Kraken Gets Fed Access as Crypto Takes on the Banks

Transcript

This is a company that runs an L2 and has access to Fedwire. Kraken is starting to look more and more like a bank with blockchain technology. >> Crypto is like, "Yay, we can have a bank account." Uh when like we shouldn't really be surprised. Like, of course, >> I think if you're inside crypto, it feels like fat comply. All dollars will move over stable coins. All assets will move over blockchains in a tokenized form. There's been so much good news that those questions to me are like answered. It does seem like there is this view in the White House that the crypto industry has made enough concessions on the stable coin yield side and that now they are putting pressure on the banks to get clarity

passed. The banks are fighting the stable coin legislation and passing interest to stable coin holders because they are afraid companies are superior from a technology perspective for users. Welcome back everyone to another episode of Inflection Point. I have with me as always David, Michael, and Matt. So, this week I just wanted to kick it off

with, you know, what what have you guys been looking at this week? What's interesting has popped up on your radar? Um, I think maybe David, you had some stuff. >> Um, I'm happy to start. Um, this has been a great week for me because I'm home for two weeks straight, which has been kind of rare uh for this year. I'm not going to continue this streak next week, but I'm I'm happy to be home two weeks in a row. Uh well I guess a lot has been a lot has been on my mind. Uh we can talk about the market movements a lot going on with oil and all the geopolitical escalations amid a very notable crypto resilience. I think that our market is proving to be

way quieter than a lot of people would have expected given the current uh turmoil. There's also a lot of interesting news flow, right, regarding uh we can go about uh Kraken getting a master account. Maybe we should touch on that uh at some point later. Uh but yeah, I'm definitely very interested in overall market price action. I think how quiet the market has been is pretty noteworthy. I think it speaks a little bit to something we discussed actually in the last episode. Uh we were talking about how positioning was very light. uh leverage is very low. Demand for leverage in crypto has been at a multi-year low. Volumes have also been pretty low. I do feel like whoever

wanted to sell Bitcoin or crypto whether those are more like systematic leverage unwind type of selling pressures or just folks moving to other themes. I feel like a lot of them have already done that uh by the time that crypto got to the 60k level. So, we were just pretty light. And I think that's a pretty cool phase to be in the market when you start to see all this big news that should move markets either up or down. In this case, maybe down for risk assets more generally, but then you start to see crypto not move much. I feel like this could mean that we're maybe getting closer to the end of this kind of bare market that we have been seeing over the

past few months. Yeah, that's on my mind. But yeah, interested in seeing Michael, Matt, what are you guys jamming on? >> Well, well, just to build on that, I completely agree. You know, my big thesis on this winter was that it would die in apathy, not excitement. And I expected apathy to be like a long drawn out period uh where crypto just traded sideways. But I think what David is pointing out is like this was an experience of the apathy in the crypto market. All the people that would normally freak out when there is risk in the market just weren't there. And you can see that in the data David mentioned that positioning is light. You can see it in things like the borrow rate on stable coins is actually at the Fed

funds rate which just suggests there's just no interest in borrower leverage at all. And it made me very optimistic that maybe not even at the end of we're not approaching the end of crypto winter. As David said, it it made me think like maybe actually uh it's spring. Um I'm not sure I'm ready to declare that yet, but the the level of people who just didn't care about the broader risk in the world and responded to cryptonative stories was really remarkable to me. Gave me a lot of hope.

>> Yeah, I mean I echo that as well. uh not on the macro picture, right? I thought it was pretty telling when the S&P, you know, dropped 2% on Middle East escalation and oil price spikes and Bitcoin was essentially flat, you know, up like, you know, uh tiny bit and now, you know, with tensions easing, you know, Bitcoin's leading the recovery, I think, um which is unusual, but very I think very bullish. Uh I don't know if you if you guys uh agree or disagree, but I think that um there's some signs of a relief. I think I'm hoping for obviously geopolitical shocks um in the past at least COVID Ukraine in in uh 22.

Uh you know, crypto sold off harder than equities, but yet we haven't we're not seeing that really uh take place right now. So it's I'm cautiously optimistic. Yeah, I think that's right. I would just add there's also just an exhausting amount of very good news on stable coins, tokenization, and other matters. Whether that's President Trump trying to put his thumb on the scale on the Clarity Act or, you know, the the master account for Kraken or uh, you know, every financial institution. I think today it's Mastercard rolling out some big crypto crypto initiative. I do think people may just capitulate that the volume of good news in that space is too big. For what it's worth, we've seen Bitcoin and Soul outperform I mean ETH

and Soul outperform Bitcoin over the last two weeks, which is notable as well when you're coming out of a bare market. So, I think there's uh I think that's another element. There's just so much good news that it may have accumulated enough that people have just acquiesced to uh to the reality that that that's a real thing happening in the market. >> I think I might be the only one disagreeing here. Um I I mean so yeah S&P is down 2% which you know historically that's a relative size of a move but I mean within the past year two years we've seen multiple singledigit moves in the S&P and so you know Bitcoin not really reacting that much but also you know even if you look at the NASDAQ

and some of the other stocks I mean they're more reacting to AI than they are to these geopolitical events. So I I maybe it's just a broader risk appetite even though I do agree that I think that the sellers are must be exhausted by now or maybe that's just my cope. Um but you know I I I still I I'm still it still feels kind of fragile for Bitcoin. I mean it's just over the last couple of days we've still seen some net negative outflows from the ETFs. Um you know and we're touching that 70k mark around now struggling to get past this that kind of resistance. So maybe I should be more optimistic like you all, but maybe there's still some more opinion ahead. I don't know.

