(This article only represents the author's personal views and does not constitute the basis for investment decisions, nor should it be regarded as advice or recommendation for investment transactions.)
Equity investors have been chanting: "Stablecoins, stablecoins, stablecoins; Circle, Circle, Circle." Why are they so optimistic? Because the US Treasury Secretary (BBC) said:
The result is this chart:
Here is a chart comparing Circle’s market cap to Coinbase’s. Remember, Circle has to give 50% of its net interest income to its “dad” Coinbase. Yet Circle’s market cap is nearly 45% of Coinbase’s. This is food for thought… Another result is this sad chart (because I own Bitcoin, not $CRCL):
This chart shows Circle’s price divided by Bitcoin’s price, benchmarked against an index of 100 when Circle went public. Since its IPO, Circle has outperformed Bitcoin by nearly 472%. Crypto enthusiasts should ask themselves: Why is the BBC so bullish on stablecoins? Why did the Genius Act gain bipartisan support? Do American politicians really care about financial freedom? Or is there something else going on?
Perhaps politicians do care about financial freedom in the abstract, but empty ideals don’t drive real action. There must be other, more realistic reasons for their about-face on stablecoins. Back in 2019, Facebook tried to integrate the stablecoin Libra into its social media empire, but was forced to shelve it due to opposition from politicians and the Federal Reserve. To understand the BBC’s enthusiasm for stablecoins, we need to look at the main problems he faces.
The main problem facing US Treasury Secretary Scott "BBC" Bessent is the same as that faced by his predecessor Janet "Bad Girl" Yellen. Their bosses (the president of the United States and members of Congress) like to spend money but don't like to raise taxes. So the burden of raising funds falls on the Treasury secretary, who needs to finance the government by borrowing at a reasonable interest rate.
However, it soon became clear that markets had little appetite for long-term government bonds from highly indebted advanced economies — especially in a high price/low yield environment. This is the “fiscal dilemma” that the BBC and Yellen have witnessed over the past few years:
The trampoline effect of global government bond yields:
Below is a comparison of 30-year bond yields: UK (white), Japan (gold), US (green), Germany (pink), France (red)
If rising yields are bad enough, the actual value of these bonds is even worse:
Actual value = bond price / gold price
TLT US is an ETF that tracks 20+ year Treasury bonds. The chart below shows TLT US divided by the price of gold and benchmarked against 100. Over the past five years, the real value of long-term Treasury bonds has plummeted by 71%. If past performance is not enough to worry about, Yellen and current Treasury Secretary Bessent face the following limitations:
The Treasury's bond sales team must design an issuance program that responds to the following needs:
· Federal deficit of approximately $2 trillion per year
$3.1 trillion in debt maturing in 2025
This is a chart detailing the major U.S. federal government spending items and their year-over-year changes. Note that each major spending item has grown at the same or faster rate than U.S. nominal GDP.
The previous two charts show that the weighted average interest rate on outstanding Treasury bonds is currently lower than the point on the Treasury yield curve for all bonds.
The financial system issues credit against nominally risk-free Treasury bonds. Therefore, interest must be paid or the government will face nominal default risk, which will destroy the entire fiat financial system. Since the Treasury yield curve as a whole is higher than the weighted average interest rate on current debt, interest payments will continue to increase as maturing debt is refinanced at higher rates.
The defense budget will not decrease, as the United States is currently involved in wars in Ukraine and the Middle East.
· Healthcare spending will continue to rise, especially in the early 2030s as the baby boomers enter their peak period of needing extensive healthcare services, with these costs largely borne by large pharmaceutical companies funded by the US government.
Control the 10-year government bond yield to no more than 5%
When the 10-year yield approaches 5%, the MOVE index (a measure of bond market volatility) soars, and financial crises often follow.
Issuing debt in a way that stimulates financial markets
· Data from the Congressional Budget Office shows that although the data only goes up to 2021, capital gains tax revenue has soared as the US stock market has continued to rise since the global financial crisis in 2008.
