Author: Arthur Hayes
Compilation: Deep Tide TechFlow
Equity investors have been shouting: 'Stablecoins, stablecoins, stablecoins; Circle, Circle, Circle.'
Why are they so bullish? Because the U.S. Treasury Secretary (BBC) said so:
The result is this chart:
This is a chart comparing the market capitalization of Circle and Coinbase. Remember that Circle must hand over 50% of its net interest income to its 'daddy' Coinbase. However, Circle's market capitalization is close to 45% of Coinbase's. This makes you think...
Another result is this heartbreaking chart (because I hold Bitcoin instead of $CRCL):
This chart shows Circle's price divided by Bitcoin's price, with the index based at 100 when Circle went public. Since the IPO, Circle has outperformed Bitcoin by nearly 472%.
Crypto enthusiasts should ask themselves: Why is BBC so bullish on stablecoins? Why is the (Genius Act) receiving bipartisan support? Do American politicians really care about financial freedom? Or is there something else going on?
Perhaps politicians do care about financial freedom on an abstract level, but empty ideals do not drive practical action. There must be other more realistic reasons for their U-turn on stablecoins.
Looking back to 2019, Facebook attempted to integrate the stablecoin Libra into its social media empire but was forced to shelve it due to opposition from politicians and the Federal Reserve. To understand BBC's enthusiasm for stablecoins, we need to examine the main problems he faces.
The main problem facing U.S. Treasury Secretary Scott "BBC" Bessent is the same as the problem facing his predecessor Janet "Bad Gurl" Yellen. Their bosses (i.e., the U.S. President and members of Congress) like to spend money but are unwilling to raise taxes. As a result, the responsibility of raising funds falls on the Treasury Secretary, who needs to fund the government by borrowing at reasonable interest rates.
However, the market soon showed that it was not interested in long-term Treasury bonds of highly indebted developed economies—especially at high prices/low yields. This is the 'fiscal dilemma' that BBC and Yellen have witnessed in the past few years:
The Trampoline Effect of Global Treasury Yields:
The following is a comparative chart of 30-year Treasury yields: United Kingdom (white), Japan (gold), United States (green), Germany (pink), France (red)
If rising yields were bad enough, the real value of these bonds is even worse:
Real value = bond price / gold price
TLT US is an ETF that tracks Treasury bonds with a maturity of 20 years or more. The following chart shows TLT US divided by the price of gold and indexed to 100. Over the past five years, the real value of long-term Treasury bonds has plummeted by 71%.
If past performance is not enough to worry about, Yellen and current Treasury Secretary Bessent also face the following constraints:
The Treasury's bond sales team must design an issuance plan to address the following needs:
Approximately $2 trillion in federal deficits annually
$3.1 trillion in debt maturing in 2025
This is a chart detailing the major spending items of the U.S. federal government and their year-over-year changes. Note that the growth rate of each major expenditure is in line with or faster than the U.S. nominal GDP growth rate.
The previous two charts show that the weighted average interest rate of outstanding Treasury bonds is lower than all points on the Treasury bond yield curve.
The financial system issues credit using nominally risk-free Treasury bonds as collateral. Therefore, interest must be paid, otherwise the government will face a nominal risk of default, which would destroy the entire fiat monetary system. Because the Treasury bond yield curve as a whole is higher than the weighted average interest rate of the current debt, interest expenses will continue to increase as maturing debt is refinanced at higher rates.
The defense budget will not decrease; after all, the United States is currently involved in wars in Ukraine and the Middle East.
Healthcare spending will continue to increase, especially in the early 2030s as the Boomer generation enters the peak period of needing extensive medical services, which are largely funded by the U.S. government to major pharmaceutical companies.
Control the 10-year Treasury yield to not exceed 5%
When the 10-year yield approaches 5%, the MOVE index (measuring bond market volatility) soars, and financial crises tend to follow.
Issuing debt in a way that stimulates financial markets
Data from the U.S. Congressional Budget Office shows that, although the data only extends to 2021, capital gains tax revenue has soared following the continuous rise of the U.S. stock market since the 2008 Global Financial Crisis.
The U.S. government needs to avoid massive fiscal deficits by taxing stock market gains year after year.
