Transcription
Hello, fellow Rebel Capitals. Hope you're well. I'm back with my good buddy Simon Dixon. Dude, it's been a while. We've got a lot to talk about with this Genius Act. Can you go ahead and, first and foremost, kind of explain what a stablecoin is, and then go into the research that you've done on the Genius Act, and is this something we should be concerned about?
All right. Okay. Yeah. Um, so, uh, stablecoins are essentially a blockchain asset that has the properties of Bitcoin. I.e., you can send it kind of as easy as sending an email, once you know how a wallet address, a wallet, and the system works. Okay. Um, but it's more of a centralized system. So, it's created by a company, a stablecoin issuer. And it's a promise that is audited, where they say, "For every dollar you deposit at my bank, I'll issue a dollar of this stablecoin." And $1 equals one unit. And, uh, therefore, you can send this digital dollar around the world. And if you ever want to come to me and redeem it for a dollar again, you can redeem it.
In the meantime, when they've got all these dollars in a bank, obviously, you don't keep it in a bank. You invest it in a dollar equivalent that pays yield. So, you end up buying some short-term bills and treasuries. Yeah. And you receive yield from your treasuries. They get a digital dollar that they can kind of self-custody, but then it's a centralized company, so it's, it's not like Bitcoin. They can still freeze it or trace it or do things. Um, but you get this digital dollar that you can send anywhere, and, uh, the stablecoin issuer gets like a free ride debt. Um, and so, and so that doesn't have to, so it's like a bank that has a zero cost of funding.
Uh, exactly. Yeah. And so you could call it full-reserve banking, um, if you like. Um, it's mainly at the moment done by fintechs and crypto companies. And the largest issuer is Tether. There's about $165 billion of them. And to give you an idea, um, in any one quarter, I think they did about $26 billion of profit because the higher, uh, the bills are that are paying the rate, the more Bitcoin they get to buy. Um, as they buy Bitcoin, they keep it on their balance sheet. They engage in all sorts of other activities with their excess reserves, not, not the reserves that make up the stablecoin. And, uh, you know, Tether is now more profitable than BlackRock and City Bank, um, with that model. And that's full reserve. They don't even need to engage in fractions.
But is it full reserve, or is it zero reserve? Right? Right? And, you know, where I'm going with that, because if you're a bank, you could say, "Well, I'm full reserve because I've got loans to offset every single one of these dollars that I just created by lending them into existence." And if you're buying treasuries, I mean, it's the exact same thing, right? Except for lending on a mortgage, you're just lending to the US government. So, you know, when people think of full reserve, in my mind, they see this bank that takes a dollar in and keeps that dollar. They don't lend that dollar out. But Tether, I don't know if they're keeping any of the dollars. I think that they're basically lending those dollars out, let's just say in treasuries to the government. So, in that model, is it, is it full reserve, or is it zero reserve?
Yeah, whichever semantics make sense. Um, zero reserve or full reserve, but they are lending it out to the US government. Yeah, they do have treasuries. They have assets to match all of their liabilities. Well, I guess the way to look at it, Simon, maybe would be, do they have risk? Do they have risk? Because if you're keeping that dollar just on your balance sheet and just giving a stablecoin and just keeping that dollar there, then you could say the risk is, is almost zero, right? But if you're taking that dollar and even if it's backed up with a treasury, then Silicon Valley Bank can tell you you've got interest rate risk, as an example.
Yeah. And, I mean, to give you an idea of the risk, that is exactly, it's interesting you said Silicon Valley Bank, because that's exactly what happened to Circle. So, Circle, the second largest stablecoin issuer, um, they audit, they have all their treasuries, but they also had $6 billion at Silicon Valley Bank. Um, yeah. Yeah. That was at the time when Silicon Valley Bank went down. And so there was a, there was a moment when people didn't, you know, know well, what is, what is my Circle USDC worth? And this is the really interesting part. This doesn't require socialized losses or bailouts or privatized gains. All that happens is the, the, the unit, uh, de-pegs from the dollar. So, the $6 billion, so there was about, I can't remember at the time, maybe it was about a $60 billion market cap. $6 billion represented funds at Silicon Valley Bank. Uh, the Fed hadn't said, or FDIC hadn't said what they were going to do yet, and so it de-pegged by 10%. So, one USDC wasn't worth a dollar, it was worth 90 cents to compensate for the risk.
Yeah. And so it's almost like a market mechanism, uh, for if you end up with a bad stablecoin. Uh, the market just reprices it and de-pegs from the dollar. I'm surprised there wasn't a run on Circle because once it starts dropping to 95, to 90, you would think you'd get panic selling and it would just almost implode, and then they've got to sell everything on their balance sheet and realize the, the, the gain or loss. What, what stopped it from doing that?
Uh, well, very interesting you say that. Yeah. And, and that is the risk because, um, they're assuming that their treasuries are worth a dollar, but if they have to dump them at a discount, it's the same thing that happened to Silicon Valley Bank. If they, if everyone's trying to redeem, um, but, yeah, it's a slow redemption process, and then by the time that, um, FDIC said what's going to happen with Silicon Valley Bank, um, they knew that they were going to get all their, that they were good for those dollars at Silicon Valley Bank because, um, obviously they had the, the, the, what was the bailout program called? BLP, something? The BT, is it BTFP? Is that it? BT Bank Term Lending, something Fund Lending Program, or whatever it is. They have all those stupid acronyms. I stopped paying attention to them when they came out with the acronym MILF. Remember that one? I like, who, who did, who was the guy that was too afraid to whisper in Jerome Powell's ear and saying, "Dude, maybe you shouldn't use MILF as an acronym." That was one that they had back during the, uh, the, uh, the survey sickness, we'll call it.
