Bankless - 50 - Crypto-Dollars, Regulation, and DeFi | Jeremy Allaire

Episode Date: February 1, 2021

🚀 SUBSCRIBE TO NEWSLETTER: http://bankless.substack.com/  ✊ STARTING GUIDE BANKLESS: https://bit.ly/37Q17uI 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ 👕 BUY BANKLESS TEE: https://merch.banklesshq.com/ ----- 💪BECOME A BANKLESS PREMIUM MEMBER: http://bankless.cc/membership ------ 📺AFTER THE SHOW DEBRIEF: https://shows.banklesshq.com/-exclusive-jeremy-allaire-debrief ----- GO BANKLESS WITH THESE SPONSOR TOOLS: ⭐️ AAVE - BORROW OR LEND YOUR ASSETS https://bankless.cc/aave 🚀 GEMINI - MOST TRUSTED EXCHANGE AND ONRAMP https://bankless.cc/go-gemini 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS https://bankless.cc/monolith 📈 KWENTA - DEVIRATIVES TRADING WITH INFINITE LIQUIDITY https://bankless.cc/kwenta ------ 50 - Crypto-Dollars, Regulation, and DeFi Guest: Jeremy Allaire Jeremy Allaire is a serial entrepreneur and the Co-founder and CEO of Circle, the firm behind USDC. He advocates for the U.S. crypto industry in Washington, paving the way for current and future regulation of cryptoassets. USDC and other stablecoins saw a massive influx throughout 2020 into Ethereum and DeFi as demand skyrocketed, providing a glimpse of possible long-term impacts on the future of money. Jeremy argues for a full-reserve money system based on Austrian Economics, moving away from the money creation inherent to today's fractional-reserve systems. Jeremy details the synergy between fiat stablecoins and non-sovereign, store-of-value, commodity assets. He envisions a future of synthetic digital currencies balanced by a basket of non-sovereign assets. This is a vital time for instituting effective regulatory measures for cryptoassets and protocols, and as a front-line advocate, Jeremy stresses the importance of the crypto industry itself taking the initiative to front-run regulatory issues via creative innovation. Jeremy self-describes as "cautiously optimistic" about establishing meaningful dialogue with regulators like Gary Gensler, Janet Yellen, and FinCen, focusing on specific issues like criminal abuse, self-sovereign identity, and consumer protection. Jeremy concludes with broad market predictions and analysis of DeFi as a massively underrated space, with the long-term goal of DeFi interacting broadly with real-world identities. This was an extremely interesting conversation that shed some much-needed light on stablecoins in a regulatory context, and Jeremy remains a key component throughout this development. ------ Resources: Jeremy Allaire on Twitter https://twitter.com/jerallaire Circle https://www.circle.com/ USDC https://www.circle.com/en/usdc Centre Consortium https://www.centre.io/ ------ Don't stop at the video! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Visit the official Bankless website http://banklesshq.com/ Follow Bankless on Twitter https://twitter.com/BanklessHQ Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time we may add links in this channel to products we use. We may receive commission if you make a purchase through one of these links. We'll always disclose when this is the case.

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, this was an exceptional interview with Jeremy Aller. What were some of the highlights for you? Yeah, Jeremy Aller, founder of Circle and USDC, a really a timely episode because of how much regulatory action there's been, especially in the last quarter of 2020 and 2021, shows that there's no signs of that slowing down. And USDC and crypto dollars seems to be kind of at the forefront of that regulatory conversation. So that's one of the big topics that we get into with Jeremy Aller, as well as, of course, USDC inside of D.E. D-D-C replacing the commercial banking layer and all the benefits that public permissionless

blockchains like Ethereum can offer the world using things like USDC. Yeah, it's interesting because he seemed pretty bullish actually on the regulatory side that we're going to kind of come out ahead. And I'm not sure that he'd always say that. So there have probably been times where I've seen him in various ways frustrated with the regulatory bodies of the U.S. and kind of their handling of crypto, but he seemed pretty optimistic this time around. What's interesting to me, David, is he knows a number of these regulators on a, on a first name basis. So he's very plugged into that world and it's kind of fighting for for crypto in D.C.

At that level. So it's good to seem optimistic on that. Yeah. One of the most interesting components of this interview that was my biggest takeaway was the relationship between Coinbase and Circle and USC. There was a little bit of unexpected protocol sync thesis conversation to to have there where the center consortium is kind of this neutral layer for producing USDC that Coinbase is a part of and Circle is a part of. And I thought that that was a pretty interesting takeaway. Yeah, absolutely. And for those of you who are wondering, you're saying like USDC, guys, that's not, that's not bankless. You're right. It's not completely bankless. This is kind of a crypto banking type product. However, we did talk a lot about how this is the gateway to defy, essentially for a lot of

people. This is the gateway to non-sovereign stores of value, commodity monies like Bitcoin and like Ether. And Jeremy talked about how he was bullish ultimately on that future. This is another bridge into that world and another path to get here. I think it would be a shame if people stopped at USDC on Coinbase and didn't do anything else. But I don't think that's likely, David. I think once they get a taste of crypto, you know, you got to go all in. You got to explore the frontier. You got to go into where the action and excitement is, which is defy. So this is going to be a gateway. This is not a replacement of crypto-native systems to me. Yeah. And bankless maximalism, I don't think is for everyone, right? So it's not just, you know, ether and defy

tokens in your Ethereum address. Using USDC in your Ethereum address is way more bankless than Wells Fargo dollars in your Wells Fargo account. It's always a step in the right direction. And the more USDC on Ethereum, the more financialized and monetized ether the asset and Ethereum the economy is. So I think it's long-term bullish for Ethereum no matter what. Guys, this was a fantastic interview. Just a reminder for bankless paid subscribers, there is a 30 minute debrief conversation that Ryan and I have at the end of every single episode. That's where Ryan and I just hop into Zoom and we discuss the episode right after we record it. That is available to all bankless paid listeners as well, as well as all the other debriefs we've

ever done. And some of, this is some of the best learning that I get done, just having these conversations with Ryan after the episode. And I'm happy to make these conversations available to the bankless paid subscribers as well. So if you guys want to access, that there is a link in the show notes so you can go and hear those debrief conversations. We will jump into the interview with Jeremy in just a minute, but before we do, we've got to tell you about the fantastic sponsors who made this bankless episode possible. If you are looking for a product that connects your Fiat bank account with defy tokens and products, you need to download the Dharma mobile app.