The U.S. government needs to avoid huge fiscal deficits by taxing the stock market's gains year after year.
U.S. government policies have always tended to serve wealthy asset owners. In the past, only white men who owned property had the right to vote. Although modern America has achieved universal suffrage, power still comes from a small number of people who control the wealth of public companies. Data shows that about 10% of households control more than 90% of stock market wealth.
A notable example is during the 2008 global financial crisis, when the Federal Reserve bailed out banks and the financial system by printing money, but banks were still allowed to repossess people’s homes and businesses. This phenomenon of “the rich enjoy socialism and the poor suffer capitalism” is exactly why New York mayoral candidate Mamdani is so popular among the poor—the poor also want to share in some of the benefits of “socialism.”
When the Fed was implementing quantitative easing (QE), the Treasury secretary's job was relatively simple. The Fed printed money to buy bonds, which not only allowed the US government to borrow cheaply, but also pushed up the stock market. However, now that the Fed must at least appear to be fighting inflation, unable to cut interest rates or continue QE, the Treasury Department has to shoulder the heavy responsibility alone.
In September 2022, the market began to sell bonds marginally due to concerns about the persistence of the largest peacetime deficit in US history and the hawkish stance of the Federal Reserve. The 10-year Treasury yield almost doubled in two months, and the stock market fell nearly 20% from its summer high. At this time, former Treasury Secretary Yellen launched a policy called "aggressive debt issuance" (ATI) by Hudson Bay Capital, which reduced the Federal Reserve's reverse repurchase (RRP) balance by $2.5 trillion by issuing more short-term Treasury bonds (Treasury bills) instead of interest-bearing bonds, injecting liquidity into the financial market.
This policy successfully achieved its goals of controlling yields, stabilizing markets, and stimulating the economy. However, with the RRP balance now almost exhausted, the question facing current Treasury Secretary Bessent is: How can he find trillions of dollars to buy Treasury bonds in the current environment of high prices and low yields?
The third quarter of 2022 has been extremely difficult for the market. The following chart shows the Nasdaq 100 Index (green) compared to the 10-year Treasury yield (white). While yields have soared, stocks have fallen sharply.
The ATI policy effectively reduced the RRP (red) and drove up financial assets such as the Nasdaq 100 (green) and Bitcoin (magenta). The 10-year Treasury yield (white) never broke through 5%.
The large "too big to fail" (TBTF) banks in the United States have two pools of capital that are ready to buy trillions of dollars of Treasury bonds if there is enough profit potential. These two pools are:
Current/time deposits
Reserves held by the Federal Reserve
This article focuses on eight TBTF banks because their existence and profitability depend on government guarantees of their liabilities, and bank regulatory policies tend to favor these banks over non-TBTF banks. Therefore, these banks will cooperate with the government's requests as long as they can obtain a certain level of profit. If the Secretary of the Treasury (BBC) asks them to buy government bonds, he will exchange them for a risk-free return.
The BBC's enthusiasm for stablecoins may stem from the fact that by issuing stablecoins, TBTF banks can release up to $6.8 trillion in Treasury bill purchasing power. These dormant deposits can be re-leveraged in the fiat financial system, driving the market up. In the following sections, we will detail how Treasury bill purchases can be achieved through the issuance of stablecoins and how to improve the profitability of TBTF banks.
It will also be briefly explained that if the Fed stops paying interest on reserves, up to $3.3 trillion could be freed up to purchase Treasury bonds. This would be another policy that, while not technically quantitative easing (QE), would have a similar positive impact on fixed supply monetary assets such as Bitcoin.
Now, let’s take a look at the BBC’s new favorite - stablecoin, this “monetary heavy weapon”.
Stablecoin Flow Model
My forecast is based on several key assumptions:
Treasury bonds receive full or partial exemption from the supplementary leverage ratio (SLR)
· Exemption significance: Banks do not need to hold equity capital for their government bond portfolios. If fully exempted, banks can purchase government bonds with unlimited leverage.
