Arthur Hayes: The real stablecoin game is not betting on Circle, please go long Bitcoin and JPMorgan.

Author: Arthur Hayes

Compiled by: Deep Tide TechFlow

(This article only represents the author’s personal views and does not constitute a basis for investment decisions, nor should it be regarded as investment trading advice or recommendations.)

Equity investors have been shouting: “Stablecoin, stablecoin, stablecoin; Circle, Circle, Circle.”

Why are they so optimistic? Because the U.S. Treasury Secretary (BBC) said so:

The result is this chart:

This is a chart comparing the market capitalization of Circle and Coinbase. Keep in mind that Circle must hand over 50% of its net interest income to its “parent” Coinbase. However, Circle’s market cap is surprisingly close to 45% of Coinbase’s. This makes one ponder…

Another result is this heartbreaking chart (because I hold Bitcoin instead of $CRCL):

This chart shows the price of Circle divided by the price of Bitcoin, using an index of 100 at the time of Circle’s listing as a benchmark. Since the IPO, Circle’s performance has outperformed Bitcoin by nearly 472%.

Crypto enthusiasts should ask themselves: Why is the BBC so optimistic about stablecoins? Why does the “Genius Act” gain bipartisan support? Do American politicians really care about financial freedom? Or is there something else at play?

Perhaps politicians do care about financial freedom on an abstract level, but hollow ideals do not drive actual action. There must be other more practical reasons that have led them to change their stance on stablecoins.

Looking back at 2019, Facebook attempted to integrate the stablecoin Libra into its social media empire but was forced to shelve the plans due to opposition from politicians and the Federal Reserve. To understand the BBC’s enthusiasm for stablecoins, we need to examine the main issues it faces.

The main issue faced by U.S. Treasury Secretary Scott “BBC” Bessent is similar to the one faced by his predecessor Janet “Bad Girl” Yellen. Their bosses (i.e., the U.S. President and members of Congress) enjoy spending money but are unwilling to raise taxes. As a result, the responsibility of raising funds falls on the Treasury Secretary, who needs to provide funding for the government through borrowing at reasonable interest rates.

However, the market soon showed little interest in the long-term government bonds of highly indebted developed economies—especially in the context of high prices/low yields. This is the “fiscal dilemma” that the BBC and Yellen have witnessed in recent years:

The trampoline effect of global government bond yields:

The following is a comparison chart of the 30-year government bond yields: United Kingdom (white), Japan (gold), United States (green), Germany (pink), France (red)

If rising yields are bad enough, the actual value of these bonds is even more devastating:

Actual 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, using 100 as the base index. Over the past five years, the real value of long-term government bonds has plummeted by 71%.

If past performance is not enough to raise concerns, then Yellen and current Treasury Secretary Bessent also face the following limitations:

The bond sales team of the Ministry of Finance must design an issuance plan to meet the following demand:

Approximately $2 trillion federal deficit annually

$3.1 trillion debt maturing in 2025

This is a chart that details the main expenditure items of the U.S. federal government and their year-on-year changes. Please note that the growth rate of each major expenditure is on par with or even faster than the growth rate of U.S. nominal GDP.

The previous two charts show that the weighted average interest rate of outstanding national debt is lower than the points on the yield curve of all national bonds.

The financial system issues credit based on nominally risk-free government bonds as collateral. Therefore, interest must be paid; otherwise, the government will face nominal default risk, which would destroy the entire fiat currency financial system. Since the yield curve of government bonds is overall higher than the weighted average interest rate of current debt, as maturing debt is refinanced at higher rates, interest expenses will continue to rise.

The defense budget will not decrease, after all, the United States is currently involved in the wars in Ukraine and the Middle East.

Medical spending will continue to increase, especially in the early 2030s, as the baby boomer generation reaches a peak period of requiring extensive medical services, which are primarily funded by large pharmaceutical companies supported by the U.S. government.

Control the 10-year Treasury yield to not exceed 5%.

When the 10-year yield approaches 5%, the MOVE index (which measures volatility in the bond market) soars, often followed by a financial crisis.

