If you're an ordinary person, you should be doing that unless you have a good reason to be self-custodying. And there are good reasons to be self-custodying. But just, you know, because some Bitcoin maxi on Twitter told me to is not a good reason.
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All right, we're back. We got HB and we got Air Horns playing in the background. This is our Stabled Up segment with Hase, powered by Frax, our stable coin partner for Stabled Up, and it's also clarity week. So we've been talking about clarity this entire week. It's been a little while. How you holding up, man?
I'm doing good. I'm doing good. Obviously a lot going on and clarity is starting to look a little bit dim, but I'm still feeling optimistic. But that's kind of my MO, you know.
Yeah. I mean, I feel like in this industry or any industry really you got to stay almost perma optimist in order to just kind of make it through, especially these times. Would you consider this like the classic apathetic market conditions we kind of face?
Yes, very clearly. You see a lot of market apathy. Things are moving pretty slow. Markets are sluggish. The thing is markets aren't really reacting that much to anything.
So people say, oh, it's terrible that clarity is not passing. The reality is that the market doesn't react to clarity almost at all. So if you remember, in February clarity was at like 80%. Then it was at like 50/50 a couple weeks ago. Now it's at 15%. You cannot see it in the charts. You can't see how markets are reacting to clarity odds. So if you just regress Poly Market against the Bitcoin or ETH price or alts, it doesn't predict anything. Same thing happened. If you remember, there was a bloodbath in the Korean markets just a few weeks ago. Cosby round-tripped like 40-50% whatever it was. You couldn't tell that was happening in crypto. Normally, Korean retail is like the index of crypto, but we're kind of in a world now where, yeah, they're all busy trading memory stocks and getting their faces ripped off, and crypto just literally didn't make a blip.
Yeah, they took all the liquidity and all the volatility with them over there into the Korean markets and the AI equities. And so I mean, yeah, I think that's effectively where we find ourselves. You know, I've heard a take just on clarity is that the market doesn't like uncertainty. And so if the Clarity Act doesn't go through and that's it, or the Clarity Act goes through and that's it. Either way, we're going to get more consensus, more certainty than we have today. Either way, the market's going to perform well going from a position of uncertainty to certainty once this thing ultimately crosses the finish line one way or the other.
I mean that's a very simple story. If that were true, then you would see the Poly Market odds predict. When it was at 80%, it's like, okay, well this is going to pass, therefore markets should pull the outcome forward and say, okay, well we have the clarity, therefore markets should be positive. Right now the odds are 15%. If your theory is true, then that should mean 50% is the worst — 50% is like we don't know if it'll pass or not, so we don't have certainty. When the odds go down to 15%, that should be bullish because now we know it's not going to pass. Obviously, that does not describe markets at all. So I think this story is not true.
I think the answer largely is that, look, clarity is nice to have. Does it really affect the asset prices of almost anything? To what extent does clarity affect the value of Bitcoin? Almost pretty much nothing. Bitcoin has no relevance to clarity. What does it affect for stable coins? Not really anything. Okay, now that they can't pay yield, but that wasn't a big part of why stable coins are growing. And aside from that, ETH — well, ETH is already a commodity. We already know what ETH is supposed to be. Most of these things — and the reality, of course, is that we know there's going to be rulemaking such that the SEC and CFTC are going to step in and do this stuff anyway. The last thing I'd say, so Kalshi has markets on clarity going into next year.
And what you can see from the Kalshi markets is that actually they're pricing 30-plus percent that clarity passes next year and more than 50% that it passes by 2028. Meaning that everyone who's telling you, oh, it's now or never — if clarity doesn't pass now, it's over and kiss this stuff goodbye — that's not actually what markets are saying. Markets are saying, look, if Democrats win the House, the bill is going to get marked up again. There's going to be a recompromise. Lines are going to get redrawn. It's not going to be as favorable of a bill to the industry as the current version looks, but likely there will still be some kind of compromise and some kind of bill because at the end of the day both sides want there to be a bill. It is a bipartisan bill in the sense that there's some basic stuff that everybody agrees on — like, hey, there should be some kind of regulatory regime. I think everybody agrees on that. Exchanges should be regulated in a clear way that's written in the laws. Yeah, we all agree on that. When an exchange goes bankrupt, the assets should belong to the customers, not the company. Yeah, everyone agrees on that. There's a lot of stuff like this that clearly there should be a bill. So it's ultimately just a matter of, okay, if there's a new Congress and there's a different set of power constraints that have to get navigated, that's going to change the face of the bill. But at the end of the day, it's more unlikely than not that there's going to be a bill that gets passed at some point within this administration.
