Original title: Why Circle CEO Jeremy Allaire Is So Optimistic About Stablecoins Future
Original author: Laura Shin
Original source: unchained
Compiled by: Kaori, BlockBeats
In March this year, affected by factors such as the bankruptcy of Silicon Valley Bank, Circle, the issuer of the stablecoin USDC, faced a serious run. USDC experienced continuous de-anchoring, and Circle faced its biggest crisis since its establishment. In August, Coinbase Global said it would acquire a stake in Circle and close Center Consortium, the operator of its co-managed stablecoin USD Coin (USDC). The U.S. regulatory landscape is still unclear, but Circle is still on the front lines.
Recently, Circle co-founder and CEO Jeremy Allaire discussed on the Unchained podcast why Coinbase invested in Circle, how Circle emerged stronger from the banking crisis, his views on PYUSD and his views on the U.S. Stablecoin Act, BlockBeats It has been compiled and organized, and the full text is as follows:
Circle’s new moves
Laura Shin: Circle recently dissolved the Center Consortium responsible for managing the development of USDC. Coinbase holds shares in Circle. What is the driving force behind these moves?
Jeremy Allaire: Looking back over the past few years, we invented USDC and showed it to the world about five years ago. When we created USDC, we had a vision for a fiat digital currency protocol, called a fiat currency token. At that time they were not widely known as stablecoins, but some people did call them that. It can run on a blockchain and you can build something that is an interoperable value exchange based on these open networks. We have a bunch of ideas, and we really think these protocols are something that would benefit from standardization around them. It is important to us to work with other industry leaders to develop these standards and share responsibility for protocols like USDC.
Therefore, we were very fortunate to enter into a partnership with Coinbase in 2018, which is a very important strategic partnership for both companies to promote the development of USDC in the market. As part of this, Circle issued USDC, and we have a lot of ideas for how it can grow over time.
While there are regulations about what money transmission is and how companies like Circle need to operate, there are no real regulations when it comes to stablecoins. Things like how reserves are held, how the security of the network itself is managed, all of these are in some sense governance issues, and how interactions with regulation and law are handled. So we created the Center Consortium to conceive of creating self-regulatory governance of stablecoins and issuing more and more policies and more.
Now five years have passed, USDC has grown from scratch, and it has grown from a very small scale to today's billion-dollar revenue, becoming one of the most important digital currencies and digital assets in the world today. At the same time, we see stablecoins as part of the prudential regulatory framework that the main regulators, central banks and payment systems, want to develop. This nature has changed as governance has moved from self-regulatory to governmental governance models.
So, together with Coinbase, we're looking at how we can ensure that Circle can continue to build, innovate, do what we need to do as a publisher and operator, but also continue to have strong economic incentives to make it as broadly successful as possible. While they own part of Circle's equity, Circle fully controls the development and operations of USDC to ensure that everything can operate within the context of new stablecoin laws emerging around the world.
Laura Shin: Interestingly, this arrangement has led to some speculation about whether Circle is adjusting itself due to the acquisition by Coinbase. As CEO of Circle, are you leading Circle toward a public offering or toward being acquired by a company like Coinbase?
Jeremy Allaire: Yes, we are definitely on the path to becoming an independent public company, and our company has been fortunate to have a number of strategic investors over the years. Most recently, BlackRock acquired a minority stake in the company as part of a broader strategic collaboration with our company that we entered into last year. Owning a stake in a company creates great product and value alignment, which is critical and important. I want to make sure that Coinbase, in addition to making money from USDC, has a stake in our long-term success, which I think is a win-win.
This year marks Circle's 10th anniversary and it's been an interesting year for us.
When I founded the company 10 years ago, I made it clear to investors and employees that realizing our vision would take decades. We now have approximately 100 billion+ stablecoins in circulation, but this has barely begun to penetrate the financial system. So there's a lot more to be done, and there's huge potential in common protocols and the utility of the dollar on the internet. Not just for the movement of funds, but for funds to be represented and stored in this form. There are 25 trillion electronic dollars in the world, distributed in different formats, so we are very small. So I would say to everyone, even though we have a lot of revenue and we're very profitable, Circle is still a startup in my mind.
Laura Shin: Circle recently announced that Mercado Libre, Latin America’s largest e-commerce and payments company, will adopt USDC. Please tell us a little bit about this partnership and what impact you think it will have on Circle?
