The Trillion-Dollar Trade You've Never Heard Of

Justin Roberti, Dingo and Tupelo discuss how the unwinding of the Japanese yen carry trade could reduce global liquidity and pressure stocks, real estate, crypto and other risk assets. They also examine Kraken Financial’s direct access to the Federal Reserve payment system and the growing integration between crypto and traditional finance.

Justin Roberti (00:00)
Hello, hello. This is Justin Roberti. Welcome, everyone, to Saffron Files.

We’re going to let people file into the room a little bit before we begin.

Hello, Dingo. It’s great to have you on air with me again. Good to see you.

Dingo:
Hello, hello. How are you?

Justin:
Good, thanks.

It has been a very active week. We’re going to cover a couple of topics today.

First, we have a yen carry trade article published by Tupelo, who is joining us today. He’s going to talk about that with us.

Then Dingo and I are going to discuss what has happened with Kraken. The Federal Reserve is allowing Kraken Financial to receive a master account.

President Trump also commented on that. We have a Truth Social post from him to discuss.

We’re going to have a lot to talk about.

Tupelo, let’s do a mic check. How are you doing today, sir?

Tupelo:
I’m good. How are you, sir?

Justin:
Good. It’s great to have you on.

Thank you for writing this article. I think we just published it.

We posted it on Twitter. Is that correct, Dingo?

Dingo:
Yes, it’s on Twitter.

Tupelo is another one of our writers, and he’ll be creating more content for us.

He has a different voice than I do, and I really appreciate his macro-level instincts and his overview of the large, big-picture forces affecting the rest of us.

It’s an interesting article.

This is something I don’t think many people are aware of, and it’s remarkable how much an issue like this can affect the global economy.

Justin:
Absolutely.

This isn’t the first time we’ve seen ripples from Japan directly affect our markets and the digital-asset market.

Let’s get into it.

The article explains the Japanese yen carry trade as borrowing inexpensive yen and moving that money into higher-yielding assets around the world.

It argues that this trade has been a major hidden source of liquidity for stocks, real estate, crypto and other risk assets for decades.

It began after Japan’s asset bubble burst, when the Bank of Japan pushed rates close to zero and made borrowing in yen extremely inexpensive.

Now that Japan is raising rates, the trade is becoming less profitable and is beginning to unwind.

I believe the yen carry trade was also discussed as one of the causes of the last crypto bear market.

As that unwind occurs, investors may sell foreign assets or move money back into yen, which can pressure global markets and trigger deleveraging.

The article’s broader warning is that shrinking liquidity from this process could contribute to a longer and more painful bear-market environment if the selling accelerates.

Am I mistaken, Tupelo, or were we discussing this as one of the factors behind the previous crypto bear market?

Tupelo:
No, you’re not mistaken.

It was definitely a topic of conversation during the last bear market.

It has always been discussed to some degree as the trade has expanded over the past 25 years or more.

But it wasn’t until around 2015 that the more serious concerns began to emerge.

Going into the previous bear market, there were discussions about it. But Japan still had its former prime minister at that point, and Sanae Takaichi had not yet taken over.

Now that she has adopted the “Iron Lady” stance she campaigned on, people are more concerned that the carry trade could begin unwinding more rapidly than it did before.

The concerns have intensified in the current environment as we’ve watched the Japanese yen nearly collapse.

Justin:
Right.

If I remember correctly, the previous issue had something to do with the way Japan was subsidizing foreign investment and then changing how that subsidy worked.

Let’s discuss the article more broadly.

When people hear “Japanese carry trade,” they may assume this is a global macro issue that has little relevance to the average crypto degen.

Why should ordinary retail investors be concerned about what is happening with the yen?

Tupelo:
That’s a great question.

It may not directly affect someone’s favorite memecoin, but it will absolutely affect the global economy.

Estimates suggest that anywhere from a few hundred billion dollars to as much as $4 trillion could be tied up in the carry trade.

If the Bank of Japan continues raising rates and the yen strengthens, it could force more of that trade to unwind.

That would affect nearly every asset class, including risk-on assets and even some traditionally less risky assets such as real estate.

One of the areas heavily funded through the carry trade is the U.S. bond market.

Institutions and major investors borrow large amounts of yen at interest rates close to zero.

As we all know, free money is a lucrative business.

