A Skeptic's Guide to Cryptocurrency and Stablecoins

0:00 So, let's start with crypto. Sure. I'm what you'd call a crypto skeptic. You write about crypto. You write about stable coins. Why should I own crypto? Why should I consider this a currency? Days where people are freaking out, petrified of inflation, and they're selling the dollar and they're selling bonds and rates are going up, crypto should go up. And it doesn't act that way. It acts the opposite to its thesis. I'm going to construct an argument into three parts. Okay? Okay. 2009 to 2019 if you look at that period there were spikes actually in the opposite direction in which the currency went not heavily correlated to NASDAQ then comes co now it starts behaving much like the financial markets there's the actual coin y then there's a technology underlying it that will have usage for payments that's it the two are not the

0:46 same it's not the same but they're interlin how many coins are there these days oh god loads yeah why am I supposed to think about that people always talk about bitcoin Should I care about any of the others? Yes. From a utility standpoint, yes. What do I need stable coin for? Okay. How do we deal with NFTs? Stablecoin is not the same thing as Bitcoin at all. At all. So, let me ask you a question about Tether cuz I've read that there's controversy around Tether that people don't trust Tether. Tell us what that's all about. Okay. So, let's start real basics. Let me explain it as simply as I possibly can. Okay. [Music]

1:32 Hi, this is Steve Eisman and welcome to another episode of my podcast. And today we're going to focus on crypto, crypto, crypto, stable coins and payments. And we have a very special guest today, Rahul Jindel, who is the fintech strategist at Autonomous. Now, for those of you who have been watching some of my podcasts, you know that I prefer generally research from boutique firms because they tend to be independent and I just find the research to be more in-depth and better. And two weeks ago, we had as a guest Dwight Collins, who's the head of institutional sales at Autonomous. We had a great conversation about all things financial and so today

2:17 we have Rahul who is here to talk about his world the world of crypto stable coins and whatever else we think is relevant. Thanks so much. Thanks for coming. Absolutely. Happy to be here. So just give us a little bit of background so people will actually know like like you're entitled to have an opinion on this because I I want to say that on on these topics payments I I can I can be very dangerous. Yeah. But on the topics of crypto and stable coins, I'm here to learn just like everybody else is. Excellent. So don't be uh upset if I interrupt you. I'm jump to you because I don't know what you're saying. Excellent. Go for tell us about your background. So I started my career in finance at Rolls-Royce uh which is a jet engine manufacturer. Nothing to do with crypto, but this is going to come up later in the conversation, I'm quite sure. Um I spent some time at Mackenzie.

3:03 Did you get a car out of it? I did not. So they do they they make uh jet engines. Oh, you work for the jet engine. So, they sold the car division to remember. So, too bad for you. Too bad. Well, I still had a keychain. And this is one of the jokes that play. Not as good as a car. Not as good as a car, but it was always funny when you get your Honda from the valley and you're like, are you really do you not look at my keychain? Um anyway, uh and then I spent several years at McKenzie uh as a as a consultant. Um then went on and worked for Capital One in the corporate company I know very well, Capital One. uh the M&A team, the the corporate development team. Uh so saw quite a bit of deal flow around fintech, you know, during the crazy sort of 2018 to 2021, 2022 years. Um and then I've taken on a

3:49 role at autonomous as a strategist uh covering fintech at um since 2022. So I've read a lot of your research. Thank you. Um it's quite extensive. So just everybody understands you don't just write about public companies. You write about crypto, you write about stable coins, and you write a lot. You did an you write quite a bit about payments, and you also discuss companies that are not public. That's right. So, okay. So, let's start with crypto because that's where I think everybody's focused on these days. So, I'm what you'd call a crypto skeptic. Okay. Not a hater. I don't like to hate, but a a skeptic. So, let me give you a little bit of um the questions that I have and let's address them. So if we were speaking 2 3 years ago, I would have said to you, I have

4:35 two questions about crypto. One of her I'm going to address myself and then I'm going to ask you the second question. And the first question is, why should I consider this a currency? Yeah. And over time, I sort of came to the conclusion, well, why is gold a story of value either? I mean, the only reason why gold is a store of value is because it's been a store of value for thousands of years, but there's no inherent value to gold because people treat it that way. So, I think at this point, it's fair to say that there are enough people on planet Earth who think crypto has value to say let's forget about that first question because it's sort of a moot point. Yeah. So, let let me come to my second question which I have never gotten an answer to and I'm really hoping that you can answer it. Okay. So

5:22 I remember during coh I would I did a lot of driving to and from the city. Okay. And I would listen to a whole bunch of podcasts. Yeah. And some podcasts were about the history of Rome. Sure. And some podcasts were about crypto. Sure. And they all asked they all addressed a question of they all said they skipped over the currency issue. So I skipped it now too. And they all addressed the following question. Why should I own crypto? Okay. which is I think a very fair question and the answer that each one of them gave yeah was basically the same and it was a version of that over the last 10 20 30 years you know governments has been spending money like drunken sailors the value of fiat

6:08 currency and for those of you who don't know what fiat currency is that's government currency has been debased y and you know one day yeah there'll be a calamity y and people will toss out their fiat currency and they'll want to have something to have value. Sure. And so therefore, yeah, buy crypto. Basically, buy crypto as a hedge against Armageddon. Fair enough. Okay. So my question with respect to that thesis is, and you know where I'm going cuz I told you before is is this. Yeah. If that's the case, Yeah. Then, yeah, on days like today, yeah, where, you know, President Trump made an an announcement that he's going to delay the the European tariffs,

6:55 so NASDAQ is up, Nvidia is up, interest rates are down, the dollar is rallying, crypto should be down. And on days where people are freaking out and they're petrified of inflation and they're selling the dollar and they're selling bonds and rates are going up, crypto should go up. Y and it doesn't act that way. It acts the opposite to its thesis. And the reason why that bothers me is I'm a stock jockey. So let's talk about your old company, Capital One. Yeah. Okay. Let's imagine I had a thesis. Yeah. And my thesis was I'm going to buy Capital One because the Fed's going to cut rates and credit quality is going to get better and the earnings are going to go up. Yeah. And credit quality gets better. The Fed cuts rates. Yeah. the earnings go up and

