Original Article Title: Quid Pro Stablecoin

Original Article Author: Arthur Hayes

Original Article Translation: Deep Tide TechFlow

(This article represents the author's personal views, does not constitute a basis for investment decisions, and should not be considered as investment trading advice or recommendation.)

Equity investors have been chanting: "Stablecoin, Stablecoin, Stablecoin; Circle, Circle, Circle." Why are they so optimistic? Because the U.S. Treasury Secretary (BBC) said this:

The result is this chart:

This is a chart comparing the market capitalization of Circle and Coinbase. Remember, Circle must hand over 50% of its net interest income to its "daddy" Coinbase. However, Circle's market cap is surprisingly close to 45% of Coinbase's. This is thought-provoking... Another result is this poignant chart (because I hold Bitcoin instead of $CRCL):

This chart shows Circle's price divided by the Bitcoin price, with the index at 100 when Circle went public. Since the IPO, Circle's performance has exceeded Bitcoin's by nearly 472%. Crypto enthusiasts should ask themselves: Why is the BBC so bullish on stablecoins? Why does the "Genius Bill" receive bipartisan support? Do U.S. politicians really care about financial freedom? Or is there another hidden agenda?

Perhaps politicians do care about financial freedom at an abstract level, but hollow ideals alone cannot drive concrete action. There must be other, more practical reasons that have led them to make a U-turn on stablecoins. Looking back at 2019, Facebook attempted to integrate the stablecoin Libra into its social media empire, only to shelve it due to opposition from politicians and the Federal Reserve. To understand the BBC's enthusiasm for stablecoins, we need to examine the key issues he faces.

U.S. Treasury Secretary Scott "BBC" Bessent faces the same key issue as his predecessor Janet "Bad Girl" Yellen. Their superiors (i.e., the U.S. President and Congress members) 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 provide funds to the government through borrowing at a reasonable interest rate.

However, the market quickly showed little interest in long-term government bonds from highly indebted developed economies, especially at high prices/low yields. This is the "Fiscal Dilemma" that the BBC and Yellen have witnessed in recent years:

Global Government Bond Yield Rollercoaster Effect:

Here is a comparison chart of 30-year government bond yields: UK (white), Japan (gold), US (green), Germany (pink), France (red)

If rising yields weren't bad enough, the real value of these bonds took an additional hit:

Real Value = Bond Price / Gold Price

TLT US is an ETF that tracks government bonds with a maturity of over 20 years. The chart below shows TLT US divided by the gold price with a base index of 100. Over the past five years, the real value of long-term government bonds has plummeted by 71%. If past performance wasn't worrying enough, Yellen and current Treasury Secretary Bessent face the following constraints:

The Treasury's bond sales team must design an issuance plan to address the following demands:

· Around $2 trillion annual federal deficit

· $31 trillion debt maturing by 2025

This is a chart detailing the US federal government's major expenditure items and their year-over-year changes. Please note that each major expenditure's growth rate is in line with or even faster than the US nominal GDP growth.

The previous two charts show that the weighted average interest rate on outstanding government debt is below all points on the government bond yield curve.

· The financial system uses nominally risk-free government bonds as collateral to issue credit. Therefore, interest must be paid; otherwise, the government would face nominal default risk, which would collapse the entire fiat financial system. Since the government bond yield curve is overall higher than the current debt's weighted average interest rate, as maturing debt is refinanced at higher rates, interest payments will continue to rise.

· The defense budget will not decrease, especially as the US is currently involved in wars in Ukraine and the Middle East.

· Healthcare spending will continue to rise, especially in the early 2030s as the baby boomer generation enters a peak period requiring a significant amount of medical services, with these costs mainly borne by large pharmaceutical companies subsidized by the U.S. government.

Control 10-Year Treasury Yield Below 5%

· When the 10-year yield approaches 5%, the MOVE Index (measuring bond market volatility) surges, often foreshadowing a financial crisis.

Issue Debt in a Way That Stimulates the Financial Markets

· Data from the U.S. Congressional Budget Office shows that, although the data only goes up to 2021, since the 2008 global financial crisis, the U.S. stock market has continued to rise, and capital gains tax revenue has also soared.