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is at your fingertips. But with Monolith, so are the groceries at your grocery store or the coffee at your coffee shop. Go to monolith.xy Z to sign up and get your monolith visa card today. Bankless Nation, we are here with Jeremy Allaire. He is a serial entrepreneur. He's the co-founder of Circle. He is also almost the king of stable coins in a way.

He's definitely an advocate for the U.S. crypto industry in Washington, D.C. Jeremy, it's fantastic to have you on the podcast. How are you doing, sir? I'm great. Thanks, Ryan and David. Really awesome to be. here with you guys. Do you know, okay, so can we start with this question? Nomenclature-wise, is it stablecoin or crypto-dollar? What do you prefer? You know, it's really funny. When we got

started working on this, we sort of call these fiat tokens. But like that, that obviously was like what they were. And then sort of stablecoin became what people started referring to these as. And, you know, I think like now basically, like people call this stuff stable coins in the broader sector, like if it's in like policy or, or, you know, financial institutions, you know, big fintechs in crypto, obviously stable coin is pretty well known. I like crypto dollar as well. But, but I think that, you know, USDC is both a stable coin and a crypto dollar. But there are going to be stable coins that are not crypto dollars. And so I think the cash. category is still stable coin. Oh, I like this. Okay. So what is the distinction? What is the difference between stable coin versus stable dollar? Well, I mean, you could have a euro stable coin, or you can have the yen stable coin or a Singapore dollar stable coin, and those are not crypto dollars because they're not dollars. Okay. And then I also would also not fit into the category of crypto dollar, right? Because it's also, Dye is not a dollar. Right. I mean, that is a sort of this

kind of collateralized, you know, issued instrument. It's a little bit, a little bit different. I mean, we're getting into semantics, obviously, but they're, you know, on a spectrum. There's, you know, different ways of working on with this stuff. Okay. Well, let's start this by talking a little bit about last year, 2020. It was really like the year of crypto dollars. It was the year of stable coins. We want to get into USC and the role that it played. I have kind of a question before we get into all of that to you, which is, I'm not sure it's totally clear for our listeners or for myself. What is the relationship between Circle and Coinbase with respect to USDC? Because sometimes you kind of hear about Circle and USC. Other times

you hear about kind of Coinbase and USDC. Can you tell us about that relationship? Does one of you own SDC versus the other? Do you both issue? How does it work? Yeah. So just a little bit of history here. We've been, as Circle, very interested in models for how you can kind of represent fiat currency as digital currency. And we've experimented with different ways of approaching that over the years. And then in 2017, we made a decision to kind of work on what we thought of as like a protocol layer for Fiat tokens and with U.S. dollar tokens being the starting point for that. But really importantly, when we thought about it, we really believed and obviously continue to believe that the right long-term approach for something like this is to have a governed standard

and to really build a governance model around it. And there's a lot of analogies to, other things that are standards on the internet, whether it's the World Wide Web Consortium and the standards around the web or the IETF and standards around different protocols that exist on the internet. But in particular, with like Fiat protocols and the kinds of things that you'd build around them, you don't just want that to be from a company. You really want it to be something that can be, you know, multiple issuers, multiple companies, multiple geographies and actually have a governance process around it. So we created something called Center, and Coinbase joined us in the founding of Center. And basically from the fall of 2018 until

today, Circle and Coinbase both manage Center Consortium. And we can talk more about that in a little bit because it's growing independently of either Circle or Coinbase. And There's a new, I think, incredibly strong CEO that is going to be building out that consortium in a very significant way with a lot of different types of firms getting involved. We, I think, as Circle and Coinbase together, saw an opportunity to build a standard and govern a standard that could work as a high-quality, kind of trusted, you know, dollar-market infrastructure in the crypto economy. technically, you know, Circle operates as what's called the minting issuer of USDC, and Coinbase operates as what is called an issuer of USDC.

And we have, we kind of jointly govern the evolution of the smart contracts, the open source project. We all contribute source code to that and implementation to that. We make decisions together about where that standard goes. There's other policies like the governance of the reserve model. the compliance and regulatory model, all those things we do together. So that's something that has been a really, really close partnership between Circle and Coinbase over the years. What would you say would be the advantage of the dividing up of responsibilities of

USDC? And is that how you would kind of characterize what the dynamic? It's not so much a dividing up of responsibilities, meaning there are a lot of pieces to this. I think the first is that, you know, stable coins are regulated as like a stored value, electronic money technology and payment technology in the United States. And that's increasingly how they're being regulated in other parts of the world. And in that model, there is sort of, you know, a company that is doing the issuing of that e-money, if you will, and has the fiduciary responsibility that has to manage the reserves and is ultimately

on the hook as the licensed and regulated entity that is doing that. Now, on top of that, you can build all kinds of different arrangements around the technology standards, around distribution, and that's what Center really established. But I think the best way to think about this and the way we think about this is essentially every kind of major innovation in electronic money has been consortium of private sector actors that are working together on technical standards and interoperability. And then they build kind of governance models around it. That's what Swift is. Swift is a consortium of private sector actors. They happen to be systemically important. So major central banks also have a supervisory role. If you look at what most people think of as the sort of most popular

forms of electronic payments, like card networks would probably be what you think of. Card networks are associations of members, their consortiums. They define set of technical standards. They define interoperability. And that way, you know, not every bank is issuing their own proprietary system for processing cards. They all can get interoperability with each other. And in a sense, it creates a fungible electronic money unit. So stable coins have the same potential. And I think will be far, far larger in scale ultimately in terms of what they what they handle compared to those more proprietary models. But that's a little bit of a way to think about it.

