[00:01:36] Preston Pysh: So I want to start off just kind of covering where you have a lot of experience, which is in currency markets, working at Morgan Stanley for like 13 years before you even came into Bitcoin. I guess my question for you in that, because I’ve never really had conversations on the show with people with that experience, I’m just kind of curious, what is that like?

[00:01:55] Like what’s the day to day? If you were going to describe it to like a family member, what’s that experience in currency trading like? 

[00:02:01] Jon Melton: Well, thanks for the question in. It’s really an interesting multidisciplinary area, which I think primed me a little bit for Bitcoin in terms of macro. So it’s changed a lot over time as markets have become more electronified, but sometimes it can be, a pretty almost kinetic environment in terms of trading activity.

[00:02:21] But at other times, it’s a little bit more cerebral in terms of structuring, when you think about derivatives and options and how do you create a hedge for a client. But on a, real-time basis, you really have to be abreast of central bank policy, what’s going on in different countries.

[00:02:35] You’re not just looking at the currency market, you’re in the commodities market and equities and risk sentiment. So it’s a mix of having a conversation about markets all day long, but really intense focus on execution and help clients. 

[00:02:47] Preston Pysh: I don’t remember what interview or when I heard this, but I do remember Stanley Druckenmiller talking about how currencies move in like these seven year, kind of three to seven year cycles.

[00:03:00] And I would imagine a lot of the job is just you got a client. They have some type of exposure through a commodity or whatever in said country, and they then have the currency exposure there as well. And you’re just trying to cover that with some type of derivative if it’s being sent here back to the US or whatever, to make sure that that’s offset.

[00:03:22] And it’s almost looked at like an insurance policy to make sure that you don’t have any type of risk there. Is that really how most people in the currency space think about it or are using it in application? As opposed to just people speculating on the direction that it’s going to go. 

[00:03:37] Jon Melton: Yeah, I think there’s a lot of both. And sort of which first item that you described? I would consider more a real money application or a risk management tool where you have a structural flow, you’re an importer, but you’re based in one country, so you’ve have got to send euros every month. So, and yeah, you know you’re going to be doing that for months on end, but the Euro keeps on going up because Trump’s hammering the dollar because we’re trying to get exports going here, and that’s something you might want to hedge and there’s different ways you can do it, but it’s also a super liquid, very deep market with a lot of leverage embedded in it. So a guy like Stanley Druckenmiller, who’s a very opportunistic global, macro oriented investor, could find it a really interesting and convenient way to express.

[00:04:20] A more macro view with a multi-year time horizon, just because there’s so much leverage with the way things are structured, you can kind of get a specific sort of pay or exposure you’re looking for.

[00:04:30] Preston Pysh: So you did this for many years, over a decade, and in 2018 you told me that you had this no turning back moment where you came into the Bitcoin space and really just felt like you had to do something in this space. Walk us through, what was that? Just tell us the story. 

[00:04:50] Jon Melton: Yeah, so in September of 2017, I think Bitcoin was four or $5,000, but it was the year where it went from a thousand. At the start of the year, I had no idea if existed, and then it got up to 19 or 20,000 that year and it’s eptember that year.

[00:05:05] So I was working at Morgan Stanley and in the midst of this big run up in Bitcoin, they had an event focused on crypto. So they had, I remember Joey Kreb was there. Ted Rogers from Zappo, which at the time was probably the biggest Bitcoin custodian in the world. Also David talk, and that really resonated and he essentially gave the very well known went s framing of Bitcoin as.

[00:05:29] The best money that humans have ever come across, or in this case, engineered. And as somebody who had been sort of grounded in macro investing, that was really, really interesting to me. So I went home and listened to a lot of Andreas, listened to everything I could find from nces. Read every blog post from Zappo.

[00:05:47] And ultimately quit my job about nine months later in May of 2018 and joined the institutional team at Zappo, where I marketed custody and trading, but essentially Bitcoin to institutional investors. So the, some of the largest college endowments in the country, hedge funds. High net worth folks, and it was a really interesting time just given what was going on in terms of sports in a bad bear market.

[00:06:13] But to your question, it was absolutely the calculation that if Bitcoin’s for real and it’s a once in a 5,000 year opportunity, and I have the opportunity to join a great company with somebody like Ted, who I respected immensely, I would kick myself if it all worked out. So, yeah. I just left. 

