Bankless - Stablecoins and National Security | Former CFTC Chair Timothy Massad

Episode Date: May 27, 2024

✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/6    ------ 🎬 DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-the-timothy-massad-interview    ------ Are stablecoins a threat to national security? How should the US government step in?   We brought Timothy Massad, the perfect guest to help us answer these hard questions. He was the Obama appointed chair for the CFTC, the guy who helped designate Bitcoin as a commodity over 10 years ago.   We touch on: - The importance of stablecoins. - How stablecoins compare to eurodollars. - Weather crypto and sanctions can co-exist. - A sensible policy for stablecoins. - And finally, his thoughts on what happens next.   Timothy brings a whole different perspective from what we’re used to in our crypto bubble. That’s exactly why you should tune into this episode.   ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium    ------ BANKLESS SPONSOR TOOLS:   🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2  ⁠   🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo    ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum    🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle    🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku    🌐 CARTESI | APPLY FOR A GRANT https://bankless.cc/CartesiGovernance    ------ TIMESTAMPS   0:00 Intro 6:34 Timothy’s Background 9:30 Security vs Commodity 12:46 Stablecoin First Impressions 21:42 The Importance of Stablecoins 28:26 History of the Eurodollar 38:46 Economic Sanctions 47:47 Stablecoins and Sanctions 1:08:59 A Stablecoin Future 1:13:37 A CBDC Future 1:18:49 What about Privacy? 1:20:58 The Role of the Dollar 1:23:18 Stablecoins Abroad 1:25:43 Predictions 1:28:10 Closing & Disclaimers   ------ RESOURCES   Timothy Massad https://x.com/timmassad    Stablecoins and National Security by Timothy Massad https://www.brookings.edu/articles/stablecoins-and-national-security-learning-the-lessons-of-eurodollars/    Five Perspectives on Stablecoins by Nic Carter https://medium.com/@nic__carter/five-perspectives-on-stablecoins-5bc20076270a    ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠  

Are we going to get comfortable with digital assets, with tokenized assets traveling on decentralized blockchains or not? They pose enormous advantages in terms of innovation, composability, open access. But on the other hand, decentralized blockchains may not offer the kind of governance that we'd like, the kind of ability to check identity, and our financial system does turn on the ability to know who is transacted. So how do we balance that? That, to me, is the central issue. Welcome to bankless, where today we're exploring the frontier of stable coins and national security. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless.

The question today, how should the U.S. government think about stable coins and crypto from a unique vantage point, something we haven't talked about before, which is national security? I think it's safe to say that many in D.C. have different concerns than probably the listeners of bankless with respect to crypto. And one in particular is this. If something like stable coins gain adoption, does that nerf the U.S. ability to sanction? How does the U.S. come up with policy around this? Timothy Massad is the perfect guest for the conversation today. He was the Obama appointed chair for the CFDC. This is the guy that actually helped designate Bitcoin as a commodity way back when 10 years ago.

And I would call him a maybe cautious stablecoin advocate, though there is definitely some nuance here. A few things we talk about today. Number one, why the U.S. can't ignore stable coins. Number two, how stable coins are similar to euro dollars? Number three, is crypto even compatible with U.S. financial sanctions and dollar supremacy? Number four, what would sensible policy on stable coins even look like in the U.S.? And finally, his thoughts on what happens next. On Bankless, Ryan and I like to host conversations with people who don't necessarily share our perspective and our values, but definitely do have a coherent opinion as to how this industry ought to.

needs to integrate with the pre-existing financial system. Tim, while he does not share our perspectives, I think we can find ourselves shoulder to shoulder with him about a lot of things and opinions. And I think Tim represents the type of person that crypto needs to win the hearts and minds of in order to get what we want out of appropriate crypto regulation. So, and with all of that in mind, let's go ahead and get right into the episode with Timothy Massid. But first, a moment to talk about some of these fantastic sponsors that make this show possible, especially Cracken, our preferred crypto exchange in 2024. If you do not have an account with Cracken, consider clicking the links in the show notes to getting started with Cracken today.

If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Cracken, one of the longest standing and most secure crypto platforms in the world. Cracken is on a journey to build a more accessible, inclusive and fair financial system, making it simple and secure for everyone, everywhere to trade crypto. Cracken's intuitive trading tools are designed to grow with you, empowering you to make your first or your hundreds, trade in just a few clicks. And there's an award-winning client support team available 24-7 to help you along the way, along with a whole range of educational guides, articles, and videos.

With products and features like Cracken Pro and Cracken NFT Marketplace and a seamless app to bring it all together, it's really the perfect place to get your complete crypto experience. So check out the simple, secure, and powerful way for everyone to trade crypto, whether you're a complete beginner or a seasoned pro. Go to crackin.com slash bank lists to see what crypto can be. Not investment advice, crypto trading involves risk. Do projects are coming online to the Mantle Layer 2 every single week. Why is this happening?

Maybe it's because Mantle has been on the frontier of Layer 2 design architecture since it first started building Mantle DA, powered by technology from eigenDA. Maybe it's because users are coming onto the Mantle Layer 2 to capture some of the highest yields available in Defi. And to automatically receive the points and tokens being accrued by the $3 billion dollar mantle treasury in the Mantle reward station. Maybe it's because the Mantle team is one of the most helpful teams to build with, giving you grants, liquidity support, your partners to help bootstrap your Mantle application. Maybe it's all of these reasons all put together. So if you're a dev and you want to build on one of the best foundations in crypto,

or you're a user looking to claim some ownership on Mantle's Defi apps, click the link in the show notes. So getting started with launching a token, worried about the IRS. Talk to Toku for five minutes to learn how to save hundreds of thousands of dollars for you, your team and your investors. Now, if you do an initial consultation, Toku will cover the cost of your token valuation, which is what you need for your launch. So don't wait.

Reach out to the team right now at team at toku.com. That's team at toku.com. Bankless Nation, very excited to introduce you to Timothy Massid. He's a senior fellow at Brookings. He's also a research fellow at Harvard, and he was an Obama-appointed chair for the CFTC, where he served from 2014 to 2017. And more recently, and of the interest to us is, he has taken a keen interest in stable coins. He published this article in April that David and I,

caught wind of. It's called Stable Coins and National Security, learning the lessons of the Euro Dollar. That's the title. And it really caught our attention after reading it because it dove headlong into what I consider kind of the elephant in the room that everyone's avoiding. How do stable coins impact national defense? Can crypto and the nation state work together? So there's lots to explore in today's episode. Tim, welcome to bankless. Thank you, Ryan. And David, it's great to be here. Well, we're excited to dive into this. I was wondering for our audience, if you could just tell us a little bit about your background and more specifically, the background that is most relevant to your interest in stable coins, because you have become more recently interested in stable coins. How did that happen? Well, I've been interested in stable coins and crypto for quite a while, actually. I've been writing about the space for quite a while. And actually, I first testified about crypto 10 years ago. Wow. Really? Really? For Congress. 2014.

It's before me and Ryan got into crypto. I think Tim beats me on that. I just started in crypto in 2014. So you might be an OG here, Tim. Right. And it was around that time that the CFTC under my leadership declared Bitcoin a commodity. And we can get into why we did that because a lot of people actually don't understand why we did that.