And so success over time looks like lots of crypto finance firms, large consumer fintechs, banks, others that are part of a consortium that are involved in this and involved in government. and involved in the standards. And that's when, you know, as that happens, we think this gets into, you know, trillions of dollars of scale that are issued in these digital currencies. You know, it's funny. People would not have believed trillions of dollars of scale was possible before a year like 2020. We'll talk about the numbers in a bit.

I just want to make one comment in what you're saying with consortiums. Quite famously, Visa was a consortium. Yeah, absolutely. The largest payment network in the world came out of the 60s and 70s. And that was a consortium, the same way you're talking. Absolutely. We use this term, Jeremy, called credible neutrality a lot on bankless. The idea that more credibly neutral protocols or organizations or institutions are more scalable,

for the simple reason that they are unbiased, they're neutral. So if you as Circle are competing against, you know, like other exchanges, like a Coinbase, or a Gemini, right? Like, they're going to release their own coin to kind of compete with you, right? Because it's sort of a winner-take-all market and you're all competing. But as a consortium, you could scale much larger because no one has, no single entity or company has the governance power to bias, you know, the coin in their favor or not. So the circle model, it seems to me, and the center model, that consortium,

underneath USDC is far more scalable. And it does seem like we could grow to something as large and as fundamentally important as like the Visa Network here on top of something. Oh, absolutely. I mean, I think, you know, I have this philosophy and this is sort of an internet philosophy in some ways, which is, you know, as we've enabled sort of these decentralized protocols

and distributed systems that kind of connect people and machines everywhere, whether it be for sharing of data, sharing of content, communications, like all these kind of layers that have been built up over the past decades, every time you do that and you enable global connectivity into standards like that, the actual volume of what happens ends up being orders of magnitude larger than in the prior more closed network systems. And so, like, my view would be that, like, the, you know, gross scale of transactions in the world will just be radically larger because as cost approach zero, which I think inevitably they do, the economic, the unit economic costs approach zero, then the velocity can be even larger. And so, you know, sort of the net output of payment volume in the world will grow larger and larger. And then, you know, it comes back to, you know, people wanting to store value in these digital

currency units because they have greater utility value. And so that leads to, you know, trillions of dollars in market capitalization over time. Yeah, it's totally true. Like what you're saying is open networks win, right? We've definitely seen that with Ethereum being an open network. Absolutely. And all of these staple coins being deployed on top of it. I hope we address that in a moment. I want to talk about growth for just a second here. because stable coin supply is up from $6 billion in January 2020 to $34 billion now, right? USDC itself, $500 million to $5 billion last year.

Yeah. Just insane. Yeah, I mean, it's it's been wild. Yeah. I mean, we're at we're just crossed just about to, we've just crossed 5.4 billion. I mean, it's, it's. Well, were you surprised by this? Are you surprised by this?

Totally. I mean, at one level, I'm surprised at another level I'm not because obviously as we built this and we thought about it, we thought, okay, this has this potential. I think everyone was caught by surprise in terms of how rapidly the pickup of this happened in 2020. And it was really interesting. I mean, I remember obviously extremely vividly to basically early March of last year. And it's really interesting. you can correlate the growth very heavily to the impact of the pandemic on the economy. And we saw issuance start to spike up as crypto markets came alive in Asia in response to COVID.

And then as the pandemic took hold globally, just the volume, you know, started to really, really take off. So there was this interesting correlation. But I think back in early March, we were actually, just launching a whole new suite of services built up around usdc and we didn't know you know what what the demand would look like uh for that we had a lot of ideas and and i remember sitting with my board of directors it was actually literally like days before the lockdown in the united states and and just saying like geez i don't know what's going to happen is the economy are like do we need to like you know cut our company in half like what's going to happen here um as a lot of people kind of thought about it and then

You know, literally it was just all of a sudden the growth just started kicking in. We're like, oh, my God, what's going on here? And so it really did take us by surprise. In the abstract, it's sort of we've always felt some inevitability to this. And so I've always thought, yeah, this can be really, really big. But even, you know, throughout the year, the way in which it sort of tended to compound, no pun intended, it really far exceeded certainly what we had planned. One of my favorite tweets that came out of 2020 was Brian Armstrong's tweet a couple days

after the $1,200 stimulus check went out. And he tweeted out just a graph of different deposit sizes going into Coinbase. And the $1,200 deposit size was just through the charts. Would you say that USDA benefited from similar tailwinds as Coinbase deposits into their their bank? I mean, I think there's some correlation there. I mean, overall, I would say, I mean, this is sort of the crypto markets as a whole, right? It's been perceived to be an asset class that has benefited from the enormous amount of

inflation that's taking place in real world dollars. And so that goes into risk assets. It goes into crypto. It drives crypto market growth, drives to be a market growth, drives to be. demand in turn for stable coins. You know, crypto market growth drives demand for defy borrowing, defy lending, drives demand for stable coins. And then dollarization as a theme, crypto dollarization,

but dollarization more broadly is driving demand. And that's a direct impact of economic conditions around the world, currency devaluations, things like that that are happening. And so all of those seem to kind of feed each other a little bit as well. Would you say that that's the main reason why there are has been such an influx of USC into Ethereum, is it just serving those demands or is there other forces at play as well? Yeah, I mean, I think the overarching drivers are there's just continued significant growth in individuals and institutions participating in digital asset markets.

That's one. The second, which is very much related, is this incredible growth in DFI and DFI protocols, which really heavily rely on stable coins, both as collateral and as borrowed assets and for liquidity and other things. And then what we've seen, which has been really fascinating, is this really, really interesting growth in businesses, not just crypto-native companies, but a lot of different types of organizations

who are basically realizing, wow, this is a really powerful settlement medium. This actually has a whole bunch of advantages, compared to the banking system. And so we're just seeing really, really nice growth in businesses that are adopting this for international, global transactions. We're seeing demand for this that's coming out of Africa, Latin America, Southeast Asia, other parts of the world, which is really interesting. And so I think one of the phenomenons, and this relates to the actual kind of market cap growth as well, which is what's been really interesting, about USDA and I think also for Tether as well is, you know, the net number in circulation continues to grow. Now, what people don't know is with USC is that it's redeemed on a massive

