Bankless - 192 - Cryptodollars Are the New Eurodollars with Nic Carter

Episode Date: October 16, 2023

Cryptodollars are the new Eurodollars. What are Eurodollars, though? Well, we get into that in today’s episode with 8-time repeat Bankless guest, Nic Carter. Nic is a partner at Castle Island Ventures, Fidelity alumni, co-founder and board member of Coin Metrics, and a prolific writer of editorials and academic articles alike, Nic is also a believer that the halvening is always priced in, he’s a stablecoin connoisseur, an onchain wizard, and an unlicensed vespa driver.  ------ ✨ DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-nic-carter-stablecoins  There’s over $10 trillion dollars worth of Cryptodollars out there and Nic believes that number could grow even bigger. Stablecoins are often called crypto’s killer app, however, Nic thinks we aint seen nothing yet! ----- 🏹 Airdrop Hunter is HERE, join your first HUNT today https://bankless.cc/JoinYourFirstHUNT  ------ 📣 a16z Startup School | Apply Before Oct. 20th https://bankless.cc/a16z-startup-school  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q4  🦊METAMASK PORTFOLIO | MANAGE YOUR WEB3 EVERYTHING ⁠https://bankless.cc/MetaMask  ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum  ⁠  🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku  🦄UNISWAP | ON-CHAIN MARKETPLACE ⁠https://bankless.cc/uniswap  🔗 CELO | CEL2 COMING SOON https://bankless.cc/Celo  ------ TIMESTAMPS 0:00 Intro 8:25 Stablecoin Tribe  10:20  The State of Stablecoins in 2023  13:40 Stablecoin’s Product Market Fit  17:16 Stabelcoin Haters 19:00 Growth of the Euro-Dollar Market  21:04 Euro vs. Crypto Dollars  24:30 Federal Reserve History  34:45 Stablecoin Incentives  37:00 Euro-Dollar vs. U.S.-Dollar Backing  43:00 Circle 45:40 PYUSD 46:56 Crypto-Dollars vs. Euro-Dollars  51:15 Why the Rise of Stablecoins?  55:57 Democratic Inclusion of Crypto-Dollarization  59:19 Chart 1:03:05 Tokenized Treasury  1:07:16 Regulatory Idea Maze  1:15:00 Big Banks  1:19:30 Stablecoin Roadmap 1:24:57  Crypto Bullishness 1:28:52 Stablecoin Predictions  1:32:12 Closing & Disclaimers  ----- RESOURCES Nic Carter https://twitter.com/nic__carter   ----- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures 

Give us some of your predictions, right? And over the next three to five years, what's going to happen, do you think, in the world of stable coins? Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams, and I'm here with David Hoffman, and we're here to help you become more bankless. Cryptodollars are the new euro dollars. Okay, but what are your dollars? We get into that in today's episode with Nick Carter, there's over $10 trillion of euro dollars out there, and our guest today, Nick, says crypto dollars are going to be even bigger. While stable coins are often called crypto's killer app, our guest Nick says, you ain't seen nothing yet. A few takeaways in today's episode. Number one, why crypto dollars are growing even in the bare market. Number two, how crypto dollars are playing back the history and evolution of euro dollars and what we can learn from all that.

Number three, how the U.S. government policy is actually pushing crypto dollars offshore. Number four, the roadmap for stablecoins. What's going to happen next? And number five, we conclude with Nick Carter's top predictions for the next five years of crypto dollars, including his take on whether crypto dollar adoption is going to be good or bad for Ethereum and Bitcoin. That's a question we had to end with, David. Is this good or bad for our bags? Why was this episode significant to you? Why this episode is significant is the same as asking why are crypto dollars significant. And of course, using crypto dollars as interchangeable with what we know as stablecoins,

Euro dollars, therefore crypto dollars, I think we talk about the semantics behind this conversation with Nick. Stable coins, crypto dollars, are an immense pillar of this industry. If there's one thing that crypto has exported, it's crypto dollars. That's one of the biggest innovations that we have. And this is something that we are going to rise in parallel with, this technology that puts crypto one foot in Tradfi and one foot in crypto. crypto finance. I think this is going to be a massive pillar of innovation that we should definitely

be tapping into because this is the way that all financial networks, bank networks inside of a nation state, all commercial banking layers inside of nation states get woven together by global blockchain infrastructure through crypto dollars, through stable coins. So this is one of the big stories of crypto is we're all coming together as a population, one global population under the same financial fabric. And this is the story of crypto dollars starting to weave that fabric together first and foremost. And so understanding the growth of this parallel industry that we are creating, we are supporting, I think is very valuable to understanding just overall where crypto is going as a whole. Yeah, they're going to be a big deal. And it's kind of ironic in that

you know, crypto was here to kill Fiat. No, actually, it's here to export to the world and also kill at the same time. How do we square these realities? So we talk about that with Nick, a fantastic episode for you. But before we get into this episode, first we disclose, David and I have nothing material to disclose in today's episode. There's always a link to our disclosures in the show notes. I own some stable coins, but if we owned a large supply of stable coins, would we have to disclose that? I don't think so. Do they go up? You know, we own some stable coins. Anyway, you can see all the disclosures at all times, bankless.com slash disclosures. We're getting it right to this episode. But before we do, we want to thank the sponsors that

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Secure, fast, cheap, and friction-free. Bankless Nation, Nick Carter is a partner at Castle Island Ventures, a fidelity alumni, co-founder and board member of Coin Metrics, a prolific writer of editorials and academic articles alike. Nick is also a believer that the happening is always priced in. He's a stable coin connoisseur, an on-chain wizard, an unlicensed Vespa driver, and the greatest achievement of all, an eight-times repeat guest of the Bankless podcast. Nick, welcome back. Thank you. Thank you. I'm trying to... I'm the number, I think, two guests on what Bitcoin did. Also, apparently number two on Bankless, so... This is correct, yeah. We want to go for more appearances on Bankless.

bankless than Peter McCormack. So that's the goal guys. Wait, so you're number two on what Bitcoin did? Who's number one? I think Len Alden, I think, is number one. Oh, well, well deserved. She's good. Valid. Alden is correct. You are only succeeded on bankless by Vitalik Pudoran. I'll take it. As the guest then. Yeah, but he's at 14. So you have sports to do. You guys did once point blank asked me if I was an Ethereum. That was episode number two. Oh, no, one. That was the first episode. I squirmed. I squirmed under that question. Yeah, you did. You really did. Yeah, I think my answer probably changed over time. Yeah, actually, Nick, are you an Ethereum?

In all meaningful senses of that term, for sure. Wow. That's amazing. Let's clip all Nick's answers together across the eight episodes. Let's always ask that question at the beginning of every Nick Carter episode. My most infamous podcast moment ever was on this show. Yes, the Rising Star Comment. The guys really screwed me with that.

The Bitcoiners, they wrote songs about it. No way. They wrote whole, there's someone wrote a song about it. I didn't listen to it. I miss this part. My reply guys love to talk about stars rising. It was a cheesy line that has absolutely stood the test of time for sure.

It was a regrettable line. Now I have this burden where I have to keep like, I don't know, crushing it, whatever it is, whatever star is. Yeah, you start has to always be rising. I can't ever stop rising. Linearily, perpetually rise. Up only star. That's what I have to do now. Well, you know what? This episode will be another example of Nick Carter's Star Rising. What are we talking about today? Not Bitcoin maximalism. We're talking about stable coins. Yeah, of your long introduction of many, many titles, we're going to pull apart one particular tribe, the stablecoin connoisseur. This is the version of Nick that we're bringing on to the show today. All right. I was actually making a list of these people like stablecoin people I really like. There's like a half dozen, but our numbers are growing. Like people that just love. stable coin tribe yeah do you want to give some shoutouts at the beginning yeah yeah yeah okay these are

people i really respect on stable coins peter johnson of course my fellow stable coin loving vc as vocal if not more vocal than me on stable coins historically amine solomani who has been an innovator in stable coins i should definitely shout out the kind of make or die people just like as a general category and then as far as thinkers are concerned anthony lewis he used to He used to write a great blog, had some great insights on stablecoins. Luca Prisbury has a great substack. He's also builder in stable coins. J.B. Coning, I'm sure you guys are familiar with his work.

