Author: Arthur Hayes, Founder of BitMEX
Compiled by: Saoirse, Foresight News
Equity investors are like Janet Yellen, who once served as the chair of the Federal Reserve and the U.S. Treasury Secretary, chanting: "Stablecoin, stablecoin, stablecoin; Circle, Circle, Circle."
Why are they so bullish? Because The Big Bessent Cock (BBC) said:
Recent reports predict that the stablecoin market could reach $3.7 trillion by the end of the decade. With the passage of the GENIUS Act, that outlook is even brighter. A thriving stablecoin ecosystem will drive private sector demand for U.S. Treasuries, which back stablecoins. This new demand could lower government borrowing costs and help keep the national debt in check. It could also attract millions of new users around the world to the dollar-based digital asset economy. It’s a win-win-win for everyone involved:
1. Private sector
2. Ministry of Finance
3. Consumers
These are the fruits of smart, pro-innovation legislation.
The result is this:
This is a comparison chart of the market capitalization of Circle and Coinbase. You know, Circle has to give 50% of its net interest income to its "financial sponsor" Coinbase. But in this case, how can Circle's market capitalization still reach nearly 45% of Coinbase? It's really puzzling...
And this depressing chart (because I own Bitcoin, not CRCL):
This chart reflects "Circle price / Bitcoin price * 100%". Since its initial public offering (IPO), Circle has outperformed Bitcoin by nearly 472%.
Crypto enthusiasts should ask themselves: Why is the BBC so bullish on stablecoins? Why did the Genius Act gain bipartisan support? Do American politicians really care about financial freedom, or is there something else going on? Perhaps politicians care about financial freedom in theory, but lofty ideals are not enough to drive action. There must be more realistic political reasons for this 180-degree turn in stablecoin policy. Back in 2019, Facebook's attempt to integrate a stablecoin called Libra into its social media empire was aborted due to opposition from politicians and the Federal Reserve. To understand why the BBC is so obsessed with stablecoins, we have to look at the main problems that the BBC must solve.
The main problem facing US Treasury Secretary Scott Bessent (BBC) is the same as that faced by his predecessor Janet Yellen ("Bad Gurl"). Their bosses (the US President and politicians in both the Senate and House) like to spend money but don't want to raise taxes, so the Treasury Secretary has to find a way to finance the government through debt at a reasonable cost. It soon became clear that the market was unwilling to pay high prices (i.e. low yields) for long-term government bonds of any over-indebted advanced economy. This is the "doomsday drama" tug-of-war that BBC and "Bad Gurl" have been watching for the past few years... It's really a headache:
Above are 30-year bond yields for these countries: UK (white), Japan (gold), US (green), Germany (magenta), and France (red).
If rising yields weren't bad enough, the actual value of these bonds has plummeted dramatically.
Actual value = bond price ÷ gold price
TLT US is an ETF that tracks US Treasury bonds with a remaining maturity of more than 20 years. By subtracting the fund price from the gold price * 100%, we can see that over the past five years, the actual value of long-term Treasury bonds has plummeted by 71%.
If past performance wasn’t bad enough, Yellen and now Bessent face other constraints. The Treasury’s bond issuance team must develop an issuance plan that achieves the following goals:
1. Funding the approximately $2 trillion federal annual deficit and $3.1 trillion in maturing debt through 2025.
Here is a chart detailing the largest items of federal government spending and their year-over-year changes. Note that each of these major items of spending has grown at a rate that matches or exceeds the growth rate of nominal U.S. GDP.
The first two charts show that the weighted average interest rate on outstanding Treasury bonds is lower than anywhere else on the Treasury yield curve.
- The financial system issues credit backed by nominally risk-free Treasury bonds. Interest must be paid, or the government will default nominally, which will destroy the entire fiat financial system. Since the entire Treasury yield curve is above the weighted average interest rate on current debt, maturing debt will be refinanced at higher rates, and interest payments will continue to increase.
- Given that the United States is involved in wars in Ukraine and the Middle East, the defense budget will not be reduced.
