Why the CME Is Suing Its Own Regulator Over Crypto Perps

Transcript

Hello everyone. Welcome to Bits and Bips, where we explore how crypto and macro collide one basis point at a time. We're here to discuss the latest in the worlds of crypto and macro, but before we begin, a quick commercial break. >> Fidelity has been investing in blockchain since 2014. They're not wondering if digital assets will shape the future, they're hiring the talent to help ensure they do. Explore opportunities today at crypto.fidelitycareers.com. Fidelity is an equal opportunity employer.

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Bips on Unchained, no more full episodes. You can get links to all of the dedicated channels with the full episodes at unchainedcrypto.com/bitsandbips [music] spelled b i p s. Thanks again. >> All right, everybody, welcome back. As always, I'm your host, Austin Campbell, high scholar of Zero Knowledge Group. I'm here with my co-hosts today, Raoul Pal Walia, Maelstrom Wealth, leader of Lumida, and Chris Perkins, the golden hand of Franklin Crypto.

We are not going to be joined by Joseph Shalom, however, thanks to some scheduling and market difficulties, but another time. However, before we get into our usual topics, I want to take a moment here and say, Chris, congratulations. So, as of midnight, Chris is officially the head of Franklin Templeton after Franklin Templeton completed its acquisition of 250 Digital. Um this is going to be fitting for our first topic, but before we go there, Chris, one of the themes we've been talking about for a long time on this show is the collision of decentralized markets, traditional markets, and all of these technologies coming together. You are now sitting at the intersection of those two things.

So, do you want to give us a little bit of what Franklin Templeton Crypto is going to be doing, what you're thinking about, and what you're focused on? >> Yeah, we've we've all been in this space for a really long time. And by the way, thank you, Austin, for the wishes. Thank you to the Franklin Templeton team for the professionalism in helping us onboard. I mean, these guys are amazing. They've been in this space since 2018. And I'm walking into this like foundation that's been set. And my partner, Seth, Tony, and I, we're we're here to build. So, it's going to be awesome but I feel like you make this great point about the cycle.

And having been in crypto for for years, I think we've all been in it for well over five years. Um back in the past, you kind of had to choose, right? You either go into crypto or you stay in TradFi. And we know that the TradFi guys were building for the last, you know, few years. And and they've been building like crazy. I mean, this is like the quote institutional cycle. But you couldn't have both. You either had and like, you know, I went full degen, went into the full native space, really, really loved it, learned a ton. Um and I was obviously prior to that, I was I was in on Wall Street for many years but now's the time when you can actually do both.

And and watching that collision come together full-time, and to the credit of Franklin Templeton, when I'm like, "Hey guys, this is how to be successful, these are the tools we need, this is how we operate, these are best practices, they've been like, yeah, let's go for it. You know, we'll make exceptions, we'll figure it out. And so, this is the first time I think in years where I haven't had to choose one side or the other. It's like, yes, let's do both. And like, that's pervasive across every institution I'm speaking to. I was out with a buddy of mine who runs a big TradFi um institution, one of the largest in the world. And he's like, you know man, I just engaged this partnership with a crypto native big big crypto native name,

and like, we're able to give them FX solutions that they never had. Because like, they didn't realize the sophistication and might of the of the tools that that TradFi bring together. We can save them, you know, a ton of money on FX by doing it, you know, in a more sophisticated way than they would doing. And so like, you're seeing this collision happen in real time. Sophistication is coming out on both sides of the equation. You're seeing um efficiencies, cost savings. Um and so like, it's just a super interesting time. And so, the other thing is, you know, I've been in this space for I don't know. We we like you said, we closed at 12:00 a.m.

You know, the the interest now from institutions saying, you know what, this is what we've been waiting for. I need a company that can help guide me through the space. Everything from like, hey, why what's a tokenized money market fund and why is that better? Why is yield to the minute important? You know, as you carry through to like growth equity, like, I need someone who can scale with me, who can help navigate me across the space. And so, it's just like, it's just such an interesting time. Um and it but it's not unique to Franklin, we're seeing it everywhere. I'll pause there.

>> Well, I want to drill in on something you said, which is you're seeing all kinds of interest. And I want to get a a bit more specific, which is where is that interest right now? Because to me, you know, again, as another person who's been in this space for a while, I think there's been this narrative since 2018 of quote-unquote the inevitability of TradFi adoption. But then if you're really a TradFi person who looks at many of the products being built, you ask yourself the question of like, why would I want to adopt these? Right? I remember being at a large bank that's an employer of both, you know, you and I in the past, Chris, and having people come pitch me stablecoins instead of using our own deposits. And I'm like, wait, so

your game plan is I give up my net margin to you and use your thing and charge any fees for it, and you think that's an upgrade. So, I want to ask you, like, where Let's get a little more granular. Like, where is the demand right now? >> Well, I love the stablecoin example, Austin, and you're one of the foremost stablecoin experts in the world. Let's break down what a stablecoin is. You give me a dollar and I tokenize it. And you're going to do that because I get this incremental value through tokenization that allows me to settle it anywhere anytime anyplace.