Issuing debt in a way that stimulates the financial market

According to data from the U.S. Congressional Budget Office, although the data is only up to 2021, the U.S. stock market has continued to rise since the global financial crisis in 2008, and capital gains tax revenues have soared accordingly.

The U.S. government needs to avoid massive fiscal deficits by taxing the stock market’s year-over-year gains.

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

A notable example is during the 2008 global financial crisis, when the Federal Reserve printed money to bail out banks and the financial system, yet banks were still allowed to foreclose on people’s homes and businesses. This phenomenon of “the rich enjoying socialism while the poor endure capitalism” is precisely why New York City mayoral candidate Mamdani is so popular among the poor—because the poor also want to share in some of the benefits of “socialism.”

When the Federal Reserve implements quantitative easing (QE) policies, the job of the Treasury Secretary is relatively simple. The Federal Reserve buys bonds by printing money, which not only allows the U.S. government to borrow at a low cost but also boosts the stock market. However, now the Federal Reserve must at least outwardly show a stance against inflation and cannot lower interest rates or continue to implement QE, forcing the Treasury to bear the burden alone.

In September 2022, the market began to marginally sell off bonds due to concerns about the persistence of the largest peacetime deficit in U.S. history and the Federal Reserve’s hawkish stance. The yield on 10-year Treasury bonds nearly 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 described by Hudson Bay Capital as “aggressive debt issuance” (ATI), which reduced the Federal Reserve’s reverse repurchase (RRP) balance by $2.5 trillion by issuing more short-term Treasury bills rather than interest-bearing bonds, injecting liquidity into the financial markets.

This policy has successfully achieved the goals of controlling yields, stabilizing the market, and stimulating the economy. However, currently the RRP balance is almost depleted, and the issue facing the current Treasury Secretary Bessent is: how can he find trillions of dollars to purchase government bonds in an environment of high prices and low yields?

The market performance in the third quarter of 2022 was extremely challenging. The following chart shows the comparison between the Nasdaq 100 Index (green) and the 10-year Treasury yield (white). While the yield surged, the stock market experienced a significant 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 yield (white) has consistently not exceeded 5%.

Large “Too Big to Fail” (TBTF) banks in the United States have two pools of capital that are ready to purchase trillions of dollars in government bonds whenever there is sufficient profit potential. These two pools are:

Demand/Fixed Deposit

Reserves held by the Federal Reserve

This article focuses on eight TBTF banks, as their existence and profitability rely on government guarantees for their liabilities, and banking 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 government requests. If the Treasury Secretary (BBC) asks them to purchase government bonds, he will offer risk-free returns in exchange.

The enthusiasm of BBC for stablecoins may stem from the ability of TBTF banks to release up to $6.8 trillion in Treasury bond purchasing power by issuing stablecoins. These dormant deposits can be re-leveraged in the fiat financial system, thereby driving the market upward. The following sections will detail how to achieve Treasury bond purchases through the issuance of stablecoins and how to enhance the profitability of TBTF banks.

In addition, it will be briefly explained that if the Federal Reserve stops paying interest on reserves, it could release up to $3.3 trillion for the purchase of government bonds. This would become another policy that, although technically not quantitative easing (QE), has a similar positive impact on fixed supply monetary assets such as Bitcoin.

Now, let’s learn about BBC’s new favorite - stablecoins, this “currency heavy weapon”.

Stablecoin liquidity model

My predictions are based on the following key assumptions:

Government bonds receive a full or partial exemption from the Supplementary Leverage Ratio (SLR).

Exemption meaning: Banks are not required to hold equity capital for their government bond investment portfolios. If there is a full exemption, banks can purchase government bonds with unlimited leverage.

Recent policy changes: The Federal Reserve has just voted to reduce the capital requirements for banks on government bonds, and this proposal is expected to release up to $5.5 trillion in bank balance sheet capacity for purchasing government bonds over the next three to six months. The market is forward-looking, and this purchasing power may flood into the government bond market in advance, thereby reducing yields, all else being equal.

