Why Hyperliquid Chose USDC and What It Means for Apps Trying to Trap TVL: Bits + Bips

Transcript

All right, everybody. Hello and welcome to Bits and Bips. We are going to start today um excuse me about that where we explore how crypto and macro collide one basis point at a time. We're going to start today with the latest stories in the worlds of crypto and macro. If you've been loving Bits and Bibs, don't forget that the show is transitioning to its own feeds on X, YouTube, and your favorite podcast player. If you're not already subscribed to Bits and Bips on its own channels, go there now and hit that subscribe button so you can keep up with our twice weekly live streams and macro meets crypto breakdowns. Bits andB will only be on the Unchained feed for a few more weeks.

So subscribe today to be ready for launch. You can get all the links at unchanged crypto.com/bitsandbbits. All right, everybody. I'm your host, Austin Campbell, now equipped with water, high scholar of Zero Knowledge Group, and I'm here with my co-hosts, Rahm Alawalia, maester of wealth, leader of Lumina, Chris Perkins, the golden hand of 250 digital asset management, and our guest Gordon Liao, master of coin at Circle, who I'm particularly excited to have on today given what's going on in both the news and the rates market. So, if you're not familiar with Gordon, trust me, you're going to enjoy this one. Now, let's start actually

specifically with Circle today because news came out that Coinbase and Circle have essentially eaten USDH. And what I mean by that is that USDH is being sunset. USDC will be enthroned as Hyperliquid's aligned quote asset. So, Native Markets, which had won the governance bake off eight months ago, is being acquired by Coinbase. I will remind everybody that there is a longstanding and existing relationship between Coinbase and USDC. So, what will happen is USDH holders will redeem for USDC during the migration.

Coinbase is going to become the treasury deployer. Circle is going to become the technical deployer and is staking I believe 500k hype to move toward validator status. 90% of the reserve revenue will flow back to hyperlquid. Uh I believe it will fund hype buybacks through the assistance fund. And what this ultimately means is a significantly greater structural tie between Hyperlid and the Coinbase and USDC ecosystem. Right now in round numbers, 5 billion USDC at a little under a 4% yield is just under $200 million a year. Some of that will be captured by Coinbase. Most

of that will go to Hyperlid. Circle will get another outpost in order to deploy USDC on chain and continue expanding volumes as they chase Tether. So, I'm going to give the bullcase. I'm gonna give the critics and then Chris, I want to start with you as someone who's been an investor in this space, but the bullcase, deeper books, less conversion, easier deposits, faster exits, better market maker support, hype tied to usage fees, staking, builder activity, and stable coin liquidity. Now, per our Aries, Bitwise is also launching a spot hype ETF. At the same time, we're seeing hype

starting to move more to the mainstream. On the other hand, you have people like Zack XPTt arguing that sort of USDC concerns around ruggability, in his words, uh, are unresolved and some questions around the native markets governance. However, the structure publicly, I think, is one worth laying out here. So, Chris, let me start with you. As an investor in this space, how do you think about this whole transaction? Look, I think this is one of many that you're going to see uh when it comes to capturing what I like to call net interest income. And so, if you step back and you look at the traditional model for exchanges, uh you make ticket fees. So, when there's

transactions, you make a little fee. You don't usually make money on liquidations. Maybe that's a new innovation in our space. As much as you hate innovations, but that's another, you know, business line, I guess. you sometimes you make money on data but you make a lot of money on net interest income. And the way it works in traditional finance is somebody gives you dollars as collateral. You take those dollars, you give them to the clearing house, they invest them, they keep a bunch of it, they give you a little bit back. That's your net interest income or your nim as some people call it. Um that is a fundamental part of any exchange business model. And a lot of them just, you know, ignored it for a long time. um not really the centralized guys but a lot of these apps

um and they were letting that that that beautiful revenue go to waste but now they're taking charge of it and they're saying listen you know I should be capturing the major the vast proponents of that float that's going to contribute to my business model I'm here to tell you that every single place that traps any kind of TVL whether it's an exchange whether it's a uh other sorts of apps prediction markets they're all going to look to monetize that float because Why would you give it to a third party? No offense, Gordon, like Circle when you can internalize it yourself. Um, and so that's the bull case if you're looking at the exchange. The exchange the lights gone on. I think Hyperlid rallied on the news because now like now the circle's

complete again, no pun intended, but you you've now solved for net interest income which is very important and that's going back to the shareholders. If you're circle Coinbase, um, you also have a win here because, and again, I think the devil's always in the details on like, you know, how long is the hookup? You know, what are the, you know, how often can the rates be negotiated? I don't know if Gordon's able to share that or not, but what you get is you get ubiquity with your stable coin. You you you have more and generally speaking, USDC is fungeable. And so, the more you flood the market with it, the more it's going to be accepted by end users as a form of payment. So I do think that USDC wins as well. Um and then maybe in time there'll be a difference in and maybe they they

they change the balance. I don't know again the the economic terms but hyper liquid big win software net interest income circle gets more ubiquity you know bigger size more distribution power law and and obviously hopefully incremental utility. Um I think it's pretty much a win-win. Uh so congratulations. Yeah, Gordon, I actually so I want to lob this one up being, you know, familiar with Circle byself. I think there are a lot of different angles to USDC as it exists in the market right now. Looking at this as a market participant from a market structure standpoint. In the US, we're used to thinking of money as being pretty

