The U.S. Banking System, Federal Reserve, & USDC Post-SVB Collapse with Ram Ahluwalia

Transcript

bankless Nation we have a special state of the nation for you today gotta talk about the banking crisis that happened last weekend I think David this week we're in a whole new world a lot has changed we want to dissect what what happened and what's changed what this means moving forward and we brought on an adult in the room someone that understands the financial system in the banking system much better than you and I do or uh maybe than we ever will and also understands crypto what are we getting into today David yeah the really the big question is are we in a new market did something change fundamentally this this throws me back all the way back into I think January of

2022 where I remember Jim Bianco tweeting out that we have entered a new paradigm and that was the rising interest rates of the Federal Reserve and I didn't really understand the significance of that phase change of markets yet Jim Bianco called it like a nail on the head all the way back then and so now I'm wondering and I now I think the market is wondering is are we entering a new type of phase change in the in the market uh Bank stocks were down across the board yesterday crypto started responding in like a logical fashion which is uh like even though it's logical still new and different and so I think this is the big question that we really want to uh to really ask is what has changed uh is there a structural difference in the world of

investing these days and uh David um it's not just you and I in this episode who do we have on to tell us that story yeah we're bringing on RAM alawalia who's the CEO of lumita wealth management we will introduce ROM shortly in a little bit but we uh were I asked Matt Walsh or friends over at Castle Island Adventures podcast uh who should we bring on and so um Matt uh suggested round uh and so Rahm actually had a Twitter space this last weekend during the middle of this confusion that was very insightful for me and put a lot of perspective into my brain so uh shortly we will be bringing ROM on here in a second guys uh before we get in I want to tell you about our friends and sponsors uh rhino-fy embrace the inner

Rhino all right this is a D5 platform so none of this behind what I'm showing you on the dashboard here none of this is custodial this is an overlay on top of decentralized protocols David tell them what Rhino Phi is up to and uh how folks can get started with this really cool application well while we have Trad banking totally breaking down we have new banking which is bankless banking across all these different chains and that's really what Rhino Phi enables you to do all of the many different chains with all of the many different verbs that one might engage with engage with as they do their Bank list banking activities uh all so all these different changes all in one space and you can do

all the things that you like to do trade swap invest pool Bridge send all the verbs on the left and it obfuscates and abstracts a lot of the complexities that one might engage with while they are going across the multi-layer 2 multi-train Vision so there's a link in the show notes to get started you can also go to app.rino.fi to start working in the bankless world of banking because sooner or later it sounds like we all might need it these days if that's why we're all here isn't it to go bankless this is a way to do that go check that out uh Rhino dot Phi David what should folks get out of this episode what should they pay attention to as ROM speaks today yeah so there's a bunch of big over overarching headlines and I think we're going to try and touch on one by one by

one one is Bank runs in the internet age uh is that the new Arena that we have stepped into uh was silver uh was Silicon Valley Bank a special case and in what ways was it was it not a special case uh Signature Bank why was it targeted what is the impact on crypto uh how is this changing the landscape of banking all together uh yields are down fear is up is that a temporary blip or is that a complete and utter phase change in the market I think these are all very big important questions and the answers to these things are really going to determine what the world of investing is like going forward as always guys we are learning as we go we are on the journey with you okay and if this is a

face chain we need to know change because we need to know about it uh we start every episode this is front running the opportunity so what is the next opportunity we need to front run and what do we need to watch out for that's what we'll get into right after we hear from the Fantastic six sponsors that made this episode possible including Kraken our number one exchange for 2023 Guys these folks have been with you since 2011 go start an account with Kraken Kraken has been a leader in the crypto industry for the last 12 years dedicated to accelerating the global adoption of crypto Kraken puts an emphasis on security transparency and client support which is why over 9 million clients have come to love kraken's products whether you're a

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intuitive familiar and fully evm compatible on arbitrum both Builders and users will experience faster transaction speeds with significantly lower gas fees with arboretum's recent migration to orbital Nitro it's also now 10 times faster than before visit arbitrim.io where you can join the community dive into the developer docs Bridge your assets and start building your first dap with arbitrum experience web 3 development the way it was meant to be secure fast cheap and friction free we are back with ROM alawala who is the CEO of Lumina wealth management which is an investment advisor specializing in investing in digital assets he's a self-professed Elder Millennial uh I

subscribe to that that title as well uh ROM we got to keep the younger Millennials in line from time to time as you know you don't mean me yeah not at all but it's great to have you on ROM thank you for joining us uh can you help us make sense of what just happened in the past five days happy to lay it out and thanks for having me long time bankless premium subscriber big fan of the work that you do week in and week out uh so let's take a step back what we've seen is the demise of Internet banks these are Banks born of the internet and destroyed by the internet through social media the speed information contact in digital withdrawals so those Banks started with of course silvergate Silicon Valley Bank

which were highly indexed to technology in the crypto sector and of course Signature Bank so three banks in one week that are either in liquidation or an FDIC receivership and to put in context at the last time we had a major bank run it was in 2008 and it was in the UK it was it was a northern Rock Bank they had lines around the block physical lines and in today's world you have digital Bank runs that are enabled by better ux where you can put away transfer online and the fragility that the public has confidence in their Bank can help to accelerate these Bank runs I'll pause there so ROM you're saying that this is

maybe the world's first uh large example of a digital Bank Run that's that's how you see the events of the past you know five days to week or so that's correct it's these are digital wire transfers now there's some other special circumstances around this so the three Banks were primarily commercial Banks as opposed to retail Banks and that matters for a few reasons one is as you know the FDIC Insurance cap is up to 250 000 and Commercial deposits from a crypto Venture fund a hedge fund a protocol VC Etc as well and excess of that so there's a higher propensity for depositors and Commercial depositors to panic if they believe their bank is not

going to be safe and sound and ROM commercial just means uh not retail more business focused so larger account Holdings in general usually above 250k because they're trying to meet payroll that sort of class exactly right big user business startups uh Venture funds hedge funds exactly and part of the crazy story that we're going to be talking about is the multivariate nature of it there's like interest rates there's uh Elizabeth Warren to talk about there's all these things but I would I really want to just carve out and Silo off this this topic of Commerce station of internet banking in the age of the internet era and social media right just the the connections that I'm been seeing uh being made here is that the pipes for ins and for fitting a bank

run through are larger than they've ever been before as well as the virality of social media is larger than it's ever been before so forget crypto forget inflation forget interest rates forget uh political targeted sectors of of banking we are simply just talking about the modern day technology of banking is probably the most susceptible to a bank run that they've ever been before ever just by a nature of that's what happens when technology progresses that's like one big pin in the story correct ROM you nailed it these are Banks born from the internet they were destroyed by the internet and Banks rely on public confidence in the United States and across the world we have a fractional Reserve banking system no Bank can