7:42 the stock collapses. And if that were to happen to me, I would say I don't know what I'm doing because I I had an entire thesis. It came out exactly as I said and the stock reacted opposite to my thesis. So, as far as I can tell, the correlation between NASDAQ and crypto is quite high. Yep. So, if that's the case, why should I own crypto if it runs counter to its thesis? That's my question. Please, God, answer my question. Okay. So, um I'm going to construct an argument into three parts. Okay. One, we're going to split the performance of crypto in three sections. Pre209, so 20 2009 to 2019, 2019 into the pandemic and post pandemic, post the crypto winter. All right? because the

8:29 correlation between uh Bitcoin price specifically and you know as as a as a bell weather for the rest and we can argue to some extent the the smaller currencies but Bitcoin to the S&P 500 and NASDAQ has differentiated between those three periods. So it's not quite as clean. If you look at the total correlation over that entire span of time it's actually not as correlated as one would think it is looking at just the last few years. Okay. So, but let me let me start with that. So, that's kind of foundation one. The second part of it is I do I do want to pick a point of contention with your the premise of your thesis. What is digital assets? What what I mean so what's sorry, what are they? How do you think about them from the perspective of utility usage and

9:14 then a store of value? Because I do want to come back to that point for a second. Um and that hopefully will influence looking ahead how you think about correlation with um with the S&P 500 and NASDAQ and so on. Um and I'm going to end it with the where we are today specifically around regulation because I think that also has a deep impact on this. Oh that fair let's go to regulation last. Sure. And uh let's separate. Yeah. You know, sometimes when you get in conversations with crypto people, they very much um mix. Mhm. Bitcoin as a store of value with cryptocurrency or maybe stable coins as a payment system. And the two are not the same. I'm not doing that. Okay. No, no, it's good. Yeah, it I'm

10:01 talking about digital. They conflate the two often. I'm talking about digital assets as a technology. Okay. of which on top of which are numerous assets. Let's call them assets for this purpose. Bitcoin being one of them, right? So I'll I'll come back to that. So let's start with the first sort of the the history behind this, right? To talking specifically about correlation. So if you split into three what's happened here from 2009 to 2019 or so there actually wasn't strong correlation between the the financial markets and uh specifically Bitcoin in this case correlation as the as the main kind of currency of circulation um if you look at that period there were spikes actually in the opposite direction in which the currency went one example is the Cypress banking crisis actually went

10:48 deeply in the opposite direction and part of The rationale during that those 10 years was that this was to your point a hedge to what banks were doing. So during the So you're saying from 2009 to 2019 it it acted more often than not according to its thesis. Correct. Okay, I'll give you that. Which again like I I do pick a point with the thesis being that it is in fact not a correlated asset. I don't agree with that fundamentally. I mean there's it's it's still a developing no my my thesis meaning it's a hedge against fi currency correct that's that that thesis fair point yeah so 2009 to 2019 it's it's really not heavily correlated there actually spikes of instances not heavily correlated to NASDAQ to NASDAQ and the S&P 5 generally right um so we've kind

11:36 of got this asset that's there the usage is limited you have some enthusiasts that are owning it there's a thesis the the the point that it hedges against Armageddon frankly. So when you have instances where people do feel like Armageddon's coming around, you have a massive spike in Bitcoin prices, right? Okay. Okay. So it kind of tracks. Let's go after 2019. Then comes co right now it starts behaving much like the financial markets, right? Because partly the ri as as this currency starts getting adopted, you have the growth of exchanges. You've got Coinbase coming on. Retail investors are getting excited. They're putting their money in it. when people start to draw money out of the financial markets, they start drawing money out of crypto as well. So it starts correlating far more strongly

12:23 in many cases even uh you know there were spikes during that period around the 2020 time March April when you had a massive downturn in the market where it correlated heavier to the NASDAQ exchange than did gold. So NASDAQ went down, crypto went down. crypto went down and it went down with a higher correlation factor than did gold during that time. Okay. So, so you start seeing this this correlation developing very strongly during that period. Consequently, once you have quantitative easing, the same trend holds true. Crypto prices go up. As the market goes up, crypto prices go up. A lot of it is again oriented around retail investors because you really don't have institutional players at this point, right? Um then there is starting to we're beginning to see some decoupling

13:09 now. So once you know you start hitting the the end of crypto winter you start hitting 2023 you know now the spot ETF gets passed black rockck starts playing a role black rockck then comes out you know the funds talking about 1 to 2% of allocation going into this now you start seeing a degree of decoupling and you can see that in the correlation coefficient you start seeing a degree of decoupling where it stops behaving I mean I don't want to go all the way and say it becomes completely decoupled because it does thrive in a risk on appet you know uh scenario and it doesn't do well in a risk off which you would expect uh but it starts decoupling and cryptospecific news does drive variance in the pricing relative to the market. Well, look, I think lately it's it's it's coupled more to the whole

13:55 regulatory situation and people want to own it because it can be institutionalized. Correct. I I agree with that. Although I I I am still disturbed by the fact that more often than not it's correlated to NASDAQ. Yeah. Which is runs counter to its thesis. So I guess you have to take the position that it's still in its infancy. A lot of immature investors in it and you either believe you believe it or you don't believe it. And if you believe points. That's my second point. So this is the history, right? So when you look at it towards the, you know, from 29 to 2009 to today, the correlation isn't over that span of time as strong as people make it out to be over the last 3 years relative to the last 3 years. Now let's look let's pause this for a second. Let's look at your your very thesis, right? What is it? What is a

14:41 digital asset? Do you think of it as I I I like to think of it as as three things happening at the same time? It is an infrastructural change in how we think of money that correlates with not the financial markets but the usage of money in this you know in with with respect to the emergence of e-commerce. We are not spending money the way we used to 50 years ago and most of the payment systems that have evolved over this time are not built for the e-commerce economy are not built for the internet. I'm going to challenge that a little bit later, but but I hear I hear what you're saying that that at least a technology correct that backs like like I always like I said at the beginning, there's the actual coin. Yep. Bitcoin and the other ones and then there's a technology