Jeremy Allaire: This is a fantastic company that paved the way for modern business. They also play a very important role in the payments sector in Latin America. This is a broader theme that we're seeing, which is the growth in demand for digital dollars and the need to use them in those markets where local currencies may not be as attractive, and Latin America is certainly one of them. But I think the first phase of this program will be launched in select countries in Latin America, and ultimately we envision this being rolled out very broadly.
But I think it's important as we look at indicators of stablecoin adoption, which has evolved from, "Oh, this is just something to trade on DeFi," or "This is just something for arbitrage traders to use." Become the basic means of providing a reserve of dollar value to those who need it, and provide a very efficient cross-border payment mechanism for those who need it.
These are major mainstream companies that serve hundreds of millions of users, and Mercado Libre has about 200 million customers, which is huge. Therefore, we thought about how to expand the overall market of wallets that can trade USDC. Coinbase has over 100 million wallets that can trade USDC. These types of partnerships really expand the scope, there are many, many more wallets that people use, MetaMask has 30 million active users, and they can all use USDC transactions. As more and more wallets, these traditional fintech commerce companies, digital wallet companies, and all the new people build the next generation of account abstraction wallets (which are going to be the killer apps to enable all of this usability), these things will Established to create more and more ways for people to use USDC.
Laura Shin: Let's say I'm in Chile and I want to buy something on Mercado Libre, it will show the price in Chilean pesos, but additionally will it have a price in USDC?
Jeremy Allaire: I don't actually know the details of the user experience or how it's set up. All I know is that they have a lot of customers with a lot of demand to hold and trade in USD. So this is a really powerful way to move their customers' store of value into a digital dollar. It’s clear once you have these digital dollars, their usefulness within their own platforms and the power of their interoperability is obvious. This is why stablecoins are interesting in some ways in the first place, especially USDC. An open network where you can conduct direct peer-to-peer, interoperable transactions is the real power.
Laura Shin: You said on Twitter that 70% of USDC adoption comes from outside the US. Is that because people just want their savings to be denominated in USD, or is there some other driver?
Jeremy Allaire: I think the first thing is that the entire blockchain ecosystem is very global. Generally speaking, we know there's a lot of activity in markets around the world, so to the extent that if you need a trustworthy, redeemable digital dollar, USDC is a great option, so it's also following this international overall growth of the market. However, we do see significant growth in demand for storing value in U.S. dollars, particularly from emerging markets like Latin America, Africa, Southeast Asia, and other similar regions where there are a lot of startups launching new products and forge partnerships with key global companies that are also adopting this approach to settling transactions. So, this international dimension is very strong and I hope it continues to be that way.
Why should the U.S. government care about U.S. dollar stablecoins? It has proven to make the digital dollar a powerful export for the United States, enhancing the country’s soft power and solidifying the economic interests of households, businesses, and the government itself. Therefore, there is a strategic interest alignment between the spread of U.S. dollar stablecoins, especially those that are well regulated and truly comply with laws and regulations, and national economic and foreign policy interests. This may be controversial to some, but it's true.
Laura Shin: Circle has just released a new programmable Web3 wallet platform that will help businesses provide digital asset payment services to customers. Please tell us more about this platform.
Jeremy Allaire: Obviously, we are well known for the USDC stablecoin. Beyond that, USDC is a protocol in its own right, existing as a dollar protocol that any developer can build on and plug into. This is already widely used in DeFi, wallets, custody and a variety of different products and services that integrate this protocol and then provide users with a secure way to store, trade and settle USD. So a big part of USDC's success is really built on working with developers, working with developers who are trying to create value and need built-in trustworthy stablecoins.
But we think there's more we can do as a company. So last year, we spent hundreds of millions of dollars to acquire a company called CYBAVO, which has excellent technology in deploying blockchain, managing and deploying smart contracts, handling wallet security, etc. We are very interested in this Web3 that has not yet emerged. The service category is very exciting. By analogy, Amazon built its own e-commerce infrastructure. They took this infrastructure out and let developers build on it. In this way, Web2 developers can easily launch an application, which gave birth to the Amazon Network. Services (Amazon Web Services).
If you are a startup or a large company and you say “I want to build a blockchain-based application, I don’t want to worry about managing infrastructure, security, operations and compliance, which are very Difficult question. I just want to focus on providing the user with a pleasant end-user experience that is safe for the user and for me as a developer." That's a big need when we talk about developers, about There is a lot of discussion about developers on the blockchain, the developer ecosystem on the blockchain, etc., which is very important. We know that products like USDC are being rolled out to more chains, and we can talk about this, but the point is that it is now easy to build a blockchain-based application and ensure that users safely hold NFT tokens. The number of developers who use coins or stablecoins and make payments is very small.