He's sort of on the outside looking in. I would say more of a crypto critic, but also really stellar work on stables. Manny Rankon Cruz, also excellent writing on stables. Austin Campbell, who I think you guys are familiar with, who's like my stable coin guru. So those are like my stablecoin thinkers who are at all. my ideas from, basically. Yeah, yeah. And the Stablecoin tribe has definitely grown in strength. It's interesting to call it a tribe because usually tribes are reserved for like native layer one

assets and some layer two assets. But the Stablecoin cohort is definitely growing in strength. And like I said, this is going to be the focus of this episode today. Stable coins have always been in the limelight ever since inception. It's always been a fascinating topic of discussion, especially as they've gone from just like something new to something core to crypto. But even lately, and throughout 2023, it seems to be a particularly shining bright star, if you will, lately. Rising star. Rising star. Yeah, the star of stablecoins continues to rise. So, Nick, maybe you could provide us with a little bit of a snapshot of just your

perception as to the state of stablecoins in 2023 as it relates to our industry and just global concerns. Yeah, I mean, from the perspective of VC, I think I could just do stablecoins for the next year, stablecoin deals. And there would be enough there. So on the kind of entrepreneur capital raising allocation side, I see enough there to just feast on. So that's very exciting. But from the outside looking in, you might be thinking, well, hang on, the stablecoin market cap is shrinking.

The stablecoin sector is beleaguered. You know, it went from, depending on whether you count UST, I don't know if I would count UST. But if you do, it went from 185 bill to 125 bill. So it lost a full 50 bill in market cap. So you might be thinking, okay, well, stable coins are over. It's all about Fed now. You know, stable coins are in the past. But the actual underlying metrics actually look really good. So like actual usage, whether that's transaction count, monthly actives, or dollar value transmitted on chain. And importantly, it's also decoupled from sort of exchange volumes, from the proxies for speculation that we see.

I mean, I don't really like that word speculation, but whatever. for all the data-driven proxies that we see reflecting sort of attention in crypto, whatever that is, those are declining. Stapag coin usage appears to be basically growing. Stimicol volumes themselves, like dollar value settled, is roughly flat over the last two years, which obviously contrasted with sort of like aggregate prices in crypto is good. Monthly actives are up. And also more importantly, we see these decoupling from stables just being used to, settle with exchanges, you know, just being this liquidity for exchanges or liquidity for defy. We see it as now an independent global settlement rail where a lot of the usage of stables has very little to do with crypto itself, this kind of like broader, like, you know, hot bottle money crypto economy. And depending on your perspective, I mean, you know, some people might say

may not like that, but I think as far as selling crypto to the outside audience, that's a very powerful and important thing. Because we've never really been able to plausibly claim, hey, there's some actual utility for making blockchain-based transactions that is in some way decoupled from the broader speculative casino and crypto. We're starting to see it. We're really meaningfully seeing remitters embracing it, global payment systems, embracing stables, you know, mobile money apps embracing them. This we see very earnestly. It's very real. It's happening globally in virtually every jurisdiction. And to me, that's a very exciting thing. We can dig into kind of the numbers a little bit. But yeah, I think it's a really key moment to get to sell the

value proposition of public blockchain-based transactions to the broader public. Yeah, so a couple thoughts on that, Nick. So you say stable coin in terms of total value or, you know, the number of billions in stable coins is actually down, but other usage metrics are up, which is interesting. I want to ask what kind of usage metrics are most important. But do you think that stable coins are crypto's, one of crypto's killer apps, like one of its use cases where it has found product market fit? I was actually just interacting with somebody in traditional finance and we were going on a kind of a little bit of a road trip. I was driving one of my kids to a sports event. And he was asking about crypto. You have a crypto podcast. Tell me about it. I don't know very

much about it. What are the use cases? And I found myself talking a little bit about about store of value, right? Kind of like, think about gold, right? Where did gold's value come from? Mimetic value and what is actually money anyway and all of these things, right? So that's the common store of value type case. But the most persuasive use case that popped into my mind and the one that was most compelling was actually the stable coin use case. It's think of you are an Argentinian and your bank system is failing you, both from an inflationary perspective, so the local fiat currency is failing you, and then the banking system in general has capital control. So it sets a limit on how much you can actually withdraw and how much commerce you can do and who you can do commerce with

and that sort of thing. And so stable coins in parallel to a store of value are a killer use case for someone in an environment like that, or take turkey or take all sorts of merging economies with less robust banking sectors than we have here in the West. And I found myself relying on that as kind of, this is an example of crypto's killer use cases. This is why we are still here. Do you think that is overselling it? Or do you think that apart from store of value, it's the second product market fit that we can honestly point to and say, hey, this is something that works and is good for the world and is useful? I mean, I think it's the first thing that we've done that has real product market fit. In 2020, I think I called it. I wrote this white paper. I called them

crypto dollars. And I called it a killer app of crypto. And I mean, the difference is that I think it's very easy, unless someone is strongly ideologically disposed against non-bank transactions occurring, and these people exist, and they generally stable coin haters, unless that is their ideological framework, virtually anyone can be made to see the value proposition of stablecoins, which is final settlement digitally, instantly, cross-border, natively interoperable, natively composable, public ledger, read-write access, everybody has access to. I think that is a very clear and compelling story for almost anyone on the planet. The kind of store value digital gold, Bitcoin Ether story, that's something that a large fraction of the world's population I think will never acknowledge or

understand or truly internalize. That's a much more difficult story. That's one that'll play out over decades. The utility of stable coins is apparent today to anybody that's, you know, had to send a bank wire internationally or anything like that. I have a hard time, Nick, imagining there are staple coin haters. Like, why would someone hate a staple coin? And does the same individual who hates a staple coin also not use fiat dollars in their bank account? Do they not pay utility bills or pay taxes? Or what's the take from a staple coin hater? Is this a group that's more exclusive to crypto

and not found outside of crypto circles? No, I mean, these people exist in Washington. There's a cohort of people that think that all transactions should be the purview of the state and thus they should be mediated by banks, which are basically banks are public-private partnerships so they're effectively an arm of the state. And we see this very clearly this year

with the, what I call Operation Choke Point 2.0, where the banks are very clearly deputized for political purposes. And so if you basically reject the notion of financial privacy, or you think only the state itself can create financial privacy, some people do believe that. So if you think transacting financially should be solely a kind of a public concern and not a private concern, you may really disdain stable coins. But these kinds of people tend to also be against fintech broadly. And they call stable coins like counterfeiting or, you know, they'll point to the sketchiness of tether, like say that it's a vehicle for money laundering. But yeah, there's like a cohort of people out there that really, really dislike the notion of stable coins because these are

typically private non-bank entities. They're effectively fintechs that are opening up this brand new transactional space. And so for some people, that's totally against their worldview, is people making sort of unencumbered transactions. One of the things that we say about Bitcoin, Ethereum, DeFi, crypto at large, is that they're largely misunderstood by the outside world. And we say the most bullish thing about crypto is to be understood. And I think that can extend to stable coins. Even though stable coins kind of straddle old world and new world, old phi and defy, there's still something that like, you know, raises the heckles of people coming from the old world. Like, oh, that's the New Wild West.

I don't like those kinds of stable coins. It's fake money printing, et cetera. But I think that comes from a place of lack of understanding of just simple global economics in dollar demand and also history lessons that we've seen play out over time. And Nick, you gave this talk at Token 2049, which is a bit of the inspiration for some of the focus here on this episode. I'm wondering if you can kind of run through the parallels of the growth of the euro dollar market because I think that is just a logical history is rhyming continuation of what we see with the rise of the crypto dollar market. I think understanding this would allow people to, I think, understand that you're going to see crypto dollars are pretty inevitable. and we should embrace them. Yeah, and this is why I called them crypto dollars as a direct callback to Euro dollars. So that was a really clear attempt to make the analogy. We tried to join you with bankless for a while,

but we raised the right flag. I appreciate that. No, because stable coin is, I call it a skewomorphic term, because we only have the term stable coin because we were starting from sort of native crypto. And so then we called the thing a coin, and we called it stable as a contrast to sort of like unstable crypto. But I totally hate the term. I think it scares people. And putting stable in the name is also, I think, a mistake because occasionally these things will try to

discount for like, you know, genuine market-driven reasons. And so then people assume that means the whole system has failed. Right. When really, it's just the market playing, doing what the market does. Like, if it deep-pegs for a second, does that mean the system's a failure because the name presupposes one thing and then it's, you know? So, anyway.

If we're going to go down this one little rabbit hole, I've always appreciated Rye as a stable coin. Rye, the thing that fluctuates around a dollar, but is free to fluctuate around a dollar and can sometimes be plus 30%, negative 30%. That's a stable coin. And if it's a tokenized dollar, then it's a crypto dollar. Yeah, totally. It's all about expectations management. And it's funny that central bankers just hate on stables. You're like, oh, these things aren't really stable. It's like, well, that's not even strictly what we're trying to achieve. We're trying to tokenize a dollar. liability held by some issuer and facilitate trade globally. Like that's what we're trying to do. You know, we don't need this thing religiously pegged to one. They're not even really pegged to a dollar. I mean, Tether, for instance, there's a redemption fee, you know, so that implies that it's not actually pegged to a dollar, if that makes sense. But so either way.

