Stablecoins at Scale: Circle’s IPO, Stablecoin Legislation, and Competing With Banks | Roundup

Transcript

Now, if I was Jeremy Lair, is there a period of time where we could have launched a token and had it been a decentralized protocol? I think the answer is definitely yes. Now, would it be Circle today and would it be USDC today? Probably not. Would you be able to have $45 billion uh of market cap of your stable coin? Probably not. Would you be able to own tens of billions of dollars of of tea bills? Definitely not. Like, you know, the entire business is different. So, it's kind of like, yeah, if we go back and say, okay, could what what if Tesla made a phone instead of cars? It's like, well, it's impossible to say. Hey everyone, quick shout out to today's sponsor, Namata. Namata is currently

entering phase three of their mainet rollout. So, make sure you check it out by following the link in today's show notes. We'll talk more about Namata later today, but for now, let's get started. Hey everyone, quick disclaimer before we get into today's episode. Nothing said on bell curve is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guests and I may hold positions in the companies, funds, or projects discussed. All right, everyone. Welcome back to another bell curve roundup. You got Michael's one and two. Obligatory cut the fat joke dancing.

the two best friends holding it down, baby. Holding down the fort. Uh, hey, happy liberation day uh to all those who celebrate. We're uh we're T+1. Yeah. Uh, feeling liberated. Yeah. I mean, it's been pretty interesting. I think people have just consistently underestimated Trump's propensity to do what he clearly telegraphed that he was going to do while he was on the campaign trail, early days in office. You know, he's kind of doing what he said he was going to do. That that is definitely true. Um I think well I it's interesting if you watch kind of like the market's reaction to the actual conference yesterday u what was first said was okay

we're going to do 25% auto tariffs and it was like oh okay that's it great market rips and and then he pulls out the board it's like oh wait there's more like market drops. Yeah. Um yeah, look I mean look I I think broadly like he is saying what he said he was going to he is doing what he said he was going to do. Um and I I mean look I I have a I studied economics in college. Um tariffs are not good for trade. Um either there is something that nobody seems to be able to see

right now. there's some master plan or there's some negotiation tactics that not you know the rest of the world or Twitter is privy to um or there's going to be some real um contagion and issues that I think are are driven from from these tariffs um just in the what sounds like the narrative and and they do the administration definitely has a unified narrative on this um they want to bring you know consumption back to American goods American manufactured goods uh or or American originated goods. And that's not something that can happen overnight.

And it's um like I I was with a friend uh last night and um worked at a very large tech company here in the Bay Area that produces a lot of uh physical devices. You can imagine which which company this is. Um and it's like, okay, when do you want Yeah, exactly. our research in motion. Uh the when when would you like for for us to be able to onshore this? Um because is it going to be in in the 2030s or the 2040s? Because that's the time frame that it would take to be able to to pull that back. Um and it's not it's not even something that would happen in this presidential administration. Um, and that I think I mean this was called out by a couple of

uh Matt Lavine in particular like what if we just and Aaron Sorcin or um Andrew Sorcin not Aaron um called this out as well like what if people just like call the bluff and say all right well we got three and a half years we're just going to not invest and wait till we see what the next president wants to do with this. Um because that that's a real potential situation that could happen. Um, so I I think that it's when you say not invest, Michael, sorry, what do you mean? Not invest in uh, you know, production of new goods, not build inventories, not um, kind of run through what they have right now. Um, and basically just like take it on the chin for the next period of time as they wait

for this economic impossibility to work its way through. Um, there are some seems like negotiations that are going on. Um, but even that is not something that's going to happen overnight or in the next, you know, couple months or or potentially even a couple quarters. Like the these are you're trying to steer a a a cruise liner um like a speedboat. And um so I think people now recognize it. The market now recognizes it. Market has sold off um per the recognition and I don't think it's going to have it's not going to change very quickly. Um, that being said, you know, if the if the transition has been from let's focus on the S&P 500 to let's focus on the

10-year rate, the rate is down. Um, you know, from election day until now, I I think the number was like 4.79%, now it's trading at 4.05. Um, it it is probably something that over time gets down below four. um that does have real effect in terms of economics here in the states because a lot of things are based on that mortgage rates, auto loans, um basically any sort of consumer credit is going to be based around what those rates are and and that I think will have a benefit as well. But yeah, it is um either there's some rabbit out of the hat motion that nobody sees right now or

or these look like they're going to be painful. Yeah, I would agree. I think you know when Trump was talking about this, he referenced different periods of time during the US uh where we had tariffs. So like sort of 1700s period on and actually was a long time till the late 1800s where we didn't have income tax at all. Now the you know there are lots of confounding factors here. the industrial revolution was going on during that period of time. We're going from a very low base. Did we succeed at that point because of tariffs in spite of tariffs? You know, there's a little bit of confounding variables there. At at the very least, I do to be fair to both sides. It's not like tariffs have never existed, right? There are lots of countries also that have tariffs against us, although there's the rub there is

how they were calculated by this administration. Well, I mean, that's another subject to talk about. Seems like they took uh they are the administration is conflating what a tariff is and what a trade deficit is. Yes. The calculation doesn't make any sense. Okay. Yeah. This is where Okay. I this is where I like I think you can construct a steelman case here for what's going on. Um however, in terms of how they actually came to the numbers that they had on tariffs against the US, I don't think there's much defense here that this makes no sense. So, you know, initially when they showed those boards, which you probably have seen on Twitter.

