sudden they were seeing massive inflation as their people were just clamoring to get somewhere else. And in a lot of cases, where did these guys go? Like Turkey is a great example. They went to Tether. Now, you know, people have a hard enough time understanding Bitcoin, you know, much less like what is a stable coin. Um, but imagine, you know, put yourself, you know, on the ground in Turkey. Your your your local currency is inflating at double digits. Your wealth is disappearing. Your ability to send your kids to school next year is questionable. You will do anything to preserve your value. You are looking for

some way to solve this problem. Now, this isn't new, right? It's happened before. We just have a new tool on our belt, which is the stable coin. But you look for some way to get to a dollar. Frankly, a dollar is a stronger fiat currency. As a result of us having raised the interest rate, it was getting stronger again. Um, people moved to Tether. They didn't fully understand what it was, but what they knew was that thing's a dollar. I can get it. And when countries start to have trouble with their local currencies, um, you tend to see the same patterns. The first thing that happens is the inflation spikes up and then the government denies that the inflation is as bad as it is. The people all feel it.

They're like, I can feel it. But the government's not telling them the truth. The next thing that happens is the people start clamoring for something else. Usually the dollar. Um, this makes the local government fearful and they're like, "Ah, lock the exits. turn off the dollar. You can't get your dollars at your banks anymore, right? Um, and then you have two currencies actually. You have like the actual price of the local currency and you have the government price of the local currency. And so you end up with a black market. Now the people just have to live, right? They're just paying rent and and doing their regular stuff and buying food, etc. They don't have a choice. The government can pretend that the the inflation isn't happening, but it's happening. And they try to lock the exits, etc. All right.

It turns out that Tether stable coins are a delivery vehicle that can get through a lot of this stuff. This is in part why, you know, governments are afraid of digital assets is because we we have a new type of asset that's peer-to-peer. It's no longer centrally controlled and so they can't fully prevent it from from moving around and they want they want to control it for cases where they think that they can preserve value for themselves. It's always bad for the people. Always. Um but anyway, that's where that's where we're at. So look, I think we've seen it very clearly in Turkey. People want stable coins because it's better money.

If you give them a strong US dollar with interest, that thing is going to get eaten up all over the globe. We actually don't have need for all these fiat currencies. A lot of these weak ones can disappear. >> So fast forward 5 years, 10 years, uh time frame is relevant just like a future period. uh because saying five to 10 years in finance and in I mean in tech in finance nothing changes but in tech every the whole world will look different especially with all the techs that we have right now that are just exploding. What what's what's the end state here?

What does this look like? What what do banks do? Are we going to see crypto company crypto like Circle or Tether? Are they going to become banks? Is is it going to be more Robin Hood and the fintexs that seem to be adopting crypto much faster than the traditional banks that are going to big big big players. World Liberty Financial like they seem to be making a big push and obviously with Trump behind them. I think they understand the power of stable coins. I know this is a very big question I'm throwing at you but I I'm trying to understand how how it's all going to fit together in the long term. Uh well look, Bitco has a stable coin as a service

product. Um meaning that uh we have all the infrastructure knowhow. We can handle smart contracts. We can handle the mints and burns. We got the regulatory capability to do it in the US and abroad. We got the mining transmission. We can put audits around it. So by the way, we we handle 100% of USD1. Um it's a it's it's a great product. They use that stablecoin as a service and then they're they're out helping it work. we're making sure that you know the money is safe and uh audited and all that. So you can go to our website, we put out a new a new audit every month um goes out. Um so there's room for competition for new stable coins. I mean everybody's got their strengths and everybody's got their weaknesses. This isn't to

criticize them. It's just to say it's it's a fact. All right. In the in the Tether case, right? So Tether keeps 100% of the interest. They've done a great job building a global product. Um it's huge. they're they're they're executing well. Um, USDC similarly also keeps all the interest. Um, and it's it's a bit of a weakness. They share half of it back to Coinbase, which uh creates a conflict of interest sometimes in the market. Uh, that's also a bit of a weakness. And then lastly, the ability to have so many of these and to create them. So you got USD1 and others that are coming in to compete in various ways whether that's on DeFi and products that give back more yield to to clients or or what we'll