Anyways, yeah, to dive down into the history, the semantics aside. Yeah, yeah. So, okay, Euro-Dolars. Stable coins are tokenized Euro-Dolars. for the most part, right? 75%. And a couple percent are crypto-backed, and then mostly they're issued by offshore issuers. Of course, the element in the room is tether. I don't know what percentage that is, like it's in the 60s, I think. It's very meaningful. But the biggest onshore one is Circle, but Circle is still issued by non-bank entity. Banks in the U.S. are banned, really, from touching stable coins, which is a huge tragedy in a big scandal, I think. But so... Wait, stable coins, or do you mean crypto dollars?

Crypto dollars, yeah. So stable coins themselves are mostly tokenized euro dollars. They're also very much like Euro dollars. And, okay, so what's a Eurodollar? It's very simple. Your dollar is a bank liability that's issued by a bank that is not based in the U.S. That's really it. And this kind of emerged after World War II when people want to make dollar transactions internationally,

and for whatever reason they didn't want to do that in the U.S. One reason was they were concerned that the U.S. would sort of arbitrarily freeze the assets for political reasons. So this is why Russia was actually initially one of the entities that was creating Euro dollars because there was the Cold War. And so they started creating dollar deposits, dollar liabilities in French banks. And I think Josh Younger mentioned this on the Odd Lots podcast. I think one of the first things they did was pay striking workers with those Euro dollars. So, you know, they look and feel just like dollars. It's just they are issued by an offshore bank, and they may not actually be backed by dollar collateral, which will become problematic later in the story. Later on, more Euro-Dur dollars were created because banks saw an opportunity to pay higher interest rates on those deposits, and depositors liked that, whereas in the U.S. interest rates were actually capped for a while. So there's this kind of market-driven reason. The year dollar market expanded. London became the center of this throughout the kind of the 50s and 60s. In the 70s, the oil shock occurred and the pound sterling stopped being the global reserve in the 50s, actually. And the oil trade began to take place in dollars. And so I'm really accelerating through history here. But what happened was the U.S. started to worry a little bit because they'd been monitoring the euro dollar space. Initially, they didn't know what it was. Then they started to kind of,

you know, go to Europe and try and figure out what was going on there. And they began to worry that all these dollar liabilities were being created without corresponding dollar assets and without the central banks themselves having access to dollar liquidity. And so the Fed ultimately decided to reconcile that by creating swap lines with these foreign central banks. So then the hierarchy was like local bank issues, dollars. They would be able to get emergency dollar equity from their central bank, their central bank would have a relationship with the Fed itself. Was that kind of a formalization of the relationship between the United States economy and Euro-dollar? Yeah, I mean, the Fed made the, and really sort of the major Western central

banks made the deliberate decision to kind of defend the Eurodollar market, because they saw it as kind of getting off sides. But one thing I want to just put a pin in about the existence of the Eurodollar market was that it's a quote-unquote permissionless technology, as in there's no gatekeepers around who can issue a euro dollar. It is just simply an invention of the free market banks to issue dollar liabilities. And because they're outside of the purview of the United States, there's no gatekeeper to say that. And so it's kind of a natural market demanded phenomenon that occurred throughout many banks across Europe. This is correct? It's like a gray market. Yeah, precisely. So that's exactly it. It was a market derived phenomenon in response to

real market need, which was dollar transactions globally. And then that eventually, force the hand of the Federal Reserve, just like, okay, this is a real market force. We're going to have to align with it rather than compete with it. Yeah, I mean, what they could have done was just deny the importance of the market and not create this dollar liquidity, which would have caused a financial crisis abroad. So what they did do over the 60s progressively and then increasingly in the 70s was realized the importance of this market and the value of the market for the U.S. except that they would have a loss of control, but trade that for dollar stability globally and for the fact that all these entities

transacting with dollars were buyers of the U.S. debt. They were buyers of the treasuries. And so they basically formalized these relationships, created swap lines, opened up dollar liquidity. I mean, the swap lines today are still a politicized thing. Like, not everyone has that access. It's kind of, if you're an ally of the U.S., you have pretty good dollar liquidity. If you're competitor, you don't. But so with their sort of partner nations, they created these swap lines and came to realize the value of the Eurodollar market. And today there's more Eurodollar than there are dollar dollars. How much are we talking about, Nick? I mean, over 10 trillion euro dollars, for sure. We don't know the exact number. And that's another thing that kind of cracks

me up. We know the quantity of stable coins to the nearest cent. But we stopped counting the euro dollars. We don't know how many there are. Importantly, just to double down on something you just said, there's more Euro dollars in existence than actual dollars. Yeah, I mean, because there's more money in the world outside the U.S. than there is money in the U.S. and the dollar is a global reserve. It's 60% of official FX reserves. I think it's like 48% of international trade is booked in dollars, you know, something like 80% of all FX transactions have the dollar as at least one leg. So by virtue of the fact the dollar is a global reserve and the world is much bigger than just the U.S.

There's more Euro-Dollars than there are dollars. Is it the Euro-dollar nomenclature? Even incorrect, shouldn't just be called global dollars or non-U.S. dollars? Yeah, I mean, so obviously, the creation of the Euro dollars preceded the creation of the Euro. So it's something to do with Visa. I don't know. There's some like a nomenclature reason,

but it does have the funny conclusion that the Euro prefix in Eurodolls just means a currency issued outside of the sort of domicile of that currency. So a euro issued abroad would be called a Euro, euro, which is like pretty amusing. Okay. So when we talk about like euro dollars and crypto dollars, we're actually kind of talking about the same exact thing, except for the fact that crypto dollars just happens on blockchains. Yeah, pretty much. I mean, some crypto dollars are issued in the

US, in which case I wouldn't call them a, you know, a euro dollar. But in the parallel, the obvious parallel is people are creating these things and using them because the original system is restricted in some way. Like, obviously, you can't do a smart contract transaction using a bank wire, right? Maybe one day you'll be able to. But so you can't get access to this transactional space, which is like a lucrative, important growing market with the legacy fiat system. You had to join the crypto dollar system to engage in crypto-type transactions. And also, the creation of crypto dollars was a direct reaction to the sort of like inherent politicization of the legacy financial infrastructure, like the exact precise reason the first crypto dollars were created,

which was really Tether, which is the first major one, was because BipFinex had trouble banking. And so all they had to do was find one bank that would do business with them, you know, persuade that bank to custody, some dollar assets that they could issue dollar liabilities out of, and then the dollar liabilities would freely trade. they could settle up with their clients, as opposed to maintaining bank relationships in every single country where every single one of their clients was domiciled. And if you guys remember back in the day, like BitFinex was banked in Taiwan and they're getting chased out of there. And then there's a network of banks. They were always trying to use. Cryptodollars change the calculus where you just have to

persuade a single bank to hold your dollar assets and reserve and create the liabilities based on those. So it vastly simplifies the ability to transact in crypto. So, the creation of these things was a direct reaction to the kind of very controlled nature of the existing financial system, which is very analogous to your dollars. Right. Yeah, very analogous to euro dollars, except for the crux of the fact that eventually the Fed, the government, the United States, accepted Euro dollars and enshrined them formally. We haven't had that moment happen yet in crypto, but this is kind of what we are hoping for and predicting, right? Yeah, so this is the speculative part of my analogy, which is on a go-forward basis, I expect this will eventually occur,

and the U.S. will realize they've lost control over the crypto dollar market, which they have. That's been deliberate. They've wanted to lose control. They've wanted to push them abroad. So the reason why this sort of like key catalytic moment hasn't occurred yet is because crypto dollars are not yet systemically useful to the U.S. So the analysis I would do is if you look at where we are, if you pretend that crypto dollars have a growth trajectory like Euro-Doh dollars. We're in the equivalent of 1967. So if you take the Eurodollar supply in 67, you inflation adjust it to today, unless my math is wrong, you get to $130 billion, roughly. That's the supply of the stable coins of the crypto dollars. So in 67,

it wasn't yet fully apparent that Eurodollar is needed to be backstopped by the U.S. directly. So they were still kind of on the out-and-out. It was still in the skepticism phase. So basically, the crypto dollar supply needs to continue to grow and then make the case to the U.S. that, hey, you should actually embrace this thing as opposed to kind of harassing it. But maybe we don't need that. Maybe we don't need that. It just for me, selfishly, is it kind of a U.S. firm, U.S. individual, it would be nice if the U.S. did do that. But meanwhile, like, these things are happily growing and thriving abroad.

Why did the Federal Reserve U.S. government come to the conclusion that they needed to backstop the euro dollar? What was that conclusion? Because the Nixon shock occurred. And this question emerged as to who was going to buy our debt, post-gold standard. Then the oil shock happened, I think, in 73. And there was this huge, huge market all of a sudden for euro-dollars. And there is a worry that the oil market, that we wouldn't be able to get sufficient oil if we didn't support the euro-dollar market.

