Stablecoins are Narrow Banks with Nic Carter

24:10Alex Thorn:And you made this point, like markets are probably going to drive monetary policy more than any individual. Correct. So it may not even matter. It just won't. It just really won't. Like, you know, 25 bips here, 50 bips there. Like if inflation comes back, we're hiking, right? If the market responds super poorly on the FX side to those cuts, like, you know, folks will be aware. And, you know, the Fed's going to get grilled why the dollar is depreciated another 10 % after depreciating 12%, 13 % before that. And then you're going to be like, oh, the Fed, Trump's coming to power and the dollar's gone off by 25%.

24:47That's not a good outcome. And so I really do think that the market will do some of that work. But at some point, I really want to double click on that stablecoin stuff that we've talked about. I think it's really interesting to think about folks talking about like, oh, stablecoin coins launching like that should mean you know a stronger dollar that should mean you know faster velocity of money um and and more demand for for us dollars but like fundamentally like unless more dollars get printed like just because you have a stable coin doesn't mean that there's going to be like more dollars out there yeah right like it it's it's not uh like i think people are misunderstanding that.

25:32And now you're seeing like, oh, a lot of congressmen and officials are like, oh, that's going to lead to trillions of dollars in demand for dollars. That's not how that works.

25:43Alex Thorn:Yeah. Is it going to just recycle the demand from elsewhere? Yeah. Well, let's get into that. We've already gone pretty long, but let's have that debate too. Also, what it means for the future of commercial lending and bank deposits generally is a great question too. But we'll leave it here for now. A nice rip here with Bimnet Abibi, my friend from Galaxy Trading. Thank you so much. Thank you for having me. Let's go now to our guest, Nick Carter, founding partner at Castle Island Ventures. Nick, welcome back to Galaxy Brains. Thank you, Alex. Great to be here. I think this is my third time. I think it is.

26:12Alex Thorn:It might even be your fourth time. Might be third time. Yeah, maybe third time. Because, no, I think it is your third time. Because you came on early. I think you were one of our first guests. And then you came on, I think you were one of the very last guests before we started doing the video, right around the FTX collapse, I recall. And then you came on last year. I know, yeah. And then last year we talked about AI. Yeah, that's right. So we're going to talk more about AI this year because, I mean, that story keeps evolving and advancing. But before we get to that, I wanted to congratulate you.

26:42Alex Thorn:Maybe was it your first venture, CoinMetrics, you were the founder of, was just acquired by Talos Trading. Congratulations. Thank you. Yeah, we're very excited about that. That was the very first company I started ever. I mean, it's kind of like a little strange because I started this kind of open source website with a friend that I met on Reddit in 2017 when I was in business school. And it wasn't really a company until November 2018, I think. And then we actually raised some money for it. And then I brought on Tim Rice as the CEO. And he ran it since then. So I haven't had a day-to-day role at the company since then.

27:25But yeah, very, very happy with the outcome. And Talos is a great, great company. I think it's a very good fit.

27:33Alex Thorn:Yeah, I think so too. And the merger of trading technology and trading markets and market data, I think, mirrors the traditional world when it comes to how these data businesses evolve typically, right? Yeah, I think it's a very natural fit. But CM has expertise delivering low latency market data as well as obviously the network data suite. And it pairs very well with Talos's offering, which is actually, they have like five or six lines of business now actually. And honestly, data is a very hard business, hard standalone business. I always actually figured that it would pair well with a more traditional trading style business.

28:19Alex Thorn:it's always interesting too because market data and i want to talk about the network data in a second because coin metrics was one of the big pioneers there and you were as well um but market data in don't the exchanges in traditional markets typically sell that data like the orders and execution data and the trading trade execution data is usually sold by like nisey and nasdaq themselves yeah it's like 20 to 50 percent of their revenue but in crypto the exchanges give it all away for free basically yeah we have this weird social convention where all the market data is free and so then it's very hard to actually sell the data yeah well coin metrics is one of the only there's a couple others that exist have existed surely amber data and keiko i'm not really aware of any other like high late low latency those are basically the two other institutional focus outstanding data companies i mean it's like what's that expression you know you just sit by the side of the river and watch the corpses of your enemies float down or whatever that's probably not it sounds like really mean or whatever but i can't tell you how many data companies i've seen come and go over the years we'll see more consolidation too actually in that space there's some good new on-chain data companies too it's there's a new breed that's what i was going to say is the announced looking at the on-chain and network data where you you in your graduate program, I remember the earliest iteration of coinmetrics.io, I encourage people to use the Wayback Machine to see what that UX was like.

29:47Alex Thorn:Very useful. I wouldn't say beautiful from a user experience standpoint, but totally functional. I actually loved the legacy. I did too. BitMEX just did a legacy UX thing. Or no, somebody did and Johnny Beer and BitMEX were saying we should do it too. Show what the oldest UX used to look like. I'm also thinking of Polonie. I was like on Poloniex and CoinMetrics and like early BitMEX and all those UXs are very nostalgic for me. The same way like looking at like CS Assault or D Dust and like old, you know, Counter-Strike maps or things is. Yeah, our UX was written in Haskell from the ground up. It was highly performant, as you probably recall.