scale as well. It's, you know, it works both ways, right? It's not like a roach motel. It works both ways. And so, you know, that's incredibly important, right? This is, this is valued as a dollar because it's always redeemable as a dollar. And there's great retail infrastructure for that through Coinbase. There's great institutional infrastructure for that through Circle. And, and so there's enormous. There's billions of dollars of value that's redeemed as well. But the net amount in circulation continues to grow because people, it's sticky. People, once they start using it and holding it, they realized, well, why would I want to put this back into the ACH form of money or why would I want to put this back into the Swift form of money? I'd rather keep it in a blockchain native

form because it's just more powerful that way. And so we're seeing that stickiness and that's creating flywheel effects of people who are realizing that this can actually be used for a much broader range of payment use cases. One of the bankless the theses thesis is the Ethereum Protocol is one of the great disintermediaries and specifically of the banking layer and specifically the commercial banking layer and you just said it but like so many people are seeing the advantages of using USC on Ethereum to settle payments and transactions between them. What do you think, how do you think these forces are going to impact the commercial banking industry? Like how will the commercial banking layer of the world pivot to answer to this new payment infrastructure with like,

for example, U.S.C. on Ethereum. Yeah. I mean, there's there's so many dimensions to it. I mean, one of the really big pieces of news was just a couple weeks ago, right, which was that the OCC, which is the banking regulator for 75% of the national banks in the United States, you know, issued a whole set of guidance around the use of stable coins and public chains as a payment infrastructure, as a settlement infrastructure, as an electronic stored value mechanism in the U.S. financial system. So that's a really big deal because it basically signals that, you know, banks and financial institutions can rely on this in some ways the same way that they rely upon, you know, the ACH network or other types of things. So in some ways, I think

there is this kind of convergence that happens, which is this becomes a really powerful, you know, payment system. And banks and consumer fintechs and crypto firms and commerce firms and others will kind of connect to it and utilize it. So I think that's extremely positive for Ethereum, obviously. And we can talk about, you know, other, you know, layer one, two type issues as well. But I think, you know, that becomes something that gets broadly adopted. But I think over the long run, and this gets to, I think, a core issue is we believe that, you know, as kind of third generation blockchains, and I include Ethereum 2 in that, and there are certainly other interesting layer 1 projects out there, but even just say successful layer 2 is on

Ethereum, as that infrastructure gets widely deployed, the cost of payment transactions falls to zero. And for traditional, you know, commercial banks, you know, it depends on the given institution, but there's a big chunk of money they make from charging fees around storing money and transmitting money. And then there's a big bunch of money that they make from loans and from, you know, risk-taking, essentially. And I think over the long run, you know, the ability to extract fees or achieve profits from the payment settlement will just go to zero, right?

It's sort of like no one charges for long distance telephone calls anymore, you know, or so many different types of services. Like we can have these free video calls with anyone anywhere in the world. No one's making any money on that per se. So I think that that happens there. I think that impacts any business whose core business model is charging a fee to collector make a payment. And you've got to kind of pick your time frame there, but it's inevitable. And so I think that has a big impact.

I think the more interesting, and I think obviously a huge set of topics that you guys explore all the time, is what does the disintermediation of other kind of financial contracts, other types of financial. market activities that becomes protocol governed and protocol facilitated, what does that do to those business models? And that's a fascinating area, obviously, and one which we're quite excited and bullish about ourselves, which I think we're in the very early stages of that. We talk about total value locked. We talk about the growth there. But when we look at the total amount of capital, that gets deployed into borrowing and lending or, you know, that, you know, is issued against collateral and other things in the world, it's in the trillions of dollars, right? It's in, it's enormous. And so there's a tremendous opportunity to transform, to transform that.

There are obviously, you know, I had a conversation with Robert Leshner last week and the topic I kind of laddered off of Brian Brooks editorial on the F.T. About self-driving banks and what that looks like. And so we were just playing off of that concept. And right now, a lot of the protocols that are there that interact with stable coins, I mean, it's fully collateralized, you know, borrowing and lending. The critical thing about commercial banks is that they take risks. They basically say, we believe that there'll be future cash flows from you as an entity.

whether an individual or business. And we're actually going to create, they create money. They create new money. They create new money by creating new deposits. And it's an extension of credit. And it's built on the premise that there will be future cash flows. It's impossible to do that right now with crypto. By definition, you can't create money.

And so I think it's an interesting interplay, which is do we move into a world of full-reserved banking and we live within the limits of kind of fully issued assets, whether it be a Bitcoin or a USDC or what have you. And then ultimately, how does that interact with that traditional banking business model of money creation and credit? Yeah, it's very interesting. Defi has not built out its credit primitive yet. That is something that is certainly yet to come. I was thinking about this. So bankless, of course, believes in the thesis that this technology crypto will completely disrupt the banking system. And I think a lot of, like, so bankless is a group of users, right? We actually, we don't just talk about crypto.

We actually use crypto. And I want to underscore this point for someone who's maybe a little bit new. There are like three types of digital dollars that you can have right now. or there are three types of dollars you can have. One is like physical dollars in your wallet, right? That has obvious limitations. It's like not in the digital at all. It's not internet.

Then you have like dollars in your bank account, like these Wells Fargo dollars. Sure. And they suck too because anytime you want to actually do something with your money, there's a limit on taking how much out or there's ACH transfer. I have to show up at a bank with my ID. physically to wire some funds. That's with my local bank. Like, how crazy is that? And then you have this third category of dollars, which are crypto dollars or stable coins, USDC, right, is one of those. And what I found personally, Jeremy, on my kind of crypto bankless journey is that, like,

stable coins like USDC are so much more valuable than the Wells Fargo dollars. Totally, yeah. Right? So like you were mentioning that USDC is sticky. Oh my God, yes. I want all of my my U.S. dollars out of Wells Fargo and into at least something like a coinbase where it's in USC. Why? Because USDC is like dollars with superpowers. Yeah. Right. Like dollars plus software. It's dollars plus software. And it has exposure to crypto rails so I can generate more yield on it. I can send money to David in like two minutes, right? Any amount that I want. I don't have to, I don't have to show up at a bank in person. Like that's, that's what this is providing people it's dollars with superpowers yeah we actually i actually have

have used that phrase talking about it in the past um yeah you know you're sort of superpowered turbocharged uh kind of kind of dollars yeah i mean i think one of the one of the really interesting other differences that i think is more subtle is you know because USC, it's a full reserve, you know, digital currency unit. It's fully reserved against underlying dollars. You know, it has some different attributes. I think, you know, a commercial bank money, if you think about it in the, in the classic sense, you know, your dollar at Wells Fargo, if that happens to be the bank or whatever, that you're using, that dollar is, is a claim. on their balance sheet.