>> No, I I think you got a lot of right points there, Mark. And I actually tweeted this like a few days ago. I think Bitcoin's price action is very it's kind of textbook example of how liquidity and positioning matters because all this price action that we saw on Bitcoin, we also saw on these broader tech stocks, right? let's say the nonAI tech this part of the tech market that Bitcoin has been tracking pretty well uh that tracking remains and I think that a lot of the uh price action that we saw has to do with these things positioning liquidity trends it was just just just a light market um having that said I do think it's

interesting to see that you don't have these new piling pressures coming whenever you have this big macro moves Right. And and and I think we saw a bunch of these. And I fully agree as well with Matt that maybe we're going to chop for a while. Uh and and I think that's fine. Um and and and that will give us like a consolidation base and more breathing room to to move from here. Um yeah, I think I think that all makes sense. >> On the DeFi side, uh you know, what's interesting what I look at is, you know, a morpho yields are like two to 3%.

um risk-free rate beats DeFi yields. So, obviously rational capital is going to stay in in T bills until those rates come down. But I will say that historically when DeFi yields exceed T bill rates, you know, capital obviously flows into DeFi. But when they're at this point, historically, uh subt yields um mark typically a reliable bottom uh signal for DeFi. Um, and if you you believe rates are heading lower over the next year, I think the setup for DeFi capital inflows is the best we've seen since 2020.

>> Yeah, 100%. Um, on DeFi Lama, you can look at the average yields across all of the products and it's it's weighted by market cap. And like you're saying, if you if you run it into as an indicator for the market cycles, it actually front runs a little bit. There's always some um external factors like sometimes there's a crash and liquidations happen and borrow and with borrowers and yields will spike temporarily but if you like take a 7-day median average looking at onchain yields is a really good like cycle indicator as you mentioned. >> Yep.

>> Yeah, I think that's right. I think a lot there are a lot of those indicators that are just flashing more bullish than I would have expected. I think that's a strong one which points to apathy bottoming. You can see slight improvement but not great improvement on things like crypto fear and greed. You see accumulation from long-term wallets and whales. Uh yes, there's been some outflows from ETFs, but net inflows on more days than than than outflows over the last couple of weeks. Uh, again, I don't think we like skyrocket, but if I'm shaping a channel and it was shaping downwards a month ago, it's now more like a flat or slightly upward shaping channel in my mind that we're going to

chop between. So, I think there are enough indicators that uh that things have improved a little bit. I don't think they're great yet, but they've improved a little bit. The other interesting thing I think was seeing some price discovery happening in crypto markets instead of in treadfi markets. And I feel like these are always interesting signposts posts of what the future can look like. Um like oil pers on hyperlquid kind of trading and starting to show some signs even some mainstream outlets mentioning hyperlquid as kind of a a a market signal. I remember in 2020 when for the first time there was a geopolitical

event which I think was when uh an Iranian general was killed and that happened over weekend and and Bitcoin kind of was the only thing that people could trade on the weekend at that point and Bitcoin kind of reacted and for us that was a huge deal. Matt Matt will recall we we wrote a monthly letter about that like how was a big deal. Of course, today the market is so much more evolved that we don't even pay attention to these things. But there's this new phase of we seeing oil price discovery happening over the weekend on hyperlquid which I think is also interesting and a sign of things to come. Yeah, I think from for the first time I think in uh Hyperliquid's history, I think uh at at

least I think of the five top uh pers that are traded, majority of them are non-crypto. Um uh so that's that's crazy that shows a convergence between uh trady markets and DeFi that we have been talking about, but um it's you're seeing in real time. Yeah, I would just I I think this is a like a 10 or a 100x trend. The little piece of financial history I'll give you is that really ETFs came of age after the global financial crisis when bond mutual funds weren't pricing properly and people realized that bond ETFs were pricing the live market. And if you look at ETF growth, it went from like 30 40% a year to like 80 90% a year out of the global

financial crisis because in normal markets, it didn't matter. It was only when there was this shock that people were like, "Oh, I need this other thing." But once they learned about this other thing, they couldn't resist using it all the time. I think the same thing is going to happen on Hyperlid. I think a huge part of the Trad 5 world learned about Hyperlid because the bombs flew in Iran on Saturday at 12:30 a.m. or whatever. Um, and now they're just going to turn to it consistently because it has these other advantages. It always had those advantages. They just weren't good enough to make someone adjust to them in normal times, but you get these shock moments and you can really see step function growth. So, uh, I'm

bullish on that growth. I'm bullish on Hyperlquid. I'm bullish on more of Trapfi moving onto crypto-based rails. I I don't think it goes back in the bottle. >> Yeah, I'm I'm really happy Bitcoin isn't the only thing that you can trade on a weekend to express views because most of the time it was panic and would, you know, spill over onto the Monday opening. So, yeah, I'm all here for it. Um but to to your previous point Matt you know with looking at this trend you know no maybe not downward sloping anymore from a apathy perspective my one of my soft uh benchmarks for this is how are people reacting to all of this good news right and I mean it's obviously not a bull market because some good news comes out all the time and nothing