[00:06:31] Preston Pysh: You mentioned this name, Wences Cassars. And for people that I think are casual observers of the space, they may not know who Wences is. For people that have been in the space, they know he’s a very big deal and somebody that, for instance, it’s my understanding that he’s the one that Orange pilled, bill Miller back in 2015, is a very high net worth individual and has had a massive impact on the space.

[00:06:55] You’ve worked with Wences. Tell us a little bit of his background for the general audience. Just tell them who he is, like what he’s built, how he became who he is, and then what key role he kind of plays in the space. And then we’ll go from there. 

[00:07:07] Jon Melton: Sure. So Lexus, I think I would agree with, as you said, some of the people who’ve been here really early, early on in on class of 2017, so everybody feels like they’re late, but there was a lot of history before 17 but a lot of people are coming into Bitcoin obviously all the time, and I do think that we is one of the most important figures in the history of Bitcoin because of what he built and also for the credibility that he brought to the space.

[00:07:31] So once this is background, this is a very talented entrepreneur, founding a company called Paton in in Argentina, which you know has been described as the E-Trade of South America. Previous to that, he had the first internet service provider in Argentina.

[00:07:47] So somebody that was around and saw the birth and participated in birth of the internet. And because of his personal background in Argentina. It’s a very different economy obviously than than the United States where we take things like a stable and free currency for granted.

[00:08:03] Really had a deep appreciation for what Bitcoin could mean for the world, and I think most specifically for folks in emerging markets. And that stuck with me. I remember sitting in meetings at Zappo and sharing with folks my view that I think Bitcoin for the first time allowed everybody in the whole planet access to a G7 currency.

[00:08:25] Whereas if you lived in Nicaragua before and you wanted Swiss Franc, that was really hard, but everybody could get Bitcoin. But back to went this, ultimately he found Bitcoin went deep down the rabbit hole and with his knowledge of financial markets and technology brought a lot of credibility.

[00:08:40] But importantly, he built what at the time. It continues to be an incredibly secure custody solution far ahead of its time called Zappo with multisig, multi continent dispersed keys, a really next level custody solution that was very saved that folks I think would even have a hard time thinking about he didn’t charge for it.

[00:09:00] Preston Pysh: What timeline? What timeline was this? That Zappos came up?

[00:09:03] Jon Melton: 2000, I believe it was founded in 2013. And the way I think of it is the network of people that once instance Zappo was connecting with, he really lowered the barriers. So if you heard about Bitcoin, you thought it was interesting. Your next question is, well, if I want to buy it, where am I going to store it?

[00:09:19] I don’t want to keep it on a thumb drive under my, self ies is an important aspect of Bitcoin or for some of those early institutional type investors, like you mentioned of Bill Miller, the famous leg mason money manager. Trusting we and Zappo to hold their keys was a really big benefit for Bitcoin early.

[00:09:36] Preston Pysh: Okay. You also have this interesting background where you were at Silvergate and for people, for people that experienced this last bear market, they know that Silvergate was like right front and center of that bear market. It got very political. There was a whole lot to unravel here. I’ve never covered this on the show, and I would love to get into as much detail as you’re willing to talk about, but I think this is a, a really core and important point is that Silvergate was instrumental.

[00:10:08] In Coinbase, Kraken Circle, having liquidity 24/7. That was never there prior to them kind of coming into the scene. And I’m more curious for you to kind of give us the story of Silvergate, kind of the founding of it, how it kind of got found itself in this space of the founding of that in Bitcoin in specifically. And then maybe some of the story of like what went down as far as there during the bear market.

[00:10:36] Jon Melton: Absolutely. So Silvergate was for a time, a small commercial bank in San Diego. It was founded in 1988 and. The CEO really the, the visionary behind the Bitcoin and ultimately digital asset strategy at Silver Date as a gentleman named Alan Lane, who joined Silver Date in 2008 or 2009.

[00:10:58] And at that time, Silvergate had side stepped a lot of the pitfalls of the great financial crisis, but it had a clean balance sheet and Alan was brought in to, help the bank with his next chapter. If you fast forward to around 2013, Alan is a very tech curious, non-traditional banker who came across Bitcoin and said, Bitcoin is a way to be your own bank, and I run a bank.

