Operation Chokepoint 2.0 and the Future of Banking with Scott Shay

13:44Beimnet Abebe:What a joke. Taking a step back like – But that caused this enormous disruption.

13:48Alex Thorn:Yeah.

13:49Beimnet Abebe:Yeah. But like, you know, what I'm hopeful for is the deal. I'm hopeful that, you know, that continues to like buoy risk markets in a healthy way. But you're right.

14:00Alex Thorn:The thought of there being a deal barely did anything for Bitcoin over the weekend. In fact, it's really just been a straight slide since we made that$82.5 near-term high, just looking anemic. And I think clarity is the clear near-term catalyst. But, yeah, I mean, I was going to say it feels a little squishier than it did two weeks ago. You pointed out the poly market. I don't want to get too deep on that. We're going to have some updated thoughts on clarity next week once Congress is back in session. That's the other thing. Congress, no one's in the Capitol. I mean, it's the summer. You get more holidays than like anyone.

14:35Alex Thorn:Everyone's like tired from the long weekend and they're not working Congress easy for people to feel a little down on clarity when that happens. Still a lot of trickiness to whether clarity can actually happen timing wise. But we'll talk more about that next week. We'll get a better idea when senators, congresspeople actually come back to work next week. This has been great. Bimnet Abibi from Galaxy Trading, my friend. Thank you so much. Thanks for having me. Let's go now to our guest, Scott Shea, founder at Next Bank. Next. Yes. Scott, welcome. N3XT. N3XT, a new Web3-enabled bank in Wyoming. Yep.

15:12Alex Thorn:Scott, you also were co-founder and chairman of the board at Signature Bank. Absolutely. Very proud of it. Yes. And so we're going to talk with Scott a bit about, certainly about Next and what they're building in Wyoming. I am assuming, and I think I'll find out during this interview, that it's a very interesting tech-enabled, forward-thinking bank. Signature was that as well. Because of your role at Signature, I want to talk to you about 2022 and the crypto meltdown. You guys had operated Cignet, which was one of the – basically the two major instant dollar settlement networks that many people used, including crypto industry entities.

15:47Alex Thorn:And also, of course, closed or forced into receivership in New York during the banking crisis in March 2023, the regional banking crisis. Is that what we call it I think now? I could give it some harsher terms. SVB actually screwed up and had a big duration mismatch issue. Silvergate is thrown in here all the time. They actually just voluntarily wound down after the – I would argue the government made their business untenable. You guys, one of your board members, Barney Frank of Dodd-Frank infamy or fame, I should say, very publicly like the day after that signature was closed said they were solvent.

16:24Alex Thorn:So I want to ask you a bit about Choke Point 2.0 and where are we now in that. And then finally, I want to ask you a little bit about the future of banking and regulation. And there were 10 ,000 banks like 20 years ago. Now there's what, 5 ,000? Less than 5 ,000. What does that mean? But yet you're opening a new one. Absolutely. Going to be the best one yet. I'm excited to hear about next. Let's start first with a little bit at Signature. And in particular, let's pick up the timeline. And it's 2022. It's after what we now know then obviously was the 21 then Bitcoin all-time high. But 22 was going okay until the spring.

17:03Alex Thorn:You had the Terra Luna breakdown and collapse. Then you had Three Arrows Capital. We later learned that Genesis basically went under shortly after 3AC. And of course, in early November of 22, FTX went down. And of course, this brought all of crypto prices down and plenty of other collateral damage. as one of the key banks for crypto. What did that crypto collapse look like from your perspective at Signature? Well, actually, as an A-rated, strongly capitalized bank with tons of liquidity, we were getting deposit inflows. As a matter of fact, on March 9th, the morning of March 9th, we had more deposits.

17:46We were up in deposits for the quarter. So people were looking for a safe bank and Signature was a safe bank.

17:53Alex Thorn:Yeah. As I've, you know, I've looked, I've testified, we could have opened the next day and should have opened. Yeah, you testified before Congress. Yeah. House and Senate. That was in 2023, March 9th. And that was like the, this was the, people kind of blamed crypto or tried to, and certainly the banking industry kind of tried to blame crypto. The regulators, even more so than regulators, some members of Congress and the Senate tried to blame crypto for that collapse. I guess the hook for them being that, well, even though Silvergate didn't actually collapse, they had a lot of crypto clients.