30:28Not pretty. It was not pretty, but it was very performant.

30:31Alex Thorn:You could do some custom queries in there as well. Yes, we had a very powerful formula builder tool. man those were the days so since then though i would say unlike the market the institutional quality market data space the on-chain data space is like highly competitive and there's a lot of players right from you know free semi-free to paid ones things like arkham and nansen and glass node and coin metrics and and all the defi llamas and rwa.xyz all these websites that give either it away for free. There's a lot of data. Dune, obviously, Dune and Flipside, I think, are also great, very powerful examples for custom queries.

31:11Alex Thorn:There's a lot of people on that side of the market. I remember when Dune came out, we actually sent Dune a term sheet. We didn't invest in the end, but we sent them a term sheet for the seed. I remember seeing Dune and thinking, this is the future of network data. And actually, if I'd still been running CM at that point, I would have pivoted into more of a dune approach because i loved the flywheel of user generated content yeah incredible product dune yeah dune is great i would say our team also loves flip side's competitive product to dune they have a similar you know like custom in the custom data normalized databases where you can build custom queries on top and i think my understanding i'm not like the data guy on on my team but that dune's uh databases are not like harmonized across chains so like there's all these nuances if you're going to make a Bitcoin dashboard on Dune versus an Ether or a Sol or an NFT or whatever, whereas Flipside has really clean cross-database harmonization, like better taxonomies, both very powerful, though.

32:15Yeah, Allium and Artemis are two newer entrants as well. RWA XYZ is good on the stablecoins front. There's a ton of great companies in the network data space. It's also a very hard market to be in, I'll tell you that. The TAM and data these days didn't grow as fast as I thought it would, actually. I think this year it might change, more institutionalization, but extremely challenging business, to tell you that.

32:40Alex Thorn:Yeah, I think if you get one that might grow the TAM and revenue and addressable market for those companies and investor types that would be buying that data would be if we got tokenized equities. And then you need real high-quality data on what is effectively securities on-chain, which surely the on-chain analytics firms could be poised to deliver to traditional markets. It's interesting. Open questions about the legality of the tokenized equities, I think. Yeah. We'll see. I agree. We've been very critical of the wrapped token wrappers. Obviously, Commissioner Peirce put out a statement, too, saying she was, well, I wouldn't say she said she was critical.

33:26Alex Thorn:She signaled some criticism of it and just recalled that, reminded that those would be securities as well, likely under their analysis. But, yeah, it still remains to be seen how, I should say, if, how, and when the SEC would allow real tokenized equities. But it seems like we're marching towards that, doesn't it? I think it has to be issued directly by the corporate entity for it to really work. So I'm skeptical of these Luxembourg SPVs that are tokenized. Also, we're now seeing it for private companies, tokenized equity for late-stage privates. That's even more complex because you can't really arbitrage a derivative against private late-stage.

34:13There's no way to really short if you think about doing that ARB between the publicly traded token. You can't close it because you can't express your short view. Sometimes you can't even express a long view.

34:27Alex Thorn:Right. Yeah, and those you would surely need the issuer's permission to do because they can approve and deny all secondary trading of those non-listed securities, right? Typically, yeah. I mean, sometimes you have these SPVs and you end up with nested SPVs. I saw a 3X nested SPV on Anthropic today. So what is that? Is that an SPV owns shares in Anthropic or invested on a primary basis, and then another SPV bought shares from holders of that SPV? And you're saying a 3X, so then yet another SPV bought? A third layer with the whole time you've got 1 in 10 fees. Oh my god. You're getting such a small piece of the pie once you get to the third level of recursion there.

35:12Alex Thorn:And is that due to significant, enormous demand in, say, in this case, you said Anthropic, in ownership of pre-IPO Anthropic shares, that people are willing to stomach that, apparently? Yeah, I mean, it's kind of a weird cottage industry that's cropped up now. These companies are staying private so long. There's ample liquidity in private markets. And there's just endless intermediation there. And this is why you should go public, man. You're worth$100 billion. dollars, just go public at that point. Well, we have been seeing, maybe that will shift. It has been a historic, you know, larger and larger private pre-IPO venture-backed companies over the last, you know, decade plus.

35:55Alex Thorn:But maybe it seems like there's a bit of a gold rush now with public markets. Maybe we'll see a shift in that. Sticking with tokenization, another thing that could drive, I think, demand for on-chain data products would be increased. We said about tokenized securities, but how about tokenized dollars? It looks like we stand on the precipice of an explosion of crypto dollars or digital dollars because of the passage of the Genius Act. What's your reaction to the, you know, Genius Act is now federal law. Yeah. I mean, I watched the press conference, I guess, when we signed it. I saw a lot of friends in the audience there.

36:34I thought it was the second or third most important political event in the history of crypto in the 15 years. So I think Trump's election was important, obviously. The approval of spot Bitcoin ETF, and then Genius Act. I mean, Genius Act's the first ever pro-crypto piece of dedicated legislation ever. And it completely ratifies stablecoins, establishes the federal framework. It really does a lot to silence the critics, too. I mean, these are very safe instruments at this point with the framework and the restrictions that domestic issuers have to face. There's open questions actually as to, you know, what will become of Tether?

