A month ago in the Financial Times, columnist Patrick Jenkins could be found, somewhat reluctantly, singing the praises of the Trump Account, under which all US citizens born during Trump’s second term are eligible for $1,000 from the government, invested in a default S&P 500 tracker fund managed by State Street. Everyone he quoted thinks it’s a great idea and I’m quite sure it’s widely popular.

““Ted Cruz, the Republican senator who had championed the idea through Congress, struck a more ideological note, proclaiming at the launch that the initiative was about “making every child and every American a capitalist”.

“It created “a mindset”, agreed Larry Fink, chief executive of BlackRock, another of the clutch of asset management partners that will be involved in the scheme: “Every newborn American . . . has a stake in the country’s future”.”

Larry Fink is right about the mindset thing, but Ted Cruz gets closer to the unvarnished truth. And it is not necessarily a long-term positive for the American nation. Sometimes a thing can be both good and bad.

Here’s the problem. In practice (and we’re already seeing it with the Iran war) when “every American [is] a capitalist” as a result of Trump accounts, financial markets, and those that can influence them, will rule the roost even more than they do today.

The nation’s political leadership, of either party, will base future decisions heavily on how the equity markets will react, and they won’t have much choice about it. Because the loss of $1,000 in a low-income voter’s Trump account will be as politically salient in the next election as the loss of $1 million in a high income voter’s personal account or $1 billion in the account of a tech oligarch. Today that’s not the case (I know, I know pensions and 401(k)s—but 42% of the population owned no stock either directly or through retirement plans in 2025.)

Any policy that threatens shareholder value maximization or any disruptive change in the existing economic order will be off the table because it “might upset the market”. Preventing equity market corrections will become a political necessity, leading inevitably to bailouts, loose money and inflation. You can forget bold government actions unless they are directed at increasing—or at least not depressing—stock prices in the short term.

Policies can have more than one motivation. Here we have two motivations, one explicit and one implicit. The first, explicit motivation is helping low-income people own some capital in a world where labor is increasingly devalued. Seems worthy, and it is. Senator Warren is on board ferchrissakes. I’ll set one up for my grandson because…free money, why not?

The second, longer-term and implicit motivation is a lot more significant: aligning the political interests of the low-income population with the interests of the billionaires and the rest of the financial capital owning class (i.e., the 1%). Because anything that threatens the growth of the 1%’s financial wealth will now also threaten the tiny but personally important financial “wealth” of the bottom 50%. That’s great news for those who have benefitted from wealth concentration. So of course Larry Fink likes it.

It’s not like any of this is a secret. If you are at Hoover or Heritage or Cato or the Federalist Society you have been working for 40 years to protect the cohort of the population that owns virtually all financial capital from blowback for ever-increasing wealth inequality. By using Trump accounts to allocate a little bit of borrowed government money to the Plebs so that they are incented to vote in line with the interests of the Senators and Equestrians you can finally deliver the apotheosis of the market capitalism revolution envisioned by Milton Friedman and Ronald Reagan’s people in the 1980s. Everything will be financial markets and financial markets will be everything.

Because “we’re all capitalists now.”

Just don’t kid yourself that the first motivation is the important one.

Chime’s original customers joined because they had no money—or more accurately they were low- and moderate- income working people with some money but liquidity challenges.  Chime gave these customers tools to manage their cash flows at lower cost compared to the alternatives and that’s why these highly price-sensitive customers moved their core banking relationship to Chime.  Chime got most of their customers’ debit interchange revenue (which merchants pay for) and paid for losses and operating costs associated with the liquidity management products that attracted this specific customer demographic.

Because Chime did this digitally and kept control of its technology stack, it ultimately has been able to generate a small profit on this customer base without high fees even after absorbing credit and operating costs and paying the partner banks that support it. The incumbent banks didn’t try to compete because they felt they could not make a profit on most of these customers without charging uncomfortably high fees and in some respects were happy to see them go (a mistake in the long term by the way for lots of reasons).

Chime’s profit margins still trail bank and fintech competitors who primarily serve customers with investment assets, credit availability, and higher incomes, and are likely to underperform even if they scale further in the current model.  But they have shown amazing ability to grow by cleverly using subsidized products to capture core banking relationships from incumbents by offering a better deal.  This is Chime’s super power.

The solution for the future? Move upscale, by betting that an excellent digital customer experience and attractive products—investments, deposits, mortgage loans, credit cards etc. etc.—can bring the core banking relationships and associate revenue of younger customers with money who are not liquidity challenged. But Chime will have to be a better deal to keep the core relationship magic happening—which means continuing to subsidize customer acquisition through product pricing.

And…it will be a whole different competitive universe. Now they are going fully head-to-head with the Bank of Americas and Robinhoods and SoFis of the financial world instead of the Daves. Without the advantage of a deposit-funded balance sheet and diversified business segments (BofA) or a high-margin gambling-based business (crypto, event markets, meme stocks) (Robinhood) or a curated set of digital products tightly focused on the same set of customers they want to target (SoFi). These competitors are not going to be caught yawning if and when this new and much more valuable set of customers starts to leave. They are going to fight back hard.

If Chime succeeds in replicating their past customer acquisition successes, they could turn into the first digital-only very large US “bank” by customer count (hmmm….watch out for Revolut.)

They may actually need to get a bank charter to make it work, especially if lending is in their future plans. A digital-only bank charter can bring them the advantages of their current model plus a reduction in revenue sharing expenses, a stable, lower-cost funding model and the elimination of partner bank risk.

There are many layers to the bank charter question—the denovo window is open now but may not stay that way and they would need to be very cautious about acquiring an existing bank as retaining their tech stack is critical and legacy customers of the target bank would be a bad distraction. Plus they will have to add a lot of products and a lot of people for this to work and the company has succeeded so far by staying laser focused on a simple model where fast growth is rewarded and not viewed as a regulatory risk.

It’s going to be fun watching them.

From the Federal Reserve today:

“The Federal Reserve on Thursday announced the leadership and objectives of its task forces to advance the conduct of monetary policy.

“The Federal Reserve’s commitment to price stability and maximum employment is unwavering. As is our resolve to pursue our mandate with rigor,” said Chairman Kevin Warsh. “The U.S. economy has changed significantly over the last generation, and never more so than right now. Each task force will carefully consider whether policymakers’ means and methods, analytical tools and policy approaches can be improved upon. I am honored that the best minds from a range of disciplines have agreed to work with us to sharpen our performance as an institution. The goal is straightforward: to ensure the Fed is best positioned to achieve our objectives in this consequential time.”

The five task forces will examine areas central to the broad conduct of monetary policy. They will be co-led by external advisers—accomplished economists, business leaders, and former central bank practitioners—with deep expertise in their fields. Supported by Federal Reserve staff, they will operate independently, with a mandate to follow the evidence, provide candid feedback, and produce rigorous findings for the Federal Open Market Committee.”

There are, as the announcement says, five task forces. Four cover the topics of communications, balance sheet policy, data, and inflation frameworks and seem reasonably constituted with broad-minded experts.

Then there is the fifth one tasked with studying “productivity and jobs":

"Productivity and Jobs: Assess the economic impact of new general-purpose technologies, including artificial intelligence, to inform the Federal Reserve's policy judgments.
--Marc Andreessen, cofounder and general partner, Andreesen Horowitz
--Charles I. Jones, professor of economics, Stanford University , currently on leave at Anthropic
--Asha Sharma, executive vice president and XBOX CEO, Microsoft Corp."

Seriously, is this an appropriate set of members for so important a topic? Why load the dice so blatantly?

All three appointees are dedicated AI maximalists and all of them are financially compromised, to a greater (in the case of Andreesen and Sharma) or lesser (in the case of Jones) extent, on the very AI topic they are supposed to address.

For those unfamiliar the AI aristocracy, Andreesen is the Silicon Valley godfather of the AI investorama/investopocalypse, Sharma ran Microsoft's AI efforts and Jones is a respected economist and AI enthusiast from Stanford who now works at Anthropic and who recently wrote a paper based on an economic model that says that AI has a 1/3 chance of causing human extinction and a 2/3 chance of either continuing economic growth or creating an economic paradise.

Andreesen is, in addition, the biggest political moneyman pushing/threatening candidates into supporting AI --the very area he is supposed to assess (see below)-- as well doing the same thing for crytpo.

The well known views of all three lead me to conclude that the task force report could be written today by any half-decent LLM 😉

What reason would Kevin Warsh have to do it this way?

I hope I'll be surprised.

From the New York Times a while back on Andreesen:

"[Andreesen Horowitz], along with its lead partners who have their names on the door, Marc Andreessen and Ben Horowitz, funneled more than $115 million [as of March] in disclosed federal contributions to midterm election efforts, according to a New York Times analysis. That makes it the biggest known spender on this campaign cycle."
....
"Already Andreessen Horowitz has put $47.5 million into the crypto super PAC network, Fairshake, since Election Day 2024. And the firm’s interests have expanded beyond crypto. It helped found Leading the Future, a super PAC network focused on electing pro-artificial intelligence legislators, which is modeled on Fairshake, and donated $50 million to it. Fairshake and Leading the Future both back Republicans and Democrats.

Andreessen Horowitz and its co-founders have also together donated $12 million to MAGA Inc., President Trump’s super PAC, including $6 million in March. A trust linked to Mr. Andreessen donated nearly $900,000 to the Republican National Committee that same month."