nothing's exceedingly spiking and if it does it retraces pretty quickly um and then you know one of one of those really good news that the crypto industry got was the uh was the Kraken Fed skinny master account which was actually kind of huge because I mean it's not even live yet but um I'll let I think David has some like valant points there. >> Oh man, I can riff on this for a while. Uh the interesting thing about these is that they combine financial infrastructure with like a little bit of financial history which are my kind of two favorite topics. So I I'll try to keep it brief. Uh but yeah, maybe to to recap the news, uh Kraken announced that they obtained a quote unquote skinny uh

Fed master account. I think that's a massive milestone for u for the industry for this interconnectedness between Treadfi and crypto that we've been talking about. Uh and this has been a long time coming. Um actually uh this debate on uh access to fed master accounts has been going for a long time. It didn't start with crypto companies. It's been it's been around for a while. Uh I can give you the whole history of uh Fed master accounts and all of that.

But maybe we can just start saying that today if you are a crypto company and if you want to provide like payment services or anything that has interaction with the banking uh industry you need to rely on this network of correspondent banks of subcustodians and this is inefficient. I think you can argue this is riskier that limits the potential of things you can do right you move at the speed of of these partners. So for a while the industry has been trying to get direct access to the Federal Reserve. A lot of companies have been doing this. Uh Anchorage we we have a subsidiary called Anchorage Digital

Bank. Uh we are uh in the process of applying for a master account but a full one not not the quote unquote skinny one. uh and there's there's a lot of discussion and innovation happened there. I'll just stop here to like broaden the discussion out, but I think it's a super interesting time uh and interesting to see and I hope we're going to see more companies uh getting this sort of access. >> No, I think it's some of the most bullish news that I've seen in maybe a maybe five years, honestly. Um, and it's bullish because it's the other end of the uh book end of what was a very dark time for crypto and all of us. We

remember, you know, operation chokepoint 2.0. Um and I remember when silvergate and uh signature collapsed, it was very difficult for a lot of crypto companies to get banked and that is a scary thing for a crypto company and um it is very delotterious to uh it was very delotterious to the uh the crypto market. And so by virtue of Kraken getting this skinny master account, I think there's a couple of things. one is um even though op uh operation chokepoint 2.0 was has obviously not been in effect since uh President Trump got in, it's still a signal that now we have a safe harbor. Crypto companies now

can bank with Kraken and Kraken has direct access to the Fed. Um and and so that's a big that is a big almost makes Kraken and crypto unkillable from a banking access perspective. I think that's really important. Um second though is that this is a very big play for Kraken. Uh Kraken um is setting up this like unified infrastructure model. Um and if you look at the stack that they're assembling um it's quite enviable, right? They've got their exchange um and now they're partnering with NASDAQ and New York Stock Exchange.

They now have a bank, you know, it's a Wyoming uh SPDI uh uh which there's a whole conversation we could have about Wyoming uh Wyoming's moves uh to uh attract crypto companies to move there. I think they did some brilliant things. They've got custody, right? Um they've got settlement now with uh with Fed wire um and um tokenization um as well you know with NASDAQ and uh they purchased backed which is uh um which is uh behind X stocks. So like that's exchange bank custody settlement tokenization under one roof. It starts to look like an advantage that you see in Tradfi with

Prime Brokers. Um, Coinbase doesn't have a bank charter. Circle doesn't have an exchange. Uh, and traditional banks don't have crypto native infra. So, I think Kraken is uh is ahead of the the curve here. >> I didn't I didn't realize that Coinbase didn't have I thought multiple crypto exchanges had SPDIS in Wyoming. Okay. So, this is this is limited to a few then. Or maybe just Kraken or I'm asking. >> Um, I see. So the the way I understand is uh Kraken has a state charter bank, right? The Wyoming charter. Uh I think custodia uh also came with that at around the same time. And there are

other firms like Anchorage that went for a different path which is the federally chartered bank. So like our charter is a federal charter with the OCC. It's not a regional one. So it's a slightly different path. uh it pro might allow you to do more things uh in the future, but that's yeah there's there's not too many uh crypto companies that have been engaging with banking licenses as I can think of for the past I know five to seven years just these three but then more recently a lot of folks have been applying to these federal charters right you guys have probably seen a lot of fintech companies a lot of crypto companies a lot of them are going for them now and some of them are already getting their conditional chart orders.

>> Custodia custodia they actually filed they actually filed for a full master account and got denied last October the same month that Governor Wallop proposed this new skinny Fed master account. So it's it's kind of ironic to see that but then you know there's critiques about that about some maybe I don't know if this favoritism or how was Kraken selected I mean the bank policy institute put out a statement saying they're very concerned by this deeply concerned I think with their words. Um, I I I can see why some banks would be salty because I mean obviously before this you would have needed to use these

banks for interchange and they collect fees off of that. But is there do you all see any reason why Kraken in particular was chosen for this? >> I actually probably should just let uh David or Michael I do not know. I'll just say that Kraken as an outside observer has been executing extremely well for the last 18 months in general opening up major new areas of the market. I think they went from a deep second place uh to now really a leader in the crypto industry. So um from that 30,000 foot perspective I'm not surprised they're an emerging giant.