15:28 underlying it. Yes. That could be that will have usage for payments. That's it. The two are not the same. It's not the same, but they're they're they're interlin. you need a medium of exchange in order to facilitate a transaction on the basis, but you could also eventually have a digital dollar. So that then well we yes and no but but the the fundamental foundation I say no because I mean they're trying to outlaw that fundamentally but at the fundamental basis but my point is if you leave that aside and you look at what is this thing and then that's where I challenge your thesis a little bit is when you look at what is this thing it's a store of information first right when you look at our traditional banking system today financial services system these These

16:13 are ledgers that are owned by banks or payment companies and and you know there's a there's a massive ledger that is uh that that correspond with links with corresponding banking and and allows payments to happen, right? But these are fundamentally ledgers that are owned and independently operated by companies that have interlinkages. Digital assets are a store of information that's distributed. So it fundamentally challenges that thesis. So there's utility in the fact that it enables commerce to happen at higher velocity and a cheaper transaction value. That's the utility point. It ain't a cheaper value now and it's not a higher velocity than Visa, Mastercard. We'll come to that. We'll we'll come to that eventually. So, okay. So, I understand what you said. Let's stick with the crypto part first. Yeah. So,

16:59 there's not just Bitcoin. Let's talk about I mean there How many How many coins are there these days? Oh, god. Loads. Yeah. And so how what am I supposed to think about that that there are just so many variations of this? I mean, you know, people always talk about Bitcoin. Should I care about any of the others? Yes. From a utility standpoint, yes. So, let me let me rephrase that a little bit. You should care about the ones that drive ubiquity and have a a depth of liquidity to it. Okay? So much like you care about Visa and Mastercard as a network and you don't care as much about you know um Starbucks's uh star you know the app the it's a closed loop payment system it exists gets me coffee it gets you coffee but you don't talk about it that much

17:46 because there's a certain degree of ubiquity to Visa Mastercard and AMX similarly these currencies have a degree of ubiquity relative to others that's kind of what do you mean by ubiquity relative to more people accept ting knowing it, knowing off it, knowing that if I give you, if I talk to you about Bitcoin, you'll think there's a degree of trust to it to your very first point that enough people on earth think it's valuable, so it must be valuable, right? But if I, you know, if I said, Steve, I'll, you know, give you Dogecoin or or give you some some other unknown, what the hell, you'll be like, what is this, right? I don't. So, there's a degree of ubiquity. The second is the liquidity behind it. And this is really important as we move our conversation to stable coins in the in the future as well. the depth of liquidity drives, you know, almost like a network effect, right? The

18:31 deeper you have, the more people are willing to take a chance on it. More merchants want to integrate that into their payment scheme and so on so forth. That's kind of the the case around it. So that's why you should care about some of these assets that are more wellknown and are used versus others. Bitcoin being one, Bitcoin, what else? Bitcoin is for very large transactions. That is how it works. Ethereum um you know and Ethereum has loads of applications layer 2 built on top of it. You can put wrappers around coins and transact on different rails. I've done this before when I've bought NFTts. Um you know obviously then there's the entire stable coin economy that's that's being built upon this. Let's leave the science type coin. We're going to do that next. We're still on the coins part. Litecoin. I mean there there are loads that have that have um displayed good value to

19:16 them. See Ripple. So let's get back to Bitcoin for a second. So I if I grant you that you know it's a young market and it's um in its infancy so you know how it acts now may not be how it acts 10 years from now. Okay I I'll grant you that. Sure. But if I was to if someone was to say to me one day yeah you will buy stuff with Bitcoin. My my response to that be would be how could that be? It's gonna they're gonna run out of making it at some point. There's only there's only so many bitcoins that are going to be issued. 21 million. Yeah. Right. And at that point, there's no more bitcoins, right? So, how you going to how you going to have a how

20:02 you going to have something called Bitcoin and have it a currency and have people transact with it when when there's only so much of it? Fractional. It's fractional. It's fractal. It's fractional is is the most simplistic version of it. It's fractal. That's the that that is What do you mean it's fractal? It's you could split it. You could keep splitting it. I see. Okay. It's fractal. So the the other finer point around this, Steve, I want to add is you've done payments for a lot longer than I have. Getting people to change how they pay for things is not an easy ask. No kidding. And by the way, let's say, yeah, I was to go buy something, right? Someone would actually take it. Yes. Bit and I let's say I could buy a car. Correct. With Bitcoin, right? versus I could buy a car with my Visa

20:47 Mastercard. Correct. Grant me that it's a lot cheaper in terms of total transaction fees to do with the Visa Mastercard than it is to do with Bitcoin. I mean, how much more expensive is it going to be to do with Bitcoin at this point? I I would venture guess if you do at the right time at the right company, it would not be all that more expensive than you think it is at the moment. I'll I'll tell you that. And I don't say Bitcoin. And I think you've got to be a bit more flexible which asset you use. And I'll come back to that. I'll come back to stable coins doing it. But it's not as expensive as you think it would be versus a traditional, you know, 3 3 1/2% interchange plus on your transaction on a on a credit card. There is no 3 and 12% interchange on my credit card. There's at most one and a half%

21:32 interchange on my credit. Three points is what the the merchant is losing or take, right? Plus, minus. So I'll give you an example. Okay. Okay, Stripe, they charge 2.9% plus fees, correct? On every transaction. Now, I don't know if your car merchant is using this. I'm sure they've got something else, but just venture, stay with me. If you run a transaction on their st on the stable coin partnership that they have, it is half that now. Okay, let's go to stable coin. Okay, so let's start with real basics. What is it? What is it? Okay, cuz stablecoin is not the same thing as Bitcoin at all. At all. Well, similarities, but it might have similar technologies backing it, but it has different purposes. Let me explain it as simply as I possibly can. Okay, so a digital asset, be it a Bitcoin,

