[00:01:09] Matt Pines: Thanks for having me back! Yeah, just a quiet spring. [00:01:12] Preston Pysh: Just a very quiet spring. The Genesis act that went, it seems like it’s a done deal. Let’s talk about that just in a little bit. [00:01:20] Where I want to start this off is just the current administration dealing with, there seems to be like this battle happening between the Treasury and the Fed. I’m kind of curious to get your, just overall take on this setup, what it means, kind of where you see this going in the coming year or two. Do you even agree with that statement? Take it away. [00:01:45] Matt Pines: Yes. I mean, this is a kind of history rhyming, but with a bit of a different twist, right? When you have large debts for a large government, they are preoccupied with ensuring they can finance themselves at a sustainable rate. That’s like, yeah, like the border boundary constraint, and it is the primary constraint that bes in his facing here. [00:02:04] And so he is there to essentially sell treasury bonds and support the administration’s strategic policy objectives. And so those are somewhat intent. Define. [00:02:14] Define that from a very high level, very simple standpoint with respect to what we’re talking about as far as funding the government. [00:02:22] Yeah, so they, well, one, we have a lot of legacy debts we have to refinance, and then we’re committed as far as we can see, to about seven plus percent of GDP in terms of deficits. [00:02:32] So just the kind of stock of debt we have to refinance is high, and then the flow of debt that we projected to to issue is also high, and that’s just kind of like the baseline condition, but that’s running up against the fact that the administration has particular policy priorities and objectives that they want to achieve in a short period of time. [00:02:51] These are strategic shifts that they want to put in motion to change the balance of trade in the world to ensure domestic resilience of their supply chains to. Make sure the US dominates these strategic industries and technology and they’re also butting up against the fact the global system’s quite volatile geopolitically. [00:03:07] So these are just like the boundary constraints that that Besson has. He has to ensure that Trump at all can achieve these objectives. While ensuring the government can finance itself at a reasonable rate and a lot of the policy objectives that the administration wants to pursue, reshoring restructuring of the global trade and monetary and security system is reflecting back on the treasury market, right? [00:03:29] Mm-hmm. Adding to term premium and generally speaking, changing how a lot of countries and foreign capital polls view the United States. And so that is ultimately the, like the boundary constraint that is putting a lot of pressure from the federal government onto the Federal Reserve. Federal Reserve has a particular official mandate, but ultimately, like they exist, like all central banks exist to ensure the national government by whose remit they operate, can finance itself right? [00:03:53] Under all conditions. And they don’t make policy right. Beyond the, yeah, the remit of meeting their tool mandate. But when the federal government decides to throw the table over and restructure the global economic and security system, the Fed has to kind of cooperate, but they can’t be seen to objectively to be queing to the party line. [00:04:10] So they have to play this double game where it, for all intents and purposes, they maintain a dependence. But if you look in the microstructure, right, and maybe certain types of debt issuance that seems to be disproportionately taken up out of fed, it looks like, okay, they’re not helping objectively the sort of yield curve control, but they’re accommodating sort of treasury issue events in a way to sort of mitigate potential gaps along the demand for certain treasuries. [00:04:34] And so this is. The constraint that we’re seeing that kind of operate within. And he is irrigating more power to himself and other tools that the treasury has to sort of manage the curve, especially on the long end. So treasury, buybacks, jawboning, right? Probably lots ofs conversations with other governments, Japan, et cetera, about, hey, like could you help us out here? [00:04:55] Right? Like a lot of the discussions are referenced, sort of foreign exchange policy. And so I think there’s an attempt to try to keep a cap on the long end, at least without having these volatile specs. I think when they have the move index go like past one 30 and one 40, everyone, everyone freaks out. [00:05:11] ’cause that can lead to contagion. This is where the trend lines are going to converge over the next six to 12 months. Towards the end of Alice term next year, I just expect. Well, you know, encroach more and more and more on the fed’s sort of territory, so to speak. Yeah. They, they’re already taking away the banking kind of regulation. [00:05:27] They want to step right out those two key functions, the monetary policy function, the banking regulatory function, and then the monetary sort of function. They’re also going to start to e away and then use rhetorical pressure that Trump has. Not shy away from to push the Fed to reduce rates on the short end, especially as we get to this refinancing cycle over the next six, 12 months. [00:05:44] I don’t see it as a crisis right now, but I see it as like the structural trends moving in this particular direction and fiscal dominance, the sort of defacto assumption of the Fed to an administration that wants to achieve pretty dramatic restructuring of the global system. And at the end of the day, like the Fed does what all feds do, they’ll like, they’ll have to accommodate what the hegemon wants. [00:06:05] But how much friction and how much happens in the public versus behind the scenes remains to be seen. [00:06:10] Preston Pysh: What do you think the Trump administration’s point of view is with the Fed in general? I know he is, he has his comments about Powell and how he’s always slowed to cut rates and all that kind of stuff. [00:06:22] But I guess my question is more pointed towards like long term, how do you think the Trump administration is going to continue to. Look at the Fed as far as their role in the government and what it is that they’re doing. Are they almost on the Ron Paul side of things where they need to end the Fed or are they more, we just don’t really like Powell in the job and we want somebody else there. [00:06:45] I. [00:06:45] Matt Pines: I think they want to chip away at some of the Fed’s powers. I don’t think they want to eliminate it entirely. I think they want to sort of knock it down, take it down to a certain, very, very circumscribed remit, and then install like a pliable chairman. Right. And so it could be either Kevin Walsh or has it. [00:07:04] Those are kind of the two names that have sort of been floated around as. Potential fed chairs, and those are obviously like very Trump loyalists. There’s probably like little minor differences between the two of them, but [00:07:13] Preston Pysh: could they even do that? My understanding is that it’s very independent and that the existing different, this isn’t the correct terminology, but the different branch offices within the Fed, that’s where the governors come from. [00:07:26] That would replace Powell. At least that’s what we’ve seen historically. Help me understand and or address how this could potentially be changing and how they would even go about doing something like that if they were able to do it. [00:07:38] Matt Pines: Yeah, so there’s like, it is a federal open market committee. The FMC is the sort of the critical group that makes the monetary policy