see. I mean I think one thing that's an obvious uh weakness of the existing incumbents is that >> you know keeping 400 basis points um roughly the risk-free rate >> as an administrative issuer fee doesn't really make sense. I mean think about ETFs. We got the ETF from BlackRock, you know, for for Bitcoin and and other stuff. They take about a 25 basis point fee. Um, so the idea that a an issuer of a stable coin needs a 400 basis point fee seems a little high. Now, I get it. The early incumbents definitely deserve credit. They were doing buildout.

There's innovation, a lot of stuff to be done. It was done during a zero interest rate environment. Um, so there's reasons why it is where it is, but there's a lot of room for competition. Um, the banking system has barely started. uh digital assets are while they've grown a tiny tiny part of the overall economy today. >> So there's massive distribution channels that people can tap into. Um I can tell you at Bico we've got dozens of folks in the in the pipeline. They're going to be launching stable coins of various forms. They have different reasons to do so. It might be local geographies. It might be interest rate returns. It might be particular sectors they want to hit.

There's just a lot that's going to happen. So, I think we're going to go through the short term, and the short term, I guess, I mean, you know, zero to 10 years, we're going to go through an explosion of new types of assets. They're all going to compete. They're going to duke out like what is the right type of stable coin that that retail likes the best, that businesses like the best. How many win in the end? I don't know. I would guess probably there'll be like three to five that are really big. Like everything, it'll have a um a long tail and a and a a steep, you know, uh concentrated sector that is most of it because at the end of the day, it's money and it's easier to interchange if you can have it liquid everywhere. And building liquidity is really the value

of the stable coin. you know, when you get a coin, whether it's USDC, USDT, USDG, uh, FRAUSD, uh, USD1, any of these, you know, what you want to know is you can take it somewhere and you can turn it back into a dollar if you need to, or you can use it. And so, the value of these coins is the network. It's the ability to have liquidity everywhere. So, that's what's going to happen. There's going to be a big duking out and you will see major US financial institutions enter in the arena with their own stable coins and there'll be conversion between these and you know that'll that'll work. Um and then long term where I think things start to change is we actually start to disintermediate banks more effectively.

Um, so this idea that a a bank, a depository, is going to take retail money, uh, be a terrible payment processor, give you 0% interest, and then lend it out to other people at risk that only gets bailed out by the US government. This is going to completely dismantle. We needed that 100 plus years ago. 100 plus years ago, you didn't have computers. So, you know, you're in San Francisco or you're in LA or you're in Chicago, whatever. you had a local bank you went to and you deposited there and he knew who you were and also he's lending out to small businesses and others. Um, and he was making those determinations about how to do lending sometimes rightly, sometimes wrongly, but he had to. It was all local. He had to know who he was lending to. Look, the mortgage industry, which

is the largest lending borrowing network in the US, has already moved out of the banks. Basically, you go into the bank, they underwrite your loan, they write the paperwork. as you're walking out and the door is closing, boom, that thing has been packaged, it's been sold off to Wall Street and securitized where it's got a much more liquid treatment than it could possibly have. We just held at some small bank, even if your bank's a big one. So, banks aren't really holding on to mortgages very much. Um, what's going to happen is all lending is going to move to something similar. And by the way, we should move it all onto something blockchain based so that you have transparency about it. And then like those that want to buy debt, want to buy bonds, they go to a an open market. It's going to be completely

liquid. It'll be liquid all day long. It won't be a bank. It'll be instead you've got private equity. You'll have corporates. You'll have retail can be in there. Whoever wants to buy bonds as part of their portfolio and they can know what risks they're taking. There'll be different types of bonds. There'll be different classifi classifications, but basically every dollar of lending will be put into that system. And now what is a bank? you don't really need a bank anymore. You got stable coins for the deposits, that's separate, and you've got lending. That's the other thing is that that'll be separate. Now, this is going to take a long time. You know, banks are are going to morph. Some of them will make this transition, others won't. Um but but that's what's going to happen. They're going to be completely um completely disintermediated from where they are today. in in the uh in

the in the this adoption cycle that we're talking about, what are the let me ask this. How first of all when the Genius Act happened yourself and your executive team at Bitco thinking like oh this is a big deal and then what are the other catalysts or or headwinds that you see in the next few years that you think okay yeah this these are the moments that could be tipping points in either direction.