22:19 Ethereum, whatever, is run on a blockchain, right? Which is essentially a very large ledger that everybody can look at. It's got permissions on it. Um, and and you can run it in a permissionless way, but fundamentally it's a very large ledger. It is immutable or trails and so on. You can build currencies on top of it. Bitcoin is one of them. Now what a stable coin is is a digital asset that is backed or is linked to X and you can put that X in as a dollar, as a euro, as a yen, as an Indian rupee, whatever you want. So it is a onetoone relationship where if I give you or I issue a stable coin one Rahul stable coin you somebody I have to have a dollar a US dollar in this

23:06 example in a bank as a custodial asset against that stable coin when that stable coin is redeemed or dissolved that dollar goes back into the into the pocket so let's let's do it let's say I'm going to do a transaction and I'm going to pay somebody with stable coin first I got to buy a stable coin correct okay so I go and buy a stable coin. Yeah. Who am I buying it from? An exchange. An exchange. So you Coinbase. Coinbase. Do you remember? Do you remember the the Mickey dollars or the Disney dollars back in like 10 years ago when I went to Disneyland for the first time? You would go, you'd give a US dollar, they'd give you a Yes. Yes. It's the same principle. Okay. So there's an exchange. So I thought there's I thought Tether and Solana are like the biggest exchanges for stable coins. Tether issues stable coins, right? Right. And Tether is is one company and Solana is

23:51 another one. there. Yes. And then hand. So if I buy a a stable coin from let's say Solana. So let's say I buy a million dollars worth cuz I'm going to buy a million dollars worth of stuff from somebody. Sure. So I send I basically walk me through h how I interact with Solana and what happens. So you would have essentially a wallet, right, which is the ability to onramp your US dollar, your your fiat currency and convert it into a stable coin, whatever company that may be. So I basically buy a million dollars worth of stable coins from Solana. That million cash that you now gave them in US dollars will go into a custodial

24:37 account. Okay? Right? that custodial account. Big banks like Bank of Melon New York maintain them and so on so forth. It goes over there. You've got an auditor that says you have a million dollars worth of stable coin issued and we can see you got a million dollars worth of USD. And what does the bank hold? Treasuries. It's a custodial account. Yeah. Treasury. They just hold treasuries. Just like you would with a normal financial institution, right? So bank holds it, auditor audits it. Everybody's very clear that there's money that backs this particular digital asset that's issued. that company is probably making money on the yield as you can imagine because some of them are US dollars, some of them are most of them are are you know short-term treasuries and so on so forth, right? Repos and and so on. So they're making money on that. Now you can use the currency that you have issued the stable coin currency to

25:24 transact whether you buy a car or you buy a house or you buy coffee it doesn't matter. That person that is now accepting your stable coin has to redeem it. So they go through their financial services institution that then swaps it back for US dollars if they so choose and deposit into the bank. So it's a way to pay people or or transact you know remittances loads of different use cases. So if I do it through Solana Mhm. I got to pay Solana a fee. Mhm. Don't I pay Salana a fee in in its in its digital currency sold? You would pay them a fee. Um in their digital currency. Yeah. Exactly. But it comes out of the same dollar pool, right? Yeah, I understand. But I mean, let's say it's a million dollars and they charge, let's make up a number. They charge a dollar. I don't know what they charge. Let's say they charge a dollar

26:09 for the whole thing. That dollar is paid to them in soul. Correct. So if Solana becomes the stable coin network and and it takes off, I should invest in soul because everybody's going to need to pay them in soul. That's the utility point. That's exactly the utility coin that I'm speaking of. But when you pay them that this is the big difference that with a stable coin, it's backed one to one. There's not very much capital appreciation. You can believe in the utility of the company and buy stock in that. And that makes total sense. But you're not so much believing in the fact that there's going to be capital appreciation of a1 to1 reserve. Why would you? No. No. That's not my point.

26:56 My point is you got to pay them a fee. Yeah. Yeah. And the fee is going to be in their digital currency. Correct. So like I said, so if let's imagine a world where stable coin really gets big and let's also imagine a world where Saul is the visa of of stable coin. Correct. I should buy Sauls. You buy Visa, right? If you buy Visa stock. No, I want to buy I want to buy Saul because people are gonna need to buy Sauls to pay them pay them they pay their fee. Makes sense. But you can keep buying them but there's always a dollar reserve against that's my point. There is no it's how would you have capital appreciation in that case? What in Saul? Yeah. Isn't there more of demand for Saul? There's demand for salt, but there has to be a dollar against each Saul that they issue or each each USDC or Ripple coin that they

27:41 issue. Ripple USD, not not XRP. Just be very clear, right? The the RLUSD coin, there's a there's a dollar behind. So, you're saying Saul is going to be pegged to the dollar? No, I'm not saying salt is going to be if there is a stable coin. I'd rather not get into the the No, no, I'm not talking. I'm talking about that there's no appreciation in the stable coin. Correct. I'm talking about there will be appreciation in salt in the Yes. in the in the currency that you going to have if every make up a simple story. The whole world goes stable coin. Yes. The whole world only uses salana. Okay. And everybody's got to pay Solana and Saul, right? If that happened, I guarantee you one thing, the price of salt is going up. Sure. But again, I think we're we're getting confused in two definitions here. A stable coin is backed onetoone with US.