- By the early 2030s, health care spending will increase as baby boomers enter their prime years receiving care from Big Pharma (paid for by the U.S. government).
2. Sell bonds in a way that the yield on the 10-year benchmark Treasury bond does not exceed 5%.
- When the 10-year Treasury yield approaches 5%, bond market volatility as measured by the MOVE index will soar and financial crises will follow.
3. Sell bonds in a way that has a stimulating effect on the overall financial market.
The data in this chart from the Congressional Budget Office is only updated to 2021, but it clearly shows that after the global financial crisis in 2008, as the US stock market continued to rise, capital gains tax revenue also soared.
- The U.S. government needs to raise tax revenue by taxing year-over-year stock market gains to avoid running an incredibly large fiscal deficit.
- The US government exists to serve the wealthy capitalist class. In the old days when women stayed in the kitchen, blacks worked in the fields, and Indians lived in the backwoods, only white men from the capitalist class were allowed to vote. In modern America, despite universal suffrage, power still comes from wealth in public companies, which leads to government policies that continue to increase and consolidate the power of the 10% or so who control over 90% of the stock market wealth. One of the most notable examples of government favoritism towards the capitalist class was during the 2008 global financial crisis when the Fed printed money to save the banks and the entire financial system, but the banks were still allowed to foreclose on people’s homes and businesses. This is “socialism for the rich, capitalism for the poor”! With such historical precedents, it’s no wonder that New York City mayoral candidate Mamdani is so popular, and the poor want a piece of “socialism” too.
When the Fed was doing quantitative easing, the Treasury secretary's job was easy. The Fed printed money to buy bonds, which allowed the U.S. government to borrow heavily on cheap debt and boost the stock market. But now, at least on paper, the Fed must appear to be fighting inflation. The authority can't cut rates or do quantitative easing, so the Treasury must do the heavy lifting alone.
By September 2022, the market began to unwind its bond holdings on the assumption that the largest peacetime federal deficit in U.S. history would persist and the Federal Reserve was taking a hawkish stance. Within two months, the 10-year Treasury yield had nearly doubled and the stock market was down nearly 20% from its summer highs. That’s when “Bad Gurl” Yellen took action. In a move called “Active Treasury Issuance (ATI)” in a Hudson Bay Capital paper, Yellen began increasing the issuance of short-term Treasury bills to exceed the issuance of coupon-bearing bonds.[1] Over the next two years, $2.5 trillion was injected into financial markets as the Fed’s reverse repurchase program (RRP) balance fell. If the goal was to achieve the three conditions I listed above, then Yellen’s active Treasury issuance strategy was a great success. But times have changed. What should the BBC do now? How will he achieve the same goals in the current environment? The reverse repurchase program has almost no balance left. Where can he find trillions of dollars of "idle funds" (which are lying on the balance sheet) that are willing to buy Treasury bonds at high prices (i.e. low yields) at any time?
The third quarter of 2022 was terrible. The chart below, showing the Nasdaq 100 (green) and 10-year Treasury yield (white), shows that stocks fell sharply as yields soared.
The Active Treasury Issuance (ATI) strategy effectively consumed the balance of the Reverse Repurchase Program (RRP, red), while pushing up the prices of financial assets such as the Nasdaq 100 Index (green) and Bitcoin (magenta). The 10-year Treasury yield (white) never broke through 5%.
There are two types of funds in the hands of the “Too Big to Fail” (TBTF) large banks, which are willing to use them to buy trillions of dollars of Treasury bonds as long as there is a considerable profit margin. These two types of funds are demand/time deposits and reserves deposited with the Federal Reserve [2]. I focus on these eight TBTF banks because their survival and profitability depend on the government’s guarantee of their debts, and the bank regulatory rules are formulated more in favor of them than other non-banks. Therefore, as long as they can make a little profit, they will do what the government asks. Once the BBC asks them to buy those poor-yielding Treasury bonds, in return, it will provide these banks with a risk-free return.
