The Booming Crypto Use Case That's Happening Right Now

27:01So the question to you of how good are these for humanitarian aid in many ways simplifies to how are we feeling about the U.S. legal system? That's a fun thought just then. I want to get into the financial stability aspect of this. But before I do, you mentioned regulation. Who should regulate stablecoins given that the issuers tend to be in different places around the world? Where's Tether again? In the Caymans or something? British Virgin Islands, I believe, is their main entity. And there is this sort of like supernational aspect to some of this. You're talking about dollar-like cross-border payments.

27:41So who ultimately gets to decide what a good stablecoin is or how the rules should be enforced? All right. So let's zoom out a little bit and look at the traditional financial system and ask how that question would be answered. And then we'll zoom back in on stablecoins. So in traditional finance, there's two layers to that regulation. Layer number one is for issuers. It's usually the local jurisdiction. And in particular, for things that are stablecoins, usually the banking regulators in local jurisdictions that would look at these sorts of things, right? So if you're in the United States, you probably don't have much of a say of how Deutsche Bank is running their operations in Germany.

28:20That will be the Boffen. So that's part one. Part two is then in your local area, if the issuer is from a foreign jurisdiction, are they permitted? Do you give them equivalency for their regimes? Do you trust them? So this is sort of the patchwork of our current regulation. And again, zooming out, stable coins work very much the same way. You would look at each one in the jurisdiction in which you're issued, right? You look at regimes that exist. You've got like Bermuda, you've got like Singapore, you've got Hong Kong who have all booted things up. Do you trust them? Do you think they're good?

28:52And then the leverage that you would have in a place like the United States is, do we think companies operating here should be able to accept or interact with those things? Say more on that. So is the idea that cryptocurrency exchanges in the United States, there would be some rule that says you're not allowed to trade this or you're not allowed to call this a stable coin on your website. I mean, this gets to the issue of we can't even really talk about regulating stable coins when both Circle and the Terra Luna coin were both called stable coins on the internet, but were radically different financial products.

29:29Yeah, no, that's exactly correct. And so if you look at something like McHenry Waters, right, which is one of the stablecoin bills running around in front of the U.S. legislature right now, they are trying to define, in their words, what a stablecoin actually is. And many of these bills include either bans on stablecoins that are outside of that box, so that probably means both issuers and people using them for payments and as stablecoins, or if not bans, at least prohibitions on calling them stablecoins, representing them as safe, using them for payments. I tend to fall into the second camp, which is people should be able to experiment and try things.

30:07They just need to be honest about it and not lie about stability or get special treatment unless they've actually done the right things. So, so far in the real world, we've seen a stable coin that was affected by the collapse of a bank. So Circle and SVB, which is kind of funny, but I'm going to ask you the complete opposite question, which is, if we had the collapse of a stablecoin, what impact would that have on the traditional financial system? So the answer to that is we need to ask what we mean by, quote unquote, the collapse of a stablecoin, right? Because you're kind of looking at two scenarios and this reveals where, you know, I said earlier, I think the discourse around these has been a little bit broken.

30:47This is why. So one would be the complete liquidation of a stablecoin, but with sufficient reserves. So Circle, as of the time of us recording this, is somewhere in like the$34 billion-ish range, but they have the super majority of that money in a reverse repo fund that's being managed by a professional asset manager. If they had to liquidate 100 % of that thing, they could. And so the answer you're asking is, what does liquidating$34 billion of overnight reverse repo look like? And by the way, who's on the other side of that? Because that money has to go somewhere. It's not being vaporized, right?

31:21Like this is the classic problem of plus one, minus one. I don't think that's really a systemic problem unless we're in a period of such deeply impacted liquidity that we can't move 34 yards of that stuff. But in that case, I would tell you the problem is unlikely to be just the stable coin. The other option is, did a stable coin hold reserves that themselves lost value? So like, let's hypothetically say that the guys at Circle to use them again as the example, not an insult to Circle, decided instead of holding like overnight reverse repo, we're going to YOLO into Tesla. And then that goes really badly, right?