Banks are profit-oriented organizations that minimize losses.

Lessons on the Risks of Long-term Government Bonds: From 2020 to 2022, the Federal Reserve and the Treasury urged banks to buy large amounts of government bonds, and banks rushed to purchase higher-yielding long-term coupon bonds. However, by April 2023, due to the fastest rise in the Federal Reserve’s policy interest rates since the 1980s, these bonds incurred massive losses, leading to the collapse of three banks within a week.

The Umbrella of TBTF Banks: In the realm of TBTF banks, the “hold to maturity” bond investment portfolio of American banks has exceeded its total equity capital in losses. If forced to mark to market, the bank would face bankruptcy. To address the crisis, the Federal Reserve and the Treasury effectively nationalized the entire American banking system through the “Bank Term Funding Program” (BTFP). Non-TBTF banks may still incur losses, and if bankruptcy occurs due to losses on government bonds, their management will be replaced, and the banks may be sold cheaply to Jamie Dimon or other TBTF banks. As a result, the Chief Investment Officer (CIO) of the bank is cautious about significantly purchasing long-term government bonds, fearing that the Federal Reserve may “pull the rug” again through interest rate hikes.

The appeal of treasury bonds: Banks buy treasury bonds because they are effectively high-yield, zero-maturity cash-like instruments.

Net Interest Margin (NIM) is key: Banks will only purchase Treasury bonds with deposits when they can bring a higher net interest margin and require little to no capital support.

JPMorgan recently announced plans to launch a stablecoin named JPMD. JPMD will operate on the Base layer-2 network developed by Coinbase based on Ethereum. As a result, JPMorgan’s deposits will be divided into two types:

Regular Deposits

Although it is also a digital deposit, its liquidity in the financial system requires traditional outdated systems for interbank interfacing and requires a large amount of manual supervision.

Traditional deposits can only be transferred between 9 AM and 4:30 PM on business days (Monday to Friday).

The yield on traditional deposits is extremely low. According to data from the Federal Deposit Insurance Corporation (FDIC), the average yield on a regular savings account is only 0.07%, while the yield on a one-year fixed-term deposit is 1.62%.

Stablecoin Deposit (JPMD)

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

According to legal regulations, JPMD cannot pay profits, but JPMorgan Chase may attract customers to convert traditional deposits into JPMD by offering generous cash-back consumer rewards.

It is currently unclear whether staking yield will be allowed.

Staking rewards: Customers will receive a certain return on their investment while locking JPMD with JPMorgan Chase.

The reason customers are transferring funds from traditional deposits to JPMD is that JPMD is more practical, and banks also offer cashback and other consumption rewards. Currently, the total amount of demand and time deposits at TBTF banks is approximately $6.8 trillion. Due to the superiority of stablecoin products, traditional deposits will quickly be converted into JPMD or other similar stablecoins issued by TBTF banks.

If all traditional deposits were converted to JPMD, JPMorgan Chase would be able to significantly reduce costs in its compliance and operations departments. Here are the specific reasons:

The first reason is to reduce costs. If all traditional deposits were converted to JPMD, then JPMorgan could effectively eliminate its compliance and operations departments. Let me explain why Jamie Dimon was so excited when he learned about how stablecoins actually work.

From a high-level perspective, compliance work is a set of rules established by regulatory agencies 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 AI agents to execute perfectly. Since JPMD provides fully transparent transaction records (all public addresses are disclosed), an AI agent trained in relevant compliance regulations can ensure that certain transactions are never approved. AI can also instantly prepare any reports required by regulatory agencies. Furthermore, regulators can verify the accuracy of the data, as all data exists on the public blockchain. Overall, “too big to fail” (TBTF) banks spend $20 billion annually on compliance and the operational and technological requirements needed to adhere to banking regulations. By converting all traditional deposits into stablecoins, this cost would be reduced to nearly zero.