Yeah. Like you said, there's a ton that everyone agrees on. Yet the bill is 600 pages and we throw a lot of other stuff in there that people go back and forth on and form compromises. We saw some similar situation play out with the Genius Act and that went through much more smoothly than the Clarity Act is going through. And recently we've been talking a little bit more about the Genius Act because it feels like we're going to get some rules actually and that was passed a year ago, but we still haven't quite gotten the rulemaking that people expected from the Genius Act. Do you have any sort of update on, given this is a stable coin segment for today, what the Genius Act — where is the status today? Does it have any relevance? Do you see stable coin companies sort of preparing for the rules that could come out of the Genius Act?
Yeah, I mean the reality is that the rulemaking has been delayed and the rulemaking is — you know, a lot of the text in any bill is going to delegate to an agency that is an expert, right? So lawmakers are not experts and they also know by the time they write the bill and by the time the bill goes into effect, a lot can change. And they don't want to say like, okay, well let's just put it from clay tablets from on high of here's exactly what everybody should be doing. What they kind of do is they say, okay, well the Fed should be responsible for this. SEC should be responsible for this. OCC should be responsible for this, and so on. And now, okay, now they're responsible. What do they do? What are the rules? That is up to them. And they got to go do the work. And, you know, it's the government. So, stuff moves slowly. People miss deadlines. And that's kind of what's going on right now with Genius.
Now, at the end of the day, the most important question is not when do the regulators make the rules. We kind of know at high level the contours of what the rules are supposed to look like. And more importantly, the signal has already been sent. And the signal is you can do this. It's okay to do this. It's okay to create stable coins. We want you to do so and you will be safe to do that within the guardrails of the American economy. And companies have heard that and so they're launching stable coins and they're basically going to say, look, I know that the exact regulatory regime is a moving target but this market is so big I don't want to be late. So that's why you're seeing OSD, it's why you're seeing these banks starting to get into the game. It's why you're seeing stable coin consortia. All of these players are entering into this market and that includes CLA and all these other fintechs that are starting to get into stable coins, including Stripe. The reason why they're here is that they know I don't want to be late. If I'm late, I'm going to lose market share. I'm potentially not going to be able to compete. And so I'm willing to take on some degree of regulatory uncertainty because I know where the puck is going.
That is most of what you need to galvanize the market. So it's not that big of a deal that the regulators are a little late.
Yeah. And Genius was a lot narrower and so people can think of themselves as stable coins. They can launch these things. They, like you said, know generally where the puck is going. Even if it's not specifically, they can remain nimble enough to adapt a little bit later. The one that comes to mind here, recently announced that they're doing their stable card powered by Rain, is Western Union. Not that they're launching a stable coin themselves, but they're building on top of Dragonfly portfolio company Rain. Maybe you could just describe like what the value proposition is for a Goliath like Western Union to now come in and build on top of infrastructure like Rain.
Yeah. So, if you're Western Union, I think you're well aware that stable coins are starting to eat your lunch. You know, they're not stupid. They're not that stupid, I should say. They know that the margins, the intermediaries using the banks and the correspondent banking system in order to move money is getting out-competed in a lot of corridors by stable coins. They see the writing on the wall. They realize that look, our advantage as Western Union is not necessarily this infrastructure that we spent all this time building — that is our advantage, but it is increasingly getting displaced and out-competed in a lot of corridors and we need to have some way to compete with them because at the end of the day our brand, our value is not just the infrastructure of the money changers and the routes and all that stuff. The other thing is that we have the trust, we have the brand, we have the customers, we have the brand awareness. People know us and they know they can trust Western Union. So it's a little bit like when you see the sports books announce, I'm going to create a prediction market, right? Why are they doing that? Because they realize, oh shit, this is where it's all going. But at the end of the day, I'm DraftKings. I'm FanDuel. I have the brand. I have the credibility. I have the customers already captive on my platform. I might as well use this as a way to potentially allow myself to not go quietly into that good night.