31:56And so in that case, you're going to have a bunch of people coming to redeem. And what's going to happen is you will have a ton of sell pressure on that asset as people bail out. And then you're going to have the classic problem of at the end, it's worth zero. I think that largely becomes a problem if you're using it for payments or using it for savings or using it with an expectation of safety. So in that case, there's this sort of intrinsic linkage between the safety of the reserves and the ability to cause shocks that Tether has been the main focus of these concerns. And it's been the main focus of these concerns because people don't know what Tether is holding.

32:31Right. But like take Paxos, for example, BUSD was shut down by the NYDFS. And at the time it was twenty two and a half billion. And now today is under one billion. And absolutely nothing happened liquidating that. Thank you.

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34:30So let's say, you know, stablecoin usage continues to grow in markets where people just want to have dollar exposure. So you're, you know, your obvious example is Argentina as your Venezuela is. And let's say people are using the popular public blockchains to exchange them, whether it's Ethereum, Solana, et cetera. There are people who are bullish on the tokens of those chains because people are going to listen to the Austin Campbell scenario where this is a lot of real dollars are being traded or exchanged over these chains. In your view, who does the value accrue to? Does there accrue much value to the token holders of these chains?

35:14I'm not certain that it does. Again, this sort of comes back to crypto sort of reinventing things in finance and everybody talking past each other, right? If you're an extremely high throughput chain, but you charge extremely low fees for that high throughput, it's not - Solana. Like a Solana. It's not clear to me that value will accrue in a deep way to the Solana holders. It's also not clear to me that it won't. But I would say that is an area where many things are simply accepted as given in the crypto space. And I often have questions about them, which is not to say, right, skeptic in the sense of like, it'll never work.

35:52But I'm, I would say, skeptical in the sense of I genuinely don't know. Like, I have a lot of questions. Could we ever have a situation where the use of stable coins grows so enormously that at some point the banks are like, actually, we're going to get in on this. Could they, in theory, flip a switch and come up with a stable coin competitor or immediately convert to atomic settlement or instantaneous settlement or something like that? Or would that just be impossible either because of their technological systems or because of regulations around remittances and things like that? So I think the current biggest problem is the legal structure and balance sheet of banks, right?

36:33Which is to say stable coins are trying to be this thing that everybody can transfer between everybody and the reserves over time have trended towards being incredibly simplistic and call it mutually acceptable to everybody. That's not typically true of bank balance sheets, right? Problem number one, bank deposits are not fungible. You would feel very differently last Last year, owning a deposit at, say, Bank of America versus Silicon Valley Bank. These will not be priced identically. And two, banks moving money around between them, back to our earlier example, if they actually have to net settle, are like de-investing out of things and then reinvesting in other things.

37:08This is not really the same as moving a token around. So to answer that question, I think there's not a reason banks can't do it in theory, but it would require a pretty radical transformation of bank balance sheets. It's like if all the banks set up, call it bankruptcy remote trusts that represent a stable coin where they're just doing T-bills, yeah, this will work fine. Those will all largely be fungible. But right now with bank balance sheets, unlikely. So basically, if J.P. Morgan and Bank of America, their asset book probably looks somewhat similar, but they're not identical. and therefore a transfer of value from a dollar of a JP Morgan deposit holder to a Bank of America means some reshuffling of the assets or the loans that they've made, and they're not perfectly identical, and then this creates friction.

37:57And I would say, importantly, the degree of difference between those things is going to be much larger than if we go look at Fidelity's government money market fund versus Vanguard's government money market fund, which may not be perfectly identical, but will be way closer. There is this talk, it's like, just treat these as money market funds. If you're a stablecoin issuer, you're a money market fund and all of the obligations that a money market mutual fund has, that's your obligation. Does that work? What are the differences? Why or why not? Yeah, so that's a very US peculiarity problem of it's really hard to pay for things with securities.