One of the second reasons JPMD is being pushed by JPMorgan is that it allows banks to purchase tens of billions of dollars in Treasury bills (T-bills) risk-free using custodial stablecoin assets (AUC). This is because T-bills have almost no interest rate risk, but their yields are close to the Federal Funds Rate. Keep in mind that under the new Supplementary Leverage Ratio (SLR) requirements, TBTF banks have a purchasing capacity of $5.5 trillion in T-bills. Banks need to find a pool of idle cash reserves to purchase this debt, and custodial deposits of stablecoins are the perfect choice.

Some readers may argue that JPMorgan can already purchase Treasury bonds with traditional deposits. My response is that stablecoins are the future because they not only create a better customer experience but also allow TBTF banks to save $20 billion in costs. Just this cost saving alone is enough to incentivize banks to adopt stablecoins; the additional net interest margin (NIM) gains would be the icing on the cake.

I know that many readers may want to invest their hard-earned money into Circle ($CRCL) or the next shiny stablecoin issuer. But do not underestimate the profit potential of “too big to fail” (TBTF) banks in the stablecoin space. If we base it on the average price-to-earnings (P/E) ratio of TBTF banks at 14.41 times and multiply it by the cost savings and the net interest margin (NIM) potential of stablecoins, the result is $3.91 trillion.

Currently, the total market value of the eight TBTF banks is approximately $2.1 trillion, which suggests that stablecoins could lead to an average increase of 184% in the stock prices of TBTF banks. If there is a non-consensus investment strategy that can be scaled, it would be to go long on an equally weighted portfolio of TBTF bank stocks based on this stablecoin theory.

How is 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 collaborate with banks or fintech companies. Of course, in theory, anyone can obtain a banking license or acquire an existing bank, but all new owners must get approval from regulators. As for how long this will take, we’ll have to wait and see.

In addition, the bill includes a provision that hands the stablecoin market over to banks, which is the prohibition of paying interest to stablecoin holders. Without the ability to compete with banks by paying interest, fintech companies will be unable to attract deposits away from banks at a low cost. Even successful issuers like Circle will never be able to reach the $6.8 trillion TBTF traditional deposit market.

In addition, financial technology companies like Circle and small banks do not have government guarantees for their liabilities, while TBTF banks enjoy this protection. If my mother were to use stablecoins, she would definitely choose stablecoins issued by TBTF banks. 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 King” David Sachs agrees with this. I believe many corporate cryptocurrency donors will be dissatisfied with the results—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 to truly advocate for financial freedom instead of just providing a stool for the “toilets” of those TBTF bank CEOs.

In short, TBTF (too big to fail) banks adopting stablecoins not only eliminates competition from fintech companies for their deposit base but also reduces the need for expensive and often underperforming human compliance officers. Furthermore, this approach does not require interest payments, thereby improving the net interest margin (NIM), ultimately driving up their stock prices. In return, to thank the stablecoin gift granted by the BBC Act, TBTF banks will purchase up to $6.8 trillion in Treasury bills (T-bills).

ATI: Yellen’s Play: Stablecoins and the BBC Act

Next, I will discuss how the BBC Act releases an additional $3.3 trillion in static reserves from the Federal Reserve’s balance sheet.

Interest on Reserve Balance (IORB)

After the global financial crisis (GFC) in 2008, the Federal Reserve decided to ensure that banks would not fail due to insufficient reserves. The Federal Reserve created reserves by purchasing Treasury bills and mortgage-backed securities (MBS) from banks, a process known as quantitative easing (QE). These reserves lie quietly on the Federal Reserve’s balance sheet. Theoretically, banks could convert the reserves held by the Federal Reserve into circulating currency and lend it out, but they choose not to do so because the Federal Reserve pays them enough interest through money printing. In this way, the Federal Reserve “freezes” these reserves to prevent inflation from soaring further.

However, the problem faced by the Federal Reserve is that when it raises interest rates, the interest on reserve balances (IORB) also increases. This is not favorable, as the unrealized losses in the Federal Reserve’s bond portfolio also increase with the rate hikes. The result is that the Federal Reserve is caught in a situation of being insolvent and having negative cash flow. However, this negative cash flow situation is entirely a result of policy choices and can be changed.

