992. Insights: Why are stablecoins SO hot right now?

0:28This episode is brought to you by Google Chrome. You know back to school is coming in fast. So why wait to find your new fave footwear? Step into a local croc store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest croc store today.

1:10Welcome to Fintech Insider Insights, the podcast from 11FS, five-time winner of Consultancy of the Year at the British Bank Awards. I'm David Barton Grimley, and today we are diving into one of the hottest topics in fintech right now. And it's not hype, it's stable, literally. As a long, hot summer in fintech rumbles on, we thought we'd take a closer look at something that has got the temperature across the industry soaring right now, and that is stablecoins. So stablecoins, once a niche corner of crypto, are now reshaping everything from cross-border payments and corporate treasury to on-chain finance and consumer savings, with an estimated$230 to $270 billion in circulation and growing adoption from players like Stripe, announcing in 2024 that they would be supporting stablecoins to enable faster, borderless, and low-cost transactions for businesses.

1:58And players like Visa, Coinbase, and even PayPal joining the hype. Stablecoins are no longer just about trading. They're becoming the rails of the next-gen financial system. So, in this episode, we'll unpack why stablecoins are exploding in popularity, how regulatory clarity in the EU and the US and beyond is fueling institutional adoption, and what it all means for the future of global finance. This is a temperate check on crypto you all need to hear right now. So let's get into it. To help us on this journey, we are joined by an expert panel. And first up, we have a FinTech Insider return for Anthony Odu, co-founder at VirtuFX.

2:38How are you today, Anthony? Can you tell us a little bit about your day-to-day role at VirtuFX? Yeah, absolutely. Thanks for having me again. Yeah, my name is Anthony Odu. I'm one of the two co-founders at Verto. I'm basically responsible for the product, technology, the growth and expansion. So basically it means that I'm pretty much everywhere in the business. Title-wise, I'm the CTO and CPO. High-level Verto is a B2B cross-border payment platform with a special focus on emerging markets and pretty much Africa, Merna is basically our quarter. One or two jurisdictions that will be focused on from day one.

3:21So yeah, nice to have you guys again. Nice to be on the call. Awesome, welcome back. And next we have a FinTech Insider debut for Neil Chopra, Head of Strategy and Business Development at Fireblocks. Neil, please introduce yourself. Tell us a little bit more about your role at Fireblocks. Yeah, I appreciate you having me on as well. A very timely conversation, as I think we'll all attest to. So Fireblocks have been at the company four and a half years now. And really my focus has been around enterprise and strategic accounts really focusing on emerging use cases. And so as you can imagine over the last couple of years, very much focused on stable coins and payments.

4:02And now that we're starting to get some regulatory framework and structure in the US, a big focus around regulated financial institutions in the U.S. as they start to take their first steps into the blockchain ecosystem. I actually was prior to this at Ripple, where I joined in 2017 and spent 10 years in corporate treasury before that. And so I really was able to sort of draw a lot of parallels and identify the utility within blockchain as a technology in solving the use case of cross-border payments. And I think it's great that we're finally starting to see that come to life and really scale across the the ecosystem.

4:41So looking forward to the conversation today. Yeah, definitely. Welcome on board. And last but not least, a warm welcome to Morgan Kropetzky, VP of on-chain finance at AvaLabs. Welcome to the show, Morgan. Tell us a little bit more about yourself and AvaLabs. Sure. And thank you for having me. So like you mentioned, I am VP of on-chain finance business development at AvaLabs. AvaLabs is one of the core contributors to the Avalanche blockchain network, which for those who might not be familiar, is an EVM compatible blockchain network that is extremely fast and facilitates extremely cheap transactions notably for a variety of different assets but especially stable coins and other types of tokenized assets with stable coins really being kind of the quintessential rwa or tokenized asset that we've seen really kind of garner more and more and more mainstream adoption from an on-chain finance perspective the remit really includes partnering with the whole spectrum of companies from crypto and blockchain native companies focused on DeFi and DeFi primitives to payments in treasury, as well as wholesale finance and capital markets.

5:46We partner with a very kind of wide variety of banks, asset managers, and FMIs as they operationalize their blockchain and digital asset strategies. And like you mentioned, stable coins are a particularly hot topic these days. So we're very excited to kind of see the institutions finally coming into the realm of public permissionless blockchains, and we're welcoming them with open arms. Awesome. Welcome to the show. And now we have our panel of experts. We are going to start by casting our minds back to 2014. Barack Obama was the president of the United States. Scotland was holding its independence referendum, and FinTech Insider hadn't yet hit your podcast feeds.