18:20Alex Thorn:And SVB had, what, a bunch of dollar deposits for USDC, but actually that isn't what caused their collapse either. It wasn't true that crypto caused that collapse, right? No. And look, in my opinion, it was – and there's been a lot written about it. And I think we do all vaguely recall that there was a time when the US government really hated crypto and policymakers – Vaguely. We vaguely recall that. Vaguely recall that. The fog. And, but no. And when you say caused the collapse, it was, you know, look, in my view, again, it was wrong and unnecessary. There was no reason for Signature not to open the next morning.

19:00Alex Thorn:Let's talk about Signature a little bit because, well, specifically, what exactly happened? There was, I think it was, what, a Friday morning that the run on SVB really started to happen. And then by Monday, Signature was closed and forced into receivership, right, on Monday open, like over the weekend. Yes. What exactly was done? I'm forgetting. Was it the state regulator that closed it or the FDIC? Well, look, I don't want to get into all sorts of details, but I will say this. It's public. There was a press release on Thursday. Signature had$34 billion in cash and liquidity at the FDIC and Federal Homo Bank.

19:40and it's also public that we had an$18 billion run. You can do the math. That sort of says that there's$16-ish billion of liquidity.

19:51Alex Thorn:Yeah. And then it's also public that the bank sold$10 billion of assets over the weekend. They've raised more liquidity. They've raised more liquidity and came up with all the tons of other collateral. So what happened is a mystery to me. Yeah, it's a mystery to many people. And I just remember, first of all, it literally wasn't known unless you were probably either the regulators or signature at the time. And then, like I said before, Barney Frank came out and said, this doesn't make any sense. We were ready to open as a going concern. And I was like, you know, it's not just like XYZ person on their board.

20:33Alex Thorn:It is the architect of the most consequential financial regulatory overhaul and framework in decades saying this like Barney knows banking. Yeah. And so that was like an alarm bell that Monday when he gave that quote to I forget which outlet. We were like, well, literally what happened? He also testified to that effect before the New York state legislature. Very bizarre. I mean his testimony is public and his surmisels are public too. And there's a lot of investigative reporting, and I understand, especially as a founder of a new-going concern in bank, why it's sensitive for you to talk about.

21:09Alex Thorn:But I would encourage our readers to read Nick Carter's work on this. He's done a great job investigating not just on Signature but also on Silvergate, on Chokepoint 2.0. Here's a question, though. Is Chokepoint 2.0 over? Until January 20, 2029. So what really got me into the – my crypto journey started 2013. And it was like – I was like so far out. I was a banker. I was chairman of a signature bank. And what got me worried about crypto was CBDC, central bank digital currency. And people were just starting to talk about it. And it just occurred to me how dangerous this would be. and I thought we really need to create a private alternative.

21:57And I didn't have the vocabulary. Stablecoin wasn't even a word. It wasn't. There were a whole bunch of things. I actually wrote an article and I read it now and I almost chuckled because I didn't have words for a lot of things. And so the government from the get-go during the Obama administration didn't really like it. then the Trump administration took a sort of hands-off approach but wasn't sure just wasn't sure and then at a certain point in the next administration in the Biden administration you had a whole bunch of folks who said um you know who really were yeah they were persecuted is the word that I would use I mean I've had exchange chairman I mean I'm not going to mention But people who told me, well, they knew how to kill you.

22:50They really tried to kill us, but they weren't sure they could just keep suing us. They could just keep having the SEC investigate. They weren't really sure how to do that.

22:58Alex Thorn:Yeah. Yeah, I think that's right. And this went to the highest levels in the White House, particularly like Bharat Ramamurthy and the economic advisors to the White House and others. And then also in the Senate, some very hostile things. I recall even Elizabeth Warren kind of encouraging runs on crypto-related banks, like on the floor of the Senate. Very hostile attitude then. You say 2029. I'm assuming that's because under this administration, you're not worried about choke point 3.0. No. But it could always come back in your mind. I think, look, I think that's part of the reason in all candor.

23:37Um, there's a great, um, uh, there's a great push toward people getting federal charters. Um, mindfully, we decided not to get a federal charter because the way it works in the federal regulatory environment is basically one person, one vote. Whoever's in charge of the OCC can do whatever they want. If you remember, Brian Brooks was giving out charters at the end of the Anchorage and a whole bunch of them. that was like January 15th, January 30th, they face cease and desist orders. So, um, it was very important to me in thinking about how to go the next step to do something to create, to build a bank that was as robust as possible and as impervious as possible to a change in administration, because one thing's for sure, you can, you know, whatever the markets are saying, nobody knows who's going to be the next president.