decisions. [00:07:45] And then the Federal Reserve system consists of these regional fed banks that have their own regional membership. And they do a lot of economic analysis and business engagement, and they kind of support that regional economy. But the true power lies with the FOMC and which is in DC basically. And then in New York, at the New York Fed, which manages the Somas, the systems open market account, which is effectively like the portfolio, the balance sheet of the VE. [00:08:12] And so you can change the leadership, but ultimately it’s a vote, right? That the FOC takes and they have their dot plots that they forecast what they think their vote’s going to be for raising and lowering interest rates. Importantly, what’s happening now, in fact, last week I think was a big conference. [00:08:25] Every five years, the Fed goes through this kind of framework review where they get all the nerds together, all like the high clergy, the high clarity of the Fed, and they sort of figure out what the next sort of canonical doctrine is going to be that they issue to the lady. It’s like, here’s our guiding principles for managing our mandate here. [00:08:43] The previous framework review created this acronym called fate, the flexible average inflation target. That they would be flexible in targeting an average inflation rate of 2%. And so basically they would kind of go above and below that target and they would try to make sure that the average would be 2%. [00:09:00] The scallop buzz are shifting just to like flexible inflation target. Getting the average, that means that they can sort of maintain like an overshoot more than you would expect, right. And so generally speaking, they’ll accept higher inflation. But we’ll see how that cashes out in practice. But I was talking to, um, an economist who was at those meetings, right? [00:09:19] And just getting a sense of like the vibe, right? And it is very much like an elite in-group club of tenured professors, fed staff. That get together, they’re all PhDs from a handful of the same institutions and they’ve all kind of breed the same air growing up in terms of the mental models of the world. [00:09:36] And they see themselves as kind of this insulated technocratic cohort that essentially the high table comes together, comes up with the model, communicates that to the rest of the world, and then they can manage the dials of the global economic system. And I was talking to this gentleman who was there. [00:09:50] He’s one foot in one foot out of that world, and he recognizes there’s a massive dissonance between the kinds of conversations happening inside that little bubble and then like massive changes taking place in the external environment. And it’s like they’re kind of a bit in denial. Yeah. That it’s like if we just kind of pretend that the world is the way it has always been, yeah. [00:10:07] Then everything will be just fine and we can just keep going through these motions. I feel like there could be like a road runner situation at some point in the near future where. Just things get out of their control. Right? Yeah. These are geopolitical kind of once in a century style. These are national leaders, irrigating to themselves the power to make these structural changes. [00:10:26] Yeah. And the Fed is just a tool that is in their way or will be hijacked to accommodate those purposes. Yeah. And these people viscerally resist that, right? They have assumed for themselves a certain status, a certain in-group kind of hierarchy, and that they are the technocrats who know better. And that political interference is an imposition on this independent institution, and I think that’s they’re in for a rude awakening. [00:10:48] Preston Pysh: I think something that’s lost on the public that maybe doesn’t really pay a lot of attention to this stuff is when the country’s being fiscally responsible. The Fed has this ability to kind of juice the markets, and I mean, they have the ability at all times, but especially when, let me just finish the thought here. [00:11:06] I guess what I’m trying to say is that fiscally that is the primary driver and the Fed is just along for the ride if it gets out of control. And I would argue that where we’re going and where the numbers are pointing is that it’s getting out of control. And so like their decisions that they have to make. [00:11:23] Are completely a function of basically papering over the out of control spending that we have from fiscal appropriators coming out of Congress. So these decisions to spend and spend and spend way beyond what is being brought in from a tax standpoint has put the Fed in this situation where. They’re going to look like total idiots because of what they have to offset from the fiscal policy side of everybody that’s been elected in the office for decades on end that just keeps spending at will. [00:11:55] Do you agree with that? If so, they’re kind of in a catch 22 at the Fed because there’s nothing they can possibly do to offset the decisions that are being made that are, in my opinion, upstream of them with fiscal spending. [00:12:09] Matt Pines: Yes. The Fed has designed itself and its frameworks around managing the business cycle, essentially. [00:12:15] Yeah. That they’re a characteristic business cycle. You have this certain periodicity where you get credit expansion, you get sort of animal spirits, you get contraction, you get defaults, and they’re just like, they view themselves as sort of smoothing out. Cycles. Yeah. So that there isn’t like a runaway media and there isn’t like a major bust. [00:12:32] Yeah. That that sort of the normal business credit cycle essentially is buffered and there’s a certain degree of safety kind of a margin imposed on the economic system. When you go through the cycle we’re going through now, which is a geopolitical cycle, right, which is a kind of a world historical cycle. [00:12:48] Like the Fed doesn’t have the tools to manage that. Yeah. They’re not institutionally capable of smoothing out those sorts of curves, which are the world historical curves where things like the Fed come and go. Right. And those sorts of shifts. It’s just above their capability set, but more practically, right, like we are going to see the Fed have to manage an environment where it looks like the US government is, the federal government has basically given up on, you know, doge cuts, right? [00:13:13] Yeah. This idea of austerity or efficiency is out the window now, like the budget that they’re going to pass is going to juice the economy. It looks almost like they’re doing nominal GDP targeting. [00:13:21] Preston Pysh: Matt, this is really important. I really want to get on this path because it seems like Elon rage quit because I think he realized that no matter how hard he tried, he wasn’t actually on the controls. [00:13:33] He was not able to steer the ship in a direction. ’cause his target was this trillion. I mean, he first came out swinging that he was going to do it 2 trillion, then he backed it back to one. When you go out there and you look at some of the numbers that are being reported, it’s actually minuscule of the dent that he’s actually been able to make. [00:13:50] I’ve seen numbers as low as like 40 billion. I’m curious, what numbers have you heard? Has he rage quit? Why did he rage quit? What does it mean to, for, you’re talking about this pressure that’s on the treasury. I would imagine this just kind of 10 x. Is it because of his inability to get some of the spending under control? [00:14:09] Matt Pines: Yeah, I, well, I actually think that those thing from the beginning, the whole idea of that they’re going to cut a trillion dollars was a smoke screen for just getting access to kind