segmented. What you use to buy a coffee is not what you use to settle a derivatives trade. But here we're starting to see increasing fungeability as USDC is used for a lot of things. How are you thinking about this from the circle side but also like zooming out to your economics background from a market structure side as well? >> Thanks for setting that up. Yeah, I think there's uh a couple of things to recognize. One is we're seeing a broad maturation of platform of infrastructure you know hyperlquid being the dominant uh perax today and that have grown quite a bit in size and along with it the USDC uh balance on the platform has grown have roughly doubled year-over-year

right and while eight months ago and nine months ago there was a vault and the uh the governance at the time chose a different reference asset um I I Think as the growth and maturation of platform become evident that they need to also engage with more traditional uh uh inter traditional institutions. Um using high quality institutional grade quality collateral asset is also a key part of that. Uh so the choice of using USC is a testament of the underlying security underlying uh promise of onetoone one backing of USDC and um as Chris mentioned I think this is also a point in which uh it's a win-win because it is

a liquidity supernova event uh being the dominant per onchain that means the collateral asset that's being used for the perp is also being used uh and radiated out to the rest of the onchain economy whether it's other daxes other type of platforms as well as as uh centralized platforms uh so it's a very big liquidity event for encouraging the usage and functionability of USC um and also uh by association other infrastructure um for note we deployed USCC on um on hyperlquid uh last September along with CCTP so it's been there for a while but it's a good

recogniz ization event and as you mentioned you know there has been this debate about what is a stable coin morality is it a medium of exchange is it a story store of value and we're seeing that uh it could be multiple things at at the same time uh it is certainly used in some contexts as a medium of exchange for payments but in other context in this context for capital mo capital mobility for collateral mobility and that will increasingly become more and more important as the system scales as it become more institutional grade and just similar to that trend you know we're seeing a lot of settlement values we're uh as we reported in our earnings recently we saw 21 trillion dollars of

onchain settlement in USDC in the first quarter alone that speaks to how the infrastructure expanding and how liquidity is improving along with uh the largest platforms uh whether centralized or decentralized. All right. So, pulling on that thread a little bit, if we zoom out and look at the ecosystem, a lot of USDC flows also integrate quite tightly with Coinbase, right? Like reminding all the listeners, some of whom are not Americans. Coinbase has a huge number of products that bootstrap off the back of USDC. Debit cards, you can pay credit cards, you can use Coinbase for business payments. Now

we're also using it as like a central asset for exchanges like Hyperlquid. Rahm, let me actually throw this ball to you on the market side of things. Does this make you more or less bullish on Coinbase on Circle in terms of the stocks and on the deployment of stable coins versus banks? Overall, >> it's a win for all of them. It's an especially big win for Hyperlid. for Coinbase and Circle. They were able to neutralize an emerging competitor. Very strategic move to get USC involved.

And with Coinbase as essentially this collateral manager installing themselves at a very key point uh in this new infrastructure for Hyperlid, it's a major win like 90% of the revenue here. So that's the toll that they exact for having accomplished a tremendous amount over the last several years. We talked about Hyperlid I think three or four weeks ago. This is one of the assets that you want to own this cycle. Um and it was very uh prophylactic of Coinbase to get ahead of that because Hyperlid is emerging as a decentralized trading venue. Um, obviously Circle generates a material

amount of recurring revenue, you know, net interest income. So, it's a win for everybody, but it's especially a big win for Hyperlid. I think it goes back to another point we've discussed too, which is that distribution is ultimately going to drive a lot of the gains in this system. Like Gordon, you were just saying it, hyperl is like the perex emerging in the crypto space now. So I think all of the parties sort of aligning together are recognition of you're following where the distribution and where the users are. I think that's a thread we're going to continue to follow throughout a number of these sort of situations as we look at who are the winners and losers going to be. So speaking of winners and

losers and somebody with uh quite a bit of users today we got news that Elon Musk lost and Sam Alman won at least in round one. So, an Oakland federal jury unanimously rejected all of Elon Musk's claims, deliberating for under two hours in the OpenAI versus Musk case. The ruling, however, turned on the three-year statute of limitations. Allegedly, or at least in the eyes of the jury, Musk knew of the for-profit shift by 2021. He sued in February of 2024.