survive a full-fledged Bank Run uh By Design By Design banks are one of the few entities that deliberately engage in borrowing short lending long and have the backing of a centralized Authority in this case the FDIC and the federal reserve banks are doing liquidity credit and duration transformation it's a kind of a financial Alchemy and you've talked about aspects of this in your prior podcast around money in the history of money and all the rest but maybe I can just walk through a quick contrast of what banks do and then I'll that'll tease up the kind of the multivariate issues that you laid out David so let me contrast a Securities brokerage account from a bank account

when you have a brokerage account let's say Charles Schwab and let's say you own some stock Tesla Apple etc those Securities are custodied by Schwab or maybe bny Mellon the dtcc uh and they're not in general being lent out in fact you can have those Securities delivered to you to your door if you want on the other hand when you make a deposit a bank the bank reports to you that you've got say a ten thousand dollar cash deposit now the reality is Banks and these custodians are very different banks behind the scenes are re-hypothecating what that means is they're taking your deposits and of course they're lending out uh and what the banks are doing is they're giving you instant liquidity you have a demand deposit you've actually made a

loan to the bank that's a Perpetual loan that's priced that par and has the perception of no credit risk and a zero-day duration loan but on the back end what is the bank doing the bank is making longer d-rated loans those loans are illiquid and therefore the banks are engaged in this kind of like a financial Alchemy of liquidity transformation maturity transformation meaning longer term loans and credit risk transformation you have the perception of no credit risk but in fact they are taking on some risk and the way this financial Alchemy or this kind of magic works is you need two things you need to prevent Bank runs and

the way we do the United States is FDIC Deposit Insurance and we learned this from the Great Depression when there were a number of Bank runs that caused the Great Depression if you can stop a bank run by guaranteeing deposits then the magic show can go on and the second thing you need is a central bank like the Federal Reserve that can provide liquidity to the asset side of the bank's balance sheet if you have those two things then the banking system should work and I'll say one other comment what you saw in crypto the last two years was non-banks pretending to be Banks if you want to explain the failure avoid your Celsius block fine Genesis what were they doing they were taking short-term deposits they were lending

long it's great to be a bank but it doesn't work if you get a bank run so for example Genesis couldn't sell their illiquid Assets in time they also also got caught up in this after this duration mismatch so with all this solvencies that insolvencies whether inside in crypto or now that we're seeing them outside of in crypto you're saying it's the same underlying pattern through and through so the insolvencies of of Celsius you can solve regardless of the mismanagement of Celsius uh the insolvencies of Celsius genetics Etc all the crypto firms that have already happened now we've seen them in three Banks but you're saying the underlying structure is still the same there's people that had instant obligations while they were also taking uh long-term

uh stances in the market yeah so when non-banks pretend like Banks watch out because when the cycle turns and the liquidity leaves the system you're going to see who's naked now obviously there was fraud in the case of Celsius and other actors as well can I ask a question clarifying question about this uh ROM so all right so fractional Reserve means if everyone tries to withdraw their funds at the same time it breaks down because there are assets there that have kind of longer maturities and kind of the money's not there because it's being and that's how banking business model works I got it and that's true whether you're Celsius or whether you're a Silicon Valley Bank understood all right but can you tell us about the assets that these banks are actually investing in because

it's got to be different than Celsius and it's got to be different than blockfi right so in the case of a Celsius or a block fi they're investing in this these highly volatile crypto assets I hate to call them risky in some cases they're very risky but like definitely volatile right they could lose 80 percent at the snap of your fingers you never know yes I gotta assume a Silicon Valley Bank is not going and buying like D5 tokens and you know going levered long they have to have much less risky uh Investments here that are like similar to Dollars much more similar dollars to Dollars than um volatile crypto asset can you tell us about that side because that does seem like it's different it should be

different in the U.S banking system versus a Celsius or a blockfire voyager that's absolutely right so let me talk about what banks generally loan to or invest in and then svb because svb is a very unique animal so Community Banks and they're about four thousand plus of them generally loan against commercial real estate and that could also be financing commercial industrial loans or construction loans uh and that's the bulk of loans for Community Bank now you have these Mega Center Banks and these other Regional banks that also offer credit cards so they take those deposits and they finance credit cards or auto loans uh historically in the past student loans and banks will also Finance mortgages now generally banks

will make a mortgage and then sell it to Fannie Mae and Freddie Mac but to the extent that for example First Republic makes mortgages that Fannie and Freddie will not buy and they'll just fund that with their deposits so that's what they do and in general you'll notice that banks finance real assets that have cash flow if you're financing a mortgage you've got a collateral it's called a house if you're financing an auto loan you've got collateral it's called a car citizens finances Apple sale cell phones and if you're financing a student loan there's human capital behind it generating cash flow so banks are conservative in fact the average return on an asset for a bank is around two percent Silicon Valley Bank's a bit different Silicon Valley Bank not only had primarily commercial depositors and 90

of those deposits were uninsured because of that concentration they also did Venture debt uninsured Sorry Wrong by fdicate because they're above the 250k limit you got it exactly FDIC uninsured and they had two types of lending programs and a venture debt financing and they also provided credit facilities to VC funds I'll explain that briefly so in Venture debt let's say you do a series a round and you need some additional account but you want to do a quick Bridge Silicon Valley Bank could underwrite you and give you a loan they might take some warrants for that and Silicon Valley Bank gives you cash flow and you pay back Silicon Valley Bank in

the next round it's a very unique business Silicon Valley Bank does no other major Bank does that much less a community bank the other bank the other product they had of course is financing Venture firms so for example a venture firm might have a hot deal it takes three weeks to do a capital call they want to provide an investment now so they'll borrow from Silicon Valley Bank that's called their credit facility and so we're starting to what sounds like mix the world of banking with the world of venture uh and and just normal Financial Services apply to these various different Venture firms but uh just at a high level like spinal reflex response Banking and Venture seems to go

hand in hand a little bit less just by in nature of the risk that the Venture industry does have is that is that a fair intuition ROM banks have an important role to provide bank accounts and enable payments uh to businesses I mean banks are in the business of payments lending and custody that's what a bank is uh so you know making Venture debt loans like the jury's out there's a reason other Banks don't do that and Silicon Valley Bank hadn't had an edge in that business and that edge was the implicit backing of silk Silicon Valley to refinance or have a new Equity around so that they wouldn't actually have losses

this is one of the reasons I believe that you haven't seen a major Bank acquire Silicon Valley Bank because if that Venture debt portfolio 70 billion dollars and they're going to experience defaults as we go through a cycle uh then they don't want to be stuck holding the bag right so Silicon Valley Bank specifically engaged in Banking and Financial Services for a particular industry because it had Edge as you said that made that activity probably less risky than other Banks but other banks are still won't touch it just because it's new and novel and potentially more risky because they don't have that edge is that a fair summary it's risky right so so what Silicon Valley Bank was doing was making loans to unprofit tech companies that's what it is so when