Might be a good time for a little bit of Fed master account history. Um these things I mean this has been a topic of contention for a while as I understand. Actually most of what I know about this is from a paper called opening a fed master account. It actually reads very easily. Uh it's from a banker scholar called Julie Hill. Uh really really nice written in 2023. And basically FAD direct access to the Fed has existed since the Fed was founded over 100 years ago. And then in the 1980s things started to broaden out a little bit. So for the most time of the Fed's history, only the member banks could

have direct access to the Fed, could have a Fed master account. So then in 1980, there was this new law and then it started to open access to these non-member banks and these credit unions. And the process to open the application process for a Fed master account at the time was insanely simple. It was like a onepage form with a signature page and you would get your approval in five to seven business days. So honestly not very different from us getting a bank account back in the 80s. Um but then over time the Fed started to exert a lot more discretion and started to kind of

delay these uh these uh these these applications that that started to happen I think mostly in the 2010 era and then all the way to 2022 we were in this limbo in which the Fed was kind of being a lot more selective. Um and that's when we started to see crypto companies like custodia uh come for for a fed master account but but it was not only about crypto there were I think it was a Kabis company from Colorado or bank uh there was the narrow bank which was a full reserve bank that started to set up shop I guess 2017 uh or 2015 uh there was a

bank in uh American Samoa So, so like there's there's a bunch of uh institutions that either were not able to get Fed master accounts or it took them a a very long time to do that. So then the Fed came with this um kind of a tiered system first, but then Christopher Waller, getting to your point, Mark, Christopher Waller, who's a uh a Fed governor, uh he's is in the board of the the the the Fed, um he came up with this idea of a skinny master account. And the idea of the skinny master account is basically to separate the role of payment processing from like

credit creation on top of fractional reserves, right? And the skinny accounts wouldn't have certain things. So they don't have access to the Fed discount window. They don't get to receive interest on reserve balances. uh they have caps on how much uh deposits they can keep overnight. So like there's there's a bunch of restrictions and and that was kind of the initial idea. Uh and and the interesting thing here to me what was I don't think it was surprising to see a crypto company get a fast uh a Fed master account. The timing was interesting though because the skinny accounts they they don't exist yet. Uh

the skinny accounts, they're still in the public comment process. Actually, Anchorage put out some comment um um I think a couple weeks ago and and that was kind of what was more surprising to me, the fact that uh it came now. Uh that that was a little bit more surprising. Uh on the fact of it being Kraken, um yeah, I don't know. I think uh Kraken was probably first in line uh in terms of applying for these accounts uh because they have their charter for a while.

Again, it's a it's a state charter. Uh we have a federal charter, so like it's kind of a a different thing. Uh there are some limitations to the skinny master account. Uh that that can be rough uh maybe for crypto companies to work with. uh one of them is that you cannot you have a cap on how much you can keep as overnight balances. I think there's a cap is 500 million or 10% of assets or something like that. So what that does is for maybe a lot of companies that will put them back on to to or will force them to kind of sweep funds overnight. So then you're back to relying on this network of correspondent banks and all that stuff. So, uh, so

there's a few things here or there to to still fix and work, uh, with the master account. Uh, but I think overall it's great to see progress. I mean, great to see more integration between Treadfy and crypto. To me, the timing was a little bit surprising. It happened faster than at least me personally was expecting, but that's kind of the the the that's how I see this. >> Yeah. On the question of why Kraken, it's it's hard to say, but I mean part of it is Wyoming designed this SPDI framework specifically to attract digital asset companies. Kraken jumped at the opportunity and that framework imposes more conservative requirements than traditional bank charters. So you

have to have a full reserve uh you know robust extremely high AML KYC and very specific standards for uh custody for digital assets. Um, and so, uh, you know, it would be, it was very hard for the Fed looking at these type of institutions in Wyoming, complying with those rules to be able to, you know, blanket reject them. Now, contrast that with Custodia, which was also a Wyoming SPDI. Um maybe they got you know maybe they were a victim of bad timing but they were also probably not as strategic because when custodia custodia applied for a master account they were denied and then they sued the Fed and they

lost. Kraken took the opposite approach. They were working five years quiet regulatory engagement. No litigation, no public pressure campaigns, complete transparency with examiners and uh it worked. And I think the lesson is at least for companies of Kraken size um you know financial regulation cooperation with uh regulators it outperforms uh confrontation um and litigation. >> I I I admire them for doing that. I would just note sometimes both approaches are are are needed. I'd note on the ETF side, uh, we all owe a debt to Grayscale for suing the SEC into, uh,

acting like a rational human instead of sticking its head in the sand. So, sometimes you have to force the issue, but for sure often, >> uh, working alongside them works, too. >> 100%. Yeah. I mean, Galaxy has taken uh, a page out of Kraken's playbook for its history, or maybe they've taken a page out of ours. We work very closely with regulators. uh we pride ourselves in having good relationships with them. We don't really make public statements about these things and um and uh we we find it really important that you know Galaxy but also obviously companies like Kraken or other companies um that are that are of size in crypto really um are the bridge between the cryptonative DeFi