They borrow that yen and move it into other markets, including U.S. Treasuries.

They earn money from the difference between the borrowing cost and the yield on those assets.

As interest rates on the yen rise and that spread narrows, the trade becomes less worthwhile.

Investors then begin selling bonds and Treasuries, but also equities and crypto.

If the trade unwinds at the pace some people fear, we could see compression across nearly all risk-on assets.

Nothing is entirely protected because nearly every asset class has received investment funded through cheap yen.

Justin:
Right.

We’re already attempting to build a global and decentralized parallel—or shadow system—to TradFi.

Does the yen carry trade teach us how global and interdependent markets have become, and how dependent they are on inexpensive money?

The United States also kept interest rates close to zero for decades. Then rates rose and inflation became a major problem.

What does this tell us about the interdependence of markets and what people need to understand when doing their own research?

Tupelo:
It definitely shows that inexpensive money is extremely attractive.

Large institutions and investors will always look for the cheapest available capital.

We’ve seen significant interest-rate increases in the United States over the past few years, and that has compressed markets to a degree we didn’t see during much of the 2000s.

Rates weren’t always exactly zero, but they remained around 1% or 2% for nearly 20 years.

Then massive inflation arrived, and one of the primary ways to fight inflation was to raise rates.

That has global consequences.

As U.S. rates rose, people became even more dependent on the Japanese carry trade because borrowing in yen was still extremely inexpensive.

There may be as much as $4 trillion in capital borrowed against the yen and deployed into global markets.

When that trade is no longer profitable, the money has to be repatriated to Japan.

Some of it may eventually be reinvested elsewhere, but if the spread is no longer attractive and investors can’t borrow cheaply in dollars, they have to find another source of capital.

At the moment, there really aren’t other markets with the kind of deep liquidity the yen provides that can support trading at that scale.

There is significant interdependence between the global economy and Japan.

It’s unfortunate that this system has operated this way for so long because it reveals a weakness in global economics.

Investors are always looking for inexpensive money, and that becomes a serious problem when the price of that money changes.

Justin:
It’s almost like putting the economy on stimulants by making money that inexpensive and readily available.

Then the caffeine wears off.

Tupelo:
That’s a perfect analogy. It’s putting the economy on speed.

Justin:
To be polite, let’s call it an extreme amount of caffeine. Maybe a five-hour energy drink.

It works, but after the energy wears off, you may feel the crash.

That’s a difficult word to use these days: crash.

When the trade begins unwinding, why does the fear cascade so much across global markets?

Digital assets seem less and less like a truly separate market.

Do you have the same impression?

Tupelo:
Yes.

At the most basic level, digital assets are still heavily dependent on traditional assets.

We always see this cascading effect.

Even apart from the yen carry trade, when certain markets decline—especially U.S. equity markets—we see risk-on assets suffer.

There are different levels of risk among risk-on assets.

Equities occupy one level, while digital assets are often treated as an even riskier version of those assets.

The assets perceived as the riskiest are usually hurt first during a market decline.

Because digital assets are so volatile and considered especially risky, they tend to be sold first.

You’ve probably noticed that when the S&P 500 declines, crypto often follows.

The correlation isn’t always perfect, but it happens to a significant degree.

It’s the same concept across the board.

As investors lose interest in risk-on assets and move their capital into cash, foreign currencies, gold or silver, digital assets often suffer even more severely.

Justin:
That connects with a theme underlying almost every topic I’ve covered this year: concern about liquidity drying up.

What does that look like in practical terms for stocks, crypto and other risk assets when things really begin to go wrong?

Tupelo:
Simply put, number goes down.

The carry trade has been a substantial source of liquidity.

When liquidity falls, markets change dramatically.

It’s frightening to consider, but if we see a global contraction in liquidity, risk-on assets are going to be hit hard.

They are usually the first assets to be hit.

We’re also seeing the effects in housing markets around the world, especially in North America.

The Canadian housing market has nearly collapsed, and the U.S. housing market is in a period of severe stagnation.

Real estate is also heavily affected by declining liquidity.

When liquidity disappears, people can’t buy.

When buyers disappear, prices begin falling because investors shift from speculation toward capital preservation.

That’s why someone like Warren Buffett is sitting on approximately $384 billion in cash—the largest amount of cash Berkshire Hathaway has ever held.

Justin:
That’s remarkable.