But in the background, that person who's the issuer is keeping that interest. They're They're investing it in treasuries and they're making a ton of profit. And so, you know, I guess the first phase of this journey is, "Wow, that's pretty cool. This is novel technology. I can settle it anywhere." But then as the sophistication comes that I was talking about, it's like, "Wait a second. I want that interest, too. And I can still move a tokenized asset with interest anywhere in the world, anyplace, anywhere." Now, regulation needs to think through it. We've talked about the risk differences between, for example, uh money market funds and stablecoins. Um not so different, right?

But as that sophistication is coming together, yield becomes very, very important. And so, you know, one of the challenges that stablecoins are going to have to overcome is, who wants to hold them? And and I've been having, you know, those conversations as well, where I'm like, "Hey, um even parts of the government, hey, I want to buy, you know, your securities with stablecoins." Well, we're not ready for that yet. What am I going to do with them? And so, I think that has to get worked out. The incremental utility besides payment. And I think the regulators and the legislation is always designed stablecoins as a payment instrument.

It's not supposed to be held. That's not was not the design goal from a policy perspective. And so, the question becomes as this sophistication comes together, why should somebody else get that yield when it's when it's my dollar? And I think that we're at the beginning of this this journey. Um you know, the press release said that the deal was consummated um with us um in in in Benji, which is the Franklin Templeton money market fund. So, I think that's a really interesting, innovative example that we probably haven't seen before, um which is pretty cool if you're in my shoes.

And Ram, I think we may have just lost Austin. >> So, what are you seeing on the on the money market innovation side? Is there a real threat that stablecoins, which are a novel innovation, could be disintermediated by a tokenized money market product that provides yield to the owner? Could we see money market be a source of kind of a money? >> You know, I it's a it's a fascinating question just through a principles lens. And look, the first thing is these are different products. One is regulated under the genius act. The other one is a security.

Um I think when you step back, the question is always like, why? And maybe we'll talk about this later as we talk about the difference between a swap and a future. Like, why does it matter if the if you you really should be looking through a risk lens? Um but to the extent um you know, individuals can transfer securities between themselves, I think there's some viability there. Um you know, working closely, obviously compliance comes first. Um but I think there's some viability in being able to add utility to yield-bearing products um by exchanging them peer-to-peer. And again, Yeah.

>> Yeah. >> Would you rather have What which would you rather have? >> Consumers Consumers would prefer yield. >> Consumers What are we talking about this all the time? What do they like? They like leverage and they like yield. Those are the two things they like. This is just a basic yield product. >> To push back on that for a moment, though, I think that's very true of US consumers and institutional consumers. Like, part of it is the path dependency of how we got here, which is to say, remember of the current holders of US dollar stablecoins, the supermajority of them are non-US persons. Right? And if you're getting out of like the Venezuelan bolivar or the Turkish lira, the reason you never cared about interest is the FX trade dominates the interest component, and getting out of your local currency in

your local system was the goal. So, if you look at Tether, if you look at USDC, these have been very good products for a subset of consumers who have that specific concern, but it's actually a terrible product for like Starbucks. Right? Because even in their gift card program, they're collecting significantly more of the interest. So, I think one of the things that the crypto segment is about to learn as people like Chris and the TradFi folks come in with tokenized money market funds is that customer segmentation is a very real thing in traditional finance, and that there are not monolithic preferences for transactions. Like, people definitely have different things

they care about. So, if you think the products you've already built are going to be sufficient for call it all the future people coming in, you've probably made a terrible mistake. >> The question crypto always goes back to the same question. What's the utility? What is the utility? Now, Tether and Circle, they have some good utility. They're accepted in DeFi. You can borrow, lend. You can get you can generate yield that way. You know, in certain cases, you can pay with Tether in certain countries. And so, that is the question.

Can I do something with this asset? Do I sit there and hold it and does it accrue value to me cuz it gives me yield? Or can I give it to somebody else to pay for a good and service, you know, in whatever form it is? That's the race. And like for a while, I thought, "Hey, everyone is going to come out of the woodwork trying to issue their own stablecoin." That may or may not be the case, but that's not the long game, right? The long game is you're going to have a couple of these things that are out there and they're going to win that utility challenge or people will accept them for goods and services. One thing you can't do today, you cannot buy a Treasury bill from the US government with a stablecoin.

That needs to change and I hope it does. Um but that that's the example of utility that I that we need to see. >> I agree with that. I think the other thing we're going to run into is as we start climbing the ladder on sophisticated financial objects, the bar for both craftsmanship and deployment gets higher and higher. Like Chris, we'll talk later about futures and swaps, but for instance, margining interest rate derivatives with you know, call it any sort of collateral is a very different game than buying a sandwich.

>> Yeah, look, collateral is an incredible part of the utility that we're talking about. In traditional markets, you generally want yield. And so, the sophisticated clients will pay will will will will use securities, treasuries, yield-bearing instruments to pay that collateral so they can receive the yield. Typically, if you post cash, you know, somebody's making the yield and usually it's you may get a little bit, but somebody's going to make more. So, that really comes down to the utility that we're talking about. Now, I do think certain technologies are already ubiquitous like tokenization.