I believe the reason why the BBC is so enthusiastic about “stablecoins” is that TBTF banks can release up to $6.8 trillion in short-term Treasury bill purchasing power by issuing stablecoins. These previously idle deposits can then be re-leveraged in the fake fiat financial system, pushing up the market. In the next section, I will elaborate on my model: how the issuance of stablecoins facilitates the purchase of short-term Treasury bills and how it improves the profitability of TBTF banks.
After discussing the mechanism of stablecoins flowing to short-term Treasuries, I will briefly explain that if the Fed stops paying interest on reserves, it will free up up to $3.3 trillion to buy Treasuries. This is another classic example of a policy that is not technically quantitative easing (QE), but will have an equally positive impact on fixed-supply monetary assets such as Bitcoin.
Next, let’s take a look at the BBC’s “new favorite”, the stablecoin that is regarded as a “monetary weapon”.
Stablecoin flows
My forecast is based on several key assumptions:
1. Full or partial exemption of government bonds from supplementary leverage ratio (SLR) regulation
- The so-called exemption means that banks do not need to set aside equity capital for their government bond portfolios. Full exemption means that banks can purchase government bonds with unlimited leverage.
- The Fed just voted to reduce the amount of capital banks must hold for Treasuries; the initial impact will be felt over the next 3-6 months. According to the above chart, this will free up $5.5 trillion in balance sheet capacity for banks to buy Treasuries. Because markets are forward-looking, this buying power will be reflected in the Treasury market in advance, driving yields down, all else being equal.
2. Banks are institutions that seek to make profits and minimize losses
- From 2020 to 2022, the Fed and the Treasury urged banks to increase their holdings of Treasury bonds; banks bought a large number of such bonds because of the high yields on long-term interest-bearing bonds. By April 2023, as the Fed's policy rate rose at the fastest rate since the early 1980s, the losses generated by these bonds led to the collapse of three banks in a week[3]. Among the TBTF banks, Bank of America's portfolio of maturing bonds had losses exceeding its total equity capital, and if it was forced to mark to market, the bank would have long been insolvent. To quell the crisis, the Fed and the Treasury effectively nationalized the entire US banking system through the Bank Term Funding Program (BTFP). However, other banks may still lose money, and if the losses on Treasury bonds lead to insolvency, management will be removed and the bank will be sold at a low price to Jamie Dimon (Chairman and CEO of JPMorgan Chase) or other TBTF banks[4]. Therefore, bank chief investment officers are cautious about increasing their holdings of long-term Treasury bonds, fearing that the Fed will once again "cut off the source of funds" by raising interest rates.
- Banks buy Treasury bills because they are essentially high-yielding, cash-like instruments that are virtually unaffected by interest rate fluctuations.
- Banks will only use deposits to purchase short-term Treasury bills if they can earn a higher net interest margin (NIM) and do not need to set aside or only need to set aside very little capital.
JPMorgan Chase recently announced plans to launch a stablecoin called JPMD. The stablecoin will run on the Base network, a second-layer network operated by Coinbase and built on Ethereum. As a result, JPMorgan Chase will have two types of deposits. The first type is what I call "regular deposits" : although these deposits are in digital form, they need to interact with the outdated system between banks when circulating in the financial system, and rely on a lot of manual monitoring; regular deposits circulate from 9 am to 4:30 pm Monday to Friday; their yields are negligible. According to the Federal Deposit Insurance Corporation (FDIC), the average yield on regular demand deposits is 0.07%, and the one-year time deposit is 1.62%.
The second type of deposit is a stablecoin (i.e. JPMD) . JPMD runs on the Base chain and is available to customers 24/7 all year round. By law, JPMD cannot pay interest, but I speculate that JPMorgan Chase will attract customers to convert regular deposits into JPMD by offering generous consumer cashback benefits. It is not clear whether staking returns (meaning that customers lock JPMD in JPMorgan Chase and earn returns during the lock-up period) are allowed.
Customers will transfer funds from regular deposits to JPMD because JPMD is more practical and the bank offers cashback benefits. It is estimated that the total demand and time deposits of TBTF banks are about US$6.8 trillion[5]. Since stablecoins are higher-quality products, regular deposits will be quickly converted to JPMD or similar stablecoins issued by other TBTF banks.