24:38And if they decide that they really hate crypto or they think CBDC is the way to go and they want to shut down the private sector, you need to be prepared for that. And I think the crypto industry is under-indexing that risk. By the way, that's why the passage of clarity is so important. I think there are some people, and I talk to them in the crypto industry, who think, well, we've got Genius Act and everything's okay. Market regulators are in our favor. And market regulators are writing all these regulations. Just as we've learned, market regulations can be rescinded on January 21st, 2029.

25:17Alex Thorn:Yeah. Unless you get it into law, it didn't really happen. Yeah, codifying it in federal statute, much more durable. One example you mentioned is that now comptroller of the currency at the OCC, Jonathan Gould, he rescinded Mike Hsu's interpretive letter 1179, which itself had basically rescinded the positive interpretive letters that Brian Brooks had done. Those have now been rescinded, thank goodness. and in fact they've also put out affirmative permissibility in interpretive letters and what the FDIC had a joint final rule on April 7th prohibiting reputation risk as a supervisory tool. Did the banking regulators, to your point about the national charter, do they have god powers over banking?

26:05Alex Thorn:Is banking really a private industry if they do? Is it the most regulated industry in the world? Yes, they have and bankers know that. they know that if they don't come you know nice bank you got there but you know you're dealing with this fellow or that industry really do you want to do that yeah they don't come in and say debank these people right but they say oh gosh the risk right and then it's sort of like you know wink and nod like you're going to have a really hard time with your examiners right is that how they don't have to you know the power of the regulators What people also under-index is, I mean, they can decide to do, you know, unfortunately, I'm sitting here as living proof.

26:52They can decide to do whatever they want to do, whatever they want to do because there is no appeal. They are the final decision makers. And bankers, what's most important is bankers know that. They know that they have to comply. They know that in the end there is no court of appeals. And that's just the way it is. that's because by the way and i've thought about this really quite a bit that's fundamentally because we live in a fractional banking system and that's what crypto came to overturn the true revolution of crypto is that when you move a block of bitcoin ethereum whatever it is even uh you You know, stupid coin.

27:39I won't use the other term. It's a whole block of something. When you move dollars in a bank, you're moving a promise to pay. I mean, if I deposit$10, you deposit$10, your producer deposits$10, if someone else out there deposits$10, we all think we have$10 in the bank. But actually, they've lent out$40. And so moving something, moving a tokenized deposit on the chain that is not – that is from a fractional bank is really a promise to pay. And as long as the regulator can control that promise because you're a fractional bank, so you are reliant on them, they have ultimate power. And it's one of those things.

28:34It's an open secret. Everybody around the table knows that.

28:37Alex Thorn:And that means that even a wink or a nod can be deterrent from doing a certain type of behavior, right? Because they know that they have those powers. So I'm assuming then, and we'll transition here a little bit, I'm assuming then, that's one of the reasons why NEXT is in Wyoming as opposed to going for an OCC charter. So starting from scratch, saying, okay, we now have the chance to reinvent a bank. How do we want to do that knowing everything we know? And, you know, I'm a believer. So I think everything happens and, you know, we're on a path and I'm saying, okay, how can we actually build a better bank?

29:19And the truth of the matter is there was one thing I was certain of. I wanted to start a non-fractional bank.

29:26Alex Thorn:Yeah, you guys are fully reserved. Fully reserved. So there's only really five states in the union where you can create a full reserve bank. And we went to all five of them more or less. And the most friendly was Wyoming with a fixed period, statutory periods of time by which one can get a charter. So it wouldn't be like an unknown, indefinite, never-ending process. It's not short. It's not like the drive-by charters that some people are getting these days. But it's – look, we filed our original. We started April – we started the process in April of 2024. We got our charter at the end of 2025.

30:07We really opened this year. So really it's still like 18 months or something. It still takes well because if you're going to really build a bank and you want to build a bank – look, as you said, I've started three banks before this. Yeah. So you want to build a bank and you don't want to do it off the shelf. So we did one other thing, which I'm super thrilled about and is going to pay dividends for decades, is every other bank is on some legacy system. We built the cooperating system of the bank on a blockchain, which means things that take, you know, weeks and months and years to do it another bank.

30:49We can just do so much better. You know, you can do creative. You can do a whole bunch of things. You can create forks. You can create. You can just add a whole bunch of different functionality. And the interesting thing about being at Cignet, so I was the creator of Cignet. Yeah.