Right? There are different flavors of it for sure. Eventually, that's commoditized and off you go. But, utility utility utility, that's the game whether you're money market fund and you use for collateral or you know, gosh, wouldn't it be great if you could use it for variation margin as well. >> Yeah. >> What what what why can't you? It's It's not like it's going to lose its value likely based on how it's regulated. >> I think there's real potential around tokenized money market funds for replacing uh stablecoins for a few reasons. Here's a simple analogy. We walk around with our wallet today, you got cash in your wallet, and it's lowering value due to the inflation rate. A better product is you've got tokenized assets

that are earning yield even while you're not consuming them. So, here you've got yield, you got a counterparty in the US government, and you don't have issuer risk, and you don't have to worry about the FDIC $250,000 limit. So, this seems to me a very novel new trajectory in American finance where you're going from uh you're redefining money. You're defining money in terms of interest-bearing assets, which historically were securities.

And it's that crypto technology that made that possible. It's very It's very interesting inflection point. I'll just study back how this unfolds in the next 5 years. >> Yeah, the other thing I'm thinking about we've talked about this like these tokenized bank deposits. Um would love your takes on it because I'm trying to I've been thinking about it for a long time. Typically the yield there's two things you don't get with a fractionalized bank deposit. You don't get the yield and and it seems to be more risky than other instruments because of the fractional exposure that you're taking to the bank. I'll be it you know you have the the FDIC insurance up to a certain amount. So So perhaps for certain amounts it's the risk is actually pretty

good. But how how do you see that playing out? And and you know you guys are well versed in the space. >> I'll go first I guess. I think tokenized bank deposits kind of sit in an interesting spot for two reasons. One kind of because of the banks own lobbying they are clearly excluded from genius. Meaning that they are closed loop instruments. To hold a bank deposit from a bank you must be a customer of that bank. You must have onboarded with that bank. Like you know I used to be at JP Morgan and City. Chris you were at City. Rom you've been at Cross River.

Like if we're thinking of a bank they don't have this concept of I have somebody who's not a direct customer of me holding something where I have assets on the balance sheet. So one is there's a real structural difference in how you can move the money around and to whom between a stable coin type object or a tokenized bank deposit. But two I think it's starting to drive home something that we've been trying to ignore as hard as humanly possible which is the implicit like full guarantee of the too big to fail banks. Because taking a tokenized deposit from JP Morgan when you're over the 250k limit versus taking it from a small local bank

in say Idaho is likely to produce a very different outcome for you if there's a scenario where the bank gets called impaired. And so, part of what I think is restructuring the payment system in the way that we're working on, quite frankly, to make it more fair and more functional, which is a thing we should do, is going to reveal kind of the inherent problem that we've had post-2008 with the too-big-to-fail banks, which is the call it large implicit guarantee in the value of that for the large banks.

>> Great question, great thoughts. So, Ron, I think you know, these tokenized money market funds are like private versions of CBDCs in a way. It's government credit risk wrapped by a private issuer. >> Yes. Yeah, for the too-big-to-fail banks. But for a small bank, it's unwrapped private credit, right? It just like sits there, and either it explodes or it doesn't. >> The losers here are small banks, regional banks. >> Yes. >> They don't have an edge here.

>> And that's where I think there's going to be a forced discussion, cuz if I'm anybody outside the top 10 to 20, I'm probably at this point agitating with my banking regulators, you need to either restructure how the FDIC works, or when the large banks fail, we expect you to let the uninsured deposits go. >> Yes. >> From the From the advocacy perspective, the ABA, the banks seem to be hanging together, whether it's the G-SIBs or the community banks. I would imagine at some point there should be a schism. Like, right now they have this common enemy in stablecoins for some reason, which I think when you look at the numbers and we doesn't make so much sense.

But um at what point do you see that the community banks saying, "Wait a second, you know, the G-SIBs are the problem." We haven't seen that, and maybe they don't think that. Maybe they're too dependent on it. I don't know. >> I mean, I think this is my point. I think the awareness is now growing as they've seen how this debate is playing out, and how consumers interact when all of this was private, and you couldn't see these things sort of happening right in your face, it's easy to ignore them. But the great and terrible thing about public blockchains is the public part. So if you have deposit tokens trading on there and you see people greatly disfavoring community banks in favor of like SIFIs, at some point we got to ask some questions, right?

>> Risk is like for Good. We should just define what what G-SIB is a global systemically important those are the big guys. Austin perhaps explain what a SIFI is. >> Yeah, a systemically important financial institution. All of these are terms that essentially attached to things that are in the bucket of too big to fail. That is to say if it fails, the damage is so catastrophic, it's better to bail it out. So some canonical examples of that sort of thing would be like the very large clearing houses, obviously DTCC itself, JP Morgan, Citi, Wells Fargo, things that if you rip them out of the financial system in sort of disorderly

fashion, it's likely to do a huge amount of collateral damage to all sorts of things in the American economy. >> So it's like what what people are thinking about strategy for Bitcoin then? >> [laughter] >> I I would argue bigger than that cuz here's the reality. If Coinbase goes bankrupt, it's fine. >> That's one of my frustrations is like the fact that people are trying to people continue to try to centralize these decentralized networks. It's just like they can't help it. Like we're even seeing that with people critical of the EF um the Ethereum Foundation, which is a decentralized network and saying oh, you know, we're going to have a second foundation. That's great. There should be there should be thousands of nonprofits in Ethereum over time. But yeah, we'd love to try to centralize things um that should be decentralized. Sorry. I I

I digress. >> No, it's inevitable. >> I'm on course. >> I think you're right, Austin, that it's inevitable the FDIC policy will be updated. You're going to see more nationalization and socialization of bank credit risk through higher limits on FDIC insurance. It's the only resolution to this. I'm not in favor of that, but that's just how it has to go. The small and regional banks drive the most small business lending. The big mega banks do corporate lending. Small businesses drive job creation. The banks also have a a major lobby in DC.