you're taking a loan is a you're taking credit risk you expect to get paid back more than the equity shareholder if you take a make a loan to a profitable company arguably you're actually taking Equity risk and now we're you know we had 14 years of QE we had valuations we had easy money it was easy to refinance and the risks was low uh and it was a great growth engine for Silicon Valley Bank but of course in addition to that Silicon Valley Bank had egregious uh Investments they did with long duration treasuries we can get into that which led to their demise okay so they have a different portfolio of assets that are protecting the deposits in uh Silicon Valley Bank than almost any other bank

and those are skewed towards like credits towards these kind of startups and VC firms I'm wondering ROM if you could kind of explain this uh to us so this is a tweet you said one of these Banks is not like the other and then you're showing this chart um of impact of unrealized Securities losses on Capital ratio and apologies for the podcast listener but there's a visual here that if you want to catch that you gotta tune into YouTube for this particular part but what we're seeing here is sivb which Silicon Valley Bank I imagine it's like kind of a an outlier dot you see all by a little bit it's a lot by a lot you see all of the other Banks and they're kind of like you know up to the I guess uh six to

fourteen percent range you know the trend line looks like it's between like eight and and uh 13 or something like this and then you have this outlier bank so what is this chart showing us so what this is saying is that silvergate effectively had no equity well this is silver yet this is Silicon Valley Bank okay this is Silicon Valley correct so what so banks by law are required to hold Capital right what so what is a bank A bank's got about 10 on average of what's called tier one Capital that's the equity of the bank and then 90 of the balance sheet is financing primarily from depositors and in general those depositors are insured by the FDIC so you can see why government actually has

a key risk on Banks and they supervise Banks so we talked about the lending side of Silicon Valley Bank those are those E-liquid loans but Silicon Valley Bank and other Banks also have a Securities portfolio and by regulation these Securities portfolio consist of what's called hqla high quality liquid assets those are generally treasuries and mortgages so what this is saying is that if you mark to market the treasuries and mortgages on the balance sheet for Silicon Valley Bank that Silicon Valley Bank has zero equity ah what how so how is that possible that's because the mark to Market of the Securities that they purchased

is just a lot lower than the VA the par value of them what versus the purchase price of the of the bond right so in uh in q421 now this is Peak crypto this is Peak Venture funding record funds raised Silicon Valley Bank had record inflows of deposits the or like tens of billions of dollars record inflows and in a short interval of time what they did is they bought the longest duration treasury bonds and duration is when you expect the average time you expect to receive a cash flow so the longer the duration the more interest rate risk you have so this is before the FED started

raising rates although the Fed was talking about raising rates then and inflation was going up so this is what that seems dumb because they were essentially betting that the FED wouldn't raise rates I don't know that they were conscious it was it's in my view it's a great it was grossly negligent they took tens of billions of deposits and they bought long duration treasuries now what happened last year of course we saw 60 40 didn't work right the stock impossible to work well the 40 is bonds those Bonds were down 20 percent and here's what happens so here's one way to think about a bank that people don't appreciate I mentioned earlier if you look at the bank's Capital stock meaning the bank is financing assets with the mix of liabilities deposits and

Equity that Equity components about 10 it borrows 90 through deposits that means on average your bank has 10 turns of Leverage a bank is borrowing short they're lending long they're 10 turns 11. so now your securities portfolio goes down 20 percent imagine you've got 50 billion dollars in securities and now that 50 billion employer is worth 45 billion dollars you've lost 5 billion but now you got 10 turns of Leverage that is why you have this unrealized loss in the Securities portfolio by the way this was known by Regulators regulars have talked about the issues in the HTM portfolio for some time in fact the Federal Reserve has about 1.5

trillion dollar unrealized uh hold to maturity loss the difference is that the Federal Reserve can hold to maturity and The Regulators hope that these other Banks can hold to maturity in which case they'll actually make money on the bond and I just want to clarify for for people who you said um bonds fell 20 in 2022. bonds aren't supposed to fall 20 right that's right unexpected I mean for the crypto listener to be like just 20 and that sounds fantastic sign me up but that this is supposed to be a less of a foundation of the entire Global Financial yeah it's an important asset to not fall and it was obviously a core asset that a Silicon Valley Bank was was betting would not fall by anything close

to 20 you nailed it so so bonds prices drop when rates go up they're the same thing right so we had 14 years of ultra low interest rates we had the Federal Reserve by about nine trillion dollars in treasures and mortgage-backed securities 25 trillion dollars in quantitative easing globally other central banks in fact had negative interest rates think about the banks that bought those negative yielding bonds and holding maturity for a loss so that's the backdrop and then we saw inflation uh increase of course that was partially driven by two trillion dollars in covet stimulus which is multiples of what we've ever seen in any other recovery package so get inflation and now rates are going up at the fastest rate since 1981 and

there is a new regime and that regime is called higher wheel rates which is what as you mentioned Jim Bianco has talked about yeah so we we often talk about this idea of going uh further out on the risk curve and that's actually a really easy thing to um visualize when we talk about bonds and bonds yields and what you said the longest term maturity Bond uh bond yields I can't remember the actual specific name of the correct asset but just like they are buying the longest dated bonds possible the svb is Silicon Valley Bank is because that's where they get the most return in interest rates but they also take what you said is the highest interest rate risk because they

are so far out on the risk curve but that's what you must do in an era of zero interest rates in order to have any margins whatsoever and so one part of this equation is like I think everyone agrees Silicon Valley Bank totally mismanaged their risk and also we also had the fastest interest rate hikes in history or in in my lifetime and so these two things have collided and and so that's really what I think we're seeing here on this chart and ROM I want to check my understanding of this chart we we're seeing two different lines here one is a line of blue dots and one is a line of yellow dots that are scattered and below the blue the blue line and the blue line is is titled common Equity tier one Capital ratio I don't really

know what that means my gut is that this is what it would have been like if the interest rates hadn't been going to Infinity really really quickly to be hyperbolic and so all of these Bank all of the yellow dots all the bank the banks individual Banks you see JP Morgan there UC Bank of America et cetera you also see a silver God Silicon Valley Bank at the very very bottom the gap between these two lines am I correcting my understanding that that is the interest rate hikes like that and and so people who are further down falling down are people that have taken further risk than other banks that haven't taken as much risk am I interpreting this track that's exactly right you nailed it cool okay so again so so now we now we've pinned I want to re like go

through other conversations so far uh Mobile Banking and and time to uh withdraw is the fastest it's ever been finances moving fast it's ever been so Bank runs are more susceptible regardless of conditions then we have this one Bank Silicon Valley Bank that uh serviced a higher risk end of the Spectrum in terms of financial services which was the Venture world and then also it happened to just take more risk itself being inside of that milieu that it was and that also interest rates got got jacked up faster than it's ever been before so these are the these are the big parts of this multivariate story I don't think we're done yet uh ROM where should we go from here well let's zoom out for a moment what you're seeing is

the unwind of carry trades let me Define what a carry trade is so a carry trade is when you borrow short in a currency it used to be the Japanese Yen low interest rate of Comedy economy and then you make a loan in a higher interest rate economy and you capture that spread and that hedge fund strategy works so long as the policy rate environment is stable so in this period of ultra low interest rates all sorts of carry trades were created one of them was the grayscale Bitcoin trust trade which you guys have talked about in your short show another is in the convenience your brokerage account you could have borrowed and bought Muni bonds you could have levered Muni bonds and get a nice equity-like return