Let me see if I can find some of the uh pictures here of these boards, I think I had the same reaction as a lot of people. I was like, whoa, we're getting tariffed a lot. Holy crap. Like, everyone has this amount of tariffs against us. Like, okay, maybe. No wonder. Right. And I'm sure that was the intended I'm sure that was the intended uh Yeah. like these boards, you know, where we're looking at reciprocal tariffs and yeah, the idea is that the US is being benevolent here because you're basically looking at tariffs charged to the US and the fine print is including currency manipulation and trade barriers. Um, and then the USA discounted reciprocal tariff, which is the tariff we're levying against China and this instance, the EU, which is half of what they're doing to us. Uh, and

then there's a there's a um a floor of 10% as well on that. There there was one example that I I can't remember if it was in what we just showed um but um Logos and there there are a few African countries that don't actually have any tariffs, but the um the entire trade equation is like we export $5 million of uh goods to this country. they um import uh $245 million or or sorry, it's the reverse. So So we have um you know basically like a 99% difference or a 98% difference in in trade with this country that got put up

on the board as there's a 99 or 98% tariff. That's not it's not a tariff. Yeah. Right. So the calculation that's being run here for folks is what they're just doing is they're taking the uh exports and dividing by the trade deficit. So imagine you have there's an example here that I'm looking at Indonesia. There's a $28 billion exports $28 billion a year to us and there's a $17.9 billion trade deficit. You take 17.9 over 28 that equals 64%. that's that's how they're getting to these tariffs, which I sort of get what they're driving at there, but it doesn't really make any sense. And there are lots of reasons why there might be a trade deficit outside of tariffs. Um,

so yeah, at the this was always going to be complicated here. And this is this is the challenge, by the way, I think, with you know, Trump Trump does I I don't know how to maybe put this into words. He really understands the the theater of politics and his solutions to things actually are overly simplistic and very narrative based in a way that's going to be he can sell them to a broad like build the wall, right? That's an example of a policy actually where you kind of get it right. He identified a core problem and probably the solution to actually solving immigration is this long process of you know you got to address the policy. there's other technical solutions, maybe drones or

whatever. That doesn't sound good, though. A nice big simple wall sounds good. And that's sort of the way that I look at these tariffs, too. It's maybe he I think he put his finger on an actual problem. Is this the way to solve it? Or is this actually a nice simple solution that he can actually ironically sell to a large populace? Pro maybe somewhere in the middle, right? Yeah, I'm sure it's somewhere in the middle. Look, the art of the deal. That's all you need to to go read to figure out how this works. Um, yeah, it it is uh it's frustrating. This episode is brought to you by Namada. Namata is the shielded asset hub, rewarding you for protecting the multi-chain. Shield your data across any asset and any chain and get shielding rewards for helping

strengthen data protection for everyone. To learn more, follow the link in the description below. This episode is brought to you by Marinade. Marinade is a high performance staking delegation platform that brings both liquidity and security to the Salana network by connecting soul holders with the best staking rates on Salana. Follow the link in today's show notes to learn more. Michael, what do you think about the market reaction here? So, we're actually down. I will say people are treating this like it's Armageddon. We're almost at par to where uh the S&P was when Trump took office back in November. So, I will say I have seen and you know, we could say this and then tomorrow when this podcast airs, the market could fall off a cliff and go limit down, but you know, the market actually has been relatively orderly here in the sell-off.

Obviously, crypto's down a good amount. It does surprise me that the market hasn't sold off more on this news if you were to take it at face value. So, my assumption is that the market is discounting that cooler heads will prevail here. What are your what's your read on on the market? Um, well, it's one of two things. Either they're calling his bluff, the market is calling the the Trump put or the tariff put. Um, and it's not going to actually get implemented. Negotiations are going to relax these tariffs. Um, whatever happens isn't actually going to go through. Um, I I don't necessarily think that that's going to happen at this point. Like, it he's not one to back

off. Um, and I think having all of this um, uh, attention on it just furthers further entrenches the perspective. Um I I think what is good is that we're hap this is all happening at once where where I think we could have gotten into a really tough even tougher place would be this week it's this next week it's that the week after that it's this other thing and we just kind of over the last couple of months since he started talking about this it has felt like he's gone back and forth two or three times in terms of you know what's going to happen what's not going to happen we're you know delaying the implementation it seems like there's a plan now so Everybody knows and it's not surprise.

Uh it was surprised yesterday but everybody now knows and I I I think the other option is it's not going to affect um as much because there will be either workarounds or there will be um ways of of mitigating this and there will be certain companies that take much larger hits than others. I mean yesterday uh the Restoration Hardware CEO had uh the live chart as this was getting announced as he was on the earnings call and didn't see what happened and like into the mic literally goes like oh [ __ ] oh [ __ ] everybody's surprised right um and and

so certain companies that are literally importing their product uh or or their manufactured um product to be sold in the US um they're going to have issues like Nike's down. I don't know how much percent but they were 12 or 13% was what I saw earlier today. Um so may maybe there is sort of like a a re-evaluation of like which companies are going to do well with this new new construct and which ones are not. Um what will be really interesting is kind of like what's excised out of this. Um and and it seems like semiconductors had a pretty clear excise from from this policy. Um and and so maybe it is something where you know certain

companies it it like dispersion happens where certain companies aren't doing as hot, certain companies are going to be okay. Uh but that net net doesn't actually affect that much in terms of like the S&P 500 or the NASDAQ. Um what is unclear is what basically the retaliation uh could be. um you know we are we are large exporters of digital services uh and and digital products what what if those uh are are you know reciprocally uh tariffed in the same way um or gone after you know that would be a much larger hit to the S&P 500 in the NASDAQ um so I don't know I mean it it is moving in real time um but I agree I

think I mean the market sold off a lot uh And this is this is definitely one of the larger single days in the last few years. Um but there's still so much to be uncovered. It's unclear as to you know what could happen. And and that's where I think you know another limit down day could be um you know reciprocal digital services where the mag seven is attacked. Um like if if that was to happen then that would have a much bigger effect than even what happened today. Yeah. I saw a quote from Scott Besson and I don't this was one of those you know DB accounts that uh so I don't know if this is actually 100% accurate but this is a mag seven problem not a MAGA problem and you know to your point

oh by the way just on the uh the calculation of trade deficits as well they just did this on goods not on it's not inclusive of services and as you mentioned we export services so just another you know pretty large omission here but it also does I think tell you where it's one of two things, right? Either, you know, he is just so focused and this administration is extremely focused on kind of the common man and main street here above Wall Street or this is a very clever there's another ulterior motive here that's being hidden that this to my mind relatively complete story is offiscating. So I have no idea.