Uh the judge said she'd accept it as her own verdict. She dismissed the case. Musk had been seeking 134 billion in quote illgotten gains um and Altman and Brockman removed from leadership based around the 2025 for-profit restructuring. Now, the merits of this case were never settled. They did not rule on breach of charitable trust. They did not rule on unjust enrichment. None of that was adjudicated. Uh Musk's team has already said they will appeal on this point and wired hilariously uh said the closing arguments made everyone look terrible that both Musk and Altman were painted as selfserving

by the other side. However, the read through here is that it could be very possible at least in the interim for OpenAI to go to an IPO. So, I want to read a few X reactions and then I'm going to let all of you guys fight about who the winners are here. Chris, we'll start with you. I know you have a related rooting interest here, but structured skeptic on Twitter, legally, this is a major win for OpenAI, but politically and institutionally, the bigger question remains untouched. What happens when an organization builds public legitimacy on a nonprofit humanity first mission and then becomes one of the most valuable commercial platforms in the world? Um, the news24.com,

a nonprofit machine founded to benefit humanity, pivoted hard into a closed Microsoftbacked profit machine. The trial did fundamentally expose broken promises around openness and safety. So, I'm gonna start with you, Chris. Did they win on a technicality? Do you expect this to stand up? But also equally so, what does this say in our modern world about what is possible with foundation models? >> Yeah, it looks like the statute of limitations was exceeded. It was very cut and dry. Uh I don't know how Elon's attorneys plan to appeal. Um but they're very very smart and I'm sure they'll figure out how to do it. Just want to point out that like this is the time of the episode where Rahm is gonna say something bad about OpenAI and he's

going to say nothing burger. But before we get to him, I think the bigger question now is in crypto land, you have a lot of challenges. Um because due to regulatory scrutiny over the last four years, we have these situations now where many of the foundations were structured as nonprofits and you also have labs and so I think I would love to get some closure here and I hopefully that you know this doesn't delay which I think is perhaps more natural structures amongst u many of these protocols that have the foundation labs. everyone's confused who does what what does who. Um I would like to see that streamlined in the future um across the board and I'm not saying that there's no need or use for uh foundations. There absolutely is

and I think that there are a number of nonprofit ideals that they could advance for their ecosystems whether it's crops with Ethereum or otherwise. But I think many of these foundations were set up uh maybe because they were a way to protect against a very aggressive regulator. So, I think this case will have some far-reaching consequences in the crypto space as well. Uh, and you know, Sam Sam is, you know, increasingly involved in that space. So, I don't know. Rob, your turn buddy. >> Look, you read me right down the fairway. Chris, uh, Marcus did not expect anything to come of this, so nothing really happened. It is a nothing burden. So, so there's there's one for two.

>> There you go. >> These are two for two. a lot of heroes and villains coming out of the tech sector. Okay, I put Elon on the hero side. I put Sam on the villain side. Doesn't mean that they've haven't created a lot of value. Uh but I think a lot of that's playing out here, right? There are he's got a a history and a reputation now of cutting deals that are illegal under contract law. He even did that with Microsoft when he cut the deal with Amazon which led to a renegotiate with Microsoft and Microsoft exacted highly favorable terms uh as a concession so that OpenAI could get the funding they need and of course

Microsoft wants that so they can liqufy their 10x uh investment in open AAI by funding its capital right so Sam is one of these guys who's I think It's clear clearly a villain. He was fired by a board that he appointed. He has accidentally seated his primary competitors. Uh he's got an employee that died under his watch under questionable circumstances. >> Oh, come on, man. You're getting a little bit You're going a little extreme.

>> No, no, no. That's a fact. He had someone die in his watch under questionable circumstances. Is that not a That's an accurate statement. those circumstances are questionable. Okay? I mean, that's just a fact. Um, but look, I Yeah, I think uh they're heroes and villains in this in this category. And I I pull I put them in the villain bucket. That's it. >> Does Gordon have a view? >> Look, I I think you know, if you zoom out more broadly, right, it's the AI space is super competitive at every single level, right? at at the foundation model level, at the application level, and this is playing out in court. Um but if you think about where the opportunity is for this audience of combination of blockchain

and AI uh I think building the rails for tomorrow for agents for AI is very important and frankly that's a bit of what we have been building at circle with our agendic stack release with also arc which is what we call the economic OS that we're trying to build for AI agents. I think that will have enduring network effect and value just like USC have very strong network effect as we've seen. Um so you know while there's competition uh at these uh foundation model level I think that shouldn't uh you know from from a business gole there's plenty of opportunities elsewhere.

>> I think the competition is excellent and we need more of it and I think that's very very healthy for what we're getting into. Um look none of these guys are perfect. I'm not perfect and it's it's a vicious vicious race out there. I'm hopeful that they continue to innovate. They continue to to drive value and I hope that the free markets prevail. I'll I'll hop in here to pull on a thread we were just talking about from a previous conversation, which is we're having a huge fight in court right now over open AI because the market, well, let's be specific, private markets are saying that open AI is extremely valuable as one of the foundation model

companies. But let me stress test this. Uh, I'll steal a term from Rahm here and say in the long run will this trial potentially be remembered as a nothing burger. And the reason that I ask that is if the thesis is right that distribution is where a lot of the market value ultimately occurs. Do we think the value is going to eventually reside in a company like OpenAI or Anthropic or is the value going to reside in the platforms that bring those models to people and can take a toll from them? So I want to like lob that ball up is are what we watching here a fist fight over something perceived as valuable but it won't stand the test of

time. Well Rahm, you had your hand up. I'm >> I'm definitely all over this. It's really the latter. There's there's very limited value capture at the LLM layer. They're they're doing public good service for the rest of us by investing tens and tens of billions of dollars to get us more free services. But Microsoft has their IP and after they liquidate their stock in six years, they have all of their IP. They can do whatever they want with it. They can even deploy in the internet. I'm not saying they would do that. But the value of an LLM is the model weights. That is that's called IP.

they've got in they will have it in the hands of a direct competitor will not have this unaligned interest. So I'm rooting for the AI labs to raise more money and invest more in the future of humanity but there's no value capture in those kinds of business model. Now you've got Meta. So Meta uh brought in like the the 18 for those that have 80s movie references like Airwolf and 18. But uh they they uh they're rolling out new models that are quite compelling. They're they're they're powerful and they are spending a lot on Nvidia GPUs.

