Senate Moves To Regulate Stablecoin. Does This Change Paul’s Crypto Position?

Evan Barnard: It kind of sounds like “Welcome Back, Kotter.”

Paul Winkler: It’s Atlanta Rhythm Section. What on earth are you talking about?

Paul Winkler, Evan Barnard. Since when do you start the segments?

EB: I just, you know …

PW: Danny!

EB: You were still researching, so I thought I’d say something.

PW: No, you’re fine, man. You’re fine.

Stablecoin Bill

PW: So you guys, I don’t know if you saw this whole stablecoin bill that was, it’s being talked a little bit about. There was this bill. They’re talking about how if it’s eventually signed into law, stablecoins could be required to be backed by liquid assets such as U.S. dollars, short-term Treasury bills.

So, stablecoin. You’ve got different types of cryptocurrency. You’ve got Bitcoin, which everybody talks about.

I’ve talked about stablecoin from time to time. There could be some utility there. I’ve talked about that because it’s interesting, and I’ll come back to that in just a second.

But the idea is that some countries don’t have great currencies, right, so they have to use some other currency in order to trade, because they don’t trust their own currency. Well, this is a bill that was passed.

And if you think about that, you have this thing called a stablecoin, which is a cryptocurrency that is often tied to something to be stable, like maybe the U.S. dollar. Well, if it is tied to the U.S. dollar and it is valued the same as the U.S. dollar and fluctuates with it, versus other currencies around the world, how do they pull that off?

Well, they pull that off by buying Treasuries. And that could be a market for Treasuries, is kind of why people are getting a little bit excited about that.

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If you have a new market for Treasuries, you have new demand for Treasuries, what does that do to interest rates? It can have a downward impact, right? 

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Because you create new demand. So that was the topic of conversation, and this lady, Katie Haun was her name, she was on CNBC talking about stablecoin and statistics, which are pretty mind-blowing, guys. I mean, just listen to some of these stats regarding stablecoin.

Katie Haun: Let me give you three statistics that I know you’ve had Jeremy circle, a lot of buzz there, but let me give your viewers three stats on stablecoins, something that didn’t even exist six years ago, seven years ago. A quarter of a trillion dollars of supply, and that’s up so much year over year.

I mean the growth has been really exponential. You’re talking about just over a year ago, a hundred billion dollars of stablecoin supply.

So it’s really growing very rapidly. And we think that growth will continue, particularly with the advent of the Genius Act. But it’s not just that.

Another statistic that I think people are surprised to learn about stablecoins is stablecoin transaction volume, for the first time, eclipsed the transaction volume of Visa last year. I’m not sure if you knew that. And then the third thing about stablecoins is they’re now the 14th largest holder in the world of U.S. Treasuries, having surpassed the economies of Germany and Norway as largest holders.

PW: Yeah, so there you go. Right there. I mean, surpassed Visa in transactions.

EB: That does surprise me.

PW: Is that not mind-blowing?

EB: But it’s not all purchases necessarily, right? Is she including trading of those things?

PW: She didn’t really get into that data. That was just what she said right there, what you heard as much as she got into it.

EB: I mean, it’s still a powerful stat.

PW: Right. And so she’s talking about that.

Investing in Currencies

PW: Now, when people talk about Bitcoin, cryptocurrencies, the big thing that we have talked about on this show forever is that it’s not an investment. Don’t invest in Bitcoin. Don’t invest in gold.

Don’t invest in, well, currencies. You stay up late at night, you see all these shows on currencies. Right?

EB: Yeah.

PW: The exchanges, the Forex and all that kind of stuff.

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It’s not an investment. It is basically gambling when you’re doing that, because there is no cost of capital. 

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There’s no rent. There’s no dividends. There’s no interest being paid.

So that’s our deal right there. Right? Now she’s talking about stablecoin, which would be even less likely. But people watch these TV shows for what?

EB: Investment news.

PW: Yeah.

EB: For ideas.

PW: Ideas. Right?

EB: Yeah.