So I suspect that this is a lot of what they're seeing is that they're probably focusing — I mean I don't know, I'm speculating. I'm assuming that they're focusing these cards in corridors where they already see a lot of stable coin adoption and they see their market share decreasing and they're saying, okay, let me go get a piece of that. And the advantage of course of Rain is that by using Rain infrastructure for stable coin backed cards, they can split some of the interchange. So it might not be as lucrative for them, I don't know, as it is for them to be running their traditional Western Union payments. But it's a lot better than having dwindling market share going to zero. It's like, okay, well, it's still pretty good economics to be able to be a card. It's the reason why you have all these neobanks who are launching cards on top of Rain is because they keep a huge chunk of the interchange. It's a pretty good business model. And so the business model of Rain has been such that they actually allow by their nature and by the economic split that they offer to these card issuers that actually you can build a business on top of Rain. It's not one of these things like, you know, it's very hard to build a business on top of Western Union, a scaled business. But you can absolutely build a business on top of Rain. It's part of the reason why they've been growing so fast is that they share a lot of the economics back to the neobank or the issuer.
Yeah, it feels like there's this value accrual story. Part of the value accrual is — or the value proposition is — the efficiency element that might create some sort of productive value and then they're going to charge some for that value. But if they leave a little bit or enough, then another business can come in. They can also take a share of that productive efficiency and charge their own spread and then therefore the entire productivity gets monetized accordingly. And it's smart for Rain to do that because then they end up with a whole market on top. It's like I was — I forget where I was the other day, but you've got sports cards, you got all these Pokemon cards where now there's markets on top of the underlying infrastructure, if you will. And it creates a whole secondary market effect as a result.
And so I also want to just check, we don't have to spend a ton of time on this, but I've been hearing more about it. The most recent one was Wells Fargo because a lot of bigger institutions, specifically banks, are getting into this game — and game I use broadly — with tokenized deposits, stable coins feel very similar in the way that these institutions are entering the market. How different is a tokenized deposit to a stable coin? What does that allow a bank to do versus just — why are we seeing banks go into the tokenized deposits route versus launching a Wells Fargo stable coin?
I think that tokenized deposits are basically completely uninteresting.
So what is a tokenized deposit? A tokenized deposit is, normally if you — let's say I'm a Wells Fargo customer, you're a Wells Fargo customer, I can send you money instantaneously. And the reason why it's instantaneous to you as opposed to a customer of JP Morgan is because it's just moving money around on the internal bank ledger. No money has left the bank or entered the bank. So there's no interbank communication that's happening. So in that world, if I'm sending an intra-bank transfer, it's instantaneous. So now with a tokenized deposit, instead of going to my Wells Fargo thing and typing in your number and then sending you money and it going to you instantly, now I can do that on a blockchain. But a tokenized deposit, every single holder of a tokenized deposit must be a customer of that bank. So it's simply a different database for the intra-bank transfers of a bank. That's what tokenized deposits are.
Okay. I agree with you that specifically is totally uninteresting. But do you think that this is potentially a stepping stone to an interbank transfer if we get some sort of interoperability between a Wells Fargo tokenized deposit network and a JP Morgan chain?
Still private permission chains but not just intra-bank. So if you're doing intra-bank settlement instantaneously, if banks are settling instantaneously with each other, that is potentially more interesting for increasing the efficiency in the correspondent banking system. However, banks can already do that. They choose not to. It is not a failure of technology that the banks cannot settle with each other instantaneously. The fact that banks settle up at the end of the day with each other is a choice they are making in order to make their grossing of transfers between each other more efficient. They actually prefer to allow transactions to accumulate over the course of the day because they sort of net against each other. It's like, okay, I would have sent you some money, but then you would have sent me some money. We're essentially extending credit to each other effectively for the net payments. And then at the end of the day, actually I sent you 4,000 transactions, you send me 5,000 transactions and the net actually is that I only send you a couple million at the end of the day because there's debits and credits on both sides. That's what banks do with each other. They don't have to do that. They could be settling with each other instantaneously. They're choosing not to because it's more capital efficient. So the interbank settlement system — are they going to be willing to settle with each other using each other's tokenized deposits? It's not obvious that they would. They might say like, well, actually, why don't we just keep doing what we're doing and instead of sending each other tokenized deposits, instead we just keep kind of netting each other on a piece of paper and then at the end of the day, then we settle with tokenized deposits. But if you're settling at the end of the day with tokenized deposits or with actual bank deposits over Fed wire, who cares? At the end of the day, you haven't improved anything. You haven't made anything more efficient. So it's a choice that banks are making to settle this way.