6:25But perhaps more importantly for today's topic, that year saw the introduction of the first major stablecoin concept. While the idea of stablecoins was born in 2014, it wasn't really until between 2017 and 2019 that we really saw some form of mainstream adoption take off in innovation accelerate, or at least adoption within the crypto world, I should say. So I'm going to start by asking our panelists, you know, where were you in 2014? And more importantly, when did each of you first become aware of stablecoins as kind of a thing? Neil, I'm going to come to you first, maybe with your background in the treasury land.

7:04I mean, how did that, how did you come across it? Yeah, actually, very, very randomly, I was working at a treasury management system vendor back in 2014, after I'd left Deloitte. And the head of sales there moved over a couple of years later, I think 2016, 17, to be the head of sales at Ripple. And I honestly had no idea what blockchain or Bitcoin was at that time. And so I really did a bunch of readings, spoke with people who are familiar with this space, and I still couldn't comprehend or wrap my head around at that point. Like, oh, Bitcoin is just this thing that sits out there somewhere and more gets created every day.

7:44As obviously I've gotten more educated and more into this, I've understood the real value prop and really the true value of Bitcoin and blockchain. But that's really where I was able to distinguish or delineate the utility that a blockchain could have for traditional markets and assets. And so when I looked at Ripple and sort of using specific digital assets like XRP within a payments flow, a lot of the sort of pushback or questions from institutions at the time was, well, I don't know what this asset is. It could lose its value at any time. It could get taken from me at any time. why isn't there a more stable form of value transfer between two assets that I need to get in and out of?

8:25And so I think that's where we really started to see stable coins come to the forefront of crypto trading. And I'll say at Fireblocks is really where we've seen the adoption and utility in that where you can actually atomically swap fiat or tokenized money against a digital or crypto asset in real time. Because if you look at how crypto trading ecosystems have evolved, it's significantly different from, I'll say, traditional markets where you really have a central venue and clearing and counterparty, whereas a lot of crypto trading is done bilaterally. And so you're now having to deal with all the counterparty risk associated with settling across counterparties.

9:05So I'd say that the first introduction to stablecoins for me was around this, I'll say, crypto post-trade clearing and settlement model. But I did draw a lot of parallels for that within the world of cross-border payments and moving value globally. Because again, that's kind of what I dealt with in my career before stepping into this space. And so I think that's where we're starting to see the world pays of the world and other payment processors and merchant acquirers stepping in to try to understand what role do they really fill in this new ecosystem? And so what are those novel products and services or just efficiencies that they can gain internally by leveraging these new rails for really global liquidity management.

9:50Yeah, awesome. And Anthony, how about you? What was that aha moment for you? When was it? Yeah, for me, that would have been 2017, actually. So maybe if you go back to 2014, I was still in banking, working my ass off. Probably don't know what I was going to do with my life. But I do remember back then, that's when Bitcoin was like, I don't know, like, probably wild wild ways like proper volatile experimental abyss but full of promise everyone loves it you just want to trade it it was just speculative at best right then at the same time you start having the whisper of stable coin which is like how do you innovate blockchain and basically putting on top of your fiat to make more stable but back then no one actually really know what how it's going to work or if it's going to take off at all.

10:41So fast forward to 2017 when virtual idea came up. The first three to six months, I remember all I wanted to build was a decentralized cost-water payment platform. And then you look at the technology and you just realize that there's not much out there at that point. Then at the same time, you wanted to do an emerging market, which is already super high risk. So you kind of bond to high risk market with a new innovation that no one really knows what's going on. And the fact that you have to be regulated by, obviously, FCA in the UK or anywhere else you want to go to, it's almost like you cannot go towards that option.

11:18There's no way to go in life without a solution because no bank will bank you. So we have to stay away from stablecoin for eBay, at least blockchain to start with, and just build a solution on a normal database. So for me, yeah, the moment was basically when everyone was literally speculating on Bitcoin. Yeah. Yeah, nice. And Morgan, how about you? So my aha moment came a bit later in like 2021. But before, so before joining AvaLabs, I was in traditional financial services industry for 12 years. All of that time I spent at Citi. 10 of those years, I was on the FX and macro derivatives sales desk covering hedge funds, asset managers, and pension funds for both G10 and EMFX.