I have one final question before Dingo and I move on to the Kraken story.

Do you see this as a temporary condition and a short-term market scare?

Or will future history books describe the past 20 years as the easy-money era, with that period now truly coming to an end?

Tupelo:
That’s a difficult question.

I wish I had a crystal ball because I would be a billionaire.

If I had to make a prediction, I don’t think Takaichi is going to allow the entire system to collapse because she understands how important the carry trade is to global markets.

That doesn’t mean the trade won’t unwind to some degree.

The unwinding has already begun and will probably continue.

If the dollar falls 3% against the yen in less than two days, you know something serious is happening.

But as the new prime minister, I don’t think she wants to collapse the carry trade.

I don’t expect one enormous cascading macro event.

I think it’s more likely to be a slow bleed over time as Japan attempts to correct the problems facing the yen.

Justin:
Right.

We’ve had decades in which the U.S. petrodollar has essentially served as the de facto global reserve currency.

I wonder whether we’re beginning to see the end of that era and entering a period where we’ll have to discuss foreign markets more frequently because we live in such an interconnected world.

Thank you for writing the article.

I’m glad we’ve published it.

Everyone listening should go check it out. Dingo has posted the link.

We’re going to move on to the Kraken story now.

Tupelo, you’re welcome to stay and join the discussion.

We’ll try to find something mildly bullish to discuss because there are a few bullish elements here.

Tupelo:
I appreciate the time. I enjoyed talking about the article, and I’ll stick around for the rest of the call.

Justin:
Absolutely.

Kraken Financial has received a Federal Reserve master account.

It is the first crypto-focused bank to receive direct access to the Federal Reserve’s payment system.

That means Kraken can connect to Fedwire without relying on intermediary banks.

If you’re looking for signs that crypto has arrived within the mainstream financial system, this is a major step in connecting crypto infrastructure directly to U.S. financial rails.

It could also reduce the historical risk of crypto companies losing access to the banking system when partner banks fail or decide to pull back.

A few years ago, banks generally were not eager to work with crypto companies.

Kraken says direct access could make fiat settlement faster, simpler and more resilient for institutions.

Kraken Financial is a Wyoming Special Purpose Depository Institution, or SPDI, operating under a full-reserve model.

Kraken argues that this setup could eventually support atomic settlement between fiat and crypto.

The larger story is that crypto is beginning to look less like an outside market and more like a continuous part of the financial ecosystem.

The debate now is whether crypto is building an alternative financial system or gradually being absorbed into TradFi.

I’ve been vocal about how I feel about that.

I’m also going to read President Trump’s Truth Social post because, as Dingo pointed out, it contains some bullish elements.

Trump wrote that the GENIUS Act was being threatened and undermined by banks, which he called unacceptable.

He said the United States needs to complete market-structure legislation as soon as possible and that Americans should earn more money on their money.

He argued that banks are earning record profits and should not be allowed to undermine the administration’s crypto agenda.

He warned that the industry could move to China or other countries if the Clarity Act isn’t completed.

It was a very bullish statement.

He appears to support both the GENIUS Act and the Clarity Act.

Dingo, if Kraken is plugged directly into the Fed’s payment rails, are we still cool, edgy outsiders living out our cyberpunk digital-asset fantasy?

Or are we simply part of the financial industry now?

Has fintech just become part of finance?

Dingo:
I’m writing an article about this, which everyone will see soon.

We’ve discussed the Clarity Act before, including on this show, and I pay close attention to what is happening in Washington.

It’s a very interesting question.

I draw certain comparisons to the early internet.

You had a disruptive technology that was ignored for a long time and viewed as niche.

Slowly but surely, it changed everything.

This is a major step forward.

I would divide it into two parts.

What we’re seeing now is the legitimate beginning of a hybrid architecture where blockchain infrastructure and the traditional monetary system begin to interconnect.

For years, crypto existed in parallel and outside the traditional system, partially because it wanted to and partially because it had to.

Banks wouldn’t touch it, and regulators hadn’t created a framework for it.

The same thing happened with the internet.

Once a regulatory framework was in place, we saw a massive boom in internet companies and internet integrations.

It completely changed and recontextualized nearly every service we use, whether travel agencies, commerce or banking.

It was a fundamental shift.

Now we’re seeing a similar pattern as the walls begin to come down.