players that are really on the bleeding edge of things and the regulators. Um, and so we play that role and and I I think Kraken's been playing it as well. >> I guess it depends on I maybe people were using the old strategy from choke point 2.0 as you mentioned, Michael, and then playing the long game otherwise like Kraken did. Um, cuz I think Krakens's had the SPDI for like over 10 years now. And as you mentioned, with stricter requirements, it kind of makes sense um, why they were given this. Let's just call it a privilege. Um, and I do like this form of regulation like you're proposing this new framework and then you can let certain individuals or entities beta test it so to speak. And

so it's, you know, you can start to see the effects almost like, you know, a blockchain rolling out a devet. So, you know, m maybe some other uh regulators can look at this kind of test before you try to speed up the out the outcome um framework. So, I think it's interesting there. So, I mean, you're going to say something, Michael. Sorry. >> I I think there's going to be a flood of uh other companies now applying for these. Um, obviously, Anchorage has been doing this uh uh according to David, but many others are, and it's going to be very difficult for regulators to deny uh like uh similarly situated uh companies that are applying for this given that they've already approved Kraken. Yeah, I'll just say one thing, one meta

comment I've seen in the industry is I think the industry has a little bit of like learned helplessness because we were beaten down by regulators for so long uh that people more or less just gave up. Toward Mike's point, I think you're going to see a flood. Uh it's one of the reasons like people were so cautious on prediction markets even though I think regulators were aggressively talking about being fine with it, but you see the largest institutions just now realizing that. I think that's true here on the banking side. So I suspect the industry has been maybe too cautious by and large over the last year. They haven't fully recalibrated to the existing regulatory framework because we were beaten down for so long. And I bet I bet that's

going to correct over the next 12 months. I think people are waking up that it's like now okay to push the edges a little bit and to find out where the edges are. There are edges, but the I think the industry needs to find out where those edges are. I I have to say one thing on that, Matt. I completely agree and it's going to contradict my previous point or might appear that way which is that with a favorable regulatory climate the industry needs to push as hard and and as fast as possible because every single concession or every single no action letter that the industry gets, every single license it otherwise wouldn't have gotten in a different regulatory climate that it gets now it sets a government precedent that is very difficult to dismantle in a

new administration. But if they if we don't move fast and we don't get certain uh regulatory uh for example the clarity act right we don't get the clarity act or we don't get regulatory guidance that is very positive um if we don't push for that uh we will lose the the moment >> yeah I think that's especially true because we're on I think we're on very solid footing here uh to to Michael's point and I kind of alluded to crypto companies can have this quote unquote privilege because they they are full reserved. So, it's a very different risk profile from a bank that runs fractional reserves or maybe doesn't have the proper uh oversight by by the Fed. We're

talking about companies that are run in a very different way and have a much more contained, I would say, risk profile. So, I feel like we can that that means we can probably run a little bit more aggressively than we we would think. uh or maybe then as Matt has mentioned then as maybe we we would have given the perception that that we have. So that's that's great to see. Let's let's see where this thing goes. I'm sure we're going to see a lot more developments on that side.

>> It's so true. Crypto is like yay, we can have a bank account. Uh when like we shouldn't really be surprised like of course we're just like any other industry. Um and yet here it's a celebration. Such >> kind of reminds me of the marijuana industry back in the early 2010s when they couldn't get they couldn't even accept credit cards. Everything was done in cash. There was a lot of loopholes around it and it I don't even know where that's ended right now to be honest. I don't know what the case is in the US. I don't live there.

>> It's totally true. I mean it is worth you know mentioning to to people outside of crypto how harsh operation choke point 2.0 was right. It was act like firms showing up at banks with $10 million checks and the banks saying we don't want your money uh is like a shocking radicalizing experience but happened I think to everyone who operated in the crypto industry and then bank accounts being shut down. It really was an extraordinarily harsh moment and I think we're just reccalibrating back to normal now.

one one one final point on on Kraken and and this question is for David. So in this skinny master account um is Kraken going to be able to settle directly on Fed wire and uh hold reserves um at the Fed? So u I don't know the specifics of Kraken's application but I think the conversation that is being had right now is that uh skinny master accounts would give you access to Fed now and Fed wire. So these are kind of two of the bigger Fed payment systems.

I don't think they give you access to a though. Um so so so there's there's a limitation there. Um, and as far as I understand, you cannot earn interest on reserve balances. That was kind of that's one of the big kind of sticking points and and factors uh in the skinny account which is a big limitation. For example, if you want to issue stable coins, right? So like depends on what you want to do, some of these things can be uh meaningful limitations. Uh the other thing is what I mentioned you cannot keep reserves overnight past a certain limit. So so so there are some of these limitations but again the

skinny account concept is still under discussion. Actually if you look at our uh at our comment letter we we talk about some of these things and how they can be uh meaningful limitations. Uh but yeah, I don't know the specifics of Kraken's application, but I would assume it kind of probably follows more more or less these guidelines. >> Yeah, because they self- selected themselves into this this model if you like. Yeah, I was thinking because if if Kraken can settle directly on Fed wire, the architecture then exists for them to issue a stable coin backed by reserves held at the Fed and a stable coin issued by an institution with a Fed master account. Uh like if if Kraken uh has the