12:02And then the last two years I spent as chief of staff or Citi's chief compliance officer. And so a lot of those kind of day-to-day experiences, especially on the FX desk, I saw firsthand what happens on the, you know, again, this is not like unique, I think, to Citi. I think it's just, it's inherent in any kind of large institution. But what happens when systems don't talk to each other and kind of a lot of the reconciliation that has to happen, not only intra-company, but also inter-company. and then from an FX standpoint, especially in the kind of post-trade and settlement process. So there was a lot of moments around trying to reconcile, especially FX settlements, and finding out what was the SWIFT code and what was the client's SWIFT code and did they match and when was it generated.

12:50And obviously, that kind of post-trade issue compounds when you think about more esoteric currencies in which we kind of dealt with all the time. So it's really from an FX standpoint, it was less so the execution of the trade, but more so all the post-trade stuff that really kind of brought to light potentially what kind of smart contract and blockchain capabilities could really do as it relates to upgrading legacy financial services infrastructure and institutional workflows. So that really was kind of my aha moment. And it's really exciting, I think, to see finally stablecoins really moving beyond, to your point, like the speculative and purely trading focused use cases to much more kind of real world use cases, which I'm sure we'll talk about, but whether that's kind of cross border B2B wholesale payments or even P2P, like all of that stuff, I think is finally starting to come to the forefront.

13:44So it's really exciting to see. And I mean, for Neil, I guess it's not been a short period of time, but for me to see it evolving quickly, especially after the election the u.s it's been kind of an in overdrive yeah i will say sorry morgan i will say the the the quick turn has happened in the last six months it's been eight years of twiddling thumbs i'll say uh although things have been happening globally the whiplash that we're getting from what's happening in the u.s is is pretty aggressive this year yeah it's i mean it's a it's an amazing time to be having this discussion i mean it sounds like all of you have clearly noticed over the years that there are significant issues with ways that the traditional finance system works that something like a stablecoin could come in and solve.

14:24Neil, I'm going to put you on the spot a little bit to maybe rewind a bit and give our listeners a bit of an explainer as to the different modes or models of stablecoins maybe that we've seen in the past and where we are today. So, you know, some of our listeners may remember Terra Luna, for example. What was that all about, Neil? Yeah, great question. I wish we could sort of put that and keep it in the past, but I know it'll be a recurring theme for years. But I think that if you look at what happened with some of the algorithmic stablecoins and really just the general ethos of blockchain maximalists, they'll say, or crypto maximalists, is trustless, decentralized ecosystems.

15:14And so we see a lot of the innovators, and this is where over the past eight years, we've seen a lot of different innovations come out of some of these blockchain native institutions or companies. I think algorithmic stable coins is just one example. But that's one example that I think had a full-blown sort of public failure. And I think that's where we're starting to see regulations being put in place globally that say, this is how you need to manage reserves associated with an asset that is being issued on chain. Because if you think about it from the regulatory perspective, everything that they care about, everything they focus on is consumer protection.

15:59If you have a run on a bank, which we saw a couple of years ago in the US, there are implications and downstream impacts for that in the banking sector. If you have a run on a stable coin, we saw this as a de-pegging of USDC and USDT a few years ago, there are issues. But at the end of the day, if you have a fully collateralized reserve-backed stable coin that you are showing publicly is there, that alleviates a lot of the regulatory risk and concern that consumers, institutions, and obviously the regulators will have as well. So we can look at some of these models for algorithmic stablecoins where on the back end you're sort of managing and rebalancing assets within a liquidity pool.

16:46We don't need to get into the dynamics of how all of that works, but essentially what you're doing as a user or consumer of that stablecoin is putting trust in the issuer that at any point in time, you will be able to receive that stablecoin back for the underlying asset, which is dollars. And in order to do that today, we need that framework and structure in place. We need issuers to be fully transparent on what is being held for those assets so that consumers can use it in a more trustless environment from a transactional perspective, not necessarily trustless from the issuance and redemption side.

17:25Amazing. Great explainer. I would also add to that, Neil, and I started Avalabs four days before Terra, so my timing was impeccable. Oh my gosh. But just to add, look how far we've come. Just to add, I also think, to Neil's point, in addition to regulatory frameworks, the labels and disclosures on some of these products is paramount. I think back a few years ago, people were calling stablecoins things that were backed by real estate and commodities and things that, you know, wouldn't necessarily fly by today's definition. I think that there's been kind of additional products and services that have been developed to kind of reflect a variety of different now called synthetic dollars that are kind of coming out onto the market that are not necessarily dollar pegged or dollar backed fully.