· The U.S. government needs to tax the annual gains in the stock market to avoid a massive fiscal deficit.

The U.S. government's policies have always tended to serve wealthy asset owners. In the past, only white men who owned property had the right to vote. Although modern America has achieved universal suffrage, power still comes from a minority controlling the wealth of publicly traded companies. Data shows that about 10% of households control over 90% of stock market wealth.

An notable example is during the 2008 global financial crisis, the Federal Reserve bailed out banks and the financial system by printing money, yet banks were still allowed to foreclose on people's homes and businesses. This phenomenon of "the rich enjoy socialism, the poor endure capitalism" is why mayoral candidate Mamdani in New York City is so popular among the poor—poor people also hope to receive some "socialist" benefits.

During the Federal Reserve's implementation of quantitative easing (QE) policy, the Treasury Secretary's job was relatively straightforward. The Federal Reserve bought bonds by printing money, not only allowing the U.S. government to borrow at low cost but also boosting the stock market. However, now the Federal Reserve must at least superficially show a stance against inflation, unable to cut interest rates or continue QE, leaving the Treasury Department to bear the burden alone.

In September 2022, the market began marginal selling of bonds due to concerns about the persisting historical peacetime deficit in the U.S. and the Federal Reserve's hawkish stance. The 10-year Treasury yield almost doubled within two months, and the stock market fell nearly 20% from its summer peak. At this time, former Treasury Secretary Yellen introduced a policy referred to by Hudson Bay Capital as "Aggressive Treasury Issuance" (ATI), by issuing more short-term Treasury bills (T-bills) rather than coupon bonds, reducing the Federal Reserve's reverse repurchase (RRP) balance by $25 trillion, injecting liquidity into the financial markets.

This policy has successfully achieved the goals of controlling yield rates, stabilizing the market, and stimulating the economy. However, the current RRP balance is almost depleted, and the current Secretary of the Treasury, Bessent, faces the question: in the current environment, how can he find trillions of dollars to purchase government bonds in a high-price, low-yield rate scenario?

The market performance in the third quarter of 2022 was extremely challenging. The chart below shows the comparison between the Nasdaq 100 Index (green) and the 10-year Treasury bond yield (white). As the yield rate surged, the stock market experienced a sharp decline.

The ATI policy effectively lowered the RRP (red) and drove up financial assets such as the Nasdaq 100 (green) and Bitcoin (magenta). The 10-year Treasury bond yield (white) never crossed the 5% mark.

The U.S.'s large "Too Big to Fail" (TBTF) banks have two liquidity pools ready to purchase trillions of dollars in government bonds at any time in scenarios with sufficient profit potential. These two liquidity pools are:

· Checking/Savings Accounts

· Reserves held by the Federal Reserve

This article focuses on the eight TBTF banks because their existence and profitability rely on government guarantees of their debts, and bank regulatory policies are more inclined to favor these banks over non-TBTF banks. Therefore, as long as they can achieve a certain level of profit, these banks will comply with the government's requests. If the Secretary of the Treasury (BBC) asks them to purchase government bonds, he will do so in exchange for a risk-free return.

The BBC's enthusiasm for stablecoins may stem from the fact that by issuing stablecoins, TBTF banks can unleash up to $6.8 trillion in purchasing power for Treasury bonds. These dormant deposits can be re-leveraged in the fiat financial system, thereby boosting the market. In the following sections, we will detail how to achieve Treasury bond purchases through stablecoin issuance and how to enhance TBTF banks' profitability.

In addition, a brief explanation will be provided on how if the Federal Reserve stops paying interest on reserves, it could release up to $3.3 trillion for government bond purchases. This would be another policy that, while not technically quantitative easing (QE), has a similar positive impact on fixed-supply monetary assets such as Bitcoin.

Now, let's learn about the BBC's new favorite—stablecoins, this "currency-heavy weapon."

