Stablecoins and CBDCs: Will the Two Coexist?

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1:30Austin Campbell, welcome to Rubison Crypto Daily Briefing. Thank you very much. Happy to be here. Well, it's really a pleasure to have you. There's so much to talk about. We were talking a little bit off camera about what's happening in stablecoins, the importance of this ecosystem to the country, obviously the importance of the crypto ecosystem. But before we talk about this, I just want to do a quick brief on price action coming out today. I'm looking at Bitcoin right now on my screen trading at$28 ,037. Looks like it's off about 1.5 % in the last 24 hours, trailing seven days off a little bit over 7%.

2:02Obviously, this coming off a significant rally. As we switch over to Ethereum, looks like it's trading on my screen$1 ,903, trailing 24 hours off about, I'll call it 2.25%, a little bit less, trailing seven days off over 7.5%. So we're roughly trading in line with Bitcoin, obviously, again, off the back of a considerable rally there. Austin, I know you watch a lot of things in the space. We're going to talk a lot about stablecoins. We're truly going to deep dive in just a second. Any thoughts on where we are right now in this market? Obviously, we've seen some buying, and we've seen the rise in price, and now we're seeing a little bit of selling pressure.

2:38Yeah, the main thing that's caught my interest is basically how boring some of the price action has been on the back of the Ethereum upgrade. I know there are a lot of predictions that that could get very wild, and instead it's been quite stable, which I think indicates a lot of the maturity of the ecosystem that's emerged in the space. Yeah, sometimes boring is good. Austin, you have a really interesting background, which is anything but boring. Tell us a little bit about yourself, and then we're going to talk more about stablecoins. Yeah, sounds good. So my background, as I have joked elsewhere, is basically being a grouchy fixed income person.

3:10So way back in the depths of the past, I ran trading desks at J.P. Morgan dealing with cash stability instruments that needed to trade. And this will sound familiar, sort of call it a$1 stable nav over time, even though their underlying instruments were highly diverse and varied. So as I've joked, I traded stable coins before they were ever on a blockchain. And then after that, I've kicked around. I was at a place called Stone Ridge, which is Nydig's parent, which is where I really got into crypto. I was at Citi. I was the co-head of digital assets rates trading along with my friend Lee Smallwood.

3:41And then I was at Paxos where I was the head of portfolio management, the chief risk officer for one of our entities there. And now I am a professor and have my own consulting firm helping people in the crypto space. And you're at Columbia University where you do this, Columbia University Business School. That is correct. Yes, I teach one of the blockchain courses there. You know, Austin, I spent a little bit of time on a fixed income trading floor myself, not as a trader on the tech side. But it's really interesting to have people who have that experience because it definitely provides a different window into digital assets.

4:11Yeah, I think one of the things that I experienced coming into the space is a lot of the people who are here either came from the tech world or when they came from finance, came from equities, came from prime brokerage, places that were very like aspirational and narrative driven. So it's a little bit different to be the person who's like obsessed with market structure and mathematics when you're in that kind of space. But that's ultimately what drives a lot of fixed income. Yeah, absolutely. So talking about that obsession, let's talk about your latest obsession, which is stable coins. I imagine many of our viewers will recently seen your testimony down on the hill where you talked about this topic.

4:4650 ,000 foot, where are we right now? What matters? What do people need to know? So I would say the biggest thing that's important right now is in the United States, we are in complete chaos as we look at the stablecoin space. If I was trying to run one here, I have multiple regulators all fighting about who's going to be in charge of me. And there's not a clear answer, and the rules between those regulators are mutually contradictory. So without knowing in advance who I answer to, it's impossible to comply. What that means is the space is moving offshore. Other jurisdictions are passing legislation that provides a very clear pathway.

5:22And I would tell you that from an American perspective, we're probably in the process of fumbling the ball on stablecoins. On the other hand, this is an incredible opportunity for the rest of the world. If you're in Europe, if you're in the U.K., if you're in Singapore, if you're in Hong Kong, times have probably never been better to look at launching a project and trying to build something really sustainable in the space. Yeah, you know, it's interesting. You talked about this at the hearing. We're going to talk a lot more about U.S. competitiveness and, of course, the importance and the primacy of the dollar as the global reserve currency for the United States.

5:53But I want to talk first about this regulatory confusion, this regulatory chaos. You have this great metaphor in your congressional testimony where you said it's like you show up to play a game and you're not sure whether you're playing football or baseball. That's not just about who you're answering to in terms of the reporting structure. That's about the basic fundamental framework for the way that you have to do business. It really is a chaotic time. Talk a little bit about where we are right now, the challenges that presents, and how you see that sort of unfolding as we go forward. Yeah, so that problem really comes into focus when you try to think of like the microstructure of what you need to do to run a business.