18:19So the labeling and the disclosures, obviously, are particularly important. I think what we're mostly talking about is kind of dollar-backed or cash-in-cash-equivalent-backed, you know, dollar-peg stablecoins. But there's still a plethora of other types that are not necessarily marketed as stablecoins, but more so synthetic dollars that are backed by a variety of different types of assets and strategies as well. That's awesome. Anthony, you want to come in? Yeah, I was just going to say that when you actually think about it, the idea of having a good within stablecoin is just crazy, right? It's like you have a code balancing demand and supply with no one to check the balances.

19:00It's crazy. I remember like they wanted to rebuild this marketplace solution to pretty much manage the demand and supply between one of the exotic currencies and obviously our currency. even that is quite difficult because you actually have genuine businesses on both sides trying to buy and sell from each other right and there are three things that you always have to think about when it comes to moving money one is your counterparty risk so no one is giving you any what's called a trust or any confidence that the risk on the other side is definitely good enough for you to say yes i want to send out my value to you right then you have the trust element One of the reasons why payment also is delayed, like it takes three or five days for payment to go through is trust.

19:46Because the banks or the ledger, they don't trust each other. That's why it takes a lot of effort in between banks to sell to. Then you talk about fraud element of it, which is basically what every bank is trying to prevent. So for me, yeah, that was just crazy. So I would say, obviously, the fiat-backed stablecoin is a no-brainer. You have a dollar for dollar. I mean, not much should go wrong as long as it's transparent. the dollar that's been backed behind the scenes so yeah it has been amazing i was the last seven years when it comes to stablecoin in general but personally i'm not a big fan of the algorithm i don't think it makes sense in a typical demand supply yeah what we live in randam it sounds like what what the three of you are saying is what we have now is trust so we have trust in the assets we have trust in the tech we have trust in the regulation now with genius um and in various other various other markets.

20:41I mean, Neil, you mentioned regs in the US. So let's go down that rabbit hole a little bit. I mean, how do we see the scaling across the world? So for example, we know in the EU, there is MICA, which is a little bit different in some ways. I mean, do any of you have a point of view of what happens now after these initial kind of round of regs? Yeah, I'll maybe take a stab at a first, I'll call it a guess at this point because that's all we're really doing here. But I think what we'll start to see are pockets or geographies where the regulatory framework is put in place and regulated institutions start to participate.

21:23They start to issue and figure out, is it a tokenized deposit that I want to issue? Is it a stable coin that I want to issue? Is it a tokenized money market fund? Because all of those will have different implications in terms of permissioning, access, controls, and essentially the ecosystem that it can be used within. And so I think what we need are regulators in each of the jurisdictions to enable framework that is at least relatively consistent. I think from what we've seen and some of the conversations I've had internally and externally is, like you look at Mika and Genius and some of the other frameworks are globally.

22:03I'd say 75 to 80 % of what they're saying is consistent. So the question is, how do we resolve or deal with that 20 % of nuance or specificity? I think as we start to get these projects coming online, we'll then start to see what does interoperability mean for institutions, whether it's counterparty and multi-stablecoin interoperability from a risk perspective to say, Bank A issues a stablecoin or a tokenized deposit. Me as Bank B will take custody of that on behalf of my client. But am I now having to discount that stablecoin because of the counterparty risk associated with somebody else's deposits?

22:48We then have to say, okay, well, how is this going to work in the FX world? Can tokenized deposits interact and interoperate at the wholesale level across currencies? Or are we expecting consumer-based products using stable coins to be used more for that sort of consumer and B2B transactional type of model? So I think it's a long-winded way of saying, we don't know how this is going to evolve. I think all the tools and building blocks are in place. It's really up to the regulators to give us the rules and give the regulated institutions the rules of the road to participate. Although we will see the tethers, the circles, and more of the blockchain and crypto natives of the world push the envelope, enable some of these innovative use cases that I think will then serve as the proof points for regulators and banks to more actively participate.