· Recent policy changes: The Fed just voted to reduce bank capital requirements for Treasury securities, a proposal that is expected to free up up to $5.5 trillion in bank balance sheet capacity to purchase Treasury bonds over the next three to six months. Markets are forward-looking, and this buying power could flood into Treasury markets ahead of time, lowering yields all else equal.
Banks are profit-oriented, loss-minimizing organizations
· Risk Lessons from Long-Term Treasury Bonds: From 2020 to 2022, the Federal Reserve and the Treasury Department urged banks to buy large amounts of Treasury bonds, and banks bought long-term interest-bearing bonds with higher yields. However, by April 2023, due to the fastest increase in the Federal Reserve's policy rate since the 1980s, these bonds suffered huge losses, and three banks collapsed within a week.
· TBTF Banks’ Protective Umbrella: In the TBTF banking space, Bank of America’s “held-to-maturity” bond portfolio has lost more than its entire equity capital. If forced to mark to market, the bank would face bankruptcy. To resolve the crisis, the Fed and the Treasury effectively nationalized the entire U.S. banking system through the “Bank Term Funding Program” (BTFP). Non-TBTF banks may still lose money, and if they go bankrupt due to Treasury losses, their management will be replaced and the bank may be sold cheaply to Jamie Dimon or other TBTF banks. As a result, bank chief investment officers (CIOs) are cautious about buying large amounts of long-term Treasury bonds, fearing that the Fed will “pull the rug out from under” again by raising interest rates.
· The appeal of Treasury bills: Banks buy Treasury bills because they are effectively high-yield, zero-maturity cash-like instruments.
· High Net Interest Margin (NIM) is key: Banks will only use deposits to buy Treasury bills if they can generate a high NIM and require little or no capital to support them.
JP Morgan recently announced plans to launch a stablecoin called JPMD. JPMD will run on Coinbase's second-layer network, Base, which is based on Ethereum. As a result, JP Morgan's deposits will be divided into two types:
1. Regular Deposits
Although it is also a digital deposit, its flow in the financial system requires banks to use traditional old systems for docking and requires a lot of manual supervision.
· Traditional deposits can only be transferred between 9am and 4:30pm on weekdays (Monday to Friday).
The yield on traditional deposits is extremely low. According to the Federal Deposit Insurance Corporation (FDIC), the average yield on a regular demand deposit is only 0.07%, and the yield on a one-year time deposit is 1.62%.
2. Stablecoin deposits (JPMD)
JPMD runs on a public blockchain (Base) and is available to customers 24/7 throughout the year.
· JPMD cannot pay out earnings by law, but JPMorgan Chase may entice customers to convert traditional deposits to JPMD by offering generous cash back spending incentives.
It is not clear whether staking yield will be allowed.
· Pledge income: During the period when customers lock JPMD in JPMorgan Chase, they will receive a certain amount of income.
Customers will transfer funds from traditional deposits to JPMD because JPMD is more practical and banks also offer consumer rewards such as cash back. Currently, the total demand and time deposits of TBTF banks are about 6.8 trillion US dollars. Because stablecoin products are superior, traditional deposits will be quickly converted to JPMD or similar stablecoins issued by other TBTF banks. If all traditional deposits are converted to JPMD, JPMorgan Chase will be able to significantly cut costs in its compliance and operations departments. Here are the specific reasons:
The first reason is to reduce costs. If all traditional deposits were converted to JPMD, JPMorgan could effectively eliminate its compliance and operations departments. Let me explain why Jamie Dimon was so excited when he learned how stablecoins actually work.
Compliance, at a high level, is a set of rules set by regulators and enforced by a group of humans using technology from the 1990s. The rules are structured like: if X happens, then X does something. This “if/then” relationship can be interpreted by a senior compliance officer and written into a set of rules for an AI agent to perfectly execute. Because JPMD provides a completely transparent record of transactions (all public addresses are public), an AI agent trained on relevant compliance regulations can perfectly ensure that certain transactions will never be approved. The AI can also prepare any reports required by regulators on the fly. And regulators can verify the accuracy of the data because it all exists on a public blockchain. Overall, “Too Big to Fail” (TBTF) banks spend $20 billion per year on compliance and the operations and technology required to comply with banking regulations. By converting all traditional deposits into stablecoins, this cost will be reduced to almost zero.