and that's also taken place across these non-banks that have had issues and that's what's happening now so think about silvergate for example silvergate in a way is a character it's not a critique of the business model they're responding to incentives they paid out zero percent to their depositors and they're earning that spread and that game works in a zero interest rate world but what happens is when you raise rates and you have an inverted yield curve the incentives change so remember we talked about before what banks are doing is they're borrowing short and lending long the expectation is that they borrow at a very low interest rate JPMorgan today is still borrowing around zero percent in deposits and they lend long and there's an expectation that that yield curve is

positive and they make that spread now this you'll just I just really want to for Once Upon a Time I remember when I did not understand a yield curve what this really means is a yield curve means is that as you take more that as you go further out on the time go from two-year maturity to 10-year maturity you get paid more that is the normal course of events an inverted yield curve is actually when you are paid to take less time and so the two-year treasury pays you more than the 10-year treasury that's one of the place that the the on the ground there that's right exactly so the yield curve is a it's a plot of the duration or time axis and then the yield so for example the 10-year bond is at 3.6 right now and the FED is expected to raise rates to call it five percent

so now what are the motivations and incentives so first off if you're a bank why would you lend long if you can just lend in short duration treasury Securities and take zero risk or you're taking the risk on the federal government less inflation and so you're starting to see that happen and that also you know that's what drives the Slowdown of the economy of course right so credit card rates auto rates go up and that starts to lower demand but there's a there's a challenge that's happening here because as the FED raises rates uh what's happening is it's creating uh a 600 700 billion dollar whole to maturity unrealized loss across the banking sector because those banks are now underwater

so the more the FED raises rates the more the banks have these unrealized losses on their balance sheet and also the Federal Reserve has losses on their balance sheet and the Federal Reserve will continue to pay out more than it brings in we can come back to that later but here's the other side here's the other challenge so the capital markets meaning like money markets as a product are paying out more than the deposit than the yield you get from your local bank so if for example you buy Vanguard money market fund we're helping protocol treasuries do this now right they're saying Hey how do I get yield we put them in an ultra short duration bond fund that pays off four and a half to six and a half percent so why would you

park your money at a bank again these Banks they don't offer that kind of yield and for them to hold on to deposits they have to raise their interest rate but now what happens now recall the average return on assets is around two percent for a bank maybe three percent okay so if they raise the deposit payout they're gonna they're not capturing as much spread and they can't really raise it above two to three percent and it can't really compete with the money market fund so this is why if you look at Signature Bank over the last year we saw about 20 billion dollars in withdrawals from Signature Bank it's kind of it's not a bank run but it's a slow moving bank run

because commercial businesses are responding to incentives and arguably you could say silvergate was subject to that and to some extent uh svb as well but that's true for other banks in the land as well so in some sense the FED is like in this Checkmate position where if they raise rates things go bump in the night we see those lagged effects they lower rate they get inflation and that's the conundrum we're in and really quick we're on a money market is not the banking system that is sort of a separate ETF it's like a separate pool of capital that is basically competing against Bank deposits so the question of why would you keep money in your Wells Fargo

account right when it's giving you like one percent uh interest versus putting it in a Money Market ETF in Vanguard which is giving you three percent right all the capital is going to flow to the three percent money market which is a different pool and out of the banks which kind of causes the slow motion background is that right what's happening now there's a chart in the document that shows us about like a high single digit drawdown in deposits in the banking system so right now it's mostly corporate Treasures that are conducting that behavior change although the headlines from the last week created awareness in households across consumers it created also some urgency and some Panic maybe

and that's causing them to shift their portfolio but it's still early days is this is this the graph no it's another it's another chart um uh yeah scroll down let's see there no no it's not there I can send it to you I can send it to you later okay but yeah so real quick like and why this this has like policy implications to an economic implication so what's on money market we Define that real briefly so a money market consists of investment grade bonds that are just about to mature and pay off their last payment principle right so those bondage towards that those companies can access the capital markets Google Apple IBM Ford Motor Company there you go that chart so look at February 22 you can see sorry

there you go uh about uh two and a half percent sorry draw down from the bank deposits at Peak right so what is this chart here this is this is stablecoin outflows out of crypto exchanges Ryan this is like the Trad version of this yeah so this is a stablecoin AKA dollar outflows out of Banks and into money market funds which is kind of like investing in in the spread of compound or something like this is oh yeah that's my God banking is making sense to me now that I understand my terms just like just like higher rates withdrew funds from defy because people want to get to T bills now it's

the exact same thing you nailed it is this what Trad five feel like by the way when they're trying to understand crypto they have to go the opposite direction they're actually they're a lot they're a lot of what is crypto it's payments it's lending it's settlement it's custody and that's what banks do okay so this chart is super interesting because we can see this big spike down in February of 2022. we haven't seen us bike this large since 1981 which was a bad year right well right that's when you had record rate increases by Paul Walker uh and of course uh you had a bear Market it ended the year following and that said in motion a 40-year bull run in equities as well so yeah we're we're uh we're doing

a kind of a Playbook there from from 81. okay um is it okay if I put this Google doc in the uh YouTube channel yeah go for it this is a another question I have for you uh ROM so okay so you you mentioned that the problem is this carry trade and you explained the carry trade and you say that meta pattern is the reason silvergate died it just happened earlier because it was involved in this super risky category of assets called crypto and you saw basically the carry trade playing out in gbt uh and and Bitcoin spot price and that was that and then the symptom of that eventually like dominoes are falling and then the the silvergate Domino fell but it's the same fed raising rates carry trade type

problem and now the dominoes have collapsed and now we're in Silicon Valley Bank my question Taurus has gotten to Trad five now right so like so so like I I feel like uh maybe it's a meme of like a bankless not bankless but everyone's saying maybe bankless to David to be honest like oh that was the last Domino to fall it's good we're good and like we said that at the end of last year's like FTX and okay if we only get through this um dgc thing then that's the last Domino to fall but now the dominoes have and it maybe it was encrypted maybe that was the last Domino to fall in crypto now the dominoes are falling into the the banking sector and the traditional Finance world and we had silvergate and then very shortly after just days later we have Silicon Valley