So a lot of it had to do with kind of like the petrodollar. So I guess a few housekeeping items here, because a lot of this is kind of new information to me or just, you know, it's paths I haven't gone down very deeply. So you're telling me that there are tens of trillions of euro dollars out there and would probably be more accurate to call these like global dollars because they're not all necessarily in Europe. And maybe there's some banker out there who's really angry about the euro dollar meme and just like us wants to change it to global dollar. But that's kind of the reality, right? There are tens of trillions of dollars out there. And by the way, we don't actually have a precise number. Like we don't actually know how much,

which coming from crypto, I mean, that feels very weird, right? Shouldn't the central bank be able to run a full node and calculate the supply of their dollars outstanding? Isn't crypto great? That's something like crypto. Yeah, I mean, it's not just your dollar. It's also physical cash. They don't know how much physical cash is out there, obviously. How could they? And there's more dollar cash outside the U.S. than there is in the U.S. also. And it's an unknown amount as well, because, of course, it's not on a global permissionless blockchain. So we got you on the technology side, Central Bank. Well, let me just ask a few housekeeping items here. So as bizarre and crazy as that sounds,

I want to get into kind of the incentives at play for the creation of this market. So we're calling this kind of a gray market. And it's increasing in legitimacy as the U.S. starts to recognize it. And it's like, okay, your dollars are here and we can't quell them. Maybe we don't want to.

It's not in our interest. Let's talk about the demand side, though. Why are dollars so demanded? Why does everyone want dollars? why is the dollar kind of better than the euro? I mean, why aren't they using euros instead? Do you have some sense of that? Because that also informs why crypto dollars might be demanded in the future. Yeah, and this is a good question that I think about a lot because the crypto dollars are very unique and that 99% of them reference the dollar, which is just remarkable, which is a much higher percentage penetration than we see dollars in any other domain, especially, is crypto is a fully global market. I mean, a very global market. So I always wonder about that.

Like, what is it about crypto that causes the dollar to have these tremendous network effects? It's just squashed any other fiat. And what you mean is there's no like Euro stable coin. There's no Canadian dollar stable coin really. That has so much. But nobody wants them. I mean, I think this will change to a certain degree. Like probably people will start, you're a European and you're using crypto and you're using crypto fiat. You're probably using dollars, which is remarkable to me. I think, you know, there's like a few reasons why people want dollars. One is it has, you know, use a dollar to extinguish a tax liability in the U.S. Obviously, that's not that salient in the your dollar conversation. You also need dollars to

purchase U.S. securities, so treasuries, for instance. But the other one would just be kind of the network effects of trade. I mean, you need some currency to denominate trade in. to denominate contracts in. And as the U.S. became the global exporter and just the trade partner for the entire world post-World War II, that was all occurring with dollars. So I think it's just really the network effect and the liquidity benefits that caused the dollar to be so demanded globally. And what a powerful network effect it's turned out to be, it seems like. And I guess the question remains over the decades to come, how durable that is. Of course, that phases into the crypto story. I just want to understand your dollars a little bit more. So what you were saying is it basically

the case. So I have dollars in my U.S. bank account, my Wells Fargo account, right? And that is a U.S. dollar. That's not a euro dollar. I have FDIC insurance on that account up to 250K. If I have dollars in a bank account in Europe, is that automatically a euro dollar? And then what is it backed by? Like what composes that specific Euro? dollar. I think you referenced early in this conversation that it's not normally or not necessarily you know, kind of there's one dollar for every dollar that I have in a European bank account. So maybe it's backed by something else. What is the actual structure of that dollar that I might have in a bank account in Europe? Is that a true euro dollar? And how is it different than the

dollar I might have in my American Wells Fargo account? Yeah. So initially they like weren't fungible, you know, so you wouldn't have had FDIC insurance if those dollars were in an offshore bank. but as time went on, the connectivity grew greater. As the U.S. realized they couldn't suffer these deflationary shocks when people thought they'd have dollar liabilities in these banks and they weren't supported by dollar assets. But yeah, initially the banks kind of were offside in the sense that they had non-dollar assets

that were backing the dollar liabilities. So what I would say they're backed by now is the relationship that ultimately the local central bank has with the Federal Reserve. That's sort of the ultimate backing. And you think about your dollars and your bank, what they're ultimately backed by is like the Federal Reserve's willingness to create liquidity if there's a crisis. So like the FDIC thing is kind of like symbolic, I would say, the F2IC insurance. And like we saw this year with a banking crisis, FDIC was kind of irrelevant in a sense, right? Because it didn't support all the unsecured deposits in the banks. So what were your dollar deposits and banks?

supported by was like the Fed's willingness to create liquidity in a crisis, which of course manifested potentially in inflation. But yeah, it's like your dollars in the U.S. are ultimately supported by the fact that there's a central bank that's willing to create dollars and shore up the banks if necessary. And then it's more diffuse offshore, but I would say it's still the strength of that bank's relationship with their central bank and then the central bank's relationship with the Fed, which is kind of a geopolitical question. So the allies of the U.S. have a tight linkage, and the foes of the U.S. or the non-affiliated countries, they've a less tight linkage. Anyone who the U.S. wants to maybe screw or just not bail out.

And what you're saying is that example is very pressing this year. And I feel like we all learned that with Silicon Valley Bank, right, where depositors were, they would have gotten screwed. And there's, of course, an FDIC limited to $250K, you know, per account. And, of course, you know, that was bailed out. all depositors money was basically guaranteed by the U.S. Central Bank apparatus, right? And so you're saying that relationship would also exist maybe in a foreign bank dependent on the U.S.'s desire, political will, monetary will, to go, you know, commit to a bailout should some sort of event happen. So I guess it sounds like it's very different. It's more similar to the dollar I would have in a Wells Fargo account

in that it's backed by, I guess, you know, some full faith and credit of the U.S. banking system type of relationship is a little different than like a USDC or a tether, which actually you can kind of like audit. Yeah, I don't know what the latest of tether is, but in the case of USC, you get whatever, monthly audits. You can actually see, oh, this is backed by 70% treasuries and X percent, whatever else, 20% dollars. It's kind of composed by a grouping of assets in the case of a crypto dollar or stable coin. And that's a little bit different than a euro dollar. Is that the case? Well, I mean, the bank's asset, their like portfolio of mortgages and loans of small business, etc.

That's like the actual asset, the supports it. But that is not necessarily dollar denominated. So the sort of like liquidity provider of last resort would still be the Fed. But the Fed, well, rather the U.S. may not feel that they owe anything to the foreign holders of your dollars. So I think this is actually something people talk about a little bit. Like, well, there's all these dollars overseas, like in particular in countries that we're not friendly with. right and there may be in kind of the near future a situation which emerges where we have a global financial crisis again and the Fed ends up being at odds with the kind of national security apparatus of the

U.S. because the Fed's motive will be to shore up the dollar system and provide that liquidity even if it helps our adversaries right so like you're not talking about American savers who are potentially dealing with loss they're saying you're talking about total foreigners that we may not feel like we owe anything too. So the kind of Natsack portion of the government might be like, well, why on earth would we bail out like people abroad that, you know, like what do we owe them? Whereas the Fed, their motive is, well, actually our job is just to like ensure the sanctity of the dollar globally, even if the dollar was created in a foreign bank. And so this is actually like a debate that will be had in the coming years, as to what extent should we support the global euro

dollar system. That's a very interesting question, right? Because when you look at it through that political lens, you sort of wonder, what's the safer asset? A euro dollar in a European bank account or USDC, denomination of USDC, which is basically an U.S. bank account at the end of the day. It almost feels like under a certain lens, you could easily say USDC is the safer asset relative to a euro dollar. What do you think of that? Well, so with USC specifically, I'd feel really good about it because, well, it's kind of an interesting thing. That's maybe not the best example because you, no offense to my friends at Circle. As a USC holder, my analysis is you're an unsecured creditor of Circle. You're an unsecured creditor of Circle. It's like you bought a bond that they

issued and you get zero coupon for that. So, you know, what would you have to be paid to be a unsecured credit of Circle? For me, it's probably more than zero. But, that's what you that's the USDA C holder is it getting paid. We'll take a better example would be like PayPal's P-Y-U-S-D so that's issued under the New York trust license and I don't want to be mean to any given stable coin here I love them all equally they're all my children but um PYUSD is a good example because it's issued in New York New York trust license bankruptcy remote the regulator is very clear about that and they do monthly out of stations they're very clear about what the assets backing that are.