Why would JPMorgan Chase bother to push its customers to switch from regular deposits to JPMD? The first reason is to reduce costs . If all regular deposits were switched to JPMD, JPMorgan Chase could actually eliminate its compliance and operations departments. Let me explain why Jamie Dimon is so excited after learning how stablecoins actually work.
Compliance, broadly speaking, is when regulators create rules that are enforced by a team of people using technology from the early 1990s. The rules are typically structured as “if X happens, then do Y.” These “if-then” relationships can be interpreted by experienced compliance staff and encoded into rules that AI agents can perfectly follow. Since all of JPMD’s public addresses are publicly accessible and fully transparent, AI agents trained on relevant compliance regulations can perfectly ensure that specific transactions are never approved and can instantly generate any reports required by regulators. Regulators can verify the accuracy of the data because it all exists on the public blockchain. Overall, TBTF banks spend $20 billion per year on compliance and the operations and technology required to meet banking regulatory requirements[6]. By converting all regular deposits to stablecoins, this cost will be reduced to almost nothing.
The second reason JPMorgan is promoting JPMD is that it allows banks to use the managed stablecoin assets (AUC) to purchase billions of dollars of short-term Treasury bills risk-free . This is because short-term Treasury bills have almost no interest rate risk and the actual yield is close to the federal funds rate. Don't forget that under the new supplementary leverage ratio (SLR) rules, TBTF banks have $5.5 trillion in Treasury bond purchase capacity. Banks need to find an idle fund to buy these bonds, and deposits held in their stablecoins happen to be the perfect choice.
Some readers may argue that JPMorgan could have used regular deposits to buy short-term Treasury bills. My response is that stablecoins are the future. They provide a better customer experience and save TBTF Bank $20 billion in costs. This cost savings alone is enough to encourage banks to embrace stablecoins, and the additional net interest margin (NIM) is icing on the cake.
I know many readers want to put their hard-earned money into Circle (ticker: CRCL) or other emerging stablecoin issuers. But don’t overlook the profit potential of TBTF banks in the stablecoin space. If you take the average 14.41x PE of TBTF banks, multiply it by the cost savings and stablecoin net interest margin (NIM) potential, the result is $3.91 trillion. The total market value of the 8 TBTF banks is currently about $2.1 trillion, which means that stablecoins could drive these banks’ stock prices up by an average of 184%. If there is any non-consensus trade that investors can operate on a large scale, it is to long on an equal-weighted combination of TBTF banks based on this stablecoin logic.
What about competition?
Don’t worry, the Genius Act ensures that non-bank-issued stablecoins cannot compete at scale. The act explicitly prohibits tech companies like Meta from issuing stablecoins on their own, requiring them to work with banks or fintechs. Of course, in theory anyone can apply for a banking license or acquire an existing bank, but all new owners must be approved by regulators. Let’s see how long this process takes. Another provision that favors banks in the stablecoin market is a prohibition on paying interest to stablecoin holders. As a result, fintechs will have a hard time attracting deposits from banks at low cost. Even a successful issuer like Circle will never be able to touch the $6.8 trillion regular deposit pie of TBTF banks. In addition, fintechs like Circle and small banks do not enjoy government guarantees on their liabilities, while TBTF banks do. If my mother were to use a stablecoin, she would definitely choose one issued by a TBTF bank. Baby boomers like her would never use a stablecoin from a fintech or small bank because these institutions lack government guarantees and are difficult to trust.
David Sachs, the "crypto tsar" during the presidency of former US President Trump, holds the same view. Many corporate donors in the crypto industry must be quite annoyed. After investing so much in campaign donations, they were quietly blocked from the lucrative US stablecoin market. Perhaps they should change their strategy and truly advocate financial freedom, rather than just fighting for a small stool under the "chamber pot" of TBTF bank CEOs.