Thanks, by the way. Appreciate that. And then when I left the CFTC in 2017, I was thinking about what I wanted to do next. and I became a senior fellow at the Kennedy School at Harvard, and I decided to start, you know, doing some writing about crypto. So I actually published my first paper on the need to strengthen crypto regulation in 2019. And I talked about this problem of, you know, is it a security? Is it a commodity? How do we deal with that?

We don't have a regulator for the cash market and commodities. And actually in that paper, it was funny because I was going back to it the other day. I also talked about the fact that, well, we shouldn't let regulation push everything towards centralized intermediaries because one of the benefits of this technology is the potential decentralization aspects of it. So an important issue, perhaps, it's going to be debated in Congress. As we're talking, right. But anyway, then I started writing about stable coins in early 2021, I think, because I was from, of watching what was happening and wrote a piece, I guess, initially for Bloomberg or Brookings, I can't remember where the first one was, where I talked about the fact that, look, these things

exist. We need to bring them within the regulatory perimeter, if you will. They have certain risks, but they also have certain benefits and opportunities. And that's continued to be my view, that stablecoins do pose certain risks that need to be addressed, but they also could enhance payments. And they could be an important competitive instrument in payments. And, you know, they do effectively kind of support the dollar in a way. This most recent paper, as you note, focuses on the national security aspects. And, you know, we can talk about what those are and what I said in that paper. Okay. Quick side quest before we get into the main event, we talk about the euro dollars and staple coins and kind of the paper, which is, so under your leadership, the CFTC declared that

Bitcoin was a commodity. And this is, of course, very relevant to current debates. Even also as we speak, there's the question of whether the SEC is going to allow Ethereum to have an ETF. And I think this will be resolved by the time listeners listen to this. So listeners in the future, you have the advantage of knowing what's actually going to happen right now. I'm wondering if you have any way in on this debate. Specifically with Ethereum, like it seems like the CFTC has already also said it's a commodity, but maybe there's some territory war, turf war. I don't know what you can get into here, but you are no longer on the CFTC. So maybe tell us how this all works. Like, what's your take on this? Well, the funny thing is, this is one of the facts that people don't understand, something can

actually be a commodity and a security. But, you know, look, let me maybe say a couple things. First, when we declared Bitcoin a commodity, I didn't do that in order to, you know, start a turf fight with the SEC. Okay. We did that because the definition of a commodity under our federal law is a long list of things that everybody would say, oh, yeah, that's a commodity, you know, cotton, oil, other agricultural products and so forth. But then the definition in the law also says, and anything else, and I'm paraphrasing,

but anything else that is the subject of a contract for future delivery, meaning a futures contract or a swap. There were people who wanted to do Bitcoin swaps in 2014. And they came into our office and asked us, well, you know, we want to launch these. What do you think? And we said, well, if you do that, it's a commodity. And it's subject to our approval. And that's what led to the determination, which was upheld by the court. And then, you know, we were the first agency to start bringing enforcement actions. But we also did approve Bitcoin swaps. So as to Ether, look, I think I get the reluctance of Chair Gensler to say whether Ether is security or not. I think that probably goes to issues of, well, isn't there some group of people that seems to be involved here?

And you can look at things that have happened, right? Look at what happened after the Dow attack and, you know, the reversal of the Dow attack back in whenever that was 2016, look at the merge, and you sort of say, well, wait, is there a group of people that's kind of in charge here? On the other hand, obviously, it is very widely distributed, and it's probably water under the bridge at this point to assert that this is a security. But as to the ETF, I don't know. I really don't know. I'm not sure that they will approve it. Interesting. Timothy, can you just place us in your head when you were learning about crypto? You're reading about crypto, learning about it for the first time. The bulk of this podcast, I think, is mostly

going to be focused on stable coins. Do you just remember what your first impressions were when you read about stable coins? And was there some sort of like maybe a eureka moment or an aha moment of like, oh, this is what this is. This is how this is going to go. Just maybe if you could remember your first impression about stable coins and crypto. Well, I think particularly with stable coins, I thought, oh, this is a really interesting application of the technology. Because I think up to that point, I was intrigued. But, you know, when I was sort of looking at unbacked crypto assets and looking at what was happening in the market, it seemed that while there was a lot of investor interest, it was largely driven, you know, by speculative forces, by supply and demand forces. There wasn't a clear use case to a lot of the tokens that were being issued, I would say.

That's not to say that Bitcoin isn't a very, very interesting thing, as is Ethereum and as our other, you know, blockchains and layer ones. But I think when I first started learning about stable coins, I thought, oh, wow, this is essentially on-chain money. And it was around that same time, I think, that, you know, people were talking about CBDCs and so forth. I first really got into it with the Facebook announcement of Libra. And actually, that was the first paper I really wrote about stable coins. They didn't call it a stable coin, of course, but that's what it was. And I found that fascinating. I found their proposal fascinating because everybody, you know, I think there was a lot of opposition to it, of course, and it never got off the ground.

A lot of that opposition was due to who Facebook was, right? Meta now, of course. But it was because, you know, people were upset about the power that Facebook had, about its failure to protect privacy, about things that people felt it did in the 2016 election. And that was kind of overhanging the whole issue. Plus, Libra in its first iteration, was a basket of currencies. I was just about to bring that up. I recall this 2019. It wasn't even the dollar. It was a basket of fiat. I read about this, and I actually went out and talked to them. I met with David Marcus and others, and I said, you know, why are you doing it this way? And they basically said, well, give us some time. He wouldn't tell me what was going on. But it was like a couple months later, they came out with the revision where it was, you know, individual tokens for individual currencies, which I thought, well, that makes a lot more sense. And so I wrote a paper for Brookings about all this where I basically, said, look, I understand the objections to Facebook. I understand the need to protect privacy and to think about the data that comes from all this, but I basically was still in favor of

creating a regulatory regime to allow this because of potential competition and payments and because of potential benefits to financial inclusion. Okay. And at that same time, I looked at what was happening with China, with WeChat Pay and Ali Pay, and also how the Chinese government had responded to those in terms of creating a regulatory framework. And I said, look, we can basically learn from what they've done because they put in, you know, kind of some prudential measures and that's what we would need for this sort of thing. So that's where I was. And of course, you know, that announcement transformed things in a lot of ways, right? It caused central bankers around the world to realize, gee, we've got to pay attention to crypto and to digital assets.

It caused a lot of central banks to start to do research and development on CBDCs. And of course, it started to focus people's attention on stable coins. And then, you know, it was a little bit after that that I started sort of looking at tether and getting worried about tether because there was so little transparency there. and it wasn't clear what they were investing the assets in. You know, and all this is very funny when you look back because, you know, again, I'm not saying, you know, Facebook didn't have its issues. And obviously, I was concerned about the data and privacy issues. But on the other hand, what they were proposing was in the second iteration a lot safer than a lot of things, you know, that have since been launched. So it was kind of ironic.

Just to tie a bow on that for people like who don't. even my memory is kind of hazy. I actually just don't know what happened, but like, why did the Libra Die? Like, why did they abandon it? I think my impression largely was, like, basically, and this is probably gross oversimplification, but I think this is in a lot of listeners' minds.