28:26 I completely acknowledge you can have initial coin offerings. You have ICOs. You can have tokens that do not are not backed one to one. They can appreciate. So if you look at look at Ripple for example, XRP is a token that can appreciate. RLUSD is a USbacked stable coin. Now that the stable coin doesn't appreciate that I understand. Yeah. But if Let me ask you a question about Tether. Yeah, because I've read that there's controversy around Tether that people don't trust Tether. Tell us what that's all about. So, look, I mean, this is my view, right? I'll tell you. Before you even tell your view, what's the story that people are worried about? So, look, I mean, there there are three things that happen over here, right? One is who's on your who's using this? You know, do you have enough KYC and AML and

29:11 so on so forth to ensure that the that there are no nefarious uses that um that that are playing out on your on your chain. Okay. What? Nefarious uses of digital currency. I'm shocked, right? I'm shocked this is going on. I mean, you see that point, right? KYCML. That's kind of So, nobody's going to want to do stable coin through an entity that they don't trust. That they don't trust by definition. That'd be like saying I, you know, if I didn't trust Visa and Mastercard, I wouldn't use my credit card, right? Or if you thought there was nefarious secretaries of wrong players and so on so forth, right? Right. Look, if I thought every time I swiped my credit card, you know, somebody got all my information and started creeping into my bank account, I wouldn't use my credit card. So, if I was worried that that there's a bad guy at some point in

29:57 this in this stable coin network, not going to use it. That's right. And I think there's a certain degree of also, you know, if you had a bank, but why are people picking on Tether as a as as as a bad potentially bad actor? because in the past there have been instances where they they've been linked or the currency's been linked to um what currency has been linked tether the tether's currency the currency the stency look again I don't want to speculate it's not my role but there is a speculate there's a perception out there that there have been nefarious uses of that that's one the second part nefarious uses that people have have have been moneyaundering correct exactly and KYC has been weak what's KYC know your customer know your customer so that's one Yes. The second part of it is custodial accounting which is very important. So as as I mentioned earlier

30:43 when I give you a dollar and you issue a stable coin against and I buy that stable coin I need to know that if I redeemed it I would get my dollar back. Correct? Otherwise why would you ever participate in this? So that means you that has to be ironclad. That has to be ironclad. Which means you also need to know for a fact that that money is being held in the right reserves with the right type of bank audited by So in other words, I need to know that either Tether or Solana takes that money and they're buying treasuries, not marijuana. Not Exactly. You get my point, right? And I need and I need to know that somebody is watching those guys to make sure that that what they say is true is true. That's right. Okay. So why aren't people worried about Tether? Well, relative to Where is

31:28 Tether based, by the way? Outside the US. I think El Salvador. I have to double check that. That's not so great. Right. So the where based? Um I'll have to double check that as well. I'm not quite sure. Probably in the US, but they're so I mean there have been companies like Circle that are very US-based and so on so forth. So there's, you know, PayPal is obviously US-based. Custodial accounting is cleaner. They have name brand auditors like Deoid picking up the Deoid check. Some people don't trust Tether because it's not based in the US. It's a little dicey and the assets that support the um or the custodial assets. And when I say custodial assets, I mean once I've taken my dollar, I don't need to necessarily hold it in a dollar, but I don't want to be buying something that is a risky asset. Like I don't want to have, you know, a digital currency also in the

32:14 custody account. Yes. Right. Because that adds a lot of risk. Let me let me let me let's I understand. So, Tether could be a problem because of where it's based and maybe they're not trustworthy and and listen, if your people are big boys, if they do stable coins through Tether and they get screwed, shame on you. Yeah. Um, let me talk a little bit more about stable coin improvements. So, like you said before, I've been doing payments longer than you've been doing payments. Okay. And from an old-timer, Yeah. Let me tell you something that that has been my experience ever since Visa Mastercard went public which is like I don't know 2001 or something like that. So I would say and I've had this happen to me many times. Um and it didn't matter what firm I was at. It didn't matter what year I

33:00 was at that every 3 to four years, people would come into my office, you know, whether I was running a hedge fund or I was at Newberger and they'd make a presentation and they would basically say, "We're the new kid on the block in payments." Y and we got this great technology and this great story. They had a whole deck and it sounded awesome and we are we are going to what was the word they always like to use? disenfranchised visa Mastercard and every you know and the first time I heard that sounded reasonable and then but what hap what happened is two to three years later they'd come back and we'd say what's going on and they go not happen it just can't it's not happening and and then they would also say and we're working with Visa and Mastercard

33:46 every freaking time okay so consider me a skeptic on stable coin because it sounds like this is another story of disenfranchising Visa Mastercard and I've heard this before. So, let me press that point. This is full disclosure. I've owned Visa Mhm. for like God knows how many years. I don't even think about it. It's the greatest business model I've ever seen in my entire life, but leave that aside. So, so the last several years, both Visa and Mastercard have added services to what they give to customers other than just the network, right? So, here are two. Yeah. So, let's talk Visa Plus Y and Visa Direct. Y So, Visa

34:31 Plus is for those of you who don't know, um, prior to Visa Plus, let's say I went to a restaurant, you and I went out to eat and I paid the bill. Y and you and let's say the bill was I was just going to pick up a stupid number. It was expensive dinner. We had some really good sushi and it was $500. Y and I said, I'll pay. And then after I I took out my credit card and I paid. And then you said, "No, Steve, I insisted that we split it." I said, "Okay, Venmo me." Yeah. So you have a Venmo and I have a Venmo account. So you go into Venmo and you Venmo me $250. Y done. Yeah. Okay. However, same situation and you you say, "I got to pay you. I'm going to pay half." But let's say you have Venmo and

35:18 I have cash plus of block. You can't pay me. Correct. But because of Visa Plus, that gets added to Venmo and Cash Plus. And now all these um consumer toconsumer payment systems are interoperable. That's right. Because of Visa, I like that word. Because of Visa Plus. Okay, that's Let's leave that aside. It's seamless. Y it's immediate. Yep. It's a Because of Glo Visa Plus, it's a global network. Correct. I mean I could do I because of Visa plus I could pay somebody in Bosnia. Sure. Okay. Then there's Visa Direct. Y this is businessto business. Yep. So this is a way basically not to get too technical

36:05 about it. You know I'm a auto parts company. You're an an auto manufacturer. Y you got to pay me because I just send you all these auto parts. And in the old days, what would happen is you'd have a whole accounting department. I would send you a bill. You would write me a check. Y, you know, till I sent you the bill, till you wrote me the check, till it all cleared. Could be two weeks. Now, because of Visa Direct, I send you a bill electronically. Yep. And through Visa Direct, you pay me electronically. Yeah. Bada bing. Done. Yeah. Okay. What do I need stable coin for? Okay. So two points digital assets are a candidate