It's an IOU. It literally is, right? And so, you know, they might, you know, have, you know, they might have, let's just say, $10 billion of actual, you know, kind of deposits of base level M1 money. And, but their obligations, you know, that are outstanding might actually be,

100 billion. So, you know, the, the assets to kind of deposits ratio can be like 8 to 1. And there are standards for that, that Basel, the Bank of International Settlements and the Basel standard set for banks. And so they're a little bit different in that sense. And that's, that's the classic, you know, fractional reserve money, you know, kind of kind of, kind of concept and issue. And that's obviously subtle for people to understand. But yeah, I mean, just the utility value alone obviously is significant. One of my favorite mental models about this industry is, is that the cryptocurrency industry is like speed running through the history of money and finance, right? Like Bitcoin is our digital gold. Ethereum is turning into our banking layer. And, you know,

one of these landmarks, one of these stops along the speed running of monetary history is fully reserved banks. And then in the future, after that, is fractional reserve banks, which kind of implies, if you want to extrapolate that out, that fractional reserve crypto dollars perhaps might be coming to Ethereum one day. Why not USDC? And maybe you can talk about just like where you see the evolution of crypto dollars going into the future. Well, I mean, the critical thing is that if you move to a fractional reserve model for digital currency, then it is, it is, you're talking about, you know, banks. I mean, that's, that is what a bank does. That is the business model of a bank, uh, is to take deposits and then issue credit against deposits,

um, in the form of deposits that they create either in their own institution or at other financial institutions. Um, it's a money creation, uh, kind of, kind of role. Um, and, you know, I, I've actually, I've done some interviews, my, itself on this topic. And I think one of the things, if you think about crypto philosophically, sound money principles, sound money principles are, you know, in Bitcoin is certainly an expression of this and it's grounded in Austrian economic philosophy. Austrian economic philosophy also extended to really the Chicago School of Economics in the 1930s and later, but basically the idea is a fixed supply, you know, money that has a fixed supply is better money than money that can be

kind of created by Fiat. And that is a really important principle. When you move from full reserve to fraction reserve, you are basically embracing the money creation that humans create money. I think one of the really important foundational components to Bitcoin and Ethereum, Ethereum as ether as commodity money, has that same sound money principle as well. It has a predictable supply, it has a predictable inflation rate, it's algorithmically determined, but it is fundamentally more or less a kind of fix supply model. That gives rational economic actors a basis to make decisions and it forces people to make decisions in the context of those capacity

constraints. I mean the basic premise of the Chicago school back in the 1930s, there's the Chicago plan is a famous set of work from many of the most prominent economists at the time in response to the Great Depression, which was this collapse of fractional reserve banks. You had a run on the bank and guess what? They didn't have the money because they had lent it out and they didn't, you know, everyone came to get their deposits at once and it was just running the bank. And there was a really significant argument made that we should move to full reserve banking, that banks should be, there should be essentially, you know, essentially deposit taking banks that also facilitate payments. And then, you know, lending activity is only

based on that fixed supply money. You can't create new money. You only have that fixed supply money. And crypto, I think, inherently supports that philosophy. And I think that's important. And people can argue about it. I think most modern economists would say, oh, that's hogwash. Like credit creation is really fundamental. And obviously, what's happening with central banking right now is an enormous amount of money creation.

And that is obviously has its own challenges. But I think the belief of the authors of the Chicago plan was that if you had full reserve banking, that you would actually smooth out the boom and bust cycles. You would actually have net increases in economic output. And it would force economic actors, whether it be a corporation or a government, to work within fiscal constraints as well. and that that's ultimately advantageous to economic activity and society. So I think a move of attempting to reintroduce money creation, literally out of thin air money creation into crypto would be very inconsistent with many of the underlying philosophical tenets of crypto itself.

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But what I think is a little bit like subtle here is that this is exactly how we bootstrap non-sovereign monies. So what people don't understand is that just as USDC is sticky, it's also a gateway to the rest of crypto. It's also a gateway to Bitcoin and Ethereum and defy. Right. So it's like a nice smooth on ramp. And the interesting thing, you talked about ether being sort of a commodity money, right? Well, every time there is a settlement transaction of USDC on Ethereum, right? It requires ether.

And eventually with other things in Ethereum like EIP 1559, a portion of that ether gets burned. So what are we doing? We're using the banking system to bootstrap our own store of value asset. This is all very synergistic in my mind. Yeah. No, I completely buy that. I mean, I think I'm a very strong believer in non-sovereign store of value commodity money. I'm quite long on it myself and have been for a long time. And I think there is very, you know, fiat stable coins such as USDC are very synergistic with that over the long run. You know, I take a very long-term view on some of this. I think tend to. 20, 30 years out, what might this look like? And I do think over a longer period of time, we'll move towards essentially synthetic digital currencies that are, you know, they're synthetic, they're composited out of multiple reserve currency, stable coins, and allocations of commodity

digital money like ether and Bitcoin as well. And effectively, it's almost like it's not, necessarily a peg, but there's a basket, if you will, and there's a balancing that will continue to go on and eventually will, you know, for everyday transactions in the economy, most people in the world will rely on that global synthetic unit. But increasingly, the amount of that global synthetic unit that is based on non-sovereign money will increase over time. And maybe over the very long run become predominantly that. So Jeremy, another question here I'm curious about is, do you think FinTech is going to join the party this cycle? So it seems to me that they're sort of the flashy user interface layer on top of the ugly, like, fax machine that is the existing ACH banking layer, right?