[00:11:21] I should look into that. So he did, as curious people do. And at that time it was only Bitcoin and there were only a handful of name brand companies. You know that it raised serious venture money like Zappo, Genesis, Coinbase, just some of like their early sort of first generation service providers.

[00:11:38] However, it’s hard to contemplate now with names like JP Morgan and BlackRock and Fidelity. These companies had a hard time getting a bank account. Yeah, and bank accounts are your. To the Fed and to the wire system and the other side of Bitcoin. If you want any liquidity out of it, if you want any productive uses, you need to get access to dollars and the credit part comes later.

[00:12:00] But early on it was simply, can we provide an operating account to these first generation companies, which was interesting as a banker in terms of a source of deposit. Yeah, so that was the first chapter. After it went along for a few years and they had gotten regulators and educated the Fed on Bitcoin and kind of brought everybody up to speed, we got a little bit more involved in terms of what problems can we solve, and Bitcoin trades 24 7, but the fed wire system does not trade 24 7.

[00:12:29] So because Silvergate ultimately had a critical mass of digital asset clients, they connected the pipes. Created a system called the Silvergate Exchange Network. Mm-hmm. Where participants could facilitate trading 24 7. Yeah. And I think this was really, as flawed as the Fiat system is, it’s really important to have access to fiat system, for Bitcoin to progress and to mature, and to go from being a 10 billion to a hundred billion to a trillion, $2 trillion asset.

[00:12:57] So the send was very successful, ultimately transferred over a trillion dollars of value. Rogate went public in 2019. The ecosystem was growing up. Fidelity came in in 1718, Intercontinental Exchange. It was just growing up and ultimately Silvergate had 1600 digital asset clients. It had the industry and it had gone from can we raise deposits from this niche industry to we can be a better bank for these clients if we solely focus on this strategy. So ultimately the whole deposit base was. Digital asset clients. It was a very liquid balance sheet and we had, when I got there in 2020, it was just the start of scaling up a Bitcoin collateralized lending strategy. Mm-hmm. Only against bitcoin. All over collateralized. Never realized any loss, but that was sort of the next chapter of, of the Silvergate strategy when I got there.

[00:13:54] So late 2020. Think about Tesla Sailor, like these material, allocations from the space that continues to mature. Yeah, the Bitcoin backed lending business. Takes off as well. We ultimately had a billion and a half dollars of commitments. We did multiple a hundred million dollar deals with Marathon, a large facility, a large loan to MicroStrategy.

[00:14:16] It was a great business. FTX Luna 2022 was a very interesting timeline from Luna in May to FTX in November. And there were widespread fears, throughout the industry and the price obviously performed very poorly. Yeah. There was a run on multiple banks because Silvergate was so liquid in terms of its high quality securities and pretty low duration securities on its balance sheet.

[00:14:42] It survived the biggest bank run in, in recent memory, I think Continental Illinois had a 40 ish percent draw down in, in 84, and Silvergate was far greater than that. Ultimately in early 2023, Silverade made the decision to voluntarily wind down, which is, as I understand it, very rare in banking and completely different from receivership where the executives are replaced and the bank assets are sold.

[00:15:06] So Silverade ultimately gave all the money back to depositors and been in the process of an orderly wind down. Subsequent to that, but in very close proximity. In terms of a timeline, the bank term funding program was put in place, so there was a amnesty and lifeline to the banking community only realized after, distress of the banks that serve the digital asset community. 

[00:15:29] Preston Pysh: We’re going to get into that.

[00:15:31] Jon Melton: Or at least there’s a lot there, but that’s sort of the arc of the silver. No, that was from infancy to maturity.

[00:15:37] Preston Pysh: That was amazing. Okay. The first question I have out of that is now that you have Fed Now or Fed wire, that’s like basically processing wires within an hour now.

[00:15:48] Do you think that what you guys stood up there at Silvergate was inspirational to the Fed, realizing that they’re going to have to start processing wires a lot faster and that the liquidity really needs to be there? Or what do you think was the impetus for this change? 

[00:16:02] Jon Melton: Knowing how slow government moves, I wouldn’t be surprised that this is something that they’d been thinking about for a long time and it just took him 25 years to do something about it.

[00:16:11] That’s fair. At the same time. It’s, absolutely certain that Silvergate pushed the banking envelope. Yeah. I know that on the credit side, we were far ahead of other bankers and I think put pressure on others to get into Bitcoin collateralized lending in the last cycle. And it wouldn’t surprise me at all if, sort of the business that we were doing and the technology that the team at Silvergate put together was a bit of a blueprint for others in the market. For update the Fed. 