In short, TBTF banks’ adoption of stablecoins eliminates competition from fintechs for their deposit base, reduces the need for costly and often inefficient compliance staff, does not require interest payments (thus driving up NIM), and ultimately drives up their own stock prices. In return for the BBC’s “gift” of stablecoins, TBTF banks will purchase up to $6.8 trillion in short-term Treasury bills.
ATI (Active Treasury Issuance Strategy): "Bad Gurl" Yellen; Stablecoin: BBC
Next, I'll talk about how the BBC can free up another $3.3 trillion of idle reserves from the Fed's balance sheet.
Interest on Reserve Balances (IORB)
After the 2008 global financial crisis, the Fed decided that banks must not go bankrupt due to insufficient reserves. The Fed created reserves that sat idle on its balance sheet by buying Treasury bonds and mortgage-backed securities from banks - an operation known as quantitative easing. In theory, banks could convert reserves deposited with the Fed into currency and use them for lending, but they refused to do so because the Fed would print money to pay them generous interest. The Fed sterilized these reserves to prevent inflation from surging further.
But the problem for the Fed is that the interest on reserve balances increases as interest rates rise. This is not a good thing, because the unrealized losses on the Fed's bond portfolio will also increase as interest rates rise. As a result, the Fed is insolvent and has negative cash flow. However, this negative cash flow situation is purely the result of policy choices 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 make up for the loss of interest income by converting reserves into Treasury bonds. Specifically, I think banks would choose to buy short-term Treasury bills because of their high-yield, cash-like characteristics.
Senator Ted Cruz has been pressuring colleagues to end interest payments to banks on reserves, a change he argues would go a long way toward reducing the deficit.
—— Source: Reuters
Why is the Fed printing money to stop banks from supporting this empire? Politicians have no reason to oppose this policy change. Democrats and Republicans are both keen on fiscal deficits, so why not release the banks' $3.3 trillion purchasing power into the Treasury market so that they can spend more money? Given the Fed's unwillingness to help the Trump team finance the "America First" agenda, I think Republican lawmakers will use their majorities in both the Senate and the House to deprive the Fed of the power to pay interest on reserves. Therefore, the next time yields soar, lawmakers will be ready to release this huge amount of money to pay for their profligacy.
Before concluding this article, I would like to talk about the optimistic outlook that US dollar liquidity will inevitably increase during the BBC's tenure, but before that, I also need to talk about Maelstrom's cautious holding strategy from now until the third quarter.
Warning Notes
Although I am strongly bullish, I think there could be a brief lull in USD liquidity following the passage of Trump’s “Big, Beautiful Act”.
The bill currently includes an increase in the debt ceiling. While politicians will haggle over many of the clauses, Trump will not sign any bill that does not raise the debt ceiling. He needs more borrowing power to finance his agenda. There is no sign that Republicans will try to force the government to cut spending. The question for traders is: What will happen to dollar liquidity when the Treasury resumes net borrowing?
Since January 1, the Treasury has financed the government mainly by reducing the balance of its checking account (i.e., the Treasury General Account, TGA). As of June 25, the TGA balance was $364 billion. According to the latest quarterly refinancing announcement of the Treasury, if the debt ceiling is raised now, the TGA balance will be replenished to $850 billion through bond issuance, which will lead to a contraction of US dollar liquidity by $486 billion. The only major US dollar liquidity project that may alleviate this negative impact is the outflow of funds from the reverse repurchase program (RRP), which currently has a balance of $461 billion.
The TGA replenishment alone should not be used as an opportunity to short Bitcoin, but rather should be done with caution. The bull market may be interrupted briefly, and I think the market will go sideways or slightly lower between now and August when Jerome Powell speaks at the Jackson Hole Fed Annual Meeting. If the TGA replenishment does lead to a tightening of USD liquidity, Bitcoin could fall to $90,000-95,000; if the replenishment process is uneventful, Bitcoin will fluctuate in the $100,000 range and fail to break the historical high of $112,000. I have a hunch that Powell will announce an end to quantitative tightening and/or other seemingly mundane but significant changes to banking regulation. By early September, the debt ceiling will have been raised, the TGA will have been largely replenished, and Republicans will focus on "distributing benefits" to avoid repeating the "Mamdani-style" mistakes in the November 2026 district elections. At that time, the surge in money creation will push the green cross candlestick to pierce the short defense line.