37:16You know, they have a few paths under Genius. I think it was actually overall a very good outcome for them. You know, they have this three-year grace period before they have to sort of make up their minds. they could potentially launch a US stablecoin or they could be determined that they are operating under a comparable regulatory regime. I suppose in El Salvador is where they are right now. I actually think there's a dark horse likelihood that that is the determination. So I think very good outcome for Tether. Genius clearly allows US financial institutions to get involved in stablecoin issuance.

37:57I think it's much bigger than even crypto. I think it's a change to the nature of banking in this country entirely. I think it inculcates a narrow banking framework, which is what banking theorists, many have been hoping for. So I think it's a total structural change as we move away from commercial bank intermediation and move towards firms. and individual retail holders having exposure to having a relationship with the Federal Reserve directly, as opposed to having to go through the commercial banking system.

38:38Alex Thorn:Can you expand on that, on the narrow banking concept? What is narrow banking? Why are these narrow banking versus fractional reserve banking? Normally, banks have this very cheap source of capital, which is deposits, and they don't pay very high rights of interest. And you are exposed to the bank's solvency. We saw what happens in 2023. Sometimes things go pear-shaped. And then the bank has that relationship with the Fed. So it's really a tiered, highly intermediated system. The bank's doing lending, et cetera. Noribanking cuts out the middleman and you get exposure directly to the Fed. in theory the Fed's paying you interest.

39:25So the Fed issues the liability and then you're in theory able to utilize that. You don't need to go through a commercial bank. There was a thing called the narrow bank, TNB, which the Fed disallowed out of concern that it would drain deposits from the commercial banking system because of course we in the US think it's a generally good state of affairs that banks are injecting credit into the economy I mean, doing lending for small businesses, for mortgages, et cetera, et cetera. So banks have this kind of dual mandate. Narrow banking potentially disintermediates all of that. That's why it wasn't allowed in the past.

40:02Now through Genius, we effectively have, in my view, stablecoins are narrow banks, especially if they can find a way to pay interest indirectly, which I think they will do. I don't think there is actually a way to prohibit interest provision through intermediaries, the way Circle does it. So now you have stablecoins, which are going to have access to the Fed directly, in my opinion. Chris Waller said that recently in a speech. Or they're just holding treasuries and giving you a transferable liability that's basically redeemable from the underlying. So it's like a money market mutual fund, but you can actually buy things with it and use it as collateral.

40:48It's actually transferred. It's not just sitting in a brokerage. It's totally interoperable. In my view, stablecoins are narrow banks, especially if stablecoin issuers get these banking charters and things like that. I think it's going to continue with this trend that we've seen for the last few years, which is this flow out of commercial banking deposits, especially unsecured, into owning treasuries directly or owning basically direct liabilities of the Federal Reserve. And that is a huge systemic change in the nature of banking in this country. Some people are afraid of it. I'm not. I think it's warranted.

41:31I think the system as it existed was very unsafe and very ambiguous as to whether your uninsured deposits are secure or not. We don't need that ambiguity. But I think it's going to challenge commercial banks hugely.

41:46Alex Thorn:I think the reason why it's fair to call it narrow banking, and you're right, it becomes more compelling to call it that if the issuer itself is itself a bank, whether it's a fintech that gets a banking charter or if it is an existing bank. But another reason to call it that is because Genius sets extremely high uniform standards, right? So whether it is Alex Thorne, Inc. or Circle or Nick Carter Limited that issues the stablecoin in the US, to be legal, we all have to achieve an extremely high bar for collateral management, for bankruptcy remoteness, for AML-KYC, for all of those things, right?

42:25Alex Thorn:It sets a uniform standard, which sort of makes it a whole, although you will have different issuers, it makes it one giant pile of fungible dollars, right? They should be fungible under this system. um do you think that you know one of the reasons for because the genius act does attempt to explicitly ban paying yield to token holders and i think it would ban say circle like if i hold one usdc in my non-custodial wallet them literally airdropping down the yield to my token but you talked about intermediaries right right now coinbase does pay yield on usdc deposits at Coinbase. Why is it that you think they'll be able to pull that off even given the ban?

43:11What is the argument behind that? Yeah, yield is the crux of it. If yield does become a feature of stablecoin systems, as it kind of presently is, then the narrow banking analogy is real. It's actually just literally narrow banking at that point. The ABA, the American Bankers Association, sent a letter, I think maybe directed to Congress or Treasury, saying you need to make sure that those anti-yield provisions are enforced in Genius. They're very concerned about this. And banks, this is because banks haven't covered themselves in glory at all. They don't pay market rates at all. I don't know what your high interest savings offers, like 2 % maybe.

43:58Of course, if you're comparing a commercial bank deposit that pays you 2 % and if it's over 250k the funds might literally not be there so it's much less secure. You're comparing that with a money market fund or with a stablecoin that acts like a money fund. The latter is far more secure. It's just a much higher quality liability. I think for accounting purposes there's no way to actually write a law such that an issuer cannot pass along an incentive that is yield flavored. I just don't think it's possible. You don't have to describe it as a yield and you don't have to pay it on chain. With Circle, you hold USDC, Coinbase, you're getting an incentive payment, which they don't call a yield.