Stablecoin Liquidity Model

My forecast is based on the following key assumptions:

Supplementary Leverage Ratio (SLR) Exemption for Treasury Bonds

· Meaning of Exemption: Banks are not required to hold equity capital for their Treasury bond portfolios. With a full exemption, banks can use unlimited leverage to purchase Treasury bonds.

· Recent Policy Changes: The Federal Reserve has just voted to lower the capital requirement for banks holding Treasury bonds. It is expected that this proposal will unleash up to $55 trillion of bank balance sheet capacity over the next three to six months to purchase Treasury bonds. Anticipating this move, the market may front-run this buying power into the Treasury market, thereby lowering yields in a ceteris paribus scenario.

Banks are Profit-Driven Organizations Focused on Minimizing Losses

· Lesson Learned from Long-Term Treasury Bonds: From 2020 to 2022, the Federal Reserve and the Treasury Department encouraged banks to massively purchase Treasury bonds, and banks eagerly bought high-yield long-term coupon bonds. However, by April 2023, as the Federal Reserve hiked rates at the fastest pace since the 1980s, these bonds suffered significant losses, leading to the collapse of three banks within a week.

· TBTF Banks' Safety Net: In the realm of Too Big to Fail (TBTF) banks, losses in the "hold-to-maturity" bond portfolio of Bank of America exceeded its total equity capital. Faced with potential insolvency if marked to market, the bank was on the brink of failure. To avert the crisis, the Federal Reserve and Treasury effectively nationalized the entire U.S. banking system through the Bank Term Funding Program (BTFP). Non-TBTF banks could still incur losses, and if bankruptcy results from Treasury bond losses, their management would be replaced, and the bank could be sold cheaply to Jamie Dimon or another TBTF bank. Therefore, Chief Investment Officers (CIOs) of banks are cautious about heavy purchases of long-term Treasury bonds, fearing a Fed "carpet pull" through rate hikes once again.

· Appeal of Treasury Bills: Banks purchase Treasury bills as they are essentially high-yield, zero-duration quasi-cash instruments.

· High Net Interest Margin (NIM) is Key: Banks will only use deposits to buy Treasury bills if they can achieve a high NIM and require little to no capital support.

JPMorgan recently announced plans to launch a stablecoin called JPMD. JPMD will run on Coinbase's Layer 2 network Base, built on Ethereum. With this move, JPMorgan's deposits will be divided into two types:

1. Regular Deposits

· Although also digital deposits, their movement within the financial system requires interbank integration using traditional legacy systems and significant manual oversight.

· Regular deposits can only be transferred on weekdays (Monday to Friday) between 9 a.m. and 4:30 p.m.

· The yield on regular deposits is extremely low. According to the Federal Deposit Insurance Corporation (FDIC), the average yield on savings deposits is only 0.07%, and the yield on one-year time deposits is 1.62%.

2. Stablecoin Deposits (JPMD)

· JPMD operates on a public blockchain (Base), allowing customers to use it 24/7 throughout the year.

· By law, JPMD cannot pay interest, but JPMorgan may attract customers to convert regular deposits to JPMD by offering generous cashback and consumer reward incentives.

· Whether staking yield is allowed is currently unclear.

· Staking Yield: Customers lock up JPMD at JPMorgan and receive a certain yield in return.

Customers are moving funds from regular deposits to JPMD because JPMD is more practical, and the bank offers cashback and other consumer rewards. Currently, the total amount of TBTF bank savings and time deposits is about $6.8 trillion. Due to the superiority of stablecoin products, regular deposits will quickly convert to JPMD or similar stablecoins issued by other TBTF banks. If all regular deposits are converted to JPMD, JPMorgan will be able to significantly reduce compliance and operational costs. Here are the specific reasons:

The first reason is cost reduction. If all regular deposits are converted to JPMD, JPMorgan can effectively eliminate its compliance and operational departments. Let me explain why Jamie Dimon was so excited when he understood how stablecoins actually operate.