[00:16:37] Preston Pysh: Yeah. You had made the comment that you guys have short duration, fixed income on the books, on the balance sheet of Silvergate, and that’s why you were in a better position than a lot of others like Silicon Valley Bank that had a bunch of long duration and that was the whole reason that they absolutely blew up.

[00:16:52] When we’re looking at that scenario and you’re looking at this idea that it just wound down. I think everybody looking at this from the outside in is like kind of raising an eyebrow saying, come on. Like why was this bank wound down? It seemed like it was politically motivated or that there was almost like a political threat that that’s what was going to happen because of how involved they were in this crypto economy.

[00:17:16] You seem like you might not be able to comment, but I’m kind of curious if you have an opinion on that. 

[00:17:20] Jon Melton: Yeah. I think from a financial perspective, and I’ll get to your question, but you mentioned in terms of high quality, the low duration assets. Yeah. It’s important to note as well, I mentioned the half dollar loan book By commitment.

[00:17:31] We had an extremely low loan to deposit ratio. So in addition to not being in the business of extending 30 year residential mortgages, yeah. We had a book of highly over collateralized short term, generally one year, sometimes a few years, but our Bitcoin back loan book was a very small portion of our balance sheet.

[00:17:49] It was very duration. All over collateralized. Super safe. Yeah. The rest of it was high quality securities. We could pledge as banks do for liquidity. That three years in duration was an extremely conservative balance sheet. And why was that? Is because the CEO Alan Lane, who’s a Bitcoin and has seen this asset grow up and seen the industry grow up, knew that with the inflows and the volatility in the market, you had to be extremely liquid.

[00:18:15] So it was purpose built for volatility. Your question about politically motivated and what’s come to light. I’m very grateful that Nick Carter has done some excellent reporting on this. Yes, he has. Because of bankruptcy proceedings and things that have come to light, there’s a Wall Street Journal, op-ed, but our former chairman, Mike Lere, it’s Silvergate, is another industry veteran, ultimately is clear, to those in the industry that the regulators are not comfortable with above a certain threshold of concentration to this industry.

[00:18:45] So I mentioned it is subrogating on from. Let’s try to banks of these companies to, this is a real industry. We can build a business and serve these clients better if we just focus on them. Yeah. So even though regulators as a fed regulated bank are meeting with you on an ongoing basis, again, like I’m not in all those.

[00:19:02] Certainly not in all of those meetings, but I do think that there’s a sense in the market that allowing a bank totally focused on digital assets one day and then quickly saying, we’re not okay with the business model that that has existed with consultation with them. That was the decision. We couldn’t run the business model any further at a high level.

[00:19:22] Like I said, like there was all the, the cash was just given back to deposit. Yeah. And this industry still needs banks. 

[00:19:28] Preston Pysh: Yeah, Nic did a fantastic job covering this. We’ll find the articles that you’re referencing and have ’em in the show notes so people can read up on it. But it’s really quite fascinating.

[00:19:38] This Silvergate was such an instrumental player there, especially in this timeline that we’re talking about, in particular for getting liquidity, getting access to traditional fiat rails. That would touch the Bitcoin rails and yeah, what an interesting historical place to work and kind of see that all unfold.

[00:19:57] You had mentioned this idea of borrowing and lending and being over collateralized, and that’s exactly what you’re doing with Unchained. Now let’s talk about this a little bit because I think. This is something that I’m super passionate about because there’s been so much pain, so much pain in this space with borrowing and lending and people thinking that they’re over collateralized only to find out that they aren’t because they’re dealing with, a centralized entity that’s co-mingling funds and some of them are over collateralized, the other ones aren’t.

[00:20:31] So do this for us, Jon. Just give us a borrowing and lending 1 0 1 overcollateralization. What does that even mean? Why it’s important. Like really kind of just lay it out there for folks and maybe even throw out like what are some things that should make you be.

[00:20:49] Like almost like a red flag was just raised, like pay attention. You’re about to be bamboozled if people would hear certain things. 

[00:20:56] Jon Melton: Yeah, and it’s an important ation because Bitcoin is this financial asset and we equate it with other sorts of services that we get in the world of fiat. So everybody’s familiar with interest on your dollars in a bank account if you’re lucky enough to find it or just returns on your portfolio or borrowing against your house.