Um but I I do think that you know a huge problem in the United States for a very long time was that we were exporting middle class jobs overseas and I think there was a decadesl long scop that that's not the case and don't you understand comparative advantage and you know the comparative advantage people are right on a global basis but comparative advantage doesn't mean that has to acrew to everyone equally and it was really disproportionately hurting a large portion in voter base in America. And so, you know, my thought on this is I don't like this. This does not benefit me. I do not like these policies.

However, you know, this is what you get. This is this you reap what you sow. You you did not solve this problem. You gas lit this huge portion of the population and you know what? Finally, there has to be the pressure built up and it exploded out of a valve and it could have been any valve, but the valve happened to be populist policies and tariffs. So, there you go. Right. And I completely agree with all that. Um I I think uh yeah, this is definitely a re-shifting of Wall Street to Main Street. Yeah. And it it I I guess the broader point is that that re-shifting isn't going to happen overnight. It's not it's not services and it's not digital that we're talking about. It's it's physical products and physical manufacturing that we're

talking about onshoring again, which takes time. Um I I I think for that reason alone, you know, it's it there's going to be, you know, more market pain. Um and yeah, it's it's there there's still so much to unravel um with all of this and uh the reactions I I think people are still digesting uh you know, the our trade partners are still digesting how this will work and what this will look like. Um, I think the implementation dates are like, you know, April 5th for some of these, April 9th for some of them. Um, so, you know, they're they're coming um very soon, but it'll be it'll be really interesting to see um kind of what the reactions to all of this will be because

that will dictate, you know, new earnings forecast, new revenue forecast, like all of that has to be rewritten. Um, and and I think maybe that's one of the reasons why the market hasn't sold off as much as people would have expected. because we still just don't know. Um, and you know, there there's the the knee-jerk reaction of like, okay, get some cash, sell, um, and wait. Or there's the other reaction, which is we just don't know. So, and the market's already down so much in the last, you know, month and a half. Yeah. Right. You want to wait and find out more information before you make a decision like that. Um, which could lead to to further days like today. Yeah. One thing that I'll just I want to get on to our next uh subject of conversation here,

but one thing that had surprised me going back to the pandemic was I remember they were you know they were doing all these um uh shutterings I can't remember what they furls of jobs and things like that and subsidies and the PPP loan era or it's not even a loan they just gave away money and I remember thinking huh this is interesting the way that they're makes sense that they're actually protecting like big corporations because I I just assumed that that was the majority employer in the US. Actually, turns out it's the opposite. It's small business employs twothirds of the US people in the US.

And so I don't know. I've seen all these people come out and say, "Well, Main Street is cheering this." I don't I haven't seen any evidence that they're cheering it, but I do anecdotally know. I got a buddy who, you know, has a has a small business up in upstate New York. um he's got a loan and he's getting crushed on interest payments and he doesn't give a [ __ ] about the stock market. Uh and yeah, this is probably more impactful to him. So it's still like who knows, right? If he if this causes a recession, then the damage again to my friend's business would probably be worse than the interest rate differential, but there might be some truth. It just depends on how it all plays out, right? And that's exactly it's exactly right. Um it it once again too too early to tell but um the reason

why we probably haven't heard you know Main Street Main Street's perspective is because they're probably not on Twitter or they're not in the same Twitter circles that we are. Um and so the the vocal reaction here is coming from people who have you know assets that are down uh uh you know four, five, six% right now. Um and um yeah, I think Main Street will will benefit from this long run if we didn't get the interest rates down, if we can get um even some of the basic, you know, uh building blocks back. Um, and it doesn't have to happen immediately, but if we can start to focus more on manufactured goods here and and maybe this in

incentivizes the creation of more like I I just saw I don't know if this is pre-planned, it probably was, but TSMC and and Intel are starting, you know, a JV to do chip manufacturing again um in the US. And and I think that that, you know, type of move um Intel's in a troubled position right now in general. Um so I I will be curious to see kind of what that means. means I just saw the headline. But um you know there there could be moves like that where they start to look at okay well it's going to be better for us long term uh to start building more in the US. Um then there's the question of like okay does the average person want to go work in a manufacturing center or you know if you're building chips the the comparative advantage the competitive

advantage of Taiwan is so strong that it's so hard to find you know that particular skill set of people in the United States um who are PhD level material scientists or or electrical engineers who aren't going to go you know take that 500k a year job at Google to go be a software engineer working on AI. Instead, they're going to go take that 200k a job uh a year job to go be a a manufacturing, you know, engineer. Um like th that that is kind of the the trade-off that we're talking about here.

Um for certain industries and and manufacturing, you know, chips is one of the most technically complex things you could possibly do. But I think that that is one of the structural, you know, situations that we're trying to write the ship on. But it's it's it's going to take time. Yeah, I think the there is a path that element of path dependence here where I understand the drive and the impetus. We want to reverse some of the effects over what what I'm very sympathetic to is, you know, people saying, "Oh, this is so disproportionately bad for poor people.