Treasuries, reverse repos, some cash probably, and they're very clear about what your assurances are as a holder of that. You compare that to, let's say, the users of the ordinary PayPal product, and JP Konek wrote a grope blog making this exact clear contrast. The holders of the dollar liabilities issued by PayPal in their conventional product have none of those assurances. In fact, there's a higher maturity. It's not just short-dated treasuries or cash.

there's some exotic stuff in there. They're not as transparent with the disclosures because they don't have to be. And you don't have a priority in a bankruptcy or liquidation situation. So because of the way the crypto stablecoin regulation is being treated in the U.S. at least, the crypto dollar holders of PYUSD are in a far better position than the dollar holders of ordinary PayPal issuance. And by the way, Nick, for people who haven't kept up with this, PYUSD is a new PayPal stablecoin that just started being issued, I believe, this summer. It doesn't have a lot of traction yet, but you're saying actually the settlement guarantees, let's call them, a P-Y-USD, are actually pretty strong. Yeah, the overall assurances you have from being a user in that system. I mean, look,

there's a freeze-and-seas function as most Fiat-back stables have. Stable tics. Yeah, yeah, yeah. And we can dig into why you probably should have that. But yeah, the assurance is the system, because of the weird contingency that it's a crypto dollar are far, far greater than the assurances you have being a ordinary user of PayPal. And not all stablecoins are like that. They're not all issued in New York with New York trust license. Obviously, the biggest stable coins, big questions around them. Other stable coins in the U.S., there's an array of strategies, issuing strategies, some are state-by-state MTL, some are issued out of trusts. But on kind of a go-forward basis, my general statement would be, I'd be far more comfortable being a stable coin holder than I would

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Is it basically just a function of demand? So I'm very familiar with how stable coins grow. And staple coins grow when the market demands bore stable coins, right? So if there's more demand for USDC, then it can just, you know, there's more USDC liabilities in the account and they can issue more USDC and it just kind of ratchets up with demand. Do euro dollars work the same way? Are they just kind of like they could mint infinite, I suppose, to the extent that the demand is there? Well, I mean, the bank solvency is ultimately the question. So if they're over-issuing dollars and then there's a run on the bank, you know, the bank itself runs into trouble and could potentially go bust.

So it's the same constraint applies. It would be a capital ratio, liquidity ratio. So they'll be able to issue dollars commasure it with like whatever the local regulatory requirements are. but ultimately it would be a function of the demand to hold dollars in that bank. So do you think crypto dollars could be a competitor to Euro dollars in the future and start to take some of that market share? Well, I think they are a force for your dollar creation, basically. But also, crypto dollars don't have to be issued by a bank.

I mean, we see non-bank issuance of crypto dollars. So it could well be the case that the banks are kind of cut out of this process, whereby you have a crypto dollar issuer, you have some custodian that holds treasuries for them. and some intermediary that helps with liquidity, and there's no bank involved at all. So basically, I think crypto dollars are the new euro dollars. They could also be accruive to the euro dollar sector generally. But yeah, I see them as basically the new euro dollars. I want to talk about some of the drivers behind the rising star of crypto dollars. Like, why is it gaining momentum? Not few things in 2023 have actually rose in popularity, rows in utility, rows in interest,

Stablecoins is definitely one of them. But why? You alluded to earlier, Nick, that it's actually decoupled from exchange volumes. So there are net new buyers of stablecoins. There are net new transactors in stable coins. Who are these people? What are the sectors of the world, the sectors of industry and parts of the globe that are like leaning into the crypto dollar world? Yeah. And I'll caveat this by saying that we see monthly active and weekly active users increasing for stables. The volumes, as far as I can tell, are flat, but obviously relative to crypto, that's good. Flat is up in this day and age. Flat's up. And the total supply of stables is contracting, but so that means velocity is increasing. So we're doing more with less

in terms of monetary base. I would love to know who all these people are. And it's very circumstantial. You have to put the puzzle together. So based on all the pieces, I'll, identify a few kind of categories. So one is cross-border payment remittances, right? And we see the legacy remittance providers getting into the stablecoin space. So that's the thing that's happening, like Moneygram is getting into it. But you also see new crypto-native remitters engaging in stable-coin transactions to satisfy the kind of cross-border leg. And these are just new names that are emerging. A lot of these remitters will be using crypto dollars without their users knowing about it. So this is kind of like utility scale B2B2C type mechanics.

So that's certainly a category. They may not be holding a big float because this is more kind of like for payments, but we certainly see that. Another cohort is stable coin, you know, like fintechs, banking as a service companies, eMoney, mobile money companies that are giving their users access to the dollar. whether it's for transactional access or just to hold the dollar, then maybe an interest-bearing mechanic, like a tokenized treasury type thing. This we see mostly outside the U.S., right?

Like, obviously, we're very well-served from a fintech neobank perspective in the U.S. But in EMS, you see this, and there's a bunch of new names emerging there, and I think within a year or two, we'll see, you know, massive, massive companies built here. And we've talked to, like, at Castle Island, we've talked to, like, two dozen of these firms in the last couple of months, a lot of them, their metrics are just skyrocketing as users become more comfortable with this, or as users become more attuned to the risk of their local fiats, you know, like we've seen banking crisis around the world. The hotspots I see, everyone knows Latam is a hotspot for this. That's probably the number

one place. You know, there's a combination of like latent amounts of wealth there. There's, you know, obviously a flow of remittance in and out. Depending on the country, there might be very unstable or weak fiat system. You've even seen dollarization episodes in Latam. And there's also a very tech savvy, like, you know, mobile first user base. So I think that's why you see such high penetration in Latium. The other hotspots we see are Eastern Europe. Again, like very technically savvy populations and history of kind of like unstable currencies,

unstable governance. We see this in Africa. we're investors and I think the largest crypto brokerage in Africa, yellow card. The main thing people do with them is make cross-border stable coin transactions. And of course, the dirty secret of all this is that a lot of it is on Tether, on Tron, specifically. So, you know, we joke about it, but TetherTron is like the number one crypto application that anyone has ever come up with, which is pretty amusing. And then you see a lot of usage in Southeast Asia as well. So it's kind of like you really have to put the picture together. I'd love to know just from like at the on-chain data what's going on, but of course,

there's only so much you can piece out of that. So we have to go kind of bottom up. We were joking earlier about, we call them Euro dollars, but they're really global dollars. Maybe just the memes started in Europe, but really it's a global phenomenon. But maybe that's just because Europe is more financialized and more banked than the rest of the world. So they got to this phenomenon first. Is it accurate to say that crypto dollars, stable coins, are a democratizing force for for access to what we call Euro dollars, that blockchains have helped, like the non-Europe,

non-United States, parts of the world actually penetrate into the crypto dollar market. Is this a democratizing force that's being brought to play here? Yeah, and people talk about, like, financial inclusion. I've talked about it for years in crypto, and, like, sometimes it's just total red herring, facade, like a justification for what we're trying to do.

But, like, it's very real. And so, like, my prediction here is actually, if you actually look at it, the euro is becoming less and less influential, because Europe is fading in many ways. My prediction is the dollar actually kind of re-entrenches their dominance in the coming years, and I think crypto is a big part of that. I think you'll see this kind of spontaneous crypto-dollarization occur. And I thought this would happen back in 2020. I started talking about it. In a podcast miniseries, I wrote my little white paper about it. I thought you would see crypto dollarization episodes. And like in certain hotspots, you have seen this, definitely,

like in Venezuela, it's absolutely the case that crypto dollarization has occurred with a certain portion of the population. But I basically think there's going to be many fewer fiats in the next kind of 20 years or so. And it's not that I think like Bitcoin is going to kill them or anything. It's the dollar will kill them, right? Like the dollar will be forcibly import into these countries and the local government authority will not have the tools to stop this. And if these countries are democracies, it will be politically unpopular to try and inhibit this, right? It won't make sense at a certain point. So I think you'll see a lot more countries kind of submit to dollarization if their local population becomes too fed up with the kind of fiat mismanagement. But, you know,

as far as giving people access to dollars that they never had before, like, oh, and a lot of these countries are just elites have access to dollar accounts. And the way that they get that is they literally fly to the U.S. with cash. They deposit the cash in Bank of America. For some reason, Bank of America is very common with like Venezuelans, for instance. And so that's like obviously not something ordinary people can do. But now that you feel out liquidity, whether it's P to P basis, like finance P to P or with these exchanges that are pretty well established and basically every country on the planet, all the tools are there. And, you know, high quality wallets, crypto wallets. that's the work, or fintechs that can kind of intermediate this if you don't want to bother