One of America’s greatest economic advantages since the end of the second world war has been a transparent legal and regulatory system that did its best to deliver predictability for businesses and investors. The system allowed companies to make capital deployment decisions based on consultation with lawyers, accountants and industry experts, with the firm expectation that regulatory actions by the US government would be predictable within a limited range of possible outcomes. 

Government decisional predictability within a bounded range allowed investors around the world to pour money into the US markets. Predictability was the product, and the US was the supplier. This paid big dividends. The willingness of the world to invest in the US has, among other things allowed American politicians to keep taxes artificially low, ignore the country’s ballooning debt crisis and ensure dollar supremacy in financial markets. 

This pillar of US economic supremacy is now in deep jeopardy, thanks to the Supreme Court (most recently in the Slaughter case) and an especially aggressive Executive Branch. For businesses and investors in the US market, all roads now lead to the White House. Forget about the agencies legally responsible for decisions. The Supreme Court has turned all of them—with the possible exception of the Federal Reserve--from independent arbiters bound by laws and expert-designed regulation into mere order takers for the Unitary Executive. 

Everything in Washington, DC now comes down to this. If you can't get a meeting with the President in the Oval Office to make your case for government action (or inaction), you're in trouble. If you can't even get staff at the White House or someone high up in The Office of Management and Budget to hear your plea in person, your cause is lost. 1

It gets worse for those lucky, or well-connected, enough to get that meeting. They need to be prepared with a “deal” to offer that demonstrates support for the political goals of the President. Anything will do — a political contribution, a crypto purchase, a library donation, settling a worthless lawsuit brought by one the Presidents’ businesses, publicly giving up diversity goals, granting the President a “golden share” — as long as it is brought to the attention of the right people at the right time. “Pay to Play” didn’t die in the Harding administration, it was just resting. 2

While party control of government may shift over time, undoing the damage taking place today won’t be easy, if it can be done at all. America’s competitive advantage as an investment and business destination was built on a foundation of predictability. When that foundation is undermined, the advantage disappears quickly. It won’t be long before international investment flows start moving to more predictable markets. Even political change may not be enough to reverse investment flows. Global investors will think twice about how much they can rely on the restoration of predictable decision making under a future Democratic party administration when a return to damaging unpredictability may only be as far away as the next GOP election win. And the now unrestrained power of the Unitary Executive may tempt even the most upright Democrats to use Trump’s tools when it is their policy priorities at stake. 

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Great scoop from the redoubtable Evan Weinberger and Bloomberg Law on the Dodd-Frank Section 1033 regulation coming soon from Russell Vought and the Consumer Financial Protection Bureau.

“Consumers will be able to share their bank account and credit card data with financial technology companies for free, but fintechs will have to pay for access after a certain point, under a highly anticipated open banking proposal from the Consumer Financial Protection Bureau that could land as soon as next month.

Banks would be able to impose access fees on fintechs after a yet-to-be-determined number of customer data pulls under the agency’s rewrite of a Biden-era open banking regulation, according to multiple fintech industry representatives who requested anonymity to discuss conversations with the CFPB....

The anticipated fee proposal is poised to deepen a rift between banks and fintechs, and it risks running afoul of the Trump administration’s push to incorporate financial technology into the banking system.”

Expect many fireworks. [Possibly more than for July 4th.] And even more OpEds, not to mention Substack and Linkedin posts. Maybe even a Truth Social Jeremiad if somebody gets the ear of the Unitary One. 😉

Because this data rationing approach is a really bad idea. A classic impractical attempt by Mr. Vought to split the baby and get that damned 1033 thing off his desk so he can open the CFPB garage door, back the steamroller out, and move on to flattening other government agencies.

I almost sympathize with Mr. Vought and his staff (a really hard thing for me to say) as they charge into the 1033 statutory interpretation quagmire.

They will never make it back to dry land. The fintech and banking industry have moved on, for better or worse, in the 16 years (!!) that the CFPB failed to write the required rule, with the largest players like JPMorganChase and Plaid setting the industry standard. The money has spoken.

Wait, maybe they should ask Michael Barr, who actually wrote the statute, what he thinks? 🤔 Yeah, right.....

One thing is for sure: the Supreme Court under Loper Bright believes that some judge in Western Texas will know what the answer is when the inevitable litigation gets going a year or so down the road and the injunctions start flying. This is getting monotonous.

What a way (not) to run a government, which may be the political point.

The Order states that ” it is “the policy of the United States to streamline regulatory processes, reduce unnecessary barriers to entry, and encourage collaboration between fintech firms, federally regulated financial institutions, and Federal financial regulators.” That’s an anodyne but unexceptional goal, although, given the source, there may be more going on here than meets the eye.

For those of us following the power game between the White House and Federal Reserve Board (the “Fed”), a closer look reveals a very clever piece of legal and policy legerdemain that allows the Trump Administration to pay lip service to a broad concept of Fed independence in the bank regulatory sphere while at the same time actively undermining it. As a result, the Order puts the Fed in a difficult position early in the tenure of Chair Kevin Warsh. 2

The Order defines “Fintech” broadly. While the definition includes what we usually think of as Fintech-- things like neobanks, which offer digital banking services without physical locations and other nonbank providers of traditional financial products--it’s hard not to conclude that the Order’s real focus is purveyors of the Administration’s (and the Trump family’s) favorite types of “innovative,” gambling-based activities: crypto trading and prediction markets. It also seeks to promote blockchain solutions of all types.

The scope of the Order is as expansive as it could possibly be:

““Fintech firm” refers to a non-bank company that uses or develops technological means to offer or support the offering of financial products or services, including, but not limited to, any application or any digital or online technology that facilitates access to, management of, or data processing for financial products or services. Such financial products or services may include, but are not limited to, payment processing, lending, deposit-taking, derivatives, investment management, brokerage services, underwriting and capital-market activities, custodial and fiduciary services, digital banking, digital asset-related services, securities and commodities market activities, and blockchain-based services. For the avoidance of doubt, such financial products or services also include the activities set forth in paragraphs (A) through (G) of section 4(k)(4) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)(4)).” The last sentence incorporates all activities deemed “financial in nature” that are permissible to Financial Holding Companies. 3

The Order requires the heads of the Consumer Financial Protection Bureau, the Securities and Exchange Commission, the National Credit Union Administration, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency –but not the Fed--to do a variety of concrete things:

“conduct a review of existing regulations, guidance, supervisory practices, and application processes to identify those that could be updated to facilitate innovation, and competition to financial products and services for fintech firms, particularly those that are small and emerging. The reviews shall identify regulations, guidance documents, orders, no-action letters, and other items that unduly impede fintech firms from entering into partnerships with federally regulated institutions (including insured depository institutions, credit unions, broker-dealers, investment advisers, and futures commission merchants), as well as regulations, guidance documents, orders, no-action letters, and other items that could be amended to streamline application processes for eligible fintech firms seeking bank charters, credit union charters, deposit or share insurance, and other Federal licenses, registrations, and authorizations, balancing innovation interests with the importance of safety and soundness, consumer and investor protection, market integrity, financial stability, and oversight.”

Within 180 days, the named Federal financial regulators are required, in consultation with Kevin Hassett, the Assistant to the President for Economic Policy, to “take steps” to encourage innovation as a result of the review.

But the most interesting part for Fed watchers is this--Section 4(a) of the Order also contains a “request” for the Fed to comply with all the “fintech”-related bank regulation requirements which are applied directly to the other federal banking agencies as mandates in the Order.

(The Order also contains a separate, but similarly phrased, “request” directed at the Fed with regard to expanded nonbank access to the U.S. payments system, but the Fed’s proposal for so-called “Skinny” master accounts proposed on the next day appears to have preempted—or at least confused— that issue for now. ) 4

On its face, the phrasing in that part of the Order can be viewed as a massive victory for the concept of Fed independence. By using this “request” framing, the Trump Administration formally acknowledges for the first time that the “independence” of the Fed extends beyond monetary policy matters and includes its supervision of state-chartered Fed member banks, bank holding companies, financial holding companies and foreign banking organizations. 5 In other words, it is admitting that it can’t “order” the Fed to do anything in the bank regulatory sphere.

This is a significant retreat by the Administration from the more aggressive approach taken in the President’s February 2025 executive order on independent regulatory agencies, which asserted that the Fed was independent from Executive Branch control only when it came to the FOMC and monetary policy matters and not when it came to bank regulation. 6 Not to mention its maximalist reading of executive power over the Fed in the Lisa Cook case. 7

Stepping back for a moment: Although the idea of Fed “independence” has been well established in policy circles, it’s legal justification is complex and has been heavily contested by the Trump White House since the Supreme Court began to adopt the so-called Unitary Executive Theory and eliminate protections for independent regulatory agencies in recent years. The Fed does many things in addition to controlling the money supply and influencing interest rates—things like regulating banks and holding companies and running the national payments system. Some argue that “independence” should not apply to these non-monetary policy matters. While the better argument is probably that the Fed’s bank regulatory and payments activities are part of its control over monetary policy and thus should be independent, the issue isn’t settled. 8

The change in the Administration’s formal attitude to Fed independence can in part be attributed to pragmatism. Two things have changed since the 2025 executive order. First, the Supreme Court strongly indicated during in the oral arguments in the case challenging the firing of Fed governor Lisa Cook case that the Court will exempt the Fed from direct Presidential control under an exception to its Unitary Executive Theory. Second, the pushback from Wall Street leadership, the financial press and Congressional leaders against any efforts to reduce Fed independence has been nearly universal.