So, yeah, that's really interesting. I've never really thought about it that way because you could have like double and potentially even triple-layered risk from the standpoint of bank runs. So, as an example, you know what? It wasn't just Silicon Valley Bank that was, uh, susceptible to a bank run. It was also the stablecoin that had an account with that bank is susceptible to a bank run. And then if you have those stablecoins at another, you know, effectively fiduciary or something like that, then if this one domino falls, then you're going to get mass selling of this, which is going to decrease the price of the, whatever asset it's issuing or liability, whichever way you look at it, which could create a run there. And you have this massive systemic type of risk that, um, I haven't even thought about that, but that's definitely something that people need to consider.
Yeah. Yeah. So, um, and that's why, you know, uh, this Genius Act, as it were, became a matter for the Fed, or the, the currency, you know, OC regulators, because if you think about it, imagine if anyone can take a deposit at a bank and they can convert it for a stablecoin, in effect, you'd be like, "Well, I prefer the risk." Because with these stablecoin issuers, they publish all the assets, you can see the assets in real time, the market reacts very quickly to what they perceive the price of that stablecoin may be in a de-pegging event, and you kind of have a speculation and an arbitrage based upon the transparency of the assets that are backing that stablecoin, and they're obviously audited and stuff. And so that's another thing that I hadn't thought of, Simon. I appreciate you bringing that up. So, let me just explain that to the audience so they can follow what you're saying there. So, what happens is, if the balance sheet, let's say for XYZ stablecoin, we'll use Tether as an example, if that's, if people can see that in real time, then let's say they go out and buy not just short-term US treasuries, but let's say they buy gold, or they buy Bitcoin, or silver, or something like that. And that, that's part of that 100% backing. Then what people can do is they can look at that and say, "Oh my gosh, they're losing money. Therefore, they don't have that one-to-one ratio because the value, if you do mark-to-market accounting of the asset side of their balance sheet, has gone down below their liabilities if they had to sell today." So then the value of that Tether, let's say, goes to 90 cents on the dollar. And then, but that could be an opportunity for speculators to come in and look at their balance sheet and say, "Well, it's actually pretty solid, and we think that the value of gold is going to go up in the future, and they're holding gold, and therefore they shouldn't be trading at 90 cents on the dollar. So we'll go ahead and buy it, assuming that the value of gold is going to go up, and then they're going to trade back at par." I mean, this is like a daisy chain, a financial engineering daisy chain nightmare for, for me.
Yeah. And, um, so you can imagine there was a tug-of-war where the securities regulator, the SEC, said, "No, that's like a tokenized money market fund. Yeah. That can also have commodities in it." And then the, you know, they were saying, "What, how can you call a stablecoin a security?" Because then we can't use it as a currency, because then it would only be available to accredited investors. And so there was this, but then the Fed was saying, "Yeah, but this could create systemic risk in the financial system because we're dealing with, you know, now Tether is the 18th largest lender to the US government." So these are significant. These are becoming, you know, I mean, it's, it's not big yet, but it's a, a $265 billion market cap, right? And there's, within the Genius Act, clauses that could unlock trillions of dollars. So, it, it became a real matter for financial stability for the Fed, for, um, securities regulators, and all sorts of stuff. And just to give you an idea, though, like Tether, right now, it's got a market cap of approximately $165 billion, right? And then using the fact that it's investing in these short-term bills, uh, which it holds and custodies with Cantor Fitzgerald, it's been using its yield in order to buy Bitcoin. And as the price of Bitcoin's gone up, it's got enough reserves. It's over-collateralized with treasuries, and it's got an additional $14 billion worth of Bitcoin in case there is, um, it ever needed to sell the Bitcoin.
And this kind of gets into what happened in the deleveraging event of 2021 when, uh, we had the whole market blow up in the crypto scam market. And that was because, uh, there was a quote-unquote decentralized stablecoin called Terra Luna. And then Terra Luna was, uh, a lot of the assets were kind of like just a so-called decentralized asset that was backed by tokens, shitcoins, Bitcoin, and essentially Do Kwon that, um, is, is still being prosecuted to this day. Um, essentially became like a central bank money manager, uh, and claiming that this was a decentralized stablecoin while he was backing a stablecoin by Bitcoin. Uh, and then we know what happened, like, you know, when you had the Russia-Ukraine invasion, and then we had the transitory inflation, and, and all those events, when the price of oil spiked, inflation happened, then we had the cuts.
Well, to be clear for the audience, they went bust. They went bust. Yeah, that was a $60 billion, um, wipeout, and, uh, Do Kwon is, is no more. And even Tether, back in the, again, I don't want to give too bad an impression, but we went through our wild west days in our sector. Um, it's professionalized a lot more to now. Um, but there was a day when Tether, they basically had, they ran out of bank accounts. Um, so they used to have Wells Fargo, basically put a ban on all of Tether's bank accounts. They were using Taiwanese bank accounts. They got shut down here, and then eventually they could only find like one bank account in the Bahamas that would serve them, and they got billions of dollars. Uh, they were about to like, think, how can we withdraw this as cash and dig it in the ground or something, literally it was getting to that level because they just couldn't find the bank. And they ended up with like this shadow payment processor called Crypto Capital, uh, that was like the most dodgy of payment processors. And, uh, if you look up Crypto Capital back in the day, the Portuguese, European, and banks basically seized $850 billion from Crypto Cap, sorry, million dollars from Crypto Capital. And so they had an $850 million hole, uh, because the government had seized the funds, and they actually ended up issuing a token to plug the gap, and then they ended up buying the reserves. And Tether was like this, this cat that, you know, with nine lives that eventually got to the point now where, um, it's able to apply with the Genius Act. It's proved the reserves. It's got good custodians, but, you know, it, it was incredible where it is today.