6:30So take some of the major U.S. stablecoin issuers. If I'm looking at Circle, if I'm looking at Paxos, if I'm looking at Gemini, and I'm trying to figure out how to structure my business, If I have to answer to a bank regulator, I'm thinking about things like capital reporting, capital standards, risk controls around liquidity, and sort of call it the prudential design that prevents all of our banks from collapsing because people do really silly stuff inside of them. At least some of the banks have problems. One of the interesting things about this space is we have people who come to us from the technology side.

7:00We have people who come to us from the finance side, and we don't always speak the same languages. Talk a little bit about what you mean by the prudential aspect of running a bank. Obviously, people who are in finance will know exactly what this means. But for folks who don't have the benefit of that background, talk about what you mean when you talk about how to tailor that microstructure, if you could define that as well, to the regulators in a banking environment. Yeah, so let's zoom out and be very simple for the purpose of explanation and talk about what would be a really basic sort of bank, which is on one side, you will take deposits from people.

7:30That's how banks work. When you give them money and it goes into your checking account, it goes into your savings account, you should be aware you are technically lending your money to the bank. The bank will then take that money and go lend onwards with that. So they're going to go to people in the market and lend for homes, lend for businesses, potentially buy government debt. And what happens is if you zoom out, banks are taking risk of their loan portfolio, but they owe all their depositors money back at some point. To make sure that goes well, regulators really have a couple of levers that they use to control banks.

8:01Number one is limiting the kinds of assets and permissible activity. So like I might be able to lend against a mortgage, but I should not go take a YOLO into a massive amount of Tesla stock if I'm a bank with depositor money. At the same time, they're going to require controls right around reporting, around liquidity, around risk so that they have a 100 percent view into the activities of the bank if that's done properly. Obviously, not always is. And then they're also going to require the bank to hold excess capital with the idea that losses that the bank takes should impact the owners of the bank, the shareholders first.

8:33And only when things get truly dire should the depositors be impacted. All of those are levers used to control banks. The punchline is if you're in a bank in America, there's a lot of strings attached that come along with that status. Yeah. So, you know, to begin with, this is the old phrase that people have probably heard on this show before, which is, of course, borrowing short to lend long. If that sounds like an inherently risky proposition, it certainly can be if you have bankers making wildly speculative bets. We've, in fact, seen this here in the 2007-2008 period. Now, of course, you have a whole raft of additional federal regulation on top of all the regulation from the federal and state level that we saw from the 1930s vintage.

9:12the last time we saw sort of this massive hypertrophy in the financial services sector. But let's connect all of this back to stable coins. Explain how all of this that we've talked about, which has kind of been a great primer or 101 on how banking works, applies to the stable coin ecosystem. Right. So when you look at a stable coin, and I said this in my testimony, they look either when designed properly like very conservative banks or like government money market funds, which is where that regulatory confusion comes back in. People start arguing, are these banks or are they securities? We know what Gary Gensler's view is, but to be clear, his view is not shared by the banking regulators who themselves think they regulate these things.

9:52What that means is that a stablecoin fundamentally looks like the activity we just described. I take deposits. Those are the people minting the tokens. And I take those deposits and I go invest them in financial assets that are supposed to support those deposits. In the case of most of the onshore stablecoins now. That is a combination of bank deposits, of T-bills, and of something called overnight reverse repo, which you can think of as very short-term loans, in this case, secured by treasuries for the stablecoin holders. So they are engaging in the same sort of borrowing to lending dance, only in this case, knowing that the deposits are highly volatile within stablecoins.

10:30They don't really lend long. They also lend pretty short. Hey, everyone. We're going to take a quick pause and hear a word from our partners. We'll be right back.

10:43Yeah. And so obviously that mix is about what creates the stability or lack of stability in the underlying stablecoins. Let's talk about the current state of play in the stablecoin space. I know we have a chart of the relative market caps of the stablecoins that are most used here in the United States and abroad. Obviously, when you look at this chart, when you see that green line, you see Tether clearly at the top of the league tables there. Talk a little bit about that USDC underneath it and BUSC. That, of course, is the Binance stablecoin. Talk a little bit about this landscape, Austin, and how you see it, how you think about it, and what, frankly, it means to have this being offshore rather than regulated onshore here in the United States.