with key management, all the pieces are there for this to occur. So as the world gets smaller, as blockchains tear down these kind of geographic barriers, you'll see, I'm certain, episodes of crypto dollarization. And basically, we're going to see the dollar be this kind of apex predator that predates on all of these weaker fiat currencies. So I might have been early in this prediction, but I kind of stand by it. I still think it's going to happen. happen. Sure, yeah. And I'm going to put something up on screen here. This is a slide from your recent talk at Missouri, which is just got three lines on it, two that we're going to focus on. One is the supply of USDT, Tether, of course, and one is the supply of USDC circle. And these lines largely move in

parallel with each other with UST and the lead right up until recently, right up until a few months into 2023 when they just massively diverge and USET grows to basically new highs that it's never seen before in the crypto world. And then USDA has seen a decrease in supply from about almost 50 billion down to below 30 billion with the context that we just had in this conversation, Nick, and the demand for crypto dollars outside the United States, what is the signal that we get from the slide? Why is this slide significant? Yeah, I think it's one of the most important charts that I've put together. I tweeted that and people like, this isn't interesting. This is not an interesting chart. I'm like, I found it interesting. I found it interesting. So this shows the

disparate rate sensitivity of the two major stable coins. And this tells us so much. This tells us so much. It tells us that USDC holders are rate sensitive. Of course. U.S.TC holders are, a lot of them are U.S.-based firms that wanted to make crypto transactions. If you were to plot the crypto yields, the kind of native crypto yield, that there's not one, but there is a collection of crypto yields against the Tradfi yields. The crossover would have happened in late 22, early 23, and that's kind of the moment when USDA supply sort of draw down. This is just like how sovereign currencies work, by the way. If there are two similar nations, two similar, their currencies and one of them pays a very high yield and one of them pays a low yield, capital

will flow into the high yielding one. It sucks it in and out of the low yielding one. So it's the exact same thing happening here. Like, Crypto land stopped paying a high yield. I mean, we can talk about the yields in crypto. Some of them were illusory, whatever. Fiat land started paying a high yield. In fact, it's gone up since this. It's astronomically high, right? In the U.S. So USDAC holders all of a sudden had this massive opportunity cost where they're getting paid zero to hold this stable. And the crypto opportunities weren't as good. And it wasn't difficult for them to move back into fiat and put their money in treasuries, right, and earn the now 535 basis points. This is the main thing that's responsible for the sell off and stable coins is the fact that the stable coins pay zero yield.

It's like a savings account in the bank that pays you nothing. You're not going to keep your funds in that bank. actually this happened to me just last week. I pulled all my funds out of my credit union because they're paying 20 basis points on my cash, which are ridiculous. So meanwhile, Tether is rallying. It's an all-time high. Tether also pays zero yield. So what's going on? Like there's something substantively different between Tether and USC, or at least as a perception. And I think it's that tether holders are more remote from the U.S. and they don't necessarily have the ability to go from crypto dollars to fiat dollars because that's more difficult for them because they're either

unable to or unwilling, they're able to tolerate the opportunity cost much better than a USDC holder was. So I find it fascinating. I think it tells us a lot about the different user bases. I think it tells us that USDT holders are holding it because they want to be as far away from the US as possible. Whereas USCC holders, we know they're much more proximate to the US. It's actually much more fascinating when you explain it. it that way. On first glimpse, I looked at it and said, okay, so tether up, USDC down, right? Maybe that's because of regulatory crackdown or something, or, you know, maybe that's because tether is just winning some sort of a narrative war. But, you know, the way you explain it, I should think sheds a lot more

light into it. And I also wonder about kind of a product that this seems to imply that would be highly demanded by the entire global market, including U.S. users of U.S.D.C. And that is the idea of tokenized treasuries, because then you could actually get that Fed fund rate on top of your stable coin and have kind of the benefit there. Does this chart also imply that that demand could be sucked up by an ERC20 or some sort of form of a tokenized treasury where you're getting that Fed fund rate yield on top of your dollar? Yeah, I mean, that's one of my big hypotheses for this year. You know, you look at the ETH to Staked ETH transition in DFI, where Stake DEETH derivatives became a very dominant form of collateral. I think the exact same will happen with

stables. It won't be a full replacement. We won't go from all of the tethers, 86 billion of tethers, to 86 billion of interest-bearing stable coins. But I think it'll be a very meaningful share because 550 basis points or 500 basis points of opportunity cost is very real. So we're seeing dozens of these emerge all kind of different approaches. The commonalities, a lot of them are issued offshore. So they're finding jurisdictions that are willing to have a interest-bearing stable coin or tokenized treasury list in foreign jurisdictions, because of course it'd be very hard to do it, if not impossible, in the U.S. So technologically, there's no reason we can't do this. It's just not that difficult to pass on some of the yield. And I think users are a little bit fed up of these

firms, the stable coin issuers, internalizing all of their yield. I mean, that's kind of ridiculous. You know, people at this point know that Tether, they have, what, 50 employees, they make $4 billion a year, roughly, from the treasury and asset portfolio they're sitting on. They pass the loaning none of that. Are you saying 50 employees generate, did you say $4 billion a year? Yeah, so I think Tether is the most profitable per employee business on the planet at this point. And I mean, That is stupid. Look, they have the golden goose.

They have the liquidity everywhere. That's fine. Some percentage of their clients will be fed up with that. And they'll move to, unless tether themselves, turns on the yield spigot. You'll see this competitive dynamic emerge. Just the same way that banks are now competing with money market mutual funds or certain banks that are now passing on a lot more interest as interest rates have risen. You'll see this competitive dynamic emerge where some newer issuers that are

willing to pass on a good portion of that yield will do very well at the expense of the incumbents. The difficult thing for USDC is they probably can't do this in the U.S., at least not on chain. They're trying to get around this by not calling it a yield. They're calling it a reward. They're passing on some of the underlying yield from USDC via Coinbase and things like that. This is security regulations that prevent them. Yeah, for sure. Like the SEC even thinks BUSD, which is a non-interest-bearing stable as a security under their very strange reading of the Reeves test. It seems like they might think Pokemon cards are security here lately, Nick.

So, you know, who knows? If it's tokenized, it's got to be a security, right? They think everything's a security, but it certainly doesn't help your case if you're paying an explicit yield to the holder. Fair enough. And look, we talk to a lot of startups that we're trying to do this in the U.S. But U.S. issuers will basically not be able to do this. This will be another force.

I've been talking about the offshoring of balance sheet from the U.S. to other places and to other X-US-iss-issued stables, this will be another force that accelerates that, too. This is fascinating. I mean, you've got, you know, maybe near the end of this episode, we can kind of lay out Nick Carter's crypto-dollar predictions. But, you know, one of your predictions

earlier in this episode seemed to be that crypto-dollars will maybe surpass at some point Euro-Dollars, right? Which would be, you know, quite the feat. And his second prediction of the coming of a tokenized treasury would be maybe another prediction that I'm hearing you make. But a lot of this depends as we start to talk about kind of what the U.S. wants, on actual U.S. banking regulatory apparatus and what's in kind of the best interest of the United States.

And it feels like they're kind of split brain on this, a little maybe schizophrenic, or there's different factions that want different things. And I'm wondering if you could walk us through the regulatory idea maze here and kind of the incentives at play, and maybe we can pull in parallels from the euro dollar market. It seems like probably, maybe you would know much more,

but probably in the 50s and 60s with the emergence of the euro dollar, the U.S. regulatory apparatus would have squashed it maybe if they could. They don't necessarily like things that are outside of their jurisdiction and control, but they were content to kind of let it grow. And then it became so big, and they found some wins there with Petrodoll and other things, exporting, you know, U.S. monetary supremacy that eventually they just brought it into the fold, right? Maybe begrudgingly at first, but they saw enough benefits, saw enough wins to kind of bring it into the fold. What is the current U.S. posture

towards crypto dollars right now, aka stable coins. They've been interchangeable through this episode, but crypto dollars. And how do you think it'll play out? What are the wins for the U.S.? And what are the things that they might not like about crypto dollars? Yeah, and this was kind of my subject to my talk, which is basically the conclusion of all that was it's kind of up to them. It can be really good for the U.S. American interests

or it can be kind of less good. And it really depends on whether they want to fold them in embrace the sector or whether they want to push it away. So it could well be more hostile to U.S. interests if they push stables away. If a few things happen, like if stables start to be issued against crypto collateral as opposed to dollars, then that wouldn't be good as far as the crypto dollar sector being a buyer of the U.S. debt, because instead, crypto dollars would be buying ether and potential Bitcoin. And that's what the U.S. wants. That's one thing the U.S. wants, is they want buyers of treasuries, basically, U.S. debt.

In theory, yes. They don't seem to care very much. The stat that I have is crypto dollars as overall would be the 16th largest sovereign holder of U.S. debt. Already. Already, 16th, yeah. So more than Mexico, more than Saudi Arabia, more than Germany. You say that, like, quote, the government, they don't care, but they're naive, right?