Yeah. I always looked at Tether as though, initially, it very well may have been a scam initially. But what happened is it became such a successful scam that they were able to basically hit escape velocity because they, you know, so many people were actually using it. And I don't think they initially maybe had any intention to be backed one by one or one to one. They just said they were. They're issuing all these Tethers and just creating this kind of network effect. But if they would have gotten redeemed, you know, 10%, they would have gone bust. But what happened is no one, no one really ever redeemed. And so they just kept this going. They kept buying, and then they made so much money on the asset side of their balance sheet that they hit that escape velocity to where now they're just, they're just printing money, and they've got, what, what do you say, $14 billion that's just in Bitcoin? I mean, I would assume that the asset side of their balance sheet is, what, I mean, $50 billion more than their liabilities?
Yeah, I reckon equity. Yeah, I reckon they got, I mean, so, I, I should disclose, like, um, in 2016, there was a hack in their sister company, which was Bitfinex, um, one of the Bitcoin exchanges. Um, and they had 119,000. Very interesting story. This all comes full circle, because they found those Bitcoin in the end, these 120,000 Bitcoin, and the DOJ has got it right now, and that is part of the 200,000 Bitcoin that the American government is claiming part of their strategic reserve. Oh, yeah. But 120,000 of them belong to Bitfinex shareholders. I am a shareholder, so I know that because it was ruled, it was ruled by the DOJ that they're going to be returned to Bitfinex. So, and interestingly, uh, when the Trump, when Trump came into power, sorry, I'm jumping around stories because there's no, this is really fascinating, Simon. When he came into power, he pardoned Russ Albright, and Russ Albright runs Silk Road, and Silk Road was where the Bitcoin strategic reserves, other than the Bitfinex hacked ones, came from. And so, it's all gone full circle where the Trump administration comes along, he's implementing the Genius Act to have a regulatory structure around these stablecoins. Um, the Bitcoin strategic reserves is their strategy. 120,000 of them go back to Bitfinex shareholders. Um, and Russ Albright was released from prison and pardoned, which makes up the other Bitcoin, which is the current American Bitcoin strategic reserves. So, we've hit this, uh, crazy, this crazy stage and been involved in, um, you know, this, this kind of, this crazy story of, uh, getting to the point where we are right now.
But I, I happen to know, you know, that throughout its lifetime, it was a banking problem, and at various stages, they couldn't, well, they just couldn't get the bank account, the stable bank account. Why, why were they so secretive about disclosing or doing an audit on the, the assets?
Pick, pick your conspiracy theory. Um, okay. But they, they would say that they couldn't get an audit because no audit would put their reputation to it, and no auditor would, which kind of is true, knowing the history of auditing. And then at the same time, I'm sure in their journey of running an exchange, um, recovering from these hacks, having Tether that started as this tiny little $5 million market cap token that nobody would use, you know, they had to beg. Kraken was the first exchange to adopt it. Coinbase wouldn't touch it. Uh, but eventually they created like this arbitrage token. And it was once Binance launched that they really got escape velocity because Binance launched in 2017 with no bank account. And so suddenly this exchange was like, "Hey, we don't need to worry about a bank account. Let's trade everything against Tether." The ICO boom happened where all of these shitcoins and tokens and the entire shitcoin casino opened up, and suddenly billions and billions of dollars was coming into Tether, and Tether acted as the bank account for Binance. And then as this market cap was going up and up and up and up, you're going through the ICO bubble, Bitfinex got their bank account shut down, and they were just lit, rich, literally hitting the stage where there was no bank, um, that would receive the money, and then they had to custody their own assets. And you can imagine, initially, they weren't buying high-quality treasuries. I think at one point they had a bunch of like China commercial paper and, uh, various other products and, and gold and all sorts of stuff. So, I, I imagine that while they're okay with an attestation, but if you had to audit the past, I'm sure there's lots of skeletons that, uh, that they, they would rather just say that's a part of the past.
Yeah. Yeah. But to be clear now, I mean, it doesn't matter. Assuming that they've got the assets that they most likely do, their assets far, far exceed their liabilities minus the, the equity, and they own the largest, uh, Bitcoin mining, private Bitcoin mining operation in the world. So, there are, you know, and I mean, the, the sheer number of assets and investments that, uh, that they've made. I mean, this is, you know, this is a private company. Yeah. Uh, that is larger in scale and profit than City Bank and BlackRock. Yeah. I mean, it's the best banking model in human history. Yeah. Because you have a banking model where you pay zero dollars on your liability. You don't pay an interest rate, and you don't really have to worry about demand deposits. You don't have to worry about interbank settlement. You, you don't have, I mean, it's, it's perfect. It's, it's like the perfect banking model.
Which begs the question, Simon, you know, you're talking about how it got to a point when they brought, or they started to team up with Binance, where they didn't really even need a bank account because basically the Tethers were trading as the reserve asset. And, and so this kind of, it's an interesting rabbit hole because then you start to ask the question, okay, well, if this is possible, then what is base money at the end of the day? Is base money bank reserves and Federal Reserve notes? Maybe, but maybe not. Because if the system, like the Eurodollar system, starts settling and trading in a dollar-denominated asset, but yet it's just bank credit, and that is seen as something that is fungible with, or just as good from a risk standpoint as those green pieces of paper or as the bank reserves, then the dollar credit the banks are creating actually becomes base money, just like that Tether, for a certain period of time, and maybe even today, would be effectively the base money within that ecosystem.