There are approximately 100 million software developers in the world, and there are approximately 500,000 developers who can build on the blockchain. If you want to see Web2 evolve into this new architecture, it will have to dramatically change how difficult it is for these developers to build, operate, and run these applications and services. This is a huge opportunity for us. This is very consistent with what we're doing with stablecoins because whether it's business applications, financial applications, consumer applications or whatever, all of these applications require the use of currency and require mobile money. We can make this so easy, leveraging breakthroughs in blockchain infrastructure, EVM, and other levels of abstraction that it just increases the number of applications. We hope to build more useful applications.
If we increase the number of useful applications and plug them into our protocols like USDC, then the network will grow and so will the utility of the network. If we can do this, we will create a lot of value for ourselves. So this is a new revenue stream, and we monetize it like AWS, which is pay-as-you-go, which is a common price. If we have a very successful app, we can generate a lot of revenue. You can get started easily, it's truly self-service. So, it really goes back to my own roots. Many people may not know this, but I started my career building developer platforms, programming languages, and some of the most popular web development tools ever created during the Web 1.0 and Web 2.0 eras. of.
I think this marks a shift for Circle from being a stablecoin issuer to becoming more of a platform-oriented business in the entire Web3 space.
Laura Shin: Are Circle's six new blockchains driven by the demand you're seeing? Let's say developers or DeFi builders say we need this, or you just want to make sure "if any of these come out, we'll be there." How do you make these decisions?
Jeremy Allaire: It’s a bit of both, we’re not going to launch native USDC on hundreds of blockchains, even though there are hundreds of them out there. Now whether it is Layer 1 or Layer 2, there are still many innovations going on. Given the number of actual applications I just described and the number of actual users of those applications, we are still in the early stages of maturity. But it is likely that in the next few years, there may be five different Layer 1 and Layer 2 accounting for about 80% of the market. There is a lot of innovation and competition, and completely new architectures are emerging. There are still some unresolved problems in terms of privacy, security, scalability, etc. We want to be a full chain, and we want to make sure that if there is an infrastructure that has strong technological innovation and has a certain amount of developer attention, or will get developer attention, we will cooperate with this infrastructure and put it into use. We're going to continue to be full-chain and experiment, but at the same time, the other products we're building are so you can build a multi-chain application.
Our Web3 services, smart contract platform, etc. will target multiple chains, and we are also working hard to solve interoperability issues, which is a huge problem in a world where there are multiple Layer 1 and Layer 2, and no one thought this would Finish. We have a really bad way for people to move their funds, and that's bridges. You lock USDC through bridges, and then there's an encapsulated version of USDC moving across those bridges. This is slow and exposes a huge honeypot to hackers. So a lot of the highest profile hacks have basically been against bridges, some of them had multi-signatures, someone got the key... I mean, it's terrible. We're talking about a billion dollars, which is scary. In fact, USDC is the most bridged asset in the entire ecosystem.
Therefore, we built and launched a cross-chain transfer protocol for USDC called CCTP. This allows users or developers to build applications where users can transfer USDC from one chain to another without the need for bridges, without locking these, without adding any fees. We can do this because we are the authoritative mint of USDC. What this means is that if I have USDC on Arbitrum and want to send USDC on Arbitrum to a wallet on Base, Optimism, or Ethereum mainnet, I can just send it there and it will destroy the USDC on one side and destroy it on the other. One side mints USDC, so it's faster and more secure, which is a huge way to provide a secure, interoperable digital dollar.
So in addition to bringing USDC to the chain, we are also protocol developers and we are building new protocols to make it safer and easier for people to use these digital dollars on the network. So, yeah, we're excited. We launched these new chains last week and also launched additional routes for CCTP, all in an effort to make this the most useful and secure digital dollar on the blockchain network.
Laura Shin: PayPal recently launched a stablecoin, which is a behemoth in the payments space. How does Circle plan to compete here?
Jeremy Allaire: First of all, I congratulated and applauded PayPal and Paxos on the day they launched their stablecoin, because it was a great partnership for Paxos. I think it’s great to see mainstream payment companies accepting USD stablecoins, and it shows that the regulatory environment around stablecoins is clear enough that big companies are entering the market. With regulation in place, you will see an open, free, and competitive market. The market will also have a safe baseline to rely on, and you will see more competition. Not just in the U.S., but globally, as stablecoin regulations are coming out, I think from an overall perspective, that's a positive thing.