The U.S. government didn't want them to have it. Congress didn't want them to have it. And they realized that, like, this wasn't the hill to die on. So they just moved on to, like, you know, AI and like the metaverse and stuff like that. And they just, like, abandon the project. Is that accurate or what would you revise? Yeah, Ryan, that's basically accurate. What happened was that they first sort of set up shop in Switzerland. They set up the corporation there. But the Swiss authorities sort of said, and again, this is by now we're in Libra 2.0, you know, or what was then called DM, which was the individual tokens representing individual currencies. And the Swiss authorities sort of said, look, we're not going to approve this unless the U.S. government approves it. And there were a lot of conversations with Treasury, with the Federal Reserve, and ultimately

those authorities were not willing to grant permission. What's very interesting about all this, of course, is that unlike perhaps its pattern in other ways, this is one occasion where Facebook asked for permission. And so they didn't get it. And I remember watching the hearings shortly after they made the announcement, and Zuckerberg testified, David Marcus testified, and they were asked by congressperson after congressperson, well, are you going to do this if you don't have all the regulatory approvals? And they said, oh, no, no, no, no, no, we're going to get all the regulatory approvals.

And I was sitting there thinking, well, what are those? There's no framework for this. There's no regulatory framework. You don't even know what approvals you really need. But because they said they would not do it unless it was blessed by regulators, they were kind of in a box. The other thing that's really ironic about it all to me is when you go back and watch those hearings, congressperson after congressperson said, this is going to undermine the U.S. dollar.

And that was in the first iteration, right, when it was a basket of currencies. It was the dollar. It was the yen. It was the pound. I went to China like two months after that to a, you know, FinTech conference in Shanghai. And I talked to a lot of Chinese officials, and they were all very worried about Libra because they said, this is going to promote the dollar. And they said, you know, the dollar is going to be the biggest component of the basket. So this is going to promote the dollar. So they were very

worried. And that was one of the things that caused them to accelerate their CBDC research. So it's a fascinating. It's ironic. It's interesting how all this works. And I do think, by the way, I'll just say this out loud. Part of the takeaway from crypto was, yeah, like, ask for forgiveness rather than permission because if you go to Congress, they're not going to have the vision. They don't have a startup mindset of what this thing could become. It's really not in their DNA or their function. I want to ask you this question.

As a former regulator, let me make clear. I'm not encouraging people to just go out and do them and break things and ask forgiveness later. All right. I'm not endorsing that. I'm just commenting on what their strategy was. Not endorsing the bankless lifestyle. Fair enough, that's our job over here. Let's get this piece out of the way before we get into your paper and the background and euro dollars. I think there's still a lot of people in the U.S. government who don't care about stable

coins. Basically, okay, so in the crypto space, we're all very excited right now about stable coins. We're at all-time highs in terms of number of transactions, in terms of number of holders. We're almost at all-time highs in supply, closing in on $200 billion, which would be a new landmark for the amount of stable coins out there. But many in government just see $200 billion, and they're just like, we handle trillions. Like, wake me up when this actually matters. Right. And they go back and they look at Diem and Libra and it was much ado about nothing.

Nothing actually happened. Here we are. Five years later. And they say, Tim, stable coins are just too small to care about. It's a niche. Right. Like, why are you spending time on it? Why should any of us spend time on it?

What do you say to that? So, yeah, it's a good point. And what I say to that is I think it's important. as a competitive factor in payments. And because we don't really know what the potential is. Let's step back for a moment. The U.S., despite having the world's largest economy, most innovative economy, strongest economy, has a lousy payment system. It's slow, it's costly, and we have problems with access. Now, most of us don't realize that, right? We think everything's fine. I've got my credit card, I've got mobile banking, I've got maybe Venmo or Apple Pay, Google Pay, whatever.

And boy, I'm making payments and they're going quickly and, you know, what's the issue? Well, the issue is it's actually costing all of us more than we realize because merchants are paying the cost of those credit cards. That's number one. It is slower than what we could have. and that is particularly a problem for people who don't have much money. If you don't have very much money in your bank account and you go to cash a check, that check isn't going to clear for three days.

And so that is why a lot of people in the lower quadrant of income in this country use non-banking services like check cashing services and payday lenders, right? Because they get paid on a Friday, but they, need to pay their bills and they can't wait three days or they can't risk getting an overdraft charge. So they go to a check casher. They get cash right away. That check casher may even send checks to pay their bills. A lot of them do that. But it costs them a lot. It costs poor people roughly 10% of their income just to use their income. So that's a big problem. So just to really reiterate, there are costs of our high friction, slower banking system.

Right. It's just obfuscated away for most people. that have any sufficient amount of money. Exactly. And the long tail is severely penalized by comparison. Right. So stable coins, when you really get down to it, stable coins are like another form of narrow banking, if you will, right? I mean, in other words, banking traditionally, we have bundled the functions of deposit taking, credit creation, and payments all in a bank. You had to be a bank. You had to get a charter as a bank. And you were regulated as a bank. Your deposits were insured.

You got the backing of the Fed. And that's, you know, good system. It's a great system. We have a very, you know, healthy, strong banking system. But with these technological developments, it's possible to sort of unbundle some of those things. And payments is one thing that I think can be unbundled, if you will. And I think having sort of non-bank payment providers that are properly regulated, can be a good thing for competition, can be a good thing for innovation.

And obviously, the other aspect of this with stablecoins is because it's on chain, you have all these potential, you know, innovative facets of being on chain, right? Atomic settlement, programmability, all those things. So all that's good. So that is why I have argued now for several years that we should bring these things within the regulatory framework, We need a strong regulatory framework, prudential measures, you know, to ensure that they invest the reserves appropriately, but also measures to prevent illicit activity.

But they can be a force for competition, for innovation, and that's all to the good. I think as a U.S. citizen, this was most impressed upon me as I was learning about the Chinese digital, you know, R&B type system, digital wand system, and how inexpensive it was. to use something like AlliePay or WeChat as a percent. So when we are doing payments in the U.S., there's like a transaction cost that credit card companies charge that merchants pay. It's about 3%. Right.

In China, when you're dealing with kind of a digital currency, they don't have this network set up. It's fractions of a percent. Right. So imagine this. Behind the scenes, there's a 3% tax on all of these payments that the system is bearing in addition to some of the other things that you mentioned. Right.

And the thing is, we could have fixed this without stable coins, okay? We could have done what most other developed countries have done in the world as well as emerging markets and implemented a fast payment system. We didn't need blockchain. We didn't need stable coins to do that. But we haven't done it. And so stable coins are out there. And so I look at them as like, okay, this is something that can be a force for innovation.