44:51I think it's like a marketing expense or something. How do you stop that happening? And stable coins, yeah, I might hold them non-custodally, but But increasingly, there's intermediation in the stablecoin sector through these payment service providers, the bridges of the world, the orchestrators, through custodians, through exchanges, through fintechs now. Those intermediaries will be the vessels through which this yield is distributed. So de facto, you will have a positive yield-bearing stablecoin situation. and if you're looking at a py usd really any genius regulated stable coin that is something you're much more secure holding than certainly an uninsured cash deposit in the bank yeah i think

45:38Alex Thorn:like you know you have fdic insurance up to 250 000 right per account at for a bank deposit but that um certainly doesn't cover the entire banking system at all not even remotely close right but But you still end up in tricky situations if you look at like Signature and SPB and other banks that collapse because the deposits aren't there, right? They're not there. You are taking, by definition, some credit risk to the individual bank where you deposit your cash with some FDIC mitigation. And, you know, if you're lucky enough that your bank that collapses is deemed so important, then maybe the Fed just steps in and backstops it anyway.

46:19Alex Thorn:But these are fully collateralized stablecoins, right? There shouldn't even be, even in the sections, in the Genius Act, I think section 8 and 10, which sort of describe the bankruptcy remoteness, even in the case of a bankruptcy, you're not just, holders don't just have primacy over all other creditors. I think the estate is required by law and the courts are directed to just let the people withdraw within 14 days if the assets are there, which they should be there because they're required to be there and bank examiners are going to make sure that they're there. So it truly is safer in some ways.

47:01Alex Thorn:It should be safer than a bank deposit. Far safer. And I don't want to get in trouble by saying this, but I can't even conceive of what a run on a stable coin would look like. And I know everybody's all worried about that and they're saying, well, this genius means the US government is now de facto insuring stablecoin issuers and we're going to bail out the crypto bros. You've never even had a run on a money market mutual fund that holds short-dated treasuries. There was one that broke the buck obviously in 2008 because they held layman's commercial paper or something. Stablecoin issuers could not do that.

47:34They could not hold layman's commercial paper under genius. So never been a run on a there's seven trillion dollars in money market funds there's never been a run on a money fund that's holding treasuries what are stable coin issuers permitted to hold under genius less than 90 day maturity treasuries cash and banks that's basically it like yeah there's nothing creative or unusual in there i don't and you know the treasure market's literally the most market on the planet so i can't even conceive of a run on a stable coin under i mean you could have

48:11Alex Thorn:like an extremely short term uh slight dpeg in the case that there's an enormous demand for redemptions like somehow before the stable coin issuer is able to sell the treasuries to create the cash to give the redemptions but we're talking like a mere hours i think maximum that that could even possibly occur. Yeah, and on the other side with bank runs, if you look at 23, the run on SVB and Silver Signature, those are the fastest runs in history by far, by far. On Thursday, I think March 8th, maybe, 2023, there were$100 billion of withdrawal requests from SVB in 24 hours. We've never had anything remotely approaching that in history before.

49:00So, people are aware of that. That's in the collective consciousness. And we have social media, right? So, everybody's communicating, oh, SVB, you remember what Twitter was like. So, everybody's going to remember that. So, on the one hand, stablecoin run risk, extremely low to possibly zero. On the other, commercial bank run risk, everybody's highly attuned to that. And every CFO is now aware of the risk. and ready to pull their funds at a moment's notice. So banking system, more fragile, stable, and stronger than ever.

49:38Alex Thorn:Yeah, the combination of social media and the fintech banking apps themselves, it's never been easier. You don't have to line up against outside Bailey Bank and Trust or whatever it was called. Is it Bailey's, the name of the bank? Yeah, George Bailey. Yeah, George Bailey. I just forget if that was the bank's name itself. But yes, in Bedford, in the movie, It's a Wonderful Life. You don't have to line up outside the bank. You can literally just pull out your phone and withdraw your money like boop, boop. And you know what? With banks embedding stablecoins in the core banking infrastructure, it'll be even faster.

50:10Alex Thorn:Yeah, I agree. So not to spread FUD around. Well, and that's the other thing, too, is that the issuers can't re-hype the underlying collateral. There's another fear that people had was that we know that there probably will be demand to take your checking account balance and put it in a stable. It is safer, theoretically, and maybe pragmatically, than the checking account deposit, even more so if you can get yield on the stablecoin. But a lot of people, even if they end up getting paid in stablecoins, will end up using custodial wallets like banks, probably, to hold the stable in a checking account.

50:50Alex Thorn:And I don't believe there's any prohibition on stablecoins are treated pari passu as cash. That's a big innovation in the Genius Act. And a good thing, there's nothing saying that the bank that you deposit your stable coin with can't then proceed to do commercial lending with the stable, right? So there could be a net drain out of one form of deposit, but it's like a stable coin itself can become a deposit again and then be used. So I don't, one of the questions people have for me is like, will there be this giant, not only movement from unsecured bank deposits to stable coins, but also will bank lending be dramatically harmed?