And they have an important role to play. So, regulation hasn't kept up with the current innovation, but it's also hard to update. It's just to see how things settle out. >> And the government's taking a more active role in the AI space now, too. I mean, this we're not seeing this trend reverse. >> And Warsh is on the ball. I mean, he's very tech forward. I mean, as far as I could see from the FOMC meeting. So, I think you got the right leader there to unpack this. >> So, speaking of tech forward things and moving the financial system forward, let's talk for a minute about tokenized stocks. So, Coinbase launched one-to-one backed tokenized US stocks for non-US users and has been leaning hard on the real part

of that. Um, they are backed one-to-one by shares in custody. Holders own them, trade them, and {quote} redeem on chain. Dividends paid automatically. They're for non-US persons with a full rollout slated in August per Crypto Briefing. Uh, Brian Armstrong framed it as actual ownership on change. {quote} "Not synthetic exposure derivatives or IOUs." Is what is coming out around this. Um, it's part of a big product blitz from them as they try to become the everything exchange, but let's talk about what real means. So, the current X stocks issued Coin X is a tracker. It's basically debt with price exposure. You don't have voting or

dividends Um, directly paid. There's some form of rebasing and you can't legally claim the share. Um the realist model would be there's actually a token that the share represents, right? A literal security entitlement. So to speak. And there are models around this. So if you look at very native issuance where the token is the SEC registered share. A good example of that is Superstate where Galaxy tokenized its own Galaxy stock this way. There are custodial wrappers, X stocks, Ando Global Markets working with I think it's Alpaca um to have the actual shares. And then there's funds that have been tokenized

and sometimes put in wrappers, the securitized model, or Franklin Templeton Chris for the money market fund where you don't have a right to redeem for the individual underlying securities, but you do own the actual fund share. And so This is sort of I'm going to call it fragmentation [snorts] as we get into this space as people trying to do different models of different things. So what I want to start with and Chris, I want to start with you in particular given your background. What is real tokenization in this space as people like confuse this topic often and what do you think good looks like here?

>> I think it is step further. I'd say what is crypto? Crypto {slash} tokenization, whatever you want to call it, is just a wrapper. It's a wrapper that gives anyone in the world with access to the internet the ability to have to to to to lay their hands and lay claim to that to that property. Uh it's just a wrapper. The question for investors or retailer or whomever is what's underneath that wrapper. And so you're starting to see these different flavors of {quote} equities. Um and and I think this is a natural phase. Everyone gets all excited about equities, $127 trillion market. The bigger prize is in derivatives. We're going to get to that next, but okay, we're

Everyone's focused on equities for now. It's very, very important. But, whether it's Bitcoin, where you're wrapping, you know, kind of energy, Ethereum, you're wrapping this gas product that allows us to power the network, you know, these are tokens that move around. You got to look underneath. Now, you have the digital twin model, where it's like a stablecoin. You take some treasuries, you lock it in a box. You you you create that token on on that receipt essentially, and off it goes. Again, what does it do? 24/7 real-time settlement, just like every other token. Or you can do something canonical, where that is the bare instrument. Um, you know, there's a lot of things to consider on, you know, which product is better. People are like, "Of course

stablecoins have to be the digital twin because of security. If it gets in the hands of a bad guy, then I can just take the treasuries back." Uh, it's not as easy as that, because there's this latency thing, and people will swap and get out of town very quickly. But, at the end of the day, it's about what's underneath that wrapper. Um, we've seen from the beginning people tokenize SPVs. Are those Are those tokenized equities? Well, kind of not really, because you're actually tokenizing the SPV, uh, the special purpose vehicle, and you're getting a share in that entity with the stuff underneath. You know, and that's why, like look AI comes into play here. If you're looking at a about in the fine print, you have to understand, you know, what am I getting exposure to? Is it Is it the Is it a wrapper on a wrapper? Is it

like Let's look at ETFs. You know, what is an ETF? It's a different type of wrapper that takes things and makes them into a security. Well, you could also take um a token You you you can take an ETF and tokenize it in the future as well. And so, it's like It's all about the wrappers. The value comes from what's underneath. And, um, I'd love to know how Ram is advising his clients, uh, on these products. >> Well, I think this Coinbase move is really about market expansion and customer expansion. They're going to have to international market. The demand for US securities is significant. The best companies in the world are American.