So, it's still early days in this race. Uh and Claude is in pole position growing revenue uh substantially. I also read today that Dell, Michael Dell shared that signed up a thousand new enterprise customers. How amazing is that? So we've gone from a world where it was the hyperscaler spending a lot on GPUs and the AI labs to real commercial adoption and are still early days. Uh so pretty exciting pretty exciting. I think that you know it it is the whoever owns the end customer delivers the most value primarily going to be the application layer and these cloud businesses and other AI enablement service providers like the accenters of the world that are

going to do really well. Yeah, I think it's maybe a barbell. I agree with you on distribution, but I think the other end of the barbell is energy. You know, he who has access to unlimited energy and effectively cheap compute is probably going to win. And I think it's pretty fair to say that Elon has an edge there. Um, I know that we were talking about it this morning. Um, the physics, the science of getting your energy pretty much for free in space ain't easy. Um, but if anyone can do it, it's the guy who has the, you know, I don't want to say the M-word, but he has a very, very robust, uh, capability across the globe in getting things into outer space. So, I think that's Elon's

unfair advantage, you know, at the very back of the stack, but yeah, in the front, distribution wins. We also, Rob, haven't seen Apple really come forth with its plan. And how often have we seen Apple come come in out of the top ropes really late and dominate? And so, you know, obviously there's been a bit of a shakeup there. That's the other one that we need to watch. >> I'll hop in and say, you know, I think Apple is a very interesting story in this space because as most of their competitors in the MAG 7 have started to earn a huge amount of money on capex and building the models. Back to our discussion about is the model layer where you capture value. Apple appears to be sitting on we are a vertically

integrated hardware company right like from front to back we can build everything from an iPhone and a MacBook Neo all the way to like servers Mac studios we can distribute we are going to be the end point for you to distribute your models and we're going to take a toll you can look at the same thing they've done with the app store you can look at the same thing they've done with ecosystem tie-ins by the way Chris to another topic near and dear to your heart about identity they're one of the few companies that's done at least an adequate job of that and privacy right of the big tech companies. So they might be more trusted about some of these things. I think one of the things I'm watching is an increasing divergence between am I trying to build AI myself or am I trying to implement other

people's AI and charge a toll for that which means you're going to be a distributor. And so with that comment, I actually want to throw the ball back to Gordon on that front and ask, you're obviously currently at a company that does a lot of work with a form of money at Circle and you've been watching not just a Gentic commerce, but call it finance companies writ large tangling with the AI side of things. I want to ask how you think that plays in with the modernization of the US financial system at large and adoption of these new products because you know for those again who are looking only at the United States I will remind everybody that Asia has had real-time gross payment 247 systems since like the late 90s and

early 2000s. So we're currently two decades out of date. And I'm curious if you think this will accelerate other parts of the financial economy, not just you know essentially the AI sector. >> Yeah, absolutely. I think look the currently most of the transactions are you know human mediated and there's no surprise by many predictions that machine to machine or machine initiated payments well dominate and while today the large LM models and companies are are quite large and important um yeah as others pointed out that uh these models are changing really quickly and uh even the open source models are not so far

behind. So more and more will acrue the value would acrue to I would I would believe the uh both the commodities and hardware but also the rail on which uh these agentic commerce happens right so for instance what type of agent commerce nano payments is something that we have done some work on we release our nano payment protocol uh having an agentic marketplace where agents could scroll through and find the other agents even without human being around the best using the best tools that is also something that's deeply valuable for uh just more machine-based commerce and all of that I I believe will be built on the

blockchain rail this is what we have done uh quite a bit recently with arc with our agentic stock uh and I think that will be a huge growth area uh and that will integrate very closely with finance which I know we'll talk a little bit in a little bit about clarity and all those stuff. I think it actually quite uh closely relates to you know activities that are being discussed uh versus more traditional uh balance sheet based intermediation. >> All right. So I want to give a counterpoint there on that one. I so I have heard often the agentic payment thing going through blockchain rails. I

also think they're just going to use traditional rails. And what I mean by that is it's pretty easy to have the agent have a credit card. And I think the winner of this space will actually be the one that can flow between systems. So going back to like the Coinbase Circle partnership at the center of things or if you look at some of the announcements starting to come out of companies like Fidelity where they're building money market funds, they already have a brokerage cash management product. they're gonna have a stable coin. Agents seem to demonstrate so far less, call it loyalty than human consumers, but they seem to be good at optimizing through flows. And not all flows have the same framework. So

sometimes you want a blockchain payment. Sometimes you want to pay with the card. Sometimes you might want to pay with bank details. I'm going to hypothesize that the winners there for agentic commerce are the ones that make it easy to flow between all of those in integrated fashion. So I think things that are trapped either purely onchain or purely offchain potentially lose to things that are very good at spanning both of those as a theory. But that also does lead us towards having a discussion about potentially clarity and what the rules for these sorts of things are. So before we go to that next segment, because I know we're going to talk about that for a bit, let's go ahead with our second commercial break and we will