PW: So you can think of her as going on there, and I’m sitting there thinking, how many people are actually looking at this going, “Oh boy, I ought to invest in this thing right here.” Right? So what are some of the risks that we might talk about right here?

Andrew Ross Sorkin: To the extent there are risks in our economy and in our system, what is the chance that the stablecoin universe is upended in some way that we don’t understand? Because either there are not enough Treasuries that are backing the stablecoins, and a player is not as compliant as you want them to be, that’s on one end of it. The other end of it is if you have the concentration that we’re talking about of one company or a group of companies owning so many Treasuries to try to back the stablecoins, how should we think about that?

KH: Yeah. Well, when I’m talking about stablecoins, Andrew, also let me be really clear. I’m really talking about fiat-backed, one-to-one, dollar-backed, or fiat currency-backed stablecoins.

I’m not talking about algorithmic backed stablecoins. Although a really interesting idea, we did see some spectacular failures in that area not too long ago. So what I’m talking about are fiat fiat-backed.

And in many ways, I think one of the really great things about stablecoins, fiat-backed, particularly with this legislation, is for every one USDC that Circle issues, there is $1 in that, for example, JP Morgan bank account. And we all woke up to the limitations of the fractional reserve banking system with Silicon Valley Bank. So this is fully reserved, and I think that’s important.

PW: And so her point is that you could have something algorithmic. I mean you can do things, and Wall Street is really great at coming up with products to try to boost the return of something.

EB: Yeah, I think she was referring to Luna.

PW: I don’t know what she was referring to in general, but anything where you are taking something that is supposed to be stable, like, for example, when we look at insurance companies investing in options contracts, they’re taking stocks, which we all accept the stock market. You can buy a stock, but if you want to really turn it into a gambling casino, let’s start to play with options, or play with derivatives, is what we call them.

So that’s really what she was getting into right there: getting into derivatives and going that particular route. And that’s what she’s talking about.

She’s talking about something where you have a dollar-for-dollar, it’s backed by something, so you have something solid. And then you have these people coming in and doing audits of these things.

Fiat Currency

ARS: Where are the risks in the system to the extent there are some that we should be thinking and concerned about, if at all?

KH: Well, look, I think some of the risks exist in the same banking system. Let’s have audits. If you talk about USDC, which is a large stablecoin, after Tether, it’s the second largest market cap.

I mean, you’re talking about two issuers, Coinbase and Circle. Those are public companies. They’re audited by Big Four accounting firms, so let’s see. And if companies are going to stay private, let’s see, the audits happen every year.

And I think, I’m not sure about Tether, but I do believe they have a board. Do they have an audit and risk committee? I’m not sure.

When you have Paolo on next time, you’ll have to ask those questions. And those are the questions I would be asking.

PW: So we’re here from the government and we’re here to help you make sure this stays audited. Right?

KH: I’ve been familiar with Circle and with Coinbase for a long time. And when I served on the board of Coinbase, I saw those audit reports, and I saw the procedures and processes in place.

And again, I think that’s where not all stablecoins are created equal. I can really speak mostly to USDC given my history and experience. But there are other great stablecoins out there, and I know that others are in the works too. Paxos has one also, for example.

PW: So they’re basically safeguards, is what she’s saying right there. Now that is the idea. Now she’s talking about you could have this fiat stablecoin.

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Now, fiat currency, it’s not backed by gold like it used to be. Our dollar is a fiat currency, and that’s why they call it that. 

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But you look at what’s happening here, and she talks about Bitcoin a little bit.

Joe Kernen: A couple of times you said, “Hey, it’s based on fiat.” If you say that to someone who’s orange-pilled, it’s like …

PW: Orange-pilled. I guess that’s a Trump term. I’m not sure.

JK: Based on fiat? That’s the whole rationale for Bitcoin. So what do we do to make a stablecoin based on Bitcoin, or Bitcoin eventually become analogous to what a stablecoin is, if it finally gets to a point where it just has a very stable — does that ever happen as we get closer to, I don’t know?