I'm not sure at the end of the day, stable coins will scale and will be that. influential. But what I've seen from both the Libra announcement and, you know, what Circle is doing and other things is it got the attention of banks. It got the attention of central bankers. And so now there's a lot more talk about, okay, you know, what do we need to do here? You know, there are big banks now who are doing very interesting things on their own in terms of looking at tokenized deposits and other innovations. Finally, I would say, you know, they're say, you know. Yeah, absolutely. And we would say finally as well. Okay, so let's get into some of the framing of your paper in order to kind of talk about stable coins and maybe some of the national

security concerns. I think we have to do some background context. And a great lens on this, a lens that we enjoy, and I think you highlighted in your paper, is the euro dollar. A lot of people don't know the history of the euro dollar. In fact, but I think there are some great analogs to stable coins in the euro dollar. In fact, one of our colleagues, Nick Carter, doesn't like the term stable coins at all. He prefers crypto dollars to describe this because of the close analogs. That hasn't picked up. So we're not calling this the crypto dollar episode, but we'll call it stable coins. Can you give us the history of the euro dollar? So how did that come about? It seems like there was some US resistance to it at first. And then gradual acceptance. How did that happen?

Why did people demand it? Just give us the full history here, Tim. Sure. Okay. So first of all, let's define what we mean by euro dollars. Your dollars are any deposit of dollars outside of the U.S. And today we use the term Eurodollar dollars. Those deposits could be in a Japanese bank. They could be, you know, in any bank outside of the U.S., outside of the U.S. regulated banking system. But they started in Europe. And the way they started was some of the communist bloc countries were trying to figure out where should we keep our dollars. They had small amounts of dollars, Russia in particular. And they didn't want to keep them in the U.S. for fear that U.S. authorities would seize them someday. And so they found a bank in Paris that would

accept the deposits, and they put them there. And that bank's telex address, I think, is what led to the name Eurodollars, because it was the Eurobank or something like that. I can't remember now. So initially, the market was very, very small. And U.S. regulators kind of ignored it because it was small, but it grew because banks overseas in Europe found a way to use those dollars. They could use them for foreign currency transactions. And then eventually they started using them for loans. And so the market started to grow. And so it started to get the attention of people at the Federal Reserve and at the U.S. Treasury. Would you say that the supply of Eurodollar grew because the euro dollars found a way to become financialized abroad? Well, they had use. I mean, banks found a way to use them. They realized, hey, you know, we can do things with these dollar deposits, which is what banks do. So they started to grow. But even then, the U.S. policy was still not quite sure what to do. The Kennedy administration actually did some things that actually encouraged the growth of the euro dollar market, not because they wanted per se to encourage that growth, but they were trying to address a balance of payments problem that we had in terms of foreign investors. But basically, we didn't really do much about it. Then people started to get worried because it did start to get quite big.

And even some European leaders were worried because they thought, wait a minute, we have these banks that have a lot of dollars. But how are we, how is our central bank going to support those, right? I mean, a central bank, one of the functions of a central bank is to act as lender of last resort to banks if they get in trouble or if the financial system gets in trouble. So leaders of some of the European countries were suddenly realizing, well, we can't do that because we can't print dollars. So what do we do? And so people started to get worried.

But then the 1973 Middle East War broke out, the Am Kippur War. And as you may know, right after that war, OPEC dramatically raised the price of oil. Oil is priced in dollars. So suddenly you had this problem of how are people around the world going to pay for oil, finance the trade in oil? And euro dollars became kind of the way to deal with that. And that's where the term petro dollars came from because you sort of recycled these euro dollars around the world, right? Essentially just using dollars abroad outside of the U.S. banking system to pay for oil. And so the market grew again. And by the time of the financial crisis, the global financial crisis, that is, in 2008, there were more dollar deposits outside of the U.S. banking system than there were in the U.S. banking system. So it's quite a big market. And now, you know, we do effectively stand behind it through swap lines. You probably heard about swap lines during the financial crisis. Well,

that's one of the reasons for swap lines is that there are all these dollars outside of the U.S. So why the analogy then? Well, stable coins like Eurodollars can be thought of as dollar liabilities of an issuer, of a bank or a financial institution that are created outside of the U.S. regulatory system. That's the similarity. And so you also have this similarity in the in how the market is kind of evolving. It's small. It's very small today. As you pointed out, Ryan, relative to the total financial market. And so a lot of people are saying, well, why do we need to pay attention to that? It's very small. But one of the points in my article was, yeah, it's small today, but it could grow. And it could grow from unexpected events. And so that's why

we need to pay attention to it. And then, of course, I get into how it's different than your dollars, which we can talk about. When you were learning about sable coins, back when you were learning about crypto and you saw the evolution of stable coins, did you just see the history of the euro dollar markets, just like flash before your eyes? Well, I'll tell you, what happened was I had been thinking about this parallel, but I didn't know a whole lot about that history. And a good friend of mine who's now at the New York Fed, Josh Younger, was also interested in this. And he had started to do some research on the euro dollar market. And so I benefited great. from learning from him, and I credit him in the paper. So he taught me a lot about that history.

But yeah, I mean, as I started thinking about it, it just seemed like, wow, this is really kind of similar. I bet there's something to be learned by looking at that history. I want people to hear about kind of the pivot that happened in the early 1970s that you were talking about, Tim, and you cite this in your article about your dollars really being a villain. They were villainized by the U.S. And there's like this New York Times article, I believe, from 1971. one, the villain of the crisis, Euro dollars, almost feels like, you know, somebody might say, the villain of stable coins at some point in the future, right? And then you also have a French minister calling it a hydra-headed monster. Yeah. And then all of the sudden, yeah, all of

the sudden this changed. 1973 with the oil shocks. And the U.S. kind of wakes up and realizes, ah, this could be good for U.S. dollar, like, supremacy in the form of the Petro dollar. And so I guess I want to ask you the question about Euro dollars. Was it a net good for the U.S.? A net bad? What were kind of the tradeoffs? What were some of the bad outcomes for the U.S.? And like, what are the good outcomes for the U.S.? I would say it is definitely a net good because it has helped cement the role of the dollar internationally as the world's primary currency of international finance, of commercial transactions, as well as the primary reserve currency that, you know, people want to invest in dollar assets. Now, you know, obviously that's due to other factors as well, the strength of our economy, the strength of our government, our rule of law, the certainty that comes from that, all those things are important. But, you know, Eurodollars played an important role in cementing that role of the dollar internationally, and particularly the role of U.S. banks in commercial transactions.

And that's one of the things I really focus on in the paper is that a lot of cross-border financial transactions, particularly say just foreign exchange transactions, converting one currency to another, involve U.S. dollars, even if those aren't the two currencies that are really being converted. In other words, if you're trying to convert U.K. pounds to Singapore dollars or something, just to, you know, create an example, you might well be going through dollars. In other words, converting one of those currencies first to dollars and then from the dollars into the other one because there's more liquidity. And that's just, again, kind of a factor of the evolution of all this, the prominence of the dollar, the way it's built up, the liquidity that comes from the dollar as against other currencies. So it's very important. And it also means that most financial transactions have touch points with U.S. banks because at some point they have. to route through U.S. banks under our financial system. That is something that a lot of countries don't like, but that is the reality today. Right. So Eurodollar is good for the U.S. dollar.