But it's always struck me that like, do they really need the banks? I wonder, right? Like, what if they just swapped out that dusty old infrastructure for this new crypto rails infrastructure we're building? Are they going to get this at some point? Are they going to join the part of this? Absolutely. Absolutely.

I think we're already seeing, you know, really interesting indicators of that. And I think that will accelerate a lot over the next couple of years. I think, you know, it'll be FinTech. so it'll be other types of financial institutions as well, I think very much so. We'll move towards that. I mean, you know, there is sort of like this kind of convergence at some level where, you know, you know, really broadly adopted mainstream stable coins,

you know, might have a supervisory relationship with banking regulators, but are they, it's not this, it's not, are they the same as what you think of as traditional banks or these, you know, crypto and self-driving banks. Jeremy, the last quarter of 2020, I think, was perhaps the most regulatory active in crypto that we've ever seen. And we saw some really awesome tailwind news, like what we talked about with out of the OCC. But then we also saw some very bearish, you know, very conflicting news that's less than ideal for this industry, specifically with what we saw coming out of secretary, the treasury

minutia, which actually just got struck down today, I believe, or if not yesterday, but then also with the Stable Act. So there's definitely some tug of wars going on between the positive and the negative regulatory news. And my opinion is that this is just the beginning. And then 2021 is going to be just a more regulatory fight. Maybe you could give your opinions to us and the listeners about what you see coming in the regulatory horizon for crypto dollars and for public blockchains.

Yeah, I mean, it's a fascinating time for that. I think the more that this lurches into the mainstream, the more that, you know, policymakers are going to have opinions about it, not just opinions that are going to legislate or they're going to come up with rules. And that is, it's a double-ed sword because on the one hand, it really means you're achieving like super scale like this is going to be something that everyone in the world is going to use and that's really exciting like wow the idea that our transactions are going to get mediated on public chains and and enable that is really exciting it's a double-edged sword also because you know you know

policy can can be a blunt instrument rules can be ill thought or or can have specific political motivations that are based on lobbying by established industries and so And so it's complicated. It's not it's not straightforward. Ultimately, my philosophy has always been work with, work with policymakers because, you know, in the march towards global scale adoption, like, you know, the notion that you're just going to route around governments, I think is is not realistic. What has to happen, though, and this is something I've said a lot is at the end of the day, regulators, you know, are there, because there are real risks and they're there to kind of create guardrails. And the guardrails are designed to make sure that people are not defrauded, to protect individuals, and to effectively limit illicit activity, limit crime, or to ensure that the financial system is not abused by crime. Now we know, obviously, that there are tons and tons and tons of financial products and services that have not been good for consumers that have been utilized very, very broadly by criminals.

And that's a, that's like a tug of war that goes on. And there's, I think, really good people in government that are focused on these things. And so I think, you know, the critical thing is industry has to engage on this. Now, the other perspective that I have is that it's really actually incumbent on on creators and on entrepreneurs and on technologists to solve the problems that are the risks that policymakers care about and solve them in a better way than regulations ever could solve them themselves. And so to me, something like, you know, the record keeping requirements on identity associated with public chain infrastructure, there's an understanding. underlying set of risk there, which is, wow, if people are self-managing their crypto, they could be

criminals or they could be abusing this in these other ways. Well, we clearly want to be able to have decentralized financial market infrastructure. We clearly want to be able to have individuals and businesses, be able to connect to that and participate in that. Are there other ways to think about solving those problems? And it's here that I think, for example, you know, blockchains are actually, blockchains in crypto provide a lot of the answers themselves. One of the things that I'm most excited about is self-sovereign identity. I'm very, very excited about self-sovereign identity. I'm very excited about identity protocols that can be built on chain that are built on, you know,

crypto, on zero knowledge proofs, on verifiable claims and identity attestations and all these kinds of things that are these really important primitives that crypto makes possible. and blockchain to make possible that can actually lead to an individual being able to say, yeah, I'm actually who I say I am. I actually am someone whose identity has been verified by an identity issuer. And I can actually take that with me and control who I give that information to and have the rights to do that. And actually ultimately have like defy protocols that know, okay, if you want to participate in this transaction, you need to prove that you're a person or what have you.

And this is the kind of infrastructure that I think needs to get built. No regulators ever going to say, here's what you need to do. They're going to say, how are you going to deal with these risks? So I think I tend to sort of put it back on industry and say, okay, well, how do we solve these problems? That's a really good take, right? So I think the challenge, though, sometimes, Jeremy, is that the good regulators might say, okay, here's what we need. How are you going to solve them?

But sometimes not all of the regulators take that open-minded, like there's a solution here to solve it. So oftentimes what they'll do is they'll just come up with these heavy-handed kind of regulations. Like famously the Stable Act is basically like, oh, you can't have any stable coin denominated in U.S. dollars. Remember, that's not regulators. That was an academic who got. the ears of some policy.

We had Rowan Gray on and we talked very much about that. I don't view. That's not regulators. But even like the, even the proposed rule coming out of kind of minutiae, that was somewhat problematic. And it didn't offer the opportunity for industry to solve it. What's your confidence that the new administration,

this new set of regulators under Biden might, how will they work with crypto in a different way? Are you optimistic or are you pessimistic on this? Well, I mean, look, you know, the new head of the SEC is someone who's intimately familiar with crypto. He's someone who I know reasonably well. I've kind of helped co-teach his crypto blockchain course at MIT. And I think he's a pragmatic person who understands the issues, the innovation. But he's also a regulator.

He's someone who is going to be focused on, like this is not. to some unencumbered thing that's just going to go flying around. By the way, this is Gary Gensler. Gary Gensler, yeah. Okay. And Michael Barr, who is apparently going to be the new head of the OCC, is someone who also has been involved in crypto and blockchain in his career. And that's helpful.

So I think people who have some awareness and education that are in these critical positions, that's really important. There will be a new head of the Federal Reserve that will be. be appointed at some point in the next year or two. That'll be a really interesting question as to who that is and how what their disposition is around this. I mean, look, when I step back and I look at, you know, the Biden administration, I mean, you can look at individual regulators. I don't think this is all about just individual regulators. I think this is about what is the United States government's posture going to be to this critical strategic technology and infrastructure area.