23:37Actually, maybe I wanted to slightly go against what Neil just said. Let's do it, Anthony. But when we talk about we don't know what the regulators will do or not, I think we do. In my world, I think they're going to move towards proper regulation. I just see them potentially lifting everything that they do today on payments onto Stablecoin. Because if you think about it, Stablecoin has gone from ban it or crypto in general ban it, we don't want it, to now let's regulate it. Suddenly, every branch of government, if you go around, whether it's UK, Europe, the US, everyone is talking about Stablecoin today.

24:17and there's only going to be one outcome. There's going to be a red tape whether we like it or not. There's going to be a law of, okay, we need to track, you need to do transaction monitoring, you need to do everything that you do on the field today. So for me, we do know where they're going. It's a baby step. Whether they get it in 12 months or 24 months, we don't know. But that's where it's going to go. They can't roll back the clock now. Yeah. Yeah, I will say, I fully agree with that. And where I do see a potential starting point for banks and regulated institutions is tokenizing deposits.

24:47Because to your point there, Anthony, it's not, I would say, materially shifting how they operate and do business today. Stablecoins actually eat into the traditional business model of banks. That's why we're seeing fintechs and non-banks issue stablecoins. Whereas I think banks are going to lean towards more tokenized deposit models as a starting point, at least, then understand where and how they need to be interoperable with all of the other assets that are out there. But do I think every bank should issue their own stablecoin? Absolutely not. Do I think every bank should have their own tokenized deposit system that can be interoperable with digital assets that are out there in the ecosystem?

25:27Certainly. I think that's a really interesting and compelling starting point for a lot of regulated institutions because, again, it's not necessarily massively disrupting what they do today. It's just really inserting a wallet and blockchain-based offering on the back of kind of what they deliver to customers today. And that doesn't need to change on the UX side. Yeah, I would maybe take a little bit, something that you mentioned, Neil, in terms of the fintechs. Like, I actually think we're going to see a lot more stablecoins and stablecoin issuance out there driven by, you know, already starting to see it between Stripe getting involved and other fintechs, PayPal.

26:10I think any company that has a distribution and client base should consider launching their own stablecoin. It automatically means a greater kind of another revenue line item for them, a way to kind of keep a stickier deposit base and a user base from which they can then start to kind of upsell and incentivize other kind of blockchain-enabled products and services from there. And I think to your point, Neil, it might start to eat away into the depository base from a banking perspective. And not to say that these, you know, fintechs and neobanks will kind of issue their own from scratch. a lot of them can kind of white label existing solutions.

26:50But I do think like for as many stable coins as exist today, I think this time next year, there's going to be way more. And not just fintechs and neobanks, but enterprises as well. And obviously the question around interoperability is going to be key because obviously you don't want, you know, all these things to be fragmented from a liquidity perspective. But I think we'll see a lot more, you know, a lot more of privately issued stable coins. So Morgan, question on that. Do you feel like we might end up in another ICO world where everyone is issuing a coin, therefore you don't even know what value to actually bring it in?

27:28I do agree with you that if you have a massive distribution, issue your own coin because it makes sense. But if every fintech, every two year old fintech is now issuing a coin, for what purpose exactly? Every bank doing the same thing. Do I want a bank that is, I don't know, somewhere in the middle of nowhere, like East Africa or wherever, a small bank, issuing a stablecoin? I don't want to see that personally. Totally. So how do you control that? Well, I also think it's different between a company issuing its own token versus a stablecoin. And obviously that will have to be subject to particular laws, rules, and regulations and transaction monitoring, KYC, and all those things that the regulatory frameworks are developing.

28:08And to your point, yes, again, like the question of interoperability is key. And I think there's a threshold to determine, does it make sense for you as a particular company to issue your own stablecoin or to leverage one that already exists? I think that largely depends on if you as a company have found product market fit and sufficient distribution such that it makes it worth it for you to go down that path or to leverage something like a USDC or USDT that already exists and is pretty kind of prolific, especially in emerging markets. Yeah. Yeah. I mean, look, these are all the things that the regulators need to consider, right, in what they're doing.

28:43And I think the other thing is that once you start to bring in these controls that all of you have been talking about, does it slow the stablecoin down to the point where it becomes very similar to a current rail? And then at what point do the benefits begin to get mitigated if you bring in the same degree of controls, I suppose? I think, yeah, I think it also just raises a fundamental question of like, what does financial services look like in the future? I think we've seen fintechs step in and kind of steal the consumer share of wallet from banks. And I think from that, we're starting to see an unbundling of financial services.