51:28Alex Thorn:And I'm not so sure it will be. I think it will be net marginally harmed for sure, because some people like me might choose to hold my checking account, stable coin cash in a non-custodial wallet, which by the way is possible for the first time ever in American history. but also some will use things that aren't lenders like paypal or cash app or venmo or robin hood to hold their stable coins but surely a lot will flow right back into the bank right yeah presumably and every bank is considering their stable coin strategy so yeah i do believe stable coins are just going to be another line item type deposit let's transition because you there were some hilarious and hysterical criticisms against genius which in the end i mean really didn't resonate.

52:08Alex Thorn:Something like over 100, I think 110 Democrats voted in favor with Republicans in the House, which is actually way higher marked to pass Genius into law. 69 Republican, 69 total votes in the Senate, well over 300 votes in the House to pass this thing. So the critics didn't really make much of a dent in support. And actually a similar, almost as high a margin for the Clarity Act in the House with 78 Democrats voting in favor, even more than fit 21 in last year's Congress. But still this hysterical sort of progressive wing of the Democratic Party advancing some arguments. And one of the ones that they advanced for genius quite loudly is that it effectively issues in or ushers in a new era of free banking and that somehow that's code for very bad.

53:04Alex Thorn:You've written about this and replied to this criticism a fair amount. And you've also written about free banking historically quite a lot as well. Nick, what is free banking and are those comparisons accurate? Yeah, I mean, it really rankles me actually because they have this extremely blinkered view of what free banking is. And no one that invokes free banking appears to actually have looked at the historical record at all. It's not like this information is hard to find. George Selgin has spent his entire career talking about this. So just read any of his books. I don't know. And it's always these central banks are like, oh, it's going to bring back wildcat banking.

53:44The U.S. domestic free banking systems, pre-Civil War, 1830s, 1860s, you did have banks at the state level were able to basically take in specie gold and issue notes against that. But it's not considered a classic. This is kind of a no true Scotsman fallacy here, but it wasn't considered a classic instance of true free banking or laissez-faire banking, it's called, which just means basically the money supply is not controlled by the central bank is what free banking really refers to. The truer, more pure examples are found in Scotland in the late 1700s, early 1800s. There was an episode in Canada around the time.

54:34There's other episodes historically in Sweden and Switzerland where the system was extremely stable, not inflationary. And the banks were held in check by competitive pressures, basically. The competitive pressure is not to over-issue notes. In the U.S., the system was much less stable because there were serious restrictions on the banks themselves. They were not allowed to branch, which means having many different branches, so they weren't able to get this geographic diversification. So if the corn harvest failed and it was the local Bank of Idaho or whatever, then the bank might fail because they're not diversified.

55:16The states also forced the banks to hold really subpar instruments. So they were very fragile. And so, yes, there were rampant bank failures during that era, but it wasn't a classic or true example of free banking. And so now, these days, you have central bankers that will refer to that time and be like, oh, stablecoins are just like that. And you're going to have wildcat stablecoin issuers. Like the wildcat bank was a bank that would issue notes, take deposits, and then leave. just disappear, basically. They're worried that in some cases in the free banking year in the US, you had the liabilities of the banks trading at different market values.

56:02So you'd have to do extra informational work to determine whether this dollar issued by the Farmers Bank of Idaho is worth the dollar in New York if you want to spend it. That's because there were restrictions on branching so you couldn't get these more nationwide banks at that time. It was also because there's informational costs and latency costs. To redeem the notes, there weren't really clearinghouses, mostly in the US. There were some. There was this one called the Suffolk System in New England. There weren't clearinghouses, so there were costs associated with redemption. You'd have to physically go.

56:42And so that introduced costs in some cases. So there were discounts. This doesn't really apply to stablecoins. Stablecoins are these natively global institutions. It's not difficult to find information. There's no cost associated with finding information on the solvency of the stablecoin, especially post-genius. It's very standardized, as you said. They are not engaging in lending at all. They're just holding treasuries. So there's no risk from the balance sheet perspective. So I have made this comparison in the past in the crypto dollars paper I wrote in 2020. I actually made a detailed comparison because I thought it was interesting, but it doesn't really fit.

57:27And you have to recognize that historical banking with physical paper notes, with limited ability to travel, right? Pre-internet, obviously, like I guess we had the Telegraph or something. That doesn't really compare to the modern day situation. And the reasons why those banks were unreliable and there was sometimes costly information with regards to the solvency of the banks, those reasons do not apply to stablecoins today.

57:59Alex Thorn:Yeah, I think that's right. And, you know, even just one of the simple ones you mentioned to the inability of the U.S.-based wildcat banks from even doing like cross-border stuff, right? Not opening, not hedging. I mean, most of them having to be solely contained inside one state jurisdiction, that obviously doesn't apply here. Right. And the quality of the assets. I guess, what is the naive reason why people are making this? Is it because you're going to have many different issuers? and it seems like a simple comparison? Yeah, I mean, I guess stablecoins, it seems like a private firm taking in deposits and issuing their own liability, which is then meant to function as money.