You can look around the world and countries will have one or two uh hero companies, whether it's ASML, SK Hynix, uh Nubank, or TSM. So, the demand This is about tapping into the international demand for US securities. There are other players out there like eToro uh that are doing this. Uh I I view this as Coinbase's way to tap into that market opportunity for US market, I don't see it as unlocking much incremental value here. It's not going to change uh how people transact. There are opportunities to tokenize and unlock value, but it's not in tokenizing publicly traded liquid US stocks. I

mean, there is opportunities are talked about around cross-margining, and can you you know, pledge your private credit risk in a token and use that as collateral against your liquid securities. Like, all those are are great opportunities, but this specific innovation doesn't get after that. That specific innovation is after the international market. >> I would also hop in to say in addition to the international market, a lot of the value here is probably more on call it the institutional side of things as opposed to the retail side of things.

The reality is retail can already trade stocks fine in the United States. If you want to open up a brokerage account, that is not the blocker right here. But, if we do think back to things like delayed payments and delayed settlements leading to a trading halt with GME through Robinhood, right when that whole thing was going on, here is where tokenized versions doing real-time gross settlement can help a lot. Because now you don't have this giant sort of rolling unfunded liability that starts disrupting markets. So, as I look at these structures, as I look at these linkages, as I look at the distribution, the part that I'm excited about is fixing a lot of our piping problems within traditional financial markets. I

mean, Chris, moving beyond just X stocks for a moment, right, and thinking about the implications of having the actual shares tokenized on chain, this opens up new vectors and scales for things like securities lending, like margin and leverage, but also tracking, right? There's the constant meme of oh my god, is naked shorting going on? How much naked shorting is going on? Well, if every token is on a blockchain that's observable, that's a very answerable question.

>> Yeah, fractionalized dividends, too. What if you get dividends, rather than have like trade X dividend date, what if you get an accrued dividend to the a minute in time? Like that's That's what hap- That's what's That's what's happening in money market funds today for tokenized money market funds. >> I mean, you couldn't you could in theory have the dividend trade as like an attached claim separate from the stock, so we don't have to worry about clean versus dirty and embedded pricing. >> You can program anything. Size, all the things you're talking about. Um it it so gives you a lot more options. And not to mention the ability to directly list these entities without going through intermediaries, which is I think going to probably overhaul our capital markets over time.

>> Okay, so I want to flip this around the other way then, cuz I think it will be valuable for the audience to hear from you and Ram on this one, too, which is we asked what good looks like. What does bad look like here? Like what are models of tokenization we think might be a problem, right? And Ram, I know you've had views on some of the AI SPVs and things like that. So, you know, if we know what good looks like, what are ones that are likely to be deficient or fail or prone to call it manipulation or fraud. >> I think Chris identified well. You have to have a good quality asset underneath and you have to have a good issuer and you've got to have a reconciliation between the on-chain data and the real

world flows. So, here's an example what's bad. It's like Goldfinch. You guys see this? Major venture backed. I'm not going to bash Sam Altman this time. Okay? >> We're still We're not We're only halfway through the show. >> segment is next. >> Yeah, we have some self time. >> Oh, I think I think Sam took out Rob again. >> I think Sam took him out. >> It's the running gag. >> That's right. So, um >> Yeah, like that that was a So, so you know, so I'll I'll be very brief on this so we can move on, but the the point you know, if you if you tokenize a bad asset, Goldfinch was lending on collateral like a motorcycle. So, you're lending to a

borrower who literally rides away with your collateral into the sunset. Okay, that's like a that's a bad loan. It's a bad issuer. The data on-chain didn't correspond to reality of cash flows. >> Are we offline? >> No, you're good. >> You're good now. You You broke up as soon as you said Sam Altman because they're monitoring our comms. >> So, so that's an example of a bad token, right? Like you can't tokenize something and create gold out of bronze. It just does not work, right? So, bad credit risk, bad business model, bad issuer, bad data, then bad news.

Um so, you know, it goes back to the It goes back to fundamentals. >> Yeah, for me, give All things being equal, if you have a digital twin model and a canonical model, I think the canonical model wins every time. Why? Because why would you pay for the custody fees, the the legacy transfer agent fees, all the other things that you're trying to abstract. Um I just think that that's maybe not now, uh but in time that's probably going to win the Kanaka model. >> All right. So, before we get to our next topic, which is going to be the AI trade, we're going to take our second ad break and we'll be right back.

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No more full episodes. You can get links to all of the dedicated channels with the full episodes at unchainedcrypto.com/bitsnbips [music] spelled B I P S. Thanks again. >> All right, everybody. Welcome back. And we're calling this segment is the AI trade rolling over. So, let's talk about what's going on in the market. Chinese models have gone from 1.2% of global usage in late 2024 to by some measures probably surpassing US models in weekly token consumption.

Um the cost is a significant driver of that. DeepSeek is 42 cents per million output tokens versus something like $75 for Claude Opus. Um semis are seeing a rotation as well. 2.3 billion in single week outflows in late May. And Nvidia has topped and slid a little bit from the last time that we've had this discussion. Data centers, hyperscaler CapEx remains large. 725 billion, 64% gain year-over-year but cancellations are now starting to happen in a few places, and we're also seeing

significant reports of delays. So, Rob, I want to start with that before we get into some of the extra components on what's going on with the government. Let's just talk first about the market segment. >> Yeah. >> Are you making of what's going on there? >> The number one question to understand the direction of markets is this. Is the data center cancellation rate going to increase or not? That's it. That's the whole question. The demand for chips, the demand for infrastructure, the demand for energy is there. The hyperscalers are trying to hand the money out the door to Micron and Nvidia and TSMC and Broadcom.