of the inner workings of the government and getting just people. That’s interesting. Yeah. And access to critical information on contracts. [00:14:26] Whereas we’re going mapping out the sort of the dark matter of the federal government, seeing who was winning, who was losing or when connected to the federal Tet. Right? That sort of knowledge was that that was getting access to that information. And I think the Doge efficiency cuts were mostly just cosmetic. [00:14:42] And I think, yeah, it was a political economy, kind of like we need to get dirt or information on our opposition in the power structure in the US system. And. Our opposition is principally connected to the technocratic management of the federal government. And so we need to understand like what their points of vulnerabilities are and try to choke off selectively, right? [00:15:00] Our adversaries access to funding and financing. So that was going after U-S-A-I-D going after part of education. It was a politically driven activity, not like we need to hit a certain efficiency cut. And I think he’s got 500 things let us do, but I think he got what he wanted out of that. And then he was like, all right, we’re done. [00:15:15] But I also think structurally it was probably impossible to get the trillions of dollars of savings that they were looking for. Like the nothing stop this train meme is, is true. And you could see in best end last year when he was articulating his vision or what if he was going to be picked, like he had this sort of his version of the Three Arrows plan, which is he was going to target bringing deficits down to 3% of GDP. [00:15:34] They’re going to pump 3 million more barrels of oil. And they were going to, I think, target last. The third was. They sort of given up on that and it was like 3% interest rates. 10 year they started given up on that, and now they’re sort of accepting that they need to sort of run the economy hot, that they’ll grow their way out of this debt. [00:15:49] Now, if we just push the accelerated button down and we have, uh, G above R right, then we can accept essentially a higher inflation rate. But as long as incomes are growing, as long as the allocation of those gains is distributed across society in a way that we’re down to the Republican party’s benefit in 2026. [00:16:08] Then it’s an acceptable outcome. Right. I think from their view now it’s like, all right, we’re clearly not going to be able to do this austerity program. It’s not going to work. Especially when you have a system that’s so highly leverage to equity prices and federal government spending, you’re going to go into a recession. [00:16:20] Yeah. That’s what you’re going to get. And I think they realize that, and they’re like Uhoh. Now they’re doing a 180. And now I think this is like where all the deals in the Middle East are. It’s like, okay, how can we basically goose the economy, but do it in a way where we control the marginal direction of credit? [00:16:33] Right. I think Besson originally wanted the banks to become the funding channel. For domestic reinvestment. I think that’s running into a bit of issues. Now. They haven’t done the SLR exemption and banks don’t just take instruction from the White House. So you go to Saudi, you go to Qatar, you go to UAE, the deal is explicit, right? [00:16:51] You invest X hundreds of billions of dollars into these specific industries. And that delay of kind of central planning to a certain extent, a strategic allocation of credit into these priorities. And the fact is worth one deficit country and you’re not going to like flip that on a dime. Mm-hmm. And so I think they’re sort of feeling their way through. [00:17:08] I think there’s like the Chinese idiom, which is like crossing the river by feeling the stones was like de xiaoping’s idea. It’s like there’s no master plan. They have no, I think real sense of like, which stone is next. I think they’re fueling their way across the river here. Maybe dunking a leg or two along the way. [00:17:24] Preston Pysh: I think another piece too is they just saw how fast midterm elections are going to be coming and how much of a lag there is in markets to react to whatever type of control inputs you’re trying to provide to get them to run. And they’re looking at the timeline and they’re saying, well, we need to start making these markets talk or else we’re going to have some issues here coming midterms. [00:17:46] I guess my very generalized generic outsider take, but yeah, it’s, [00:17:51] Matt Pines: yeah, I mean, and it used to a 12 month rolling correlation, I think between our trade deficit and our equity markets. Yeah. It’s pretty tight. Yeah, very. That’s the system we have, right? We run a deficit. Those dollars go overseas, those dollars round trip back into our equity markets. [00:18:04] Yeah, and what we did now, installing a toll booth, were we willing install a toll booth or. We’re going to be doing soft capital controls now. I think they’re shifting away from trying to use tariffs. Mm-hmm. I think they’re still going to have those as like a baseline. I think they’re more likely going to use capital controls in a very kind of marginal way first. [00:18:19] Mm-hmm. Kind of make people pay for the privilege of owning US assets. Mm-hmm. Essentially. Mm-hmm. And that’s a big bluff because it’s like, all right, well we have some desirable assets. We have desirable real estate, we have really desirable max seven inequities that are dominating certain technology areas. [00:18:34] And we have, quote unquote, the safe and liquid sovereign debt market and the treasury security. But of course, a lot of other governments around the world are putting pressure to kind of repatriate capital, right, to help them out. Everyone’s facing bond market issues from Japan to South Korea, to the Germans, to the French, and they all have the same sort of strategic challenge, which is how to support an aging population, a more risky world, where they have to invest more defense. [00:18:57] Where they all realize that they’re going to be behind the technology curve, so they need to make sure they get access to the cutting edge AI chips and the semiconductor supply chain. That’s like resilient for their own strategic industries. So they’re all realizing they need to borrow and spend money. [00:19:09] Yeah. Right. And they’re looking around and being like, Hey, pension fund, Hey, you know, sovereign Wealth Fund. I need you to maybe take some of that out of Nvidia or the NASDAQ and pull it home to invest in German buns or oats. Yeah. And it’s like, well, you have to ask nicely or you have to use carrots and sticks. [00:19:26] And so everyone’s sort of fighting over where the capital flows are going to be reapportioned here. And it’s a world where they’re essentially geopolitical and strategic prerogatives, not just in the US but around the world, are now supervening on market dynamics. And it’s not like they can just dictate to the market where those capital flows go. [00:19:41] But now there’s a new kind of strong force that’s more explicit. It was always kind of implicit, right? The kind of monetary dynamics and setting up favorable conditions to pull capital in and out of certain countries. But now the kind of mask is off and now it’s like, no, no, no, you will invest here. No, no, no. [00:19:55] You will do this Or else and else is country specific. [00:19:59] Preston Pysh: Alright, let’s talk about the Genius Act. This is stablecoin regulation that went through Congress yesterday. This is a really big deal, I think, for traditional Wall Street banks, but give us your take on all of it where you think this leads, what this means long term. [00:20:16] Lay it on us. [00:20:17] Matt Pines: Yeah. We passed a critical kind of procedural step in the Senate and then we’re going to be moving shortly to a series of votes. And then the, ultimately we’ll have to be reconciled with a house bill. And I think the writing on the wall is that it’ll, whatever passes to the president’s desk, will reflect more about what the Senate’s thinking here than what the house is thinking. [00:20:35] But. There’s a lot of politics in between now and then, and the upshot is they have sort of telegraph this early in the administration there was going to be a sequence of digital asset legislative priorities, and it was basically stable coins first. Spend market structure. There was a bit of debate about whether they should do both at the same time. [00:20:51] Certain players wanted to put one in front of the other or merge the two. It settled out. This was the order of operations. Of course, we came into the year being like, Bitcoin guys. Bitcoin’s pretty important. Bitcoin may be the most important part of this whole industry here. Coin’s, great market structure, great for token holders and VP sort of VC LPs. [00:21:09] But Bitcoin is the thing that floats every, this entire industry here. Right? 65% of the total market. So we put on this event in March trying to raise the sill of this region Bitcoin reserve, and so now it’s still tentative, but we’re trying to bring the SBR codification of the executive order into sort of third place, at least as like a sequence of operations here. [00:21:26] Hmm. There was a bit of a stumbling block with the Democrats kind of putting on this big show, walking out. Then not voting for the first round for the Genius Act, but they met over the weekend. They squared away all this differences. It was mostly politics. It was the fact that the world will be financial, which is a Trump family associated their crypto fund is going to issue its own point stable with Binance. [00:21:47] I think the Democrats wanted to make hay out of. The president’s involvement in this industry. Ultimately, I think they settled that out now that that is on glide path to passing, at least I think that’s what their, the industry read is, which is good timing. ’cause I think actually just today or yesterday, Hong Kong, the Hong Kong monetary authority just approved its own stablecoin framework. [00:22:05] Yeah, right. To stablecoin. This was essentially this. Pretty flexible regulatory in pharma. So like a lot of countries are now trying to, couldn’t place their own regimes here. This is a, from the US’ perspective, a lot of the commentary has been interesting. You know, BPIs written about for years now, which is like, there’s a strong. [00:22:20] Strategic synergy between staple coins and the United States, but also between Bitcoin and staple coins and the United States’ interests. And it actually was interesting to see a treasury borrow advisory committee report that was commissioned by the Treasury Department that they produced at at the end of April. [00:22:34] Very detailed report. They have tweet out some screenshots where they forecast that if the Genius Act passes. They expect by 2028 the total amount of stable coins in circulation to be $2 trillion. Wow. So right now it’s about 240, 250. So 10 x from here. Yeah, exactly. And and importantly, they note that that would correspond given the nature of the balance sheets involved. [00:22:54] A trillion dollars in demand for T-bills. Yeah. Yeah. And there’s the total size of the TBI market’s about $6 trillion. Tether alone is like 2.5% of the TBI market. If they 10 x, they’re now a quarter of the TBI market almost. So now you move from stablecoin is kind of being this interesting, emerging, but somewhat marginal new player in the global monetary system to being like a core pillar of how the government kind of finances itself. [00:23:16] And then on the other hand, also dollar rises, parts of the world that don’t. Yeah. Have easy access to hierarchical correspondent banking. Services in dollar, so it’s kind of a win-win from their perspective. But it also implies like pretty large move in Bitcoin, right? Yeah. I mean there’s probably endogenous demand for dollars itself, but just the historical correlation between Bitcoin and stable coins is the higher the dollar price of Bitcoin is the more stable coins that you need to intermediate Bitcoin transactions in the crypto economy. [00:23:42] Yeah, right. Obviously with exchanges where you’re using like bank money to buy Bitcoin, there’s also lots of exchanges that use stable coins to buy bitcoin. And so the bigger the size of Bitcoin in stablecoin terms, the more stable coins you have in circulation. And so if you take a conservative sort of back implication of what that forecast, it means that Bitcoin is somewhere between 200 and 300,000. [00:24:00] If you take a more aggressive, more optimistic, it’s like six to 800,000, just in terms of that 10 x in the total stable coin market. But I think this is being seen by, it kind of moved up the chain from being blog posts being like, yep, crypto dollars, crypto your dollars. These are the same thing being like senior senators, the Treasury secretary all saying like, this is in our strategic interest here. [00:24:21] It’s been [00:24:22] Preston Pysh: MeMed into reality. Yeah, I mean it really has. This was something I remember we started talking about maybe in 2021. As kind of a a community as like, hey, like the government you would think would really be interested in this, because they don’t really have real biases of any type of long duration treasury issuance. [00:24:42] And when I saw Senator Haggerty, I think it was yesterday, went on CNBC and was. I think one of his talking point was stable coin Issuers are going to be the biggest buyers of US treasuries in the future, and I think he even maybe put out a date like in the next four years or something like that. I was just watching this clip and I’m thinking, and for people that don’t know, Senator Haggerty is intimately involved in all finance matters in Congress, and I remember seeing this and I was just like. [00:25:11] Oh my God, this is crazy. This is moving at a pace that I don’t think any of us had really anticipated and like, what does this mean for banks? And the question I have for you, Matt, do you see the traditional Wall Street banks really wanting to play in the stable coin space to issue their own stable coins and start competing with Tether and things like that? [00:25:30] And what does that mean if so? [00:25:32] Matt Pines: Yes. I mean, this is where there is still a large amount of contention. Obviously the banks. Want to get in on the senior age here. Right? Like Tethers been basically had a monopoly on this offshore dollar crypto token senior age, where they don’t pay interest on the tether that they create. [00:25:47] Yeah. But they earn a ton of interest on their reserve holdings, right? Yeah. Mostly short dated treasury bonds that are four to 5%. So they’re just collecting that spread of like $13 billion net profit every year. Right. And that exists basically only because of regulatory arbitrage. Geographic arbitrage. [00:26:02] Yeah. And so a lot of people, right, in different positions in, in both onshore and offshore banks that would love to try to get into that game. TE has a lot of network effects. There’s a lot of brand trust, there has a lot of penetration to the ecosystem and so it’s be very interesting to see how the domestic banks, the typical gibs, decide to issue stable coins because there actually isn’t a huge demand for it onshore, right? [00:26:22] Most people have PayPal or Zelle or you know, Venmo to do kind of pretty easy payments. The real kind of demand is offshore. Right, and that’s mostly