Bank the same symptom it's the carry trade problem what's next who else has the carry trade problem it's a great it's a great question so yeah first off the CR the positive yield curve motivates credit creation and it creates leverage and that boosts asset prices that's the simplest way to think about it 14 years of that and people are equilibriated to these low rates they condition their behaviors human psychology around that and they planned around that Now inverted yield curve and that leads to credit destruction because people pull in banks are slowing down the pace of lending for example now here's here's what's going to happen in traffic it really will turn on policy and there are two policies you got to look at what is going to happen with

monetary policy and the behavior of the Federal Reserve they have to make a choice do they want to Stamp Out inflation at the risk of creating more risks or do they want to reflate the banking system by lowering interest rates and of course now markets starting to price a lowering of interest rates that's one policy the other policy is what will the bank Regulators do for other Regional banks that uh apparently have liquidity issues will they intervene to protect depositors those are the two things to watch to understand what happens from here so but Ron okay here's why I want to understand it so we've we've been in crypto since

the early days like of of this kind of Crisis right this yield curve curve inversion and the carry trade collapsing we've seen all the dominoes fall we've been tracking it up to here now the dominant as a phone it wasn't the action on Sunday the FED actually putting its foot down imagine this row of dominoes falling in it it basically ends to the the end point is the end of all finances we know it like the world is burning like the rest of the dominoes yeah it's Armageddon it's like terrible right um but didn't the the I'm saying the FED but I don't mean the FED didn't um basically the U.S government Treasury and the FED collectively just on Sunday put their foot down in top of the

dominoes send some Domino scattering but they put their foot down in the middle of the the sequence of dominoes falling and say this stops here and they said basically Silicon Valley Bank equities wiped out but depositors are secured Signature Bank equities wiped out but deposits are secured this contagion is not spreading any further and therefore it can't spread it can't get through you know Jerome Powell and Janet yellen's foot because they have their their foot based on the on the um the row of dominoes here is that effectively what happens like have they stamped it out that's the that's their goal that's what they want happen they did as you pointed out they insured all uninsured they're gonna make sure all uninsured depositors

are made whole uh what they did not do is provide a system-wide guarantee to deposits wow well they cannot right so the the FDIC in terms of their Authority it's beyond their limits by the way the fdac has 125 billion dollars in their Insurance Fund and there's 20 trillion dollars in deposits so it would take an act of Congress to put a system I guarantee that said they did roll out a program to create confidence I think in Broad Rush you're right that's their goal they're saying to the public hey banks are safe work with banks uh and I believe they will do everything they can to stop a bankrupt okay so I so the the letter of the law for FDIC is if you have a deposit of the bank it's only

insured up to 250k and above that it's not insured what they basically said is for Silicon Valley Bank and for Signature Bank we are breaking that rule and we are ensuring all depositors up to Infinity yes yes my impression is like de facto they're signaling yes to the rest of the entire banking system that we will ensure your deposits up to an unlimited amount but you're saying maybe they implied that but they actually don't have the power to um grant that ability because that requires an act of Congress and you actually have to go vote on something and change laws I think you got it right and look I'm

betting that's correct I think everything you said there is correct um and I'm betting on that I think I bought financials you know yesterday for example I'm betting that the regulars will do what they can to safeguard The public's confidence in the banking system and Stamp Out runs right so overall broad restricts you're correct that said they haven't issued a system-wide guarantee which is what Bill Ackman has been arguing for and keeps arguing for but they don't need to if they're if they're I guess if they can stop it here they can just say the signal that we're prepared to do this is the signal in the market and as long as that stops Bank runs they'll never need to actually get to the point to put a new law in place and increase fdic's mandate that's right they're trying to stamp out the fire

before it becomes a forest fire and by the way no taxpayer funds put to work the FDIC fees are assessed against the banks the banks will pay for this which is great however here's the other thing and this is outside the control of the FDIC which is it goes back to the other issue about higher interest rates so if you continue to see a movement from Banks to money markets not because of fear of banks because consumers are responding to incentives then it doesn't matter if you've got a system-wide guarantee ah so if the money market trade continues to exist that may not stop the forest fire that's correct there's a

slow burning right go back to like signature they've had a 20 billion dollar year-of-year decline in their deposit which is about 20 percent this this flow that we have to see does it accelerate or not now I don't think consumers retail households by and large had much Behavior change we know that because JP Morgan's deposits are still growing and they're paying out zero percent but the commercial treasurers have started to adjust and last weekend was a wake-up moment for the household for some households that read periodicals like like what we do more for looking and they're saying G inflation's at five percent I'm earning

one percent why don't I get a Vanguard money market fund if that happens what are you gonna do system guarantee is not going to help that money movement so that's not quite a bank run but you're that's what you're calling is a slow motion uh withdrawal that's happening just because there's this Arbitrage opportunity basically and I guess how does the how does uh the banking system Yellen and Powell stop that it's not it's hard it's very very the way you stop it is you lower interest rates exactly and this is the you got this aha moment now what can a bank do to stop deposit flight they can raise interest

rates to create an incentive it can be with money market funds but it's not mathematically possible for a bank to offer a four and a half percent interest rate they would be unprofitable and so that would impair their equity so one way or another you can see how the banks are in a bad position if rates go up that whole to maturity portfolio declines in value if Federal Reserve raises race the whole maturity portfolio declines in value If they raise rates they lose money silvergate went through this as well they issued CDs that they're paying money out and they have to pay an interest rate on that they're going to lose money on that I want to ask about one last thing and then uh I know I know we want to get to sponsors and we've got

a lot more to cover though um you said something that that perked my ears which is taxpayers aren't responsible for this right or they um this is not going to cost taxpayer money I think was the the word you used that's also what I saw in kind of um you know Biden's uh tweet outs and that sort of thing is not going to cut but didn't they do something else didn't they also effectively say that um long dated treasuries would not be marked to market value for banks but would be par value didn't wasn't there some move of Treasury to sort of or whomever's responsible for this kind of reset the value of this collateral on the Banking balance sheet

and isn't that in net effect not a direct tax on taxpayers but a tax by way of money printing by way of quantitative eating easing by way of um Supply issuance senior whatever we want to call it isn't that in effect a tax a sneak attacks on um on taxpayers or at least kind of an money supply inflationary pressure well it's it's really I look at it differently I mean the existing laws of the land already in terms of banks how Banks account is allows for hold to maturity accounting right so Banks can't hold a bond at Cost uh and that's what svb did that's what all the banks are doing but it's all

disclosed to the public so if you go to the the 10-q or the 10k of a bank you can see what the unrealized losses on that Bond portfolio you can do the math and ask yourself if they were if they had a bank run which would force them to liquidate which of course will happen with silvergate then you can calculate what that loss would be to the bank holder Equity uh so that's existing law of the land I did not see any change around that you could send me a link I can take a look at that The Regulators did introduce a new program it's called the btfr program uh essentially it's like a fund uh that's meant to um you know step in uh to help the banking system and again the fees for

that fund are assessed against the banks rum I just want to check my understanding you you said that it's simply just like not profitable for banks to be offering a sufficiently high yield to maintain deposits is that what and I'm going to share on my screen here uh this is a tweet that we uh shared out yesterday this is already 24 hour old data so I don't know what the banking sector did today but to me this is this is that being reflected in the market where the smaller and smaller banks are getting hit with a repricing event because the market has understood that the long tail of Banks and here's my question to you is that like the zero percent interest rate Paradigm has created a long tale of banks it's allowed for banks to exist many many