But, you are seeing higher cancellation rates, an increasing public backlash, including from politicians. And by my account, I believe all the presidential contenders uh in the midterms, which will come into focus on the other side of the bicentennial, are voicing some concerns around this. The other constraint is at the energy layer. We saw this deal that was announced today in the Wall Street Journal. Chevron's providing a 2 plus gigawatt data center for uh OpenAI, which is tremendous, right? There's no There's no data center that consumes that much energy on the planet today, to put that in perspective. Like a 25 megawatt is considered like a mini data center. 900

gig 900 megawatt is large. So, the demand for energy is emerging as a constraint. Utility bills are going higher. Uh so, that's the concern to watch. I think within the semi space, you're seeing names like ARM at 100 times earnings. Uh Sandisk has gone up 900% nine times, like year-to-date. By the way, we think these names are still relatively affordable, like 14 13 times forward earnings. Micron is still you can make the case it's cheap. They got a backlog for a few years, and so is SK Hynix. So, the way I look at it is that positioning within semis matters.

Um however, you have seen this market where semis is the only category that has outrun the S&P. Every other sector in the S&P has lagged semis. So, it's like semis have been this liquidity drain across every other sector in the market. The last time we saw this was in May, June, July 2024 when Nvidia announced their earnings and it had the same liquidity suck. It ramped for a few months. Everyone owned it. Everyone felt like they're participating. And then it lagged for a few months. So, all this say, I would just say the balance of risk is starting to come into focus now.

Uh and uh you should just be mindful of that positioning in names with value in semis. I might actually submit Nvidia to the value investing club. The thing is like 20 and 1/2 times earnings. So, it's not as if all semis are overpriced. But, you have seen aspects of the market get ahead of itself in some some pockets of euphoria. >> And Sam Altman? >> [laughter] >> I mean, he's uh what's he up to these days? >> Oh, come on. >> I don't know. I I've been >> I Well, I actually want to poke a little bit on this thesis, which is for the RAM companies, for Nvidia, for the power companies, is it a big component of that? How much is prepaid versus how

much is just contingent? That is to say, if you don't already have the money in hand, you're betting on the credit of the hyperscalers, which means that you're betting on them continuing to exist to spend this money to finance themselves. And what I look at here is we're sort of unwinding this whole trade and it's a reminder of mechanics of when things work and when things go wrong. If you've made commitments for future spending that are signed, that are based either on already paid cash or companies with large positive cash flow they can internally finance, like say a Google.

Right? I am not terribly worried about those. But if you're taking commitments that are unfunded or from people who need to take on debt to pay them or raise additional money, you're taking a ton of credit risk. And so when I look at the forward price to earnings of these, I'm saying if everything continues to work, right? Cuz not all of that is prepaid. >> Yes. Yeah, I agree. I mean there's a there's a deal between Anthropic and and Micron today. It's a quote-unquote strategic agreement. Micron will work at Anthropic work with Anthropic to optimize memory and storage for cloud training.

And there's a multi-year supply agreement. So Micron have more visibility on longer-term cash flows. They aren't going to take credit risk uh on Anthropic. They didn't disclose the dollar numbers. Uh the bigger question there's just political risk. >> Yes. >> The public and politicians can stop voluntary trades happening between parties. I don't believe that's priced into markets. >> Let me add to that. Um one thing that I've noticed is that it's almost never when Republicans and Democrats agree on something.

Almost never. But when it happens, it's very powerful because they can get something done. And right now I'm starting to see things aligning where you know, look what just happened with Mythos and we should talk about that. I mean, it sounds like there was some really scary stuff that went down, which makes me think that we really need to stay at the forefront of this technology. But you're seeing Republicans getting involved and taking action. You're seeing Democrats also, like I said last week I was with Hillary Clinton and she said, "AI is keeping me awake at night." You know, she's the mouthpiece for many of the of the Democratic platform still.

She's super involved in in in that sausage making. So, you're seeing this alignment now around AI. Um what does this mean if you're an investor? Well, every time I've seen regulation come into effect, you see consolidation. The the you see you see consolidation around the biggest players and there become then then there's a moat and the big get bigger and that's it, guys. So, that's what I'm looking out for. >> So, to pile in on this just to set the context. So, Mythos, the NSA, uh per The Economist, General Joshua Rudd told Senator Mark Warner uh on June 11th that Anthropic's Mythos, quote, broke into almost all of our classified systems not

in weeks, but in hours. This is the same week that the admin banned all foreign access to these models even for the Five Eyes intelligence partners, and Anthropic was having to disable things. So, if we're talking about national security, that is what people are hanging their hat on now. There's obviously a big question of what they mean by breaking into systems and what level of access you have to get that done. There's a lot both said and unsaid in that statement, shall we say? Like, I don't believe they broke like traditional cryptography. I find this is more likely to be things like on-device on-device exploits and things of that sort, but fine.

Point is, Chris, we're having this alignment of forces where people are bad about data centers, energy usage, power bills, hardware prices are now going up. They don't really have a business model that's paying for all of these things yet at the scale they're building out, but they have faith that they'll get there, but also now they're starting to break stuff. Right? This is a very unusual mix, as you've said. So, the political risk is real, but let's also talk about What is the right way to say this?