>> Yeah. Um well look the the financial controls you hear about all the time and you know we've got Fininsen and we've got OFAC we have a number of regulators who are tasked with the daunting job of how to stop terrorist financing how to stop fentanyl how to stop uh sex trafficking. Um, so look at at some level we all as Americans, we agree like we want these things stopped. So, okay, great. And so in the US we have this thing called BSA, the Bank Secrecy Act. It doesn't matter if you're regulated or not. Every American is subject to bank secrecy act. Um, it has to do with, you know, how how you do money movement and, you know, how do you make sure that you're not not dealing with bad guys.

But let's break down some of the controls here. And I think overall the law enforcement elements of money and this applies again to not just stable coins but everything I think it's gone a little bit overboard and their their reasons are good um for why they want these controls but sometimes it's just not very good. For instance, you know, you talk about fentinel. Look, money has nothing to do with fentinel. like drug dealers, they obviously they they figure out ways to trade bad stuff with other people using something. And the number one thing they use is US dollars, not stable coins, right? Actually, stable coins are more traceable than US dollars. Um, they tried to use Bitcoin. They've kind of

stopped using Bitcoin because that was way too traceable compared to US dollars. >> Interesting. That's interesting. People don't realize that they've stopped using Bitcoin. It's a good point. >> It's a It's a loser. It's a way to get caught. Um but um more interestingly the um the idea that you're going to try to track drug dealers by way of money, you're like three steps away. So remember here in the US, like in San Francisco, you deal drugs and you're back on the street like four hours later. So, if you're not going to actually stop the crime, you want banks to go and figure out who the bad guys are and figure out where the the the money is being moved. Look, it's it's a tough problem. It's indirect. Like, if

you're not going to do at the direct point, like, how can you do it at the indirect point? And this isn't cryptospecific. Remember, you read all the time. TDM trade got fined over a billion dollars for some bad movements just I don't know, eight months ago. You hear about it, you know, at least at least two to four times a year from traditional banks, not related to crypto, that they can't prevent this type of stuff. It happens. You know, they've got all the controls in there. They're trying to do business. Unfortunately, bad guys are tricky and they try to get through. So, my personal opinion is that BSA should not be the place where we try to enforce general drug problems. Now, then let's go to the other two. Let's talk about sex trafficking. Let's talk about terrorist financing. Sex trafficking is kind of the same thing. Like you got to stop it

at the source. Expecting banks to be the ones that stop sex trafficking. Look, it's not that we want to participate in it. We don't. It's just that you're asking us to surveil every American, every transaction. Um and yet, you know, you're not actually stopping the crime directly. Um so I just think that's a fool's errand. I think I think they're on the wrong path there. I think they got to back off. Terrorist financing. terrorist financing. Of course, we all agree with like, you know, we think about, you know, what we see in the movies of somebody buying, you know, a big a big boy nuclear weapon or whatever and they're going to go use it. Of course, we want to stop this and of course we need to know who it is that that that's dealing with us. However, when you look at like modern warfare,

it's drones, right? Um, and uh, I have had talks at Treasury about, you know, what types of things they're trying to capture, and they're like, "Hey, look, somebody can buy a $200 drone and do a lot of terrorist damage. It's terrible." Um, well, once you're down to the $200 transaction to be monitored, you're basically saying we need to monitor every transaction of every American all the time. And I just think that, you know, you're you're in the wrong place at this point. like really like we need to just monitor every transaction that everybody ever does in case, you know, there's one bad guy out there. Um it's not that I disagree that we should stop any of these terrible things. We should. It's

just I think the money system is not a good place to do it and the evidence is very clear. Um it doesn't really work. Also, there's no accountability in the government. You know, we have SARS, you know, suspicious activity reports which we as a financial institution are required to report. These things are so designed pre- electronics. It's hilarious. Basically, it's a piece of paperwork you fill out. Of course, you can fill it out electronically if you want. It's it's only due 14 days after the transaction. We can see in real time on the blockchain money moving way faster than you can through the suspicious activity report. And that's just to get it filed.