The U.S. government's policies have always favored wealthy asset owners. In the past, only white men with property had the right to vote. Although modern America has achieved universal suffrage, power still stems from the few who control the wealth of publicly traded companies. Data shows that about 10% of households control over 90% of stock market wealth.
A notable example is during the 2008 Global Financial Crisis, when the Federal Reserve bailed out banks and the financial system by printing money, but banks were still allowed to repossess people's homes and businesses. This phenomenon of 'socialism for the rich and capitalism for the poor' is why New York City mayoral candidate Mamdani is so popular among the poor—the poor also want a share of the benefits of 'socialism'.
When the Federal Reserve implements quantitative easing (QE) policies, the Treasury Secretary's job is relatively simple. The Federal Reserve buys bonds by printing money, which not only allows the U.S. government to borrow at low cost but also drives up the stock market. However, now that the Federal Reserve must at least appear to be fighting inflation and cannot cut interest rates or continue to implement QE, the Treasury has to bear the burden alone.
In September 2022, the market began to marginally sell off bonds due to concerns about the sustainability of the largest peacetime deficit in U.S. history and the Federal Reserve's hawkish stance. The 10-year Treasury yield nearly doubled in two months, and the stock market fell nearly 20% from its summer high. At this time, former Treasury Secretary Yellen launched what Hudson Bay Capital called 'Aggressive Treasury Issuance' (ATI), injecting liquidity into financial markets by issuing more short-term Treasury bills (T-bills) rather than coupon bonds, reducing the Federal Reserve's reverse repo (RRP) balance by $2.5 trillion.
This policy successfully achieved the goals of controlling yields, stabilizing markets, and stimulating the economy. However, with the RRP balance now almost depleted, the problem facing current Treasury Secretary Bessent is: In the current environment, how can he find trillions of dollars to buy Treasury bonds at high prices and low yields?
The market performance in the third quarter of 2022 was extremely difficult. The following chart shows the contrast between the Nasdaq 100 Index (green) and the 10-year Treasury yield (white). As yields soared, the stock market experienced a sharp decline.
The ATI policy effectively reduced RRP (red) and boosted financial assets such as the Nasdaq 100 (green) and Bitcoin (magenta). The 10-year Treasury yield (white) never broke 5%.
Large U.S. 'Too Big To Fail' (TBTF) banks have two pools of funds that can be ready to buy trillions of dollars of Treasury bonds when there is sufficient profit potential. These two pools of funds are:
Checking/Term Deposits
Reserves held by the Federal Reserve
This article focuses on the eight TBTF banks because their existence and profitability rely on the government's guarantee of their liabilities, and banking regulatory policies are more inclined to take care of these banks rather than non-TBTF banks. Therefore, as long as they can obtain a certain level of profit, these banks will cooperate with the government's requirements. If the Treasury Secretary (BBC) asks them to buy Treasury bonds, he will offer a risk-free return in exchange.
BBC's enthusiasm for stablecoins may stem from the ability of TBTF banks to release up to $6.8 trillion in Treasury bill purchasing power by issuing stablecoins. These dormant deposits can be re-leveraged in the fiat monetary system, thereby driving the market upward. In the following sections, I will detail how Treasury bill purchases can be achieved through stablecoin issuance and how to enhance the profitability of TBTF banks.
In addition, it will briefly explain how stopping the payment of interest on reserves by the Federal Reserve could release up to $3.3 trillion for Treasury bond purchases. This will be another policy that, while technically not quantitative easing (QE), has a similar positive impact on fixed-supply monetary assets such as Bitcoin.
Now, let's learn about BBC's new favorite - stablecoins, this 'monetary heavy weapon'.
Stablecoin Liquidity Model
My predictions are based on the following key assumptions:
Treasury bonds receive full or partial exemption from the supplementary leverage ratio (SLR)
Meaning of exemption: Banks do not need to hold equity capital for their Treasury bond portfolio. With full exemption, banks can buy Treasury bonds with unlimited leverage.