I don’t think this means crypto will simply be absorbed into the legacy system.

The technology is too revolutionary and innovative to be absorbed entirely by traditional banking.

That is part of why Trump is upset.

The banks have pulled away from the negotiating table regarding the Clarity Act.

The White House, crypto lobbyists and companies such as Coinbase reached an agreement, and the banks effectively took their cards and left because they don’t want competition.

The traditional banking system has gone largely uncontested, and banks are protecting record profits.

The United States risks losing this entire industry.

We came close to losing it during the previous administration.

A lot of people left the United States because of regulation by enforcement under Gary Gensler and moved to more welcoming countries.

If the United States continues delaying regulation, it could miss out on one of the most transformative technologies since the internet.

It’s remarkable to see a sitting U.S. president openly siding with the crypto industry over legacy banking.

That is a huge deal.

It’s bullish for me.

I’m not sure any previous president would have made a similar statement.

This fundamentally changes the conversation.

Five years ago, the traditional financial system was asking whether crypto should even exist.

Now the question is how to keep the industry happy and ensure it stays in America.

That is a major change.

Integrating parts of blockchain and crypto into the financial system does not close the door on DeFi.

I discussed this in my article on Ondo and tokenization.

It means capital can begin moving between the two environments more seamlessly.

We saw that through the redemption of Nvidia shares through Ondo.

It opens the door to on-chain markets, more advanced DeFi protocols and programmable financial instruments that can operate alongside traditional financial infrastructure.

The decentralized side will still exist.

I think we’re moving toward adoption through a hybrid system.

Honestly, that may favor our industry.

Decentralized finance will continue to exist, while the traditional banking system may be completely transformed by integrating blockchain technology, even if some implementations remain closed and don’t fully reflect the ethos of crypto.

Justin:
That’s fair.

TradFi may change crypto, or blockchain may change TradFi.

It will probably be some combination of both.

Tupelo, what do you think about Trump’s explanation of the urgency surrounding the Clarity Act?

Is he right about China?

Could the United States lose its opportunity or its leadership position in this industry?

Tupelo:
I would say a couple of things.

I have a friend who works deeply in TradFi and has been a registered investment adviser for many years.

He’s disappointed because Trump campaigned as the crypto president but, in his opinion, has done very little for crypto while in office.

Trump has only been president for a little over a year, but you can argue that he hasn’t done much for the industry so far.

He says a lot of things, but there’s a difference between talking and acting.

My friend believes the industry won’t be fully adopted until the United States begins purchasing assets for the strategic Bitcoin reserve.

I’ve told him for the better part of a year that I think Trump is much smarter than people give him credit for.

He has also become a very shrewd politician.

I think he may be timing his statements about crypto carefully so that, as the midterm elections approach, he can make moves that help Republicans politically.

His recent Truth Social post came slightly earlier than I expected, but it is still only words rather than action.

I think we’ll see actual movement on the Clarity Act during the next four to six months.

We may also see the government begin purchasing assets for the strategic Bitcoin reserve.

That could reignite the enthusiasm of the crypto voters who helped him win the election.

Politics is often about what someone has done for you lately.

If Trump had completed all of this in February 2025, would people still care by the time of the midterms?

Would it still motivate voters?

I don’t know.

But if he completes it during the months leading up to the midterms, it could make a meaningful political difference.

He has smart advisers around him, including people such as Scott Bessent.

I think his actions may be strategic.

As for China, I absolutely think it is a legitimate threat.

China wants to surpass the United States as the global leader in any industry it can.

If it can take the lead in crypto, it will.

There’s a reason Binance remains the largest exchange in the world.

China and the broader region have put considerable effort into ensuring that remains the case.

Trump is concerned that China could “eat our lunch,” as he used to say.

He understands how powerful this industry could become and how much it could benefit the United States over the long term.

Justin:
He certainly appreciates the industry differently because he has become directly involved in it.

He should have some understanding of how it works.

Dingo, does direct Federal Reserve access actually make crypto stronger?

Or is it a trade-off because crypto becomes more dependent on the system it originally intended to disrupt?

I’m going to sound like an old man here, but 10 years ago I was writing white papers about disrupting traditional finance.

Now we’re becoming part of it.

What’s your view?

Dingo:
As I said earlier, I think it is both.

The two systems will inevitably change one another.