And today it's actually like it's absolutely the dominant medium of exchange. Right. And like for payment settlements, it's something north of like 70, 80 percent of all worldwide transactions are dollar denominated. There's massive demand for dollars. And you point this out, which I think isn't immediately noticeable by people who come to this point in the story, is the U.S. also gained as a byproduct of this, almost accidentally, a new economic weapon, let's call it, sort of a national security weapon, the modern ability to sanction dollar-denominated transactions. You say this in the paper. Luckily for U.S. officials, even if not by conscious design, the growth and maturation of the

euro-dollar market has enhanced the ability of the U.S. to project power by non-kinetic means. Of course, in a world where we're talking about the 1970s, 1980s, like even into modern times, the catastrophic potential of a nuclear exchange, having a weapon that is non-kinetic and that allows you to project geopolitical power is quite an advantage. So I want to ask you about that, Tim, that byproduct. So it's almost like the ability to sanction anyone who is using the Eurodollar. How did that work out? And how does that work out now? Right. Okay. So again, keeping in mind that so many commercial transactions are denominated in dollars, and that that means that they have touch points with U.S. banks. In other words, there's at some point in

that chain of a transaction, a U.S. bank is involved. That enabled the U.S. government to say, ah, well, we can impose sanctions through those banks. In other words, we can restrict the ability of people to deal with the U.S. financial system, right? We can sanction them. And, you know, we started doing this early on with Iran, and, you know, it's kind of grown, basically, over time, where we've relied more and more on this power. And to the point where, you know, we've obviously sanctioned individuals and businesses, but in some cases, you know, it's been trying to cut off country. So, you know, we did this with North Korea and Iran in the early 2000s. And And of course, we've done it recently with Russia, first in 2014, and then in 2022 over the Ukraine war.

And, you know, what's interesting is it was kind of early on maybe an adjunct to the exercise of military power, or maybe we're using something to supplement military power as in, say, the first Iraq war. But now it's kind of, you know, the tool that we're using in place because we don't want to use military power. military power. So, you know, we're using sanctions instead. They've been very, very effective, but of course they've also provoked some consternation among other countries. And frankly, it's led some other countries to look at how that can they create payment systems that aren't dependent on the dollar. Yeah, just like the behind the scenes piping of all of this is a lot of the dollar denominated settlement, the euro dollars, you know, like the US dollar, this all happens

in an international standard, basically a network called Swift. And the U.S. basically has the ability to just block sensor, like reroute sanction Swift transactions, which gives them a tremendous amount of power to economically sanction actors or countries or just like basically anyone attached to Swift. Yeah, so Swift is a messaging system, right? It doesn't actually transfer the value. I mean, this is one of the interesting things about payments today and the difference with a blockchain, of course, is that there's kind of transfer of the information or the message

about the payment and then transfer of the value as well. The transfer of the value is really just adjusting balance sheets of banks, right? Because it's not really that money actually goes somewhere. It's that, you know, J.P. Morgan and Deutsche Bank or whatever settle up in terms of their depositors. Yeah, two banks agree to adjust their own internal line items at an equal amount according to the message that was passed. That's right. And so what Swift does, Swift just communicates the messages about those payments, although Swift is actually now looking at getting into actual settlement, which is interesting.

But Swift is a huge network, I mean, 11,000 banks. What happened after 9-11 was the U.S. government was able to get information from Swift about transactions and it then used that information to basically incorporate into its sanctions effort. That was a big deal that Swift agreed to that. It was actually kept secret for a few years, and then it came out later that Swift had agreed to that. So at this point in the conversation, I think listeners should take away that the U.S. has this superpower, basically, to economically sanction things by route of euro dollars through mechanisms like Swift. I think it's beyond the scope of maybe the conversation to sort of weigh in on how effective

these types of financial economic sanctions are. And yet I'm also tempted to just like ask you what your personal take is, or at least if you don't have a personal take on this, maybe what's the debate? Because I mean, I could see some contours of the debate being sort of a layman to this being, it's very easy to sanction a small actor, small players. So terrorist groups that kind of like exist, you know, within a nation state apparatus or rogue nations, like something like North Korea that are completely very much isolated. But when you start talking about large blocks like maybe Russia or maybe a China-Russia-type block alliance, then rather than sanctions actually working, what they will do is incent these geopolitical actors to just like route around Swift,

come up with their own Swift network. So what's the current debate on the effectiveness of sanctions? Well, it is a very big debate. And I take no position on this. I make it very clear in the paper that I'm not taking a view one way or another as to when it's appropriate to use sanctions under what circumstances and what should those sanctions look like. That is a complicated debate. I don't consider myself a national security expert sufficient to weigh in on that. But it is now an increasing debate. And one of my, you know, former bosses, Jack Liu, who was Secretary of the Treasury after Tim Geithner, and I served under him for a little while, gave a very good speech several years back, probably 2016, probably shortly before he stepped down on this issue. And other people have weighed in as well. But as you know,

Ryan, it is something that has caused some countries to say, hey, we have to somehow move away from the dollar. And whether that's through central bank digital currencies or multi-country payment platforms involving CBDCs or even fast payment systems. I mean, there's a lot going on in this area around the world that people in this country, you know, particularly our Congress, should be aware of. There's a project, for example, called Embridge that involves China, Hong Kong, Thailand, and the UAE that is looking at creating a platform where they can make commercial payments by using, by having this shared platform that relies on CBDCs, Central Bank Digital Currencies, and they're getting more countries involved in that. Now, that's not real yet, and I think the governance issues on platforms like that

are very difficult, probably more difficult than the technological issues, but things like that are happening around the world. As my friend Josh Lipski at the Atlantic Council says, you know, people are building the pipes. They may not be flowing water through the pipes yet, but but they're building the pipes. And we in the U.S. need to be aware of that and think about the consequences of that. Selo is the mobile-first EVM-compatible carbon-negative blockchain built for the real world. Driving real-world use cases like mobile payments and mobile defy.

And with Opera MiniPay as one of the fastest growing Web-Free wallets, Sello is seeing a meteoric rise with over 300 million transactions and 1.5 million monthly active addresses. And now Sello is looking to come home to Ethereum as a layer two, Optimism, Polygon, Matter Labs, and Arbitrum have all thrown their hats in the ring for the Sello Layer 2 to build upon their stacks. Why the competition? The Sello Layer 2 will bring huge advantages like a decentralized sequencer, off-chain data availability secured by Ethereum validators, and one block finality. What does that all mean for you? With Sello layer 2,

gas fees will stay low and you can even pay for gas natively using ERC20 tokens, sending crypto to phone numbers across wallets using Social Connect. But Sello is a community-governed protocol. This means that Sello needs you to weigh in and make your voice heard. Join the conversation into Sello forums. Follow Sello on Twitter and visit cello.org to shape the future of a theory. You ever felt that the tools for developing decentralized applications are too restrictive and fail to leverage advancements from traditional software programming? There's a wide range of expressive building blocks beyond conventional smart contracts and solidity development. Don't waste your time building the basics from scratch and don't limit the potential of

your vision. Cartese provides powerful and scalable solutions for developers that supercharge app development. With a Cartese virtual machine, you can run a full Linux OS and access decades of rich code libraries and open source tooling for building in Web3. And with Cartese's unique roll-up framework, you'll get real-world scaling and computation. No more competing for Blockspace. So if you're a developer looking to push the boundaries of what's possible in Web 3, Cartesey is now offering up to $50,000 in grants. Head over to Cartesian's grant application page to apply today. And if you're not a developer, those with staked CTSI can take part in the governance process and vote on whether or not a proposal should be funded. Make sure your vote ready

by staking your CTSI before the vote. Arbitrum is the leading Ethereum scaling solution that is home to hundreds of decentralized applications. Arbitrum's technology allows you to interact with Ethereum at scale with low fees and faster transactions. Arbitrum has the leading defy ecosystem, strong infrastructure options, flourishing NFTs, and is quickly becoming the Web3 gaming hub. Explore the ecosystem at portal.arbitrum.io. Are you looking to permissionlessly launch your own Arbitrum orbit orbit chain. Arbitrum allows anyone to utilize Arbitrum's secure scaling technology to build your own orbit chain, giving you access to interoperable,

customizable permissions with dedicated throughput. Whether you are a developer, an enterprise, or a user, Arbitrum orbit lets you take your project to new heights. All of these technologies leverage the security and decentralization of Ethereum. Experience Web3 development, the way it was always meant to be. Secure, fast, cheap, and friction-free. Visit arbitram.com.