And I think there's a tremendous opportunity for the U.S. government to actually realize that this is a major, major area of infrastructure that is going to be fundamental to the future of economic systems, to commerce, to many other things. and we'll figure out ways to support that industry. At the same time, I think there is going to be much more precise engagement around certain things like criminal abuse risk, consumer protections. And this is where I think, you know, I'm very hopeful that there's like meaningful engagement and meaningful dialogue and ultimately a kind of collaboration with industry to ensure that, you know,

If there are regulations that get introduced, they're cognizant of the fundamental differences in how this technology works and the innovation that it spawns. For example, I mean, defy is just a totally profound example of that. This just doesn't fit the model of how you think about financial market infrastructure. This is software that runs on the internet that is just machines that run this financial market infrastructure. That's a really, really different thing. But it's here and it's got incredible power and it's a really significant innovation that opens up a lot of opportunities.

So, okay, well, how do we think about that? So I'm cautiously optimistic is ultimately what I'd say. Jeremy, I'm wondering to get your opinion on the interaction between what me and Ryan are following, which is kind of the rise of MMT and crypto dollars and using Ethereum to host and facilitate payments with crypto dollars. We've we've seen Janet Yellen, who is Joe Biden's nomination to be the cabinet secretary of the treasury. Yeah. And she she's made two statements recently, one saying that, you know, they that she's interested in making very big moves when it comes to coronavirus relief, which kind of is an extension of MMT using the ability to mint coin help facilitate relief.

And then also she's made, you know, some of the common criticisms of Bitcoin, we would call this FUD, that Bitcoin is used to serve terrorist financing, which to my mind kind of is like, why is Janet Yelling, yeah, yeah, excuse me, why is Janet Yellen talking about Bitcoin's facilitating terrorist financing? We know that's not true. That's pretty baseless. To me, the incentive is, is that she's trying to protect the brand of the U.S. dollar to help facilitate MMT. And we saw some of this energy coming out of, of Rohan Gray and the Stable Act. That was very much a MMT-inspired initiative. Do you have any thoughts about the, perhaps the collision course between public payment rails and MMT? Yeah, I mean, I think there is a major, a major challenge here, which is, I think, in particular,

I would say I'm less focused on stable coins in relation to that and more on non-sovereign, you know, non-sovereign store value, commodity money like ether and Bitcoin and many others that sort of fit that category, but just use those as a reference here. I mean, the rise of that on a global basis, I mean, it is absolutely a direct threat to monetary sovereignty in the current modern form.

And, you know, there is, there are a couple ways that can go, right? It can go the path of, okay, it actually becomes so big and important that, you know, it continues to be regulated as property, which is how it's regulated today. But it actually becomes a balance sheet instrument of governments themselves. And not only is it a balance sheet instrument in terms of, you know, holding it in reserves, but actually governments make it a national priority to participate in mining and participate in network validation and say this is sort of systemically important infrastructure and we actually want to be active market participants in it and that's actually necessary strategically competitively and from a

national security perspective. I think that's where it goes. I think that's ultimately where it goes when at the end of the day people really think about it that that will be that will be the path. But there could be, you know, in different parts of the world, there could be very rapid, harsh, unpredictable interventions that could be very negative for that form of digital assets. I mean, obviously, in the history of money, during the Great Depression, the federal government made holding gold illegal and seized all gold from everyone, you know, because it threatened monetary sovereignty and it affected how fiscal stimulus worked in a massive economic contraction. I mean, could that happen? Could something like that happen? Conceptually,

it did then. So, I mean, there are, these are tail risks, right? But I, but I, I, I think ultimately, you know, I don't know, I don't know Janet Yellen, but I hope to have a chance to spend time with her. And I think, you know, there's a lot of educating to do because I think the simplistic, oh, this is used for this or this is used for that, those tend to be very simplistic understandings. And so when you actually get down to the staff level, you get down to the actual, you know, people who work in these agencies in the regulatory community, they have a much more sophisticated. view on this, like FinCEN, which is actually the financial crimes enforcement network that is in charge of how to deal with terrorist financing, how to deal with financial crimes and the abuse of the financial system, they're incredibly savvy about this. And they're very, very great to work with. I mean, you know, they really are. I think they're an agency that is part of Janet Yellen's

remit now. It's part of the Treasury Department. But I think when you get in and you get working with with the actual kind of career civil servants and the established entities, they have a much stronger understanding. Last thing on this, Jeremy, and then we'll get to D5, but just to tie off kind of regulatory in government. So you're talking about how maybe in the more distant future with MMT, these non-sovereign store of values may be threatening to something like the dollar. But in the short to medium term, let's face it, the dollar is the world's reserve currency. and it's quite strong. We even saw its strength, as you were saying earlier, during coronavirus.

There's this, you know, some people have called it the dollar milkshake theory, this like sucking of capital into dollars itself. Could you talk a little bit about the wins for the U.S. government in crypto? Right. So the U.S., from a adversarial perspective, you've got China developing its own central bank, digital currency, making pretty good progress from all we can tell. what is the U.S.'s answer to this? And could it be something like U.S.D.C. on Ethereum? Yeah. So I have a pretty strong view on this. And that is that historically in the West,

the major advancements in the financial system have come from the private sector. And it's typically been consortiums of private sector actors working together. to define standards and infrastructure that then is built out and utilized at a large scale. It's technology innovators, its financial sector innovators, and its standards. And that's sort of been what has worked. And I have no reason to believe it'll be any different in the digital currency world in the West. I do not believe that a giant R&D project out of the Federal Reserve with a contract with IOM or however you'd want to think about it is going to be remotely. successful in competing with the open internet, internet entrepreneurs, public open source infrastructure,

and private sector actors building on top of that. The innovation is just night and day. It's just going to be far, far more competitive on the open internet and private sector side of things. I think that the government will realize that and they'll say, actually, that's how we're going to compete. We're going to compete like we've always competed by having open networks, by having, you know, sound supervision of way private sector actors that are innovating in this space, and we're going to let that drive innovation. And I think that I just think that's likely. And I think ultimately what that translates to is I think the U.S. government and many other governments are going to get very much behind adoption of public blockchains as fundamental strategic infrastructure, not just for economic activity, for a wide