So has the Administration given up on trying to bend the Fed to its will? Legally, perhaps, but not as a matter of power politics.

There are many ways to use legalism to skin a cat, as this Administration knows well. And, as we all know, some requests are really demands. This is one of those “requests.”

The President is throwing down a politely-phrased gauntlet to new Fed leadership, daring them not to comply with a bank regulatory policy diktat while offering them a face-saving way to maintain the aura of independence without the reality.

This puts Chair Warsh in a particularly difficult situation personally. He is newly confirmed for the job after facing Congressional skepticism about his ability to stand up to political pressure from the President. If he leads the Fed to comply with the request/demand, he may be accused of “secret deals” in areas where the President is ethically and financially compromised and of political subservience to the Trump agenda. If the Fed fails to comply, he will be attacked aggressively for that failure by the Administration because, after all, the President asked nicely.

Warsh’s situation is complicated by the fact that he has openly opined in the past that the Fed is not independent of Executive Brach control in bank regulatory matters. 9 So what’s a new Chair to do?

Given his history, and despite the criticism that may follow, Warsh will almost certainly take the bait proffered and push the Fed to do what the President asks by adopt Fintech-friendly bank regulatory policies in line with those of the other banking agencies, regardless of what the views of the experts and

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career regulators at the Fed might be. And the Administration appears confident that Michelle Bowman and Christopher Waller, Trump appointees to the Fed Board of Governors, will agree and that the Fed as a whole will support the President’s personal and policy priorities.

The irony is this. Despite badly losing both the legal and public opinion battles on Fed independence in bank regulatory matters, the Administration appears to have won the war, leaving the Fed with a future of “Potemkin independence” in bank regulatory matters, where it will comply with any policy directive from the President as long as it is phrased as a “request “rather than an order.

Upstart announced today that it was applying for a national bank charter. Bully for them—this is an inevitable but positive development for an excellent company that has worked hard to make fairly-priced loans to more people.

Under its founding CEO Dave Girouard, Upstart consistently argued that it was not really lending--just facilitating lending by others-- and therefore did not need a bank charter. This was part of its effort to portray itself to the capital markets as a tech company entirely distinct from its “lookalike” LendingClub, which shares an almost identical lending business at nearly identical origination volumes but which makes its own loans and funds itself in part with the balance sheet of its subsidiary bank and in part through capital markets.

This strategy worked for years as Upstart's stock price benefitted from tech and, more recently, large helpings of AI glamour. Upstart touted its small balance sheet and AI and tech-enabled loan underwriting, production and servicing platforms and investors were convinced.

The market rewarded them. Upstart's market cap was over $30 billion in October 2021 and at over $8 billion as recently as July of 2025.

But as time passed without Upstart showing any exceptional performance characteristics, the “AI/tech premium” dissipated. Today its market capitalization is $2.7 billion.

LendingClub, which is typically valued as a fast growing bank despite similar AI and tech-enabled capabilities to Upstart's, topped out at $4.4 billion in market capitalization in late 2021 and is currently worth $1.7 billion.

The main benefits for Upstart from a bank charter are funding stability (particularly important when markets or credit go south, as Upstart learned some years ago to its dismay), the cost advantage of deposits over market funding for balance sheet loans, potential to cross-sell other banking products including deposits. and national lending rate preemption.

Cutting through all the spin, Upstart has permanently lost the market value advantage that came from being viewed as a tech stock, and now looks to the market like a finance company.

Because banks are typicallly valued more highly than finance companies on a PE ratio basis, the financial and operational benefits of being a bank have become more attractive.

As for their bank strategy: First, they are going to change the model and orignate all loans through the bank to preempt state law and have consistent, national loan products (this will also eventually change their accounting—instead of platform fees we’ll see net interest income, gain on sale and servicing fees like other lenders); second, that they will not move quickly to a deposit funded balance sheet but will continue to sell/securitize a big part of their production to small banks and institutional investors, and third, that they will raise deposits through a national online platform using social media, possibly supplemented by program deposit sweeps from other fintechs and small banks.

Postscript: let’s say a person wrote a slew of articles a decade ago arguing that all the marketplace lenders would inevitably need to become banks. He even debated Mike Cagney about it at a conference in 2015!

So here’s the question: If it takes more than 10 years to be proven right are you really right, or just sparkling wrong? And can event market bets even last that long?

Asking for a friend.

Examples below.

Financial Times

American Banker

American Banker

American Banker
American Banker

Debanked

Witness last Tuesday’s Truth Social post about the stalemated negotiations between banks and crypto interests over the so-called Clarity Act, which would integrate crypto assets into the US financial regulatory system under a “regulation lite” framework.

Strangely, Trump’s Truth Social post said nothing at all about what is is holding up the “negotiations” about the scope of the Clarity Act—the question of whether and to what extent third parties and issuer affiliates can offer indirect yield on stablecoins.

This is no small issue: it may be critical to the future of bank deposits and the stability and effectiveness of the global financial and banking system.

The holdup with the Clarity Act relates to the banking lobby’s proposal to amend Section 4 of the 2005 GENIUS Act (which set up a system of regulated stablecoin issuers) to prohibit indirect yield arrangements on stablecoins. Section 4 states that “[n]o permitted payment stablecoin issuer ... shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.”

As the Congressional Research Service (CRS) puts it:

“While this appears to create a blanket prohibition on interest, the restriction may not apply to the current market practice for issuing and holding stablecoins involving exchanges ….”

Today, stablecoin issuers sell most stablecoins to exchanges and institutional traders. In practice, retail users usually rely on an intermediary like an exchange, to acquire stablecoins and hold them as custodian on the investor’s behalf. Interest on reserves is the main source of revenue for stablecoin issuers. Some of this interest is passed on to the exchange, which it uses to pay the investor yield on the custodial stablecoins. Lending and hedging activities conducted through the exchange often supplement investor returns.

Trump friend and MAGA contributor’ Brian Armstrong’s Coinbase provides pass-through yield as part of its arrangement with Circle Internet Financial, the issuer of USDC stablecoin, as CRS notes:

“Circle… pays a portion of the interest it earns on its reserves to Coinbase, the largest U.S.-based crypto exchange, proportionate to the stablecoins held on that platform…. Therefore, while [Circle]may not be paying the holder directly, they are supplying the funding that is simply passed through the exchange.”

The banks, large and small, are adamant that permitting indirect yield effectively makes the GENIUS Act prohibition of yield toothless. Others like Coinbase’s Armstrong, who publicly walked away from the negotiations when it looked like Coinbase might lose out, like it that way.

Why is stablecoin yield potentially important to the U.S. economy? It’s all about bank deposits and the way in which low-cost deposit funding is deployed by banks into lending. While experts disagree on just how big an impact yield-producing stablecoins at scale would have on bank deposits-- and how much any reduction in deposits would affect bank lending—the more negative cases project an alarming impact.

Stablecoin deposit substitution at scale could also impair the Federal Reserve’s and other central banks’ ability to manage interest rates through its traditional bank-based pathway, a matter of great concern to both regulators and markets.

This, frankly, doesn’t seem like a piece of financial policy that should be outsourced to commercial interests with a hands-off exhortation that they should “make a good deal.”

Normally the Treasury Secretary would be trying to craft a legislative solution that wouldn’t create risk for the economy on his boss’s watch—in this case that would mean tight limits on indirect yield. But other than salivating at the prospect of trillions in non-price sensitive demand for T-Bills to back those stablecoins, strengthen dollar dominance and prop up the jenga tower of U.S. debt, Secretary Bessent has stayed out of the debate. This seems like a wise choice since crypto maximalists at the White House continue to dictate large parts of U.S. financial policy with the help of massive political contributions and privileged access to the ear of the Unitary Executive.

But back to last week’s Truth Social blast. The President reverted to an old trope to try to jumpstart the Clarity Act process--an ominous warning about the bogeyman across the Pacific: unless the Clarity Act passes, “our powerful Crypto Agenda...will end up going to [drumroll please] China.”

This was a distinctly odd choice of villain. China does indeed have a “powerful Crypto Agenda” .... just not the one the President thinks it has.

[Maybe he meant his family’s “powerful Crypto Agenda” but got confused. It happens to the best of us.]

To put in bluntly, China hates crypto—including stablecoins.

CoinDesk summarizes the buzzkill emanating from Beijing nicely:

“Chinese regulators have broadened their crackdown on crypto activities, imposing strict oversight on tokenization and stablecoin issuance in a Friday notice....
The notice reiterates China’s blanket ban on crypto, saying that trading, issuing or facilitating transactions involving digital currencies such as bitcoin BTC, ether (ETH), or stablecoins like Tether’s USDT is illegal....
The notice singles out stablecoins — cryptocurrencies pegged to fiat currencies — for special scrutiny. Authorities argue stablecoins replicate key functions of sovereign money and therefore threaten monetary control....
The rules also tighten control over tokenization, the fast-growing trend of turning ownership of real-world assets like equities, real estate or funds into digital tokens....
China’s crackdown on cryptocurrencies and related activities have been a staple over the past years. The new set of rules build on Chinese authorities in 2021 deeming all crypto-related business activities illegal and prohibiting crypto mining, often called a “China ban.” In 2017, authorities banned Initial Coin Offerings (ICOs), labeling them as illegal fundraising and financial fraud, and ordered domestic cryptocurrency exchanges to shutter fiat-to-crypto trading operations.”