From a high-level perspective, compliance work is a set of rules established by regulatory bodies and enforced by a group of individuals using technology from the 1990s. The structure of these rules is similar to: if a certain situation occurs, then take a specific action. This "if/then" relationship can be explained by a senior compliance officer and written into a set of rules for a perfect execution by an AI agent. Due to JPMD providing fully transparent transaction records (all public addresses are public), an AI agent trained in relevant compliance regulations can perfectly ensure that certain transactions will never be approved. The AI can also instantly prepare any reports required by regulatory bodies. Regulatory bodies can verify the accuracy of the data because all data exists on the public blockchain. Overall, "too big to fail" (TBTF) banks spend $200 billion annually on compliance as well as operational and technical requirements to comply with banking regulations. By converting all traditional deposits into stablecoins, this cost will be reduced to almost zero.

The second reason JPMorgan Chase promotes JPMD is that it allows banks to use custody of stablecoin assets (AUC) to risklessly purchase billions of dollars in Treasury bills (T-bills). This is because Treasury bills have almost no interest rate risk, but their yield is close to the federal funds rate. Keep in mind that under the new Supplementary Leverage Ratio (SLR) requirements, TBTF banks have the capacity to purchase $5.5 trillion in Treasury bills. Banks need to find idle cash reserves to purchase these debts, and stablecoin-collateralized deposits are the perfect choice.

Some readers may argue that JPMorgan Chase can already purchase Treasury bills with traditional deposits. My response is that stablecoins are the future because they can not only create a better customer experience but also save TBTF banks $200 billion in costs. Based on this cost saving alone, banks are sufficiently incentivized to adopt stablecoins; additional Net Interest Margin (NIM) income is just the cherry on top.

I know many readers may want to invest their hard-earned money in Circle ($CRCL) or the next promising stablecoin issuer. But never underestimate the profit potential of "too big to fail" (TBTF) banks in the stablecoin space. Using the average Price-to-Earnings (P/E) ratio of TBTF banks as a basis, multiplied by the cost savings and stablecoin NIM potential, the result is $3.91 trillion.

The total market value of the current eight TBTF banks is about $2.1 trillion, which means stablecoins could potentially increase the average stock price of TBTF banks by 184%. If there is a non-consensus investment strategy that can be scaled, it is to long a equally weighted portfolio of TBTF bank stocks based on this stablecoin theory.

How about the Competition?

Don't worry, the Genius Act ensures that non-bank-issued stablecoins 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 financial technology (FinTech) companies. Of course, theoretically, anyone can obtain a banking license or acquire an existing bank, but all new owners must be approved by regulatory bodies. As for how long this will take, only time will tell.

Furthermore, the act includes a provision that hands over the stablecoin market to banks by banning the payment of interest to stablecoin holders. Unable to compete with banks by offering interest, FinTech companies will not be able to attract deposits away from banks at low cost. Even successful issuers like Circle will never be able to tap into the $6.8 trillion TBTF traditional deposit market.

In addition, FinTech companies like Circle and small banks do not have government guarantees for their liabilities, while TBTF banks do. If my mother were to use a stablecoin, she would definitely choose a stablecoin issued by a TBTF bank. Baby boomers like her will never trust FinTech companies or small banks for this purpose, as they lack government backing.

Former U.S. President Trump's "Crypto Tsar" David Sachs agrees with this. I believe many corporate cryptocurrency donors will be dissatisfied with the outcome—after donating so much to cryptocurrency campaigns, they are quietly excluded from the lucrative stablecoin market in the U.S. Perhaps they should change their strategy and advocate for financial freedom rather than just providing a stool for the "throne" of those TBTF bank CEOs.

In summary, the practice of TBTF (Too Big to Fail) banks adopting stablecoins not only eliminates FinTech companies' competition for their deposit base but also reduces the need for expensive and often underperforming human compliance officers. Additionally, this approach does not require paying interest, thereby increasing the net interest margin (NIM) and ultimately driving up their stock prices. In return, as a token of appreciation for the gift of stablecoin bestowed by the BBC Act, TBTF banks will purchase up to $6.8 trillion in Treasury bills.

ATI: Yellen's Charade: Stablecoins and the BBC Act

Next, I will discuss how the "BBC Act" could release an additional $3.3 trillion in static reserves from the Fed's balance sheet.