31:09And I knew we wanted to build it on a blockchain, not criticizing or, you know, Silvergate was built on a different system. I wanted this built on a blockchain so it could be native to our clients. Yeah. But the thing that really I was painfully aware of throughout is that creating Cignet and putting it in a fractional bank system that used a legacy core, it was like stapling a piece of paper to cardboard. So yeah, it works, but it's more fragile than you would like. It's not really compatible. I mean, I don't want to take the whole podcast to talk about the incompatibility. Cigna was great. I mean, by the end of 2022, we had a trillion dollars floating on this.

31:57That's crazy. It was immensely valuable. Yeah. But it was, it did require a lot of gerbils in the background in all candor.

32:08Alex Thorn:You were connecting modern public blockchain infrastructure to the, I don't know what, COBOL written backends of the, yeah. So even if you look at the so-called immediate payment systems within banks, I'll tell you a secret. They're really debits and credits until they run the batch. Yeah. Once or twice a day. So they're not instant. They are instant the way it appears to you because you get a debit or a credit. But it's not really. It's like Venmo where it says you've got – you've paid, but the guy getting it hasn't received the money. Now, banks have the power to provide credit against that, right?

32:53So you can feel like it's all good until everything isn't good. Right. And then you have the – you know, you have the HACET risk and – HACERT risk and you have the fact that it's still a promise to pay. And before that batch actually settles, I mean, it's like a very short version of Cinex Evolve.

33:16Alex Thorn:Yeah. If you think about Signet, which, by the way, I will say, after Signature was closed, and I think it's banking assets and bank later acquired by NYCB, which became Flagstar. But strangely, this technology, which was well-known in crypto to be pretty good blockchain tech that you guys had for Signet, not sold. In fact, as far as I understand, killed, disappeared. Why was that? To the best of my knowledge, you're right. It's another mystery. Mystery. So are you building – it sounds really cool, by the way. So maybe you're building a new signet, among other things. Actually, it sounds like the whole bank is built on this from first principles up rather than stapling it to the cardboard.

33:58Yeah. So the stapling – and here's what I love up against me. I'm sort of a bank nerd, obviously. There's something I can do about it at my advanced age. You're pot committed. Yeah. I'm like, yeah, I'm there. So on a good day, Cignet could do 10, 15 transactions a second. We can do 3 ,000 transactions a second because we're built native. It talks directly to our systems. And I love that. So in terms of – I mean, again, we pushed Cignet as hard as we could and we created a successor to the Cignet 1.0 that was percolating Cignet 2.0. And it would take – we had to run – when you're a bank, you have to run KYC AML before every transaction settles, which is part of being in a regulated banking system.

34:54I embrace that.

34:55Alex Thorn:Yeah. But whereas a transaction would take 25 seconds, 30 seconds, we now do it in five. And if you look at the functionality, sort of the wallet, the wallet is much prettier. The ability to do delivery versus payment is just so much. It's on a different scale. And I mean it's definitely 10x better, so I'm really happy with it. But the bank nerd part of me says, and once it, that couldn't have happened if we hadn't built the bank on crypto rails and on crypto blockchain technology. You just can't do that. And so what I think the thing that – and look, Galaxy is part of embracing this too, is you go to conferences.

35:48We try to have all these kumbaya moments with TradFi and crypto and everybody is sort of trying to put it together like putting Betamax and VHS together. And fundamentally, it doesn't work. We need at certain point, we need to say, okay, those barely 20th century rails need to be retired and we need to move on to rails which are fundamentally different, fundamentally better, fundamentally less vulnerable. And that's what we're trying to – that's why – look, what really makes me excited is what we're doing in terms of if the – this will work and we will revolutionize banking. I mean, I really believe that fundamentally.

36:37I mean, even what we're doing with allowing clients to be able to show their bank accounts on the Ethereum chain, which we just announced recently.

36:45Alex Thorn:Yeah, what was that announcement? This goes hand in hand, I think, with building natively on the blockchain your bank. What is that announcement? So you can't even sign that you couldn't have even you couldn't have done that with that technology. I mean, there was other technology we were clearly thinking about. Again, it would have been stapled. But here, you can have your private bank account and the parties can communicate without anybody within the bank walls, within the four walls of the bank and nobody sees and it's Bank Secrecy Act, etc. Or you can choose to actually put your deposits on the Ethereum chain.

37:21Now, you can still only interact with people who we've KYC, KYB'd at this point because – and they'll get an NFT. You'll have NFTs and we can control that. But there are folks like exchanges. There are folks like, look, first brands. And the other thing that's critical, I'm interrupting myself. The other thing that's critical is to get this out of the crypto world. I mean, first brands could have never happened had payments been visible on the chain. Or if you're in a network of shipping and logistics and you want to say, see, yeah, I want to know that you're paying people. I don't want to just take your word for it.