Why the Chinese hostility to crypto? China has no problem with digital financial technology itself—witness all its efforts around the digital Yuan CBDC-- and has even created a laboratory for crypto uses in Hong Kong. But it wants to make sure that financial technology is used to support the long-term development of the Chinese economy and promote state interests rather than the interests of speculators.

Outside of the limited case of stablecoins as a dollar-based payments rail (something of no interest to Beijing, which is pursuing a centralized CBDC instead,) crypto assets serve none of the real world productive purposes that the Chinese government seeks to promote, i.e., helping businesses, individuals, and governments raise, save, transmit, and use money for socially and economically useful ends. As I pointed out in 2022:

“Banks allow savings to be pooled and turned into loans for fruit orchards, solar farms, automobiles, small business, and housing. The securities market supports the needs of larger businesses and the government in raising substantial amounts of capital and helps make the banking process more efficient by distributing risk broadly. Insurance and derivatives markets help manage risk. Participants in finance seek to maximize profit, of course, but in the context of a larger social and economic purpose. Crypto trading, by contrast, does not, and cannot, produce any economically or socially productive outcomes. It is, as Seinfeld’s George Costanza might have said, finance about nothing.”

China has been wise enough to realize that crypto assets are useless for anything other than speculation and has set its financial policy accordingly. This shows a level of maturity sorely lacking in its US counterpart.

So why is the U.S. President making China the bad guy threatening part of his “New Golden Age?” Perhaps he has his family’s own crypto investments in mind, or perhaps he thinks that if the U.S. banks and the crypto interests can’t reach a compromise on the issue of stablecoin indirect yield or if the compromise doesn’t meet the desires of the President and his crypto whisperers, the Chinese will do an about face and ask Brian Armstrong to move to Shanghai to make it “the Crypto Capital of the World” instead of Washington D.C.

That’s not going to happen. Unlike the tulip merchants dominating the Trump Administration, the Chinese government seems committed to their well-reasoned and policy-based hostility to the whole crypto asset enterprise.

So, no dice Mr. Trump, at least in China. As far as Beijing is concerned, the U.S. is welcome to wear the paper crown as Crypto Capital of the World.

Wyoming SPDIs like Kraken are state-chartered uninsured depository institutions—designed as part of Wyoming’s effort to become a crypto leader--that receive deposits and offer custody and asset management services but don’t lend money. They are in many ways classic narrow banks – while subject state capital rules they must hold 100% of their fiat deposits in unencumbered reserves. None of their fiat deposits are insured and they are not subject to FDIC regulation or any federal oversight by design. Digital assets are held separately as custodial assets.

So why this and why now?

You are no doubt aware that the initiation and receipt of payments in the US has been a bank-only business for a very long time. This contrasts with some other countries and geographies—the EU being a good example—where regulated nonbanks can directly initiate payments. US Banks benefit from this exclusivity because they charge customers for payments intermediation services, banks in exchange bear (they would argue) the associated heavy costs of comprehensive regulation and oversight, and the rest of us benefit from strict regulatory control over systemic risk associated with payments.

This bank oligopoly has been under pressure from crypto interests for a number of years, through efforts like Wyoming’s to legally structure “bank-like” vehicles that could meet the Federal Reserve’s standards for access to Fed Wire and other parts of the federally and bank run payments system.

Up to now, no SPDI has been granted a Fed Master Account under the Federal Reserve System guidelines, although Governor Waller and others on the board are in the process of establishing standards for so-called “skinny” Master Accounts which would provide access to some parts of the Fed-run payments system, such as Fed Wire, but not other parts such as ACH.

So back to the question of the moment. Why are the Trump Administration and Federal regulators hell bent on integrating a crypto broker into the financial services regulatory system?

It can’t be because crypto is socially beneficial.

With the exception of the currently tiny flow of stablecoins in real-world payments, speculative crypto trading of the kind that Kraken does serves none of the productive purposes that define finance: helping businesses, individuals, and governments raise, save, transmit, and use money for socially and economically useful ends.

Banks allow savings to be pooled and turned into loans for fruit orchards, solar farms, automobiles, small business, and housing. The securities market supports the needs of larger businesses and the government in raising substantial amounts of capital and helps make the banking process more efficient by distributing risk broadly. Insurance and derivatives markets help manage risk. Participants in finance seek to maximize profit, of course, but in the context of a larger social and economic purpose.

Crypto trading, by contrast, does not, and cannot, produce any economically or socially productive outcomes. It is, as Seinfeld’s George Costanza might have said, finance about nothing. And because it serves none of the purposes of finance, the law and policy should not recognize it as finance.

See my short paper from 2022 for more detail about this CLS Blue Sky Blog

So the reason has to be something else. It could be a desire to end the bank oligopoly over payments. But in that case—certainly a “major question” in current Supreme Court parlance--the solution should lie with Congress not administrative agencies.

Alternatively, one suspects that this is part of the pattern of pervasive corruption emanating from the Trump family’s crypto interests and the massive amount of political contributions the crypto industry has made to Congress and its strategy of punishing any Congressperson or candidate who does not toe the crypto line. All abetted by the Unitary Executive theory’s gift of control of formerly independent administrative agencies by the President and his staff. The Fed has been under enormous pressure from the President and satisfying his desires in this way may take some of the pressure off.

Back to today’s announcement about Kraken….

Apparently we should not be concerned about the details of the arrangement with Kraken because “[t]he Kansas City Fed has approved a limited purpose account for an initial term of one year that includes restrictions and limitations tailored for Kraken Financial’s business model and risk profile that are appropriate to mitigate risks identified in the Guidelines.”

But good luck finding out what those “restrictions and limitations” are: this gem is also part of the Federal Reserve Bank of Kansas City press release:

“Due to the confidentiality of business information provided by applicants, the Kansas City Fed does not disclose specific information about account holders’ access to the range of Federal Reserve financial services.“

Here we see the treatment of the Regional Reserve Banks as “private” entities coming home to roost in a new way. Not only is the Kansas City bank changing national payments policy on its own—it isn’t telling us how or why it has done so.

The substantive question here is much like the debate on stablecoins and yield. The bank oligopoly on deposits, payments and national lending has served us well for a very long time. To take it apart piecemeal and expect no problems is naive and dangerous.

On the other hand, there is no reason that we couldn’t decide to let nonbanks into the payment system, after extended discussion and analysis under a Congressionally designed and carefully and heavily regulated structure, as in Europe. But it is a huge change, with profound impact, that should not be made lightly on a one-off basis by an unaccountable regional Reserve Bank.

Transparency be damned. That’s a recipe for bad decisions.

The PDF is attached.

Are Fintechs And Banks Converging 07 25

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The Act provides a legal and regulatory framework for fiat-backed stablecoin issuance and is expected to spur vastly increased use of these blockchain-based payment tokens in national and international payments. The Genius Act is part of a larger agenda promoted by the Trump administration and aimed at promoting U.S. leadership in digital finance by integrating blockchain-based crypto assets into the "traditional" financial services system.

Join two panels of crypto and payments industry leaders, venture capitalists, crypto law specialists, banking analysts, consumer and market advocates, academics and experts from the Federal Reserve and the Bank for International Settlements as they discuss what the Genius Act does and doesn't do and why stablecoins matter for banks, the payments industry, crypto finance companies, Treasury markets and U.S. and global financial stability.

Conference Invitation

I visited the Frick Collection in New York City yesterday.

I always enjoy seeing Hans Holbein’s portraits of “the two Thomases”—Sir Thomas More and Thomas Cromwell— contemplating each other across a fireplace in one of the Frick mansion’s gorgeous rooms, while I think about the price of working for an erratic, all powerful, king.

Henry VIII, the king in question, was an authoritarian by birth with a mercurial and violent personality. His views on policy and people changed direction with the weather and the whisperings of competing courtiers. He dominated a weak Parliament which never pushed back against his excesses. He viewed laws—and women—-as his personal playthings. This should be a familiar paradigm to anyone following contemporary U.S. politics.

Like so many ambitious men and women today, Sir Thomas More believed that he could work with King Henry “for the good of the nation” while maintaining his independence and loyalty to higher principles, in his case those of the Catholic Church. Thomas Cromwell had no such illusions, but thought that his total loyalty to the King, demonstrated repeatedly and ruthlessly over the years, would make him a rich man and protect him from the fate he helped hand to Thomas More. Both men were wrong and ended up on the gallows. As did many a titled and propertied Duke and Earl who lost both their lives and their fortunes.

It’s a tale as old as time: absolute monarchs demand absolute loyalty but give none in return. This is something the MAGA political strivers, the Federalist Society lawyers, and the rich, propertied men like Bessent, Lutnick, Pulte and Sacks currently vying for presidential favor would do well to remember.

Fed independence is currently in the news. President Trump and members of his administration have been making an unprecedented and aggressive series of attacks on Fed Chair Jerome Powell over the Fed’s interest rate policy, including personal insults and threats to fire Powell or force him to resign. The president also issued an Executive Order, “Ensuring Accountability for All Agencies,” in February 2025 which, while declining to assert authority over monetary policy, did claim direct authority over the Fed in connection with its “conduct and authorities directly related to its supervision and regulation of financial institutions.” ^[2]

Does the president's authority under the now canonic "Unitary Executive" theory of the Constitution apply more strongly in those other statutory areas than it does in setting and implementing monetary policy?