58:44And all these economists, like Gordon Zhang has written about this a lot, Gordon A. and Zhang, rather, they say that stablecoins don't satisfy the NQA principle, no questions asked. So that's the idea that for money to be efficiently utilized in society, whenever you use the money, you can't have any questions about what that money's worth.

59:05Alex Thorn:I give you a dollar, you look at it, you know for sure it's a dollar, you've received it, there's no further questions. If I have questions, then we can't do commerce. But I think that's an unrealistic bar, actually, for any form of money, frankly. There is a guarantor always. And then also, just empirically, stablecoins tend to be worth a dollar. and people very happily accept them. And they're also redeemable for the underlying dollars. Right, especially under the genius framework, which really codifies all of that stuff. The redeemability is key. So when you send me Tether at USDC, I do not have questions.

59:43So it's always like economists would be like, yeah, it doesn't work in theory. But it works in practice, but not in theory.

59:51Alex Thorn:Yeah, that's the strangest when you see that. On any topic, you're like, well then perhaps the theories need working on. Yeah, the theory doesn't seem good. It's not like a good model of the world. Because there's trillions of dollars of stablecoin transactions, and there are no questions asked, truly. That's also the point of genius, is to eliminate any lingering questions. That's right, and it is quite comprehensive. Wow, we're looking at a truly historic change to the way the U.S. banking system works, it sounds like. Do you expect all big banks or all banks to issue these? I think so. I think you'll have consortia.

1:00:31It's very hard to be an issuer of a stablecoin. A lot of people have tried. Arguably only three have ever succeeded. I would say Tether, Circle, and Athena's different. But I would say successful, sure. Maybe USDG and Paxos' stablecoin. I think they're also doing well. But very few have succeeded. you need to band together if you're going to issue a stablecoin. So there's these rumors of JPM and Bofa and Citi doing a stablecoin. I think a lot of banks will mistakenly think that they can just do it, but they don't understand you need distribution for a stablecoin to work. All the major stablecoins that have worked have had the distribution of an exchange as the Nexus.

1:01:17USDC with Coinbase and Tether with Bitfinex and later all the other major offshore exchanges, it's going to be immensely challenging. Just based on the conversations I've had with several of the top 10 largest banks in the U.S., they will all issue or join some kind of consortium.

1:01:38Alex Thorn:Yeah, it seems like they don't want to, at a minimum, they don't want to leak that 90-day or less treasury yield to just some other fintech. I think the interesting thing for me, the ICBA, which is the community bankers, trade. They also heavily opposed Genius and wrote some angry letters. And I think, to me, this is maybe the most interesting disruption. Surely, JPMorgan Chase, the world's largest bank, could figure out how to launch one of these things. Or a consortia of banks could. But do you want to hold a stablecoin issue? Even though you should be able to, because they really are federally minimum threshold.

1:02:18Alex Thorn:It's quite high in terms of all the safety. million. Yeah. And, but also in terms of the safety and the rules and all that, even if you register with the state, that that state regime still has to basically be as strict as the federal one anyway. Um, but do you want to hold, you know, like local stable coin issued by your, by a community bank in Spokane, you know, Washington, I don't know. And so I think there's a fear among the community bankers that their depositors who are largely comprised of workers in their local jurisdiction getting their direct deposit, getting paid their salaries into a checking account, that they might end up receiving JPM coin or Circle or Tether as the deposit.

1:03:00Alex Thorn:And now they're leaking some amount of yield back to some unknown company. So there is an incentive for them to issue their own. To me, it seems like debit cards are pretty much the directly challenged by stablecoins, debit card holders, those types of checking accounts. Yeah, I think community and regional banks will be challenged for sure. I mean, the U.S. is actually a bit unusual with how many financial institutions we have. We have, I think, 4 ,000, 5 ,000, which is very, it's actually been declining significantly. Yeah. I think the winners will be the largest banks. but I do also think that the window is opening again to get new bank charters, which is very exciting.

1:03:45So I welcome that. I think since the financial crisis, since Dodd-Frank, it's been virtually impossible to get a bank charter. I'm very excited for this new era now. All the banking regulators are signaling they're open to new charters. You're actually going to get some competitiveness. And Chris Waller, the Fed governor, says it's not my job to protect banks' profits. He's basically admitting stablecoins will challenge the profitability of banks, especially as they lose the very cheap funding and deposits. And that's okay. Like, the banking system is not that good. Yeah, let's roll that clip.

1:04:23Alex Thorn:Let's roll that clip from Waller. Stablecoins are just, they're just a new method for making a payment. So stable coins are just a new dollar token, just like a poker chip, that is now going to trade over a different set of digital rails, typically the crypto rails, Ethereum, Solana, these various platforms. What is that going to do? It's going to open up different ways of making payments. These are fast, 24 by 7 by 365 payment setups. They're just a dollar representation. They don't pay interest. You have to have them fully backed. There's no banking credit backing this up. It's just pure liquid assets, treasuries, or reserves in the Fed.