Recent policy changes: The Federal Reserve has just voted to reduce capital requirements for banks on Treasury bonds, and it is expected that this proposal will release up to $5.5 trillion of bank balance sheet capacity for Treasury bond purchases in the next three to six months. The market is forward-looking, and this purchasing power may flood into the Treasury bond market in advance, thereby lowering yields, all else being equal.
Banks are profit-oriented, loss-minimizing organizations
Risk lessons from long-term Treasury bonds: From 2020 to 2022, the Federal Reserve and the Treasury urged banks to buy large amounts of Treasury bonds, and banks purchased long-term coupon bonds with higher yields. However, by April 2023, due to the fastest rise in the Federal Reserve's policy rates since the 1980s, these bonds suffered huge losses, and three banks failed in a week.
The umbrella of TBTF banks: In the realm of TBTF banks, Bank of America's 'held-to-maturity' bond portfolio losses have exceeded its total equity capital. If forced to be marked-to-market, the bank would face bankruptcy. To address the crisis, the Federal Reserve and the Treasury effectively nationalized the entire U.S. banking system through the 'Bank Term Funding Program' (BTFP). Non-TBTF banks may still suffer losses, and if they go bankrupt due to Treasury bond losses, their management will be removed, and the banks may be sold cheaply to Jamie Dimon or other TBTF banks. Therefore, bank chief investment officers (CIOs) are cautious about buying large amounts of long-term Treasury bonds, fearing that the Federal Reserve will 'pull the rug' again by raising interest rates.
The attractiveness of Treasury bills: Banks will buy Treasury bills because they are essentially high-yield, zero-duration, cash-like instruments.
High net interest margin (NIM) is key: Banks will only buy Treasury bills with deposits if the Treasury bills can bring higher net interest margins and require little or no capital support.
JP Morgan recently announced plans to launch a stablecoin called JPMD. JPMD will run on Coinbase's Ethereum-based Layer 2 network, Base. As a result, JP Morgan's deposits will be divided into two types:
Traditional Deposits (Regular Deposits)
Although it is also a digitized deposit, its flow in the financial system requires interconnection between banks using traditional old systems and requires a lot of manual supervision.
Traditional deposits can only be transferred between 9:00 AM and 4:30 PM on weekdays (Monday to Friday).
The yields on traditional deposits are extremely low. According to the Federal Deposit Insurance Corporation (FDIC), the average yield on ordinary checking deposits is only 0.07%, and the yield on one-year term deposits is 1.62%.
Stablecoin Deposits (JPMD)
JPMD runs on a public blockchain (Base), allowing customers to use it 24/7, 365 days a year.
By law, JPMD cannot pay yield, but JP Morgan may attract customers to convert traditional deposits to JPMD by offering generous cash-back spending rewards.
Whether staking yield is allowed is currently unclear.
Staking Yield: Customers receive a certain yield return for locking JPMD in JP Morgan.
Customers will transfer funds from traditional deposits to JPMD because JPMD is more practical, and the bank also provides cash-back and other spending rewards. Currently, the total amount of current and term deposits in TBTF banks is approximately $6.8 trillion. Because stablecoin products are superior, traditional deposits will quickly be converted to JPMD or similar stablecoins issued by other TBTF banks.
If all traditional deposits are converted to JPMD, JP Morgan will be able to significantly reduce the costs of its compliance and operations departments. Here are the specific reasons:
The first reason is to reduce costs. If all traditional deposits are converted to JPMD, JP Morgan can effectively eliminate its compliance and operations departments. Let me explain why Jamie Dimon would be so excited when he understands how stablecoins actually work.
Compliance work, from a high level, is a set of rules set by regulators and executed by a group of humans using 1990s technology. The structure of these rules is similar to: if a certain situation occurs, then perform a certain action. This 'if/then' relationship can be explained by a senior compliance officer and written into a set of rules for AI agents to perfectly execute. Since JPMD provides a completely transparent transaction record (all public addresses have been made public), an AI agent trained in relevant compliance regulations can perfectly ensure that certain transactions are never approved. AI can also instantly prepare any report required by regulators. And regulators can verify the accuracy of the data because all the data exists on the public blockchain. Overall, 'Too Big To Fail' (TBTF) banks spend $20 billion annually on compliance and the operations and technology required to comply with banking regulations. By converting all traditional deposits into stablecoins, this cost will be reduced to almost zero.