The Supreme Court (in Trump v. Wilcox[3]) appears to have decided that the Federal Reserve Board’s chair can’t be replaced during his or her statutory term because the Fed is different from other formerly independent agencies in critical respects. The Court in the Wilcox case reasoned that the Fed is different from agencies like the FCC, FTC, NLRB and FDIC because it is “a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.”[4] This legal and historical distinction between the Fed and the other post-New Deal independent commissions and agencies has been comprehensively and convincingly criticized by Justice Elena Kagan[5] and Professor Lev Menand, among others.”[6] However, there are other arguments for supporting the structure of the Fed and its independence from direct presidential control that the Fed’s internal lawyers are, no doubt, sharpening right now.

While the courts have not weighed in on the validity of the February Executive Order as applied to the Fed, the question of whether the Fed is independent in all its aspects or only when setting monetary policy may come to a head soon given the large number of applications for new national trust banks engaged in the crypto businesses, including stablecoin issuance and custody.[7] These new trust banks (no new charters have been granted as yet, but the OCC is expected to wave these applications through) all want Fed master accounts to get direct access to the Fed’s payment system and connect their crypto activities to the traditional payment rails . The granting of master accounts to banks, trust companies, and others is discretionary and is governed by the Fed's three-tiered review policy from 2022, which emphasizes the significant risks to the system if access is too freely available to entities other than insured banks.[8] Only one application from a Tier 2 or Tier 3 applicant, the categories that these crypto trust companies fall into, has been approved by the Fed under the 2022 policy, and that one had a fairly simple business model that did not involve crypto activities.[9]

As we know, the administration has been pulling out all the stops to "repay" the crypto industry for its election-year contributions, and the president himself is deeply compromised by his personal engagement with a variety of Trump family crypto businesses.[10]

Does the president, under Supreme Court precedent and the February Executive Order, have the power to bypass Fed policy and direct the Fed to approve master accounts, in the way that it appears to have acted in similar circumstances at formerly independent agencies, or are these decisions protected under the Wilcox concept of independence due to historical tradition? Are all parts of the Fed independent of the president or only some? The answer is unclear, given the opacity of the legal distinctions embraced by the Supreme Court in Wilcox amid its effort to slowly overturn Humphrey’s Executor[11] without harming the Fed’s independent monetary policy role.

Taking it one step further, if the president wanted to test his limits by trying to force through crypto-related master account applications, how would he go about it? By “directing” the Fed under the February 2025 Executive Order to grant master accounts to specified applicants outside of the 2022 policy, even though the accounts are actually issued by the regional reserve banks? Would he try to forcibly replace the Fed’s Vice Chair of Supervision if she did not go along?[12] Would that even work for a decision that might require full board approval or approval of the individual Federal Reserve Bank involved?

These legal issues are novel and interesting, but it is likely that none of them really matters. The Fed clearly would prefer not to litigate the question of its independence if there is any way to avoid doing so, given the risk of a negative outcome. This is especially true since any litigation of this type would likely be withdrawn or settled once a new, Trump-nominated, Fed chair is confirmed in 2026. The pattern of the Trump Administration has been to settle lawsuits brought by Biden-era regulators, which has the effect of converting the defendants’ position into new law. Wouldn’t a new Fed chair promise Trump to do the same thing here – that is to say, settle the Fed’s lawsuit by abjuring Fed independence?

That leaves the Fed with only one real alternative: quietly giving in to pressure from the president on master accounts and other less “important” areas in the hope that this will relieve pressure on monetary policy decisions.

We may already be seeing signs of this alternative in action . In recent testimony before the Senate Banking Committee, Fed Chair Jerome Powell said that reputation risk would no longer be considered when reserve banks evaluate applications for master accounts. "It may be that this whole thing with reputation risk needs to be thought about," Powell said. "We're taking that concept out of the one manual that we've been using for account access for master accounts; we're just going to take that out. But I think this needs a fresh look and I think it's time for that."[13] The Fed also signed on to a “whole of government” approach led by the Treasury Secretary in proposing significant reductions in the large bank supplementary leverage ratio under the Basel accords, a subject the Fed historically viewed as within its exclusive purview.

As has become evident in many parts of government over the last six months, laws offer weak protection from the active exercise of presidential power. It is often easier, and may seem wiser, to submit in practice on individual matters than to fight for principles. For the Fed, avoiding a showdown over its monetary policy discretion independence may seem more important than retaining that discretion in other areas.

ENDNOTES

[1] See Paul M. Connolly & Robert W. Eisenmenger, 2000. "The role of the Federal Reserve in the payments system," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 45 (Oct), pages 131-161.

[2] Executive Order 14215. 90 FR 10447 (2025). The attempt by the administration to distinguish the conduct of “monetary policy” from other Fed activities is novel and in many ways nonsensical. As Lev Menand has pointed out, monetary policy is effectuated through the Fed’s bank regulatory authority and in many respects “is bank regulation.” Menand, Lev, The Supreme Court's Fed Carveout: An Initial Assessment (May 23, 2025). Columbia Public Law Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=5266613 or http://dx.doi.org/10.2139/ssrn.5266613

[3] Trump v. Wilcox, No. 24A966, 605 U.S. __ (2025).

[4] Id. at 2.

[5] Id. At 7.

[6] Menand, at 10.

[7] https://www.americanbanker.com/news/what-ripples-bank-charter-application-means-for-banking

[8] https://www.federalreserve.gov/newsevents/pressreleases/files/other20220815a1.pdf.

[9]

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Trust Me: Wise, Circle, Ripple Seek Charters, Master Account Access

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a year ago · 16 likes · Jason Mikula

[10] https://www.theguardian.com/us-news/2025/may/25/trump-crypto-corruption-ethics

[11] 295 U. S. 602 (1935).

[12](It has been speculated that one of the reasons the last Vice Chair for Regulation at the Fed resigned under political duress was a desire not to have questions like this tested in court prematurely.

[13] https://www.americanbanker.com/news/fed-policy-tweak-removes-reputation-hurdle-for-crypto-banks

The fintech world is understandably in an uproar, predicting the end of fintech innovation. The great Bloomberg story that broke on this quoted one source as saying: "JPMorgan’s proposed fees in some cases would eclipse the revenue certain companies generate on a single transaction by as much as 1000%”

I have no idea if the quote from the story is true, but if it describes the situation at all accurately, you can see the impact.

I know that no one will thank me for saying that there’s no clear right or wrong position here from an objective standpoint. The question is ultimately about how the economic value of consumer financial data is allocated between various parts of the banking and fintech ecosystem and consumers.

I have a personal view, of course, but I don’t fool myself into thinking that it is correct as a matter of principle. My view comes out of an effort to balance the interests involved, with a prejudice towards the new rather than the old.

Let’s quickly sum up the two arguments on the data sharing issue.

The “open banking” view is that the economic value of financial transaction data belongs entirely to the consumer “as a matter of right” and that the consumer should decide how that economic value is allocated.

This view starts from the not unreasonable premise that data about a consumer’s financial transactions held by a bank belongs to the consumer who therefore must be able to access that data and use it, or provide it for others to use, for its own benefit. That “rights” view was generally supported by the language of Section 1033 of Dodd-Frank, which says that a covered person [i.e. a bank] "shall make available to a consumer, upon request, information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information relating to any transaction, series of transactions, or to the account including costs, charges and usage data." The information is to be made available in an electronic form "usable by consumers."

The banking industry sees things differently. The banks see everyone (including many direct competitors) making money from their customers’ transaction data except the banks. It costs banks money to collect, organize and protect consumer data. Of course, they earn revenues associated with their own products that use that data, but it’s not unreasonable for them to assert a priori that they should be entitled to some compensation for the economic value they have created by collecting and storing the data and securely making it available to others.

It is also not unreasonable for them to seek to control security to protect their customers’ data from disclosure or misuse, especially as they have learned that customers’ will usually blame their bank when something goes wrong. This has financial importance because recourse against any fintech using bank data is limited by the financial condition of the fintech and requires contractual arrangements which don’t exist in many cases.

Beyond this fundamental disagreement, everything about the data sharing issue is up for grabs. Section 1033 was drafted before the emergence of the large ecosystem of fintechs that relied on scraping data (and then started using bespoke APIs) from banks, nor did it contemplate the rise of huge data intermediaries like Plaid.1 The statute isn’t helpful when considering how it should apply to these new business cases. It also said nothing about who is responsible for the use or misuse of that data, doesn’t explicitly discuss cost recovery or fees for banks providing the data or deal with liability of third parties acting for consumers who seek to access that data.

The CFPB, after a very long process, came up with a not unreasonable rule which tried to take both the statutory language and the reality of the fintech ecosystem into account. In doing so it answered the binary question of whether banks could charge for access to consumer data by prohibiting bank fees. This was received with great glee by the fintech industry.

Rather than allocating liability directly, the CFPB used a regulatory approach to put compliance and risk management controls on third party users of the data and effectively stopped screen scraping. But the agency didn’t resolve the elephant in the room issue of who pays for data misuse, leaving this to private arrangements. While the fintechs thought the compliance standards were a small price to pay for free access to consumer data, the banks saw little practical value in this approach when the regulation still forced them to deal with undercapitalized fintech counterparties.