and get your journey started in one of the largest Ethereum communities. So it certainly sounds like the U.S. would love to maintain the geopolitical power to economically sanction. I think a realist would look at some of these things and ask themselves, how long can that power actually be preserved in the face of alternatives? And I even think the most strident folks around that are true believers in economic sanctioning would probably admit that it's an exhaustible resource, right? just the game theory of it is such that other countries would try to route around if they could.

I guess this sort of brings us to staple coins. So one difference between the euro dollar and stable coins is in the euro dollar apparatus because the origination of the setup was basically U.S. banks, the U.S. still was able, through the export of its dollar, to preserve the might of its sanctioning facility. In fact, almost enhanced that ability. With stable coins, it might not be so clear cut. And I want to dig into the crux of this issue. So is there evidence today that foreign actors are using stable coins for any sort of sanctions evasion? We've seen news headlines of this. There was talk of Hamas maybe using this. Some of this was like based on spurious evidence. And it came out that like, well, Hamas was actually not using stable coins in crypto at scale. It doesn't mean that some foreign adversary couldn't in the future though. So take us to the state of stable coins in this conversation around economic sanction ability? Well, I think people are using them to escape sanctions. What's hard is to

quantify by how much. In the case of Hamas, you know, I've talked to people at chain analysis and TRM and other places. And yeah, initially there was a report that said this was, you know, pretty significant. Then people realized there was some problems with the analysis. They were sort of counting the total held in certain accounts at intermediaries rather than just the part that was going to Hamas or something. So, you know, those estimates were scaled back. But I think, you know, the conclusion is generally that Hamas is using crypto and stable coins to some extent. Similarly, there were reports that there were Russians that were using Tether to buy arms and evade sanctions. So I think it is happening. It's, again, hard to quantify it. But the reason is that stable

coins, as we know, settle on decentralized blockchains. And therefore, transactions don't have to pass through a bank. Now, if you want to convert that stable coin back into fiat currency, back into dollars, you either have to do that on a trading platform like Coinbase or Cracken, or you've got to figure out a bank that will do it for you or whatever. So that off-ramp conversion is a point at which you could say, well, we should be able to catch the perpetrator then, right? And yeah, we should. But the point is that as stable coins grow and as the crypto universe grows, you have the risk that people can transact without doing that conversion, without going through an off-ramp, as apparently the

Russian smugglers were able to do, or, you know, they're going through off-ramps that aren't abiding by those sanctions. You know, you can have offshore entities that aren't abiding. You know, there are international rules, something called the Financial Action Task Force. FATIF has issued guidance, you know, on how virtual asset service providers and exchanges and so forth have to apply certain laws to prevent illicit activity to prevent money laundering. But, you know, not all jurisdictions are enforcing those. So the risk is that you can have activity that doesn't go through an off ramp, particularly as the crypto universe grows or goes through an off ramp that isn't following those rules and therefore can circumvince sanctions. And that's kind of the thing I talk about in the

paper and the need, therefore, to look at this and, you know, I view it. Again, it's not a reason to say, oh, stable coins are bad. Let's hope that they don't grow because I don't think that's a good policy, but rather it's a reason to say, we need to create a regulatory framework around this and to look at how we do prevent illicit activity with these. Okay. And so do you think that this issue is kind of alive and well, and maybe one of the primary issues that any U.S. legislation would have to face and surmount, and, like, the U.S. government would have to get comfortable with in order to start promoting stable coins. You think this is the big one, the ability to kind of, like, sanction, preserve that.

Well, I think it's pretty big, and I think we've seen a lot of people in Congress pay attention to this, whether it's, you know, I mean, I talk about this in the paper. I mean, Senators Elizabeth Warren, who I also had the privilege of working for, briefly, and Roger Sherman introduced, you know, a bill that would impose anti-money laundering responsibilities and Bank Secrecy Act responsibilities on crypto generally. And I think they're very concerned about stable coins from this aspect. I think a lot of people are concerned about this. So, you know, I think the issue is what I've said when I've talked to people who work for Congress people is, look, I don't expect Congress to figure out exactly how.

we will do this because the technology is going to evolve, the technology is going to change. But what we need to do is create a regulatory framework where there is an authority, whether that's the Federal Reserve or somebody else, with authority to figure out what those requirements should be, what those rules should be. And, you know, Congress can give some general direction. And I talk about some of the ways we might do this. I mean, obviously the holy grail of in some ways might be some sort of digital identity system, right, where, you know, a stable coin smart contract won't process a transaction unless your identity has been vetted by some authorized vetter and you've pinged your, you know, enough information about that so that the, you know,

transaction goes through. I mean, that's one solution. You know, there are others that people are talking about. You know, I do think we need to talk about this. Look, I mean, to step back from this, you know, I would say the following generally about crypto. You know, we're bogged down in this debate about whether something is a security or a commodity. And I've argued why we shouldn't be bogged down in that and there's a way to get around that. To me, that's not the big issue. The big issue is the rails. The big issue is when we talk about tokenization and we talk about digital assets, are we going to get comfortable? with digital assets, with tokenized assets traveling on decentralized blockchains or not.

They pose enormous advantages in terms of innovation, composability, open access, right? We've seen that. I mean, that is clearly one of the incredible things about this space. One of the things that keeps me interested is just the amount of innovation and creativity that is taking place. I spent a lot of time on a college campus, and I meet a lot of students who are quite interested in this space because of that, and I admire that. But on the other hand, decentralized blockchains may not offer the kind of governance that we'd like, the kind of ability to check identity, and our financial system does turn on the ability to know who is

transacting. So how do we balance that? That, to me, is the central issue. issue in digital assets. I'd really like to dig into this a little bit more just because there's just a fundamental trade-off space between, you know, traditional bank transfers of dollars versus stable-coin transfers on the rails. And of course, there are some properties about, you know, payment rails on Ethereum on crypto that are just brand new and people still just need to wrap their heads around. Like if some illicit actor gets their hands on stable coins, there's no one to really talk to to prevent, to reverse a transaction. There's no reversible transactions. It's actually like not easy. It's not trivial to just immediately identify an actor.