What is going to be the political response function of Republicans and Democrats to this popular view of these guys are acting very arrogant, raising all of our prices, and appear to be producing primarily cat videos. >> Yeah, it's super tricky. Don't forget people are very nervous that it's going to take away all their jobs. The content creators hate it because the AI is creating more content though they'll say it's slop. So, there's just a lot of anger right now. And this is a very natural response, you know, human response to new things and new technologies. I think over time you're going to see a new stasis. Like, we never had like influencers or KOLs growing up, you know, there may have

been a couple on TV, but that entire industry was beyond our comprehension. So, you're going to see new industries emerge um you know, new capabilities emerge. Maybe people like philosophers are going to be the most, you know, in-demand type employees going forward as they start to interrogate, you know, these models. So, I think in time we're going to find a stasis. Um in my experience, the regulatory response typically is always super aggressive and conservative at first, and over time they pull it back. We see it with bank capital rules and other rules.

Um I hope we get it right because remember this technology is so powerful and so defining that people in other parts of the world are going to continue to accelerate and they're real national security issues if if we don't do the same. So, I hope that it's done thoughtfully and and in a way that allows us to maintain, you know, leadership across the board. >> I hope they're going on offense. So, looks like they're identifying vulnerabilities, but have they deployed Mythos to identify vulnerabilities in China, Russia, and Iran?

I mean, China is flagrantly hacking American companies and stealing IP and defense technology all the time. How can we never hear about the story where they're using this technology to go on offense? I mean, now now is the time to you know, say, "Okay, we we we got the IP. We won the war." Use that moment of time. >> Well, we just we did seize quite a lot of cryptocurrency from the Iranians. Um but but you make a great point because again, what's the bull case here? Vulnerabilities are getting closed pretty quickly.

And yes, there will be more sophisticated models that may uncover new vulnerabilities. I personally will continue to believe that the biggest vulnerability going forward is what it's always been, which is social engineering. Like that's going to get more and more tricky, but the code based vulnerabilities are getting cured. And they like once they're cured, you're in a much better place. >> Where's the China knocklist? Like go go get it now. It's it's open >> about privateers? >> 30 days. >> [laughter] >> Oh boy. All right. So, finally, uh Chris, I think we need to talk about the CME, man. So, the CME has sued the CFTC over perpetuals, which is the incumbent suing its own regulator. So, the CME

filed on June 18th in DC District Court to undo the CFTC's approval of US perpetual futures. It's challenging the May 29th order greenlighting Coin Shares' BTC Perp, um naming the agency and Chairman Mike Seelig, who the CME says, quote, "Circumvented the regulatory regime." Um the CFTC had approved Coin Shares' Bitcoin perpetual with a policy statement letting exchanges self-certify similar crypto perps as futures without prior review.

And the CME says, "These perps are swaps, not futures, and approving them as futures was arbitrary and capricious. Um under Dodd-Frank, this is Terry Duffy, under Dodd-Frank it clearly defines what a swap is and what a future is and when there's two parties exchanging payments to each other, that is defined as a swap. Now, I have a lot of things to say here, but Chris, I'm going to throw the ball to you first cuz I'm sure you have a few thoughts. So, >> Uh there's a lot of history here, Austin. Um Terry Duffy, who I testified in Congress many years ago, I don't know that many, three years ago, something like that. He didn't like perpetuals and he doesn't like them now. Um we tried to set the

stage for changes to market structure that would enable them, specifically around like not needing an intermediary as much anymore. Um and he vociferously pushed back and he said some mean things to me at the time. But we can leave that to one side. Um but if you go back to the history of Dodd-Frank, I think the policy makers got this whole idea wrong. I'll walk you through the history and then why I think it's messed up. So, we had a we had issues and by the way, like back in the day banks were innovating all the all the time. Post Dodd-Frank, we really saw very little innovation across the derivatives front, but now we're seeing it again.

We're seeing perpetuals, we're seeing prediction markets. So, you're seeing these green shoots of innovation again and of course the incumbents don't like it but after the global financial crisis, we had this huge issue with what we call derivatives or swaps. And there was the G20 conference in Pittsburgh in 2009. All the governments were like, "Guys, your derivatives are out of control, these things we call swaps. Uh we want you to report them to a central repository so we can see them. We want you to centrally clear them. We're going to put these entities, we're going to put all this capital in there and we're going to make you face the central entities. And then you're going to want you to electronically execute them so we can see it all. And so their policy response to this these issues with derivatives was was hyper-centralization cuz we didn't have blockchain back then.

And what I think they got wrong was they said, if an instrument is a swap, you have to hold a certain amount of collateral against it. And then they were very prescriptive. It was a 5-day margin period of risk. And let me explain what this means. If I call a swap, I have to make sure that the margin withstands 5 days of stresses, and the stresses are calibrated. Now, why would it be 5 days? Well, because you need to hold um that margin, that collateral, based on the liquidity, how fast you can liquidate a defaulter.