Yeah, it, it fundamentally changes a lot, which is why they had to be really careful because if you had an exodus of bank deposits with a user experience where you could convert it to a stablecoin, uh, obviously that's incredibly disruptive, um, as a model, and, um, as bank deposits are converted to stablecoins, um, you're essentially, you know, affecting the money supply.
Go into that, Simon. Yeah, definitely. Please do go into that because, and let me just, I'll tee it up for you here, guys. If you take, let's say, just Tether, and let's assume that Tether was as widely accepted as the US dollar. Let's just assume that right now. So, if you take your dollar, give it to Tether, then they're going to give you a Tether, which you can use as a dollar. It has $1 worth of purchasing power, but then they're going to take that dollar and buy a treasury. So, that dollar goes back out into the system and circulates. So, now you have two tokens, let's say, that are from a purchasing power standpoint, are a dollar. You can buy Chipotle with them. You can buy Starbucks. You can pay your rent, whatever it is. So, you've just increased the number of currency units chasing goods and services. You've doubled them. So, walk us through, walk us through how that works and potentially what the risks are.
Uh, well, essentially, yeah, you're, um, you're eliminating a bank deposit. You're paying some, well, I guess you're moving it from the bank that would have, would be integrated with a stablecoin, uh, and then you're moving it over to the stablecoin issuer, and the stablecoin issuer now has the treasury. So, it, it kind of, it's Tether, if it's Tether. So, they're taking in a dollar. They're giving you a, basically a dollar of Tether, and then they're taking that dollar and then sending it back out to buy the treasury. Yeah. So, now they got the treasury, but now you've got two dollars that are circulating when before you just had one.
Yeah. And then the interesting stuff is what it does on the payment rail. So, um, you know, the way, so, for example, I, we run a global business, and without stablecoins, you know, we pay our contractors in the Philippines, Vietnam, um, India, uh, and they all take stablecoins. Like, some of them are okay to take Bitcoin, but some of them want stability where they can, you know, not have exchange rate risk, and you pay them that way. Some, I'm assuming, because the friction is so low.
Oh, well, it's, um, the key difference is, is that it's a, firstly, you can take your stablecoin and while it is still a centralized company, so if you're committing crime, you're doing money laundering, they could freeze it, right? You know, or they could put a, they could sanction a wallet address, put it on the OFAC list, and then if you try and spend it from that wallet address, um, then people are meant to freeze it and, and have a notification. So, it's not Bitcoin. Um, it's not where you have the private key, but you can extract it from the stablecoin issuer and hold it in self-custody as if it were Bitcoin, right? And so because I have it in my private wallet where I own the key, it's no longer like a bank deposit where, um, I go to the bank and say, "Will you pay a million dollars to this person?" And they say, "Well, hold on, hold on. Let's wait till Monday. You've asked on a Friday." And then charge you for it, right away? Yeah. And then I'll go to the compliance team, and the compliance team says, "Okay, can you send me the invoices? Can you give me the source of funds and source of, and you go through this whole process?" And then eventually they say, "Yep, okay, you, you are innocent." Um, so you're guilty until proven innocent in the banking system. With a stablecoin, you're innocent until proven guilty. Um, so I, I can send it, and anybody that else that has a wallet address, I can send it to their QR code, and they can receive it, and then they'd have to go through a court process of sanctioning it, saying to Tether, please freeze this. But in the meantime, we're all transacting 24/7, no requirement to have anyone in the middle. And we're creating immutable records of all of our transactions, you know, as you would with any blockchain asset. And so, it, it moves as an innocent until proven guilty system.
Which means that if I want to pay staff completely legitimately in the Philippines, Vietnam, and, um, and India, then I'm not trying to get this banking system to plug into that banking system and persuade SWIFT to be happy with this transaction. Um, and then they just say, "Oh, no. We don't like Vietnam. It's too high on our risk model." Um, and you end up with your account shut down. So, I, I can, we can pay our staff anywhere, any time, at any moment, knowing that these are legitimate transactions with no permission. And so, it is a significantly superior system. And, and what it also does is you don't need a point-of-sale terminal as a merchant. You just need a QR code, right? And so, it, it transforms the payment rails to QR code. So, everyone can just become a merchant, start accepting stablecoins, and you don't need any, any middle people or any permission from, uh, any Mastercard, Visa, or any type of, um, merchant processor. And if you want to, you got an easy off-ramp because you've got the Tether, let's say, or the stablecoin, and then through your app on your phone, you can just go ahead and sell that and get the dollars if you want them, and then just deposit that into your account. So, it becomes, that's what I was talking about when I was referring to friction, a lot less friction.
And it really highlights something that I say all the time. When you look at a currency or money or whatever you want to call it, uh, most people look at it strictly through the lens, or a lot of people on Twitter, let's say, look at it strictly through the lens of a store of value. That, that's really, you know, it has to be a store of value. But in reality, in the real world, people rarely gravitate to a currency just because it's a store of value. They gravitate to a currency because it has utility. And it is true that a store of value is a component of that utility, but it's a very, very small component. Network effect, as an example, is something that I think is vastly, vastly more important. And then the reduction of friction, to your point, and that's why you're using the Tether, let's say, as opposed to the dollar, is because it has more utility for you. So, I don't want to get off on a tangent. I just wanted the audience to kind of think about, at the end of the day, what, why do people use a currency versus B currency? And 99.9% of the time, it's because it has more utility.