where the Treasury Bar and Advisory C committee is sort of forecast the expansion of stable coins, especially because stable coins, if they’re properly regulated and reserved, can themselves function as collateral, right. [00:26:41] In the offshore system. Well, whereas right now, like an IOU claim from a bank is not collateral itself, the underlying treasury security that the bank or that shadow bank holds. To kind of backstop its IOUs, that’s the collateral. We’ve been moving more from an unsecured global dollar system that was using LIOR to a more secure dollar system using SOR. [00:27:01] So they’ve been trying to push more collateral into the system to make it more of a secured lending shadow banking system. There’s still a lot of leverage in there ’cause you can hypothecate this treasury securities, but if you could regulate and have a high amount of institutional trust in stable coins in the global dollar system, if you get to the point where you actually just need, like the stablecoin itself could become the clutter instead, the treasury security. [00:27:21] And then you can imagine these things merging. BlackRocks whole business is tokenization, right? When they want to tokenize and the first sort of traunch of assets they want to tokenize is treasury securities. Mm-hmm. Right? It’s like, all right, we’re going to be creating a lot more debt out there. We need to create more demand for it. [00:27:36] And if the traditional demand and sort of the, the dealers that intermediate the on the run and off the run treasury market and that has had plumbing issues and there’s all sorts of things with central clearing and. Different repo facilities that they’re trying to put in place and SLR relief to make sure the banks can buy more treasury securities, but you can tokenize that, those securities then, oh, boom. [00:27:53] There’s a bunch of other needed demand and use cases to use your debt as collateral in these different use cases. [00:27:59] Intro: Yeah. Yeah. [00:27:59] Matt Pines: That’s why the big fight now is over whether you can issue interest bearings, stable coins. Yeah. Which is directly threatening the bank’s monopoly, right? Yeah. It’s like the banks. [00:28:08] Kind of cartel where they’re the only ones that get to issue. You know? Like I don’t get really paid anything on my checking account. I don’t know about you, but I get paid nothing. Right? Yeah. Whereas the bank is using that and they’re lending out an interest. Right. And they’re collecting what the collateral that they bought. [00:28:22] So like the banking system is basically collecting a big off of the checking deposits. And to a certain extent, if there was a interest-bearing stable coin from a high trusted, high regulated entity, I might shift most of my checking deposits out of the bank and just hold the stable coins. Yeah, that should can use them just as much. [00:28:37] And you see Stripe integrating stable coins. I think we’re going to see a lot more kind of traditional FinTech. Players get into the stablecoin business, and if you do that play up then like a stablecoin in like a PayPal or a Cash app wallet is just as useful as like your dollar claims in your Bank of America checking account. [00:28:55] And so then you can have a big sucking sound come out of the banking system. And that is really what the banking system does not want, right? Like the other BPI, the Bank Policy Institute definitely does not want to have that threatened. [00:29:06] Preston Pysh: Matt, what I find really ironic about this is you have traditional banking, it’s all fractional reserve. [00:29:12] There’s like nothing actually there behind the scenes. They just go and basically tap the Fed to come up with real monetary units to then push in, or I’m saying real, to come up with monetary units to push in the thing. And it’s a giant Ponzi the whole way that it’s set up. This is literally the opposite of everything is actually back and collateralized and interest bearing for anybody that wants to play in this dollar stable coin issuance. [00:29:40] What I also find interesting is comparing these two models, you would think that the Ponzi scheme model would be super lucrative. And I mean it is if you’re big enough, if you’re JP Morgan, it sure as heck is, but I guess I’m saying it relative to look at tether. Look at Tether versus BlackRock. They were more profitable than BlackRock. [00:30:01] Okay? And they’re playing a fully collateralized game versus one that is not. So what I find, so I. Ironic about all of this is the banks are now incentivized to become fully collateralized and not play the fractional reserve game. They’re all wanting to play in this space because they’re looking at the profits that are being realized by a player that is fully collateralized, or at least we suspect they are. [00:30:26] Isn’t it just ironic? Isn’t this just strange how this is all playing out? [00:30:31] Matt Pines: Yeah. I mean, our banking system has gone through a whole twist bunch of twists and turns in the financial crisis, structurally shifted it. Right. Obviously the required reserve ratio is now basically zero. Yeah. But we operate on a corridor system managed by the Fed, where the Fed ensures that the banks have sufficient liquidity. [00:30:49] To backstop themselves under almost any, they do all these stress tests, et cetera. They’ve kind of been moving in this direction anyways. They have to maintain a certain amount of collateral to backstop their books. At the end of the day, they’re like government franchises. Right? Like they’re, you couldn’t say it [00:31:02] Preston Pysh: any better. [00:31:03] Yes. Yeah. [00:31:04] Matt Pines: And, and so then this is a question of, okay, how much on, on the spectrum do you go from that to like a narrow bank? Yeah. Where all you do is issue stable coins. You don’t do, actually, you don’t have to take on any credit risk. Yeah. And you know, you want to have banks exist to take credit risk ’cause you need to have that entrepreneurial engine in the economy. [00:31:19] But the banking system has become, and some of the critiques of the banks is they become so, so tightly regulated because they, they’re more useful to the federal government as like a place to stuff treasury securities. Yeah. Rather than as a means of ensuring a dynamic economy is sort of, has a sufficient liquidity. [00:31:36] And that’s why you’ve seen the rise of private credit, right. The rise of kind of shadow bank like entities. BlackRock, Blackstone, big private equity companies. That are now providing private credit. Right. And those are shadow banks, right? They’re not g sibs, they’re not regulated like those. There’s some regulation obviously, but it’s like nature finds a way. [00:31:54] And so if a, a Fortune 1000 company like wants to borrow, right? They can go to a one of these private credit facilities and ’cause Bank of America’s like, I don’t want to touch you, this is a little more of the financial stability risk that’s lurking in the system is if you do have a large amount of debt in the private markets. [00:32:10] That was fine for the last few years. ’cause they all refinanced at those really low COVID rates, but they’re like usually five year terms. Yeah. And so we’re kind of coming up on that period where they’re going to have to refinance and they’re going to just adjust up several hundred basis points. And a lot of those businesses can’t sustain that. [00:32:25] And so maybe that’s like, there’s this other pressure to make sure that you can keep short rates down or do other things. [00:32:30] Preston Pysh: Let’s talk a little bit about the SBR, the strategic Bitcoin Reserve, where that’s at with respect to the, just the appetite on the hill, and