36:51 amongst many other pieces of technology including V visa value ad services which obviously you referred which is a large part of their revenue now it is a candidate I can extend your metaphor even further to say let's look at India for example UPI is free under a certain you better explain people what what you you just use the whole thing in India there's a payment system called UPI correct not visa masterard created did it themselves. They did it themselves. I was just trying to slow you down because you know the world you live in is not on planet Earth. Fair enough. Okay. I mean I can give you money in India in India by scanning a QR code. You could be selling me coconut water on the street and instead of giving you cash, I could scan your little code and transfer you

37:38 money. Immediate payment. No, no, no questions asked. right right now that is that's their version of Visa Mastercard but probably maybe even better correct you know similar my point is that is a candidate for that particular country and they're exporting it to other countries now it also uh um does um identity and authentication management so when I pay you Stephen I know I've only paid you and nobody else and you know you've received it from me right and so and so forth get directly deposit but getting back to my point if I'm I'm a business, right? Okay. I got to pay bills. Yeah. Yeah. Like, yeah. I'm I'm thinking about this from the perspective of, you know, the man or

38:24 woman who's in the who's in the payments, right? Bill department of General Motors. Yeah. This is about as mundane. Okay. No offense to people who do this, but this is a this is a breadand butter absolutely thing that General Motors does that has to work 100% of the time. Yeah. Because god forbid something should happen, the CEO is going to find out about it. Okay. So, so I'm that person and I know Yeah. I know that if I use Visa Direct, that payment is going through. Yeah. Visa is there to protect me against fraud. Y and they do. Yeah. And I never have to think about it. I never have to

39:09 worry about it. Why would I use stable coin? Fair point. So let me there's two points I was trying to make. So one is I think I got you. I don't think you did. Maybe not. But okay. So the first point is they are not challenging Visa and Mastercard. Stable coin. They are not even from the perspective of credit card payments. Right. This is something that is an invisible technology to the end user whether it goes through the traditional Visa rail or it goes through a stable coin rail linked with Visa because right to your point about I but I but stable coin is in theory a method to paste to to send money from here to this for whatever purpose but but as you realize obviously there are lots of things around it which the network benefits the merchant with things like

39:56 chargeback protections things like insurance things like you know if if the p the person returned the item now what happens right where does that where does that money get routed back if a if a return is made all of that is hard to build that's why Visa and Mastercard are so hard to disintermediate which is going in my view is going to stay stable coins provide an alternate route for payment but still need these capabilities that Visa and Mastercard Namics are providing them so I think the world that we're going to live in is not going to be on where there is any point in taking down that network that has all of these interconnectivities already built up all over the world. All over the world and every merchant you can accept. So, so you think stable coin will be go through the the rails? Exactly. So, here's my question though.

40:42 Okay, I'll grant you that. Okay. Why is there a use? Yes, let me get that. stable coin that I must put this way if it's a competition between should I pay with stable coin or should I pay with Visa direct if that's the if that's the choice which it isn't that's my I'm just saying go with me for a second if if if if the selling point of stable coin is we're going to it's a method of payment y and if if then people are faced with the question is am I going to use stablecoin to pay or am I going to use Visa direct to pay. Visa wins that every time, right? So my question is and

41:28 this this I this is a very interesting question. What would I use stable coin for? Yeah, that that is the best alternative use. So it's a great question. So I think let's step back for a second. There's a buyer and there's a seller. I'm going to go back to your GM example. There's a buyer and there's a seller. What's happening is from the from the buyer's perspective, you and I customers, okay, the payment technology is largely invisible today and I suspect it's going to be invisible in the future. Most human beings, if you pick somebody off the street, doesn't know how a payback works. How what works? A a payment scheme. A payment scheme, right? Just don't know how the payment scheme works. No, they have no idea. They just they just know they have a credit card. It says Visa and it works, right? They swipe it and they can pick up a bottle

42:14 of water and walk out the store and it's all the same, right? I don't think that changes. I think technology is good when it is invisible to the end user. I don't think people are going to switch go out of their way to switch the path in how they pay. I think what's going to happen is that this rail will start becoming more adoptable by merchants if there is two things that happen. Velocity of payment increases or the cost goes down and or both. Yeah. Again, my my my question is if it's a choice in payments between Visa Direct and Stablecoin, Visa Direct wins. What can stable coin do that Visa Direct can't do? If they can make the velocity faster and they can drop the price lower, then they win. But I don't think they're competing with Visa and Mastercard. That's my whole point. Okay.

43:00 So, what are they competing with? They're competing with Swift when it comes to cross border. They're complete competing with I can't do cross border through Visa direct. Well, not the same volume at the the current Visa Direct doesn't have the same volume today that Swift does. I mean, it's still a techn tell people what Swift is. Swift is when I if I'm sending money to India. If I want to send $10,000 to a bank account in India, I may be using a JP Morgan Chase account here and I'm transferring money to uh Bara Bank in India. Right now, by the way, I've been to Bara Bank. Have you? I have. I used to go to India all we used to have investments. It's an old bank. It's an old bank. We have accounts. Now, if I'm transferring money, somebody has to say, "Okay, number one, we're going to take $10,000

43:45 here. Make sure it's going to the right bank account in India to the right person." So, you see it as a money transfer business, stable coin. Absolutely. Okay. Absolutely. Maybe. I mean, that's not the biggest business in the world. It's still it's a I mean, countries that are very dependent on remittances if you think about it and it's a large economy and the basically saying it's it's it's a replacement for um what's the name of the company that people always go into and walk into the store and send money. Wise. Uh no, not Wise. That's the new one. Uh Western Union. Western Union. She's saying stable coin is a replacement for Western Union. I think I think that the the the switch happens in the following way in the following use cases. Velocity of money. I keep saying that. It's can you make the payment go faster so the person