Naturally the banks sued, and an election intervened.

[It’s worth noting that the CFPB rule was in many ways similar, although far less comprehensive, than the European statutory approach, which was and is quite elegant and forward-looking. On the other hand, the US system of unregulated and contractual fintech data sharing has arguably resulted in more innovation than is found in, for example, elegantly-regulated Europe.]

Now that the CFPB rule is likely dead, the ultimate question remains—can banks charge fees for access? JP Morgan is taking the view that they can, and it will. Other banks may follow in due course.

Yes, there will be lawsuits, but I do not see the Roberts-era courts taking an expansive view of Section 1033’s statutory language, which would be required to thwart the banks. After all, Section 1033 doesn’t say banks can’t charge fees for data access, although open banking proponents may believe that it is implied. And there’s little evidence of Congressional intent, not that anything beyond the words on the page mean much under current statutory interpretation practice in the courts.

In today’s political environment, it also seems highly unlikely that Congress will intervene on the issue. Keep in mind that JP Morgan has almost 25% of the US population as customers. The banks still control deposits and payments through their long-standing oligopoly, and the Fed controls monetary policy through them. That’s real market power in this dispute.

What does all this ultimately mean for the future of open banking? Nothing good, although the chances that this will kill the whole area off are slim.

Bank data fees will either make the sector less profitable for fintech companies or fintechs will pass through the fees to their customers. Past history suggests that the latter outcome—higher consumer fees ---is the most likely fintech industry response. That will make fintech products less attractive and erode the competitive position of fintechs that rely on “no fee” or “low fee” offerings.

Complicating all this further, it seems likely that consumers would also pay more if the fee issue were to be decided the other way. If free data sharing is forced on the banks, some of the cost will either make banks less profitable or be passed through to their customers And we have a pretty good idea how that will work, don’t we? After all, what good is an oligopoly if you don’t use it?

I have an ivory tower answer to all of this, which is to permit banks to charge for providing data access based on a cost recovery formula. I have in mind something like the Durbin Amendment debit card cost recovery formula (I know, I know, everybody in banking hates that one). Cost recovery wouldn’t solve the liability issue, but a requirement for small fintechs to post liability bonds or something similar would, albeit to the disadvantage of the newest and smallest fintech entrants and therefore, VC-funded innovation.

[Something similar is already going on in the partner banking space, where compliance concerns make it harder and much more expensive for fintech startups to find banking partners who will take them on.]

This cost recovery approach would almost certainly require a new law, and compliance would need to be supervised by a regulator with expertise, which means it has no chance of happening in the current political environment.

I expect an enormous hue and cry over the next few weeks from the fintech industry, ending up with no concrete action. I suspect both sides of the issue will ramp up their contributions to MAGA, emulating the crypto industry’s success in the “pay to play” game, but there still won’t be time for Congress to act before the midterms, when the rules of the political game could change again.

Bottom line: we’re back where we started 15 years ago. No general rule, everyone negotiating one-offs. Lawyers prospering.

Yet more proof of the wisdom of my motto: “All Progress in Finance is Circular.™

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A day or two ago a new application for a national bank charter was filed by the founders of something called Erebor Bank. Here’s a brief description of the business plan:

“The Bank will be a national bank and will operate as a banking organization providing traditional banking products, as well as virtual currency-related products and services, for businesses and individuals. The target market for the Bank comprises businesses that are part of the United States innovation economy, in particular technology companies focused on virtual currencies, artificial intelligence, defense, and manufacturing, as well as payment service providers, investment funds and trading firms (including registered investment advisers, broker dealers, proprietary trading firms, and futures commission merchants). The Bank will also serve select individual consumers in the high and ultra- high net worth category who work for, or invest, in such companies, and provide certain deposit and payment services to qualifying foreign banking organizations.”

Given the open-door policy that Trump Administration regulators have announced for both new bank charters and any type of crypto related finance, seeing an application like this come down the chute is no surprise.

It’s a good thing that new digital banks are being created as long as the related risks are managed effectively by regulators. But it is worth digging a little deeper on this one because there is a Silicon Valley story here.

The organizers of Erebor Bank listed in the application include one experienced heavyweight banker and several fresh-faced younger men with backgrounds as lawyers, compliance experts and family office employees. So far, so good. But who is the money behind this de novo bank?

The name “Erebor” is the giveaway.

Although you won’t see it anywhere in the application, tech heavyweights Palmer Luckey of Anduril Technologies and Oculus fame and Joe Lonsdale, formerly of Palantir Technologies, are the money men behind Erebor Bank. Just two normal guys working for companies named after seeing stones and swords in the Lord of the Rings and naming their new bank after something in The Hobbit…. Nothing to see here…move along, move along.

JRR Tolkien is all the rage in the Silicon Valley techno-determinist world and its diaspora. As Michiko Kakutani pointed out in the New York Times a few months ago, adolescent Tolkien worship in the technology world has evolved into a bizarre mix of Aleksandr Dugin-style “traditionalism”, autocratic and militaristic yearning, transhumanism and fantasies about saving the world from “darkness.” This view of Tolkien and society can be found in the writings of people like Peter Thiel, Curtis Yarvin, J.D. Vance, and Marc Andreesen.

While there is little doubt that Tolkien’s views about the world are sometimes retrograde, having been shaped by his upbringing in Imperial Britain, he would almost certainly be shocked to discover that he has become the avatar of a movement that wants omnipotent tech lords to rule the earth and impose the technological singularity on the lower orders of society.

As Kakutani wrote:

“Tolkien himself regarded “machine worshipers” with suspicion, even aversion. His experiences as a soldier who survived the gruesome World War I Battle of the Somme left him with a lasting horror of mechanized warfare; on returning home, he was dismayed as well by the factories and roadways that were transforming England’s landscape. This is why Mordor is depicted as a hellish, industrial wasteland, ravaged by war and environmental destruction, in contrast to the green, edenic Shire that the hobbits call home.”

“Of the atomic bombs dropped on Hiroshima and Nagasaki in 1945, Tolkien wrote that nuclear physics — or, for that matter, any technological innovation — need not be used for war. “They need not be used at all. If there is any contemporary reference in my story at all it is to what seems to me the most widespread assumption of our time: that if a thing can be done, it must be done. This seems to me wholly false.”

That doesn’t exactly sound like a ringing endorsement of the Palantir AI future or Anduril-style robot warfare.

Back to billionaires Palmer Luckey and Joe Lonsdale. Luckey is famously a huge Trump and MAGA financial supporter as is Lonsdale. Both are massive funders of right-wing think tanks and political causes of all stripes.

Although the business plan for Erebor Bank is straightforward for a digital bank applicant—think Brex plus First Republic for tech and defense companies and their owners, with a little Anchorage Digital Trust thrown in for flavoring—the organizers would normally have to endure a long process to get their OCC bank charter and FDIC insurance approvals.

But these founders have friends in high places. In Trump’s “pay to play” Washington, loyalty to MAGA and a demonstrated willingness to provide money when needed are the only keys needed for government approvals by formerly “independent” agencies that are now just fingers on the hand of the Unitary Executive. So, it doesn’t take much imagination to see this one sailing through to approval very, very quickly. I’d be willing to lay odds that they’ll be approved and open by year end.

As a long-time Tolkien aficionado myself, I have just one suggestion for Messrs. Luckey and Lonsdale—maybe give the bank’s name a second look?

Erebor was the name of the mountain inhabited by Smaug, a giant, evil dragon who lived only for the gold and jewels he stole from dwarves, elves and men by burning to death everyone in his path.

Smaug slept in a giant cave filled with gold and precious gems that covered his body. He turned the countryside for hundreds of miles around into a wasteland, eliminating anything that could threaten him.

Forgive me for suggesting that this might not be idea brand positioning.

Imagine the "About Us" in the bank website: “We named the bank Erebor as an expression of our core mission: to steal all the wealth in the world by killing or impoverishing everyone else and sleeping on it inside a giant cave.”

On second thought, maybe that mission statement really is on brand for the tech overlords who are likely to be the bank's core customers.

New York Deli Waiter: How do you want your transaction?

Diner: what are my ch….

Waiter (bored): debit, Zelle, ACH, FedNow, stablecoin…

Diner: uhhh…I don’t…what do you recommend?

Waiter (impatient): It all comes from the same place.

Diner: uhhh

Waiter (more impatient): It’s all the same.

The Wall Street Journal reported last week that the big US banks are exploring collaborating on a joint stablecoin, a step the Journal attributes to “escalating competition from the cryptocurrency industry.” Well, that competition isn’t there yet, but given crypto-funded politicians desire to “make stablecoins happen” by rushing through the Genius Act, some response was clearly called for.

Like swatting a troublesome fly, the plans being discussed by the big banks would basically stop the whole stablecoin craze in its tracks by making stablecoins just another (yawn!) choice for bank customers looking to move money domestically or internationally.

There’s ample precedent for this. The Clearinghouse has been implementing collective bank approaches to new payments technologies (albeit slowly) for decades. The Fed has done the same (even more slowly) for far longer. And don’t forget that Visa and Mastercard started out as, and essentially remain, bank utilities for credit-based payments.