Naive or there's some overriding concern. So one concern is the loss of control, similar to Euro-Dolars. and I think what they don't understand is if they were to cultivate a network of issuers here in the U.S., they would still be able to exert meaningful control. I mean, it's not like your ability to project power, you know, through sanctions enforcement or to pursue law enforcement objectives. That doesn't go away with the Stablecoin. You can still ask the issuer to carry out your will.

And the stable coins themselves listen to law enforcement. I mean, even Tether does, right? Tether has frozen more addresses than U.S.D.C., I believe. So what they should want is accountable issuers that are willing to listen to courts and listen to Treasury if they want to pursue some kind of political objective. But of course, stable coins are less accountable than ordinary transactions that are happening fully within the banking sector because they're cash-like transactions. These are p-to-p. So I think that's one thing they don't like. You know, I'd say often if cash was invented today would be illegal.

Yes. This is like the reinvention of cash, and so it's not surprising they don't like it, even if it can be frozen in a distance unlike cash. The other thing they're worried about is quote unquote financial stability, so it's very ironic. U.S. regulators think stable coins and crypto helped bring down some of the banks that failed earlier this year. I don't buy that. In fact, I think the banks were pretty much taken out behind the woodshed and shot, and that's being pinned on crypto. So I think it's pretty much the opposite. But what they worry about is like, oh, what if, you know, Tether redeemed all of their outstanding liabilities in one day

and they had to sell off their entire treasury portfolio, wouldn't this cause yields to spike? The obvious point there is, like, stable coins are cryptid dollars is still very small relative to, like, treasury liquidity. Austin Campbell wrote a good blog post on this. I don't see a scenario today where that's a threat. Also, I don't think it's very likely that all of the Tethers will be redeemed all at once. In fact, everything we've seen about tether is that it's incredibly sticky. Like, people don't want to redeem their tetheres. They want to keep holding them, and they may not be able to redeem them, frankly. So that's the other worry they have. So it's a loss of control they're concerned about, and then I think this pretextual concern about financial stability.

So with all that in mind, like what we've actually seen this year is every tool in the toolbook the U.S. has to kind of suppress and quash the stablecoin sector they've used. So in January, they denied the Custodia application. The Federal Reserve did to get access to the master account, which is basically the core of the Fed. That meant the custodia couldn't issue their own stable coin, which they were trying to do with a bank charter. That sent a signal to anybody else that was trying to get a bank charter to issue a stable coin, which in my opinion would be the best way to do it through a chartered bank, not just with a state-by-state money transmission license. In March, we had this crisis with the bank's. Silver, and signature, Silvergate choose to voluntarily liquidate. Signature were shuttered unfairly, in my opinion. They both ran this fiat clearing infrastructure, which was very useful for a stable coin liquidity, Sen and Signet, respectively. What they allowed was 24-7 liquidity for the creation redemption of stable coins. The process of winding down those banks and having their assets sold off in that process, Sen and Signet were not

included in the sales, which violates the FDIC's mandate to maximize the value of those sales. So this is a huge scandal, in my opinion. It's really a huge, huge deal. This is like key infrastructure that should have been sold to someone to keep these networks running, and the government didn't allow that to happen. So they basically selectively destroyed a key piece of crypto infrastructure, which was very useful for stable coins. That's a huge deal. Also in January, all of the major federal bank regulators wrote a letter saying, yeah, we think stable coins are risky. Don't touch them. In August, they wrote another letter the Fed did saying, yeah, look, if you want to do stable coin itself as a bank, you can do it, but you have to ask us permission, get a letter.

So basically, they're saying you can't do it. So everything they've done to date has been an effort to kind of discourage stable coin activity in the U.S. specifically with banks. And that's, I think, a big part of the reason why we see the stable coins going offshore. frankly, Nick, been kind of bizarre behavior because what they are in effect doing is they're trying to slow it down in the U.S., but they are in effect, as long as the demand is there, we saw this play out with Euro dollars. They're actually just driving it offshore. And they might even be driving it towards a different asset. As you said, well, if they're not going to allow dollar-backed stable coins, then how about an ETH backed stable coin or another crypto asset backed stable coin?

So it's frankly been kind of bizarre behavior. And I'm wondering what you think about this kind of, not a conspiracy theory take, but just sort of an influence type take, which is, how about the big banks? It seems like they might have a lot of sway in Washington in D.C. and are tied up at some level with kind of the central banking apparatus. What about when they get a product to sell? Maybe the approach makes some logical sense if some of the larger banks are just trying to slow down almost like these neo-proto banks call Coinbase or Circle, like proto-banks, slow them down until they have product that they can sell. It was very interesting to me that J.P. Morgan, for instance, they have a private blockchain. Like, not a lot of people are aware of this. It was formerly called Quorum. It's

called something else now. Onyx, I think. Yeah, onyx. And they're doing things on their private network, and there's an actual J.P. Morgan chain. I could imagine that they would want to issue that as an ERC20 on public networks and take some of this global market that you're talking about. And they haven't been able to yet. And I'm wondering if it's just because, well, I'm wondering if the tide could change if there are enough wins for traditional Wall Street or the big banks to kind of push this down the throats of regulators who might be resistant. What do you think of that theory? Yeah, it's a great question. I think generally open interoperable networks probably are not good for the banks. And banks as an industry, especially now that rates are high, so in theory,

banking is more profitable. They probably wouldn't like the competitive dynamic where a bunch of quasi-banks were able to emerge all of a sudden very quickly. The banks certainly benefit from the status quo whereby it's very expensive to charter a new bank, if not impossible. Like post-financial crisis Dodd-Frank made it very, very hard to create new bank, so the rate of bank chartering became effectively nil after that, which is a form of regulatory capture. It's a very unfortunate situation, and it reduced the competitiveness of the banking sector, in my opinion. So the banks themselves, I think some newer, like, smaller banks would want to hitch their horse towards a crypto space and become stable coin issuers and compete. That's what Silvergate and

signature were trying to do, was to be like crypto-focused banks. That's what Custodia was trying to do. So the states want to charter these things. There's newer banks that want to do this. They want to distinguish themselves by doing crypto. The big banks, I think the status quo works for them. However, there's also the asset managers. Like B&Y Mellon has clearly had crypto ambitions for some time. BlackRock is active. They work with Circle. You know, they actually administer some of these assets. They would like to issue an ETF. There's a whole laundry list of asset managers that seek to benefit from crypto. We know Fidelity is active there. Franklin Templeton has a tokenized treasury product. Right. So from the asset manager side, I think there's certainly,

the will there. One problem is this obscure accounting rule, SAB 121, which means that if you are a bank, you have to take a capital charge against any crypto asset that you're holding, even if it's on behalf of your customers, which is kind of a ridiculous interpretation of how it works. So that holds any bank back from sort of like touching crypto meaningfully. So I think you kind of have to disaggregate the institutional environment a little bit. I think it's heterogeneous, basically. I think the large banks don't have a lot to gain from public blockchains. I think certain asset managers have something to gain from it. And I think smaller banks that want to win market share certainly have a lot to gain from it. And it's them that have been

really harshly stymied here. The conversation of stablecoins is always in my mind an innovation on two fronts. One is the trad world innovation. And this is just like legal work, making sure you're buttoned up, making sure you're accepted. And then maybe some like BD stuff. and then there's actual like raw stablecoin innovation on the crypto side of things and that's where I want to ask you about next nick about like with the new frontiers of stablecoin innovation there's topics here like on-chain t-bills which again kind of straddles both but then there's new form factors for stablecoins which are a little bit more crypto-native but overall if we talk about just like stable coins and a roadmap if you will like Ethereum has got a roadmap salon has got a roadmap

If there's a perceived stable coin roadmap about like, you know, things to squeeze juice out of, what do you focus on? What's there left to squeeze here? Wow, there's so much juice to squeeze, man. It's very exciting. We'll see L2s that are stable coin focused, L1s that are stable coin focused. We will see like aggregators for stable coins to emerge, especially as stable coin liquidity becomes very fragmented. So you see like the one inch for stable coins, the cow swap for stable coins. On the stable coin issuance side, you'll see interest-bearing stables. You'll see crypto backstables, especially now that ETH has this positive carry.