11:26So what I see when I look at that chart is concrete evidence that the difficulty of running a stablecoin in the United States is becoming such that people are just leaving. Right. So if you look at the history of Tether, Tether is not particularly transparent. They disclose a little bit about reserves, but I would describe it at best as a little bit. And they have not been particularly open about whether they are fully reserved at all times, what their real business operations are, what they plan to hold in the future. On the other hand, if you look at Paxos, which is the issuer of BUSD, and you look at Circle, they both move to a standard of complete and total disclosure.

12:01So you know down to the penny what is in each of those stablecoins. They disclose their bank deposits. They disclose all of their securities holdings. That is a radical degree of transparency comparatively. They have much better consumer protections around them with guarantees of redemption, better holding structures, and all the sorts of things that if you were a pretty granular lawyer in the fixed income space, you would care about. And so to have a situation where everything is moving offshore because we're so worried that U.S. regulators will just stamp these things out of existence and into something that is, quite frankly, less transparent, less consumer protective tells you how toxic the onshore regulatory regime is.

12:38But it also tells you how big the opportunity offshore is. If you build a transparent consumer protective version, it will probably dominate the current environment. I want to talk a little bit about something since you mentioned BUSD there that you've written about in the past. We should say that you've worked with Paxos in the past. You could talk a little bit about that. But tell us, because you wrote about it in Coindesk and you wrote about it very eloquently, what your view is with what happened with the relationship between Paxos and Binance in terms of the stablecoin that Paxos was securing for Binance?

13:11Yeah. So if you look at BUSD, it's a little bit of a confusing story, which is to say, The original BUSD, which is the one that was issued by Paxos, was approved in 2019 by the NYDFS. That only exists on the Ethereum chain. And so for that version, there's a lot of strings attached. And what's going on there is Paxos is managing the reserves, managing the mint and burn and the issuance, but Binance is by and large the distributor. So their name was on the token. It was distributed through their platform. So you kind of think of this as like front-end and back-end, if you want to simplify it in your head from a tech perspective.

13:45In addition to that, because BUSD only existed on the Ethereum chain and the canonical version, there was also a wrapped version, which is to say Binance would take tokens, lock them in some sort of bridge contract, and then create the wrapped version of it, which is what existed on things like the Binance smart chain or some of the other chains out there. So what they would do is they would show essentially the reserves. They would show the digital hashes of that. You could verify it, and then they would create liabilities, in a sense, against those assets that were then disclosed publicly through an open sort of standard.

14:18Yeah, that's correct. It worked pretty much like any other bridge worked, right? Like you hold tokens on one side, you have the wrapped version on the other side. Yeah. Okay, so what happened there? Well, I was going to say, you mean in the sense of what happened with the NYDFS? Yeah, I mean, and this idea that what the statements that the state of New York made and the ultimate outcome, which is that it no longer exists. Yeah, so I would say the NYDFS specifically always had concerns around representations of the activities of the stablecoin other than on the Ethereum chain. they have always felt to try to represent their position adequately, that they weren't getting enough disclosure and not understanding enough of what was going on there and had some concerns about how it was managed.

15:04I think some of this is probably just poor communication, to be totally honest. But the net result of that is that the NYDFS banned Paxos from minting more BUSD. So importantly, it does exist in the sense that the reserves were all there, the stablecoins still existed, but they can no longer create new stable coins. And all people can essentially do is redeem it over time. So when you look at the previous chart that was up on the screen, you will see from the point of that order from the NYDFS, it's basically just a downtrend for BUSD. And that's because you can't mint more of it. You can still redeem it.

15:38All of the money is there in the reserves, right? Like that is actually held at custodians, right? Like the state streets, the bonies of the world, the physical dollars are there. It's just a question of slowly unwinding all of that to get it out for the holders of BUSD. So I would tell you it's a product in unwind as opposed to one that was called disruptively shut down. Yeah, I should say no longer exists as an ongoing business model that they are currently operating. But of course, as you say, the redemptions continue. By the way, I believe it's on a redemption schedule where they are attempting to extinguish it after X number of years.

16:09I don't know what the exact timetable is, but the ultimate goal is to take it out of existence. That is correct. But I raise that point specifically because there's a big difference between going out of existence in the form of something like UST and being able to be unwound in orderly fashion. Yes, a very important point, especially in this space, as we've seen the disorderly unwinds happen before, and it causes a tremendous amount of pain for people who are invested in that space. Let's talk about this a little bit more broadly to get the context on this, because this is an issue I think that you've been incredibly eloquent on.