KH: Look, Joe, I’m glad you brought up, I think you’re talking about Bitcoin, and I’m glad you brought up Bitcoin. We’re obviously also long Bitcoin, and I don’t think the two are mutually exclusive.

Bitcoin’s Volatility

KH: In fact, zooming out, Bitcoin is the granddaddy of them all. This is what launched Satoshi’s whitepaper. If you read it from 2008, it called for an electronic peer-to-peer payment network. So really, stablecoins are kind of the original vision of Satoshi.

Now, Joe, as you mentioned, there’s been a lot of volatility historically in Bitcoin. And think about gold. People forget gold lost 30% of its value in the 1970s.

I mean, there’s no denying that Bitcoin has been volatile. But let me tell you an interesting statistic about Bitcoin that your viewers might or might not know.

PW: Okay, so I stopped it right there. I’m going to leave you hanging through a break, okay? But I want you to get, she said right there, she talked about how the original vision was as some kind of a currency, right? I mean, to paraphrase to some extent.

EB: Just kind of like PayPal, just a peer-to-peer transaction mechanism.

PW: Exactly. Yeah. Yeah. So that’s kind of what the vision was.

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The problem with Bitcoin is it was just too stinking volatile. 

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And that’s why Musk didn’t want to take Bitcoin in exchange for a Tesla because you could go and do that transaction, and all of a sudden it drops in value and you just got hosed. Now he’s talking about stablecoin, which, if it’s literally linked somehow to the U.S. dollar, you have that stability that you’re looking for, that you want in some kind of a currency. So that’s the point.

Now, she’s going to give a stat regarding Bitcoin after we come back from this break, and then we’ll talk a little bit more about that. Then I’m going to walk you through something that you just go, well, what is in it for them?

Because you have all these shows and you have all these things where they are talking about Bitcoin and investing in these cryptocurrencies. And you go, what is the game here? We’ll be back right after this.

What Is Cryptocurrency?

PW: All right, back here on “The Investor Coaching Show,” Paul Winkler.

EB: Evan Barnard.

Dan Hill: Dan Hill.

PW: So we got into talking a little bit about, there was a new bill passed, and they’re talking about the possibility of it becoming actual law, being signed into law. We’ll see, very well may be.

But anyway, stablecoin is a form of cryptocurrency. People are like, “What the heck is cryptocurrency?” People still ask that question, “What is it?” So you have internet, you have blockchain, you have the ability to actually own properties on the internet, which always cracks me up.

“That’s right. I own a property next to …”

EB: The chip next to Snoop Dogg.

PW: There you go. Exactly. Exactly. Or, “I own this non-fungible token,” right?

EB: Right.

PW: And the non-fungible token is, it’s a picture that anybody can put on their website, but “I own the real one.” It’s like, whatever. It’s just a testament to how people will buy just about anything. And that’s it.

You say, “What creates the demand for that stuff?” That’s it. People will buy just about anything.

Well, proponents of this say stablecoin could be used to send payments instantly. And there has been talk about how blockchain is supposed to make the banking system more efficient, and you could bring down costs.

There was even talk about doing away with a banking system and just having everything done through straight through the Treasury. I mean, that was something that had people up in arms what, a couple years ago, something like that.

EB: I don’t recall, but I’m sure the banks were thrilled about that.

PW: Oh, they were not thrilled about that. No, no, no. It was the idea that you wouldn’t have a bank account anymore.

You’d have a Treasury account, and that was something that was just creating fits — the idea that you could do that. That’s been talked about pretty seriously, actually. And the idea is if you could get rid of the friction in the system, you could cut your costs.

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So anyway, the idea of stablecoin is that you could have something that could get rid of some of the expense in the system.

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So this lady’s being interviewed, Katie Haun, regarding this, very, very excited about the whole concept of stablecoin representing one of the issuers. Because you have various issuers of this, and they have to buy Treasuries to actually put out these things.