The second reason JPMorgan is pushing JPMD is that it allows the bank to risk-free buy billions of dollars of T-bills with the custodial stablecoin assets (AUC). This is because T-bills have almost no interest rate risk, but their yields are close to the Fed Funds Rate. Remember, TBTF banks have $5.5 trillion of T -bills buying power under the new leverage ratio requirements (SLR). Banks need to find an idle cash reserve to buy these debts, and stablecoin custodial deposits are the perfect choice.
Some readers might counter that JPMorgan can already buy Treasuries with traditional deposits. My response is that stablecoins are the future because they not only create a better customer experience, but also allow TBTF banks to save $20 billion in costs. This cost savings alone is enough to incentivize banks to accept stablecoins; the additional net interest margin (NIM) earnings are icing on the cake.
I know many readers may want to invest their hard-earned money in Circle ($CRCL) or the next shiny stablecoin issuer. But don’t underestimate the profit potential of “too big to fail” (TBTF) banks in the stablecoin space. If we take the average TBTF bank price-to-earnings (P/E) ratio of 14.41 times and multiply it by the cost savings and stablecoin net interest margin (NIM) potential, the result is $3.91 trillion .
The total market capitalization of the eight TBTF banks is currently about $2.1 trillion , which means that stablecoins could increase the share prices of TBTF banks by an average of 184% . If there is a non-consensus investment strategy in the market that can be executed at scale, it is to long an equally weighted portfolio of TBTF bank stocks based on this stablecoin theory.
How is the competition?
Don’t worry; the Genius Act ensures that non-bank-issued stablecoins can’t compete on a large scale. The act explicitly prohibits tech companies like Meta from issuing their own stablecoins; they must partner with a bank or a fintech firm. Of course, in theory anyone can get a banking license or acquire an existing bank, but all new owners must be approved by regulators. As for how long this takes, we’ll have to wait and see.
In addition, there is a provision in the bill that cedes the stablecoin market to banks, which is a prohibition on paying interest to stablecoin holders. Unable to compete with banks by paying interest, fintech companies will not be able to attract deposits away from banks at a low cost. Even successful issuers like Circle will never be able to touch the $6.8 trillion TBTF traditional deposit market.
Furthermore, fintechs and small banks like Circle do not have a government guarantee on their liabilities, whereas TBTF banks do. If my mother were to use a stablecoin, she would definitely choose one issued by a TBTF bank. Boomers like her would never trust fintechs or small banks for this purpose because they lack a government guarantee.
David Sachs, the “crypto czar” to former US President Trump, agrees. I believe many corporate crypto donors will be unhappy with the outcome — after donating so much to crypto campaigns, they were quietly excluded from the lucrative stablecoin market in the US. Perhaps they should change their strategy and truly advocate for financial freedom, rather than just providing a stool for the “toilet” of those TBTF bank CEOs.
In short, the TBTF (Too Big to Fail) banks’ adoption of stablecoins not only eliminates competition from fintechs for their deposit base, but also reduces the need for expensive and often underperforming human compliance officers. Moreover, this approach does not require interest payments, thereby increasing net interest margins (NIM), ultimately driving their stock prices higher. In return, in gratitude for the gift of stablecoins granted by The BBC Act, TBTF banks will purchase up to $6.8 trillion in Treasury bills (T-bills).
ATI: Yellen’s play: Stablecoins and the BBC Act
Next, I discuss how the BBC Act frees up an additional $3.3 trillion in static reserves from the Federal Reserve’s balance sheet.