Yet nonetheless, at the same time, it's also, there's so much data out there because of the fact that it's a public permissionless ecosystem. And so while there's no central authority, which makes people uncomfortable, the amount of data that's out there is highly available. So there is a tradeoff space that's not completely nerfing, neutering the power of regulators to really elicit the control that they want to control. It's just now it comes in a different flavor. There's different strategies. So how do you feel about just a different tradeoff space about the tools that regulators have because of the affordances of crypto versus what they're familiar with? Yeah. Well, I think that's right. Well, you know, to maybe zero in specifically on this question of illicit activity, obviously the data, if this is

what you're getting at, the transparency of the blockchain in terms of being able to see every transaction, Every transaction is always there is an enormous benefit when you're trying to track illicit use. Of course, it's pseudonymous, so you have to be able to somehow figure out the identity of a person. But that is a big asset in law enforcement. And law enforcement people will say that. On the other hand, of course, you can transfer things very, very quickly. So, you know, I mean, one of the things I talk about in the paper is should we be requiring stable coin issuers? You know, stable coin issuers, presumably, can apply anti-money laundering and KYC and combating

financial terrorism, what we call CFT requirements when they issue or redeem a stable coin. And, you know, if you talk to Jeremy Allaire or people at Circle or wherever, they will say they're doing that, and I believe that they are. But obviously, once the stable coin is issued, it can be transferred to anyone. And so the question is, what responsibility do they have? then. One of the things I talk about in the paper is whether stable coin issuers should be responsible for not simply kind of monitoring transactions, but kind of aggressively monitoring and maybe doing risk analysis of wallets and maybe even taking action to seize and freeze coins. Now,

I think Circle would say, well, if law enforcement comes to us and says, you know, gives us a subpoena or obviously they'd do it then, or maybe if they give us enough evidence, do it. But gee, we can't just freeze anyone's coins on the basis of our own due diligence. So we're going to have to think about that. We're going to have to think about how do we balance reasonable expectations of privacy and, you know, we don't want improper seizures going on. But on the other hand, we're going to need stable coin issuers, I think, to actively monitor what's going on on the chain and, you know, circles on what, 12 or 16 blockchains now. This balancing, Tim, is such an interesting conversation. I think this is the meat of the conversation. I just want to at this point of the conversation, just thank you for engaging us in this way. I mean, you're coming on a crypto podcast. You can imagine we're not super favorable towards the Senator Warren Bill to kind of extend the Bank Secrecy Act and effectively KIC validators and like mine equipment and all of these things. We think that there's a better way. But I appreciate that you're coming here and like we're all collectively addressing what I called in the intro, the elephant in the room, because I think it's a

elephant in the room. And I actually want to press into that more because it's not just stable coins. But stable coins, there's the ability to freeze, as we mentioned. There's lots of different abilities that a circle might have to kind of like control these things. Once it's on chain, less so. But there's still some capabilities here. With crypto-native assets and decentralized networks like Bitcoin that we're talking about earlier that is a commodity, right? And Ethereum, ether, the asset, transitioning, moving that from place to place. That's not issued by a circle. It is not the U.S. government kind of like behind this. And so let's just full on address the elephant in the room here, okay, in propagating decentralized networks, the fact that we have an open

internet and open blockchain networks means that there is the ability for illicit activity to happen on a chain like Ethereum with a crypto-native asset, maybe not with a stable coin, but certainly with a crypto-native asset. And I think the question that the crypto industry is sort of asking those in the U.S. government is like, what do we? do about this? Are you effectively going to AMLKYC everything? Is there like some notion of an open internet that we can preserve, an open chain that we can preserve? And I'll just run this one kind of like game theoretical outcome that could be the case. Right. So let's imagine we start living in more of a multipolar world where the U.S. has less ability to economically sanction. Less of the world

runs on Swift. Well, it then seems to be the case that you could have a world that runs in kind of like the U.S. block financial system, Swift-based, and then you might get some alternatives. You might get, you know, China or something like this. What's interesting about blockchain is it doesn't have an alliance with either. It's credibly neutral. And so one question, you know, I don't know that this is being considered, but I would ask, like, wonder if it's considered is if the U.S. has to pick between the world kind of moving to a Chinese central bank digital currency type of system, a China-led swift or something that is credibly neutral, like blockchain, like Ethereum, which would it pick? And I know it seems like very preemptive for us to start having this

conversation considering the size of crypto to date, but it's still like a possible outcome. Yeah, what do you say to that hodgepodge of thought? I guess what I would say to that is we clearly don't want a Chinese CBDC model or a Chinese dominated Swift. But look, I guess I'd approach it all, maybe slightly differently. The fact that blockchain distributed ledger technology is sort of like the internet in the sense that it's supranational is, you know, a big thing, a big potential benefit, but also a potential risk, if you will. But the truth is we still live in a world of nation states and laws are made by nation states. And I believe in that. And, you know, I'd love to to see harmonization of certain areas of the law. I did that. I worked on that a lot when I was at the

CFDC with derivatives, believe me. But, you know, the fact is we still live in a world of nation states. We have countries that obviously don't share our values, our values of democracy and openness, and I don't want to become like them. And I want us to, you know, make sure that we continue to uphold our values. And I don't believe that. that, you know, blockchain technology is of such great advantage that I would sacrifice anything in terms of those, you know, values of this country and what it stands for and, you know, the rule of law and the strength of our financial system, which is in part built on transparency, just because of the potential advantages that blockchain technology might offer.

And I think you have to recognize, I think the crypto industry needs to recognize that that is how financial regulators think in part, right? And meaning that, yeah, the crypto sector is small, and while crypto advocates may see huge amounts of potential given the open access, given the innovative potential, given the composability, the U.S. government is not going to, you know, give away or it's not going to diminish the values that I think are at the heart of this country and have contributed to its strength simply to promote that innovation. We've got to find a way to promote innovation with this technology that is consistent with our values. And that means, you know, people in government need to understand the technology better.

Some of them do. Some of them don't. And it means people in crypto need to understand the purposes of financial regulation and the value of financial regulation better. People in crypto can't just say no. They can't just say, well, you know, it's decentralized or it's supranational. So, you know, U.S. laws shouldn't matter. They shouldn't say that. That's not going to get us anywhere.

We've got to have responsible, reasonable people from all sides kind of get together and think about how do we create a framework where this technology can develop and can develop in useful, constructive ways that are consistent with our values. That's what I'm interested in, at least. So let's talk more about the pro case for staple coin. So we were talking about kind of like illicit actions and economic sanctions and that sort of thing. I think that there's an analog that I'd like to continue, which is at first, the U.S. government wasn't so sure about Euro dollars. And it turned out to be very good for U.S. interests in the long run. And it wasn't quite clear how, but it became clear later on. And there are some that make the case.

So one is Fed Reserve Governor Chris Waller. just makes the case that basically if you look at the crypto economy, so you got the U.S. economy, the different economies, and then there's a crypto economy, if you look at what its trajectory is, the U.S. dollar is actually a major winner inside of the crypto economy. It's something like 90% or so of defy transactions happen and their U.S. dollar denominated. So Federal Reserve, Governor Chris Waller makes the case that basically crypto and the propagation of crypto is a net winner for the U.S. dollars.