Maelstrom will be heavily invested in collateralized USDe (Ethena USD) from now until the end of August. We have cleared all liquid shit coin positions and may further reduce Bitcoin exposure depending on price action. Altcoin bought around April 9 have achieved 2-4x returns in three months. In the absence of a clear liquidity catalyst, the Altcoin sector will be hit hard. After that, we can rest assured to "pick up leaks" and perhaps reap 5-10x returns before fiat liquidity stagnates again in late Q4 2025 or early Q1 2026.
Summary
TBTF banks' adoption of stablecoins will create up to $6.8 trillion in short-term Treasury bill purchasing power; the Federal Reserve's cessation of paying interest on reserve balances will create up to $3.3 trillion in short-term Treasury bill purchasing power.
Thanks to the BBC's policy, $10.1 trillion will eventually flow into the short-term Treasury bill market. If my prediction is correct, the impact of this liquidity injection on risk assets will be exactly the same as the effect of Bad Gurl Yellen's $2.5 trillion, which will drive the market into a frenzy!
This is another liquidity "arrow" in the BBC's policy toolbox that can be used at any time. It will be needed when Trump's "Big and Beautiful Bill" is passed and the debt ceiling is raised. Because soon, investors will start to worry again: How can the Treasury market digest the huge amount of debt that will be issued without collapsing?
Some of you are still waiting for the "Money Godot" (Godot comes from the absurdist play "Waiting for Godot" by Irish writer Samuel Beckett. In the play, the two protagonists are always waiting for a person named Godot, but Godot never appears, symbolizing people's futile wait for something illusory and difficult to achieve), waiting for Federal Reserve Chairman Powell to announce a new round of unlimited quantitative easing and interest rate cuts, and then you are willing to sell bonds and buy cryptocurrencies. But this will not happen, at least not until the United States is sure to break out into a hot war with Russia, China and Iran, or a large systemically important financial institution is on the verge of bankruptcy. Not even a recession can summon this Godot. So stop listening to the idiot sitting in the "soft seat" and listen to what the person holding the "big stick" says. The former refers to Powell, and the latter refers to the BBC.
Don’t make the same mistake again. Many financial advisors are still pushing clients to buy bonds, saying yields are expected to fall. I think central banks around the world will cut rates and print money to prevent a collapse in government bond markets. And even if central banks don’t act, the Treasury will. This is exactly the point I make in this article: I think the BBC can unlock up to $10.1 trillion in Treasury buying power by supporting stablecoin regulation, SLR exemptions, and stopping interest on reserves (IORB).
But really, what's the point of holding a bond and earning 5% or 10%? You'll miss out on Bitcoin rising 10x to $1 million, or the Nasdaq 100 rising 5x to 100,000 by 2028.
The real way to play stablecoins is not to bet on old financial technology companies like Circle, but to understand that the US government has just handed the launch key of a trillion-dollar "liquidity weapon" to the TBTF banks, but this weapon is covered with the cloak of "innovation". This is not decentralized finance (DeFi) or financial freedom, but a debt monetization costume worn on Ethereum.
If you are still waiting for Powell to say "unlimited quantitative easing" in your ear before you dare to long on risky assets, then congratulations, you are someone else's "exit liquidity."
So, long Bitcoin, long JPMorgan, forget Circle. The Trojan horse of stablecoins has entered the fortress, and when it opens the gates, it will not be filled with libertarian dreams, but with liquidity to buy short-term Treasury bills to sustain stock market bubbles, finance deficits, and keep baby boomers in their place. Stop waiting on the sidelines for Powell to "open the door" for the bull market. The BBC has warmed up, and it's time for him to drench the world with "liquidity juice."
Recommended reading:
Can Tether maintain its leading position under the impact of the GENIUS Act?