Interest on Reserve Balances (IORB)
After the 2008 Global Financial Crisis (GFC), the Fed decided to make sure that banks would not fail due to insufficient reserves. The Fed created reserves by buying Treasury bills and mortgage-backed securities (MBS) from banks, a process known as quantitative easing (QE). These reserves sit quietly on the Fed's balance sheet. In theory, banks could convert the reserves held by the Fed into circulating currency and lend them out, but they choose not to do so because the Fed pays them enough interest by printing money. In this way, the Fed "freezes" these reserves to prevent inflation from surging further.
However, the problem for the Fed is that when it raises interest rates, the interest on reserve balances (IORB) also increases. This is not good because the unrealized losses in the Fed's bond portfolio also increase with rising interest rates. As a result, the Fed is in a predicament of insolvency and negative cash flow. However, this negative cash flow situation is entirely the result of policy choices and can be changed.
US Senator Ted Cruz recently suggested that perhaps the Fed should stop paying interest on reserve balances (IORB). This would force banks to make up for the lost interest income by converting reserves into T-bills. Specifically, I think banks will buy T-bills because of their high yield and cash-like properties.
Ted Cruz has been pushing his Senate colleagues to eliminate the Federal Reserve’s power to pay banks interest on their reserves, Reuters reported, arguing the change would help significantly reduce the fiscal deficit.
Why is the Fed printing money and preventing banks from supporting the Empire? There is no reason for politicians to oppose this policy change. Both Democrats and Republicans love deficits; why not allow them to spend more by freeing up $3.3 trillion of bank buying power into the Treasury market? Given the Fed’s unwillingness to help Team Trump finance its “America First” goals, I believe Republican lawmakers will use their majorities in both chambers to strip the Fed of this power. So the next time yields spike, lawmakers will be ready to unleash this flood of money to support their spending spree.
Before concluding this article, I would like to talk about Maelstrom’s cautious strategic layout between now and the third quarter, as US dollar liquidity will inevitably increase during the implementation of the BBC Act.
A cautionary tale
While I am very optimistic about the future, I think there could be a brief lull in USD liquidity creation following the passage of Trump’s spending bill, known as the “Big Beautiful Bill.”
As it stands, the bill will raise the debt ceiling. Although many of the provisions will become political bargaining chips, Trump will not sign a bill that does not raise the debt ceiling. He needs additional borrowing capacity to support his agenda. There is no sign that Republicans will try to force the government to cut spending. So, the question for traders is, when the Treasury resumes net borrowing, what impact will this have on dollar liquidity?
Since January 1, the Treasury has primarily funded the government by draining the balance of its Treasury General Account (TGA). As of June 25, the TGA balance was $364 billion . Based on the Treasury’s guidance in its most recent quarterly refunding announcement, if the debt ceiling were raised today, the TGA balance would be replenished to $850 billion through debt issuance. This would result in a $486 billion contraction in U.S. dollar liquidity.
The only major USD liquidity program that could mitigate this negative impact is the release of funds from the overnight Reverse Repo Program (RRP), with the current RRP balance at $461 billion .
This is not a clear-cut short trade opportunity for Bitcoin due to the Treasury General Account (TGA) replenishment plan, but a market environment that requires caution - the bull market may be temporarily interrupted by short-term volatility. I expect the market to consolidate or slightly decline between now and the speech by Federal Reserve Chairman Jerome Powell during the Jackson Hole meeting in August. If the TGA replenishment has a negative impact on US dollar liquidity, Bitcoin may drop to the $90,000 to $95,000 range . If the replenishment plan does not have a substantial impact on the market, Bitcoin may fluctuate in the $100,000 range, but it will be difficult to break through the historical high of $112,000 .
I suspect Powell will announce an end to quantitative tightening (QT) or some other seemingly mundane but powerful bank regulation change. By early September, the debt ceiling will have been raised, the TGA account will have been mostly replenished, and the Republicans will be focused on winning over voters in the November 2026 election. By then, as money creation surges, bulls will fight back against bears with a strong green candle.
Maelstrom will increase its allocation to collateralized USDe (Ethena USD) from now until the end of August. We have liquidated all illiquid Altcoin positions and may reduce Bitcoin exposure depending on market performance. Risk positions bought in Altcoin around April 9 this year achieved 2x to 4x returns in three months. However, in the absence of a clear liquidity catalyst, the Altcoin sector may suffer.