16:42And there are two issues that are related, though not identical, that I think are incredibly important to discuss. On the one hand, I'm talking about U.S. competitiveness globally. Obviously, for anyone who's been paying attention for the last several decades, Silicon Valley, the innovation economy has been a tremendous, tremendous boon to the U.S. economy more broadly. That's one component of it. That's something that would be true of any industry. But there's something special about the blockchain space, particularly with regard to stablecoins, which is the idea of the U.S. dollar as the reserve currency, the opportunities there and the risks if this is not handled in a way that supports the U.S.

17:20dollar as the global reserve currency. Talk a little bit about those two points in your view. How do you think about global competitiveness? How do you think about the importance of the U.S. dollar as a reserve currency and how stable coins can support both? So zooming out a little bit, I would say as a veteran of the financial services industry who's thought a lot about 2008, the real innovation here is the blockchain, right? Like a global neutral platform for the simultaneous exchange of all goods is an incredibly powerful tool. I think over the next, call it 10, 20, 30 years, you will see increasing tokenization of most forms of assets so that you can exchange them efficiently and without counterparty credit risk.

17:59And when you exchange an asset, you need money, right? Like if you go to buy a coffee, if you go to buy a car, if you go to buy a bond, if you go to buy a stock, you're typically not bartering. I don't offer them my services as a professor. I don't offer them my services as a consultant. I'm not trading them a table, right? Like I pay for it with, in my case, dollars typically. And so what's most important to me about stable coins is that they serve as money on the blockchain, right? Like this is a representation of the central thing that people use to exchange. And so whatever is preferred on the blockchain is going to become the standard for that space.

18:35So if crypto continues to grow at the pace it's grown from 2012 to present, and there is going to be a form of money on the blockchain, and we prevent that form of money from being the dollar, I think that is a problem for the United States. If that's the euro, if that's the yuan, it will lead to another currency eroding the dollar's status and starting to become the preferred method of exchange globally. And for folks who are not really thinking about the macro as often as you do. Let's talk about why the U.S. dollar being the global reserve currency has been such an important asset since the Bretton Woods period.

19:08This is something that people maybe on the tech side haven't given as much thought to as you have. Why is it so important that the dollar maintain its reserve currency status from the perspective of U.S. competitiveness, national security, et cetera, et cetera? Yeah, so I would say being the reserve currency fundamentally does two pretty important things for you in the context of this debate. One is that it causes everybody else to end up with dollars, which means they want to invest them, which means they typically invest them in America. If we're thinking about funding the deficit, if we're thinking about funding for American companies and American projects, this leads to a huge amount of capital showing up here so long as we have open markets, which in America we do.

19:45So this kind of allows us to be globally competitive in a way that countries without the reserve currency status essentially call it pay more. The second part is exactly as I alluded to in my testimony from a national security perspective. When you are the center of exchange for everybody, you see all the data, right? If that moves somewhere else, we no longer control that. Somebody else does. And so when you're thinking about interdicting activity that is genuinely bad for the world, because I'll just say, you know, as a generic statement, pretty much all forms of terrorism are bad. So if you're trying to cut off terrorism financing, you would like to be able to control the pipes that money is flowing through and understand where it is flowing around.

20:24That's much harder if it's not in your currency or through your systems. Yeah, and also there's another attribute of this, which is the pricing and denomination of commodities prices, the so-called petrodollar system in the United States. Talk a little bit about that and why it matters. Yeah, I mean, long story short, when everything priced in dollars and everybody exchanges dollars for it, everybody wants to own the dollar, right? If I'm going to buy oil globally, even if it's two non-American countries trading, they typically settle it in dollars. Hey, everyone, we're going to take another quick break and hear a word from our partners.

20:57We'll be right back to the Real Vision Crypto Daily Briefing.

21:05And this is something that, by the way, has come under question lately. when you see the Chinese attempting to negotiate yuan-denominated payments across the world with various producers of petroleum and petroleum products. Yeah, that is completely correct. And the interesting part about that is that, you know, you'll see takes on places like Twitter and out in the world that the dollar is somehow magically going to lose its reserve currency status overnight. That's typically not how things work. Things erode slowly over time. So each of these is like a brick in another wall that's being built at the same time our wall is slowly eroding, if you think of it that way.

21:41So as I watch all of these things, stable coins are a good way to start putting more bricks back on the wall for the dollar. And I think it would be profoundly misunderstood by the United States to block that innovation. People are trying to give us money to put into treasury debt, and we're telling them, no, that's a little bit bizarre. Yeah, this sort of reminds me of the epigraph for American Psycho. It's a talking head song. And as things fell apart, nobody paid much attention. When they happen slowly, it's difficult to see them and difficult to feel them. One of the pieces of data that we've gotten on this in the last week, of course, is MECA.