If the big banks can get it together to do this (and that’s a big if) through the Clearinghouse or another entity, the impact on the ambitions of cryptoverse to take a big piece of the real-world economy will be profound and likely catastrophic. A bank consortium blockchain — a single blockchain — will be immediately interoperable for the holders of virtually all the money there is in the world. That solves the fundamental non-interoperability problem that blockchain-based money movement has faced from the start and keep us from reading daily headlines about billions stolen from “bridge” applications.

A bank consortium stablecoin will also spare us from the world crypto maximalists envision where there will be hundreds of non-interoperable (and low value) stablecoin issuers fighting for customers and striving to achieve scale when scale in stablecoins only matters if you have reached the Highlander stage of near 100% adoption. Only then does the interoperability issue go away (there can be only one!). Stablecoins by their nature are a monopoly product, so what better way to acknowledge that then to imbed them in the US bank payments monopoly/oligopoly?

The so-easily swatted competitive fly might, alas have some friends stuck in the ointment, as there are a few questions and issues standing between the big banks and finishing off the crypto maximalists.

From a mundane standpoint, there is the question of fees. The promise of stablecoins has always been that, for utopian reasons, they will come without fees for users. While other identical payment methods from a speed and reliability standpoint, such as FedNow and Zelle are generally fee-less, although wires for big transactions still require them. Luckily for the banks, they will generally make enough money from the Treasury securities they or the consortium need to hold to back fiat stablecoins — without paying interest to users — under the Genius Act that income related to stablecoin use is guaranteed. Or they can go transparent and charge a few cents in account fees if they are feeling greedy.

From a political standpoint, there is the vexed issue of the small banks who have Congress by the short hairs. As a general matter, adoption of stablecoins won’t be great for traditional small banks who benefit greatly from the high Durbin Amendment interchange on debit card payments transactions that is likely to be displaced by stablecoins. It will be even worse for the fintechs using small “partner banks” for payments as the slice of that interchange is what keeps them alive (Chime, we’re looking at you.)

The big banks would prefer that the small banks go away, but since that’s not in the cards the simplest solution is to include them in the bank stablecoin settlement system. The problems will come in figuring out how to do that given the costs associated with adapting systems, processes and compliance for the new stablecoin channel. But this is something they must solve lest Congress intervene to spike the whole consortium idea.

The happiest person in the land if big bank stablecoins come about? Treasury Secretary Scott Bessent, who will be salivating at all the new T-Bill demand — deliciously price insensitive demand — from stablecoin collateral which he can use to help plug the ever-larger borrowing hole the current Administration is creating.

Citigroup’s bullish estimate calls for $3.7 trillion in stablecoins within 5 years even without a bank consortium, and it’s certainly not out of the question that that number could double or triple over the succeeding five years to something like $7–10 trillion. That is more than the $6.0 trillion in currently outstanding T-bills. No wonder Secretary Bessent loves stablecoins.

The Fed, on the other hand, will be conflicted, as the impact of all this on deposit flows and systemic risk is going to complicate its bank regulation and monetary policy jobs.

Finally, we come to antitrust, which is a significant risk any time the banking industry gets together to do anything. Visa and Mastercard have spent billions over the years defending their — definitely not monopolistic! [TM] — practices in a bank consortium context. There’s no reason this kind of stablecoin ploy wouldn’t draw the same interest.

The best advice here is to tell your daughter or son to become an antitrust lawyer because there will be litigation about this for a long time, funded by crypto dead enders furious that their baby was stolen in the night.

On Tuesday, Donald Trump took to Truth Social to clear up any ambiguity about his plans for the re-privatization of Fannie Mae and Freddie Mac.

Posting ex cathedra on Truth Social, the Unitary Executive sought to cut through the many conflicting statements coming out of his team and Congress on his plans for the two GSEs.

(You can tell how important he thinks this is as he used all caps.)

“I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the US Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President….”

Now I don’t know about the rest of you, but where I come from we listen to Tyler Durden: the first rule about Fight Club is you don’t talk about Fight Club.

And the second rule about Fight Club is when a GUARANTEE is supposed be implicit you shouldn’t promise to honor it …you know…EXPLICITLY! AND IN WRITING!

I can only imagine the sobbing sounds emanating from Bill Pulte’s office at the FHFA, Mark Calabria’s at the OMB, Mike Johnson’s at the House, and Bill Ackman’s corporate jet somewhere above the Atlantic. I’m sure they spent a lot of time carefully explaining the guarantee question to the President while he was texting or watching Fox News, but I guess it didn’t really stick.

We should expect a series of clarifications from Administration figures letting us all know that when the President wrote about “keeping implicit GUARANTEES” he meant something mysteriously and profoundly different but known only to him (although apparently Pulte “re-Truthed” Trump’s words, so maybe the problem lies in a different place).

Implicit and Explicit

An explicit guarantee is exactly what it sounds like: spelled out in law, regulation, or contractual language (and maybe in Truth Social posts). Take Ginnie Mae. Its MBS prospectuses leave no room for ambiguity: principal and interest payments are backed by the full faith and credit of the U.S. government. You can’t miss it — it’s in the first few pages, usually in bold.

An implicit guarantee, by contrast, exists entirely in the minds of market participants. It emerges not from statute, but from the rational belief that government inaction would be too economically or politically costly to contemplate. In other words, investors price in state support not because it’s promised, but because they believe the alternative — systemic failure — is politically impossible.

The GSEs are the classic case study. For years before the crisis, Fannie and Freddie issued MBS with prospectuses that made it crystal clear: there was no U.S. government guarantee. The language was not subtle. “The certificates and payments of principal and interest… are not guaranteed by the United States.” And yet, the market treated them as if they were — correctly, as it turned out.

Why? It’s hard to tell, but as the size of the GSEs grew over time their securities became treated as substitutes for Treasury securities in international markets and the conclusion became a matter of faith. Otherwise, why would the US government give the GSE’s favorable capital treatment and SEC exemptions while encouraging repeated reiteration of the “implicit guarantee” concept in the media and academic discourse? They could have stopped it at any time by disavowing implicit backup through statute, but deliberate ambiguity was considered to be a clever tactic to get better mortgage pricing for US consumers without facing the consequences of explicit backing.

As a result, when FHFA put the GSEs into conservatorship in 2008, no one was particularly surprised. The mechanics may have been novel, but the outcome was expected: public backstop, private losses socialized, MBS holders made whole. The implicit had simply become real, and in fact was now explicit. The market was right; the documents were wrong.

The real point is this: implicit guarantees aren’t created by governments. They emerge from conviction — investor belief that the needs of markets and the economy trump legal language. Governments can encourage or discourage that belief in small ways, but once the market reaches a conclusion, it tends to be sticky, durable, and remarkably accurate. Explicit guarantees, on the other hand, are written in stone.

To be fully credible, explicit guarantees need to be legally enforceable (a topic Trump should be aware of given the high judicial rejection rate for his Executive Orders.)

That’s what makes Trump’s statement that the “US Government will keep its implicit GUARANTEES” so hard to figure out.

Budget Woes?

There is one area outside of markets where one would think that the difference between explicit and implicit guarantees for the GSEs would really matter — the Federal budget. But the budget story isn’t straightforward.

The budget treatment of Fannie Mae and Freddie Mac in conservatorship is confusing. The CBO views the GSEs as effectively part of the federal government while the OMB treats Fannie Mae and Freddie Mac as nongovernmental entities for budget purposes. 
 The two methods don’t result in materially different outcomes in the current economic and market environment as credit losses are low and operating costs and guarantee fees are treated as offsetting income and expense to the government The US is actually making money from the GSE conservatorships which is being used to support other priorities, so it’s a net positive in budget calculations.

Despite the benefits of the status quo, there is a strong desire by the Trump Administration to privatize the GSEs. There are economic libertarians like Calabria for whom privatization is a religious principle. IPOs would also generate proceeds that could be used for other priorities. If at the same time the Administration can provide the President’s friends on Wall Street, such as Ackman, with the opportunity to pad their fortunes in the process, so much the better. That’s what makes Trump’s gaffe treating the implicit guarantee as explicit, which will vastly complicate any privatization plans, so strange.

Despite all these desires, the budget impact of privatization will be muted under CBO rules, as any proceeds from a sale of stock will be offset by the elimination of projected GSE earnings collected by the Treasury.

(Keep in mind that continued “on budget” treatment for the GSEs would cause big problems if mortgage credit costs were to rise in a substantial recession, a real estate downturn or a repeat of the 2008 episode. At that point, operating losses at the GSEs could blow a hole in the budget.)

A dose of reality would be appropriate here. We’d all be better off if the government guarantee was made explicit but was paid for by the GSEs. Then the amount of any government subsidy to the mortgage market would be both transparent and adjustable as economic circumstances and policy preferences change.

Alas, transparent subsidies are not very popular with politicians, who seem desperate to revert to the hall of mirrors where the GSEs and their guarantees aren’t part of the government, but voters still benefit from lower costs paid for by “implicit” protection. That gives the political class another opportunity to scold whomever is then in power about “moral hazard” even as they proceed with an uncompensated bailout necessary to save the housing markets. This will be followed by recriminations and promises of “never again” — rinse and repeat.

Posting ex cathedra on Truth Social yesterday, the Unitary Executive sought to cut through the many conflicting statements coming out of his team and Congress on his plans for the two GSEs.

(You can tell how important he thinks this is as he used all caps.)