After the market adjustment, we will have the confidence to reposition and look for undervalued assets, perhaps seizing the opportunity for 5x to 10x returns before the next round of fiat liquidity creation slows down (expected to be at the end of Q4 2025 or early Q1 2026).
Step by step check
The adoption of stablecoins by systemically important banks (TBTF) could create up to $6.8 trillion in purchasing power for the U.S. Treasury short-term note (T-bill) market. The Federal Reserve’s cessation of paying the interest on excess reserves (IORB) could further release up to $3.3 trillion in T-bill purchasing power.
Overall, due to the BBC policy, there may be $10.1 trillion flowing into the T-bill market in the future. If my prediction is correct, this $10.1 trillion liquidity injection will have a similar impact on risk assets as former Treasury Secretary Yellen's $2.5 trillion liquidity injection - driving the market "surge"!
This adds another liquidity arrow to the BBC's policy toolbox. With the passage of Trump's "Big Beautiful Bill" and the increase in the debt ceiling, this tool may be forced to be used. Before long, investors will once again worry about how the US Treasury market can absorb the large amount of debt that will be issued without collapsing.
Some are still waiting for the so-called "monetary Godot" - waiting for Fed Chairman Powell to announce another round of unlimited quantitative easing (QE) and rate cuts before selling bonds and buying crypto. But I'm telling you, that's not going to happen, at least not until the United States is actually in a hot war with Russia, China, or Iran, or a systemically important financial institution is on the verge of collapse. Even a recession is not enough to make "Godot" appear. So stop listening to the "weak" man and pay attention to the people who are really in control of the situation!
The next few charts will show the opportunity cost that investors incur by waiting for "Monetary Godot". The Fed's balance sheet (white line) shrinks while the effective federal funds rate (gold line) rises. Logically, Bitcoin and other risk assets should fall during this period.
But former Treasury Secretary “Bad Gurl” Yellen did not disappoint the rich and stabilized the market by implementing ATI (probably referring to the asset-backed liquidity instrument). During this period, Bitcoin (gold line) rose 5 times , while the overnight reverse repo (RRP) balance fell 95% .
Don’t make the same mistake again! Many financial advisors are still telling clients to buy bonds because they predict yields will fall. I agree that central banks will indeed cut rates and print money to avoid a collapse in government bond markets. Moreover, even if central banks don’t act, the Treasury will. The core point of this article is that by supporting stablecoin regulation, easing SLR (supplementary leverage ratio) restrictions, and stopping IORB payments, the Fed could potentially unleash up to $10.1 trillion in Treasury buying power. But the question is, is it really worth it to hold bonds and earn a 5% to 10% return? You could miss out on a 10x increase in Bitcoin to $1 million or a 5x surge in the Nasdaq 100 to 100,000 , which could happen before 2028 .
The real stablecoin "game" is not to bet on traditional fintech companies like Circle, but to see clearly that the US government has handed a trillion-dollar "liquidity bazooka" to systemically important banks (TBTF) and called it "innovation". This is not decentralized finance (DeFi), nor is it so-called financial freedom, but debt monetization in the guise of Ethereum. If you are still waiting for Powell to whisper "unlimited quantitative easing" (QE infinity) to you before you dare to take risks, then congratulations - you are the "taker" of the market.
Instead, you should be long and JPMorgan instead of wasting your energy on Circle. The Trojan horse of stablecoins has already infiltrated the financial fortress, but when it is opened, it is not filled with the dreams of libertarians, but with liquidity for purchasing T-bills. This liquidity will be used to maintain the high stock market, fill the fiscal deficit, and appease the anxiety of the baby boomers.
Stop sitting on the sidelines, waiting for Powell to "bless" the bull market. The "BBC" is ready to finish laying the groundwork and start flooding global markets with liquidity. Seize the opportunity, don't let yourself become a passive bystander.
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