You got 14 days. And then if it takes 14 days to file it, then the Secret Service picks it up. It might take them months before they actually look into it. Um, frankly, there's just there's no amount of manpower, there's no amount uh of, you know, filing reports that's ever going to actually stop this stuff. And I think that's evidenced by the fact that the thing just doesn't work. And if you ask the government, hey, can you just show us the accountability? Like, hey, how much are we spending on this that is tracking all these transactions? And how much are you benefiting from it? Of course, they won't give you that report. Instead, they want just to to forever grow it. Um, all right. I I've probably gone on too long. My my my my my point is this. I think the governments are well-intentioned, but they've gone a

little bit off the reservation in terms of in their quest to get down to a $200 transaction being monitored, they've kind of forgotten just how much they've hindered Americans. And this is why payments are so bad at banks. You know, we we blame the banks entirely, but it's not entirely their fault. Banks have this horrible task which is they're supposed to never ever allow any single bad transaction through and they're also supposed to never ever freeze an innocent person's account. These two things are incompatible. You can have one or the other, but you can't have both. So, if you've ever had your bank account frozen um or you know, a weird thing delayed or whatever, it's quite likely due to one of these laws.

And you know, we can complain about the banks, but it's not entirely their fault. >> The regulators as well. You're now hearing this at Coinbase. You know, Coinbase is trying to do a a technology first approach and they're running into the same oops. Uh we tried to do what the government told us, but now like we flagged this guy who's been a great loyal customer for eight years. How do you how do you do both? >> So the regulators have broadened their scope maybe a little bit too wide. Uh as as we wrap here, Mike, when when you look forward, you know what? Let me actually bring it back to a cryptosp specific question here because I think what's been great about this episode is it's been great to get you

have you have such a great history mind and to take us back and to show us where we are now and where we're going. I think it's fairly clear especially to our listeners to understand where stable coins are right now and where where they're going to go in the in the near term. It feels fairly obvious when you look at where how how that where that would be built within crypto. Obviously, you know, most of stable coins are on Ethereum currently, right? Salana has also been a good place for stable coins growing there. Base is a booming ecosystem right now and we've talked about Coinbase. I can't have an episode where they're not brought up.

Where where will the stable coin economy exist? Is it going to exist on I don't mean the actual stable coins themselves more so the blockchains or the infrastructure that it exists on. Will it exist in the same way that it exists today or is there going to be a movement happening there in the coming years and decades? It's going to go to whichever blockchain provides the best product. Um we've already seen this right. So uh when Ethereum fees spiked high we had a bunch of traffic move over to Tron for stable coin activity. And if that type of thing happens again where there's scalability issues on one, you know, people will move to another. So, look, I I think that's open. I think it kind of doesn't matter. You know, the stable coins can be run across a number of networks pretty easily. By the way, here's kind

of a funny one. You know, Ripple has a um a stable coin, RLUSD. Now, Ripple is also famous for having, you know, why do they exist? They they have this thing called XRPL, which is their layer 1. Um does RLUSD run on XRPPL? a little bit. Um I think of their 600 million market cap, they've only got about 10% running on XRP. The rest of it runs on Ethereum, right? So what did they have to do? Well, they had to go to where the apps are actually running and there's no apps significantly running on XRP. So they had to go do it on um on Ethereum. uh as they move up the stack, they themselves recognize that like no actually the stable coin needs to be

provi working on the chains that are providing the most value, Ethereum is providing more value than Ripple. So they move to Ethereum. Um even though they are Ripple um which is I think I think fascinating. We we'll continue to see this duke out. Um but I think you know the the ecosystems are the L1's are are fighting to to bring in the best apps and the best ecosystems on their chain. Um, you know, Ethereum got in earliest, still has the bulk of DeFi to this day. Salana's made some good inroads. Sooie's made some good inroads. Maybe the thing which doesn't exist very much on the L1 level is privacy.