1:05:11And the whole idea for me is that this is just going to introduce competition in payments. It's going to make cross-border payments so much easier. It's going to make them faster, and it's going to make them cheaper. And that's the goal for me as a free market capitalist economist, economist is I want competition and payments to drive down the cost for households and consumers and businesses. That's it. Banks have to compete. Sorry, that's your job. So it's not my job to protect profits of individual firms. So that's it. But I want a level playing field. If you're going to interest a stablecoin, let the banks in on it too.

1:05:49Then go compete. See what happens.

1:05:51Alex Thorn:All right, Nick, plenty of discussion on genius and banking. Always interesting. Before we wrap, let's talk a little bit about AI. Like I said, at the top of the interview, we talked a lot about AI last time you were on the show. You're an investor in CoreWeave and in CoreScientific. I think you both. And obviously those companies have huge data center businesses tied to AI. Of course, Galaxy has a big data center business tied to AI. Before we get to data centers and energy and demand for the growth of AI, it's been a year. Three years ago, what was the video AI threshold was like, can you make that video of Will Smith eating spaghetti?

1:06:29Alex Thorn:And it was really, really bad. Now Google VO's video is incredibly good, but also LLMs have improved. As a user of AI tools, how would you characterize the last year of advancement? On the one hand, if you're in the trenches using AI tools as a white-collar professional, I think you're blown away. And I think it would be very irresponsible if you had any kind of job and knowledge work and you did not use AI. I would never hire someone that didn't incorporate AI into their ordinary processes. So I think the amount of compute per capita we're going to assume is just going to continue to rise through the orders of magnitude.

1:07:13At the same time, the diffusion of AI into the enterprise has been actually very slow, I think. So the corporate sector adoption curve is much slower than I expected. At the startup and entrepreneurial level, smaller firms, more nimble, less constrained. It's immense. What percentage of code now in startups is being written with AI? Probably at least 50%. So it is interesting. It's kind of contradictory things. On the one hand, O3 Pro is, in my opinion, it is AGI. I think that actually we've achieved it already. Not super intelligence per se, but I'd say it's better than humans at virtually any task.

1:08:03It involves thinking and knowledge. Just got a gold on the Olympiad. What's the competition called?

1:08:12Alex Thorn:I forget, but yeah, it scored very high, yes. So you're talking elite mathematical problems that professional mathematicians struggle with. I can do this now. On the other hand, we haven't seen it affect GDP growth, as I expected. I thought it would add a couple points, actually. So I do think there is tremendous inertia in the largest firms. So the diffusion is actually slower than I thought. it yeah i think that makes sense you want to see the efficiency gains from these ai tools translate into more revenue more product more everything are we seeing like layoffs because of it yet you think or like is it affecting the labor market have you talked to like your like younger sibling or like friends that are younger that are just graduating from college it seems like the labor market's extremely tough, actually.

1:09:09Very, very challenging. But at the same time, as a VC and an entrepreneur, it actually changed the balance of power between founders and capital. Founders are actually very empowered right now because they need less capital. The fixed cost of building a software startup is much less now. You just don't need as many humans to produce the same output. So it's the golden age of entrepreneurship. Anyone even non-technical can build an MVP or an actual technical product now. So at the startup level, I think it's absolute golden age to be a founder. But it's not universally diffused, which is remarkable.

1:09:54Alex Thorn:Well, actually, before we get into how this is going to translate into the growth of energy and data center needs, You had an interesting post today about, you said you wouldn't hire somebody that doesn't have these skills and young people are finding it hard to get jobs. Are we worried about young people being able to develop critical thinking skills and also writing, which I think you would definitely agree with? writing is thinking you know if you can't think well you won't write well and i encourage my team especially newer researchers to work on their writing as a method of making their thoughts themselves coherent understandable relatable are we worried about the future generations losing these key skills of writing thinking and critical thinking yeah i'm very concerned actually very very concerned.

1:10:44I think people, if given the choice, would offload virtually all cognitive tasks to the AI. It's like we don't memorize maps of the city anymore. We just use Google Maps, right? And so we don't know what the city looks like. It worries me immensely and I'm very glad that I completed my education before AI came to exist. I think there's just going to be so few parents that are willing to do the work pedagogically pedagogically, to teach their kids, to make them literate. I think the literacy rate's going to collapse. And I actually am deeply concerned for future generations. I think it's going to be this massive Pareto principle where you're going to have 1 % or half a percent of kids who are actually going to learn to perform cognitive tasks.

1:11:34And the vast majority will just use AI to do all educational tasks. and as a result will learn nothing. But they will have brain-computer interfaces in a decade or so. So from the outside, they'll look extremely competent, but they won't have internalized any of the cognitive ability at all. It'll just all be outsourced.

1:11:57Alex Thorn:So that's kind of terrifying, and I agree. I'm happy that I already did my schooling in education without these tools. Do you think it ends up, assuming that's what happens, does it end up more like idiocracy or does it maybe do we end up with an anti-machine revolution like in dune where these things end up getting banned uh is there some middle ground the butlerian jihad yeah no there's no reversing it you know there's absolutely no reversing it so yeah i think you'll have a tiny tiny fraction of the population that will be building things and the rest will be dependent um and so i do think this is actually what's leading people to support Zoran and other incipient socialist movements, I think there will be a huge upswing in socialism in the developed world as even, you know, educated folks become, you know, effectively irrelevant from an economic standpoint.