38:00And if you're doing trade finance, you're going to say, yeah, OK, now I can follow the chains. I can't interrupt that chain. I can't get money from that chain. But I can see that you're paying your suppliers.

38:13Alex Thorn:A lot of people recently have been highlighting the privacy needs of blockchains. You're extolling the benefits in some cases of the transparency benefit of the public blockchain. I think it's both ways. Again, it's going to this attempt at TradFi and, you know, crypto, you know, trying to say kumbaya. There will be some people that will want privacy who are, by the way, currently in crypto. I mean, we're banks, so they'll still be AML, KYC. But they don't want, you know, they don't want to – nobody should know from them as far as they're concerned or their trades. They want to keep quiet. But other people really – the ethos of crypto was a certain amount of radical transparency.

38:55And if you're doing your trades radically transparent, there is a benefit to that in terms of market trust. I definitely can imagine public exchanges wanting to put their clearing on the Ethereum blockchain.

39:15Alex Thorn:Yeah. You want to take a look at it? And I think this is going to be very important for emerging market and other exchanges that don't have necessarily the credibility of sort of developing country exchanges. Say, okay, take a look at us. We're all – it's all here. The stablecoin issuers under the Genius Act framework, the permitted payment stablecoin issuers, PPSI, they now have a regulated path to offer something kind of similar to what you're offering, fully collateralized, proof of reserve. one-to-one backing. What does a chartered, next, modern, sort of narrow bank offer to a client that they can't simply get just with a stable coin?

39:57So first of all, I think, you know, I'm a big and I've historically been a big proponent of stable coins. I think there's a lot of use cases for them. What we're doing is, I think, sort of a little bit next generation in the sense that you're not actually getting a receipt for a dollar when you transfer among us. You're actually getting a full US dollar. Remember I was talking about fractional banking because we're fully reserved. When you transfer a dollar and we keep all of our, we keep all of our money at people, a zero environment. So if everybody wants all their money any day, we just give it to them.

40:33So that those dollars change hands whole on the chain. You're not worried about, you don't have to think about gas fees. You don't have to think about redemptions or, you know, minting and burning, you are getting a dollar. And that's actually an advance. Plus, we have to have bank capital. So a stable coin - You're over-collateralized. You're over-collateralized, but you don't really, we have protection against things going bump in the night, which if a stable coin goes bump in the night, it works just like a money market fund. Right now, I think they're mostly closed until the next day. They're closed and then they run it off and you get 98.

41:16Look, I think stable coins are not going to have huge – I'm not saying they're going to have a huge loss or anything. Again, I don't want to – but it will work just like money market funds.

41:25Alex Thorn:They can trade below R briefly until they rebalance and so. Well, circle traded at 88 briefly. Yeah. Yeah, and it's very – so if I understand what you're saying, it's – the way you've built from the ground up from first principles using the blockchain, it's kind of like your deposits are tokenized on the blockchain. But the difference between when you hear the tokenized deposits from the banks today, they're tokenizing a fractional reserve deposit, which is a liability to the bank. You're tokenizing the actual dollars themselves and you're not lending. So there's – they're not fractionally reserved.

41:59Alex Thorn:So they're there. It's a better tokenized deposit. It's a better tokenized. It's the best one. It's the best one, thank you, because it's actually a dollar. Yeah. It's not a promise to give you a dollar in the future. Right. It's not a dollar, synthetic dollar created by owning treasury bills. And look, this goes back to the January 2029 risk that I talk about, is that in a future administration, the reason we thought about this deeply, how do we want to structure this? because if you had a hostile administration in the future, and I hope we don't have a hostile administration. I hope that this really gets embraced in a bipartisan manner.

42:36I really do. I talk to Democrats and Republicans, and I think there's a segment of the Democratic Party that really embraces this. But who knows? And I don't want to be in a who knows environment.

42:48Alex Thorn:You don't want to roll the dice. Don't want to take a chance. Don't want a non-zero risk on this. We might not get Kirsten Gillibrand as president. We could get Elizabeth Warren or something, and those are very different. That's a bingo. Yeah. So you could get an environment in the future where we're going to protect deposits, but if you're in a tokenized deposit, you take a haircut. Even though it's literally fully there and better in many ways. For a fractional bank, I'm saying. Yeah. Oh, right. Whereas for us. That's right. So I'm saying a fractional bank that's on a tokenized – that's tokenizing their deposits.