Yeah. And there's one more interesting component that will bring us into the Genius Act, is that right? Once you have this programmable money, and it's backed by treasuries, some people will say, "Well, I want my, you know, stablecoins." The leader, uh, sorry, Tether's the leader in the market. What can I do differently? Well, why don't I pass on some of the yield? And so, we have these tokenized, let's call them real-world assets, which are like, even BlackRock came out and said they partnered with a company called Securitize, that I invested in, and they said, "We'll tokenize this money market fund." And so, once you can take the money market fund via a blockchain and programmatically receive daily yield via a stablecoin on the blockchain, you've now got a real-time deposit that you can hold in self-custody that is paying real-time yield, and you can programmatically, um, convert the dollar yield as it comes in through a stablecoin into Bitcoin. And so, you've got a, you've got a dollar that generates Bitcoin for you.
Yeah. So, it's basically like having a bank account that pays you an interest rate. That interest rate is automatically turned into Bitcoin. Yeah. So, you can programmatically create these interesting scenarios. Which is why the Genius Act came along and said, "No, no, no, no, no. We don't, you know, we don't, we don't want people converting their bank deposits to stablecoins without us deciding, uh, that we want to do it. We don't want people paying yield. We don't want Circle and, um, Tether doing it. We want JP Morgan to do it." And so, they said, they introduced a series of a bunch of legislation that obviously the bank lobby and the crypto lobby were kind of competing. The crypto lobby is like a new, a new faction of. It's interesting because Bitcoin has no company or CEO, obviously, it's decentralized. So, very few people will lobby for Bitcoin. But if you're Ethereum, and you've got a foundation, or if you're Solana, and you've got a foundation, and you pre-mine your coin, uh, suddenly you want to engage in the lobby game because you want stablecoins to be on your blockchain. And so, suddenly this crypto lobby has emerged, which doesn't have a Bitcoin lobby. And so, suddenly, when the Trump administration came along, about $150 million was raised, you know, through, for the Trump administration through the crypto lobby. And so, now they're up there with the military-industrial complex, you know, the military lobby, the bank lobby. Uh, and so, now you have this new emerging lobby, but it consists of mainly the pre-mine coiners, let's call it, that are looking for adoption of their blockchain. And so, you ended up with this whole thing around the election where it's like, "Yeah, we're going to have a Bitcoin strategic reserve, but maybe we want an XRP strategic reserve, and a Solana strategic reserve, and a Cardano strategic reserve."
That reminds you of Trump's, remember when he was tweeting about that, and he, or Truth Social, what the hell you call it, and he was tweeting out that he's going to set up the reserve, and he was listing all of the currencies, but then he forgot like Ethereum and Bitcoin. It's like an hour later, he's got to come back out and say, "Oh, and also, of course, I meant Bitcoin and Ethereum." You know, you're like, "Dude, how much did you get paid for that tweet?" You know?
Yeah, that, that was hilarious. And, and there is very genuine like corruption claims when you start getting into Justin Sun and Tron, and, um, then Trump, the Trump administration, well, the Trump family, let's say, right? Uh, they have, it's, it's quite interesting. You have Cantor Fitzgerald, uh, Howard Lutnick. He handed Cantor Fitzgerald over to his, uh, son to run as he was getting into politics, and then Trump kind of said, "Yeah, Donald Trump Jr. and Eric Trump, you run this new company called World Liberty Financial." And, um, the, who's the envoy to the, Steve Mnuchin, his son is now part of World Liberty Financial. And World Liberty Financial is the Trump family's, um, company. And what they did is they started, they launched their own stablecoin. And so, there's this real interesting thing where it said in the Genius Act, in order for any congressman to have a stablecoin, that's a conflict, and you can't do it. But it didn't say the president can't do it. So, the president's allowed to do it, but no member of Congress is allowed to do it. And what you've actually seen is these really interesting transactions. Well, I, I don't know if you call them interesting, corrupt. Um, we'll leave the, the, we'll leave that to be figured out. Suspicious. Yeah, very suspicious. Um, that basically World Liberty Financial did a token sale. Justin's, the token sale wasn't going too well. Um, they were launching their own shitcoin for this DeFi service. And then suddenly Justin's son, who's the founder of a blockchain called Tron, who's got a very suspicious record to say the least, he said, "I'll put like a hundred million in." And then suddenly the token sale was oversold. And then suddenly his SEC case went away, which was being investigated under the Biden administration. And when Trump went across to his Middle Eastern visits, you had the UAE sovereign wealth fund was going to invest $2 billion into Binance, and Binance has about 270 million users. During the Biden administration, you know, they were taken out. CZ had to go to prison for four months, negotiated a deal. But suddenly, you know, the UAE sovereign wealth fund and the Qatari wealth fund say, "We want to invest in Binance." And World Liberty Financial went over and said, "Hey, how much are you going to invest?" And they said, "We'll invest $2 billion." And so they said, "All right, I've got an idea. You put $2 billion into World Liberty Financial. We'll issue USD1 stablecoin, $2 billion worth of it, and then we'll invest the, the USD1 into Binance, and we get to buy all of those short-term bills, right? And now the Trump admin, World Liberty Financial is getting about $60 million per year. And the higher the short-term debt gets, uh, the more that they make in World Liberty Financial off these stablecoins. And so all as, as Trump is doing these deals, these tariff deals, these offshore investments, um, there's this whole crypto play that's happening at the same time. And the higher the rates, the more profit for World Liberty Financial at the same time as this whole drama that's happening between Powell and Trump to get this 300 basis point, you know, cut. So, it's very, it's very interesting how this, you know, crypto and Bitcoin has kind of found itself at the center of the largest power plays that exist in the financial system.