Interest on Reserve Balances (IORB)

Following the 2008 Global Financial Crisis (GFC), the Fed decided to ensure banks wouldn't collapse due to inadequate reserves. The Fed created reserves by purchasing Treasuries and Mortgage-Backed Securities (MBS) from banks, a process known as Quantitative Easing (QE). These reserves quietly sit on the Fed's balance sheet. In theory, banks could convert the reserves held by the Fed into circulating currency and lend it out, but they choose not to do so because the Fed pays them enough interest through money printing. The Fed "freezes" these reserves in this way to prevent further inflation.

However, the issue the Fed faces is that when it raises rates, Interest on Reserve Balances (IORB) also increases. This is not ideal because the unrealized losses in the Fed's bond portfolio also increase as rates rise. As a result, the Fed finds itself in a situation of insolvency and negative cash flow. However, this negative cash flow situation is entirely a policy choice and can be changed.

US Senator Ted Cruz recently suggested that perhaps the Fed should stop paying Interest on Reserve Balances (IORB). This would force banks to compensate for lost interest income by converting reserves into Treasury securities. Specifically, I believe banks would purchase Treasury bills (T-bills) due to their high yield and quasi-cash-like nature.

According to Reuters, Ted Cruz has been pushing his Senate colleagues to eliminate the Fed's authority to pay interest on reserves to banks, believing this change would help significantly reduce the fiscal deficit.

Why does the Fed print money and prevent banks from supporting the "Empire"? There is no reason for politicians to oppose this policy change. Both Democrats and Republicans are fond of fiscal deficits; why not unleash $3.3 trillion of bank purchasing power into the bond market, allowing them to spend more? Given the Fed's reluctance to assist the "Trump team" in financing with an "America First" agenda, I believe Republican lawmakers will use their majority seats in both chambers to strip the Fed of this power. Therefore, the next time yields spike, lawmakers will be ready to unleash this flood of funds to support their reckless spending.

Before concluding this article, I would like to discuss Maelstrom's cautious strategic positioning from the current stage to the third quarter amid the inevitable increase in dollar liquidity during the implementation of the "BBC Act".

Cautionary Tale

While I remain very optimistic about the future, I believe that with the passage of Trump's spending bill—referred to as the "Big Beautiful Bill"—there may be a temporary halt in dollar liquidity creation.

Based on the current content of the bill, it will raise the debt ceiling. While many provisions will become bargaining chips in the political game, Trump will not sign a bill that does not raise the debt ceiling. He needs additional borrowing capacity to support his agenda. There is currently no indication that the Republicans will push for government spending cuts. So, the question for traders 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 drawing down its Treasury General Account (TGA) balance. As of June 25th, the TGA balance is $364 billion. According to guidance from the Treasury in its most recent quarterly refunding announcement, if the debt ceiling is raised today, the TGA balance will be replenished to $850 billion through debt issuance. This will result in a $486 billion contraction in dollar liquidity.

The only major dollar liquidity item that could potentially offset this negative impact is releasing funds from the Overnight Reverse Repo Program (RRP), which currently stands at $461 billion.

Due to the TGA replenishment plan, this is not a clear-cut Bitcoin shorting opportunity but rather a market environment that requires cautious operation—a bull market that may be temporarily interrupted by short-term volatility. I anticipate that from now until the August Jackson Hole meeting, prior to any remarks from Fed Chair Jerome Powell, the market may consolidate or see a slight downtrend. If the TGA replenishment has a negative impact on dollar liquidity, Bitcoin may dip to the $90,000 to $95,000 range. If this plan has no substantial impact on the market, Bitcoin may oscillate within the $100,000 range but struggle to break the previous high of $112,000.

My speculation is that Powell may announce the end of Quantitative Tightening (QT) or other seemingly mundane yet impactful banking regulatory policy adjustments. By early September, the debt ceiling will be raised, the TGA account largely replenished, and the Republicans will focus on wooing voters in the November 2026 elections. At that point, with a surge in money creation, the bulls will counter the bears with strong green candles.