44:31 who's receiving it gets it faster than they would yesterday? One. And two, is it cheaper? And if those two are checks or one of them is a check, that is generally a good business to be in. Okay. Right. Crossber domestic payments P2P you call it a thing. That's why Venmo won. Right. Yes. So long. That's kind of one part. By the way, the first time I used Venmo, I was very proud of myself. My kids were proud. They couldn't believe that I actually use Venmo. It works. It's so seamless. It's unbelievable. Um I think the second part of this that's also very important as we continue building upon this is this is a store of information. So if I go back to your Visa examp example, right? It's a dual message system fundamentally. I when I swipe my credit card, a message goes through from the merchant, you know, Starbucks's bank to

45:19 my bank, you know, the issuer and says, "Okay, Rahul's good for the money. Let him have the cup of coffee on the credit." Right? Two messages are being swapped. What blockchain does is it allows you and stable coins really allows you to put a lot more information in that message. So you can not only push it and I want to come back to your GM example. It's a very good question. You can not only say yes you bought a cup of coffee you could say you know for for companies like GM if you're paying a bill you say what part was it for right? So if I go back to my old I see you could load it up with you could load it up with information even even see the point I just you know when I see people sometimes get on go on CNBC and they're like um religious zealots with respect

46:05 to Bitcoin and stable coin I get skeptical I understand because for the reasons that I said I I've heard this drill yeah five times in the last 20 years we're going to replace Visa Mastercard card. I'll stick to my Visa stock cuz it just it's just too good a business model. If you're saying to me that stable coin will have a role in the payment system, I could I'll grant you that. It's it's a it's a horse in the race. Now, what I do also want to make a final point on this. If you look at domestic payments, just let's just say, you know, US credit payments, right? If you look at the three odd percent, right, that the merchant is is basically, you know, you spend $100, they're really getting 97, right? that three odd percent. Off that three odd percent the the network fee the Visa

46:51 Mastercard is like a percent is very very tiny. Oh, it's tiny. So why would anybody go out there and try to build all of the capabilities that Visa Mastercard is offering for 12 basis points for that tiny part of it? Oh, I agree. It's not going to happen. Same argument when I published my report on Apple Pay. It's the same argument I had then. Why would you challenge that? Why wouldn't you challenge the rest of it? Right. Okay. Fair. Let's talk regular. what's going on in the regulatory world. So it's a really interesting space right now Stephen. So what happened is now after the election especially this government is very pro crypto and they have done it in a very sequential manner. So let me just do you mind if I rewind the clock a little bit? I'll take a minute. Okay. So I think of regulation in essentially four phases. So you had

47:37 kind of the beginning of this. It was kind of I'd say like 2009 to 200 call it uh 19 roughly give or take wild west wild west right no regulation the biggest issue was and and tell me if this is too much detail but biggest issue was people didn't know if this was a commodity or security or a currency right and if you don't know the three you can't tell the three apart you can get into real hot water with regulators because you may be using something and suddenly the SEC comes and says, "Oh my god, that's a securities, right? There's a whole bunch of laws you got to and you will go to jail and people did." So that was the wild west. So because of that, most traditional financial services companies did not partake in this. They could they couldn't. Then you come to

48:23 the next phase where you've got some companies that have grown up, FTX being an example, no governance, offshored because there wasn't regulation here. You got some big problems and that starts depreciating the big problems starts fraud starts depreciating the trust in the entire technology. Right. Right. And you had Celsius, you had FTX and so on so forth. Then comes a heavy hand from regulations. So the SEC came down and they started suing companies operating in the United States that are touch digital assets that were you know either doing this business or associated with this business. And there were sort of things like operation chokepoint where you know there were agencies such as the SEC, OC and so on that by by you know

49:09 basically encouraging traditional finance not to even open bank accounts for companies that were operating digital assets. So you went into this phase that was a regulatory uh nightmare for digital asset companies. Then comes the election year. Then suddenly people start realizing elections matter and there is a crypto lobby and the lobby is is you know lobbying for cryptocurrencies and the the Republican party came out ahead of this knowledgeably. though there was senior senior senators like Senator Lumis that had been invested in this space and by the way so so were the Democrats in some instances like uh um uh Senator Gillibrand that started putting legislation out there for for draft and and it started clearing the path a little bit and it became an

49:55 election issue a serious election issue some of the most expensive Senate races fought were fought and and and won on so where are we today how is this how's this how is all this stuff going get regulated. So there are three buckets I want you to think of when it comes to regulation. One is how do we govern the entire thing which is called market structure, right? All right. So there are good there good products in the house, good products on the Senate, uh bills that have gone through quite a bit of drafting and revisions. Most likely that the general consensus is this will pass by the end of the year. Okay, before the end of the year that governs the entire thing. That's part one. Part two is a carve out that only deals with stable coins. Okay. And that is the 10 m target. So there are two 10 me very very close. This is going to happen even

50:40 faster. So we have two I did inches and feet grow and yards you know not meters like I come from a different country right I still have yeah somebody says meters I go whoa whoa whoa what's that mean? Um so so that is the the the the that's near-term near-term right. So how is stable let's assume that what's in front of them passes. How is stable coin going to be regulated? So the the the genesis of this is it is going to be under the OC, right? Most likely the OC, the office of the control the currency control the currency. Um COC and it is essentially the the bill that we're talking about here. There's the two parts to it. Stable and genius. Um Senate and House very close to each other roughly. Um old civics lesson you

51:26 need to have. Yes. Yep. And the president signs it. Um the uh most likely there was a schoolhouse rock about that you know when I was growing up there was there was you know like they they had all these things um like conjunction junction what's your function you know then they had this I'm just a bill going up to Capitol Hill you know that was my how I became a law I might actually look that up it's absolutely wonderful yeah um so fundamentally I mean the three things to keep in mind on this is one it's OC and it's a you know as a governor of the of the of the um of the group. Um under $10 billion in market cap is going to sit at the state level. Okay. North of $10 billion it goes up to the federal level. What do you mean the market capitalization of the stable

52:12 coin? Okay. So if your market cap is below 10, you can be you can state level much like traditional banks. If you want to if you breach the 10 billion then you have to apply and you be you know you get you so what about the legislation for Bitcoin? How is it going to be treated as a security, a currency? Like what's how's it going to be? Who's who's going to regulate it? So, that will fall under the market structure bill. The first one I talked about because it's not a stable coin, right? Um and who's going to reg be the regulator? I heard it was like the CFTC, commodity futures trading commission. Correct. Most likely most assets are going to be considered um commodities. Commodities, not a currency. Not a currency with a carveout if something is clearly a securities or securities contract. I see. Okay. um and in which case the SEC would pick up.