“I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the US Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President….”

Now I don’t know about the rest of you, but where I come from we listen to Tyler Durden: the first rule about Fight Club is you don’t talk about Fight Club.

And the second rule about Fight Club is when a GUARANTEE is supposed be implicit you shouldn’t promise to honor it ...you know...EXPLICITLY! AND IN WRITING!

I can only imagine the sobbing sounds emanating from Bill Pulte’s office at the FHFA, Mark Calabria’s at the OMB, Mike Johnson’s at the House, and Bill Ackman’s corporate jet somewhere above the Atlantic. I’m sure they spent a lot of time carefully explaining the guarantee question to the President while he was texting or watching Fox News, but I guess it didn’t really stick.

We should expect a series of clarifications from Administration figures letting us all know that when the President wrote about “keeping implicit GUARANTEES” he meant something mysteriously and profoundly different but known only to him (although apparently Pulte “re-Truthed” Trump’s words, so maybe the problem lies in a different place).

Implicit and Explicit

An explicit guarantee is exactly what it sounds like: spelled out in law, regulation, or contractual language (and maybe in Truth Social posts). Take Ginnie Mae. Its MBS prospectuses leave no room for ambiguity: principal and interest payments are backed by the full faith and credit of the U.S. government. You can’t miss it — it’s in the first few pages, usually in bold.

An implicit guarantee, by contrast, exists entirely in the minds of market participants. It emerges not from statute, but from the rational belief that government inaction would be too economically or politically costly to contemplate. In other words, investors price in state support not because it’s promised, but because they believe the alternative — systemic failure — is politically impossible.

The GSEs are the classic case study. For years before the crisis, Fannie and Freddie issued MBS with prospectuses that made it crystal clear: there was no U.S. government guarantee. The language was not subtle. “The certificates and payments of principal and interest… are not guaranteed by the United States.” And yet, the market treated them as if they were — correctly, as it turned out.

Why? It’s hard to tell, but as the size of the GSEs grew over time their securities became treated as substitutes for Treasury securities in international markets and the conclusion became a matter of faith. Otherwise, why would the US government give the GSE’s favorable capital treatment and SEC exemptions while encouraging repeated reiteration of the “implicit guarantee” concept in the media and academic discourse? They could have stopped it at any time by disavowing implicit backup through statute, but deliberate ambiguity was considered to be a clever tactic to get better mortgage pricing for US consumers without facing the consequences of explicit backing.

As a result, when FHFA put the GSEs into conservatorship in 2008, no one was particularly surprised. The mechanics may have been novel, but the outcome was expected: public backstop, private losses socialized, MBS holders made whole. The implicit had simply become real, and in fact was now explicit. The market was right; the documents were wrong.

The real point is this: implicit guarantees aren’t created by governments. They emerge from conviction — investor belief that the needs of markets and the economy trump legal language. Governments can encourage or discourage that belief in small ways, but once the market reaches a conclusion, it tends to be sticky, durable, and remarkably accurate.

Explicit guarantees, on the other hand, are written in stone. To be fully credible, explicit guarantees need to be legally enforceable (a topic Trump should be aware of given the high judicial rejection rate for his Executive Orders.)

That’s what makes Trump’s statement that the “US Government will keep its implicit GUARANTEES” so hard to figure out.

Budget Woes?

There is one area outside of markets where one would think that the difference between explicit and implicit guarantees for the GSEs would really matter—the Federal budget. But the budget story isn’t straightforward.

The budget treatment of Fannie Mae and Freddie Mac in conservatorship is confusing. The CBO views the GSEs as effectively part of the federal government while the OMB treats Fannie Mae and Freddie Mac as nongovernmental entities for budget purposes. The two methods don’t result in materially different outcomes in the current economic and market environment as credit losses are low and operating costs and guarantee fees are treated as offsetting income and expense to the government The US is actually making money from the GSE conservatorships which is being used to support other priorities, so it’s a net positive in budget calculations.

Despite the benefits of the status quo, there is a strong desire by the Trump Administration to privatize the GSEs. There are economic libertarians like Calabria for whom privatization is a religious principle. IPOs would also generate proceeds that could be used for other priorities. If at the same time the Administration can provide the President’s friends on Wall Street, such as Ackman, with the opportunity to pad their fortunes in the process, so much the better. That’s what makes Trump’s gaffe treating the implicit guarantee as explicit, which will vastly complicate any privatization plans, so strange.

Despite all these desires, the budget impact of privatization will be muted under CBO rules, as any proceeds from a sale of stock will be offset by the elimination of projected GSE earnings collected by the Treasury.

(Keep in mind that continued “on budget” treatment for the GSEs would cause big problems if mortgage credit costs were to rise in a substantial recession, a real estate downturn or a repeat of the 2008 episode. At that point, operating losses at the GSEs could blow a hole in the budget.)

A dose of reality would be appropriate here. We’d all be better off if the government guarantee was made explicit but was paid for by the GSEs. Then the amount of any government subsidy to the mortgage market would be both transparent and adjustable as economic circumstances and policy preferences change.

Alas, transparent subsidies are not very popular with politicians, who seem desperate to revert to the hall of mirrors where the GSEs and their guarantees aren’t part of the government, but voters still benefit from lower costs paid for by “implicit” protection. That gives the political class another opportunity to scold whomever is then in power about “moral hazard” even as they proceed with an uncompensated bailout necessary to save the housing markets. This will be followed by recriminations and promises of "never again" - rinse and repeat.

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Like swatting a troublesome fly, the plans being discussed by the big banks would basically stop the whole stablecoin craze in its tracks by making stablecoins just another (yawn!) choice for bank customers looking to move money domestically or internationally.

There’s ample precedent for this. The Clearinghouse has been implementing collective bank approaches to new payments technologies (albeit slowly) for decades. The Fed has done the same (even more slowly) for far longer. And don’t forget that Visa and Mastercard started out as, and essentially remain, bank utilities for credit-based payments.

If the big banks can get it together to do this (and that’s a big if) through the Clearinghouse or another entity, the impact on the ambitions of cryptoverse to take a big piece of the real-world economy will be profound and likely catastrophic. A bank consortium blockchain—a single blockchain-- will be immediately interoperable for the holders of virtually all the money there is in the world. That solves the fundamental non-interoperability problem that blockchain-based money movement has faced from the start and keep us from reading daily headlines about billions stolen from “bridge” applications.

A bank consortium stablecoin will also spare us from the world crypto maximalists envision where there will be hundreds of non-interoperable (and low value) stablecoin issuers fighting for customers and striving to achieve scale when scale in stablecoins only matters if you have reached the Highlander stage of near 100% adoption. Only then does the interoperability issue go away (there can be only one!). Stablecoins by their nature are a monopoly product, so what better way to acknowledge that then to imbed them in the US bank payments monopoly/oligopoly?

The so-easily swatted competitive fly might, alas have some friends stuck in the ointment, as there are a few questions and issues standing between the big banks and finishing off the crypto maximalists.

From a mundane standpoint, there is the question of fees. The promise of stablecoins has always been that, for utopian reasons, they will come without fees for users. While other identical payment methods from a speed and reliability standpoint, such as FedNow and Zelle are generally fee-less, wires for big transactions still require them. Luckily for the banks, they will generally make enough money from the Treasury securities they or the consortium need to hold to back fiat stablecoins—without paying interest to users--under the Genius Act that income related to stablecoin use is guaranteed. Or they can go transparent and charge a few cents in account fees if they are feeling greedy.

From a political standpoint, there is the vexed issue of the small banks who have Congress by the short hairs. As a general matter, adoption of stablecoins won’t be great for traditional small banks who benefit greatly from the high Durbin Amendment interchange on debit card payments transactions that is likely to be displaced by stablecoins. It will be even worse for the fintechs using small “partner banks” for payments as the slice of that interchange is what keeps them alive (Chime, we’re looking at you.)

The big banks would prefer that the small banks go away, but since that’s not in the cards the simplest solution is to include them in the bank stablecoin settlement system. The problems will come in figuring out how to do that given the costs associated with adapting systems, processes and compliance for the new stablecoin channel. But this is something they must solve lest Congress intervene to spike the whole consortium idea.

The happiest person in the land if big bank stablecoins come about? Treasury Secretary Scott Bessent, who will be salivating at all the new T-Bill demand—deliciously price insensitive demand-- from stablecoin collateral which he can use to help plug the ever-larger borrowing hole the current Administration is creating.

Citigroup’s bullish estimate calls for $3.7 trillion in stablecoins within 5 years even without a bank consortium, and it’s certainly not out of the question that that number could double or triple over the succeeding five years to something like $7-10 trillion. That is more than the $6.0 trillion in currently outstanding T-bills. No wonder Secretary Bessent loves stablecoins.

The Fed, on the other hand, will be conflicted, as the impact of all this on deposit flows and systemic risk is going to complicate its bank regulation and monetary policy jobs.

Finally, we come to antitrust, which is a significant risk any time the banking industry gets together to do anything. Visa and Mastercard have spent billions over the years defending their--definitely not monopolistic! [TM]--practices in a bank consortium context. There’s no reason this kind of stablecoin ploy wouldn’t draw the same interest.

The best advice here is to tell your daughter or son to become an antitrust lawyer because there will be litigation about this for a long time, funded by crypto dead enders furious that their baby was stolen in the night.

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