From now until the end of August, Maelstrom will increase its allocation to staked USDe (Ethena USD). We have cleared all positions in low-liquidity altcoins and may reduce our Bitcoin risk exposure based on market performance. The risk positions in altcoins purchased around April 9th have realized 2x to 4x returns within three months. However, the altcoin sector may suffer significant losses in the absence of clear liquidity catalysts.

After the market correction, we will have confidence to reallocate, search for undervalued assets, and potentially seize 5x to 10x return opportunities before the next round of fiat liquidity creation slows down (expected in late Q4 2025 or early Q1 2026).

Stepwise Checkmark

The adoption of stablecoins by Systemically Important Banks (TBTF) could create up to $6.8 trillion in purchasing power in the U.S. Treasury Bill (T-bill) market. The Federal Reserve's cessation of Interest on Reserve Balances (IORB) could further unleash up to $3.3 trillion in T-bill purchasing power.

Overall, due to the "BBC" policy, there may be a total of $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 the $2.5 trillion liquidity injection by former Treasury Secretary Yellen—propelling the market into a "mania"!

This adds another liquidity arrow to the "BBC" policy toolbox. With Trump's "Big Beautiful Act" passed and the debt ceiling raised, this tool may be forced into action. Soon after, investors will once again worry about how the U.S. Treasury market will digest these pressures without collapsing.

Some are still waiting for the so-called "monetary Godot"—waiting for Fed Chair Powell to announce a new round of unlimited quantitative easing (QE) and rate cuts before selling bonds and buying cryptocurrencies. But let me tell you, this will not happen at all, at least not until the U.S. is truly embroiled in a hot war with Russia, China, or Iran, or until a systemically important financial institution is on the brink of collapse. Not even an economic recession is enough to summon "Godot." So, stop listening to that "feeble" person and focus on those who truly control the situation!

The following charts will show the opportunity cost investors suffered while waiting for the "Mogul of Money." As the Federal Reserve's balance sheet (white line) contracted, the effective federal funds rate (gold line) rose. In theory, during this period, Bitcoin and other risk assets should have fallen.

However, former Treasury Secretary "Bad Gurl" Yellen did not disappoint the wealthy. She stabilized the market by implementing ATI (possibly referring to asset-backed liquidity tools). During this time, Bitcoin (gold line) surged 5x, while the overnight reverse repo (RRP) balance plummeted 95%.

Do not make the same mistake again! Many financial advisors are still urging clients to buy bonds because they predict a decline in yields. I agree, central banks worldwide will indeed cut rates and print money to prevent a government bond market collapse. Additionally, even if central banks do not act, the Treasury will step in. The central point of this article is that by supporting stablecoin regulation, relaxing SLR (Supplementary Leverage Ratio) restrictions, and halting IORB payments, the Fed could unleash up to $10.1 trillion in Treasury purchase power. But the question is, is holding bonds to earn a return of 5% to 10% really worth it? You might miss out on Bitcoin skyrocketing 10x to $1 million or the NASDAQ 100 index surging 5x to 100,000 points, potentially by as early as 2028.

The true "game" of stablecoins is not betting on traditional fintech companies like Circle but realizing that the U.S. government has handed a "liquidity bazooka" worth trillions of dollars to systemically important banks (TBTF) in the name of "innovation." This is not decentralized finance (DeFi), nor is it the so-called financial freedom; it is debt monetization disguised in Ethereum clothing. If you are still waiting for Powell to whisper "QE infinity" to you before daring to venture in, then congratulations—you are the market's "bagholder."

Instead, you should go long on Bitcoin, go long on JPMorgan, rather than wasting energy on Circle. This stablecoin, the "Trojan Horse," has long infiltrated the financial fortress. However, when opened, it does not reveal the dream of libertarians but is filled with liquidity used to purchase U.S. Treasury Bills. This liquidity will be used to sustain the stock market's highs, bridge the fiscal deficit, and soothe the anxieties of the Boomer generation.

Don't sit on the sidelines anymore, waiting for Powell to give the bull market his "blessing." The "BBC" (note: possibly a playful term for the Fed or related policies) is ready to stop laying the groundwork and start flooding the global market with liquidity. Seize the opportunity and don't become a passive bystander.

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