And the government wouldn’t be unhappy about it if you create a new market for Treasuries, as was talked about a little bit earlier. Because if you create a new market where people are buying it, you drive up the price of Treasuries, you drive down interest rates.

And one of the biggest problems that we have in our federal budget right now is what? Debt and the cost of debt.

EB: Well, and who’s going to buy it?

PW: Exactly.

EB: Right.

PW: Yeah.

EB: Who’s going to buy it, let alone the interest rate.

PW: And that creates interest rate increases if you have nobody to buy your debt. Yeah, exactly.

Institutional Adoption of Bitcoin

PW: So anyway, we’re talking about stablecoin and fiat stablecoin, which would be tied to the dollar as opposed to an algorithmic, which would be where you’re playing around and you’re trying to actually increase returns to using some maybe derivative type products. But anyway.

JK: A couple of times you said, “Hey, it’s based on fiat. If you say that to someone who’s orange pilled …”

PW: Okay, I think that was the one I already hit there. But now this is the one I meant to hit.

KH: Right now, Bitcoin is seeing some real institutional adoption. And here’s the statistic I was —

PW: Oh, that’s right, because that was the issue that I was talking about earlier. She was going to give a statistic.

I needed to build that up and I blew it. It was a statistic on Bitcoin that you all needed to hear that would blow you away. That’s right.

Okay. So that’s where we were.

KH: Right now, Bitcoin is seeing some real institutional adoption. And here’s the statistic I was going to give your audience.

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In traditional asset classes, you’ve got, traditionally, about 80% of other asset classes are held by institutions, and 20% are held by retail.

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PW: So 80% held by institutions, big institutional investors, big pension funds, big investment firms managing money. So we’re looking at 80% of money invested in traditional products is held by institutions, 20% by retail, in other words, the individual investor.

So I want you to get what she’s saying there. Okay, 80, 20. So check this out.

KH: And in Bitcoin today, we think it’s still so early because the institutions are still just at the beginning of coming in, to the point that only 10% of the world’s Bitcoin is held by institutions.

PW: Okay, so what is she implying there? What is she implying, Danny?

DH: Well, as you were going through there, I was thinking, see, I don’t know how any pension fund would have in their investment policy statement that they could own that kind of stuff.

PW: Yeah, you would look at it and say, “Well, maybe they don’t own it because it’s imprudent.”

DH: Not stable.

PW: Too speculative, and it’s imprudent. Yeah.

DH: Right.

PW: Yeah, right?

DH: Definitely doesn’t pass the prudent man rule. Okay, so that’s number one.

Institutions Getting Excited

PW: Number two, maybe they’re just like with the big investment firms, the big wirehouses, they weren’t terribly excited about annuities when it first started, right?

DH: Yes.

PW: When did they all of a sudden get excited about annuities and annuity sales, the big investment firms, the major investment firms that you see advertised all over the place? When did they get excited about that?

EB: I don’t know.

PW: 

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They got excited about it when they figured out that they could make a lot of money selling this stuff, right?

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DH: Yeah, I was going to say, when sales hit billions and billions of dollars and they were not in the party.

PW: That’s exactly right. That’s when they got excited. When did Fidelity get excited about adding commodities to their target day funds?

EB: After commodities did great.

PW: Right after the party was over.

EB: When did Vanguard add small value?

PW: Exactly. When did Vanguard come out with a small international value fund or a small international fund? Way after international small had done well. The party was over.

She’s saying, “Oh, but what could happen here is you could create demand.” Because remember what drives up — or what can drive up — the price of something: demand. So it’s rational for her to think that possibly this new demand could drive up the price of this thing.

But if we think back to when Fidelity added commodities to their target date fund, and not only did they add it, it was the number one holding in their target date, 2040, 2050, their later target date funds for people that were retiring later. It was the number one holding.

And what happened is it temporarily went off, and then it crashed like a rock, and it did awfully. So she’s just like, “Oh, the institutions could be getting excited about this stuff.”

KH: So really, it’s very much flipped from other asset classes, and we’re starting to see that change. Now, why are we starting to see that change?