>> I'm happy to hear that and there's more privacy being discussed now. I think we do eventually get to privacy chains. I mean, there's a real thing for for the crypto heads, myself included, to to think twice about, which is, you know, for anyone that's not in crypto yet, they're like, "Okay, that around what happens with digital assets. Um, and then they're like, well, wait a minute. So now everyone can see my transactions. Um, and I I I don't want that, you know. Okay, so look, that's a that's a real thing we have to deal with. And today it's pretty much true. Um, if if you put all your assets on chain, people will see where you are. So I think that has to be fixed. And I think the the L1's will compete to provide the best service to stable coins.

>> Yeah. and and the L1's will fix that whether it be with ZK or some other new tech which we've been talking about more recently. If you guys want to go back check out the episode last week with Jake where we talk all about ZK and the status of of that. Mike, did you have anything else to add there? >> Yeah, there's one thing I I guess I skipped over um we didn't talk about which is different types of stable coins. There's uh algorithmic stable coins, there's one to one backed. So, the Genius Act only allows for the one to one backed type stable coins. Um, I personally am only a fan of the one to one backed. The there's always people that think they've built a way that, you know, tracks the dollar. I think, you

know, make or die uh has done reasonably well. Um, but, you know, there was a few years ago they had a >> uh an existential threat. They bailed themselves out, so they survived. Um, but the the concept of it still exists. you know, at the end of the day, because it's algorithmic, there's a tie back to Ethereum, and if the Ethereum price drops too quickly, you know, they could fall out of whack and and no longer be able to maintain the peg. Um, they put in protections to to protect against that, which is is good, but in general, when you get into non onetoone backed, it's a lot harder to tell whether or not you really have the backing or not. Um, and people will say they do, like Teral Luna, um, and they didn't. Um but you know it's it it's just tricky. So so far

we've only been talking about one to one. I think it's good that the government's confining it to that. Um but one interesting thing I I do like to note you know we have a bunch of stable coins that exist in traditional finance to the US dollar that have nothing to do with crypto. You know some some countries like El Salvador and Panama don't even have their own currency anymore. They just want straight onto dollars. Others like Hong Kong have a Hong Kong dollar which is one to1 backed to dollars as a ratio. Um but it is one to one backed and then like in UAE uh the dinars there are backed by a combination of dollars and oil reserves which is effectively an algorithmic stable coin. Fortunately they have a lot of oil. So um I don't think there's anyone that's calling it into question.

Um but uh it's interesting we have all these models in traditional finance. None of this is new. >> It's very it's very interesting. Uh I'm I'm gonna end it there because you're you're now getting into you make me want to talk about uh digital asset treasuries and the potential of them as using uh other digital assets for backing of their their treasury which kind of makes a parallel to oil companies. But I'm I'm not going to I'm not going to open that can of worms. >> We could talk for three hours. Yeah. >> Yeah. Yeah. Mike, this could go forever. Uh Mike, just a pleasure to get you on the show today. Your big picture thinking is uh very enlightening. Thank you very much.

>> Thanks for having me, Jay. Uh, you run a great show, so it's my pleasure. >> Appreciate it. Well, thanks everybody for listening in. I got to remind you as always, none of today's episode is financial advice. I'm not your financial adviser. Mike is not your financial adviser. You should always do your own research. If you need help with your investments, you speak to a investment professional. As I mentioned at the beginning, if you're doing swaps with your crypto, check out Milkroad Swap at swap.mmillroad.com. Some of the lowest fees in the space. Have yourselves a wicked awesome day. We'll see you back again tomorrow. Crypto still has two major problems. First, a lack of privacy. Onchain transactions are public by default.

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