And the fact is, we had really slow operations, we still do to this day. If you have a long weekend, that's 3 days right there. You know, somebody does a trade on a Friday or even a Thursday, you lose, you know, if it was Juneteenth Friday Saturday Sunday this this year, you're 3 days out. And so, if the product's a little bit less liquid, maybe you and it's concentrated, you couldn't liquidate it. So, if you call something a swap, it's 5 days. Futures are 1 to 2 days, um with a lower, what we call, confidence interval. So, you less margin. And I don't want to get too technical, but it's more than two times if you look at the square root of time in the collateralization, but forget that for now.

The problem with this whole idea is that we have some very, very liquid swaps and some very that are and we have some very illiquid futures. And so, you from a principles-based perspective, you should really collateralize something not by what it's called, but by the properties that it has, but for some reason we got that wrong. And now, as we move forward with the CME saying and I'm saying, "Wait a second, these things, they're not futures, they're swaps, so you have to hold more cap You have to hold more collateral against them." The whole idea behind this is to lower leverage.

And let me say this many times in the show, what do retail like? They like They like yield and they like leverage. And so, if you really constrain the leverage on shore, and you say American people can't can't partake in like, you know, perhaps even thoughtful leverage, they're going to go offshore. And my sense is that if you're a big incumbent derivatives exchange, and US persons, you know, can't avail themselves of products, and you're keeping them offshore, that buys you some time. Um, and so yeah.

>> I mean, I agree with all of that, but my other piece of advice to the CME would be you should be real careful what you wish for on this one. Cuz as somebody also familiar with the guts of Dodd-Frank, one, everybody remember the distinction between a future and a swap is at the discretion of the CFTC based on certain factors, which are not the payoff profile or strictly having an expiration date. If you really poke the bear, they have a huge amount of discretion looking at these things. They could easily say "Rolling a futures position is actually a swap, cuz now you have eliminated the expiration date, and it needs to trade like a swap, right?"

And you're not going to like how that works compared to futures treatment. They could also go the other way and say as long as you construct your swap as a rolling sequence of indefinite futures, this is a futures contract. I am also going to point out there are large categories of instruments that are technically within the Dodd-Frank definition of a swap that are clearly not swaps, and clearly were never intended as such. Good examples are tons of stuff in the insurance markets, right? Because they have a reference point, a future payoff, an exchange of cash flows, like all of the components that you would think. In fact, if you're a lawyer and you want to be a real grognard, go look at footnote 719D

in Dodd-Frank, and you can find Congress basically admitting we have no idea how the to deal with these things and we're just going to punt on whole categories of products which to this day have not been resolved. So, one of the things that's surprising to me here Chris and I kind of want your view on is if you're an incumbent being regulated by a regulator of this sort and then you were going to pick a fight with your regulator over something where they were clearly delegated authority, don't you risk one of two outcomes both of which are terrible? One is the agency wins and then it's just pissed with you cuz the delegation of authority was proper, but two is in the current Supreme Court it goes all the

way up and they say one of two things which is either no it means what it says and life insurance is a swap and it's been illegal to trade that thing since 2009. So, rewind that whole market or life insurance is clearly not a swap which means Dodd-Frank is unconstitutionally vague so get rid of all of it. >> Yeah, and it gets more complex in the post-Chevron era as well where back in the day the if if things were vague the tie would go to the regulator. Now, that's been rolled back so like you really got to go back to the law. It's very complex and time-consuming right?

Um I think one other perspective to to have is what are the other incumbents doing? And ICE has announced a strategic partnership with OKX. OKX is very much involved in the perpetual space. Eurex has announced a strategic relationship with Kraken. And so as these dance partners come together um sometimes you can take um a policy issue and at the end of the day it's a business issue. So, I think the other thing to watch as this prevent as this case moves forward is where are their competitors uh and how are they how are they positioning themselves? Um it'll be super interesting to watch. But last thing I'll say is that uh Chairman Seeleg

um hat tip to him, man. He's um he's fighting the good fight. He's what I see is I see a leader who's focusing on principles. And he's saying, you know, I'm trying to do the right thing for responsible innovation. Um and he continues to do it every single day in the crypto space. So, um Mr. Chairman, just want to say thanks again. Um we're appreciative because we know what it's like when we don't have someone who's thoughtful about principles-based regulation. >> Yeah, and I'll I'll close out before we end the show by saying I also know Mike. Right, one thing that I would suggest here is when you look at the position federal regulators have been put in they've been handed a mutually contradictory set of

principles and rules in many cases. And getting to a point where we can standardize those and have a system that works properly is an important thing, many parts of which have been punted on in Dodd-Frank. You know, another good example is prediction markets right large in the state versus federal system. I think many of these things in a post-Chevron world are going to come down to the courts. But I think it's good that we have a CFTC willing to stake out and explain clear positions and put the flag there and then litigate them to see where things end up. What we ultimately need, pun not intended in this case, is clarity. So, I do hope we get there at the end, but I I'm going to

stop us here since we are out of time. Chris, I want to say congratulations again. >> Thank you, sir. >> And everyone else thanks for joining us for this episode of Bits and Bips. We'll be back in 1 week to discuss more about how the worlds of crypto and macro are colliding. Until then, everyone. >> Good to see you, Professor. >> watching and hope you enjoyed this episode of Bits and Bips. Just remember, nothing we say here is investment advice and please check unchainedcrypto.com/bitsandbips for more disclosure. [music]