Look at how much you're making a TV cost." It's like, guys, I mean, we hollowed out their jobs and the middle class and the livelihood and shipped those overseas and what they got was the cheap. So now they're, you know, the idea is they're kind of clinging to the scraps, but I I don't think that I I I do I'm not very sympathetic with that point of view. However, I'm also kind of sympathetic with the view that you can't just run that whole thing in reverse, right? What's been done is done. And there are different pockets all over the world of, yeah, we got a bunch of people who've grown up thinking manufacturing is, you know, the way to, you know, lead a better life in Taiwan and China and South Korea. We don't really have that as much in the US. I don't know how

you're just going to reverse the clock on that either. So, I actually just don't know what the solution is and no one really does. But I guess we'll just have to see. And yeah, look, as as someone who spent some years studying economics, what a fascinating time to be alive. It is a fascinating time to be alive. And you know what? I think it's a good time to be alive in crypto. I would shift our our topic of discussion here. One thing I'm curious to get, we talked last episode about potentially uh IPOs and M&A happening. So, I'm curious to see whether or not you think that disrupts that. But the other thing is circle after you know very long awaited I believe this is their third uh bite at the apple here they have filed for an IPO um and their perspectus came out and

we finally got to take a look at it and we got to see P&L balance sheet cash flows of their business going back three years which was super interesting. So let's start with the circle piece. Uh here I'll I'll um let me find uh Nick Cannon from Gauntlet had some uh interesting takeaways, but here let me I'll read from the so the P&L uh going back to here I'll just throw this on my screen so everyone can look at it. But the P&L going back to 2022 uh tells a pretty interesting story which is so back in 2022 they actually lost um uh was that 760 million there um loss um and then they turned it

around 2023 uh topline growth of they were did 271 million shrunk a little bit in 24 to 156 Um a lot of people are paying attention to uh well there's the channel costs um which we'll get into. Um so the topline growth has been all right. uh like there's a big a market cap reason and then there's also a yields uh reason uh which is driving the revenue but a huge amount uh the a huge data point that the market is focusing on is how much is circle paying out to channel partners in particular Coinbase uh you know was the big one where you know uh something like in the last year 900 million um got paid out to Coinbase

um out of 1.6 6 billion uh topline and that I think that number really surprised people. Um and yeah, I mean we've talked about this as well. You know, we've I think we talked about this relative to Tether where they the sort of you know, the rumor was they don't pay an enormous amount in um to distribution partners where Circle did and now we actually got to put some numbers uh to what they have to pay out to not only Coinbase but other market makers, exchanges, whatever. So what were your takeaways looking at the some of the numbers? So on on that $761 million loss, I I think they also paid something like 700 million that year. Um they had so like the Ebidon numbers are

probably better than the net income numbers. Um because they had some financial transactions internally that skewed 2022. Um, I I think I saw something that that may have been them buying out basically the center equity that they owned or or the center uh ownership from from uh uh from Coinbase. Um, so that's a little bit skewed. Um, yeah, look, I mean, the these guys are making, you know, whatever the number was like 151 million a year in net income. Um, and I think it's more than that in cash flow and more than that in EVAP. But um you compare that to the 13 billion in net income that Tether made last year and it's not really a comparison. Um the the kind of Twitter meme that I saw was uh um Coinbase makes

more money from from Circle than Circle does. Yeah. Um yeah, there's a lot of incentives that are given out. Um and I think um I I don't see that that necessarily changes. Um I I think once you kind of tap that spigot, uh you can't really turn it off. Um and unless you go through the process of something like regulatory capture where you become the only one that's enabled to to operate in certain jurisdictions. Um, now I I think there's also an interesting thing going on um in in the backdrop which is and we talked about this a bit um but you know yield bearing stable coins seem to be cut out of at least the Genius Act uh

potentially the stable act as well. Um we'll see kind of how both of those play out. Um but do you consider you know a stable coin like like USDC where you put it on Coinbase and you can earn 4% is that yield bearing? um unclear and so maybe you know they're limited in terms of um you know offering that service and and what does that do to growth? What does that do to kind of the the viability of the asset? Unclear. Um but I I I think that they will have a successful IPO. I think that there's definitely public market interest for crypto um companies. I I think the question is where does BA end up you know landing? Um the rumor was somewhere between four and a half and five billion

off of a net income of 150 million. That's you know it's a sizable price to earnings. But um if you think about sort of the direction of where stable coins are going, you know being uh uh having a regulatory framework in the United States um the growth of the the stable coin industry at least we think is is about to you know explode. um Circle is, you know, number one or number two uh globally and and number one in the US in terms of adoption. Um we we don't think that that um that positioning may adjust over time, but they're they're going to be one of the top stable coin providers, issuers, um kind of into perpetuity is

is hard. This is the these were the numbers that I was referencing before. This is James Hoe of Modular Cap. Um but there's a nice little distribution of circle revenue chart uh that got put out uh which is uh which is measuring looking in 2024 of 1.7 billion in revenue 900 million plus got paid out to Coinbase as a distribution partner. Now, one thing that I think does uh bear mentioning is James, and no offense here, James, you're going to disagree with a slight uh part of your point is that's 1 billion going to Coinbase likely comes with little to no cost opex to serve. Um at 10x earnings equals 10 billion of market cap and likely contributes to 25% of Coin's valuation.

I will say that Coinbase does actually pass a lot of that back on to their users. If you hold USDC at Coinbase, you've been making anywhere from four to 5%. I think still for holding there. I I don't know what their net interest margin is. Um but I would imagine it's in the like single digit to maybe 10 basis points. Um I I'm saying Coinbase. So you know if if treasuries are yielding X, they're distributing Y, that difference is is very small. Yeah. Um so the real winner here actually is well it should be users, right? like this is a and there was a long there was a long uh I read I read an article actually about uh I read an article about the beginning

of money market funds back in the day and there was huge resistance to money market funds at the time as well and yeah for a bank if you're running a nim like a net interest margin business having to pay users um it directly erodess your profit margin and so yeah it's your cost it's your literal co yeah it's your cost So yeah, I think even though it's, you know, it's didn't make it this way through the stable coin bill, I mean, the fact that Circle is still passing that yield back to users, at least for the time being, um, I think is good. It might be a structural advantage for certain DeFi protocols that lean into that as well. Being able to offer yield, I think, to Well, so I to be clear, I I think the only way to

