How Bitcoin Quietly Defunds the Fed

People hear “defund the Fed” and imagine pitchforks, hearings, or some new bill that dies in committee. That’s not what I mean. I’m talking about a slow, mechanical process that happens whether anyone votes for it or not: people exit dollar liabilities and migrate to a harder monetary standard, and the Federal Reserve’s cheapest source of funding dries up. The Fed’s profits fall. Remittances to the Treasury shrink. Its levers get creaky. No protests required—just arithmetic and time.

This isn’t a fantasy about flipping a switch. It’s a balance-sheet story. The Fed earns interest on assets (Treasuries, MBS) and funds those assets with liabilities (currency in circulation, bank reserves, reverse repos). Currency pays 0%. Reserves and RRPs pay interest. When the Fed funds assets with paper cash—our banknotes—that’s essentially free capital. The spread between the yield on assets and the zero rate on cash is called seigniorage. It’s the quiet engine that has long subsidized the system.

Now imagine a world where fewer people want to hold those banknotes, or even the Fed’s other liabilities, because they prefer to hold bitcoin and settle on Bitcoin-native rails. The Fed loses its cheapest funding base first (cash), then has to lean harder on interest-bearing liabilities to do its job, which drives up its interest expense. Profits compress. Remittances wobble. Transmission leaks. That’s what “defund the Fed” looks like in practice.

I’ll walk through it in plain English: how the mechanics work, why Bitcoin is uniquely capable of biting into seigniorage, what to watch for, and what to do about it.

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What “defunding” actually means in accounting terms

Let me strip the theatrics. The Fed’s P&L is simple:

• Assets: Mostly Treasuries and mortgage-backed securities. They pay interest.
• Liabilities:
  • Currency in circulation (“CiC”): physical cash. It pays 0%. This is the golden goose.
  • Bank reserves and reverse repos (RRP): these do pay interest.
• Net income: Interest income minus interest expense and operating costs. After that, the Fed sends remittances to the U.S. Treasury. When income goes negative, remittances stop and the Fed books a “deferred asset” to offset future profits.

If demand for currency falls, the Fed’s free funding shrinks. When the free funding shrinks, the Fed either runs a smaller balance sheet or replaces that zero-cost funding with interest-bearing liabilities—both outcomes chip away at net income. That’s the core: less cash demand ⇒ less seigniorage ⇒ less profit. No speeches, no headlines.

Bitcoin is one of the few things that can take a real bite out of cash itself because it’s not just another bank account; it’s a separate monetary standard with its own bearer asset and its own settlement network. Most “innovations” live on top of the dollar. Bitcoin doesn’t. That difference matters.

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Why cash demand is the jugular

For decades, U.S. currency outstanding kept grinding higher. People love cash in crises, for privacy, for under-the-mattress savings, and because the dollar is global. That growth turned into a structural subsidy: the Fed could hold a massive portfolio and earn a spread funded by a mountain of 0% banknotes.

Now picture a persistent shift where households and businesses save in bitcoin and transact on Bitcoin rails for a growing share of activity. Even if it starts at the edges—online services, cross-border commerce, niche communities—over time it eats into the use cases that cash and low-yield dollar deposits used to serve. The first-order effect is straightforward:

• Every $100 billion that moves from paper cash to bitcoin is $100 billion less of 0% funding for the Fed.
• If the Fed’s portfolio yields 2–4% in steady state, that’s $2–$4 billion less gross income per year for every $100 billion of lost cash demand.
• Scale that to trillions of currency outstanding, and you see why this matters. A 20–50% haircut to CiC over a decade would translate into tens of billions less profit, year in and year out.

That’s not a doomsday campfire story. It’s just a subtraction problem. The only real question is adoption pace.

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Policy transmission gets leakier when money migrates

The second act isn’t just about profits; it’s about control. The Fed sets the price of short-term dollar credit by paying interest on reserves and steering money-market conditions. When more saving and settlement happen off the Fed’s balance sheet—on Bitcoin rails—the transmission chain between policy rates and behavior gets noisier. To keep short-term rates corralled, the Fed relies on more remunerated liabilities (reserves and RRPs), which raises interest expense and further compresses net income. Think of it as paying a higher “control premium” to keep the old machine working in a world with new plumbing.

In traditional banking, moving dollars from Bank A to Bank B doesn’t leave the Fed’s balance sheet; it just shuffles reserves. But settling value on Lightning or other Bitcoin protocols is a different category: it’s a netting system that clears obligations outside the dollar-reserve loop. The more value that lives and circulates there, the less tight the Fed’s hand feels on the wheel. The feedback is subtle at first, then persistent.

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Bitcoin as savings rail vs. payments rail

Let me split the adoption story:

1) Savings rail (the big early bite)

The cleanest early bite is portfolio substitution: people convert a portion of savings—cash, checking, money market, even Treasuries—into bitcoin. That can happen “on exchange,” in spot ETFs, or in self-custody. From the system’s perspective, that’s dollars exiting the liability stack and taking up residence in a non-dollar asset with a fixed supply schedule.