then also the Sovereign Wealth Fund and what that means because I mean, anybody that’s been following Howard Lutnick and Cantor knows their super insanely bullish on Bitcoin, and he’s been the guy as the Commerce secretary that’s been charged with the Sovereign Wealth Fund, I would imagine. [00:32:55] They would take a pretty sizable position in Bitcoin inside the Sovereign Wealth Fund, but I just don’t know where it’s at with respect to it just being executed and them like acting on all of this. I. [00:33:07] Matt Pines: Yes. So there’s two pieces. One and one is the executive piece, one is the legislative piece. Mm-hmm. The executive piece, we got established to be executive order back in March. [00:33:15] Mm-hmm. And that executive order created the strategic car reserve and then laid out kind of this timetable at to a hundred days for the president’s working group on digital assets. To do a number of things. The most relevant to SBR was instructions to the commerce and Treasury secretary to identify, quote, budget neutral ways of acquiring additional Bitcoin for the SBR in a manner that didn’t pose any marginal taxpayer burden. [00:33:38] That policy development, those ideas have been developed in, they are being reviewed by Be Hines and the folks on the president’s working group, and they range, I don’t know the all, like all the ideas. I have a sense of what’s on the table though. They range from pretty trivial, like couch cushioned money. [00:33:54] Let’s just sell off some of our coins and sweep them into Bitcoin. Or take maybe obviously the additional holdings that we’ve seized, right. That we have clear and final title to move those into the SBR and all the way on the other end of the spectrum, you have like gold revaluation. Yeah, [00:34:08] Preston Pysh: yeah. Talk that in detail so people understand. [00:34:10] Yeah. Like how all that would [00:34:11] Matt Pines: work. So that’s like, that’s the big kahuna and that was the idea that we sort of fleshed out last year as like an option for the federal government to acquire Bitcoin without legislative action and without borrowing new money. Right. It’s the mechanism that’s inside the Bitcoin act. [00:34:24] But the upshot is the government has gold certificates that are still marked at the 1973 value. Uh, that was sort of the, when we went off the gold standard, we’re like. We’re going to pretend that gold is not a monetary medal anymore, and so we’re just going to pretend that gold maintains its $42 and 22 cents an ounce value, right? [00:34:40] So all the gold we have as a federal government is marked on the books at the Fed for the Treasury General account at it 1973 value. And so you can imagine a swap where the Treasury Secretary retires those certificates, creates new certificates. Just like an accounting maneuver values those like marks those to market and then goes to the Fed and says, I want you to accept this as collateral for my checking account effectively. [00:35:04] And the Fed could say no, but I don’t think the Fed would say no. And they already have the legal authority to accept this collateral by law. And so this actually gets around changing the gold price, which you actually have to have a law to pass to change the official gold price. This, we actually retired the old certificates that are anchored to the 1973 value, and then you create new ones that are just valued at the market price, and then you have the Fed accept those at collateral and then credit the Treasury General account with the difference, say $11 billion value to 850 billion. [00:35:32] Yeah, that’s the number that goes. It goes from the gold kind of certificate account to the Treasury general account. And now the trade secretary now has 800 plus billion dollars of dry powder to spend on whatever he wants. And then we interpreted the Gold Reserve Act. This is getting a bit legalese, but the Gold Reserve Act says the trade secretary may deal in gold foreign exchange or other instruments of credit insecurities, and it’s not gold. [00:35:54] Bitcoin not gold. It’s not foreign currency. Right? By the definition of of the statute, it’s even if it’s used in as legal tender, it’s not considered foreign currency, but you can structure a transaction, say an overnight note that is denominated in dollars, but redeemed in Bitcoin as an other instrument of credit insecurity. [00:36:11] So if you wanted to, there’s a will as a way for the federal government right now, do this swap and use some portion of the $800 billion to purchase Bitcoin. They could also use a portion of it to defray future debt issuance to seed the Sovereign Wealth Fund for any government expenditure, basically. [00:36:26] And so that’s an idea we put on the table. We’ve been talking lots of folks in Congress about it, but there’s certain executive actions that you could do to execute it independently, but ideally, right, you’d want to have legislative authorization to make it endure past one administration. So it’s both and, right? [00:36:40] Like the administration should pursue the most aggressive path, acquire as much Bitcoin as possible in a prudent fashion, but we should also codify that program, the SBR in law, right? So that’s the sort of two pinster movements here. One is on the executive side, make sure that they’re aware of this as an option. [00:36:56] This checks a lot of different boxes for them, but then also educate members of Congress. That like this also checks a lot of boxes and also is a matter of strategic urgency. Yeah. Because the president has stated how publicly in executive order that this is a strategic finance supply asset that’s digital gold for the 21st century. [00:37:13] And Behe has said, and we want to acquire as much as we can. Yeah. And then Trump just goes the Middle East and is basically selling, telling people, Hey, we’re going to run the economy hot. Treasury bond holders are going to get hosed. We’re going to have a special deal for our friends in Saudi, Qatar, the Emirates, they we’re going to let them get equity right and access to these frontier GPUs. [00:37:32] And so the treasury market ultimately is going to get hosed here, but we have other strategic priorities and that means hard assets are going to run. Yeah, it means gold. Big Bitcoin’s going to run. We scared gold on shore with the tariff threat on mostly London Gold. And we emptied that into New York Vaults. And so if I’m like a master planner here, I’m like, you scare the market. [00:37:51] You bring gold on shore. You then do this accounting maneuver where you do this sort of certificate swap. The higher the gold price is, the more kind of like essentially extra reserves you just get to like invent print on the On government balance sheet. Yeah. You just print it. You just like, this is the value. [00:38:07] Now that collateral’s worth Treasury Secretary now can spend it on something and then global will run obviously. But if I was advising them, I would say, well, listen, like China has a lot of gold, Russia has a lot of gold, India has a lot of gold. Basically a lot of the bricks in the Middle East has a lot of gold. [00:38:22] We probably have about eight to 10% of the above ground gold stock River. Just did a great analysis where we have roughly 30 to 40% of all the available Bitcoin, so we’ve at least a three to four to one like asymmetric advantage. Mm-hmm. From seeing Bitcoin monetize relative to gold. Yeah. In a world system that’s going to be fragmenting where these hard assets are going to run. [00:38:41] And we know the big Bitcoin is going to run much faster than gold. Yeah. This is the play you’re committing to. I love this framing. I love this framing. Yeah. And like then we can sort of, I wouldn’t say we