actually get the yield is if you hold USDC on Coinbase. It is that is. So I don't think that at least I don't I don't believe this is the case where circle is providing yield either to users of DeFi or protocols in DeFi. Uh correct. Yeah. I think I think there will just be a the I guess the macro trend that I see here is there's a lot of different issuers. Um there's going to be a lot of different stable coin issuers and it's sort of if you don't have distribution, it's very hard to figure out how to compete here outside of trying to find a way to return yield to users. Um, and Coinbase is an example of how they've kind of got around that, right? Like they they they are passing back essentially the yield um from USDC

onto their users. Yeah. And and I mean, look, this is a question that we have, which is how does that work within the confines of the draft bills that are working their way through the Senate? Yeah. It's it it is unclear. Um, you know, does that get cut because you can't have a yield bearing stable coin? Uh, unclear. Um what does that do? Well, it probably favors Tether pretty heavily. Yeah. Like if you were to cut down all the incentives um for USDC, what happens to growth? I mean, it's not like it it probably doesn't decimate, but it it definitely hurts growth prospects.

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solutions for both DeFi users and Tradfi, including liquid and native staking, as well as direct enterprise integrations. Marinad's platform is optimized for institutions to securely expand their exposure to Salana. Whether through the provisioning of custodial or non-custodial yield, integrating staking rewards into Salana financial products, or leveraging Marinad's best and market rewards rate for revenue and treasury management. Whether you're in DeFi, Tradfi, or somewhere in between, Marinade has something for you. To learn more about Marinade, follow the link in today's show notes. What do you think about Circle's business here?

just I mean they're they're you know they're still generating an enormous amount of operating their their cash flow actually looks much better even than their net income. Um so they're still generating an enormous amount of free cash flow here. Uh the income the net income is trending in the wrong direction. The top line is trending in the wrong direction but still uh you know still it's a good business. I think the estimates that I've seen is anywhere from three to you know $6 billion something like that window. What do you think about how would you underwrite you know pros and cons of the business here?

Yeah, I think you would have to take a pretty like market uh centric approach to how you build a strong valuation model that gets above like let's say a 10 billion plus valuation. Um and and not in the IPO window, but but probably in, you know, the next three to five years window. um which is just that they're going to be one of the few, if not uh you know, one of the two or three regulated stable coins in the United States that have scale. And by scale I mean anything over five billion plus. Um there's effectively three stable coins that do which is USDT, USDC, and USDS. Um if you're one of those three, you you do

have a Lindy effect that I think is extremely strong. While I do think that there's going to be a lot of entrance into the stable coin market, I think it it's never been easier to start a stable coin, it's also never been harder to hit scale with a stable coin um because of all these variables. Um you know, the massive amounts of incentives that Circle is pumping into Coinbase for USDC, the massive profitability and distribution that Tether has and and how they can wield that. Um and USDS is, you know, growing rapidly and doing differentiated things um like using its balance sheet um in in more interesting and um I'd say bespoke ways. Um we talked about this on stage. Um but I I

think yeah, if you're one of the three, where do you think the stable coin market goes from here? It's at 230. Do you think it could hit a trillion in the next three years? If you do, it's probably a good buy. you know, the implementation of okay, this is a business. I mean, cash flow positive basically means default alive in in this, you know, at this point in time. Um, and they're definitely default alive. Um, so you don't have to worry about that. And I I think the question is, you know, how do they work within the confines of whatever this, you know, bill ultimately ends up becoming? Um, are they the only one? It doesn't seem like there's going to be regulatory capture for a single product or a single company. Um, there's going to be competition. at least there's going to be a bilateral agreement that Mika um

and whatever this ends up becoming will be kind of like on the same playing field. Um so there will be competition. It's not going to be a winner or take all market. Um which is how it should be. But how do they get the growth? How do they get the profitability up? It all comes down to how do you well it comes down to two things. It's how do you how do you get more onchain? So how do you get integrated into um you know major institutions or major vectors of asset AUM that you don't have access to now um maybe this is RWAS maybe this is you know private credit maybe this is other things that kind of underpin all of this um that that would be the biggest growth

vector that I think they haven't been able to tap into yet and I think a lot of those financial institutions are are probably waiting for the stable coin act to be able to actually know how they can interact with stable coins in general um where they haven't had a clear road map to yet. Uh and then the second variable is how do you how do you basically decrease costs? So how how do you increase that net interest margin because their business is basically in a weird way it is kind of like a bank. um you you earn a certain amount based off of, you know, whatever the yields are of the assets that you can hold underlying the stable coin and how much you're paying out as as incentives and the difference is is what you make. Um and so how can you decrease cost, increase

that net interest margin, how do you grow the size of the pie in terms of the total AUM? Um, but on the opposite end, what happens if there's a JPM USD or a B of A USD and those start to take share from some of the US- ccentric use cases of USDC? I mean, we use USDC to fund investments. We hold USDC as like a balance sheet asset in lie of cash uh at a bank. Um, and we obviously have, you know, our fund assets spread across, but we definitely still hold some USDC in in basically like a bank deposit format.

Um, and so having that in USDC, I think, is is helpful. Um, but if you know we have a JP Morgan account and let's say uh Coinbase decides to integrate, you know, a JP Morgan stable coin, well, what's the difference between us holding USDC versus holding JVMCoin? I I think, you know, we don't even earn the the yield as a prime custody account holder. Um, so we're not even in that realm of getting the 4% back as most users are. Um, and you we wouldn't get that back if we were using JP JP Morgancoin as well. Um, so it's not even like a trade-off that frankly

matters. Now, if we're going to use it for productive things, maybe we can't fund an investment with JPMCoin, but we can with USDC. So, then we're going to hold USDC. Like, these are kind of the evaluations that at least us as a, you know, cryptonative institution would be looking at. um users in retail. I I think USDC to USD is basically how people bring you know assets at least in the US on and offchain. Um just the one for one instant liquidity that Coinbase provides is is is strong. Um so I don't see that necessarily changing but once again if you have a JP Morgan or a Bank of America account maybe you eat into that share a little bit as well. So there

there's definitely ways that you can look at the business expanding but I think at the same time part of that expansion comes with more competition. Yeah, I agree. Um and I also just want just want to correct the cash flow from operating activities actually for circle is trending in the right direction. It's up I was going to say yeah cash flow I think is trending. Um, look, I think with any of these companies that are about to go public, the net income is kind of a wonky metric um because you've got like non-cash um costs that are associated with like equity conversions and stuff.