Now, what's that George Carlin saying? Do you, do you remember that one? It's something like, "It's a private club, and you're not in it." Is that what you just described makes us realize, Simon, that there's a private club, and, and Trump, you can love him, hate him, whatever. Trump, his kids, the, the people in Dubai, or the UAE, Saudi Arabia, wherever it is, Tether, CZ, they're in this club, and us plebs are not, to say the least. But there is definitely a club. That is for sure.
So, let's go back to the Genius Act. And the other day, when we were on that Twitter space, you and I were trying to think through, what does it mean that the banks like JP Morgan can actually use their bank reserves to back these stablecoins? And for me, why that's important is because I'm a person that doesn't really think the banks need to settle on the Fed's balance sheet. In other words, they don't really need bank reserves to go ahead and settle interbank transactions, especially on the Eurodollar system. So, whether the bank reserves are three trillion or four trillion, I don't really think it impacts bank liquidity. I don't think it impacts global liquidity. So, if they've got these bank reserves that they don't really have to use, then they can issue stablecoins with the, the backing of these bank reserves. But then what that does is that allows the Federal Reserve to take base money, which are bank reserves, you know, they're the dollar liabilities of the Fed, the electronic dollar liabilities, and turn them into broad money. Where right now, let's just say the Fed increased bank reserves by a trillion dollars, that doesn't necessarily mean there's going to be an extra trillion dollars in broad money. But if these stablecoins are used as broad money, fungible with dollar-denominated credit that the banks create right now, or green pieces of paper, whatever, then the Fed would have much, much, much more control over the broad money supply, which at the end of the day is most important because those are the currency units that are chasing goods and services. So, and, and that's just the tip of the iceberg based on what we were talking about, but I'll hand it over to you and let you take that ball and run with it.
Yeah. So, there's, there's a few things to unpack in the Genius Act that most people aren't talking about. So, firstly, it came as a package of three. There was the Genius Act, which is mainly focused on stablecoins. Then there was the Clarity Act, which is still being negotiated but passed the initial stage, which is around, you know, do you have to register with the SEC, or is it the CFTC, and all of that regulatory, and if you're a token, who do you have to get? And basically, it hands over to the SEC the ability to determine whether something's a commodity or security or sufficiently decentralized. They're basically going to be the certifier of whether these coins are accredited investors, like securities, or cryptocurrencies that anyone can invest in. And the third was an anti-CBDC Act, which is interesting. So, obviously, in Europe, they're beta testing in October the digital euro, uh, which I would classify as a central bank digital currency. It's issued by the European Central Bank, and, um, it's going to be, you know, integrated, and it will be a CBDC in the classic sense of the word. Uh, controlled, programmable, the surveillance, 1984 nightmare that we've always been warning about.
Are, are they talking about a wholesale, retail, or both?
Simon, uh, I'm not sure what it's going to be yet, but, um, they're looking to beta test. It will probably be wholesale initially, and then move over to retail. Okay. And it'll be an iterative process, and, um, you know, so that's what's happening in Europe. So, we're going for, here's the full surveillance state nightmare, 1984, uh, typical where Europe's going. Uh, then in America, we've got a different model, which is kind of the covert CBDC. Um, and the covert CBDC is the usual model, which is the Federal Reserve is owned by, when you go lay us down, it's owned by the banks essentially, which are the shareholders, and then once you're in that club, you get an account with, um, the Fed, and, um, there's JP Morgan being the most important. There's the few things in the Genius Act which are worth pointing out. So, the first is what you said, um, that there's about $3.5 trillion held by the banks at the Fed that at the moment is normally the reserves, uh, which is, you know, the overnight lending repo markets, or whatever you need to do to, uh, make the system sound or safe. You can actually issue stablecoins against those reserves. And so now a bank like JP Morgan, they'll have their normal fractional reserve system creating credits, all their digital dollars in their account, but their reserves can also be a stablecoin. And to also give it, um, additional edge, if you have a banking license and you have a Fed reserve account, you're able to pay yield on that stablecoin. Whereas, if you're a non-bank and you don't have, um, an account with the Fed, you can't pay yield on that.
They also put in there that, um, illegal. Sorry, it's illegal for a non-bank to pay. In the Genius Act, you have to be a bank in order to pay yield on your stablecoin. So, they're just putting everyone out of business except for the banks. They're, they're trying to make everyone a bank and give the banks the head start. You know, this is the, yeah, this is the consolidation of the market. Yeah. Um, and obviously, this was the bank lobby piece. So, the bank lobby, so they, they picked the winners and losers. Absolutely. And, uh, I believe that essentially JP Morgan has already had their, um, stablecoin, um, for massive wholesale transactions. It's, it's very opaque and very hard to see, but something's happening for a long time at the institutional level. Uh, I think basically JP Morgan are the chosen one to kind of have a covert central bank digital currency, but it's not a CBDC. It's a privatized stablecoin that has that special relationship with the Fed, that has a competitive advantage with the Fed. And they're kind of like the beta test for what does this two-tiered model look like? And so, you can, you, you can use your, um, you know, and then we talked about all the risks with stablecoins, but now that applies to the funds at the Fed. So, what new risks is this introducing into banking? Is this depletion of reserves? Are we moving to additional attack vectors? And I don't think much of the conversation around this because everyone was so excited about bringing stablecoins and making America crypto capital of the world. I feel like those conversations were around the table without the crypto bros, as in a creature from Jekyll Island type of type of meeting.