1:12:54So it does concern me a lot, actually. I think there will be some kind of, you know, rebellion, for lack of a better word, on the part of labor versus capital, which is coming in the next 10 years. I think you'll see extremely powerful socialist movements in this country as people realize how unbalanced things have become.

1:13:21Alex Thorn:Foreboding. What does that mean, that growth and demand and reliance upon this for data, data centers, energy? How is your thesis evolving there? Yeah, I mean, look, I'm tremendously exposed to that, of course. All the Bitcoin miners now are looking to convert or sell themselves to the AI neoclouds, the core weaves, the Crissos of the world. And we're going to face bottlenecks very soon. We're already facing them. Zuckerberg talked about this on the Dworkesh podcast. and you're talking about hundreds of billions of dollars being spent by the hyperscalers on AI infrastructure. I mean, Elon yesterday was throwing out some insane numbers on this.

1:14:12And there's also going to be an overbuild because you'll want redundancy at the sovereign level, right? Like the OE and Saudi and Japan and China, they're going to want their own clouds. You're not going to want to run on some other country's cloud for your critical, like your military AI infrastructure, right? So there will actually be a massive overbuild. I was just looking at the data recently, and I think we've now eclipsed the spending on AI infrastructure as a share of GDP when you compare it with the broadband, the fiber build-out from the first bubble in the 2000s. The telecom bubble? I don't know, what do we call it?

1:14:52Dot-com bubble? Dot-com bubble, yeah. So we're now ahead of that. But we're not at the railroad level yet from the railroad bubble. So I think it'll go further, actually, because this is much more important than just the internet, actually. I think much, much bigger, economically speaking. So we're definitely in a, I don't know if I would call it a bubble, but we're in this period of massive infrastructure overbuild, which I think will continue and go further, actually, than people might expect because every sovereign will want their own. But the ultimate bottleneck, of course, is power. And we don't produce enough of it in this country.

1:15:33China is far, far ahead of us. It has to be nuclear, but nuclear takes so long. So we're going to reach that bottleneck very soon. I think we're reaching it. And if you look at the power prices in some of these markets, it's already kind of going nuts. And a lot of those inefficiencies have been scooped up. We used to talk about West Texas as this place with cheap power and Bitcoin contacts. And then you have Stargate plonking down multiple gigawatts in Abilene, Texas. I mean, if you've seen the development of these facilities, it's unbelievable. So we're running out, and there's just no way to bring power online fast enough.

1:16:14So we're hitting that bottleneck now.

1:16:17Alex Thorn:Well, that's what the president said in his 2024 Nashville Bitcoin conference speech. We're going to have so much electricity. You're going to say, please, sir, no more electricity. It sounds like we definitely will need more. Nick, given all of these conversations we've had on crypto data and those markets, the expansion of stablecoins, AI, energy, we haven't talked a lot about crypto or Bitcoin, and we're not going to, but maybe here, what is Castle Island focused on in the sort of near and medium term now for venture investing? What themes are you tracking closely? Yeah, we aspire to be the premier stablecoin-focused fund in the world.

1:16:57And I think we're probably close to that in terms of deal count, capital deployed. Stablecoin is such an interesting space. We're doing a lot in emerging markets. Scott Besson obviously talked about this. But when you talk about the growth sources for stablecoins, a lot of it will be substitution with moving from commercial bank dollars to stablecoins. that doesn't make a difference for us fiscally. What does is other offshore foreign markets doing currency conversion, currency substitution into stable coins. And we think it's very good. Actually, there's a welfare reason to do that. Other foreign governments may not like it, but that's where we see a huge source of demand.

1:17:44So looking offshore, emerging frontier markets, facilitating dollarization and a free flow of capital and goods, which I think is very good for the world. And then looking at startups that are facilitating this transformation domestically from banking as it used to work to banking plus stable coins. And that's going to be very challenging. Banks don't update their software very quickly, right? So there's a lot to do there. So those are the big themes for us. And then, of course, what we've always done since inception, which is financial market infrastructure for crypto. We've been very consistent.

1:18:23Nothing's actually changed in eight years of doing this, which is kind of interesting.

1:18:28Alex Thorn:Eight years. My God. I know. It's been a lot. It seems like not just yesterday that you guys founded Castle Island up there in Boston. So much has changed. Well, congratulations on the success at Castle Island, Nick. congratulations the founder of coin metrics on a coin metrics acquisition that's also a long long time coming that was even longer yeah um and this has always been great thank you for coming to galaxy brains nick carter founding partner of castle island ventures thanks for having me that's it for this week's episode of galaxy brains thank you to our guest nick carter founding partner of castle island ventures and our friend bimnetta bb from galaxy trading everyone have a safe and happy weekend and we will see you next week

1:19:16Alex Thorn:Thanks for listening to Galaxy Brains, the weekly podcast from Galaxy Research. If you enjoy the show, please like, rate, review, and subscribe wherever you get your podcasts. To follow Galaxy Research, sign up for our weekly newsletter at gdr.email, read our content at galaxy.com slash research, and follow us on Twitter at glxyresearch. See you next week.