full uh Fed master account, um that's going to be the safest possible backing for a stable coin. Um now obviously there's been no talk of this. uh Kraken hasn't announced anything but um it's possible that the plumbing is now in place which could be quite interesting. >> Yeah, I think uh that's a great point. Actually, there is an economist George Seljin. Maybe some of the folks here follow George Seljin. His he's has been actually is a monetary economist. He's a great guy. You should totally follow him. But George Seljin says that he says that the ideal setup for a stable coin issuer would be to have to be connected straight to the Federal Reserve. That's

kind of less risky than having a bank deposit or or or something like that. So getting straight connection to the Fed. Um I think today though from uh the the way the skinny master account is developed because you cannot earn interest on those reserves. I think there would be very severe limitations to that. But yeah, it will be interesting to see >> if the Clarity Act though uh limits uh being able to uh pass uh yield to uh stable coin holders. Um that might not matter and what might matter is instead just the security of the account and the reserves for backing the stable coin.

>> I I think that's a I mean that's a great point. There's sort of two ways of imagining stable coins ultimately. one is that they can't pass on any interest in which case this is an interesting solution and the other where they have to pass on all of the interest uh you know but but but I think it's I think it's a fascinating idea. I wouldn't be surprised if somebody tried it. >> It sounds like the closest thing to a CBDC that I've heard but without all of the detriments of a CBDC. Well, well, what's interesting though is that if the Fed um I'm sorry, if the Clarity Act allows you to pass interest through the stable coin and banks start issuing

stable coins with full master accounts, they will have superior products to Circle, which would then give rise in my mind to a cause of action by Circle to enforce um it to make sure that it become gets access to uh a Fed master account, right? So all of a sudden you start to see these uh these strategic games that are played. Um but a real regulatory issues which is that the a regulator cannot favor certain institutions over others if those institutions are similarly situated and have similar products. So once you crack the door open a little bit with Kraken, you're cracking it open for Circle, for Coinbase, for Galaxy, for Bitwise, for

Anchorage. So there's a bunch of different interesting things that that you might see over the next couple months. >> 100%. Uh and that's probably part of the reason why companies like Circle and many others are going for federal banking treasury. Uh fintech companies too like it's um it's definitely this this is a part of the industry that will change a lot in the next year or two. If if we separate the government from the Fed, wouldn't the government rather T- bills to be the backing because it it would make debt if if if if stable coins do pick up as we think they will into the trillions, then that's a lot of buying pressure and a downward price on on on yield making borrowing cheaper. So it would be in

their incentive to push more for that form of backing than than reserves. >> Yes, I agree. I agree with that. That's definitely right. >> Okay. So, we I mean we've we've we talked this I mean obviously this is good for Kraken. This is some I mean there's their rumored IPO coming up if they with this Skinny Master account they will be probably saving tens of millions of dollars if not more on on settlement fees in the back end which will you know prop up their bottom line or allow them to do other things. Do we consider this as part of like a fundamental one of the fundamentals as good for crypto as a whole if this starts to happen? And are we are we are

we seeing anything the other good news that we've talked about that keeps coming up? Do we consider these fundamentals and the mismatch between prices and what's happening right now? >> What do you think? This is great news for the industry and this is actually piling on top of a lot of great fundamental news that we have been seeing for quite a few months now. I think we discussed this in the past in the last episode or maybe in our chat. How much very positive news flow that three or four years ago would completely change the market trajectory. Right? So like all these massive threadfi companies doing partnership with a lot of the DeFi OGs or the DeFi leading the

leading DeFi protocols uh partnerships between big traditional exchanges and crypto exchanges. Now we have all these crypto companies coming for banking charters. One of them obtaining um a Fed master account. So, I feel like this adds to this convergence between Treadfi and crypto that is the very theme of our podcast. And I think it's positive news flow that we're seeing on top of positive news flow. Uh the market is not ready for that. I feel like I I'm a big fan of George Soros's prevailing bias and I feel like the market has this prevailing bias right now. So, it's probably not such a big topic of

discussion outside the circles we are in. But I think we who are seeing these things from a close distance can totally see where the future is going. I think this should be extremely positive news uh for the industry as a whole and it adds on top of all these amazing things we've been seeing. >> Yeah, I I would definitely agree. I think if you're inside crypto, it feels like fat comply. All dollars will move over stable coins. All assets will move over blockchains in a tokenized form. Uh there's been so much good news that those questions to me are like answered.

I'm already living in that world. It may be three years, it may be five years, it may be seven years, but that world is like effectively inevitable. The two remaining questions are the one that David hinted at, which is how long does it take the rest of the world to realize this this thing that is uh that is like the manifest destiny of financial assets to move over blockchains. And then the second one is does the value where does the value acrue and that's the one that even within crypto there is just massive debate. It's going to be the focus of the next cycle. Does it acrew to L1's?