Now, kind of for the first time, in some ways, it's possible to have a robust ETH back stable coin, a synthetic U.S.D. That's all very exciting. Then on the sort of like financial rails, you'll see more efficient ways to stitch together Fiat rails and stable rails to create an alternative to the corresponding banking system, which is highly, highly efficient at moving money. So you see like global Venmos, global PayPal's emerge, when they just weren't able to do that before. So yeah, and then you'll see like more sophisticated, especially offshore, like fintechs that are fully powered by stables on the back end, custodial, semi-custodial. So, I mean, total Cambrian explosion is what we're seeing. And the quality of entrepreneurs here

and the number of startups I'm seeing is very significant. As I said, I could just do stablecoin related deals for the next year, probably, and that would be it. Yeah, so we started off this conversation saying like, oh yeah, stablecoin is kind of crypto's killer app, right? I think what you're calling for is like, yes, and we're just getting started, you ain't seen nothing yet. That kind of seems like what you're saying. Yeah, I mean, it's remarkable, actually, like how in some ways, like, poor the stable coin experience has been, like, the stable coins that exist don't give us great assurances. Like, I'd love to see better transparency also in the accounting. Like, I would like to see real-time proof of assets as opposed to monthly

out of stations, which I don't like. I would like to see much more concrete property rights carved out. So I would like all issuers to find a way to make the assets, bankruptcy, remote, held for the benefit of holders as opposed to being an unsecured creditor. That's a bad thing. So there's a lot of legal and contractual innovations to occur there. And then stable coins are still pretty siloed. They are not fully integrated into the financial system in the U.S. or abroad. One interesting thing that it's making them more proximate is the emergence of rapidly settling payments on the Fiat side. So if you want to go from Fiat to crypto to Fiat for, let's say, an end-to-end remittance that you want to send, you know, from the U.S. to whatever, the Philippines,

the historical issue was that there was a settlement risk on the Fiat side. So it was always the Fiat lag of the transaction that was a problem. But as these newer payment systems emerge, that settle very quickly on the Fiat side, now you can do that whole transaction and maybe in seconds, as opposed to having the issuer trying to take on some risk where like ACH might be reversible.

After some number of days, a credit card payment might be reversible, like this chargeback risk. So one interesting thing that's going to make stable coins better and more useful is fiat transactions getting better and more useful. So as fiat transactions approach the settlement speed of stables,

that makes the whole system more functional. if that makes sense. Right. Yeah. So the properties, the underlying strengths of one Fiat network impacts how strong the StableCoin network can be. If you want to go end to end from Fiat via crypto to Fiat, the Fiat leg on the ingress side needs to be fast settling. Otherwise, the entity that's intermediating the transaction is taking on a whole lot of risk. And it's one of the weird ironies. We think the U.S. financial system is really good. Actually, relative to many, many others, including developing world financial systems, it's very, very bad because there's a lot of settlement risk in the U.S. financial system, typically. And actually, as we see more real-time

payment systems emerge, even Fed Now, potentially, believe it or not, that will actually make the experience of going from Fiat to Stables back to Fiat much, much better. So that's a weird thing that's been holding us back is actually the Fiat side that sucks. Fed now is bullish for crypto. That's one interpretation. So I want to ask you for the crypto natives who've been hanging out this entire episode, who are excited about, you know, crypto dollars and the potential. But they might have the question. Okay, so how about our crypto native assets? What does this do for our bags, Nick? Since we've been talking about staple coins and crypto dollars, there's always been kind of two sides

of the coin here. You know, some have made the argument that crypto dollars are actually parasitic to the value of ether and Bitcoin because they represent sort of a monetary demand that's expressed in dollars rather than in, you know, a crypto-native asset. And others have said, no, adoption is good. More addresses and more people's, in more use cases and more gas fees and all of these things. What do you think? So if this vision comes true and we get crypto dollars, you know, rising to scale of the euro-dollar market, is that going to be good for crypto-native assets like Bitcoin and Ether? It depends on whether you lean into the change or whether you reject it. So I think I wrote a blog post for your newsletter, like some years ago, like saying,

I think crypto fiat was parasitic. You did. You totally did. Yeah. At the time, I think I'd be saying it was. So I think the real question is, how quickly are you able to internalize this reality? Like, one of the charts I showed on one of my talks showed that something like 70, 80 percent of all dollar value settling on blockchains is now happening in dollars, as opposed to Bitcoin or ether, or other L-1s. And when I wrote my first white paper in 2020, it was 30%, I already thought that was a big deal. And now it's like 70, 80%. So it's a huge deal now. So it's a kind of a challenge I posed to the protocol engineers. Can you make your blockchain such that it benefits from the existence of settling non-native assets? The eth folks, I've said this before, I think did a good job

because eth tokens are able to extract some of the value from the transactions happening in fiat via fees and like the burn mechanism, things like that. Bitcoin is still more up in the air because, well, there aren't really a lot of crypto dollars settling on Bitcoin, but potentially it could be a force driving up fees if that were to be to become a domicel for crypto dollars, but it would also eliminate the medium of exchange value prop of Bitcoin. Now, maybe not eliminate it, but challenge it. And this is a big argument I've been having with the Bitcoiners. Like, Is Bitcoin being a medium of exchange and bridge currency an absolutely inherent part of the Bitcoin thesis? If it is, that's challenged by the emergence of stablecoins for sure. However, if you can

position your blockchain such that stable coins represent a revenue opportunity for the blockchain itself, then you can certainly benefit from it. So I don't think it's a bad thing for crypto that we're settling a ton of dollars. That's usage. That's very real world economic usage. That's like a great thing. But the question is, can you position yourself to benefit from it? I think you'll see a lot of these L-1s start to realize this instead of trying to position themselves to be like the stable coin domicile of choice. Like we certainly see this with like the stellar of the world. Solana is like leaning into this heavily. Eith, I think tends to not really care what kind of transactions you're doing. So maybe this is for the like newer, smaller

are L1s that want to distinguish themselves in some way. But yeah, it's kind of like up to you, really, whether you benefit from this trend, because it's very real and I think intensifying. Yeah, it'll be fascinating to see what L2s do with it as well. I mean, your base is a fascinating experiment with Coinbase, who's obviously very friendly with USDC in Circle and now having their own layer too. There's going to be a lot of innovation here. Nick, a final question for you, you've been kind of an Oracle of Crypto Dollars and Stable Coins for a while, you know, long predicting that their star would rise. Is that the fourth time we've used that in this episode? I'm not sure. So give us some of your predictions, right? And over the next three to five years,

what's going to happen, do you think, in the world of crypto dollars? Okay, so first of all, I think the U.S. dollar is going to remain the main unit of account. I think the interest-bearing cohort of Stables, it's less than 1%. I think it'll be at least 25% within two to three years. Wow. That's large growth. So I think that'll be a huge, huge shift. I think Tether will eventually realize this and probably be forced to create their own competing product. USDC will not be able to directly. Maybe they'll be able to indirectly, so the way they're currently doing it. I also do think crypto collateralized, starting with ETH collateral, also moving on towards Bitcoin collateral. Those will become a meaningful sector, at least 10% of supply. And of course, I think total supply is going to grow dramatically.

completely plausible to me, we'll see $500 billion worth of stables within three, four years. Do you think stable coin market cap might actually overtake ether market cap? Yeah, I think so. Yeah. I certainly see that. I think stables will ultimately flip in the kind of crypto-native assets. I mean, it's interesting question. Bitcoin too?

Yeah, yeah, sure. Wow. For sure. Like, what's the supply of all stocks and then what's the supply of all dollars? It's actually probably pretty close. Parity. It's actually probably pretty close. I think their equity, public equity, my market cap. But, you know, Bitcoin and Ether are just a subset of that. So yeah, I think

will ultimately exceed the L1 tokens, rather. One thing I think is that the rise of crypto collateralized stables will push down ETH yields because that'll be a big consumer of ETH staking. And it also pushed down the yield from the basis trade on ETH and Bitcoin because basically stablecoins themselves will be doing this carry trade. You think the issuance and minting of stablecoins, will use ether staking as one of its assets? Yeah, yeah. I mean, so you look at these synthetic stables, like ethene, a good example,

where they're long, steaked eth, and they're also short, ETH futures. Both of those have a positive carry. As you see billions and billions of this type of stable created, it'll push down both of those yields. I think the other big prediction is other jurisdictions will embrace U.S. dollar stables. This is clearly already happening.

And then I think longer term, It'll take the U.S. some time to realize this, but they'll see the benefit and themselves fold stable coins in and potentially even give stable coin issuers, you know, closer access to the central bank directly. So I think eventually you'll see that. Any short term, Nick, U.S. laws, do you think, that will be pro-stable coin? Do you see that happening in the next one to two to three years? Certainly not before the election. Maybe if the Senate becomes Republican, then maybe we'll see that, but not with this current Senate. There we go. Nick Carter. Thank you so much. This is great. I learned a lot. Clearly you are bullish crypto dollars. And to me, we never call them stable coins again. It's been an absolute pleasure. We appreciate it. Thanks, guys.

It's been great. Bankless Nation, got to end with risk and disclaimers. Of course, crypto is risky. But crypto dollars, on the other hand, no volatility there. You just got to make sure you know what backs them. You could definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone.

But we're glad you're with us on the bankless journey. Thanks a lot.