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>> Yeah, you're I mean, you're talking Austin, you're talking about how agents hyper optimize, and that's one thing that we've we've learned. if there's anything that they're awesome at, they almost overoptimize? And I guess my question would be in that world, and I think you alluded to it, do money markets win? And the reason why I'm asking that is because if I'm an agent, I want that I want that interest to come to me, not to go to the stable coin issuer and and do they start, you know, like what prevents that? And then I guess the second question is what's the freaking difference between a money market fund and a stable coin when you step back for a second and you ignore rappers and other stuff and just say like fundamentally if it's the same risk and I get interest in one I don't get in

the other. Why would any agent go into a into the stable coin space? >> All right. So, I'm going to pile in on that one and say this is something that clarity is actually quite important for Chris because the distinction between payments products and investment products >> has a lot to do with the legal structure in the United States, right? So, like rewinding the clock for people, you know, and putting on my business school professor hat for a moment here, we had the 1933 banking act. We had the 34 and 40 act in the securities space. We subsequently had the BSA, which is technically handled by banking regulators, not the securities regulators. And we have this proliferation of agencies in the United

States. If you're in a place like Japan, where they have the FSA and you go over there and explain to them, we have somewhere around 19 regulators who touch all this stuff, they look at you like you've grown a second head because it sounds kind of crazy. But here in the United States, we do have like this divide in our regulatory apparatus. You have the SEC and CFTC on the investment side which helpfully aren't even the same agency and often don't agree with each other. Then you have all the banking regulators who don't agree with each other or the SEC or CFTC and vice versa. So Chris, I think we've had this market fragmentation because of the structure that Congress has created. And one of the interesting parts about

clarity to me and we'll talk about whether it's going to pass or not is as we're having the discussion around digital assets as we're having a compromise around yield and Gordon I would love to get your opinion on that in a moment. One thing that I'm seeing about this whole thing is that inadvertently we're probably highlighting how weird the US framework is and giving a big advantage to the people who can move between the different aspects. Because here's the honest answer. An agent probably wants a money market fund that pays incrementally if the money is at rest.

But the moment it wants to pay somebody, it wants that thing wrapped into a stable coin to make a payment easy. is cuz if nothing else the paperwork implications of paying for things with securities and who can receive them is awful. So because we have this weird fragmentation I actually think it's going to be the people who are transformers aka people who can move between one state to another. Like now I'm a stable coin. Now I'm a money market fund. Now I'm a bank deposit. Wait I'm a money market fund again. No I'm a stablecoin. who will ultimately be the winners here because you can optimize across all of those channels. Which is why I'm paying increasing attention to integrated stacks like say on one hand to go cryptonative circling Coinbase and on the other hand say what's JP Morgan

going to do. So Gordon let me throw that ball to you. I know you have some >> Yeah, I think you're you're you're doing the selling for circle almost. you know, we have uh the largest uh um regulated stable coin, but we also have a uh the largest uh tokenized money market fund, USYC. Um and people could go between them and you know, as you rightly pointed out, one is a payment instrument. Uh other one is uh if you want to get the money market yield and you go through the uh the the typical type of requirements um then you get the USYC yield and moving in between them we offer a seamless process uh and perhaps aging some days will make that even easier um

but you know there is also some friction at end of the day right it's uh why why is there $3 trillion of physical cash in the world. Why is there uh non-interestbearing deposit accounts alongside with you savings accounts? There's always some type of delimination uh even if it's offered by the same institution. And you know, I think you you always going to have both uh not just one versus the other. And >> Chris, what do you think to throw that ball right back to you?

>> No, I I think you're right. I think you're going to see an interoperable uh capability I I do think you'll see, you know, there's there's a lot of of there's a network effect when enough people have accounts with money market funds that you'll see more um I guess ability to to to I don't want to say pay but but uh exchange them for value and goods or whatever. Um but yeah, I think that that intersection is going to be very important going forward and the agents are going to be very good at it. All right. So, let's talk about clarity then, which is part of the key to unlocking this. Senate banking advanced uh the digital asset market clarity act to the floor on a 15-9 bipartisan vote. It would need 60 votes

on the floor to proceed. Also, an open question on if we're going to get more amendments as we land on the floor. Um there are many core mechanics in here. We've talked about this before. decentralization tests, assigning duties to the SEC and CFTC, what tokens or what kinds of entities. I think everybody has agreed that this bill is not perfect, but it is at least decently good. And I want to throw two things out here to discuss for the group. Let's start with the first one. There's still an ongoing fight around stable coin yield, which I think consumers, retailers, and the crypto industry are calling working as intended. The bank lobby is still

calling a loophole. But Senators Tillis and also Brooks have cut a compromise where strictly passive yield is banned, but activity- based rewards are allowed. The ABA is upset about this, but several others seem relatively happy with it. And the senators have indicated, quote, "We're not open for renegotiation." So, I want to start with that issue, which is what do we think of where it's landed? Let's assume that what Senator Tillis and also Brooks said is correct, that there will not be renegotiation. How do we feel about where that is if the bill passes with the exact language in it?