The second reason JP Morgan is pushing JPMD is that it allows the bank to buy billions of dollars of Treasury bills (T-bills) risk-free with the assets under custody (AUC) of stablecoins. This is because Treasury bills have almost no interest rate risk, but their yields are close to the Fed Funds Rate. Remember, according to the new leverage ratio requirements (SLR), TBTF banks have $5.5 trillion in Treasury bill purchasing power. Banks need to find an idle cash reserve to buy these debts, and stablecoin-custodied deposits are the perfect choice.
Some readers may retort that JP Morgan can already buy Treasury bills with traditional deposits. My answer is that stablecoins are the future because they not only create a better customer experience but also save TBTF banks $20 billion in costs. This cost saving alone is enough to incentivize banks to accept stablecoins; the additional net interest margin (NIM) is icing on the cake.
I know many readers may want to put their hard-earned money into Circle ($CRCL) or the next shiny stablecoin issuer. But don't underestimate the profit potential of 'Too Big To Fail' (TBTF) banks in the stablecoin space. If we base it on the average price-to-earnings ratio (P/E) of TBTF banks of 14.41x, multiply it by the cost savings and stablecoin net interest margin (NIM) potential, the result is $3.91 trillion.
The total market capitalization of the eight TBTF banks is currently about $2.1 trillion, which means that stablecoins could increase the average stock price of TBTF banks by 184%. If there is a non-consensus investment strategy in the market that can be executed at scale, it is to go long an equal-weighted portfolio of TBTF bank stocks based on this stablecoin theory.
How's the competition?
Don't worry, the (Genius Act) ensures that stablecoins issued by non-banks cannot compete on a large scale. The Act explicitly prohibits tech companies like Meta from issuing their own stablecoins; they must partner with banks or fintech companies (FinTech). Of course, theoretically anyone can obtain a banking license or acquire an existing bank, but all new owners must be approved by regulators. As for how long that will take, we'll see.
In addition, there is also a provision in the bill that hands the stablecoin market over to banks, which is to prohibit the payment of interest to stablecoin holders. Because they cannot compete with banks by paying interest, fintech companies will not be able to attract deposits away from banks at a low cost. Even successful issuers like Circle will never be able to touch the $6.8 trillion TBTF traditional deposit market.
In addition, fintech companies and small banks like Circle do not have government guarantees for their liabilities, while TBTF banks do. If my mother were to use stablecoins, she would definitely choose a stablecoin issued by a TBTF bank. Boomers like her will never trust fintech companies or small banks for this purpose because they lack government guarantees.
Former U.S. President Trump's 'Crypto Czar' David Sachs agrees with this. I believe that many corporate cryptocurrency donors will be dissatisfied with the outcome—after donating so much to cryptocurrency campaigns, they have been quietly excluded from the lucrative stablecoin market in the United States. Perhaps they should change their strategy and truly advocate for financial freedom, rather than just providing a stool for the 'toilets' of those TBTF bank CEOs.
In short, the adoption of stablecoins by TBTF (Too Big To Fail) banks not only eliminates competition from fintech companies for their deposit base but also reduces the need for expensive and often poorly performing human compliance officers. In addition, this method does not require the payment of interest, thereby increasing the net interest margin (NIM) and ultimately boosting its stock price. In return, to thank (BBC bill) (The BBC) for the stablecoin gift, TBTF banks will buy up to $6.8 trillion of Treasury bills (T-bills).
ATI: Yellen's play: Stablecoins and the (BBC bill)
Next, I will discuss how the (BBC bill) releases another $3.3 trillion of static reserves from the Federal Reserve's balance sheet.
Interest on Reserve Balances (IORB)
After the 2008 Global Financial Crisis (GFC), the Federal Reserve decided to ensure that banks would not fail due to insufficient reserves. The Federal Reserve created reserves by purchasing Treasury bonds and mortgage-backed securities (MBS) from banks, a process known as quantitative easing (QE). These reserves sat quietly on the Federal Reserve's balance sheet. Theoretically, banks could convert the reserves held by the Federal Reserve into circulating currency and lend them out, but they chose not to because the Federal Reserve paid them enough interest by printing money. The Federal Reserve 'froze' these reserves in this way to prevent inflation from soaring further.