In terms of how to compete, I focus less on competitors and more on what we do that is valuable to people. I think part of the reason why USDC has been so successful is because we are a market neutral infrastructure company, we don't compete with merchants, we don't compete with retail users, we don't have consumer wallets, we are purely a market neutral infrastructure company . We see USDC as the U.S. dollar utility on the internet and want to work with a number of different companies to build it.
I think PayPal also has a lot of great partners, but they have a franchise where they charge merchants fees for using credit cards and have a large number of end users, so there are a lot of people who would see this as competitive. But we've built great partnerships with a lot of companies that might see each other as competitors, Robinhood and Coinbase might see each other as competitors, we've got partnerships with Block, we've got partnerships with Stripe, we've got partnerships with Visa and There are partnerships with MasterCard, MoneyGram, and many different companies that all rely on and use USDC in different ways.
I think our market neutrality is very important. We see examples like Mercado Libre, a company with 200 million users. PayPal has over 100 million users, and our great partner Coinbase has 100 million users. USDC is supported by the Binance wallet and they have 100 million users, so we have broad coverage and we will continue to add great partners with broad coverage, which is most important.
And then our strategy was completely different. We're building the developer platform, we're building the infrastructure platform, we're building the protocol layer, and that's the way we want to grow. So we feel good about where we are and we think we can continue to be a very important player in the market, but we also welcome competition.
The Crisis and Opportunities of the Silicon Valley Bank Incident
Laura Shin: Circle faced a do-or-die moment earlier this year when $3.3 billion in reserves were locked up in Silicon Valley Bank, which subsequently collapsed. Since then, USDC has been losing market share to Tether, what strategies have you adopted to deal with this incident?
Jeremy Allaire: Okay, there's a lot of parts here. The first thing to understand is how our infrastructure works, and one of the things we're most proud of is that we have the most transparent disclosures about our market infrastructure. So, we disclosed every bank that we worked with, every single bond, every Treasury note that we held, down to the serial number, down to the date. Currently, approximately 94% of our reserves are held in an SEC-registered and regulated structure called the Circle Reserve Fund, which is managed by BlackRock. If you search for the USDXX stock symbol, you can see everything there to understand how safe this fund is. That's a compliant registration infrastructure that no one else in the market has, so we have a very high level of security and transparency.
The second point is to think about what happened. I think there's something very dramatic going on across the industry, and obviously we're unique in that our own particular bank exposure is a large, $170 billion public bank. Over the course of 48 hours, the bank experienced a run that had nothing to do with cryptocurrencies and came after revelations that they had incurred huge losses on their own balance sheet. Goldman Sachs was unsuccessful in raising money for them. So, I'm happy to walk you through what's going on here in detail, but this is a shock that's affecting the entire U.S. financial system. And there are still banks that fail regularly for similar reasons. But the day before SVB Bank collapsed, they were a very good Grade A financial institution. So this was a shock to everyone except some of the hedge funds who were shorting them.
I would also say that we are always looking to continually improve the level of USDC's underlying market infrastructure. We've done a few things, one of which is a strategic partnership with BlackRock, where we established a Circle reserve fund. In the first quarter of this year, we have transferred more than 80% of our reserves to this fund. We also continue to maintain approximately 20% cash now so that we can always meet the most extreme day-to-day liquidity needs that may exist.
For a company like Circle, where we've been compliant from day one, doing things the right way, being very transparent, having all the capabilities in terms of risk management, we don't have the option of, Hey, JPMorgan, would you rather hold our reserves ? That's not how things work. If you were Microsoft, yes, you could decide which bank to deposit your cash assets in, but that freedom doesn't exist. However, we have made tremendous progress in improving our ability to use what are commonly referred to as Global Systemically Important Banks (G-SIBs) as the infrastructure behind USDC. We actually just started doing this for USDC cash a week or two before SVB collapsed.
So despite all that's going on, we're actually very lucky that we can sweep everything into the most secure G-SIB in the world. You can now view our certification that all cash is held in the world's most secure global system and within this trusted reserve fund structure. So after this, we actually have the most secure and transparent digital dollar on the internet, there's nothing that's even close to that level.
So in terms of what we're doing, we're just continuing to do what we've been doing, which is continuing to improve the level of market infrastructure, increasing transparency and so on.