U.S. Senator Ted Cruz recently stated that perhaps the Federal Reserve should stop paying interest on reserve balances (IORB). This would force banks to compensate for lost interest income by converting reserves into Treasury bills. Specifically, I believe banks would purchase Treasury bills (T-bills) because of their high yield and cash-like attributes.

According to Reuters, Ted Cruz has been pushing his Senate colleagues to eliminate the Federal Reserve’s power to pay interest on reserves to banks, arguing that this change would significantly reduce the fiscal deficit.

Why does the Federal Reserve print money and prevent banks from supporting the “Empire”? There is no reason for politicians to oppose this policy change. Both Democrats and Republicans have a fondness for fiscal deficits; why not release $3.3 trillion of bank purchasing power into the Treasury market, allowing them to spend more? Given the Federal Reserve’s unwillingness to assist the “Trump team” in financing under the “America First” goal, I believe Republican legislators will use their majority in both houses to strip the Federal Reserve of this power. Therefore, the next time yields soar, legislators will be ready to unleash this flood of funds to support their extravagant spending.

Before concluding this article, I would like to discuss the cautious strategic layout of Maelstrom during the period of the implementation of the BBC Act, when the liquidity of the dollar is bound to increase, from the current stage to the third quarter.

Warning Story

Although I am very optimistic about the future, I believe that after Trump’s spending bill, known as the “Big Beautiful Bill,” is passed, the creation of dollar liquidity may experience a temporary halt.

According to the current content of the bill, it will raise the debt ceiling. Although many provisions will become bargaining chips in political games, Trump will not sign a bill that does not raise the debt ceiling. He needs additional borrowing capacity to support his agenda. There are currently no signs that the Republican Party will attempt to force the government to cut spending. So, for traders, the question is, what impact will this have on dollar liquidity when the Treasury resumes net borrowing?

Starting from January 1, the Treasury Department primarily funds the government by consuming the balance of its Treasury General Account (TGA). As of June 25, the TGA balance was $364 billion. According to the guidance in the Treasury’s most recent quarterly refinancing announcement, if the debt ceiling is raised today, the TGA balance will be supplemented to $850 billion through debt issuance. This will result in a contraction of $486 billion in dollar liquidity.

The only major dollar liquidity project that could possibly alleviate this negative impact is the release of funds from the Overnight Reverse Repurchase Agreement (RRP), which currently has a balance of $461 billion.

Due to the Treasury General Account (TGA) supplementary plan, this is not a clear short-selling opportunity for Bitcoin, but rather a market environment that requires cautious operations—the bull market may be temporarily interrupted by short-term fluctuations. I expect that from now until the Jackson Hole meeting in August, before the speech by Federal Reserve Chairman Jerome Powell, the market may consolidate or slightly decline. If the TGA supplementary has a negative impact on dollar liquidity, Bitcoin may drop to the range of $90,000 to $95,000. If the supplementary plan does not have a substantial impact on the market, Bitcoin may fluctuate within the $100,000 range but find it difficult to break through the historical high of $112,000.

I speculate that Powell may announce the end of quantitative tightening (QT) or other seemingly bland yet impactful adjustments to banking regulations. By early September, the debt ceiling will be raised, and most of the TGA accounts will be replenished, while Republicans will focus on wooing voters for the November 2026 elections. At that time, with the surge in money creation, bulls will retaliate against bears with strong green candles.

From now until the end of August, Maelstrom will increase its allocation to staked USDe (Ethena USD). We have liquidated all positions in low-liquidity altcoins and may reduce our Bitcoin risk exposure based on market performance. Positions in altcoins purchased around April 9 of this year have achieved returns of 2 to 4 times within three months. However, in the absence of clear liquidity catalysts, the altcoin sector may suffer a heavy blow.

After the market adjustment, we will have the confidence to reposition ourselves and look for undervalued assets, perhaps to seize the opportunity for 5 to 10 times returns before the next round of fiat currency liquidity creation slows down (expected in late Q4 2025 or early Q1 2026).