52:57 That's the go now between now and when that thing actually gets uh uh you know uh debated on the floor things can change but that's the the most likely outcome. And then if I may add, there's a third bucket of a splattering of other bills, right? So things like um how do we deal with NFTs, the NFT act, right? Right. How do we deal with um you know uh you know US-based companies if we think of this as a national technology or a technology that has a national security implication, right? So how do we think of US doicile versus non- US domicile? So there's a splattering of bills that I put in the third bucket. The one I find most interesting is the reserve, the Bitcoin reserve. Do we start buying Bitcoin as a government

53:43 reserve? By the way, getting back to the thesis about owning Bitcoin as a hedge against currency, I I sort of have this is like my joke about the whole thing, so you'll excuse me. I just I I my joke about it is just that there are very few people in this world who are going to put you know a significant significant percentage of their net worth in Bitcoin. There are some sure but you know for Don't you wish you had though? Of course I do. But I'm just saying for most people they're going to say okay if it's a hedge I'll take 5% of my money Yeah. and I'll buy Bitcoin. Yeah. And so my my joke is if if the thesis proves correct Yeah. and it's a zombie apocalypse Armageddon, you're going to lose 95% of your money, but your 5% will go up. Good luck to

54:31 you. I guess, you know, that's sort of like my my I sort of joke about it. It's like, you know, it's not you're not going to be happy. Yeah. Um let's talk about payments to finish up. So payments is a very complicated space. Um there's Visa and Mastercard, which are the kings. Y there's everybody else. Yeah. Um so if we go back in time to two to co sure you know as everybody was sitting at home y buying stuff y everything went e-commerce and all these stocks from block yeah to bill to you know you aen you name it these stocks went in fuego correct they went nuts and then what and but almost all of them had no earnings. Yeah, they had big revenue growth. And

55:16 then in 2023, the Fed raised rates. Yeah, there was a big correction. The S&P was down 18%. But these companies were down and I I this statistically true 70 to 90%. Yeah. Yeah. Okay. So, when you're down 70 to 90%, and then you have a rally, you're not back to where you were. You're still way lower. Yeah. Tell me what just We're not going to get into all the payments. I mean, it is so complicated. I mean, you put out an 85page deck on payments on payments and I I am I'm not embarrassed to say I read all 85 pages. Thank you. But I needed to take breaks because this is not easy. And but yeah, what I would say like if I was still running a hedge

56:04 fund and an analyst came to me. Yeah. and said, "We should buy pick a name." Sure. Bill. Mhm. And so, so I was telling the analysts, "Okay, write it up for me." And then I would start to do my own work. And the conclusion that I would reach Yeah. is that this is a very complicated sector. Yeah. Everybody's trying is if now getting into each other's business. Yep. I need a virtual dissertation knowledge to really understand this sector. Y I'll just own Visa Mastercard and I'll and I'll sleep at night. What do I need this for? Sure. What do you What's your view? Because I cover fintech, I'll give you a broader view. Right. So, separate from just digital assets, right? So, when I look at I'm talking about the fintech public

56:50 companies block. I really like verticalized business models. I like what does that mean? What I mean by that is payments companies like Toast that understand the specific needs of a specific industry vertical. Oh, vertical. And Toast is a company that restaurants and it it not not only gives them the the payment system, it also gives them software to manage their back office. I mean the value ad that you talked about earlier, right? What that does is it makes the life of the merchant easier. They can they and and that then generates a revenue mode for the company and it generates stickiness with that particular merchant. Right? So I had dinner the other day in DC and I was having dinner with um a friend of mine and I started talking to the restaurant owner. They use toast. I was like, "Why do you like toast?" I didn't know. Every time I asked this question,

57:36 it's something new. Not only payments, right? Deliveries. They do even kitchen staff uh um payroll now. Okay. So So So you like if a company conquers a I quite like that. So they therefore you must not like block which is much more general. I like block for different reasons, but yes, they are far more general. They did very well in adoption when it uh when when when COVID came around. They made it easy. What I really liked about block during that time was it made it very easy for anybody whether you're a hair cuttery or you're a you know a coffee shop to quickly go online to accept payments but I mean if you look at the if you look at the stock price of block it's it's been in this range for years it's I have a friend of mine who works at a hedge fund the way

58:21 he he treats these as trading vehicles not as long-term investments because it's so complicated and um everybody's trying to get into each other's space you know even like by the way what happened to I saw Fiser have got rocked you know felt like some people are trying to encroach on on their space so their growth is down the acquisition business is tough you know and and and in acquire business and look my my sense on payments broadly is do you if you didn't if you believed in the super app which is when I'm going to use one app be it PayPal or be it you know cash app to do all of my work right? I can buy my insurance. I can buy my products. D shopping. Um if you believed in that, then you would believe in the thesis, the investment thesis back skyrocketed during 2020. Right. Um

59:09 I've never bought into that. I don't think the super app strategy really works in the United States. I think it's really hard to kept keep people condensed for all of their financial lives on one app. I think it's very different thesis outside the United States. So I think that took a bit of a a a slice out of that valuation postco. a slice more than a slice. They lpped off half the body. So, I think that that is something that's tough. Um, but again, like I said, I like verticalized business models a lot with the payments. They have a a bit more of a protective mode around the business. Harder to commoditize, harder to challenge. Okay. Thank you. Thank you. Great. [Music]

59:54 This podcast is forformational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.