more Banks to exist because they never had to pay out interest rates they had no costs for deposits and so now I think perhaps what is happening here is when we talk about a phase change in the market the long tail banks are being made unprofitable and is that what is being reflected in the market the banks are still making money uh the banks they can hang on to deposits If they raise interest rates but increasingly Savvy deposit are starting to migrate to money markets right so if that if that accelerates then the banks have an issue because they cannot compete with the money market fund they'll have to raise rates so far the banks are making money to be clear uh but there's this issue where the more

the FED raises rates the more incentive there is to shift out of your depository institution into a money market why do we have money markets in the first like couldn't you just like delete money markets entirely and then have some sort of a central bank digital currency and like provide um everybody who is a holder of US Dollars digitally some sort of return directly from from Treasury well so treasuries are part of the Money Market corporate bonds uh investment grade bonds you know asset-backed Securities these are all part of the money market money market is the collection of bonds that are about to mature So when you say why do we have money markets like saying why do we have Capital markets and capital markets play

an incredibly important role in driving Capital formation right there's Equity Capital markets think about as an IPO but they're also initial debt offerings those initial debt offerings create the bonds that eventually work their way into the money maybe I mean more why do we need um why why do we need Banks as a middlemen to good question good question depositors funds is probably more what I mean I do we need Banks our Pro question from a bankless co-host and I never would expect we're going bankless by taking three Banks out in a week uh here's why so the capital markets are open to large institutions right and S1 filings when you go public and IPO it's an incredibly high standard

we cannot access the three of us cannot access the capital markets Apple Google Microsoft tech overlords can access the capital markets so where does mom and pop or Joe six pack or the farmer access funding they get it from their Banks and by the way the top five banks including JPMorgan Bank of America they're on the coasts so you're talking like Middle America and Rural America and the population is not benefited from the growth on uh asset price inflation it's that population so Banks play an important role in extending credit by the way bank loans are cheaper than Equity cost of capital they're the cheapest source of funding

in fact in the land and so they play a very important role you know if you want to look at a world without banks there's a wonderful book by Hernando de Soto called mystery of capital like David you're not in your head right and his basic headline is you know one is you need property rights entitled to property but the second message is once you have that you can liquefy that so if you there are people in Egypt let's say that have a home they the convention is they own it but it's not recognized as such and they can invest in their homes so you'll see them put a roof on one year two years later they painted the house you ask them why because they can't get a mortgage or you know a farmer can invest in a plow they're trying to make an economic decision but

they cannot Finance the productive growth at investment because there's not a bank so instead what you have are de facto Equity markets those are called like loan sharks so Banks play an important role in credit intermediation ROM there's a bunch of uh other topics that we have to get into that I want to ask you about what's your opinion on whether or not silver Signature Bank was targeted um I know we got to talk about the impact on crypto and the impact on usdc and then we also I want to get your take on uh yields and interest rates whether or not this is the pivot moment that we've all been holding our breath for or not so we're going to get into all these subjects and more but first a moment to talk about some of these fantastic

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in 24 hours with Jeremiah Lair uh so we'll ask him the same question we'll ask him the same questions well as you know like we played last week so usdc broke the peg traded down as low as 88 cents in the Dollar on reporting that 3 billion plus of the usdc reserves outstanding were held at svb then on Sunday the FDIC announced an action to make uninsured depositors whole uscc closed the peg I think it's like 99.9 cents on the dollar it's there effectively and circle has shifted their banking relationships to bny Mellon which were the deposits are and they shifted their Fiat Ram to crosstalk river that was my old shop I built the

crypto business there so the biggest irony of this whole thing is that usdc is now custodied as at a systematically important financial institutions called the sifi usdc is too big to fail usdc is held in a institution that is branded known to be too big to fail it's designated by the regulator as a g-sip bny mellow not going to go anywhere so uscc one of our guys cracked the code they're in the Emerald City they co-opted the defenses of the banking system right so uscc is ensconced behind bny Mellon and we're protected from Bank runs so so basically we got someone

inside on the inside we did it but Ewoks took over Endor so so usdc only fails if the US banking system fails basically exactly that's right that's right and and that relationship is hard to get and we like usdc had to go through these smaller Banks like silvergate first and and signature and and now somehow like how are they able to get this uh big too too big to fail type banking relationship well Germany can elaborate more but they had a prior relationship with bny Mellon and circle has a number of banking relationships they have five to seven they try to diversify across that but the principal institution is bny Mellon and you're right you had to start

somewhere silver gay was the Pioneer uh and then other Banks like signature got in there as well uh and so but now those deposits are at a g sub institution so was it never about this we're happy about this right I don't know how tell me how I should feel about this it's it's I'm I've my mind is blown I'm trying to process this myself uh it is look we need us we need a centralized stablecoin and a decentralized stable coin is one take okay censorship resistance on the one hand regulated C5 but make it Bulletproof on the other and usdc was never going to be the decentralized we know this correct correct and arguably uscc is the first

cdbc maybe I totally think it is yeah I I I'm it's perplexing to me that regulators and and those and DC haven't realized this I think they're going to connect the dots real quick now and by the way you know the American banking system does rely on private markets like Americans as an ethos in terms of bank I know it may not seem like this in terms of banking regulation they do lean on private Market infrastructure the idea that usdc is our first cdbc is not a it's not a crazy idea in fact JPMorgan has a stable coin called JPM coin as well and in the 19th century before the creation of uh you know certain banking regulations pests that create the national bank system you had wildcat

banks you had Banks issued their own form of of currency so it's not a it's not a crazy idea it's familiar to the history of the banking system I am totally waiting for like um the FED to just be like oh yeah we're researching a central bank digital currency and like whatever we'll do it and then them basically to collab Co-op something like usdc and be like this is mine now you know I think they could I think if you were at U.S treasury which is like the policy Think Tank the brain for the US government I believe I haven't heard this from Dan but if at U.S treasury their thesis is probably hey we need big Mega Money Center Banks like JPMorgan and Citibank to issue these stable coins I'm not saying that's what they should do I'm

saying that's what I expect them to have them this event just fast-tracked us towards that do you think well yeah in a certain way it did it did and maybe you know JPMorgan acquires usdc or Circle that could be interesting acquisition to complete the loop interesting sometimes they will but that's a logical conclusion right and ROM was was usdc ever under threat like over the past weekend well you know there's breaking the buck is one thing but as you know there is rumors of Wells notices that SEC chair Gensler has issued and you know the unknown is Will Gensler consider stable coins unregulated money market funds and

if so that could put stable coins at risk so we don't nothing I mean because money market funds are securities right money market funds are securities hi tight tight tight part of the uscc story is I'm ignoring that by the way I'm moving on I'm glad I'm glad you're ignoring that can you talked to Esther about that tomorrow we recorded with Hester purse tomorrow yeah as well as Jeremy or Lair uh one part of this uscc story ROM is uh this thing called Cygnet which was a product out of Signature Bank I think it stands for Signature Network or something like this uh what was it used for uh is it dead and what should we think about this

