Castle Island Partners: The Bitcoin Strategic Reserve Bill is unlikely to pass

Nic Carter

Nic Carter is a General Partner at Castle Island Ventures, focusing on investments in crypto financial infrastructure and internet property rights. He is a co-host of the podcast On The Brink and writes a column for CoinDesk. Carter holds a Bachelor’s degree in Philosophy from the University of St Andrews and a Master’s degree in Finance from the University of Edinburgh. He has experience working at Fidelity Investments and has written for several publications, including Harvard Business Review, Fortune, and Bitcoin Magazine. Carter has appeared multiple times on media platforms such as Bloomberg, CNBC, and BBC News.

He is known for advocating for anti-authoritarian technology and freedom. While not a Bitcoin maximalist, he supports principles like Lockean property rights and monetary competition. He believes the Bank Secrecy Act is unconstitutional and advocates for the restoration of private currency issuance and the establishment of a true digital cash standard. He is also involved in the Bitcoin Clean Energy Initiative and serves as an advisor to several organizations in the crypto space. Additionally, Carter is a 1-0 amateur MMA fighter and has personal investments in various tech and crypto companies.

Nic's Reaction to Trump's Mention of Dismantling "Chokepoint 2.0"

Nic expressed surprise that his blog post became part of the political discourse, stating, "It's astonishing that my blog post has become part of the political discourse in this country; it really shocks me."

He described Chokepoint 2.0 as a strategy similar to Chokepoint 1.0, which "was an official program under the Obama administration aimed at marginalizing certain businesses they didn't like, using unconstitutional means." He explained that Chokepoint 2.0 resurfaced after the FTX collapse, with federal regulators beginning to target the cryptocurrency industry, making "access to banking services extremely difficult and expensive." Trump's mention of this is "significant for the entire industry."

Joe asked Nic to explain Chokepoint 2.0 for the audience, mentioning that the term had been discussed previously and emphasizing the impact of the Biden administration's attitude toward cryptocurrency since May. He acknowledged the difficulties digital asset companies face in obtaining banking services and reflected on the importance of Chokepoint 2.0 becoming part of the political discourse.

Joe referenced Nic's tweet, which included a photo of him shirtless, touching on key points including Chokepoint 2.0. Joe requested Nic to discuss the spirit of that tweet and the points he raised, suggesting a deeper exploration of the karate competition mentioned in the tweet.

Bitcoin Strategic Reserve Bill

Nic believes Trump's proposal to retain seized Bitcoin is politically more pragmatic, as it avoids the controversy of the market buying Bitcoin and potential attacks from the Democrats. He pointed out that the seized Bitcoin primarily comes from the Bitfinex hack, which technically does not belong to the U.S. government, complicating the situation.

Nic expressed skepticism about whether the Lummis bill could pass, viewing it more as a statement to attract the Bitcoin community rather than a serious legislative effort. He appreciates the idea of Trump holding seized Bitcoin but emphasized the need to address the issue of legitimate ownership.

Nic also compared Lummis's proposal (aimed at purchasing 5% of Bitcoin) to the U.S. holding about 3.4% of above-ground gold reserves, noting that Lummis's proposal is more radical. He concluded that the bill is unlikely to succeed, especially with the upcoming presidential election, viewing the proposal as a narrative-driven effort with significant implications for global Bitcoin policy but uncertain outcomes.

Importance of Trump's Commitments at the Bitcoin Conference

Alex pointed out that although the chances of the Lummis bill passing are slim, its significance lies in sparking discussion and media attention. He mentioned Trump's statements at the conference, such as "Bitcoin is the new steel industry," "Bitcoin will surpass gold," and "Bitcoin users are highly intelligent people." Trump also promised to fire Gary Gensler on day one, abolish Choke Point 2.0, oppose Central Bank Digital Currencies (CBDCs), support self-custody and trading freedom, transform the U.S. into a Bitcoin mining powerhouse, and never sell Bitcoin. Alex emphasized that these statements reflect a shift in cryptocurrency from being seen as a threat to being accepted.

Joe believes the key takeaway is the discussion and media attention triggered by Trump's commitments. He acknowledged that while many of Trump's statements may have political motives and are unlikely to be fully realized, their inclusion in the discussion is important. This has led mainstream media to report on the topic and garnered attention from international leaders.

Nic pointed out that Trump made very specific commitments, such as firing Gary Gensler, abolishing Choke Point 2.0, establishing a cryptocurrency advisory committee, and passing legislation within 100 days. He mentioned that these commitments are hard to retract, and although some argue that Trump technically cannot fire Gensler, there may be ways to circumvent this. Nic also noted Trump's support for stablecoins, which expands the Republican platform and reflects the growth trend in the crypto space.

James observed that the audience reacted most strongly to Trump's commitment to fire Gary Gensler. While Trump cannot technically fire Gensler immediately, Gensler's position may change after a new president takes office. Even if Trump cannot directly fire Gensler, he could make Gensler's tenure challenging.