The other thing I would say is that there's been a de-banking of the entire industry and that's still going on. We have made significant investments in building a global USDC liquidity and settlement network and are establishing banking partnerships with high-quality banks in every major region of the world to be able to create and redeem or provide in local markets as well. USDC Liquidity. So you're no longer relying on Bank of America to make this happen, we're making huge investments in market infrastructure and the reason we're able to do all of this and the reason banks want to work with us is because we're a compliant, transparent Yes, a company with risk management.
Like some of our competitors, no one knows any of the banks, it's just a huge mystery, there's liquidity issues, and it's not clear how to actually redeem it, I mean, it's scary, no one knows except for public statements Anything, it's very tricky. This huge series of events happened over the course of about eight weeks, and the response from the rest of the world was that it was unsafe in the United States, that it was unsafe to have money in an institution that was storming the U.S. banking system, with companies that were regulated by U.S. agencies. Cooperation is unsafe. So what we're seeing is an exodus, and at the same time other companies are going to trumpet that we're not exposed to U.S. affairs. But there has been tremendous progress on these matters, with the Federal Reserve introducing a regulatory framework for banks dealing with cryptocurrencies, clear rules emerging around stablecoins, and some major financial institutions deepening their work in this area. So eventually this rush for safety will become a reality.
Another thing to note is that we also have a cyclical business. When interest rates are at zero, a lot of money flows into various fields, including the cryptocurrency field, which creates an environment where if you have dollars, you can conduct various investments and other activities in the blockchain ecosystem. You're seeing tremendous growth in stablecoins, and we're benefiting from that. Now you've seen interest rates rise dramatically, at a pace not seen in decades. Therefore, the opposite occurs. If you own a digital dollar asset and you know you can get a 5.25% return elsewhere, then it's a no-brainer that you would do that if you were a customer with access to the U.S. banking system and the traditional financial system.
If you look at the stablecoin supply in April 2022 (which is when the first rate hike happened) and then look at the rate hike, there is a direct inverse correlation. But we're actually in this interesting position where Coinbase and Circle have relatively good banking operations and we actually offer a free way to redeem to the bank at a 1:1 ratio, which is to say we have traditional financial layer. This is part of the reason why people like USDC and why they trust this product.
But it also makes us candidates for departure. Exiting is more difficult with some other products, but exiting with USDC is actually quite easy. So we're impacted by that, but I would say the broader impact is really macrocyclical, which is in a high interest rate environment. Yes, we are generating a lot of revenue and we just publicly disclosed our revenue and EBITDA for the full year last year and the first half of this year. This is very impressive.
Even though we have circulation issues, we're also seeing very high year-over-year growth and cash flow, and that's part of the macro cyclicality, so I think in the long run, it's the best infrastructure, the most compliant regulatory base to build. Facilities, building the best banking infrastructure, the most transparent infrastructure, doing it right, making this work, making this work for any fintech company, any financial institution, building great things for developers , other things will follow.
When interest rates fall, macrocyclical issues will arise. When you get into a neutral interest rate environment, how people use their dollars changes. Notably, banks have lost $1 trillion in deposits since interest rates rose. You can view the chart. This is data from the U.S. Federal Reserve, the FRED database. You can view it from April of last year to now. Banks have lost $1 trillion in deposits. Money market funds received approximately $800 billion. So, the same phenomenon is happening here.
It is imperative to implement supervision
Laura Shin: In late July, a stablecoin bill that many expected to have bipartisan support gained Republican support in a House committee but not Democratic support. During that time, you made some recommendations to the House Financial Services Committee to improve this bill. Before discussing your specific recommendations, please tell us what you think of this bill.
Jeremy Allaire: First of all, this bill did have bipartisan support in committee, although it was not broad. Five Democrats joined Republicans in voting to allow it to pass the committee without the support of ranking committee member Waters. I think this bill accomplishes a lot, and I understand the issues and politics here very well. This is legislation that everyone wants to get done, the Fed wants it, the Treasury wants it, Congress wants it, the White House wants it, it's the priorities set by the highest levels of administration that we need Implementing U.S. dollar stablecoin regulation in the United States. So, this is a national priority and people are working hard to get it done. I want to remind everyone that the United States is the global leader in leading the G20 to agree on stablecoin regulation, and everyone at this table, all these countries, need to implement stablecoin regulation. They all agree on establishing stablecoin regulation, agree on the principles, and then they go back to their respective governments and say okay, let's get it done.