38:31So my question would be, what do you mean by money market fund? And if you mean we can put it in like a bank or a trust wrapper and own assets that look substantially similar to a government money market fund, I would tell you that's basically what McHenry Waters does. So I think that works fine. If you want to say, no, you like literally need to be issued as a security and handled in that way, then no, that creates a whole host of other problems that will break things for payments. So here we are in early 2024. We're talking about stable coins, which a lot of people thought might go away at some point or there would be some sort of volatility event that would lead everyone to question whether or not these are a legitimate store of value.

39:13And instead, they're still here. They've been pretty stable. What's next in the sort of stable coin, either discourse or trajectory? So I think what we're starting to see right now is a growing realization among some of the regulators, mostly in Asia, who have looked most closely at crypto that, wait a minute, using these things properly is a way to fix some of our lingering problems from 2008. Right. And then probably a increasing merging of call it crypto native stable coin thinking with traditional financial thinking into something that one hopes will get you to best of. And those two problems you referenced one earlier are atomic settlement.

39:56Right. Which is to say the ability to pay for something completely, perfectly, simultaneously on chain using a smart contract so that I don't have counterparty credit risk in my trades. That is actually a pretty big upgrade to the current system if we can get that done. And then simultaneously having these very bankruptcy stable vehicles that can be held in self-custody, because what that does is eliminates a lot of the run risk of the large banks and the systemicness there, right? Like in 2008, if you owned USDC in its current form, which is basically a government money market fund under the hood, nobody's running that thing.

40:33Nobody's panicking. They're all just sitting around looking marginally bored instead of having a giant run on bank deposits. And so I think a system that starts embracing those things and then being able to move them around easily across borders both eliminates a huge amount of frictions and simultaneously reduces a lot of risk that's left from 08. Tracy mentioned the prospect of a JPM stable coin or something like that. I believe like has JPMorgan, like have they built their own like sort of EVM compatible chain? So JPM has a project called Onyx and a thing called JPM coin. And back to using it for financial purposes, now you have a 24-7 platform that can do atomic settlement largely of things like repo, and you can do them outside of regular market hours.

41:23So yeah, these are very real. So is there any reason why a platform like Onyx couldn't just be the chain that everyone around the world uses to transfer stable coins? Well, let me ask you a different question to reveal the problem with that question, which is if you were the CEO of Goldman Sachs, would you use a trading and settlement platform unilaterally controlled by JP Morgan? You get a little consortium together, get like, get six or seven banks to do it. Correct. So now you're leading down the path to like DTCC. So like, let's take this actually a few steps forward. If you get a large consortium of, I would suggest in the US, this will not work with just banks.

42:03So let's say banks, asset managers, and maybe insurance companies. That would probably work inside the US, but then you're going to have the problem of how do we get Europe to use it? How do we get Asia to use it? Okay, so now you're incorporating those entities as well. So if you're telling me the, I'm going to say public here in a very loose way, blockchain of the future that everybody is using is a consortium of call it the 500 largest financial entities globally, that actually seems viable to me. Like that is decentralized in a slightly different way. I don't think anonymous public validators are necessarily the perfect answer.

42:36And by the way, even if you look at current technology, like if you're familiar with the Stellar blockchain, they have a fully doxed validator set. And what I just described is essentially how they want it to work. So I do think in the future, more institutional, if you will, chains could be the answer. I'm not like an ETH maxi on that, but I do think they need to be neutral enough that everybody trusts them. Wait, I have another question just on why others aren't doing this. We've been talking about the banks and you laid out a very clear argument why banks might be reticent to create their own stable coins, including that it would involve possibly rejigging the way their balance sheets are structured or creating some sort of shared balance sheet, which, okay, obviously banks don't want to do it.

43:18What about other financial intermediaries like a PayPal? Is this something they would ostensibly be interested in? And could they create their own competitor? Well, I mean, I built the back end for PayPal stable coins. Oh, here we go. The answer there is, oh, yeah, they're very interested. I would say as you look at the groups who are threatened by this, banks and payments companies are probably the most exposed to the technological change, and the majority of them are currently paralyzed by a combination of the innovators dilemma and regulation. Whoever moves first there and gets this right is probably your leader in the next generation of how these things are going to work.