so Cigna is still operational the FDIC is running a global 24 instant settlement crypto Network that's what it is Signet 24 7 uh settlement for crypto Banks or crypto or exchanges and institutions and hedge funds so it's used to settle transactions let me give you an example right let's say I'm coinbase David is win from you and Ryan is Jump uh and wait can David be John no no no uh your jump bye thank you so let's say uh ice it's like David is borrowing from jump uh Ryan and uh David is at risk of getting a margin call I send David some funds because I contractually I'm contractually

obligated a little over that um if you've got to wait time if you've got like say t plus three settlement which is standard in U.S markets and you cannot make Ryan whole on let's say your D5 smart contract you get margin calls even though technically you're solvent that's called settlement risk you just didn't get the cash in time right to deliver and that's cash is there it's on the way but because of t plus one or t plus time uh you get liquidated even though you have all the money it's just not in the right spots checks in the mail exactly so you need a 24 7 instance element layer to match a 24 7 crypto Market silvergate send played that role Signet played that role without that it creates settlement risk operational risk

unforced errors mistakes for the category this is like a a shadow ethereum right a shadow instantaneous payment rail right it's like a layer 0.5 or something like that yeah okay for sure uh well it's like its own Bank inside of its own Ledger right so all of these customers have to be customers of the same bank in order it's a side chain it's a side chain yeah that's that's right that's right so what what is what happened to Cygnet is it now that Signature Bank is gone where so let me so signature is in receivership that means Management's not in charge the FDIC run Signature Bank has a new name and silver big silver svb excuse me is also being run by the FDIC okay so Cigna

is still running today so the fgic is currently running Cygnet which was which is mind-blowing again so so the federal government has the federal government has nationalized Mission critical crypto infrastructure I don't think they realize obviously they were not that was not their objective but we need to get a meme talking about how we federalized Mission critical crypto infrastructure we're behind the wall right and it's a trojan horse this receivership but look here's what's going to happen the FDIC is going to auction off and attempt to find a buyer and hold for Signature and failing to do that they'll auction off the assets and then the

liabilities so the buyer of signature or their assets will look at the deposit base and say do I want that depository customer uh and if they do then they have a second question of the Signet Network My Hope Is that they want the depository customer and they maintain Cigna but right now the federal government is running instant 24 7 crypto Network by the way this is important to add because there's been so much fun against silvergate about and I want to get into that topic now we'll get into that later but around how it's this alleged any money laundering Network it's nonsense if that was the case the regulars could have should have done before they had oversight over silvergate and allegedly the federal government is running an

anti-money Learning Network now clearly that's not the case so ROM this this gets into the question that David was asking before our last break which is was signature targeted maybe you could answer that but the wider context is crypto is kind like we're kind of reeling about this because we don't know who our friends and uh the government are and who are kind of the enemies uh anti-crypto um people who just don't want this new Financial system at all or trying to squelch it and so My worry is like we're kind of laughing yeah FDIC controls uh now now manages a uh crypto side chain without them knowing it hahaha but what happens if one of the large Banks acquire this signature thing and acquire Signet along with it and then the um The

Regulators or the anti-crypto government people are like well you gotta stop doing that we're gonna put an end to that let's squelch that we'll kill it um we're wondering is is crypto being targeted in this and what do you expect after there's a lot of rhetoric I mean Elizabeth Warren put out an op-ed piece and opinion piece yesterday and named crypto you do control F search named crypto as being responsible for these bank failures three different times is there any concern there what should we be worried about we're going to learn a lot about the regulator's intentions it gets back to Nick Carter's operation choke point 2.0 so the fact that signature was put into receivership was a surprise it was a surprise even for the hedge funds that were short

signature uh it is it's a concern we need Clarity we will learn over time through foia through investigative journalism Freedom of Information Act correct I imagine the house natural Services committee led by chair Patrick McHenry uh will also learn more and I'm sure you may have seen already Senator uh Frank who co-authored dot Frank was on the board and he said he believes that it may have to do with crypto but that's his interpreter we don't know just because we really don't know it was a surprise you know there are allegations that there are credit risk issues around signature they certainly had a deposit run which could be caught which would be cause for receivership so we really don't know if Cygnet keeps

running with a new acquirer then that's evidence that The Regulators aren't trying to kill crypto if Cigna is shut down it's not evidence the regular is trying to kill it so it could mean the acquirer doesn't want that this we won't know so we'll have to find out it does raise a concern on the other hand Signet is running today and it's run by the FDIC so we don't yet know but it could be a very it could be a bad sign about the intentions of the regulators and those in power uh like it we're unclear on why Signature Bank was put into receivership and it could be a bad sign for crypto if

if it was targeted because it's a crypto bank and they wanted to knock it out and my presumption yes my presumption is that it was Bank Run driven The Regulators have to abide by rule of law as well because that would be illegal doing that to Target a specific bank industry because of services as a population that is not something that rule of law in the United States against the law right it's like it would be my interpretation of the law not a lawyer I'm not giving legal advice is that be a violation of the administrative procedures act which requires Regulators to treat like scenarios likely meaning if you put a bank in receivership you got to look at the facts apply to the law and say those criteria are met and The Regulators have to hold themselves

to account to that and I again I might I have a presumption of good faith here let's see what happened let's learn more uh and I am we will learn more in the coming weeks uh and months my presumption is is that it was Bank Run driven but I don't know yeah I I think we're just we're getting mixed signals on both sides right like if there was true actual risk of contagion it's actually not that crazy to think that a second Bank Beyond Silicon Valley Bank was also at risk that would be actually kind of the indication that you would you would see right correct and look if The Regulators really wanted to kill crypto is there any better moment than post FTX right right the Gensler could declare eth a security which would be horrible

coinbase would be forced to be listed uh he could declare a coinbase and Kraken and unlicensed Securities Exchange right and they haven't so and this is why we need Clarity interpretive guidance and we need Congress we don't know I just go back to like Barney Frank saying this well that was a direct quote that they're targeting signature because of crypto um he is no fool I mean he know he knows how this system works inside and out and also he doesn't care to defend crypto just because it's crypto I don't crypto positive or supportive he's on the board did he have a privileged point of view we don't know my read of his statement was that it was his interpretation as an observer of the facts

but I don't know wow uh so I want to get into this last topic here uh which is interest rates uh the market has signaled that this is something breaking and it's time for the FED to Pivot uh yields are down uh the most that they've ever dropped uh in since the aftermath of Black Friday uh it says uh the biggest one-day drop in yields for 12-month t-bills since Black Friday indicating a panic buying of treasuries uh the vix fear gauge has become elevated so fear is up yields are down the market is saying hey this is the fed's totally not going to continue to raise interest rates ROM do you have an S dance here and how do you how should we think about this right so the