• Impact on the Fed: Indirect but real. Less sustained demand to hold dollar cash and deposits means less cheap funding. If the substitution accelerates during periods when the Fed is already paying a lot on reserves, the net income pinch is worse.
• Impact on Treasury: More direct. Dollars that would have financed new government borrowing at low yield chase bitcoin instead. That raises the government’s financing cost at the margin, which loops back into the overall interest-rate environment the Fed tries to manage.

2) Payments rail (the slow burn with leverage)

Settling commerce on Lightning and other Bitcoin L2s is the second act. Even small percentages matter if the network handles the long tail of internet-native payments cheaply and reliably. It starts niche (creator economies, B2B settlement, cross-border remittances, machine-to-machine), then compounds as tooling improves.

• Impact on the Fed: More daily life runs on networks it doesn’t operate. To keep the dollar system attractive, the Fed indirectly relies on banks and fintech to offer yield or convenience. Either way, it pushes more activity into interest-bearing buckets, raising the cost of rate control and bleeding seigniorage.

Together, the savings rail and payments rail create a pincer: savings leave (shrinking the free funding base), while payments leak (forcing more expensive liabilities for control). That’s the defunding mechanism.

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Stablecoins aren’t the same thing—and that’s the point

A quick detour: stablecoins drain bank deposits too, but many are backed by short-dated Treasuries. That ironically supports government funding even as it sidesteps banks. So, stablecoins can weaken the bank deposit base and still funnel value into the public debt machine. Bitcoin is different: it exits the dollar stack, doesn’t fund the Treasury, and doesn’t give the Fed a liability to pull on. If stablecoins are private banknotes stapled to T-bills, bitcoin is a separate monetary asset that lives beyond the Fed’s funding ecosystem. If you want to understand which instrument actually defunds seigniorage, follow the liability trail and ask, “Who’s earning the spread?”

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The long game: from store of value to unit of account

The honest path looks like this:

1. Store of Value: individuals and institutions hold bitcoin as savings.
2. Medium of Exchange: pockets of commerce settle on Bitcoin rails when it’s cheaper/faster or for values alignment.
3. Unit of Account: invoices, salaries, contracts, and treasuries start quoting in sats, even if the back end still converts.

You don’t need step 3 to compress seigniorage; steps 1 and 2 are enough to put real dents in the Fed’s free funding base. But if step 3 shows up—if people price in sats as a matter of habit—the effect turns structural. Cash becomes a convenience tool, not a savings instrument. Bank deposits are for bill-pay, not net worth. The Fed’s balance sheet becomes a smaller part of everyday value storage. The profit engine never fully recovers.

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“But cash demand is sticky.” It is—until it isn’t.

Three common pushbacks:

1. “People still love cash.” True. Crisis demand, privacy, legacy habits—all real. But adoption stories are S-curves. You don’t see the change until you do, and then it looks “sudden.” If cohorts that used to hoard paper now hoard sats, the Fed feels that loss of 0% funding immediately and permanently.

2. “Regulators won’t allow it.” Governments can slow things, tax things, and nudge flows. But meaningful chunks of Bitcoin adoption live in software and choice: how you save, where you settle, what you accept. To erase it, you’d need to outlaw private keys and math. Good luck.

3. “Volatility.” Bitcoin’s volatility is the tax you pay for a credibly scarce asset bootstrapping itself into a global store of value. Hedging costs fall with adoption, and the medium-of-exchange layer can abstract price swings via instant conversion. Savings volatility is a feature for early adopters; settlement doesn’t require risk if rails are liquid.

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The math that matters (simple, directional, and brutal)

Let’s play with round numbers to anchor the intuition:

• Suppose $1 trillion less demand for paper cash over a decade—pulled into bitcoin by savers and merchants who no longer want to hold zero-yield paper in a world with a 24/7 global settlement asset.
• If the Fed’s portfolio yields 3% on average over that period, that’s $30 billion per year of gross income gone.
• Layer on the fact that, to keep policy rates where it wants them, the Fed must pay interest on more reserves/RRPs because less of its liabilities are free—call that an extra few tens of billions in interest expense across cycles.
• The combined effect is a system that still functions but sends smaller and spikier remittances back to Treasury. Translation: the quiet subsidy fades, and the policy machine gets pricier to operate.

It doesn’t take a radical scenario. A 10–20% erosion of CiC bites. A world where a meaningful slice of internet commerce settles on Lightning bites. A world where households keep “rainy-day” funds in bitcoin instead of cash—that bites. None of this requires majority adoption. Seigniorage is most sensitive at the margin because the funding base is so large and so cheap.

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What to watch: four dashboard dials

If you want signals rather than anecdotes, put these on your dashboard:

1. Currency in Circulation (CiC): Does it flatline or decline on a multi-year basis? That’s the seigniorage acid test.
2. Fed Remittances / Deferred Asset: Are remittances consistently small or intermittent, even outside crisis windows? Persistent deferrals tell you the spread isn’t recovering.
3. Bitcoin Savings Flows: Spot ETF assets, exchange outflows to self-custody, on-chain accumulation. Regardless of wrapper, these are dollars leaving dollar liabilities.
4. Bitcoin Payments Activity: Lightning channel capacity tells part of the story, but the more useful signal is merchant integration, payroll experiments, and B2B usage. Watch the tooling, not just the charts.