rug gold, but like you can sort of do both and then we have this extra bit of octane in our tank. And I think maybe the market sniffing something like this out could be just general market sentiment shifting, but I suspect the US government’s going to acquire a meaningful position in Bitcoin soon. [00:39:06] So you’re saying [00:39:07] Preston Pysh: the definition of when is soon. [00:39:09] Matt Pines: Without legislative action. [00:39:10] Preston Pysh: Without legislative action, okay. [00:39:12] Matt Pines: I think, again, this is all just like in the air, right? I think the market hasn’t fully priced in. My probability of that happening. Yeah, correct. Nothing’s a guarantee, but I’d say my assessment situation is that is the probability that I have in my head is not the [00:39:26] Preston Pysh: market’s probability. [00:39:27] What do you think the probability on them doing this with the gold is? And I also want to just kind of foot stomp for folks that are hearing all this and they’re saying, but yeah, where does the $840 billion come from? Listen, they just print it. They do, they take the his clock on some keys. They literally just print it. [00:39:46] They put it in the Treasury General account, and that’s the end of it. And then they can do whatever they want with the 840 billion that they just printed. That is simply as I can say it to you, and they’re doing this by everything that Matt just said legally. That’s how they’re going about this with the certificates and then what they do with the 840 after it hits the account after they just cracked on the keys and made it. [00:40:06] That’s up for debate in how they’re going to do it. It seems like I hadn’t heard the comment that they could take a significant amount of that and seed the Sovereign Wealth Fund. I hadn’t heard that talking point, which would give them a ton of flexibility. ’cause Lutnick is working directly underneath the president. [00:40:22] That’s where it falls. The concern, I think, is that easy come, easy go. You get a new administration in there and they could immediately liquidate it and sell it just as fast as they bought it and put it in there. Where the SBR seems like it’s much more long-term hold in something that is being overseen by all the members of Congress and would be a lot more difficult to do. [00:40:44] Matt Pines: Yeah, go ahead. No, the fund, it’s interesting, there was also an executive order putting that on the table, instructing Lunik to develop ideas. Although Trump down in the Middle East. Poor on the idea of a cyber wealth fund. He sort of said he wanted to handle the debt first, so I don’t know if there’s some behind the scenes issues with that. [00:41:02] Maybe it’s politics there where the treasury department. Didn’t want. I mean, you can imagine like Bestin doesn’t want a so wealth fund that’s managed by Lutnick. He just doesn’t want that. Yeah. Right. That’s a whole new power base that’s independent of him. Yeah. That potentially drinks his milkshake, right. [00:41:16] When it comes to the, these sorts of discretionary funds. And so there’s maybe a bit of personal rivalry there and well, he [00:41:22] Preston Pysh: was supposed to be the treasury secretary, remember? Yeah. Yeah. [00:41:27] Matt Pines: And also like. The deals that they’re setting up here, like the Saudi was very, very important. That was a strategic pivot there because we basically said, we’re not doing regime change anymore. [00:41:36] We’re not nation building anymore. We’re here to do this deals and squash beef. Right, right. Yeah. And Trump wants to squash the erasion peripheries collective beef. That’s easier said than done, but that’s like their high level foreign policy is to squash the beef in Eastern Europe. Squash the beef Israel Gaza squash the beef Saudi Iran. [00:41:53] Squash the beef Pakistan India squash, the beef China, Taiwan squash, and on the North Korea. Yeah, right, like that’s their objective. Squash the beef and do business deals. And a lot of those business deals center around domestic investment, meaning hundreds of billions of dollars, trillions of dollars investment in these strategic technology areas, which are extremely capital intensive, mostly AI and energy. [00:42:12] This is a bit, you know, a lot to feel, but I think. Everyone at the national leadership level is getting increasingly a GI pilled, meaning they’re increasingly upcoming under the belief that a GI, artificial general intelligence will be a thing. Yeah. However you define that. It will become economically and strategically significant like in two to four years. [00:42:29] Yeah. And so this is now like a first order function of these decisions that are being made for trade and for security deals. Was an idea that what a lot of the US government can essentially leverage private capital with some public capital to, to do that strategic investment. And the idea was they would collect a lot of revenues from tariffs that could be funneled into that, but they’re not really collecting that much revenue from tariffs. [00:42:51] Right? They clearly, those are, they shift away from tariffs as being an actual financing mechanism. It’s more just like a negotiating tactic. So they’re not going to be that many like new revenues coming in that will just be easily pushed into the star all fund unless you do this gold evaluation trick. But the Treasury Department has no incentive to like give any of that up to some other balance sheet at the government level. [00:43:11] Right. Especially when Besson says, oh, this is necessary to maintain stability at the long end. And then maybe they’ll use it to finance some Bitcoin purchases. I’m like, Barrish on the seventh fund right now as an idea. It could reemerge, but I think a lot of these are going to be like direct investment deals. [00:43:25] Preston Pysh: Even though you had the executive order, you’re saying that, so [00:43:29] Matt Pines: basically to create it, but it might be more of like a. Right, like a few billion dollars or something. Oh, wow. Okay. They already have, like the defense department already has an office of strategic capital, which to a certain extent is a cyber wealth fund. [00:43:40] We just don’t call it that. Yeah. And it’s not tens of billions. It’s in the billions of dollars, but it has relationships and uses private equity and venture capital firms to sort of leverage up. Right. So if they have a billion dollars of DOD capital Mm, they put that into a structure with some multiple of that, of private capital. [00:43:59] They strongly influence where those investments go. Yeah. Right. And AI into quantum, into fusion to whatever. And so that’s basically the same thing a strong wealth fund would do. And again, I think about this from the perspective of political economy inside the us, like depending on has its priorities. [00:44:13] Treasury has its priorities. Lunik wants to just take on this thing and it could mess with these other priorities. Here I’m having a call next week, two weeks with Australian. And yeah, it’s very much like top of mind, these structural shifts here, and we’re trying to steer that capital into the US and so you can have us on wealth fund at the top, but that’s very expensive. [00:44:34] And if it like takes losses, right? It’s kind of politically, it looks weird. So I don’t know. I’m not as, I. Bullish on the Star Wolf Fund as I am on the SBR, but the SR does require a lot of political education. Right. Like we came into the year Yeah. And SBR legislative priority was like not even on the radar. [00:44:51] Mm. And now we’re trying to make sure that it’s at least number three. Wow. And we’re making the argument that it shouldn’t be like next. Yeah. Right. To, to a certain extent