Alex added that Trump could fire the SEC chair but cannot completely remove him from the SEC, meaning Gensler would still have a vote. He further pointed out that Nic made significant contributions to the stablecoin discussion. Alex emphasized that if Circle is allowed to issue interest-bearing stablecoins, it would enhance its dollar reserves. He compared this to the use of Tether, which is used by international users to avoid currency devaluation.

Similarities Between Tether and the Eurodollar System

Joe asked Nic if he could elaborate on how Tether compares to the Eurodollar, mentioning that this might be useful for the audience.

Nic noted that he is unsure if Trump fully understands this concept, although Vance might. He mentioned Vance's point that dollar hegemony may be detrimental to the Midwest, contrasting it with the idea of expanding dollar influence through stablecoins. Nic explained that Eurodollars emerged due to restrictions in the U.S. banking system and the demand to circumvent those restrictions. Similarly, the creation of stablecoins like Tether aims to provide a means of dollar transactions outside the traditional banking system. Stablecoins were initially used for settlement and collateral but have evolved into tools for global digital dollar access, benefiting those who cannot access dollar banking. This is similar to the role of Eurodollars.

Alex added that the total deposits of Eurodollars currently amount to about $13 trillion, highlighting the enormous scale of the market.

James mentioned that when he and Nic first started reporting on cryptocurrency, they referred to stablecoins as "crypto dollars," noting that 98% of stablecoins are dollar-denominated. He observed that despite this dominance, the term "crypto dollar" has not gained widespread acceptance.

Potential Impact of Federal Reserve Meeting Language

Joe mentioned that with the Federal Reserve meeting this week, it is worth discussing macroeconomic impacts. He acknowledged Alex's expectations for the meeting and pointed out that no rate cuts are anticipated this week, but he still stands by his prediction of a 50 basis point cut in September, rather than the 25 basis points Alex expects.

Joe emphasized the importance of the Federal Reserve's language in the press conference, particularly regarding weak economic data, rising unemployment rates, and negative CPI data. He also mentioned that if the Federal Reserve waits too long or cuts too little, it could lead to policy errors, and the language might imply a scenario of "long-term rate cuts," similar to what the European Central Bank did in June.

Additionally, Joe pointed out that the Bank of Japan's decisions following the FOMC meeting could impact the dollar-yen exchange rate.

Alex believes that Wednesday's Federal Reserve meeting will be a bland event with no rate cuts, focusing instead on the language used by Powell. He anticipates that Powell will prepare for a potential rate cut in September, with language aimed at reducing volatility and maintaining predictability.

Alex emphasized the importance of good inflation data and high-frequency economic data, such as the Dallas Fed Economic Index, which indicates that certain parts of the economy are performing well. He is concerned that if there is only one rate cut this year, it may be seen as a policy error and suggests that more cuts are needed.

Regarding the Bank of Japan, Alex expects a 25 basis point hike and possibly a reduction in QE, which could affect the dollar-yen exchange rate. He noted that recent fluctuations in the dollar-yen pair are significant due to the impacts of arbitrage trading and risk aversion. Alex concluded that the outcome of the Trump-Kamala election will have a greater impact on Bitcoin than the actions of the Federal Reserve.

Alex expressed concerns that if the Federal Reserve were to cut rates twice in September, it might be interpreted as the Fed's worry about a hard landing, sending a pessimistic signal rather than an optimistic one.

James noted that the market currently expects about a 10% chance of more than one rate cut, but he personally only anticipates one 25 basis point cut. He believes there could be three cuts by the end of the year, although he doubts there will be two cuts in September.

Potential Impact of Harris's Campaign Team Engaging with Crypto Companies

James discussed the recent efforts of Harris's campaign team to reset relations with the crypto industry at the Bitcoin conference. He believes a less partisan, ideally bipartisan approach would be more desirable. He pointed out that while some in the crypto community are dissatisfied with this initiative, about 15 Democrats signed a letter calling for a reevaluation of crypto policy, which could be more favorable than the Biden administration's policies. James believes that even if the Democrats win, the impact on the industry could be neutral or potentially positive compared to the current administration.

Nic compared this move to Hillary Clinton's "reset" with Russia in 2012, suggesting that Kamala Harris's engagement may not lead to genuine support for cryptocurrency. He noted that progressives, including Harris, typically do not support cryptocurrency, as it contradicts their preference for state-controlled financial activities. Nic is skeptical about whether the left will truly embrace cryptocurrency and believes this engagement is merely an attempt to reclaim ground lost to Trump in the crypto space, rather than a genuine acknowledgment of the industry. He acknowledged that there are some progressive crypto supporters, but they do not represent a broad progressive stance.