FED has nine days between now and March 23rd before they make a decision and they will look at every piece of data between now and then obviously we saw CPI come in uh and still you know warm if if not for the recent bank runs which are deflationary because they cause consumers to pull back and spam this and you know Crouch a bit more if not for that you know would have been 25 to 50 bips right now markets are pricing in a 25 Pips uh increase that's my base case as well I'd expect that if you continue to see uh a waning and public confidence in Banks then that changes like the only two things I will try drive a Fed pivot are one is a significant weakening in

the real economy which is what they're trying to engineer to lower inflation they're trying to destroy demand this is what Fed chair policy when he says we're going to have pain in the Jackson Hole some in August the second thing that will cause the FED to Pivot is a financial Market dislocation they're very concerned about financial Market dislocations they want markets and the public to be able to rely on their Visa Mastercard working their Banks to work the ability to go buy a bond right if you were calling kovid Financial Market structure broke down you couldn't buy a Muni Bond credit markets were locked and that caused the FED to provide it you know credit facility and liquidity to the market so my base case 25 biffs but we got to see what happens right now and

then yeah I was gonna say isn't this financial Market dislocation if it's not there yes it's not there because it hasn't hit retail right so the the failure of these Banks is not yet at the level of systemic that's the view of the regulator it's also my view too these are These Are banks that were indexed to technology and crypto and you know when the tide goes out those institutions that were the major beneficiaries that liquidity again svb grew their deposits tens and tens of billions but of course those deposits went away quickly as well and obviously you know we've seen what's happened you know you're seeing the tide go out you're seeing who's naked who's over concentrated too much commercial risk exposure it's not systematic however if you know consumers are

memetic creatures we look at others Behavior we imitate we follow Etc if there's a shift in consumer Behavior if consumers start to doubt their Banks I don't think we're there yet you know talk to people not in crypto Twitter ask friends family mom dad Joe six pack yeah they're not they're not there yet they didn't go through 2022 of like Luna Terra FDX like block fi Celsius and now this they're they're not quite there yet so you're saying that you think Powell and the Fed have some room still to tighten because this hasn't completely broken I believe I believe that they well do they have room to tighten that's another thing I believe that their base case would be that's their own Dot Plot their own projection is to tighten they

are on path to Titan yeah two or three more times got it but certainly this had to be a shot across the price this weekend oh yes oh yes they're going to be running flag every every day they're going to be looking at the Integrity of the banking system they're going to look at deposit flows uh and you know they they want an all clear sign for sure this is you know banking crises are extraordinarily deflationary the Great Depression was not caused by 1929 crash it was caused by a bank run right and that's why Ben Bernanke you know won a Nobel prize in economics became the fetcher it's also why policy makers You could argue overreacted to 2008 and slam the gas

with quantitative easing low interest rates so in a way this is the counter response to the significant deflationary shock of a banking crisis in OA and the Pendulum has come full circle we're paying the consequences of that now with the central the central bank as well as obviously you know the US government debt to GDP ratios at a very high level sure yeah so I think what I'm hearing is that we were previously charging into high interest rates and now we are tiptoeing into a little bit higher interest that's right the FED is uh they change their gear shift from 75 bits to 25 diffs they try to be deliberate methodical they're trying to lead

markets there's a question are arguably markets are now leading the fed the Fed was setting Pace up till now meaning markets were expecting a Fed pivot for three quarters in a row and if you just looked at chair Powell's prepared remarks not the Q a don't focus on the Q a look at the prepared remarks and the transcript they're very deliberate and every sentence uh now it's changed we've seen the two year as you pointed out dropped substantially Yesterday by the way we haven't seen these kinds of Treasury Market movements since like 1987. the tightening and the the pace of the tightening in uh of course that tightening is Capital Mark is Tiny not the FED uh that flight to safety and the tenure of course dropped like 3.6

rapidly so now the question is are markets going to lead the FED going forward and there's that chicken and egg game so the Fed so far has been leading the markets and the markets haven't puked when the FED has continued their rate high campaign will If the Fed stays the course and the markets are calling for a pivot we're expecting a pivot how does that disappointment translate into risk assets pricing rum this has been uh fantastic and your your wealth of knowledge and traditional finance and the banking system has uh been super helpful for us as we're kind of learning all of this through the lens of crypto through the lens of D5 and that's why I want to on the last

question for you as we as we close this out is um I know you are as familiar with crypto and D5 as you are with um traditional markets and the banking system could defy have fixed this is crypto the solution to these sorts of problems how might we rather than getting blamed for banking crises that weren't precipitated by crypto how might we paint the case to finance the banking system and Treasury and palate everyone else that crypto can actually help with these sorts of problems there's a positive story here for crypto the 2008 crisis would not have happened if you settle Securities on chain you'd have the transparency you'd have the

liquidity you wouldn't have the counterparty risk and you would have had the instant settlement what does defy represent it represents payments it represents lending settlement and custody so there's an incredible opportunity for crypto to strengthen our Banking and Financial markets I wrote an op-ed On The Wall Street Journal in Q4 uh by the way with former SEC Arthur Levitt fun fact he was on the board of bitpay by the way first crypto Bitcoin so not all SEC chairs are created equal four looking guy uh and there's there's an opportunity for crypto but we need policy to advance and we also need to invest in more institutional infrastructure there's a reason why Genesis existed defy was an

Institutional grade uh and so we need more engineering more technology and we need a policy environment as well as a positive vision for crypto the values for crypto censorship resistant lower transaction costs those are noble qualities and they improve the quality of life for ordinary people Ron are there more of you out there straddling these two worlds they're uh yeah look I think there's a big flow of people from tradfy into crypto Trad five people uh uh look we we like technology we we're forward-looking as well I promise you you know there's there's quite a few of us out there that's awesome tell us a little bit about uh your company moving out and what you do sure I'll be brief thank you you know lumita is we're building a web

2.5 private bank so we believe crypto grows the more interacts the real world as opposed to like a dragon eating its own tail with defy expands and contracts like according look at like maker for instance so we're building a private bank we're focused on the top you know one five percent of the crypto market and we're providing service and Investment Management we're helping them manage uh how to generate yield securely and compliantly uh through traditional Securities uh as well and we're also helping them with alternative Investments the interesting about cryptos like the way you made money in crypto previously it's really investing in early stage Venture because those Venture firms have a structural

Advantage due to Securities laws because they can legally participate whereas you can't do an Ico so we're building a private bank we think there's a gap in the market for a trusted institution we come from crypto we come from tradify you know my investor base includes Regulators like SEC chair Arthur Levitt uh Raj Dante former tragedy advisor also crypto natives like Mike dudas and Ryan sulcus you know we think that's an opportunity uh we're excited about the promise and potential of crypto and we want to play a role in in in leading in that area well you are very well positioned it's a perfect place to be kind of bridging those two worlds and and making sense of uh the banking system for crypto Natives and for crypto natives to to help kind

of translate to the other side too it's it's great ROM thank you so much for joining us today we appreciate it thanks for having me thank you Ryan thank you David be well cheers of course gotta end with this bankless nation none of this has been Financial advice gotta end with our traditional risks and disclaimers but I'm gonna change them up this time crypto is risky but so are banks all right you could lose you never know we are headed west this is a frontier um it's not for everyone but we're glad you're with us on the bank this journey thanks a lot