Does it acrew to apps? Does it acrew to ecosystem builders? Does it just go to users? Uh there are not great answers or not a huge amount of clarity there. But I think crypto has been fighting this sort of battle with itself. Will stable coins really scale? Will tokenization really scale? To my mind, those are now answered. It's like yes. And now it's going to fight this battle on is block space commoditized? Uh do DeFi apps have pricing power? Uh will tradi institutions co-opt all of this and put it onto uh their own chains? I think those are going to be where the battles are fought for the next year and those are are really fun battles to think about.

>> Completely agree. I think uh the noteworthy thing about Kraken as well is that with a uh with the announcement um that they've gotten a Skinny Master account. Um this is a company that runs an L2 and has a and has access to Fedwire, right? Uh this is a company that runs validators um and also is now part of the elite club of uh of uh the Federal Reserve's uh banking partners. So it's now what you could think about that in one of two ways and there these are two this is a sort of a a ne the next debate or or it's it's something that I think is really interesting to

speculate on is one camp thinks that well crypto will eventually um be absorbed into tradi um another camp thinks that these uh trady and crypto will sort of both take very dominant positions but they will have different lanes. And then the third um which is one that I subscribe to is that actually crypto companies will dominate over traditional financial companies. Right? So Kraken is starting to look more and more like a bank with technology, a bank with blockchain technology.

That is a powerful combination. if as uh the SEC chair says securities are going to be tokenized and move on chain. Um, so I think that you might be a you might start seeing the early signs of crypto companies that are just better prepared for the future economy such that when we look back on this, you know, 2026, we're going to say it was so obvious that companies like Kraken or Bitwise or Galaxy or Anchorage would be in a good position for uh for penetrating the the future uh global uh economy.

I love that point >> to your point, Matt. You, you know, you were saying that with this convergence and with we're we're already seeing, you know, cracking is applying. You we mentioned that the floodgates will open up for others to apply for their their master accounts and charters. We're seeing other fintexs doing it, but we're also starting to see some DeFi protocols with stable coin affiliate cards or cards linked to their payment, right? And some of these even DeFi protocols are starting to look like neo banks in of themselves and they're and also kind of changing what the definition of a neo bank is. And so >> there could be a future and you know these these protocols are you know set up from the foundation from the labs and

the labs tends to do stuff like create the app create the front end you know try to drive that growth the DeFi mullet so to speak and so you know your three things whether TRFI you know integrates into crypto cryp crypto does the other or the third point like it start it might be like you don't even know which is happening at some point it all just starts to blur in with each other and just has these definitions and these pathways change. Um, and and we're we're seeing a a huge push right now at least with some of the protocols like Jupiter and Ether of with these cards, these lending programs, these, you know, they're trying to um maybe let they're trying to market them as savings

accounts, but in a very, you know, safe way that they don't get in trouble with any regulators because it's not FDIC insured. But then they would also love to push for those kind of things. So I 2026 as you said will be the year that we look back and be was so obvious and it it probably is happening now like if you think about if you believe in the singularity it's probably happening all now with the the convergence with with AI the there's no like actual inflection point no pun intended with this kind of stuff it's more like a a morph into it that you don't really realize while you're going through it.

>> Yeah Mark but make no mistake about this. The banks are fighting the stable coin legislation and passing interest to stablecoin holders because they are afraid that companies um like Circle and companies like Coinbase or Kraken or or other stable coin issuers are superior from a technology perspective for users and they will get out competed by them. right now. It would be very easy for the banking industry, I think, to just simply issue their own stable coins and pass yield um and be able to compete with Circle and with other stable coin issuers like Paxos, but they don't have

the technology, they don't have the technological footprint, they don't have the culture to build that technology quickly enough. Um, now the many are trying and they're they're uh they're definitely hedging, but it would be easier for them to kill uh the stable coin yield uh uh provisions um in the Genius Act than um than to have to compete with with uh these NEO banks, these crypto uh crypto neo banks. >> Mike, don't you think they can't from a sort of classic innovators dilemma perspective? Right? like if if they endorse stable coins as an alternative to bank accounts, they destroy their the core of their business. In so doing, it's it's a really I think technology

and culture is part of it, but part of it is sort of classic Clayton Christensen uh they can't do it. U they almost have to wait to acquire their way in uh as the only like viable pathway. I think it's really hard for them if they really believe a significant threat. I mean, I I I agree, but I don't see necessarily everyone adopting stable coins like everyone adopting bank accounts right away, right? Um I I don't see uh you know, the older generation, you know, boomers uh you know, necessarily aping into stable coins just because they can receive yield. Um and so rather than lose those the customers that do want stable coins, um rather the

banks lose those bank accounts, um you would think they would just offer a bundled service with stable coins, right? And pass yield to them. Um but there's there's trade-offs there, too, which is that well, if they do that for some customers, they're going to have to do that for everyone, and they lose a huge source of revenue. I guess the question for me, Matt, is like how much money um how much money are they really making right now just on deposits? Um or is it is it is it just a is it just merely um the revenue or is it more a structural power dynamic that's at play here that they want to maintain their their monopolies? I'm not sure.