[00:21:15] But if Bitcoin is a still maturing industry, you really just, you do have to be careful and you have to diligence. You know who you’re working with and the sorts of transactions that you’re involved. So the only business that we did it at Silvergate, and then we actually do it, unchained is the most conservative style of lending.

[00:21:32] We lend dollars over collateralized by Bitcoin, and all that means is that if you’re looking for a $200,000 loan, then you have to post $400,000 in Bitcoin. So if you think about that in another more familiar asset like your house, it’s the same thing as p pledging your $400,000 house and getting a $200,000 mortgage against it.

[00:21:56] No bank is going to give you more money than the asset that you pledge. So that’s the structure. Lending dollars backed by Bitcoin. I’ll tell you why it’s an appealing, strategy for some, a lot of Bitcoiners ultimately come to the view that Bitcoin is the right investment, and it might not be a 10% allocation, it might be a 50 or a 60 or more percent allocation of their portfolio, and they believe that it still has years and years of a really attractive cater compound annual growth rate.

[00:22:26] Maybe it’s going to 10x listen to your show at Jeff Booth and HODL. Those guys are really smart, but they also have a long-term constructive outlook that a lot of players do. Yeah. But we’ve all have got to live in the fiat world, so. As I said, there’s only two ways to get liquidity.

[00:22:40] You can sell it for dollars, pay taxes on it, totally fine. You can also borrow against it, and that has the value of you maintain access to your collateral. It can grow over time and sort of do the work for you if you’re conservative and you know care for with your risk management.

[00:22:56] Now, you mentioned sort of, what should you watch out for? It’s really important for us and on chain to deliver transparency and note reation or repledging. These are technical terms, but they’re really, really important and I think it might be helpful to kind of like break it down by a degree in terms of what is rehypothecation.

[00:23:17] At a high level, rehypothecation is you giving your lender Bitcoin collateral and they take your Bitcoin collateral and give it to somebody else. In Unchained. We have a policy in the strict des sense of never giving your Bitcoin to anybody else or another party. We use Multisig, which is a native. Part of the Bitcoin protocol and all collateral is held in a two or three multi vault.

[00:23:41] Our borrowers have a private key. They participate in the creation of the collateral address. They can verify that their key is tied to that address and once they send the Bitcoin there. They can monitor it and make sure that that address still holds their Bitcoin collateral strict. No application. You may hear others in the lending market and the Bitcoin backed lending market talk about funding partners or they’ll take your Bitcoin. Your Bitcoin will be with a partner, and they might even say things like drawing liquidity against that. I wouldn’t call that soft ation. We’re all non-bank lenders. 

[00:24:16] Preston Pysh: Say the term again. What was the term that you just said? I wouldn’t, 

[00:24:19] Jon Melton: I would call it, it’s my own term. I would call it rehypothecation. 

[00:24:23] Preston Pysh: Okay. And what would the people normally say when it’s a soft rehypothecation? 

[00:24:27] Jon Melton: Your Bitcoin will be with a partner. Oh, okay. There you go. So like, yeah. And this is important because Yeah, unless you’re a bank, you’re not lending out deposits, you’re what’s called a non-bank lender.

[00:24:38] Yeah. And I can kind of like explain, what that means. But at its highest level, all it means is that you need to go raise capital to facilitate your loan. We have capital partners and funding partners. The difference is they hold your Bitcoin. Yeah. Some of them would like to hold your Bitcoin.

[00:24:53] They might give us a lower rate if we gave them your Bitcoin. But that’s something, and again, it’s not a pernicious, it’s just something that you have to be careful if your Bitcoin is pledged with somebody other than the person you’re getting a loan from. Maybe it’s a credit fund, maybe it’s an asset manager. You should diligence and understand who that party is. What the custody technology is where your Bitcoin is sitting. It just makes it more complex. 

[00:25:18] Preston Pysh: Well, I think that your point on the yield is because you’re dealing with higher risk or they’re dealing with higher risk because you got such strong custody of your coins and they don’t have a hundred percent assurance that they’re going to be able to get it back.