Hong Kong, Singapore, Japan, the EU have done it, the UK is about to do it, people are doing what they promised to do. The legislative process in the United States may be longer, but everyone wants to get it done, so the likelihood of stablecoin regulation is high. That said, I don't think the specific bill that makes it out of committee will become the bill that ends up being signed into law because there are still some key issues that are important to the administration and the Fed that haven't been addressed yet. So a lot of questions have to do with the Fed's role in this. Currently, the bills coming out of committee basically leave it to the Federal Reserve to set the standards. They say here are all the requirements and then define them. But I think there's an argument to be made, is does the Fed have the authority to decide who can license stablecoins? Or if a state, like New York, licenses someone a stablecoin, does the Fed have any joint or dual regulatory role? That sounds bureaucratic, but it's actually important issues related to aspects like state's rights and federal rights and the balance of power, but therein lies the problem.
But overall, what I like about this bill is that it creates a clear path for bank and non-bank stablecoin issuers, and it delineates roles for state and federal governments. It sets very clear and very high standards in terms of prudential regulatory requirements, very specific on all the necessary things like reserves, transparency, risk management and so on. It actually creates legal certainty for U.S. dollar stablecoins to become part of the global financial system, to be part of the U.S. dollar financial system, which means whether it's a public company or a private company, accountants will know how to deal with this issue, and financial institutions will be able to act like Hold it just like you would hold cash or collateral. So as this develops, it will unlock a lot of mainstream applications.
So there's a lot to like about this bill, and it'll be interesting to see how this moves forward in the Senate. Also pay attention to what is going on in the House of Representatives. But we remain optimistic that the United States will ultimately make the right decision and safeguard and protect the U.S. dollar’s interests on the Internet. As I have said many times, the future of currency competition is technological competition, and it is the technology on the Internet that drives this. It's a question: Do you want to unleash open networks, free market competition, private sector innovation and private sector technology innovation, which is the way competition has been done historically in the United States. This is why the Internet and technology sector in the United States is so strong. They have to make a choice. Do you want to compete in this way, or do you want to follow authoritarian regimes that try to create monetary monopoly systems?
Laura Shin: Yeah, I noticed that one of your proposals in particular intrigued me, and that was your request to amend the bill to allow stablecoin issuers to use Federal Reserve account services, and I think your experience with the SVB influenced that request. Yeah?
Jeremy Allaire: Actually, many years before the Silicon Valley banking crisis, and when we founded the company 10 years ago, one of the fundamental premise of the company was that we needed to move to an all-reserve banking system. I think that's sort of an economic philosophy that's inherent behind things like Bitcoin, like the Austrian school of economics philosophy, which is that you can't fractionally reserve Bitcoin. I mean, you can do what Sam Bankman-Fried did, if you have a database and you tell people you have a note receivable, you can do that. But Bitcoin is physically impossible to be fractional-reserved, and the idea of a full-reserve banking system is something I've been passionate about for a long time.
After the Great Depression, when bank failures spread across the United States, a similar economic philosophy emerged, and there was considerable debate about how to deal with the failing banks. Two options were discussed very seriously. One was called the Chicago Plan. This was a group of prominent economists, including Irving Fisher of the Chicago School and many others, who argued for the need to separate the payments function of money from lending and the need for a fully reserve currency. It is still a sovereign currency, which means it is still an obligation of the government, but it is fully-reserve and banks cannot create money themselves. They cannot have fractional reserves and can only borrow money from full reserves. There's a big argument, and the argument is that this will lead to a less risky financial system that is inherently less risky and prone to fewer booms and busts, although it may lead to fewer recessions.
The other perspective is the bank perspective, where they think, no, we're going to be able to do fractional provisioning, but we're going to create an insurance pool. We'll have an insurance pool that basically has us all insured, and if one fails, we can draw on their insurance to cover the cost of failure. But we could take this risk, and that's how the Federal Deposit Insurance Corporation (FDIC) was created. So I think business interests prevailed at that time, and the issue was revisited all the time later, when the savings and loan crisis happened in the 1980s, and also after the 2008 financial crisis. That got me really interested in all of these questions, which is why I got into crypto, which is how does this fractional reserve banking system actually work? What is central bank currency? How can we improve this system? Before I learned about Bitcoin, I was interested in all of these questions.
I've always wanted an all-reserve dollar model. I believe that if you have the technological superpowers of blockchain and the Internet, and you have this incredible programmable currency that can spread at the speed and efficiency of the Internet, then the ideal foundation for it should be a fully reserve currency, It should be government debt currency, which should be cash deposited at the Fed or short-term government debt such as Treasury bonds. If you have this, then everyone knows that this is as close to cash as possible, as safe as possible, and they're willing to use it broadly as a medium of exchange, and that's what we're striving for. We are very close to this goal, the only problem is that now, the cash portion we hold, we have to deposit it in commercial banks. I've always been nervous about this, and it turns out it's something to worry about.