43:24If you really don't like crypto, you could say in a future environment that – in a future administration, well, deposits are guaranteed up to$250 ,000 and we're going to pay X if you're a regular deposit. But if you're a tokenized deposit, you're going to take a haircut above X. Because of the risks of the blockchain. Whatever it is, you can make it up. Whereas with us, it is all there in cash because you make no loans ever to anybody.

43:55Alex Thorn:So what is the – Like for a penny. I know one of the arguments that Caitlin Long from Custodia also in Wyoming has been making. There's all these interesting paths with these fully collateralized Wyoming SPDIs. Kraken, Financial, Custodia, Next. I'm sure there's a couple others I don't even know about, but she took a path of asking for the Fedmaster account. Rightly, basically, you're not quite a bank in the traditional sense if you don't have one or you have to operate through another correspondent bank that does have one for most of your stuff, right? And one of the arguments she had made on this show before about – I said, why?

44:34Alex Thorn:This sounds so good, a fully collateralized bank. Most people, we're not getting the yield anyway from lending our dollars to the bank, almost none, right? So most people really just want to know their money is safe. Wouldn't a narrow bank, quote-unquote, be the safest? Why doesn't the banking system like that? So two things. First of all, we're using the charter a little different than the custodian Kraken. A lot of respect for them. So it's, again, just no. But we're a pure bank. We don't – we are a pure bank. All we're doing is banking. We're not an exchange. We're not doing custody in the same way.

45:08So we think we're – and even when we made our presentation to the Commission of Banking, they said, yeah, you're really the first ones using the depository charter as a pure depository. Fractional banks really, really don't like the idea of a non-fractional full reserve bank because it is a better alternative. And they know that. Yeah. Right. And so they really don't – they'd prefer that that not exist. Now, there was an attempt to create something called the narrow bank. You may have read about it. It was a Connecticut institution, another state that does allow fully reserved banks. And it took a very different tack that we're not taking.

45:58It was actually just a middleman for the Fed and the Fed didn't like just being arbitrage because they weren't going to keep all the money at the Fed and use only the Fed master account for a payment system. They didn't have their own payment system. They didn't want to have their own anything. And so people and the banking system really didn't like that. We're doing something that is, we think in advance on that too, being a pure bank.

46:24Alex Thorn:So Fed Governor Waller has talked about the skinny master account. Kraken just got something kind of like that. I guess technically it's not that, but it's something like that. What did they get? They got a pilot account. Yeah. So it's different. But it's kind of like that. It's a payments only kind of thing. So just for full disclosure here, we have applied for a Fedmaster account. And I think, you know, I think we, you know, in my opinion, we'll, you know, check all the boxes. And I think, and I think, look, it's a different environment. Yeah. Yeah. You talked about clarity and I think you've made pretty clear the, we call the January 21st, 2029 risk.

47:10Alex Thorn:I've called it a rollback risk, basically. I mean, just as fast as, for example, Chairman Atkins has solved and corrected course at the SEC and done some great things that you look at the delta between Gensler and Atkins, like surely someone could come and just as aggressively spin it the other way. And that could happen to the banking regulators as well. What about the argument the banks and crypto have been having on stablecoin rewards. I'll sort of paraphrase it in a humorous, although I would argue accurate way. The banks are basically saying stablecoins with their full reserve, their near instant settlement and transfer, ability to self-custody, et cetera, that's just too damn good a product, especially if it pays yield.

47:49Alex Thorn:So good that no one might want their crappy deposit product. And that, if everyone doesn't want their deposit product, it could collapse the banking system and therefore ruin the economy and cause a nuclear holocaust, right, basically. in collegiate debate terms where you always end with the end of the world. I think that's overblown. One of the arguments they've – when we've put out a bunch of research showing that net credit creation can improve by stable coins, that foreign inflows into the U.S. banking system will exceed any interbank deposit migration. But they've also argued along with the ICBA, which is the community bank trade, that small and midsize banks could be harmed.

48:30Alex Thorn:OK, fine, Alex, if you're right that it's net better for the banking system. Still, there could be all these losers inside the banking system that don't benefit and perhaps are truly harmed. What's your view on that? So it's a very complicated question in that – and it's also the topic of a whole podcast because I do think that the small banks and the mid-sized banks in particular are the most vulnerable. Some of them have tried to take some rearguard actions and create their own collective communal stablecoins. But I think the risk is that they will pale in comparison to the big five creating their stablecoins.