range of other types of record keeping activity, transactional activity, and the like. So I'm extremely bullish about public chains. I think Ethereum, obviously, I think very, very highly of Ethereum. And I think that that's where we'll get to is a model like that. And, you know, I think something like USDC could evolve to have a lot of other major market participants involved in it could evolve to a place where it has, you know, there is some kind of relationship with central banks as well. But that's still a ways off. Do you think these regulatory headwinds that we have seen in the recent times actually turn into regulatory tailwinds once regulators realize that the key to competing with the Chinese digital yuan,

or the fact that Russia is now purchasing petrol in euros. Instead of doubling down on a central bank digital currency out of the Fed, is actually just much more aligned with the interests of regulators to just promote public use cases, public blockchain's usage of U.S. dollars. Absolutely. Makes sense to me. Yeah. Yeah.

So, Jeremy, let's conclude with talking about D5 for a moment. So we've been talking very much about kind of disruption to banks, the banking system. How big of a deal is defy? I think you talked about Brian Brooks from OCC. He penned this fantastic piece, like equating it to self-driving cars, which I think probably is an analogy that works for a lot of folks. But is defy overrated? Is it underrated? How big of a deal is it in the future of crypto and the future of finance for the world? Yeah. I think it's totally underrated right now. And I think, like I said, I think we're in the opening innings of this.

And just, you know, financial market infrastructure, you know, is fundamentally about providing certainty, providing mechanisms of risk management and dealing with, you know, clearing and settling things, but also dealing with counterparty and counterparty risk. And so much of what the financial market infrastructure does, you know, deals with that. For the first time ever, you can actually create systems of that that do not have humans intermediating it. that is totally public and transparent to all market participants, that is extremely efficient, that is open and global, anyone can connect to it, that has ultimately radically lower kind of

union economic costs to market participants in it. That is just so profound. And I think you can take almost every dimension of finance, and you can imagine ways for that to happen in these on-chain protocols. Now, there are going to be, you know, you know, oracles, I think identity, identity attestations, so entity attestations, things like this, those become really, really critical because the real world and the defy world do need to interact. But as those primitives come into place, this, I think this can get, you know, enormously larger and can disrupt more and more dimensions of what, you know, is currently run by banks, currently run by other financial market infrastructure providers as well, you know. So there's a tremendous amount that can happen there,

and I think it's underrated right now. There's a common thought that, you know, the cryptocurrency industry and defy especially exists because it lives on the margins of what is perhaps legally or legally acceptable or compliant, right? Hazu, I know. famous cryptocurrency thinker, it reiterates that he thinks that one of the main use cases for cryptocurrency is scurting regulation. And yet, and USDC is flowing permissionlessly through defy, which, you know, some protocols are probably totally, completely compliantly fine. Other defy protocols are probably more legally dubious. How do you think about this tension between USDC flowing through perhaps legally dubious defy protocols?

Yeah, I mean, I think that this is a place where, you know, we talked about kind of what regulators care about and where they're focused and, you know, that some of this has to do with, you know, abuse, you know, by potentially criminal actors, things like that. This is, you know, this is going to be the vexing critical issue that faces defytheid, which is, you know, how, you know, how can Defi essentially interact with real world identities? And how can real world identities interact with public protocols in a privacy-preserving way in a way that puts greater control into users' hands?

So to me, that's how we answer these questions. It's not a USC thing. It's actually these identity meta-systems How are they built for the internet? When we were getting started with Circle, and I was really excited about blockchains as an innovation, the view from my perspective is, wow, like this is the technology that solves two of the fundamental issues,

two missing layers of the internet. One was money, the other was identity. And I think the identity piece is going to come later. In fact, it needs to come in response to the development decentralized finance and money on the internet. And so I think that will be one of the next major phases that gets developed. And that's how we'll face those issues at a high level. Jeremy, it's been a pleasure to get your thoughts on all of these things. One last question for you. A prediction question. How big do you think stable coins are going to get this market cycle,

in particular in USC. And where are you guys going to flip and tether? Yeah, it's a good question. I mean, so if you say this market cycle, what do you have in mind? We have in mind that we are in a bear, excuse me, a bull market, a full head bull market.

And so we're thinking, you know, that could last the next year, the next two years, sort of, then all assets will grow along with the bull market. So that kind of time horizon, one to three years. Yeah, I mean, it's interesting. I mean, I think USC over, say, two years, you know, could easily, well, I think it easily exceeds like $50 billion.

I think, you know, there are scenarios where in particular if more mainstream financial applications integrate to this and start to utilize it in different ways. It could exceed $100 billion. But, you know, it's hard to know. I would have given you a different number six months ago. Jeremy, do you think Heather's here to stay? I do, actually. I mean, I think a, you know, there's the classic kind of offshore dollar market kind

of euro dollar market type role. There's significant demand in Asia for shadow banking, for dollar shadow banking. Those markets exist. They're large. They will continue to exist. They'll grow. And so I expect Tether to play a critical role in that. And so I would expect it to absolutely to have staying power and continue to grow. Absolutely. Well, Jeremy, it's been a pleasure to have you on bankless. Thanks so much for joining us. Thank you guys. Really enjoyed it. Bankless Nation, some action items for you today. One is something that you can do, which is if you haven't already, try out USDC. It is fantastic. I think you will find yourself wanting to move more and more of your funds out of the traditional banking system and into the crypto banking system. USDC is a great

gateway for that. Secondly, David and I are now doing debrief episodes. This is for bankless premium subscribers where it's just David and I's raw uncut thoughts on the episode we just recorded. It's about 20 to 30 minutes. Premium subscribers get that after every episode. We'll include a link if you're interested in that for you to subscribe and get a premium bankless membership. Finally, of course, risks and disclaimers, none of this was financial advice. Crypto is risky.

Bitcoin is risky. ETH is as well. So is defy. You could lose what you put in. But we're headed west. This is the frontier. It's not for everyone, but thanks for joining us on the bankless journey.