Gradually check

The adoption of systemically important banks (TBTF, Too Big To Fail) for stablecoins could create a purchasing power of up to $6.8 trillion in the U.S. Treasury bill (T-bill) market.

The Federal Reserve’s halt on paying interest on reserve balances (IORB) could further unleash up to $3.3 trillion in T-bill purchasing power.

Overall, due to the policies of the “BBC”, there could be $10.1 trillion flowing into the T-bill market in the future. If my prediction is correct, this $10.1 trillion liquidity injection will have a similar impact on risk assets as former Treasury Secretary Yellen’s $2.5 trillion liquidity injection — driving the market to “soar”!

This adds another liquidity arrow to the “BBC” policy toolkit. With Trump’s “Beautiful Big Plan” passed and the debt ceiling raised, this tool may be forced to activate. Soon, investors will once again worry about how the U.S. Treasury market will absorb the pressure of a large amount of debt about to be issued without collapsing.

Some people are still waiting for the so-called “monetary Godot” — waiting for Federal Reserve Chairman Powell to announce a new round of unlimited quantitative easing (QE) and interest rate cuts before selling bonds and buying cryptocurrencies. But I have to tell you, this will not happen, at least not before the U.S. is truly caught in a hot war with Russia, China, or Iran, or before a systemically important financial institution is on the brink of collapse. Even an economic recession is not enough to make “Godot” appear. So, stop listening to that “weak and ineffective” person and pay attention to those who truly control the situation!

The following charts will illustrate the opportunity cost that investors have suffered while waiting for “currency Godot.”

As the Federal Reserve’s balance sheet (white line) shrinks, the effective federal funds rate (gold line) rises. Logically, Bitcoin and other risk assets should have declined during this period.

But former Treasury Secretary “Bad Gurl Yellen” did not disappoint the rich; she stabilized the market by implementing ATI (which may refer to asset-backed liquidity tools). During this period, Bitcoin (gold line) rose by 5 times, while the overnight reverse repurchase (RRP) balance fell by 95%.

Don’t make the same mistake again! Many financial advisors are still advising clients to buy bonds because they predict that yields will fall. I agree that central banks will indeed cut interest rates and print money to avoid a collapse in the government bond market. Furthermore, even if central banks do not take action, the Treasury will do something.

The core point of this article is that by supporting stablecoin regulation, relaxing SLR (Supplemental Leverage Ratio) restrictions, and stopping IORB payments, the Federal Reserve could unleash up to $10.1 trillion in Treasury purchasing power. But the question is, is it really worth it to hold bonds for a 5% to 10% return? You might miss the opportunity for Bitcoin to increase tenfold to $1 million or for the Nasdaq 100 index to soar fivefold to 100,000 points, which could happen before 2028.

The real stablecoin “game” is not about betting on traditional fintech companies like Circle, but rather recognizing that the U.S. government has handed a “liquidity rocket launcher” worth trillions of dollars to systemically important banks (TBTF), under the guise of “innovation.” This is not decentralized finance (DeFi), nor is it the so-called financial freedom; it is monetization of debt disguised as Ethereum. If you are still waiting for Powell to whisper “QE infinity” in your ear before daring to take risks, then congratulations—you are the “greater fool” of the market.

On the contrary, you should go long on Bitcoin and JPMorgan, rather than wasting energy on Circle. This stablecoin “Trojan Horse” has long infiltrated the financial fortress, but when it opens, what comes out is not the dream of liberals, but liquidity filled with funds for purchasing short-term U.S. Treasury bills (T-bills). This liquidity will be used to maintain high stock market levels, fill budget deficits, and soothe the anxieties of the Baby Boomer generation.

Don’t just sit on the sidelines, waiting for Powell to “endorse” the bull market. The “BBC” (note: possibly a nickname for the Federal Reserve or related policies) is ready to end the prelude and start flooding the global market with liquidity. Seize the opportunity, don’t let yourself become a passive observer.