[00:25:32] Because you still got control of the key there, and therefore you’re going to pay a different rate or you’re going to, yeah. On the Bitcoin that you’re depositing, you’re going to pay a higher rate than if you are doing it this other way where they’re basically holding the keys. So that seems to be a really important like foot stomp kind of thing for people to think about when they’re looking at the spectrum of interest payments and why some are higher than others. Right? 

[00:25:59] Jon Melton: That’s absolutely valid. And that if you’re three types of, of threat application, strict, no react qualification, your Bitcoin’s, other blockchain. It doesn’t go to a lender or a partner. The second one where somebody’s pledging it to somebody, say it’s not going to move. They just need to pledge it to get the capital or to get a better rate, but it’s still with somebody else.

[00:26:18] You have to underwrite that risk. And the third, there are four stories about is you’re taking your Bitcoin collateral and they’re lending it out. To somebody to generate interest. And maybe that comes in the form of backbeat the borrower in the form of a lower rate, but it comes with the highest amount of risk.

[00:26:34] So I think what we’re describing here is sort of a continuum of super conservative security conscious model of a more, maybe traditional model in terms of we’re going to pledge it with somebody else to raise lending capital. And then a very risky model. Unchained clients tend to be really long-term, probably very concentrated.

[00:26:53] Security focused Bitcoiners, so we just surpassed a billion in originations. We’ve been doing this since 2017. there’s lots of clients who simply trust us because, we’ve been in the market through cycle and we have unique infrastructure that allows us to deliver Multisig loans at scale.

[00:27:12] Preston Pysh: I’m curious about how you see the real estate plus Bitcoin collateral. Borrowing and lending kind of maturing. So let’s say we’re like five, 10 years out into the future, so many of these ideas are, have progressed in. I mean, let’s look at where we were in 2020, or even back to 2015, and like those five year movements in this space have been, you’re in a different galaxy.

[00:27:36] As far as like what’s happened, so five years from now, I kind of suspect we’re going to look back at this moment and be like, wow, it has changed so much. And I think one of the things that’s going to be part of that is you go and buy a house. Let’s say you buy a house for a million dollars, that house just has the inherent value of the million dollars, so that if you would default, they can take the house back.

[00:27:55] And that million dollars for all intents and purposes is still there. And there’s not a lot of risk to the bank because you can always repossess the house. I kind of suspect, and I’m curious if you would agree with this, that you’re also going to be able to pledge some Bitcoin along with the loan on the house to lower your interest rate because there’s this kicker or there’s this guarantee that even if the house went down by 20 or 30% in value.

[00:28:21] You put up 20 to 30% of that value right from the start, let’s call it $300,000 of Bitcoin along with the loan on the house. And so the risk to the bank is really, really small at that point. So you should get a much lower interest rate. Is that how you see this playing out? Is it’s going to be the same? And then my guess, my next question is.

[00:28:41] You’re getting into this weird hybrid scenario of not being over collateralized, but somewhat being over collateralized because you’re mixing it with something that is super illiquid, which is real estate with pretty much probably the most liquid thing on the planet in five years from now, which is Bitcoin.

[00:28:58] Right. And I think that there are two considerations for me when I think about sort of the dual collateralized structure. Number one is in five years, who knows where we’re going to be in terms of capital. And you need capital to sort of, to underwrite that. And I think that right now real estate is obviously a government sponsored market rates are certainly artificially low because lots of that supply of loans could be offloaded to Fannie and Freddy. Either banks are going to have to come. What do you think? 

[00:29:25] What do you think those rates would be if that wasn’t the scenario that it was subsidized so much by the government, you think they’d be closer to 10%?

[00:29:33] Jon Melton: Why not? I mean like a couple of points in real estate and the wealth effect. I mean, Luke Groman talks about, is like how critically important is for asset prices in general, like the stock market to be high, to generate tax receipts. a lot of folks in the country ultimately like aspire to own a house or have most of their wealth tied up in their house.

[00:29:50] But the second piece is that, as you said, really accurately, you have a piece of poor collateral that requires upkeep, that if you just left it there, a house is going to decay over the case of a, I mean, a 30-year-old house needs a new roof. If you didn’t touch it, you’d need to maybe have, working out of that requires, a whole department of folks at a bank to work on those sorts of default situations.

[00:30:13] Whereas Bitcoin, in a perfect world where all the money was flowing to all the right places, should be priced. Much lower than that in because it can be instantly seized, sold. You can get back the dollars very quickly. But like all things Bitcoin, there’s a reason why it’s a $2 trillion asset class and a world of 40 trillion in equities and 40 trillion in bonds, and 20 trillion in gold.