>> I can jump in there. uh you know I think the tois and also broke compromise is is actually you know it has a academic nature in it right at least from an economist perspective there is uh multiple facets of money as I mentioned uh it's a settlement instrument but it's also store of value in some ways this is separating the store of value component from the settlement value and from the uh uh from the unit account and um it also speak to a larger I movement um about how intermediation happens in finance. Traditionally we think about intermediation being very balance sheet heavy right that that's why we have uh all the banking rules that is focused on

stress testing the balance sheets of banks right in that world it is about growing the size of the balance sheet and making as big as possible and having the right regulatory structure around it but if you look at how you know even just decentralized finance have evolved onchain finance have evolved quite a bit of it is activity based it is uh not necessarily about having the largest balance sheet but having the set of intermediaries sometimes are mediated by uh smart contracts that's a set of activities uh so I think this is this compromise is actually speaking very well to that divide between the old and the new the tri-y view of balance sheet heavy intermediation to the newer world

of smart contract agentic uh mediated intermediation in finance and um I think there's tremendous opportunities uh for those who want to focus on the activity based uh you know type of rewards activity based services inter newer form of intermediation that will take over the older form. Uh, let me start by saying uh, Senator Tim Scott, um, Senator Lumis, Republican side leadership's been amazing. And I also wanted to give a special shout out to Senator Ggo. Um, and also Brooks, of course, but but Senator Ggo uh, is a Marine and dude fought HadithA when I was in Ramani. The guy has some courage.

I just thought it was awesome for him to to make it bipartisan coming out of committee. Um, I see that we're now like, you ever climb Everest, Austin, and Rahm Gordon? It's like we're approaching Hillary's step on this bill, right? We're approaching Hillary's step. You still got commissioner issue. I'm sure you're going to talk about that, Austin. You've got ethics, which is going to be really hard to overcome. And then you've got the interesting where the banks aren't really happy. So, what's going to happen? Like the banking lobby was pulling on the national security string today because maybe they're not happy about other aspects.

So, it gets really weird towards the end. I'm still in the camp that it gets done. Um, I would love to know where you guys are because I think we diver we've been diverging for a while. I think it gets done barely. It gets really weird between now and and and when it gets done. Uh, but I still think it gets done because when Epic Fury started and the bullets were flying, what did Trump do? He tweeted out about the Clarity Act saying he's going to put the chips on the table to get this thing done. I also think as midterms approach, there's not a lot of upside for not making this happen. There's more downside than upside, right? And I I still think we it squeezes by.

>> So, I guess I would say I remain more skeptical than average, though I'll say obviously getting to the floor is a very positive sign. Whatever your previous estimate was of probability, you need to have moved it up based on that happening. To me, Chris, the one that I have not heard somebody give me a truly credible solution to yet is the ethics part. And I think there's two potential ways that that ends up. One, which is probably a temporary good but extremely long-term bad, is you would not want clarity passing on a purely partisan vote in the House and the Senate. And that is possible with the current framework if you can get to a vote. But

I think if it's Republican only, this probably ages like the Affordable Care Act where the other side just takes it apart over time. When you jam through something transformative on purely partisan lines, the history in United States legislation is pretty poor. Now, the other hand is do we just crash on the ethics rocks completely? If it dies, that's where it's dying. I think every single other issue we have there's a solution to and many of the arguments being made like with the bank lobby around yield are quite frankly special pleading by industries. It's not in good faith for the average consumer, the American economy, the national security apparatus who is growing more and more interested and positive on digital

assets as they see the capabilities. The ethics part is the one that as I've talked to people on both sides I still have some doubts about. So, I guess that's why I keep pumping the brakes. >> What What are the specific issues on the ethics side that you're alluding to? >> I I think basically here's the question. Are the Democrats going to vote for something that doesn't force Trump's family to divest world liberty, the meme coin, etc. And would the Republicans send a bill to the president that forces him to do all of that? That to me is like the break point right in the middle. I don't see a great answer. But also, as Chris said, now that it's on the floor, things get weird at the finish line. Like there is a nonzero

chance that it does move. >> One of the >> it can compromise somewhat like totally away from from crypto, >> right? >> There's chips. >> It makes sense. Guess the distinction between uh paying interest and activity is a very clever distinction. It's a good principle. I like the principle. Um the question is going to be like how many edge cases come out of activity based regulation. It looks like a duck. It quacks like a duck. Well it starts looking at interest again. >> So so this is the problem. So so what we're living now is we're living in a post chevron difference world.