EB: I think I already get that reason.

KH: Things like the Bitcoin and Ethereum ETFs were approved. It’s just another signal that this is not going away.

EB: There it is, ETFs.

KH: I know there are plenty in the crypto community who don’t need government imprimatur, but guess what? Institutions do. And so when you have things like the Bitcoin ETF approved, what was it, a year and a half ago?

PW: You have to give them the legal standing to be able to jump into those things, number one. But you have to come up with laws that allow them to put products together that they can make money off of.

That’s the bottom line of what’s going on here, folks. That’s exactly what’s going on.

Do We Need a Stablecoin?

PW: Now the question is this.

JK: If Bitcoin becomes stable, why do we need a stablecoin? It does everything a stablecoin does.

KH: Well, Joe, that is absolutely a first-class problem for the crypto industry. And we have dollars out in the world. We have euros out in the world. We have credit cards in the world.

We have countless payment apps out in the world. And you know what? A lot of them are pretty big. We’re talking about trillions and trillions of dollars of disruption coming.

PW: If it became stable, what would we need it for?

Okay, so remember the problem was that we can’t use it as a payment source or as a payment, as some kind of a currency, because it’s too unstable. And currencies, by their definition, have to be stable.

So why do we need it? And I think that the best part of this was literally as that they were going to break, what they said.

JK: You would never say that, would you?

ARS: What?

JK: Just that I don’t know what I’m talking about.

ARS: I don’t know what I’m talking about at all.

JK: Okay. As long as we both know, neither one of us knows anything, we got that in common.

ARS: We got that in common.

PW: “Yeah, we got that in common. I don’t have a clue. I don’t even suspect anything.”

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But the question that you want to ask yourself is, what’s the game plan? Why are we trying to get people to buy this stuff? What is it? 

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And I said to my wife, I said, “This is my sneaking suspicion.” I said, “Deb, this is my sneaking suspicion on what’s going on here.”

And I walked into her a couple of minutes later and I go, “I’m so brilliant.” And she starts laughing. She goes, “You’re an idiot.” And I said, “No.”

I said, “My sneaking suspicion is this: If you have a stablecoin that moves with the dollar, how do you make money?” Because the only thing I can think of is that they’re buying Treasuries that earn interest for them and issuing this stablecoin that moves with Treasuries and keeping the interest. That’s how they make money.

DH: Some kind of arbitrage.

Why Sell Bitcoin?

PW: Well, not even arbitrage. It’s just simply keeping the interest that you earn because you buy these Treasuries and hang onto them, and then you issue this thing that just moves with a dollar.

So if I put $100,000 in an account this year and one full year from now, maybe I should have had $104,000 at the end of the year because I earned interest. Well, with stablecoin, it’s what? Stable. It’s $100,000, and in a year from now, it’s $100,000.

EB: Well, it’s like funds keeping lending revenue or all of that same stuff.

PW: Oh, my wife corrected me. When I said I was brilliant, she said, “I know.” She just texted me.

EB: Oh, I thought she was going to correct you and say, “You said you were a genius instead of brilliant.”

PW: She’s the wind beneath my wings. Don’t let anybody kid you.

But that to me is the issue. It’s a stable value pegged to a dollar. And we’re looking at this going, what is in it?

And when we look at Bitcoin, why try to get people to buy something like that? Well, if you own it and you create more demand for it, you can drive up the price and enrich yourself, the reality of it is.

I can’t think of any other reason to do that, but maybe somebody can come up with something, and they’re going to send me hate mail or something like that because they like it. But anyway.

EB: Some of this I kind of view a little bit like gold, meaning if Bitcoin is going to be so great, just like Cindy said, “Why would they sell their Bitcoin and take my dollars?”

PW: Oh, sure, exactly.

EB: If it’s such a wonderful thing, hang on to it.

PW: Right.

EB: 

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They make money by the movement of the money, not the growth of the money.

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PW: Oh, that just sounds way too rational to me.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.