However, the problem facing the Federal Reserve is that when it raises interest rates, the interest on reserve balances (IORB) also increases. This is not good because the unrealized losses in the Federal Reserve's bond portfolio also increase with interest rate hikes. As a result, the Federal Reserve is in a state of insolvency and negative cash flow. However, this negative cash flow situation is entirely the result of policy choices and can be changed.
U.S. Senator Ted Cruz recently stated that perhaps the Federal Reserve should stop paying interest on reserve balances (IORB). This would force banks to make up for the lost interest income by converting reserves into Treasury bills. Specifically, I believe that banks will buy Treasury bills (T-bills) because of their high yield and cash-like properties.
According to Reuters, Ted Cruz has been pushing his Senate colleagues to eliminate the Federal Reserve's power to pay interest on bank reserves, arguing that the change would help significantly reduce the fiscal deficit.
Why would the Federal Reserve print money and prevent banks from supporting the 'empire'? There is no reason for politicians to oppose this policy change. Both Democrats and Republicans have a penchant for fiscal deficits; why not let them spend more by releasing $3.3 trillion of bank purchasing power into the Treasury bond market? Given the Federal Reserve's unwillingness to assist the 'Trump team' in financing with 'America First' as the goal, I believe Republican legislators will use their majority seats in both houses to strip the Federal Reserve of this power. Therefore, the next time yields soar, legislators will be ready to release this flood of funds to support their wanton spending.
Before concluding this article, I want to discuss Maelstrom's cautious strategic layout between the current stage and the third quarter, given the inevitable increase in dollar liquidity during the (BBC bill) implementation.
A cautionary tale
Although I am very optimistic about the future, I believe that there may be a brief pause in dollar liquidity creation after Trump's spending bill—known as the 'Big Beautiful Bill'—is passed.
According to the current bill, the bill will raise the debt ceiling. Although many provisions will become bargaining chips in political games, Trump will not sign a bill that does not raise the debt ceiling. He needs additional borrowing capacity to support his agenda. There is no indication that Republicans will try to force the government to cut spending. So, for traders, the question is, what impact will this have on dollar liquidity when the Treasury resumes net borrowing?
Since January 1st, the Treasury has primarily funded the government by depleting the balance of its Treasury General Account (TGA). As of June 25th, the TGA balance was $364 billion. According to the Treasury's guidance in its most recent quarterly refinancing announcement, if the debt ceiling is raised today, the TGA balance will be replenished to $850 billion by issuing debt. This will result in a $486 billion contraction in dollar liquidity.
The only major dollar liquidity item that might alleviate this negative impact is the release of funds from the overnight reverse repurchase agreements (RRP, Reverse Repo Program), which currently have a balance of $461 billion.
Due to the Treasury General Account (TGA) replenishment plan, this is not a clear-cut Bitcoin short trade opportunity, but rather a market environment that requires cautious operation—the bull market may be temporarily interrupted by short-term fluctuations. I expect the market to consolidate sideways or slightly decline between now and the Jackson Hole conference in August, prior to Federal Reserve Chairman Jerome Powell's speech. If the TGA replenishment negatively impacts dollar liquidity, Bitcoin may dip to the $90,000 to $95,000 range. If the replenishment plan does not have a substantial impact on the market, Bitcoin may oscillate within the $100,000 range but struggle to break through the historical high of $112,000.
I speculate that Powell may announce the end of quantitative tightening (QT) or other seemingly bland but deeply impactful bank regulatory policy adjustments. By early September, the debt ceiling will be raised, most of the TGA account will have been replenished, and the Republican Party will focus on wooing voters in the November 2026 election. By then, with the surge in monetary creation, the bulls will counterattack the bears with a strong green candle.
From now until the end of August, Maelstrom will increase its allocation to staked USDe (Ethena USD). We have cleared all illiquid altcoin positions and may reduce Bitcoin exposure based on market performance. Risky positions in altcoins bought around April 9th achieved 2x to 4x gains in three months. However, in the absence of a clear liquidity catalyst, the altcoin sector may suffer heavy losses.