49:12Let's not forget, before the financial crisis, the six big banks were less than – they were in the 30s in terms of percentage market share. Now they're at 60 percent of market share. It's not that long. And if you go back to 2000, before the passage of Graham Leach Bliley, before the repeal of Glass-Steagall, they were, I think, just above 10 % in those six banks.

49:40Alex Thorn:So we've seen incredible concentration of the big banks already. It is incredible. And the question I think you have to ask in the banking system, look, as you know, I used to be at one point vice chair of the Mid-Sized Bank Coalition of America. So I'm sensitive to these interbank questions because behind the facade of where they're all holding hands and complaining, the big banks will be disproportionately beneficiaries. By genius act stables and stuff like that. Yeah. Disproportionately beneficiaries. I've read that JPM has already, over the years, and we know they've been working on blockchain stuff with Connexus and I think it was previously called Onyx and whatever.

50:21Alex Thorn:They've spent hundreds of millions of dollars on blockchain tech development. How does Alex's Bank of East Dogpatch compete with that? It's a real issue. So I think that you will over time see interbank sort of combat on this. And the truth of the matter is the big banks have lots of power. Yeah. I think it's interesting, though, because I forget the exact dates on this, but 20, 30 years ago, we had 10 ,000 banks in America. Today, I think it's less than 5 ,000. You pointed out that concentration at the big banks has increased dramatically just since 2012. Isn't this fear of little banks getting squeezed out by big banks actually just a long-term trend that, frankly, the big banks are a big part of and that this Genius Act stablecoin is kind of a red herring for that?

51:19Alex Thorn:But isn't the biggest threat to small and mid-sized banks the big banks? Yes. I don't think there's any question about that. I've described their strategy in the clarity negotiations as sort of using the community banks as human shields, right? Look, oh my god, these poor small banks. It's the banks your barber and your local mechanic. Like you wouldn't hurt them. While meanwhile, they've been opening tens of thousands of branches in small America, competing directly with them for years. But let me get back to this next because who will be the ones in that environment with the new technology percolating and the regulatory frameworks allowing it?

52:03Alex Thorn:How will a small or mid-sized bank stay relevant? What do they have to do or a new bank? So we're really trying to do something new under the sun, being a full reserve bank. And I can tell you talking to clients now that we're out there, we were really stealth, but talking to clients now, the idea of a full reserve really resonates. The idea of, you know, I don't have to worry about another administration. I don't have to worry about deposits only being insured up to some level or taking haircuts really resonates. It's the idea of, I mean, we've had people just, it's not that our AML, KYC is as strong as anybody.

52:48I mean, we basically follow OCC standards. But it's being able to onboard in a technological way. It's being able to interact with people on an API. So our APIs, if you're working with us on an API, it feels just as good as working with and actually better than working with a big bank using their API.

53:15So technology can help new entrants too in the same way that I think it's helping us. But if you are a legacy bank in a midsize using someone else's cooperating system and relegated to being on their user committee and hoping, which meets in Palm Beach twice a year and hoping to get something moving, it's a tough haul because you're so far behind what is going to need to be done. And I think that there is a risk that the mid-sized banks end up being turned into something like the thrift industry. Squeezed, too, by both the bigs and the – Lower returns. Still viable because they have franchises.

54:10It's not like they're going to disappear. They have franchises.

54:13Alex Thorn:Bank deposits at the local business and local level are very sticky, right? People have the same bank they've had for – My wife has the same bank account she's had since she was like 12 years old. Yeah. That's why they love to get college students to sign up. Right. No question about it. One last question before we end. What's something in the last year or two years, recently, that you've changed your mind about? um i have um i've changed my mind about um stable coins and the proliferation of stable coins um i think they're going to be fewer than people recognize fewer individual yeah i think the genius act i thought it was going to be let a thousand flowers bloom and I think they're going to be some more flowers.

55:09But if I give you, if you're a supplier, I mean, if I gave you a Target gift card or a Target stablecoin and a Walmart stablecoin and a Costco stablecoin and, you know, come up with whoever else, CVS, any big buyer and you're the supplier, like... That's going to be annoying. What are you going to do? You can't pay anybody in these stablecoins. So, because you've got too many and so you're going to be swapping them back And I do think that the predictions of, you know, a thousand stable coins, they're – fundamentally, they're not interchangeable. And that's basically fundamentally why I like, you know, transacting in USD because USD is really the bottom layer.