So right now, we're lucky enough to have our cash almost entirely in one of the most secure global system-important banks, which means it has government backing behind it. So we still have a very secure place, but I think in terms of the proper design of a digital dollar and a private sector intermediary digital dollar (which is what we're talking about here), leveraging the facilities of central banks.
Laura Shin: Will Capitol Hill think this is a good step and put it in this bill?
Jeremy Allaire: I don't think we're going to see that in this bill because the banking lobby is very seriously opposed to it. The reserve requirements for reserve assets ensure the safety of reserve assets to a large extent, and can even reach 98% safety.
Laura Shin: Another suggestion you made is that the bill should clearly define what are legal USD stablecoins and so-called "fake" stablecoins. To be honest, some of your previous comments felt like they were alluding to Tether without mentioning it. Name, so what kind of definition would you like to see for this legal USD stablecoin?
Jeremy Allaire: If you quote Federal Reserve Chairman Powell verbatim, his view is that stablecoins are dollar currency creation, and it is the federal government's responsibility to define what is legal dollar currency. What is considered a dollar instrument in the global financial system? I think, especially if something is deemed to be equivalent to cash, from an accounting perspective, from a balance sheet perspective, and everyone considers it that, then there should be a very, very high standard here. If you claim yours is a dollar, but you don't meet the standards and requirements to legally be a digital dollar, then you shouldn't be out there pretending to be a dollar, and that's pretty much my point. Therefore, my personal view is that there needs to be consistent prudential standards for these fiat stablecoins globally.
In the G20 jurisdictions, which are basically central banks, they have all come to the same conclusion and the laws are basically similar in those places. So I think over time we're definitely going to live in a world where if you offer a digital currency, a fiat digital currency, you're going to have to accept this strong regulatory regime or you won't be able to use it . I think that's the direction that's happening now. It may take two to three years to achieve this, but it seems to be very clear.
Laura Shin: One country that is very worthy of attention is China, which is focusing on blockchain technology and central bank digital currencies. They quickly launched a digital yuan. What are your thoughts when you see the contrast between these two governments’ approaches to stablecoins and central bank digital currencies?
Jeremy Allaire: I don’t think China has a clear regulatory stance on stablecoins, and as far as I know, they haven’t formulated specific new rules for stablecoin issuers in China. But it wouldn't surprise me either. I think if you look at the current situation, the top priority for governments in most jurisdictions is to implement stablecoin regulation as quickly as possible. The regulations for euro stablecoins are therefore becoming model law and it will be many years before the ECB launches a digital euro. Japan’s stablecoin regulations have been in effect since June this year, and it’s not even clear whether Japan will have a CBDC. Therefore, the top priority, including in the United States, is that private sector digital currency plans need to have safeguards and rules, and there needs to be a fair competition market for technology innovators, banks, non-banks, etc.
So I think as every major jurisdiction around the world regulates private sector innovation in this area, China has no choice but to unleash its creativity, its technological competitiveness. Now, a privately brokered RMB stablecoin might actually be more attractive to businesses and users in other countries than an actual CBDC, because you might want a buffer zone from the Chinese government.
I wonder, for a large company that conducts cross-border transactions with China, do they want the government’s systems to enter their own technical environment? Probably not. Therefore, private intermediaries may be backed by central bank digital currencies. In the long run, I think the United States will move in this direction as well. We will see an upgrade to the central bank’s wholesale core technology infrastructure, and then private intermediaries will be integrated into it. But it will primarily be stablecoins and a rapid and continuous innovation cycle related to open infrastructure and technological innovation, which will become so-called "retail", directly touching enterprises and end users. I personally believe that a similar situation may occur in China in the future.
Laura Shin: Do you think these developments will be rapid enough in the United States that the dollar's global reserve currency status will be maintained?
Jeremy Allaire: Well, I think the United States needs to take aggressive action now. A vigorous push for a competitive digital dollar on the Internet is one of the best things the United States can do right now. I made this point in my testimony and I made it face to face with many people in Washington. But it's a very clear thing to do, because then it's about you competing for the minds of users, businesses, families and other people in the world, making decisions when they turn on their computer or their smartphone. I think the United States and the dollar remain the most resilient and attractive reserve currency in the world, and it remains the safest asset in the world. And if the United States is willing to support some of the changes that the dollar needs in terms of security and technological competitiveness, I think that's definitely going to continue.