Yeah, I don't know if you can see here. Let me zoom in on my screen. Oop, what I um Yeah, here there should be cash flow from operating activities. This is kind of the source of truth um in my opinion and yeah in 2022 it the trend here for those following along not on videos they lost they net cash flow or negative cash flow 72 million then that went up in 2023 to 139 million then this year it's 344 million um and you can actually see that particularly what's impressive here is you know you build a you know operating uh cash flow starting with net income so they're actually starting on a lower

base from 2024 compared to 23. But the differences here is it's stuff that you would like to see as investors, right? It's like stockbased comp. They're paying way more in stockbased comp in 2023 versus today. Um and there's a huge difference in accounts payable and acred expenses. So they're getting ahead of some um you know, they made some big payments last year um that they're actually seeing the fruit of uh this year. So yeah, I mean I think that I I I agree that I think it's a it's it's a good business overall and it should do well from the growth of the entire uh market cap of stable coins. Um it is interesting to think about how it will compete. I I feel a little vindicated. I I've actually been hearing people

describe stable coins as a form of narrow banking, which I think we've talked about on this podcast. Um but yeah, it's you know big light bulb moment was uh Brian Moyahan just describing stable coins as tokenized bank accounts, right? So yeah, it's kind of an interesting thought actually. I do I really wonder how how banks are looking at this because you know if you think about it the what is the tr the trend is there are going to be a bunch of dollars that move onchain um in the form of stable coins. the competition between different issuers means you probably have to you probably have to pay out do what circle's doing with um distribution partners and start doing rev shares where would you do it you probably do it on exchanges and things like that so if you if I'm imagining

like JPMCoin starts to trade here right where all of those bank deposits that are just you think of as dollars which are JPM coins become tokenized and uh yeah in the stable coin form they currently what that looks like is non-token tokenized just dollar form is all of those dollars they basically print and they put into a a a uh portfolio of fixed income, right? And then there there's a net interest margin. There's a spread there that they're taking. in stable coin land um you are actually depositing and you're uh those are backed by you know short-term treasuries in the form of circle like T bills and then they're going to have to split some of that yield with right they're going to want that to be adopted at exchanges and

brokerages and yada yada so this actually feels disruptive to banks so I'm not surprised that in the stable coin bill they're like oh nope can't pay yield out you know but you can't pay yield to users but you can pay to distri you just reach your partners, channel partners. I mean, disruptive to banking. It it could be um but what if banks so let's say you know the vast majority of depositors um come from Bank of America and JP Morgan into uh what if all of those banks got together and said whenever a user wants to deposit the only format that you can deposit into Coinbase is in our stable coin. I mean, but that that completely kind of negates the whole USDC USD

conversion right there. That like what what's And if your average user is like, "Oh, I want to go buy some crypto. What's the best way to do it?" Oh, well, I'm going to go and you put $1,000 from my JP Morgan account, for my Chase account on on chain. Um, well, the format by default from a JP Morgan USD account into Coinbase is JPMCoin. you're probably going to want to trade with that versus like do another swap and then do another swap. Okay. As a Okay, someone walked me through this exercise um and I still don't really know what to conclude from it, but imagine how just for a second imagine um without getting too complicated that a bank were to absorb a large stable coin,

what that would look like from a balance sheet perspective. So you have a bunch of um imagine the balance sheet of a bank today which is a bunch of portfolio of fixed income. So you have maybe like T bills but also longer duration like 10 years that type of thing. You might have some private credit, you might have some real estate like whatever it is, right? You've got that portfolio um where the lowest yield is T bills, right? And then it kind of goes up from there when you take on duration risk or credit risk or whatever it is. And then you've got um you know customer uh dollar liabilities on the liability side of the balance sheet. Imagine you move a stable coin into that environment. Okay. So on the liability side of your balance sheet you are you like one liability denominated in US like JPMCoin versus stablecoin

it's the same but then what you're moving onto the balance sheet side of the equation is a bunch of T bills which have the lowest amount. So you're actually you have to be dragging down the net interest margin of the bank, right? So not a it is not in a creative transaction. It is not and the buy circle. And the reason it feels like a truly disruptive technology to me is because I think banks will look at that and say this makes no sense to me. I'm literally just my net interest margin is eroding here. But what stable coins can do is they have two big advantages is one they're global from day one, right?

They can do you can right now uh the U US banks are limited to deposits that exist within the US stable coins can be anywhere and because you're not taking on as much risk on duration different types of securities you they should be lighter more lightly regulated right they're like lower overhead right and they're safer in a lot of senses than banks are so one part of this and you know all all the banking regulations I'm not an expert on so quick disclaimer. Yeah. Um but let's say that there's strategic value in buying circle. Let's say JP Morgan was want to buy circle. What does that get JP Morgan? Yeah. The transaction itself, I mean independent of the value of what

whatever it would be. The transaction itself is not accreative to their balance sheet and and sort of like a net interest margin um acquisition, but it is in the form of looking at this as basically an acquisition of deposits and and potentially depositors. Yeah. And if you've got dollars that are being held in accounts that are then, you know, converted into T bills or whatever yield bearing assets they have on the back end, um you that that may be something that because of the the basel requirements and being able to have leverage on top of deposits, maybe that's where it actually does look like in a creative transaction. And you know, how much would they want? And I can't