>> And so in the past they'd be like hey you know tie goes to the regulator regulator you figure it out. We're going to give you a little bit more um leeway to kind of fill in the gaps. right >> now you have legislation that has to be much more rigid and prescriptive which makes the legislation worse frankly >> uh so it's going to be and then it just goes to the court and like so that that you know in a way we needed the Chevron deference to come away but there were some benefits to it I'm not saying it's time to bring it back by all means >> but it's sort of the complexity we're dealing with over >> I'll go back the other way though and say the original problem with this is the call it Gordian, not of financial regulation at large because

>> totally >> if you want to prevent money market funds from paying yield, you're going to have to rewrite the 40 act because I will remind everybody they are legally obligated to pay people yield right now. You can't hold that money inside of the vehicle and just compound. So, as long as we have tokenized securities on one side and stable coins on the other side and reserves that look like the tokenized securities, there's kind of no way to close this door. It's more a question of form over function. Otherwise, you're rewriting the Banking Act and the 40 Act. And I don't think Congress has the appetite or willingness to do that right now. I mean, they could barely confirm WASH, right? And that's like getting a guy in a seat to do one specific job. And we think they're going

to rewrite the fundamental structure of US securities regulation. No. So, this is part of why I thought this fight was quick for the banks in the first place is like, what do you guys get out of this? Like are you handing essentially a giant win to asset managers by stabbing each other to death? You might have done that. >> Yeah, I think Senator Gillibrand is probably one of the most important people to watch right now. Uh she's pro crypto. Uh she's very involved in uh the formation of of legislation from the very beginning, but she's also been adamant against ethics. So, uh I'm watching her and I think if if there's a way that uh folks can reach a deal with her, I think it's going to be really impactful.

All right. So, I would be remiss not to t talk about a segment we've titled bond vigilantes box wash if we have Gordon here. And the reason I say that is Wsh was confirmed. So 54 to 45 vote, the closest Fed chair vote in the modern era. Uh the only Democrat to cross the line was Senator Federman on this one. So not the people crossing the line around clarity. The first FOMC is in middle of June, but hours after his confirmation, the 25 billion 30-year auction broke 5%.

We had 30-year yield hit 5.12 at the high. The first five handles since before the financial crisis of 2008. The 10-year is currently sitting at 4.59. The two-year is at 4.08. uh CME Fed Watch has 50% odds of a hike by later in the year which is a complete inversion of the cut narrative though I think there is a lot to be said about how to interpret that data that we can get into it is not purely one linear cut um so let's talk about commentary so Edardenni the man who coined the phrase bond vigilantes I believe said they are now setting policy and the Fed may be forced to raise in July to appease the long end

Vincent An of Wisdom Fixed Income said Walsh wanted the option to cut on day one. The bond market just took that option off the table. Uh Morgan Stanley is saying rate cuts are off the table until 2027. And Ryan Swift of BCA is saying if WSH pushes dovish during this blood bath, inflation expectations will break out and the Fed loses control of the long end. Um there are some who view this as a good thing. Phil Blanto uh Reuters Breaking Views basically saying vanishing cuts by time and that stripping power from an overinterventionist Fed might be a good thing. But this is a very complex space like interest rates are a very

misunderstood thing in traditional markets and there's a lot of complexity to these dynamics. So I want to lob the ball up Gordon first. Just as an economist, a market observer, somebody who obviously has deep experience with the Fed, what do you make of what the market is saying about US interest rates right now? >> Sure. Um I'll give you, you know, answer from my background. I I used to uh work at the Fed board in DC and uh you know, one of the first things you look at uh in those positions is what has driven uh the interest rate move. Is it the term premium or is it the expected rate change? If you look at if you take the iconic ACM model and break it down, uh most of the 30-year uh rise in yield is

driven by the term premium is term premium right now is I think it's like in the 80 bips or so which is quite high relative to a couple years ago is negative. What does it mean? It means that the term premium is basically reflecting supply demand whereas the expected short rate is expected market expectation of how much of fat is actually going to uh hike or or or not uh over time. Uh so so much of the increasing the yield being reflected in term premium means that what we're observing is a market reflection of uh perhaps a few things with regards to uh supply and demand. One is you know continued fiscal issues uh continue

expansion in fiscal uh aspect and uh perhaps over a long-term uh lose of uh credibility of uh the ability to control inflation and also perhaps some lack of uh foreign demand uh as it was uh I think if you look at just the balance of payment has changed quite a bit over the last year or so. So that's on the kind of the demand side and in terms of supply side this is where uh it's also quite interesting uh soon to be governor wars has also been a proponent of um actually shrinking the fed balance sheet uh meaning that uh kind of reversing QE which essentially since 2008 has been an expansion in balance sheet although with

e and flows in overall size uh that comes at a time when you know you're getting this pressure on long-term yield as well. Um this narrative that others have put out, I think the even the US treasur has has uh mentioned in the past of stable coin being the marginal uh buyer of treasury. I think actually has a bit more meat than uh you know people give credit to uh not only because the stable coin circulation is increasing but also because of the maturity uh aspect. uh stable coin maturity is uh the asset that's held is generally very short short-term T bills and reverse repoles which free up the opportunity

give up the opportunity for the US treasure to issue more in the shorter term versus longer term. Now if you actually do the duration waiting that actually could mean a significant shift in the dollar duration kind of reduce the supply of longdated dollar duration in the market and uh hence perhaps help moderate uh the the current uh rate pressure upwards. Um so in a way it's all kind of linked together. Uh but I think it's not to think about the rates in itself as a single number but you should break it down into two but also think about the balance sheet aspect.

how they're playing with the expected changes in uh the both the Fed balance sheet but also the private sector demand. I think an important part of that that people often don't think about is exactly what you said which is not just who is buying treasuries but asking the next more granular question of who is buying which type of treasury specifically because exactly as you just said stable coins are going to have a preference for T bills thanks to the Genius Act and the restrictions there but also even if they're not they're doing reverse repo which is a form of funding that can take treasuries as collateral but you have larger haircuts on longerdated versus shorterd dated. So there's some preferencing there as well.