[00:30:35] It’s because that knowledge and that understanding of Bitcoin is not diffuse, in the economy and certainly amongst lenders. And that’s another reason why rates are, are still high. But I’m optimistic that banks have been a theme through this. I think that bank market is loosening up, and I do think rates are going to come down and banks are going to get more involved in the couple years.

[00:30:55] Preston Pysh: Yeah. So in general, do you see that hybrid taking place?

[00:30:59] Jon Melton: I don’t think it’s going to be a near term phenomenon. 

[00:31:02] Preston Pysh: You think it’s more than five years out?

[00:31:04] Jon Melton: There could be some specialty lenders, like a credit fund or something that’s really structured on an institutional basis, but I think that for, for banks, they have to get their feet wet in terms of are they comfortable custodying Bitcoin? Do they know how to custody Bitcoin?

[00:31:19] And having been in the market at a bank and speaking to banks now, I’m sure they’re going to come up the curve, but I would be, I would be more optimistic of that, something like that coming about through sort of private credit offering with somebody who’s willing to take a little bit more perceived risk in terms of holding Bitcoin, trading Bitcoin.

[00:31:38] Preston Pysh: Okay. Hey, there’s been a ton of discussion, news policy with respect to stable coins in general. Why is all this stablecoin stuff a big deal? Like what’s the so what for the person out there, if you were going to give the 101 on why stable coins are such a big deal to the federal government, why they’re passing things like the Genius Act. What’s your takeaway? 

[00:31:59] Jon Melton: Yeah, so even as a Bitcoin or stable coins are incredibly interesting. And I think that sort of digging back into my macro background and, and interest, I think that it’s clear to me that the federal government is looking for any sort of buyer, pocket that they can find for us treasuries.

[00:32:16] And whether that comes in, sort of arcane, regulatory ratios, like the supplementary leverage ratio that allows banks to buy more treasuries with less capital. Or the Genius Act, which Scott says could be a $3.7 trillion market. These are all, to me, the markets. Everybody’s looking at the Fed, and you’ve have got to look at the Fed, but you mentioned the bank term funding program, like these are different ways.

[00:32:42] The liquidity of the economy can expand and assets can get marked up, and liquidity can get pumped into the system that are just new enough. And I think that. The banking system. For example, if bigger banks get involved with the stablecoin market, that could create an environment of, really easy money.

[00:32:58] If they’re not paying interest on those, that could make, despite the hesitancy of the Fed to, to cut rates that could produce another one of these. Moments where Bitcoin just, melts off, so to speak. Bitcoin’s already proven they could, can rally in the face of non-zero rate.

[00:33:13] That was a question for a long time given to when Bitcoin was conceived, so to speak. But to the extent that there’s another explosion of liquidity, the sort of, nothing stops this train type mantra in the world of Bitcoin. Bitcoin probably won’t be surprised at what Bitcoin. 

[00:33:25] Preston Pysh: It almost seems like there’s a butting of heads between the Fed and the Treasury on this particular topic because you see Bessett, he’s out there just championing this idea of stable coins. Really seems to be excited about the entire space and doing whatever he can to support it. And then Powell seems to be literally the polar opposite and kind. Emblematic of the legacy typical, like, I don’t understand any of this and I don’t want to support any of this, and just kind of bucking the entire movement.

[00:33:54] So what’s your take on that dynamic kind of playing out and how it relates to stable coins? 

[00:34:00] Jon Melton: Yeah, so I think that the dichotomy between the Fed and treasurer or even the Fed and the whole apparatus of the executive branch and the the legislative branch is really striking right now. And I think that there is a very unified agenda by, like I said, the executive and the legislative branch, treasury senators talking, really talking in a negative fashion about Powell.

[00:34:21] And I can’t remember a time in markets when senators have cared so much. About the Fed chair, but there’s a lot of attention on Powell and it’s all very coordinated and very direct. And the jobs number today, it seems pretty hard with the stock market at all time highs to say that lower rates need to happen or else something cataclysmic is going to happen to the economy.