After the market correction, we will have the confidence to reallocate, looking for undervalued assets, and perhaps seize opportunities for 5x to 10x gains before the next slowdown in fiat liquidity creation (expected in late Q4 2025 or early Q1 2026).
Gradually tick
Adoption of stablecoins by systemically important banks (TBTF) may create up to $6.8 trillion in purchasing power for the U.S. Treasury bill (T-bill) market.
The Federal Reserve stopping the payment of interest on reserve balances (IORB, Interest on Reserve Balances) could further release up to $3.3 trillion of T-bill purchasing power.
Overall, due to the 'BBC' policy, there may be $10.1 trillion flowing into the T-bill market in the future. If my prediction is correct, this $10.1 trillion liquidity injection will have a similar impact on risk assets as former Treasury Secretary Yellen's $2.5 trillion liquidity injection—driving the market 'into a frenzy'!
This adds another liquidity arrow to 'BBC's' policy toolbox. This tool may be forced to be enabled as Trump's 'Beautiful Bill' passes and raises the debt ceiling. Soon after, investors will again worry about how the U.S. Treasury market will absorb these pressures without collapsing in the face of a large amount of debt to be issued.
Some people are still waiting for the so-called 'monetary Godot'—waiting for Federal Reserve Chairman Powell to announce a new round of unlimited quantitative easing (QE) and interest rate cuts before selling bonds and buying cryptocurrencies. But I'm here to tell you that this will not happen, at least not until the United States is actually engaged in a hot war with Russia, China, or Iran, or a systemically important financial institution is on the verge of collapse. Even an economic recession is not enough to make 'Godot' appear. So, stop listening to what that 'weak' person says and focus on the people who are really in control!
The next few charts will show the opportunity cost that investors have suffered while waiting for 'Monetary Godot'.
The Federal Reserve's balance sheet (white line) is shrinking, while the effective federal funds rate (gold line) is rising. In theory, Bitcoin and other risk assets should fall during this period.
But former Treasury Secretary 'Bad Gurl' Yellen did not disappoint the rich, stabilizing the market by implementing ATI (likely referring to Asset-Backed Liquidity Instruments). During this period, Bitcoin (gold line) rose 5x, while the overnight reverse repo (RRP) balance decreased by 95%.
Don't make the same mistake again! Many financial advisors are still advising clients to buy bonds because they predict that yields will fall. I agree that central banks will indeed cut interest rates and print money to avoid the collapse of the government bond market. In addition, even if central banks do not act, the Treasury will do something.
The core argument of this article is that by supporting stablecoin regulation, relaxing SLR (supplementary leverage ratio) restrictions, and stopping the payment of IORB, the Federal Reserve may release up to $10.1 trillion in Treasury bond purchasing power. But the question is, is it really worth it to hold bonds and earn a 5% to 10% return? You may miss out on Bitcoin rising 10x to $1 million or the Nasdaq 100 index soaring 5x to 100,000 points, which may be achieved before 2028.
The real stablecoin 'game' is not betting on traditional fintech companies like Circle, but rather seeing clearly that the U.S. government has handed a multi-trillion-dollar 'liquidity bazooka' to systemically important banks (TBTF) under the guise of 'innovation.' This is not decentralized finance (DeFi), nor is it so-called financial freedom, but rather debt monetization disguised in Ethereum clothing. If you are still waiting for Powell to whisper 'unlimited quantitative easing' (QE infinity) before daring to enter the market, then congratulations—you are the market's 'bag holder'.
Instead, you should go long Bitcoin, go long JPMorgan, and not waste your energy on Circle. The stablecoin 'Trojan horse' has already infiltrated the financial fortress, but when it opens, it is not filled with the dreams of libertarians, but rather with liquidity used to buy U.S. Treasury bills (T-bills). This liquidity will be used to keep the stock market high, fill fiscal deficits, and soothe the anxieties of the Boomer generation.
Stop sitting on the sidelines and waiting for Powell to 'bless' the bull market. 'BBC' (Note: This may be a playful nickname for the Federal Reserve or related policies) is ready to end the build-up and start saturating the global market with a flood of liquidity. Seize the opportunity and don't let yourself be a passive bystander.