If those four dials move, the “defund” thesis isn’t academic—it’s underway.

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The political angle (or lack of one)

I’m not waiting for a committee to pass a bill that says “Section 1: The Federal Reserve shall be defunded.” That’s not how any of this works. Monetary history is mostly migration, not legislation. People re-price risk, re-route value, and re-write their balance sheets when a better option exists. Bitcoin provides a better option for savings (credible scarcity, self-custody, global portability) and increasingly for settlement (finality at the speed of software). The state can participate, compete, or complain—those are the choices. What it can’t do is legislate away the arithmetic of seigniorage loss if people stop holding its 0% paper.

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Playbooks: how individuals, builders, and businesses move the needle

This isn’t just theory. Here’s how it gets real.

Individuals

• Save in bitcoin on a schedule. If you want to spend dollars, that’s fine—let your savings be the defection.
• Learn basic self-custody. If it’s new to you, start small and graduate to a multisig or hardware flow you actually understand.
• Accept bitcoin where it makes sense. If you sell digital goods or global services, Bitcoin rails can beat legacy friction.

Builders

• Kill the “last mile” pain. The best way to push adoption is to make accepting, holding, hedging, and accounting for bitcoin boring and reliable.
• Automate fiat ↔ BTC bridges invisibly. Not everyone wants asset risk; they want the rail. Give them that without complexity.
• Ship tools for treasuries and payroll. The moment salaries and invoices can quote in sats with sane taxes and reporting, unit-of-account shifts get real.

Businesses and municipalities

• Diversify treasury policy: hold a slice in bitcoin as you would any strategic reserve.
• Pay vendors and contractors in BTC where mutually beneficial. Cut settlement times and FX costs; reduce chargeback risk.
• Pilot Lightning for microtransactions: if you have streaming or per-usage models, you’ll discover product mechanics that legacy rails literally can’t do.

Every one of these choices squeezes the same tube of toothpaste: fewer zero-yield banknotes, more settlement outside the Fed’s liability stack, and a system that has to pay up to retain influence. That is defunding by usage, not rhetoric.

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A note on prudence and risk

I’m not telling anyone to YOLO their rent into a volatile asset. I’m saying savings—the multi-year capital you park for future optionality—deserves a place in a system with credible scarcity and self-custody. If you run a business, you hedge cashflows; if you run payroll, you match liabilities to your jurisdiction’s rules. None of that contradicts the bigger picture. The thesis is not “replace everything overnight.” It’s “re-denominate the foundation and let usage compound.” The Fed defunds itself as a side effect.

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The endgame nobody votes on

What does the world look like if this path compounds for a decade or two?

• The Fed still exists, still sets policy, still backstops crises—but it looks more like a narrow technocratic utility and less like a giant profit engine remitting easy billions to the Treasury.
• The government still borrows, but investors demand real yields because a meaningful slice of global savings prefers a non-sovereign reserve.
• Banks still operate, but deposits are more transactional; the “savings account” is code you control, not a promise you rent.
• Payments become a polyglot: dollars where required, bitcoin where desired, instant bridges between them.
• Seigniorage is smaller, policy transmission is leakier, and the cost of state finance tells the truth more often.

Nobody has to wave a banner for this to happen. People just have to choose the tool that aligns with their incentives. Bitcoin aligns with productive people who want finality, portability, and savings that can’t be diluted. The Fed aligns with a political machine that benefits from quiet taxation via monetary expansion and free funding via your paper. When those two incentives collide, the exit option wins over time. It always has.

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My bottom line

If you want to “defund the Fed” in the only way that actually sticks, don’t look for a savior on C-SPAN. Hold bitcoin. Build on Bitcoin. Settle on Bitcoin. Help the world discover that the most powerful vote is the one you cast with your balance sheet. As adoption compounds, the math does the work:

• Seigniorage shrinks as fewer people hold 0% paper.
• Interest expense rises to maintain control as activity migrates off the Fed’s rails.
• Remittances fall and the quiet subsidy fades.
• Policy still works, but the machine gets honest about costs—and that honesty is the point.

I don’t need grandstanding to get there. I need software, discipline, and time. The rest is just exponents.

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A closing checklist (for those who like action items)

• Set a bitcoin savings policy for yourself (and your company if you run one).
• Learn self-custody you can execute under stress. Write it down. Test it.
• Add a BTC acceptance flow where it actually improves your product or cash cycle.
• If you’re a builder, ship one thing this month that makes Bitcoin rails easier for someone else—less friction, more boring reliability.
• Keep an eye on CiC, Fed remittances, ETF flows, and real-world Lightning usage. If those dials move, the thesis is live.

This is how a parallel standard takes hold: not by slogans, but by replacement—bit by bit, invoice by invoice, savings plan by savings plan—until the old system’s free lunch is gone. When that lunch is gone, the Fed isn’t “ended”; it’s funded by consent, not subsidy. That’s the quiet victory I care about.