remember what the numbers were, but you know, they've got uh well, there's $45 billion of USDC, give or take. That's $45 billion of deposits that they can use as you know, balance sheet addition. How much is that worth to JP Morgan? Um and you know I what I do know about IPO processes is that as you're going through the process as they are right now you also run a parallel process of do we want to go public or do we want to seek a potential strategic acquisition. Yeah. And so they are absolutely or maybe they already have had conversations with all the potential acquirers who would look at this and say okay well here's you know how it would

function. And think about it from JP Morgan or any bank's perspective. It's like, okay, we get, you know, right before there's a stable coin act that regulates stable coins in the United States, we get, you know, to buy the largest one that's, you know, issue largest issuer in the United States. It is definitely valuable to us from a strategic perspective, but it could be valuable to us from a balance sheet and net income perspective as well, depending on some of the Basil requirements and how they would look at it, how they'd be able to evaluate new customers versus existing. Um, but I I mean, if it's at four to5 billion dollars, this thing's valued like a tech company. It's not it's not valued like a financial institution. Yeah.

That that's where the rub kind of is where it's like, okay, do you want to go public and try to show everybody that you're, you know, a tech valued financial services business? Um, and and hope that that lands or or do you want to find an acquisition? Um, I don't know. It'd be interesting. Uh, super interesting. One also thing that might be a little bit wonkish is what I mean what percentage of uh, this is a very possible thing that could happen, right? Is you take dollars from your JP Morgan account and then you transfer that into USDC. What how would you account for that on the balance sheet of JP Morgan?

I actually like you have those dep are you double counting deposit internal transfer. I think it wouldn't actually affect anything. Um, I mean, look, I I think the uh the value of Coinbase to or Circle to a JP Morgan like acquirer is that you get probably a lot of new customers because I don't know how many of them are also JP Morgan customers. Probably a large proportion, but I'm sure you get new ones. Um, you get obviously the balance sheet hit immediately and you can look at those as deposits and that is the lifeblood of a net interest margin business. Totally. So, like there is value in it. Is it worth four to five billion dollars? Not side. Traders, AI enthusiasts, and deans, listen up. The

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like Morpho. Whether you're an individual fund fintech or institution, Morpho is for you. Follow the link in today's show notes to try Morpho today. Okay, here's a final question for you. Do you think there was a moment when Circle could have launched a coin or a token instead of trying to go IPO? Like if you had been in knowing what you know now and if you were Jeremy Lair, we shave your head, you know, you're you're Jeremy and you have the choice. Do you try to do an IPO? Do you launch a coin? If you even have the benefit of going back a moment in time, um you know, like if you could have launched this in 2022, uh pre pre the um banking crisis or banking, you know,

whatever um challenge where there the USDC dagged, you know, and I guess like on a larger meta level, sorry to pile a question on a question, but how do you think even like Coinbase, right, if Coin were to issue a token, do you think it'd get a better valuation in crypto markets or do you think it get a better valuation on US capital markets. Um, look, I think what we're trying to figure out as an industry is what are the valuation heristics that matter for tokens. Yeah. Um, and so I think it's extremely hard for us to be able to say right now whether or not, you know, apples to apples comparison, an equity versus a token has higher or lower valuations. In the fullness of time,

you'd assume that they're the same. And in in general, I mean this is where it like becomes a question as to like okay, how do you build a valuation model? And you know, is a 100 price to earnings tok 100 price to earnings equity something that's you know fairly valued? Well, it could be depending on what that means. Whether that's like growth prospects that people are expecting, whether that's like the the val the value of I don't know like Tesla in 2013 because everybody expected that it was going to continue to grow and they were doing something totally differentiated and you want to own the equity because they were going to grow into that valuation actually far supersede even the wildest analyst expectations. Um you know like that that's one method of

thinking about growth stocks. Um but you know from a values analysis perspective or a value valuation analysis it's it's not fairly valued and so I think um if you look at something even today like any of the major L1s or even Bitcoin like you can't value Bitcoin based off of a cash flows basis. It's the moneyiness. it's the it's you know the the store of value um digital gold narrative and so there's all these things that are kind of like intertwined whereas in you know equity land there's kind of two paradigms there's like value stocks and growth stocks um and both of them have the same heruristics because everything's been standardized by SEC

you know accounting standards which is profitability cash flows revenue you know and growth um and evaluating the business on an apples to apples basis I think is a it's a tough thing to do. Now, if I was Jeremy Lair, is there a period of time where we could have launched a token and had it been a decentralized protocol? I think the answer is definitely yes. Now, would it be Circle today and would it be USDC today? Probably not. Would you be able to have $45 billion uh of market cap of your staple coin? Probably not. Would you be able to own tens of billions of dollars of of tea bills? Definitely not.

Yeah, like you know the entire business is different. So it's kind of like if we go back and say okay could what if Tesla made a phone instead of cars? It's like well it's impossible to say. I I feel you. It's a it's a difficult thing. It's uh I yeah I um I've actually been seeing people uh there there's kind of this idea of like a super app that people are this is something that people have talked about in crypto for a long time. It's like the L1 plus the stable coin plus kind of a vertically integrated stable coin L1 plus a bunch of applications on it. Um, what will be really interesting is, and

you know, we're investors, we're very excited about it, but an L1 that is um dedicated to stable coins would be very interesting and and plasma is going after this um where they're Bitcoin based and they've released some of the technical docs um but they're a Bitcoin based consensus layer EVM compatible with zero fees um for stable coin transfers. Um so I think that will probably be the best, you know, AB test, let's say, for does circle equity or or plasma, you know, network value, um in the fullness of time, you know, which one of those does better? Yeah. Um Michael, let's close here. you're just

speaking about tokens. Uh I would love to get your sense on the ground here of what it's like to you know there are a bunch of founders that are probably thinking through as they always do like should I be launching a token? Um and part of that right is there's a market cycle like where are we in this current market? um there's a component around maybe for a little bit later stage um you know what does the IPO or M&A market look like but could you maybe walk us through starting from the beginning right like I don't know any lessons learned or sort of you know best-in-class advice for especially founders on the earlier stage side of things like what do you absolutely need to have or how should you be thinking about token launch um so yeah taking a a full step back um I mean we have this