Joe agreed with Nic, viewing Harris's campaign team's engagement as more of a political maneuver rather than a serious attempt to interact with the crypto industry. He pointed out that the Biden administration's reversals on crypto-related issues seem politically motivated. Joe expressed skepticism about Harris's campaign team’s intentions to establish a comprehensive regulatory framework for crypto, believing it may be more about scoring political points than implementing substantive change.

James emphasized that younger Republican senators tend to be more supportive of cryptocurrency and may gain more influence over time. He also mentioned issues related to regulatory opacity and Bitcoin mining practices, noting that while there may be regulatory progress in other areas, these issues could still spark controversy.

Nic commented on Trump's speech regarding artificial intelligence and energy-intensive industries, suggesting that Trump's platform should focus on revitalizing America's heartland, aligning with support for energy-intensive industries like Bitcoin mining and AI data centers. Nic believes Trump's views are coherent, although not universally accepted.

Recent Performance of Solana

James reflected on his experience at the Bitcoin conference, mentioning Jan van Eck (CEO of Van Eck) and his significant personal investment in Bitcoin, and discussed the performance of Ethereum ETFs. He noted that Ethereum ETFs experienced net outflows, while Bitcoin ETFs initially saw significant outflows but ultimately achieved net inflows. James predicted that Ethereum ETFs would not reach the success level of Bitcoin ETFs, partly due to Wall Street's lower acceptance of Ethereum.

Nic believes Ethereum has a narrative problem and is not as established on Wall Street as Bitcoin. He attributed the poor performance of Ethereum ETFs to Ethereum's role being less clearly defined than Bitcoin's identity as "digital gold." Nic thinks that new platforms like Solana are benefiting from the ongoing debates surrounding Ethereum and are seen as more innovative and high-performance options.

Joe commented on the challenges facing Ethereum ETFs, noting that despite predictions, the outflows from ETH-ETF are severe compared to other ETFs due to its high fee structure.

He compared this to Solana's recent performance, mentioning that Solana's metrics, including trading volume, have surpassed Ethereum's, despite Solana's lower market value.

Joe believes it is reasonable to compare Solana directly with Ethereum as first-layer blockchains since Solana does not outsource its execution to second-layer blockchains like Ethereum does.

He also recalled Kyle Samani (Managing Partner at Multicoin Capital) predicting that Solana would surpass Ethereum in key metrics, which affected the relative value trading between the two.

Regarding Solana ETFs, Joe acknowledged that while it is uncertain whether they will be launched soon, the metrics indicate that Solana is a strong candidate. He also discussed his bet with Steven McClurg (from CoinShares Valkyrie Fund) regarding the liquidity of Ethereum ETFs, noting that the current liquidity is negative, and he is at a disadvantage in the bet.

James shared insights from discussions about the potential for a Solana ETF, noting that while VanEck believes it could happen within a year, BlackRock is currently focused on Bitcoin and Ethereum, with no immediate plans to launch a Solana ETF. He mentioned that the final deadline for ETF applications is at the end of March, and while it is uncertain how potential policy changes under Trump might affect the timeline, Solana appears to be a strong candidate for future ETF considerations.

Alex asked Joe to respond to criticisms of Firedancer developed by Jump, questioning whether this might be a way for Jump to extract value from retail investors.

Joe responded that this criticism is a classic Crypto Twitter issue. He emphasized his friendship with the Jump team but clarified that he is not an investor. Joe praised Jump's involvement in advanced global state synchronization technology and believes these innovations benefit retail investors. He acknowledged that Jump is a for-profit company that may use custom hardware for Firedancer to gain a competitive advantage, but insisted that this does not mean it would harm retail interests. Joe pointed out that Firedancer is an open-source client, allowing anyone to fork and modify it, and noted that if Jump attempted to exploit retail investors, they might do so in a closed-source manner.

Comparison of ETH and SOL

Nic, as a venture capitalist, pointed out that his firm is currently more active on Solana than on Ethereum. They do not impose a specific chain preference on entrepreneurs but allow them to choose based on project needs. However, Nic observed that currently, more founders are engaging with projects on Solana. They generally maintain a hands-off approach regarding the ecosystem's focus.

Alex shared his views on the Solana versus Ethereum debate, expressing a preference for a Bitcoin and Solana combination, believing it will outperform Ethereum. He acknowledged that while ETF trading volumes are as expected, the rapid outflows were surprising. He emphasized that ETFs could bring positive inflows in the medium to long term.

Alex also mentioned that incorporating second layers into Ethereum's metrics complicates comparisons, suggesting that second-layer valuations and market capitalizations should also be considered. He used an analogy to explain, likening Bitcoin to digital gold, Ethereum to AWS (Amazon Web Services), and Solana to the App Store, which he believes is a fitting comparison.

James added that Robert Mitchnick (BlackRock's Head of Digital Assets) believes that Ethereum and Solana are complementary to Bitcoin rather than direct competitors. He agreed with this view, noting Bitcoin as a store of value, while Ethereum and Solana compete for different, potentially larger market shares.

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