It's, it's because most people don't understand the plumbing behind what you're talking about, Simon. And if you don't understand the plumbing, it's just like the teacher in Charlie Brown. You, you, you want, you just focus on, you know, what you do understand, and that's just kind of something that's like a Tether, uh, type of equivalent, just, but it's just, uh, issued by JP Morgan. You know, going back to what you're saying, I've always said that in order to have a central bank digital currency, or in order to have the, I don't want to call them features, but in order to have the Orwellian, draconian type of big brother features the central planners would want, you really need to have the accounts on one ledger, uh, because then that ledger is going to get the data in real time to know what your social score is. If you've got, you know, to have multiple ledgers, it becomes very, very difficult to get that, that real-time data. So, I always said that the, the, we've got to realize that the Fed, the foundation for a CBDC is everyone having an account with the Fed. That's one reason why I asked you with the ECB, the wholesale and retail. But in order to have the draconian, Orwellian, 1984 features, you don't necessarily have to have all the accounts with the Fed, you just have to have all the accounts on one ledger. And if that one ledger is JP Morgan, and JP Morgan is reporting and giving the social score, it's, it's the exact same thing. And they can also issue credit based on narrative. This is what we were talking about the other day. One of the things they can issue credit based on narrative instead of merit. And what I mean by that is they can issue credit based on your social score instead of your credit score. And the, the reason they can do that is because if everyone has an account with one bank or one ledger, they never have to transfer a deposit liability. And if they never have to transfer a deposit liability, they literally don't need assets. And therefore, they don't need to be paid back. That's why the Fed can't really go bust, but they can have negative equity.
So, and as you were talking, Simon, I was thinking that through, and I'm like, well, if JP Morgan is issuing a stablecoin, let's say JPcoin, then how would I use that? Like, like how would I, if, in order for me to use that as payment, let's say with you, I'm buying something from you, you would have to have the ability to accept that JP Morgan coin, and to use that JP Morgan coin, even if the payment rails are on the, uh, on Ethereum or something, and in order to do that, then you would have to download the JP Morgan app, and effectively you would have to have an account at JP Morgan. So, in order to use the JP Morgan coin, you have to have an account with JP Morgan. Am I seeing that correctly?
Yeah, exactly. So, you, you have your account with JP Morgan. They control the interoperability between the bank deposit and the stablecoin. Uh, they issue the stablecoin. They do some kind of transaction that puts it out in the market. I mean, maybe it's the next bank bailout. You know, you, uh, you used to have $10,000 here. Now, download this app, and you've got your, uh, your stablecoin. What, whatever mechanism is used after beta, right? Um, and then all you need at that stage to spend it is everyone just needs to use QR codes on the rails. These stablecoins don't really care about blockchains. Like, if you look at Tether, it's on every major blockchain. So, they do some on Ethereum, some on Solana, some on Tron, some on Cardano, and it, it, so it's, it's kind of irrelevant in that sense.
Okay. So, if, maybe I wasn't understanding that.
Correctly, Simon, so if I have the JP Morgan coin and I wanted to send it to you in for payment for goods and services, would you, you would, would you need to have an account or download the JP Morgan app, or you would just have the QR code, therefore you would accept it? It would, the JP Morgan coin would live on the ledger that your downloaded app, whatever that is, has access to. But would it necessarily have to be JP Morgan's ledger? Yeah. Once you're out, so JP Morgan could have their own ledger. Like, you know, the XRP army would be saying it's all going to be done on Ripple, you know. But JP, the reason it's not going to be done on Ripple, just as a tangent, is because 50% of XRP is on Ripple Labs balance sheet. They're not going to make Ripple Labs the company, the Federal Reserve. It's not going to happen.
Um, so we can put that one out. And um, but they could either have their own blockchain, but this then goes into this whole ETF pay. It was kind of like they, they did the Bitcoin ETF, the most successful ETF of all time, and then they did the Ethereum ETF. Now, suddenly around the time with Genius Act, Ethereum starts recovering after uh years of underperformance to Bitcoin. And then suddenly um we're getting loads of Ethereum going into these Ethereum ETFs. Now, Ethereum is what's called proof of stake rather than proof of work. In a nutshell, proof of work means that you don't get a vote by owning Bitcoin. With proof of stake, you get a vote by owning Ethereum. And so, if more and more Ethereum goes into the ETF, Black Rock picks up all this ET, these Ethereum, Ethereum, Ethereum, and it just applied with the SEC to be able to stake it. Uh once you stake it, you govern the network. So we're having almost this competition amongst ETF issuers to own the stakes of these blockchains like Ethereum, which would get then we're kind of creating this new network um of people that own the Ethereum rails or the proof of stake coins uh via ETFs. Then anybody that wants to receive, I just need to have an Ethereum wallet in order to receive that stable coin. I don't need an account at JP Morgan. Okay. So that answers my question.