Laura Shin: So, in addition to your previous suggestions for the stablecoin bill, are there any practices you would like the U.S. to adopt from other jurisdictions regarding stablecoin regulation?
Jeremy Allaire: What I'm seeing in some places is giving stablecoin issuers direct access to central bank clearing facilities. For example, in Japan, there are regulations regarding various forms of reciprocity with foreign-issued stablecoins. And, I think it's also very important that we can get similar treatment so that if I'm a business in Japan or I'm in the capital markets in Japan, as long as there's regulatory equivalence in terms of various security measures, the regulators in Japan will Acknowledge that instruments like USDC are on their market. So I think that's the initial thinking that we're seeing from other jurisdictions, and it's something that hasn't been clearly addressed in the U.S. stablecoin legislation.
This is a difficult problem, but one that will be iterated around. Ultimately, because these are digital assets that move across the internet and can appear in any digital wallet, it's just a matter of where the private keys are and who owns them, and I think the cross-jurisdictional issue is one that has to be considered, I hope. This issue can be taken more seriously here in the United States.
Laura Shin: You said on Twitter that cryptocurrencies have the tools to unlock better KYC processes to deal with issues such as anti-money laundering. How should this be understood?
Jeremy Allaire: Yeah, for example, there was a huge data breach recently where all the KYC information was made public. How did this happen? If you're a financial institution, the way anti-money laundering rules and KYC rules work, when you interact with another financial institution, you have to exchange the personal information of a customer, whether it's an individual or a business, you have to exchange that information. So, all these different financial institutions, whether they're start-up fintech companies, large banks, brokerages or other market players, are spreading your personal information at large. So your personally identifiable information (PII) is broadcast over and over again, showing up in honeypots everywhere. Of course, there are SOC standards, security standards, and protection standards, but at the end of the day, as an individual, your personal information is widely distributed.
Cryptocurrency is cryptography, and innovations in cryptography are constantly happening, making it possible to prove without sharing information. Zero-knowledge proof is the most common method. But there are other types of cryptographic proofs where you can have a certificate that is provable, like a credential. You can then show this credential to someone, and this KYC credential was issued by a compliant company that meets strict standards. And I can rely on that credential without requiring you to provide all your personal information.
That is to say, we can use cryptographic proofs, use digital credentials, and these encrypted credentials to allow people to more securely protect their private information when interacting. It also allows for selective disclosure, the most common example being, if my daughter walks into a bar, why does she legally have to tell the bartender her address and name? That doesn't make sense, right? So why can't we prove that we are adults? Why can’t we show a certificate from our digital wallet proving that we have reached a certain age? And I have biometrically proven that I am the holder of this credential. All of this has to do with cryptocurrencies, right?
So I'm very interested in various types of cryptographic credentials, non-fungible tokens, zero-knowledge proofs, and other technologies that have the potential to become mainstream. We can better prove identity while preserving privacy, and financial institutions can even exchange proofs without creating giant honeypots. But it would require, say, the U.S. Treasury Department to set rules for financial institutions on anti-money laundering policy, or the global body the Financial Action Task Force (FATF), a consortium of all governments to decide on, to set the standards they require.
Laura Shin: You've mentioned many times what you'd like to see regulated in the United States. If you had any particular message that you'd like to convey to regulators and legislators, what would it be?
Jeremy Allaire: I think there are several points, such as the issue of dollar competitiveness, national competitiveness, industry and market competitiveness. While it's easy to look at companies that are committing fraud or running Ponzi schemes and you say it's all garbage, that's not the case. So we are now on the verge of a very strong framework that is very good for the United States, the U.S. dollar, industry competitiveness, etc., I'm very firm on that.
The other thing is that globally, not just in the United States, blockchain technology is always viewed as a financial technology. I think it's important for policymakers to understand that we're talking about general Internet infrastructure, computing infrastructure, data infrastructure. This is a very, very important common infrastructure that is very important to many industries and fields. So how we treat that infrastructure needs to be independent of just saying it's a financial regulatory issue because it's not.
I find that sometimes the policies that are being considered are to put everything in one furnace, or to put everything into a financial regulatory perspective. That’s not a good position to take, and I don’t think it’s accurate. So I encourage policymakers and their staff to really better understand the computer science of this network technology, because that's where a lot of value is generated, not just because someone got an airdrop token or people felt like they had Problem stuff.
Recommended reading:
BTC becomes the currency of choice in the AI era
< END >