43:57So to your point, you'd much rather cannibalize yourself than have other people cannibalize you. And there are very much people at like PayPal, Visa, and others who are thinking about this exact problem and building things right now. I would also say the other big thrust is the asset managers because they're the ones probably with the biggest incentive to disintermediate the banks. I would say BlackRock's interest in blockchain is not a coincidence economically. Going back to the countries or the regimes in which someone might want to hold dollar-denominated assets, and let's bracket out the Afghanistan to the world, which is an extreme scenario, but the places that just do not have stable domestic currencies, etc., they presumably don't want all of their domestic savers to hold dollars, right?

44:46They presumably don't want people swapping their money into dollars as soon as they can. Do they have mechanisms of pushing back against this? Does the Argentinian government have, like, you know, anyone can download an ETH wallet onto their phone, get ETH transferred onto it, et cetera. At some point, does it scare them? And do they have ways of pushing back against their domestic savers automatically being able to hold dollars? So, one, it 100 % scares them. If you look at what's going on in Nigeria right now and them taking like executives from Binance hostage, literally like this is part of the driver.

45:24So I would say to you, there's two things you need to think about there. One is, do they have ways to stop them that involve coercive measures? Yes, but they have to be extreme. Like, again, to go back to having run a stablecoin, the only country where we were totally certain nobody owned a stablecoin was North Korea. right and the answer is you have to take the internet away from your people right to be able to totally stop it so there will always be some degree of leakage now you can get more and more coercive and abuse human rights more and more to try to turn it down but that's going to have other negative effects on your economy that go hand in hand with that the other part which i would call the positive case is you know you could just run your currency better and cut it with the inflation right if you look at places like switzerland and singapore they're not seeing massive outflows into dollars out of their local currency because people trust the local currency.

46:15In many ways, if you give people the option but not the requirement to substitute into dollars, it's going to, if people want their local currencies to survive, have to raise the level of behavior so that you're at least close to the dollar or you are eventually going to get wiped out. Conversely, asking the same question from the other side, is there a reason that the U.S. should be concerned about this? I mean, we are kind of talking about a shadow dollar system. there is this ongoing discussion about the pros and cons of the dollar being the reserve asset to the U.S. economy. Is there a reason that people in America or policymakers in America should be concerned about this?

46:55Well, I would say from a policymaker standpoint, my biggest concerns would be two, which is one, we restrict these things so much that something other than the dollar becomes the dominant currency on a blockchain. Because if this process essentially continues to run of people getting access to other financial systems, but they prefer like the euro or the yen or something like that, that could have a major impact on dollar dominance. And whether you think the dollar should be the reserve currency or not, I would hope everybody is in agreement that a call it unpredictable sort of technology driven catastrophic unwind of that system is probably bad for everybody.

47:31Two, there are a lot of national security implications to dollar stablecoins working properly. Back to what I just said about public blockchains. If you have all of the KYC information and you know where the reserves are, you are in very good shape to interdict bad actors and retain some degree of control over a system. If everything moves offshore in a way that you have no access to it, things are worse instead. So I think we have a real fork in the road here of being able to call it enforced dollar norms in a more effective, targeted, and quite frankly, transparent way, or having that break down even further.

48:09And that is based on getting US dollar coins onshore, structured properly, and in a way where we can interact with them easily. Dollar norms is a really good phrase. I might use that at some point in the future. All right, I just have one last question. You know, you mentioned that sort of like Circle, due to its own, I don't know, maybe misunderstanding aspects of the traditional financial system, did not have particularly good risk management. And they had some money in SVB. And for a while, they had a pretty significant DPEG, but then SVB got bailed out and it was fine. What are the when you talk to crypto people, what are their sort of frequent misunderstandings?

48:51And I again, I imagine we could go hours and hours with a series of things crypto people don't get about the financial system. But what are the consistent patterns that you see, failure patterns in people in crypto not getting some aspect of TradFi? Yeah, so I would say there's a couple of big themes. One of the biggest is sort of extrapolating from personal finance, which is a big problem in finance in general. Like the way your local bank account works for$5 ,000 is not the way that like Ford's balance sheet works. And that is a big problem because when you have people being like, well, I own USDC.