[00:34:41] So I think that Powell seems to be really kind of digging in on a traditional dual mandate on, justified and sort of holding rates where they are and the other side. And the president has been outspoken about. We’re just going to wait. We’re going to issue a lot at the front end. And clearly anybody in America with, any sort of debt, if they can lower their own interest rate, which is essentially what the Fed would do for the treasury, if they lowered rates, the 3% that Trump wants, anybody would do that.

[00:35:07] And it’s just amazing at the macro level, sort of how open it is. But as somebody who cares deeply about the future of America. It’s hard to see another alternative given kind of where things are at in terms of interest expense relative to other all outlets in the government.

[00:35:21] Preston Pysh: Yeah. It doesn’t seem like they’re ever going to be able to issue anything with duration in the foreseeable future.

[00:35:28] Jon Melton: No, that that’s a really interesting point. I mean, yeah, that came in as in the chief Bond salesman and. There was Doge and that was quickly U-turned and it really seems that yeah, the executive rate is moving really fast and really aggressively and they’re focused. If indeed there was a pivot and it was, Hey, we can’t cut, we’ve have got to look to the short end.

[00:35:47] What’s the stable, like this is stable point playbook that we can run. Let’s see if it can work and see if we can do that. They’re very aggressive and very fast. 

[00:35:54] Preston Pysh: Because it’s just pure gravy for the stablecoin issuer to squat and just sweep the coupons and then do whatever they want with them. If it’s just kind of like one month money or where wherever they’re issuing it at in short duration. It’s kind of fascinating to see it all unfolding. 

[00:36:09] Jon Melton: Yeah, and for me, the use case for stablecoin has always been sort of, Bitcoin is the best money ever. Anybody can get access to it. Yeah. If you’re in emerging markets, the dollar’s pretty good. And Tether Hass proven that there’s ginormous product market fit globally for the dollar.

[00:36:23] But how do you induce us, banking customers to flip into, into stable coins? Yeah. So you know, Arthur Haysbert a really interesting, quite colorful piece on stable coins recently talking about the sort of compliance savings big banks could realize if, stable coins became adopted and mass.

[00:36:40] And it’s a really interesting, we talk about. The days of zero interest rate policy, what if there was a way for banks to induce consumers to get into stable point that paid zero through some sort of rebates or fees? Because it just made so much more sense on the compliance side from the bank’s perspective that sort of, hayes’s take on it, which is interesting.

[00:36:59] Preston Pysh: It seems like the banks are going to be using the stable coins in and amongst themselves, and they’re going to be sweeping the coupons. And then for the retail customers of the bank, they’re going to not even realize that that’s what’s happening behind the scenes. They’re just going to continue to get some pittance of a interest income by having their funds on, quote unquote, on deposit. Would you agree?

[00:37:21] Jon Melton: I mean, I would love to get up the curve more in terms of how these are going to be used on a, and the interbank market seems like that’s kind of the easiest one to control, and there could be lending against stable coins. For me, bitcoin’s always been the most interesting thing in the room when it was a hundred billion dollars, when it’s $2.3 trillion like it is today. Even though it’s small, I mean that’s really, I’ve bit grateful that I can continue to focus on that and then unchain, serving Bitcoiners with prudent products. 

[00:37:47] Preston Pysh: Yeah. Jon, I’ve really enjoyed the chat. I’ve thoroughly enjoyed the history lesson there on Silvergate.

[00:37:53] That was really interesting and we’ll make sure that we get those into the show notes. We’ll also have some links to Unchained and the borrowing and lending and the custody stuff that we talked about.

[00:38:01] Is there anything else that you want to highlight or give people a handoff to your social media accounts?

[00:38:06] Jon Melton: I appreciate that Unchained.com. Feel free to reach out. We would love to connect with folks. I’m on LinkedIn and on Twitter. at jmelton21mm. I’m not super active. There’s some high school football stuff and some stuff there, but appreciate what you do for the space Preston and happy to speak with you today.

[00:38:22] Preston Pysh: Thank you, Jon. Really enjoyed it. 

[00:38:24] Intro: Thank you for listening to TIP. Make sure to follow Bitcoin fundamentals on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to the investors podcast.com. This show is for entertainment purposes only. Before making any decision professional, this show is copyrighted by the podcast network.

[00:38:48] Written permission must be before.

[00:38:39] Outro: Thank you for listening to TIP. Make sure to follow Bitcoin Fundamentals on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

This show is for entertainment purposes only. Before making any decision, consult professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.