My thesis is that the traditional system will be influenced more by crypto than crypto will be influenced by it.

From a broader perspective, direct access to payment rails without the same friction, settlement delays or counterparty risk will make the ecosystem more robust for institutions that want to participate.

That is exactly what will happen.

At the same time, integration will involve some dependence on existing financial infrastructure.

We’re seeing that in the Clarity Act.

Never underestimate the power of the traditional banking system.

As an industry, we need to remain conscious of that.

We cannot repeat the same mistakes the traditional system made.

As more capital flows into blockchain systems, the programmable nature of DeFi is what turns people’s heads.

It creates capabilities the traditional financial system never had.

Saffron Vaults are one example.

You have transparent yield markets, automated settlement and composable financial products.

Traditionally, retail users don’t receive direct access to those tools.

They may receive second- or third-order exposure, but not immediate access.

The more important question isn’t whether crypto becomes dependent on the traditional system.

It’s the degree to which the traditional system will eventually have to adopt crypto’s architecture.

Justin:
That’s true, although I may have drifted back toward a question I already asked.

Let me ask something else.

If Kraken receives direct access to the Fed while most companies still depend on outside banks, doesn’t that give Kraken a major structural advantage?

Dingo:
Yes.

You could also argue that Coinbase has a structural advantage because it is one of the largest crypto political forces in Washington.

I was surprised that Kraken received this access before Coinbase.

It is an advantage and gives Kraken a head start.

But I don’t think it means Kraken will automatically become the definitive exchange for crypto going forward.

The important thing is that Kraken has established a pathway.

It did everything by the book, and I believe it took around five years to receive approval.

Now other exchanges can begin following that path.

Justin:
Very cool.

When are you hoping to publish your article, and where should people look for it?

Dingo:
It’s currently in review.

I want to publish it quickly, so probably by early next week.

It will be shared through the Saffron Twitter account.

We’re also doing several new things, and Tupelo’s work is an example.

We’re bringing on more writers.

We’re also determining the best way to distribute the strong content being created by these talented people.

We’re considering building a newsletter or another dedicated space where we can communicate ideas about what is happening in the market and keep people informed.

On the product side, we’re continuing beta testing and gathering more data.

Right now, we have a Saffron Vault pairing tokenized gold with USDT.

The tokenized-gold ticker is XAUT.

We started the vault around four days ago, and there was a sharp drop in gold on March 3.

The variable side is currently slightly in the red and isn’t performing as well as when the vault was first enabled.

Anyone familiar with a Uniswap v3 pool will understand that the pool is repricing quickly to match the underlying gold market.

Some of that movement is amplified by the way Uniswap liquidity pools function.

I’ll share screenshots in the chat afterward.

It’s very interesting.

We’re continuing to test and gather data, and everything is progressing smoothly.

We should be able to get at least the beta into the community’s hands relatively soon.

Those are probably the two main updates.

We also have another writer who may appear next week or the week after and will be publishing an article.

We’re expanding the team and preparing for the beta and eventual launch so we can hit the ground running.

It has been awesome.

Thank you for doing this. I appreciate it.

Justin:
Absolutely.

I love content in general. I love doing shows and writing articles.

There are so many brilliant voices within Saffron.

I’m not exaggerating when I say that many projects I’ve worked with might have one or two people with this level of insight.

At Saffron, we have a tremendous opportunity because there are so many intelligent people involved.

It’s great to be able to conduct these interviews and publish these articles.

I need to keep things concise today.

We’ve completed our Saffron Corner and shared all the alpha.

Are we good with that, Dingo?

Dingo:
We are good with that.

Justin:
Thank you, gentlemen, for joining me today.

We really appreciate it.

We’ll post this so it remains available for the community to review and listen to.

We do this so everyone knows what we’re working on and gets a sense of the people involved in the project and what we’re thinking about.

Tupelo, thank you for joining us and sharing your article and your thoughts.

Dingo, thank you as well.

We look forward to reading your article when it is published.

Tupelo:
Thank you very much. I appreciate it.

Justin:
Thanks, guys.

We’re going to end it there, and we’ll talk to you soon.

We’ll be back again next week.

Remember to take care of yourselves and detach from your devices at some point today if you can.

It’s beautiful here in Pennsylvania. It finally looks like spring.

I’ll definitely be taking my dog for a walk.

Talk to you soon.

Peace.