>> Yeah, I think it's a great question. Love to hear David's thoughts. I think a lot of it is satisfying regulatory requirements and and capital amounts. they're sort of in a box where they need that deposit base in order to operate as banks. Um uh but but it is yeah I think it's yeah it is notable that stable coins are tiny. I mean they're tiny, right? It's $300 billion. They're they're 12th of money market funds. They're tiny. Um and and yet they're this afraid of it. I think that tells you something. >> Yeah. I'm curious to see what's going to happen with uh clarity whether it's going to pass. I feel like that's a critical step that we ideally need to be we need to see over the next I don't

know two to three months. Uh it feels like that's actually another topic that I think has been helping move markets which it does seem like there is this view in the white house that the crypto industry has made enough concessions on the stable coin yield side and that now they are putting pressure on the back on the banks to get clarity passed. um at least the Senate. Uh so let's see how how that's going to shape out. But I I think it's very interesting to see how much support the industry is getting from from from the White House against an industry that is I mean these are the banks like it's uh really interesting to see. Uh we're yeah we're we we've gone a

very long way over the past many years. >> It's absolutely crazy to It's absolutely crazy to me that a Republican president is siding with this naent crypto industry over the banks. Like just put ourselves back in 2008, you know, Obama years, the Bush years. Like it's it would be it would be it is crazy to think that the politics have shifted in our favor uh or any industry's favor that's going up against the banks. I don't know. I'm sure you guys remember. Do you guys remember change fees uh with the credit cards versus the banks? Um which was one of

the most brutal lobby battles, you know, I guess that's like 15 years ago now. I don't but um swipe fees where uh the credit cards were going against the the retailers. Um but yeah, like the financial industry has always been the most powerful industry in in in DC. Um, and to see Trump, you know, tweeting in favor of crypto, uh, I think is really, really interesting. >> Although I would remark that the industry has, it seems like the industry has made some important concessions on the stable coin rewards side like idol stable coin balances are not going to earn uh, yield or be subject to rewards.

Uh, but yeah, let's see. I feel like now it's time to to see this pass. >> I feel like that's a huge concession there. And I think moving banks is probably a very sticky segment, but of course these these banks have been around for hundreds of years and so they're looking to the future and there's competition coming from all over. There's competition from crypto with the stable coin yields and the other NEO banks that we mentioned. There's even you know with the flood of charters coming in like even Robin Hood more and more you youth are depositing money into Robin Hood and their their cash sits idly by there and you can also earn interest on that. I mean we have I think Mr. beast acquired a bank recently that's targeted for for youth step right

so I mean where it's it's not just about surviving now it's about the future generations income and who who's going to be holding and costing that money for them so I can see how it's it's of it's almost existentialist to to the banks but I mean it's not we at the end of the day you know regulation needs to be for the consumers and the utility that it provides so I'm I'm hoping and optimistic that that the clarity bill comes through soon. >> So cool. And being a bank is a cool thing again. Look at that. Look what we made.

>> Okay. Nice. Um we're coming up on time here. So um does anybody have any last thoughts? >> I think we covered a lot of ground. Um I'm very interested in seeing uh where the market goes from here and where all this news flow is going to end. Uh the one thing I would remark is banking licenses is not the only interesting thing going on in crypto. There's also there's a lot of interesting things going on with prediction markets and defy and vaults. And we're going to have a lot of time to talk about those in the next episodes. But I'm I'm glad we cover the the federal uh the Fed master account topic in detail today.

>> Yeah. I mean, you know, it's it's not the sexiest topic, but it's certainly one of the most important. Um, and I think it is a huge signal to the economy that crypto has arrived and we are ascendant. um and that it is uh going to be led by companies big and small but um supporting each other, working together and um I think uh with uh the recent uh regulatory developments and if we can get clarity passed uh uh I think we're in for a really interesting year. Um I I think the big the big import of this for uh people sitting at home thinking about

like how does Kraken impact me? Um or how does Kraken impact the market? Um it's not just symbolic, right? There is now a cryptonative institution with superior access to the banking rails of the US economy that can provide cover for all other crypto native institutions that may be under threat by a choke operation chokepoint 3.0 in the future. Um, obviously a lot has to happen and you know I think Kraken's license is only for one year so it' have to be renewed or have to extend but it's a

very positive development. A very positive development. >> Yeah. I just end with one market-based comment for people. Uh I think a lot of what we're talking about is uh focused on the idea that finance is going to be fundamentally reinvented. Uh I would note that all publicly traded crypto equities are worth like a hundred billion dollars. Uh that the largest publicly traded crypto equity is the 445th largest company in the world just a bit below a public storage which is a place that lets you store your junk in the exerbs of America.

I think there's a generational opportunity. It's not all in publicly traded stocks. Some of them are privately traded. But I think some of the value of this uh crypto-enabled revolution is going to end up in the companies building in this space. And it is just so small right now compared to the scale of the financial services industry. If you believe in this disruption at all, you have to imagine there's some level of normalization. It's like it's like 50 or 100 to one at this point. 100 to two is a doubling of that market cap. And so I would just sort of uh raise that point for investors to keep in mind.

>> Such a good point. >> Love it. We're still so early. The time is huge and we're just beginning and crypto is coming for the banks and hopefully the banks are are coming integrating into crypto too. So thanks everyone for joining me. This is a great talk. Loved it. Learned a lot. Um yeah and take care. >> Thanks. >> Thank you folks chatting. See you next week.