conversation all the time when we're looking at early stage investments where there's a lot of times where I think founders who maybe come from the web two world or um I think about it and or maybe just don't have as much experience in the web 3 space are like oh yeah we're going to you know build equity and we're going to have revenue and it's going to be flowing to the equity and like we're also going to do a token. It's like no no no there are effectively zero examples of where you have both a successful value for your equity and a successful value for your token. you need to choose one. And I I think that is that's the starting point. So you you're either going down the path like should we launch a token should not be a question. Yeah. You're either launching

a token or or you're you're building value to your equity and you have to make that decision basically at the start. Um and now there's a question of when should you launch a token and those are two different questions. I think there's sort of like which year type when and there's also like which month or which quarter within a year. Um those are also two separate questions. I think what we have seen um more recently uh and I think that this is kind of what happens when you have a profleate funding cycle in 21 and 22. You've got a lot of founders who were basically looking at 2023 24 as like build years.

Maybe they raised like a bridge round to try and get them to the next bull market and like they're just stretched so thin and they're finally limping across the finish line with like a halfbay product that isn't really working and they're like all right and we're going to launch a token. Everything's going to be great. Guess what doesn't work. Uh we've had, you know, we've seen a couple launches recently that have no centralized exchange support. They have no market making support. they have, you know, they launch a token with a unis swap pool and it's like market cap, fully diluted market cap, three million bucks. You know, launching the token as the Hail Mary is like I don't know, it's like last ditch effort. Uh, and it just obviously never

works. And you know, when to launch a token and and look, the reason why there are lockup schedules of token unlocks is not because let's just like hold people back from getting these assets. Those are baked into in understanding that that's the period of time that it will take you post launch or post mainet post toteen genesis event to find product market fit and you should be well on your way to doing that by the time you launch otherwise you won't have a successful launch I think last year there were like 60 launch 60 token listings on Binance it's like one per week and if you're not at that level if you're not you know at the bar of being able to list on on Binance it's not going to go very

probably um and like we we think of like the stack rank of exchanges in terms of you know which ones are the best place to launch and there's jurisdictional things like if you're in the US and you want to have US coverage like Coinbase is is the pinnacle um and if you're in Korea or want you know coverage of you know the Korean market up is the best there um but rest of world is Binance or bust and and so getting a Binance listing is is a very coveted thing but it's also that just as great as that is, it is that much harder to get one because they want to see the growth metrics. They want to see the users, they want to see the TVL, like you it's it's not something and it's actually kind of funny because one of the reasons

why Binance became Binance is in 2017 they just listed everything, but now it's by far the hardest one to get listed on. Um, and so I I think this is also maybe cognitive dissonance in the founder community right now. It's like, oh, we'll just launch it like no problem. like that's not it's not how it works. Um and you know all all the other stuff that comes with this is like getting the community ready, getting the node operators ready, like there's so much blocking and tackling that it takes just to like get to mainet and that's when that's when things start. That's not the end. Um and and so being able to have, you know, the product market fit enough to be able to show growth, adoption, um and strong perspectives going into the launch, but

then also having, you know, what we say is you need to have nine months of successful product launches and partnerships and integrations and growth post launch. Otherwise, you'll be, you know, one of one of the tokens that launches and then everybody forgets about. Yeah. It's, you know, crypto is this story of, it is funny because every time I hear that sometime people often say the easy money's been made. Uh, people love to say that and I've heard that in almost every era of crypto that I've been involved in, you know, people like to say that a lot and in some ways crypto is getting easier actually like if you're building on the just the raw building on infrastructure used to be so so difficult, but in a lot of ways it's getting tougher also because like the

centralized exchange listings are a great example of that. So yeah, I would definitely say that and I think it's a very positive thing as well that you don't have people that are just like, "Yeah, I'm just going to launch this token and that's my, you know, that was never good for the market." Slap a token on it and call a day. Like that that game was over in 2021 to be honest. Um I I think we also had a lot of honestly just like faked founders that were like, "Oh well, I I like couldn't cut it being a you know, entrepreneur previously, so I'm just going to do crypto stuff." Like those people are gone. Um, and I I think you know, easy money, man. You think it's hard being a startup founder where you're like worried about the next, you know, milestone or the product launch,

whatever. Try sleeping when you have a 247 token that trades and a network that's live and you're trying to hold the ship together that over that period of time. Like it is being being a founder times 10 being a crypto founder with a live token. So I like this is part of the evaluation that we have whenever we talk to people like why do you want to do this? Yeah. Um, sure. I'm going to drop a uh link to a podcast in here that my buddy Miles sent to me, but it was a it's a 20 minute show uh Hamilton Lane um podcast where they're describing the uh condensing or the convergence of private and public markets where uh

public like private markets are large enough and there are sophisticated enough buyers now that they want things like monthly liquidity but they see tokenization as the bridge in between like bridging the gap there. super interesting. Drop it in the show notes. And yeah, I would just say if you're building in the space, especially if you're in DeFi and you have to you can get hacked at any point and lose hundreds of millions or billions of dollars. You're doing it on ultra hard mode. And yeah, I've got nothing but respect. Uh and it is extremely difficult. Kane from uh OG Synthetics Days had a tweet thread about this the other day where he was like, "Yeah, I just didn't sleep for two years. Two three two years." It's like you'd go to sleep and you'd, you know, want to get eight hours of sleep, but you think

every single time you wake up and check your phone, you're like, "Okay, great. We didn't we didn't die overnight. We didn't get hacked." That's That's what life is like. Savage mode. But all right, partner. I think uh we're out of time here. Got to end it, but this is a good one. And uh see you back here next week. Perfect. Thanks.