The same time that's going on, you know, back from my days on the street, some of the biggest buyers at like the 30-year point are both insurance companies and sovereigns, right? And the preferences of those are shifting over time. Sovereigns just towards holding less longdated US debt. You know, a lot of geopolitical concerns potentially moving around in there. but also insurance companies role with the call it demographic profile of the country that they're serving. So as the boomers age out and the next largest group of people is probably millennials and we see sort of like a curve transformation for insurance, we could see less demand for the 30-year. So I'm watching term premium. Gordon, it's funny to hear you

say, "Hey, term premium at 80 bips is pretty high compared to recent." because conversely it's pretty low compared to at least some truly historical measures where you could see like 1.5 or more. So I think the curve itself changing shape is part of the story here that people should not miss. So Rahm I want to ask you then on an investing standpoint how are you feeling about the long bond right now? >> Yeah, a few things. So first off uh yeah I agree it's supply demand driven. Investors are saying I need more compensation for greater inflation risk.

That's it. and they know the Fed isn't biased to cut rates. So they're saying something's got to give and what's going to give is rates are going to go up. That's what's happening. Uh so what all you see it because of oil it's impacting memory prices, gasoline, a lot of different areas you're seeing inflation make a comeback. U I did find it kind of uh ironic that Worsh was uh approved in such a lopsided manner. Elizabeth Warren her litmitness test is will you cut rates? This guy wants to cut rates like he should be a shoein. So uh he he fit he fit the profile perfectly which is kind of uncanny. It's

more about sending a political message uh more than anything else. Overall though I would say I expect that the rates are topping out right around here. And if that's the case, then rate sensitive names which have been hammered. You mentioned insurers Austin for example, right? Insurers are a balance sheet business like a bank. >> So when rates go up, the value of their holdings drop, the value of their bonds drop. Uh the value of the assets to fund their future liabilities drop. Right? So they've been hard. But what we're starting to see in the most recent even two or three days is that long duration high free cash flow assets have rallied.

There's been a a pullback of over a point in the major indices the last two days pick an index all of them except these long duration high free cash cash flow assets have been rallying. So the equity markets are saying that they believe the long rates are going to come in which is kind of funny because you usually think of the bond market being smarter than the equity market. I think the equity market actually is right here. I think Kevin Worsh his confirmation was a kind of a capitulatory event. The only thing we haven't seen here is a Ray Dalio video that's gone viral talking about the end times uh missing around the bottom.

Awesome. >> I was gonna say we'll we'll know. >> Yeah, let me let me chime in. I think long term there's a number of very deflationary pressures coming to hit the economy starting with AI and then on top of that energy prices. The amount of investment going into cheap energy is profound right now. Elon's going to channel it in space. You're going to get compute coming out of that um that you've never seen before. So, I feel like in the long term that's going to be quite deflationary and worse talks about that particularly around AI. It's the near-term that's the problem. Um you've got sovereigns selling treasuries. Why?

Because in certain cases they want to decouple. In other cases, they need the money. Oil prices are high. And we know why there. Um, now the difference with this administration in in the postwar era is number one, he's he's re-evaluating how we should be looking at inflation in the first place. We've spoken to the true inflation guys in the past. I think we're going to get much more thoughtful on what inflation is. Second, you know, the cooperation between Treasury and Fed and the Fed is going to be like you've never seen before with Besson. And I think that coordination should help arrive at better just holistic policy responses.

And that doesn't mean that worse isn't going to be independent. I think coordination, you can be independent and be coordinated at the same time. And I think you should be. Uh so I'm very positive there. So and last thing is like this geopolitical stuff. Um it it can get worse very quickly or it can get better very quickly. My sense is that it's going to get better because midterms are coming. The American people don't love it. Um, and it's a matter of of it's it's a tough tough problem, but um, but I think Trump is axe to to deescalate, not escalate, if he can. >> Agreed.

>> All right. Well, we're right up on time, so I'm going to leave it right there. First, I wanted to say in particular, Gordon, thank you for joining us today. The timing here was excellent to talk about these particular subjects. So, I hope our viewers benefited from your knowledge. And then secondly, for everybody, thanks for joining us on Bits and Bips. So, stay with us. Laura's up next on Unchained with FIA's Walt Lukan and Chris Perkins breaking down ICE not the one deporting people and CME's KYC complaints against Hyperlid, the SpaceX preipo pers debate, and how the C Thank you for watching and hope you

enjoyed this episode of Bits and Bips. Just remember, nothing we say here is investment advice and please check unchainedcrypto.com/bitsandbbits for more disclosures.