So when I'm, I want to do a whiteboard on it and I appreciate you walking me through that because that's obviously I need to explain that on the the whiteboard video for just the normie that's out there, Simon, that is concerned about freedom and liberty and free market capitalism and all the things that we value. What should they be paying attention to? What should they be putting their foot down for and what is just noise that they should be ignoring? So, I would say I think it's too late. Okay. Um, um, because while people have been distracted with um, I believe the big beautiful bill plus the genius act has actually given all the tools of apparatus for the 1984 scenario. So, if you look what's been happening behind the scenes, you had the whole uh we're going to pay down the the trade deficit. Um, and you had the Doge and Elon Musk theater. Eventually, Elon Musk says, "All right, it turns out you can't pay down the national debt because it would cause a recession." But, uh, and they raised the debt ceiling limit, too. But, exactly. So, in the meantime, what have we got? Well, we've actually consolidated all of the data of all the different departments um and we've given it all into one database and we handed it over to Palunteer. Oh, I was just going to say Palanteer. Yeah. Yeah. So now Doge has handed over all the data to Palunteer. In the big beautiful bill, there is a budget which you're paying for America which uh is going to consolidate uh all of the different departments, whether it's health, whether it's um IRS, um it's all going to be creating one single ledger and Palunteer is the artificial intelligence producer. Elon Musk, who's highly likely to be launching his stable coin soon. He's obviously got X AI, the SpaceX data. He's got all the data from uh Tesla. So now you got driving data, social media data, artificial intelligence, all of the data from all the different governmental departments, and I imagine that Palunteer is going to be the one. Now, what else has Palanteer been doing? It's actually been um powering all the wars in the Middle East. It's been doing crowd control in Saudi Arabia in the Muslim annual Hajj meeting. It's been doing the surveillance state in the UK, pulling together Department of Defense, National Health Service. Um, it's been doing much of the contracts across the European Union. It's been doing the integration with uh the drones in Ukraine. It's been doing the border control contracts that are now integrated with the private ICE, you know, private military and prison contracts, right? And Palanteer has been selected for all of it. So, Palunteer um with the combination of the two PayPal mafia, Elon Musk plus Peter Till is pretty much all of the data and you know that these social networks have back doors to NSA, military and all that stuff. So the Orwellian data nightmare to build the social credit score and a global social credit score is here and that was all handed and you're paying for it in the big beautiful bill. You know that I, I think it's worse yet. You, what you're saying is so fascinating because it reminds me of a whiteboard video I did a long time ago, but I remember it well. It's when I was talking about the World Economic Forum and I was explaining how they're basically all Marxists at the end of the day and among eugenicists and a lot of other bad things. But, but the Marxist component of it, if you're someone who believes in socialism, communism, Marxism, and you're smart, you realize one of the problems is you can't allocate resources efficiently because in order to do so, you need the price discovery, you need the price signal that you get from the free market. And I, what I explained in the video was just this idea I had where they would use first of all CBDCs, so they centralize all the data, exactly what you're talking about. And then they would use artificial intelligence to crunch the data in real time and have the artificial intelligence tell them how to allocate resources, scarce resources with alternative uses without having to have a free market price signal or without having to have free market price discovery. And what you're saying is exactly what I was talking about in that video where if you were Klaus or, you know, whoever is running the show here and you're a Marxist and you need a workaround for the free market uh price signal that works so well and how to allocate resources, consolidating the data, seeing it in real time and then overlaying AI and then just letting the AI determine your whole economy. That's your solution. Yeah.
And who does um the Federal Reserve, what technology do they use for their artificial intelligence? Black Rock, Aladdin. Uh who the Treasury use for their fiscal data? Black Rock, Aladdin. Um who does um the ETF provider have a board seat on 20,000 different companies across the world? Black Rock. And so if you look all of this, who, who owns the, who's the biggest shareholder in uh Tesla and Elon Musk technology? Black Rock. Who's Peter Thiel and Palanteer? Black Rock. You know, so if you, if you put this all together, who owns Black Rock? It's a public company owned by State Street and Vanguard. Um, and so you've got the asset managers at the top of the chain. Trump plus Elon Musk plus Peter Thiel has put together all of the data and created the artificial intelligence data. And Black Rock is managing a portfolio globally right now that is able to say, uh, right, you know, here's your ESG score, here's your carbon credit score, uh, here's your whatever score. So, and, you know, then you look at who paid for the Trump administration, Elon Musk, you know, um, the crypto lobby, which was the the Shitcoin casino bros rather than the Bitcoiners. Um, then you had the Mellon Banking family, and then you had various other interests. So you can trace the lobby money, you can trace the banking mo uh lobby and JP Morgan's got the covert CBDC uh and Black Rock's managing all the assets and everybody's the technology companies are bringing all the data forward. Um, so the Trump administration has done it. They're all part of the club, Simon. They're all part of the club and you ain't in it, my friend. Absolutely. There, as a viewer, you can disagree with what we're saying. You can have a different opinion, but the one thing you cannot deny is there is definitely a club and none of us are in it. That's, that's I think the main takeaway from this whole interview.
Simon, tell us about where the viewers can find out more about what you do. Yeah, absolutely. So, I go live um every week on um YouTube. My channel is Simon Dixon and I go live. I just track the events in Bitcoin, macro, geopolitics, tie it all together every week. I mean, it's just unbelievable, George, how much content there is right now, right? Literally, every week is a new movie. Yeah. Yeah. Yeah. That's a double-edged sword, isn't it, Simon? Yeah, absolutely. And um the reason me and George got together after years of doing um is because we, we were on X and I try and jump up on these X spaces. So, you can follow me on um X, Simon Dixon, Twitter. Um, and I got a blog, simonixon.com, where I try and condense um all of these different topics um into some something a bit more manageable. Okay, buddy. Thanks for coming on. Thanks for your time. Fascinating discussion and I can't wait to do it again. Okay, thanks George.