49:28Won't the FDIC protect the deposits at SVB? It's like they have$3.3 billion of deposits and$250 ,000 of FDIC coverage. I don't like your odds. and very basic misunderstandings like that happen frequently. Number two is this thing that happens a lot with tech, where when you look at Silicon Valley companies, right, the tech people drive it, the product people drive it, they are the rock stars, and the finance people are kind of in a broom closet in the back room and not even in the decision loop. So a lot of it's information accessibility. Like there may have been people who knew this, but nobody was talking to them or taking them seriously.

50:03It's kind of the reverse of what a lot of banks do, where they don't spend enough time on the tech and let the investment bankers drive everything, right? So there's a cultural problem there in crypto. And then the third part is you have a lot of people who have these ideological stances on, I want hard money, I want to reinvent the system, we shouldn't have leverage or credit at all, without understanding the implications of what they're saying. And I often, like I've had this discussion with students in my class, if you guys want to go back to a system where there's no lending, everything is hard money, and it's just do you have it or not, we've had that before.

50:35It's basically like European feudalism. Like, why would you want to go back there? So there's very core misunderstandings of how the monetary system works that I would say are a subset, but unfortunately still a significant subset of people in crypto. Austin Campbell, thank you so much for coming on AdLoss. That was great.

51:06Tracy, I really enjoyed that conversation. It was just, you know, zoom out. So it was nice to talk to someone who genuinely seems grounded in multiple worlds, which is extremely rare, frankly, honestly, in any perspective. Most people have a worldview that's extremely skewed to one. well it was very impressive when i asked about paypal and he's like i built the back end yeah okay um you know what i remembered while we were you asked that question about jp morgan and eth and i remembered in 2013 finding a patent application for jp morgan to do a at the time it was described by me as a bitcoin like online payment system but it was basically like on-chain payments.

51:53And it's so funny reading this. I just dug it up and I was reading it and there's a line like, traditional finance companies have had to contend with new types of virtual currencies, which some people view as viable alternative payment systems that could one day challenge the biggest banks and credit cards. That was 2013. And it's funny how like much has changed, but also how the conversation is still very similar. Totally. You know, so like I think Austin made a very good case that there are some very deep institutional headwinds, so to speak, with banks going fully crypto, either launching their own stable coins or launching their own EVM compatible chains, etc.

52:36That being said, it's hard for me to imagine the banks just sort of sitting idly by, particularly in the scenario in which, and Austin seemed to be sort of agnostic on this question, if it turns out that a lot of value is accruing to the holders of ETH tokens, or the holders of Solana tokens, or the holders of Tron tokens, or whatever chain people are exchanging stablecoins on, I doubt they're going to like sort of sit idly by and just sort of let those, let them, and it's like, oh, we're just the custodian that holds the dollars while everyone else makes the money on the payments. Well, on the other hand, I mean, if the price of developing or if the cost of developing your own stable coin is that you have to, as Austin said, radically reimagine your balance sheet and also cooperate in some ways with other banks, which banks don't tend to be very good at cooperating with each other.

53:32Maybe the business play is just become the custodian for those assets and make money that way. Yeah, it could be. It's also we didn't really bring it up in this conversation, but like, especially in the last couple of years. I mean, the stablecoin business is like the best business coin, the best business in the entire world, because you're getting all this yield on your T-bill holdings, et cetera. And for the most part, none of them, I think there are some like theoretically yielding stablecoins, but for the most part, they're just keeping all that yield and owner, you know, so it's like, do not use these as a money market mutual fund because you're giving up the yield.

54:09You're giving up that yield. Yeah, but still a fascinating conversation. And we'll have to keep track of stable coins again. Yeah, because it's been a while, hasn't it? All right, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow Austin Campbell. He's at CampbellJAustin. Follow our producers, Carmen Rodriguez at CarmenArmandDash. Michelle Bennett at Dashbot and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam.

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55:36Thank you.

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