55:53Alex Thorn:Yeah, it's – I think part of the argument that Treasury would make and that real big genius act proponents would say is that the prudential standards for the underlying collateral, the risk management, the examinations are so uniform. Even the state pathway has to basically be the same as the federal that they should be interchangeable. But I think you're sort of saying that even if that is true, you just don't want to have like USD1, USD2, USD3, USD4. It's just like a pain in the butt. Yeah, people have under-indexed that entirely. And I talked to Shippen. Oh, we're going to create our own. We're going to – our manufacturers, we're going to create our own.

56:37We buy so much, we're going to make our own stablecoin. Well, yeah, you're going to create your own stablecoin. People are going to want to dump it the minute they can. And so unless you get to a certain level of reserves and like – actually, it's not economic to have a stablecoin. And I really talk to a lot of people who I think are making that error. There will be some. Don't get me wrong. And I'm rooting for them. I'm happy. Totally. But it's not going to be what people are predicting with the Genius Act. I think the stablecoin industry or whatever – maybe not the industry.

57:10Alex Thorn:The new entrants or people who think it will be 1 ,000 flowers blooming. they're not looking at the recent last you know eight years of crypto where you know a big thesis for a lot of 2017 icos and um crypto protocol tokens and app tokens was that like you know you'll use a you know vr token to like operate your oculus and you'll use a whatever token to operate that blockchain and you'll use this token to play this game and basically the one of the main ideas at the time was the unbelievable proliferation of bespoke currencies one token for this one token for that one token for that now on ethereum the biggest uh collateral is eth and the second biggest is basically wrapped bitcoin yeah right so it's not thousands of tokens that actually matter it's really a couple um just a sort of a it's like you know um uh the telco companies can conglomerating into one giant conglomerate right it's just natural right the three big tv companies right it's like each of them has like 33 percent share it's kind of the natural, um, in network effect businesses.

58:13Alex Thorn:It's sort of the, it's, it's, it's probably in nature. iPhone. And, you know, Sam's, you don't have that many because it ends up being a pain in the rear for people to use. And, um, yeah, I think there's going to be, uh, I think there's going to be a few. Um, and, um, I look, I think there's going to be a next. And I think, you know, I'm really heartened to be, you know, part of this journey. Very interesting. Well, okay. One final question. And where can people find out more about Next? And, you know, what should we be excited about for the next six months that you guys are doing? So first, please find us at n3xt.io.

58:51You can onboard. We're only, by the way, I should say we're only B2B. So it's only entities and businesses. But we are friendly to U.S. entities. We're friendly to foreign entities as long as they're not in a prohibited country. So we're doing, we're onboarding lots of folks, Europe, Asia, LATAM. LATAM is ending up as a very popular site for us. And we're, you know, we're happy to embrace that. So what are you going to be looking for from us? So I think actually the next six months is going to be pretty exciting. We've got some things that, you know, are behind the curtain that we're working on.

59:34but I think we're going to find people really happy to be able to do those two things that highlight. I was debating in my head which dimension, so I'm going to just say both. Okay. Okay. One, I think being able to transact with NDD on Ethereum and having USD actually pass on the Ethereum blockchain, I think that's like a little bit revolutionary and the transparency, I think people are going to find lots of use cases for that. And then the second thing is shipping and logistics. And what we really create, what we really launching is the ability to do self-service letters of credit. Now, crypto people may be less interested in that than shipping and logistics, But I am super committed to bringing crypto out of – to bringing these technologies, not necessarily crypto but crypto technologies.

1:00:37I'm a blockchain maximalist to busting out of this little crypto world that we're in and having – breaking into the whole galaxy as it were and allowing people to ship goods and services by creating a self-service letter of credit essentially, delivery versus payment at a fraction of what banks are charging. And I mean, I remember at Signature how much we charged for letters of credit. And there's, frankly, no need for it. And we are going to like, you know, really allow people to be creating the same, literally the same functionality for like 10 % of the cost. And that's like a radical reduction.

1:01:26So I love being able to help goods and services move, cheapen products, make things more trustworthy. Because in that case, the only people really losing out are the big banks that are just putting in their profit margin.

1:01:41Alex Thorn:Scott Shea, founder of Next, N3XT.io. Thank you so much for coming on Galaxy Brain, Scott. It's a pleasure.

1:01:55Alex Thorn:Thank you for listening to Galaxy Brains, the weekly podcast from Galaxy Research. I'm Alex Thorne, head of firmwide research at Galaxy. Follow me on X at Intangible Coins. Follow Galaxy Research on X at GLXY Research. Read our written reports at galaxy.com slash research. And don't forget, if you like Galaxy Brains, to like and subscribe on your favorite podcast platforms like YouTube, Spotify, Apple Podcasts, and more. We'll see you next time. Thank you.