after it gets able coins off the deck is going to be the market structure bill and then the SBR. And right now, kind of like the naive default is obviously market structure comes first, then the SBR. [00:45:07] Our argument, ed, to anyone who will listen has been the NPR R is much simpler, right? Has much more consensus across the industry, is actually aligned not just with the industry’s collective interests, but the US government’s strategic policy. Right, and it’s much more a matter of urgency that we acquire a meaningful position in Bitcoin before the Saudis, the Emiratis, and the Chinese, et cetera. [00:45:28] Preston Pysh: That’s where Matt, this is where I’m at, is if you’re right about the US is going to start buying Bitcoin soon. I just can’t imagine the second and third and fourth order effects that are going to pop out all over the world that feel like they’ve gotta be doing the same thing and that will start doing the same thing. [00:45:45] Just look at it from a state standpoint. You now have states passing legislation. To have their own strategic Bitcoin reserve and what that’s going to do. [00:45:54] Matt Pines: I mean, I’ll tell you like I know somebody that was in Hong Kong recently and they had meetings with senior officials from the Hong Kong government, and these officials were very interested in the SBR and were familiar to a level that. [00:46:08] Most folks that I talked to in the crypto policy world inside DC we’re not even familiar with with these, that whole thing that went through the gold certificate. Yeah, yeah. Mechanics that, like even people in Bitcoin, even people in crypto policy kind of go like, wait, what? How does that work? Well, these folks in Hong Kong were very read up on those mechanisms, totally, very closely tracking it. [00:46:28] Right. And I know there’s also mainland attention being paid to these moves. Here you have the Hong Kong is kind of the sandbox for the mainland on all the crypto stuff. They have an in kind ETF already. They have large family offices with heavy bags. China’s obviously took a anti Bitcoin stance in 2021. [00:46:45] They picked out all the minors, et cetera, but there’s always been stuff happening behind the scenes there, and I think they’re now reassessing at a high level policy. There’s always like seven levels for these sorts of policies to get reviewed before the big bosses make a decision. That’s happening. And then the Middle East is like Sheik Do noon meeting with David Sack. [00:47:03] He controls a whole empire of stock wealth funds that have already publicly disclosed. They own significant Bitcoin ETF holdings. And so if they have half a billion dollars worth of Bitcoin, just sort of on one of the more visible balance sheets, I guarantee you they have multiples of that are non-visible balance sheets. [00:47:19] I know Qatar’s been mining Bitcoin. I’d say we haven’t reached that State of the Dominoes tipping over yet. I know some folks actually. Well, does that happen? I [00:47:28] Preston Pysh: mean, [00:47:28] Matt Pines: well, it can be really interesting. In fact, there’s a guy that I know is be flying to Middle East next week and we’ll be discussing this exact topic with them, and I’m curious to hear what he comes back with in terms of a read right of situation. [00:47:41] Especially post this, you know, this big Middle Eastern visit where. I’m sure there were lots of conversations like about, obviously AI was the headline dominating thing. Mm-hmm. But I don’t think Bitcoin is not on the agenda. And then separately, we have conversations inside the bowels of DC Defense department intelligence community, and these gears are clicking into place here where the strategic sense of what Bitcoin represents. [00:48:04] And the shifts that could be in motion that you’re either riding that wave or you’re getting run over by it. And so I don’t think we’ve reached like the critical mass where everything starts to fall, but we’re not that far away. I think from that happening, and there’s a reflexivity here, a lot of BPIs job is like encouraging that reflexivity. [00:48:22] Preston Pysh: Matt, I could talk to you all day. We need to do more of these sessions. Just, there’s so much happening up in DC and there’s nobody better to cover it than you. So thank you so much for making time. Tell people about this BTC policy summit that you guys have going on and anything else that you want to highlight with, uh, BPI. [00:48:40] Matt Pines: Yeah, no, I’ll, I will shamelessly shill our flagship event every year. We did this kind of popup event last minute that was really successful, called Bitcoin for America in March, and we brought some really interesting people to the table. We’re going to sort of double down on that. This is basically an event designed to set the tactical agenda for America’s Bitcoin strategy that has now been declared, but how do we operationalize that? [00:49:02] So this is a summit, not meant to be like a bunch of jibber jabber conference panel sessions, but like policy presentations by and for senior government officials and sort of the policy ecosystem inside dc. The first policy summit we did was basically like a month after the FTX collapsed. Its whole ethos was like, Bitcoin is still here. [00:49:21] Bitcoin is not that. Bitcoin is a serious thing. Like please pay attention to it. Just kind of like holding the line. The second year we did it last year was like, okay, Bitcoin survived. Now what does it mean for the global system? And we were talking about geopolitics, human rights, energy environment, et cetera. [00:49:37] This year is like the government has decided to be pro bitcoin. What does that mean? How to catch that rhetorical check? And let’s think about this from a whole different sort of vantage point of the geopolitical significance of the moment. And so that’s going to be in dc You can go to a btc policy summit.org. [00:49:52] If you use code statecraft, you can get a free ticket. That code might not last uh that much longer. But for the loyal listeners of Preston’s podcast. Get in on this special deal. If you listen to me spew for the last hour, you know your reward is a free ticket. And we’re going to be doing a full day of these like very tactical presentations. [00:50:08] We’re going to have multiple members of Congress, Senate House, we’re going to have White House senior officials to speak. We’re going to have the St. Commissioner. We’re going to have an individual that I think people will be surprised to see a present we haven’t announced yet. And yeah, so I think it’ll be a pretty cool event in DC We’re going to have a number of other kind of like parties and events that week as well. [00:50:26] And a day on the hill, the following day was the dates again. June 25th. June 25th, okay. Is the summit. And then June 26th is the day on the hill where we’re going to organize and bring Bitcoiners to sort of flood the zone on Capitol Hill and make sure that they’re aware of just how local and significant Bitcoin is from their constituents. [00:50:43] So where all systems go, we’re expecting a pretty, pretty significant turnout. So if you are in DC or you want to come into dc. I would recommend getting a ticket now. [00:50:53] Preston Pysh: Amazing. Okay. We’ll have a link to this in the show notes. Don’t forget the, the discount code. That’s pretty awesome. And uh, Matt, thank you so much for coming on. [00:51:01] I love the chat. Learned a ton. So thank you sir. Thanks for having me. [00:51:05] 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 the investors podcast.com. This show is for entertainment purposes only. [00:51:23] Before making any decision professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before.