There's also Brian Brooks, who was a former comptroller of the U.S. He penned an op-ed piece. It's basically the title of which is stable coins can keep the dollar, the world reserve currency. And basically through demand. So his point is that, you know, stable coins are an export of the U.S. dollar. They're primarily held by people that aren't based in the U.S. of foreigners. So it's good for U.S. dollar reserve currency status and supremacy as well.

What do you think of those arguments? Do you think they hold water? Do you think they will, you know, be a positive story? Yeah, no, I do. I have a lot of respect for both Brian and Governor Waller. I've talked with both of them. I know both of them. And I do have a lot of respect for those arguments. You know, again, will stable coins really turn out to be important at scale relative to other payment mechanisms? I'm not sure. But I'd like to see us find out by, you know, by creating that regulatory framework. You know, again, I mean, I wrote a paper with a couple of other law professors on how, you know, The bank regulators could set up this framework today. They don't even have to wait for Congress. And we kind of walk through. It's a very technical piece on how the Office of the Comptroller of the currency could do this. But I think they could do it today. And I'd like to see that happen because I think they can be a net benefit, again, assuming we address the risk. What I call the prudential

risks, we know how to do that. I mean, and that's the risk that, you know, you take in dollars, you issue tokens, what do you do with those dollars? You got to invest them very conservatively, and you got to still have some capital on top of that because you could have operational losses. You got to have liquidity measures. And I've chatted with Jeremy Aller, and I know he believes in all those things. So I think, you know, we know how to address those prudential issues. The big fight in Congress has been over whether states can charter stable coin issuers, even without some overlay of federal standards. And, you know, I am on the side of, well, you know, we need some federal standards. I'm fine with state chartering as long as there are some federal minimal standards because we don't want to risk a situation where states keep lowering the bar or something. But as I say, I think the harder challenges come with how you prevent illicit activity and how you ensure the resilience of the blockchain. I mean, the truth today, is, you know, stable coins have grown in usage, but, you know, to my knowledge, no one's going to make

a hundred million dollar transfer using USDC, you know, right? Because, you know, you're just not going to do that, because if something goes wrong, who do you sue? What happens? You know, and when you look at the volume of stable coins, yeah, you know, they've grown. It's significant. But, you know, look at the size of what moves through Fed Wire today, right? It's like a hundred trillion a month or something. I mean, it's huge. So I'm kind of covering a few different things here. But the point is that I think stable coins can be of net benefit to the dollar, but we need to create the proper regulatory framework. What about the other side of this? What if the U.S. goes full, narrow bank and actually launches a Fed coin, a central bank digital currency? I mean, there's some other countries that are doing

this, you know, even Western, you know, liberal democracies that are considering this. What do you think of that idea. So, you know, it's interesting because there have been a lot of talk about that, obviously. And I guess what I would say right now, my view is I don't see a reason for us to launch a CBDC, certainly not a retail one. What I would like to see, though, is the Fed continue to do research and think about, well, you know, if we were to do something, what might we do, how would we do it. And I would like to see the Fed really focus on what we call the wholesale settlement system, meaning how banks settle with one another. Okay. So let me explain all that. So in terms of the retail CBDC, look, a lot of reasons were thrown out. Some of them had, you know, the Fed doing

retail services. I think that's a bad idea. I don't want to see the Fed doing, you know, kind of having an actual interface with consumers. That's not the Fed's job. So then people said, well, it could be distributed through banks. Yeah, maybe, but I'm not sure we need it even then. I think if we create a framework for sufficient private innovation, we can get those benefits. And that could be stablecoins. It could be tokenized deposits. I mean, the thing about stable coin legislation is what we really need is not simply legislation

on stable coins. We need federal payment regulation, right? We don't even have an e-money statute in this country, which a lot of countries have. You know, I did some work with PayPal because, you know, that was the one consulting thing I was willing to take on. I turned down basically every other crypto company that came to me asking me to help them because I wanted to be free to just give my views on policy. But I agreed to work with PayPal when they started looking at this because I thought, well, they're a traditional payments company and, you know, they're thinking about this in a responsible way. And so, you know,

I was supportive of them launching a stable coin. But, you know, their suburb. to state regulation. There's not really a federal framework for them. And I told them, look, I'm still going to argue for a federal payments framework. And they said, fine, that's fine. So, you know, we need that kind of framework in this country. We don't have it. But getting back to sort of what the Fed should do, one of the things I'd like to see the Fed really focus on is, all right, if we create a framework where there can be private innovation, and we can have stable coins, and we can maybe have tokenized deposits, does the interbank settlement system need to be upgraded? It's electronic, right?

And some people say, well, we have a CBDC today. Banks have electronic accounts at the Fed. But it's not a tokenized settlement system. And I think the question, and I've had this discussion with people at banks, who've said, you know, for tokenized deposits to really work well, it would be good if the Fed had kind of, you know, the equivalent, a tokenized deposit settlement. So JP Morgan and Bank of America, if they both issued tokenized deposits, can settle up instantly through the Fed in a similar kind of tokenized structure.

I don't know enough about the technology to know for sure whether the existing interbank settlement system is sufficient to incorporate bank tokenized deposits and stable coins. think those are the issues we've got to be thinking about, right? If we want stable coins to be truly safe, we could consider what the UK is thinking about, which is any systemic stable coin should keep its reserves at the central bank, because that's the safest form of money there is. Now, again, that would come with strict oversight and supervision and so forth, but that's one of the things they're thinking about. So I think, you know, I believe, we can address our payment issues and we can, you know, take advantage of these new technologies

through private innovation. We don't need the government to try to, you know, lead the way on innovation. And I don't think the government is a good judge of what innovations are going to work best, right? Imagine if the government had had to decide whether we should have ATM machines. You know, they said, well, why, you know, why do you need those? You just go to the bank, get the money while it's open. And, you know, ATM machines are probably the greatest technological advance in banking in the last 50 years. But what we do need the government to do is create the regulatory framework where this innovation can flourish, and particularly with the Fed, look at the interbank settlement system and look at cross-border payments, and how do we make sure our technology

is up to date on those? I guess maybe speaking of ATMs. ATMs, of course, quite famously, they spit out cash, which is an interesting instrument, I think, from a civil liberties perspective. And so far, we really haven't talked about that. And I don't know if you've, you delve into any of this, but one of those, what many would argue is civil liberty is some form of privacy, you know, inside of our digital cash apparatus, whatever we choose as a society. And so like Fourth Amendment protections against unreasonable search and seizure, that sort of thing. One thing that we want to maintain in crypto is some sort of privacy for peer-to-peer transactions. Right. Have you seen anything like that in your travels that is kind of compatible with some

the worldviews that we've been talking about so far in this episode. Like, is there a way to thread that needle? Or do we just have to like sacrifice peer to peer privacy of money transactions in the society that we're moving towards you like no matter what? Well, I certainly don't think that should be the assumption that we have to sacrifice that. I mean, clearly, you know, small value transactions, you know, don't have to be, you know, no one needs to be collecting information about those, right? So exactly how you thread that needle with digital transactions, I'm not sure, you know, because the blockchain, obviously, everything's on there. It's pseudonymous, but, you know, you have ways of identifying who addresses belong to. But I guess in terms of thinking about what

the policy should be, I think the policy should be, if we can get there technologically, that sure, there's a certain level at which we should not be. collecting information about people's transactions. But there's a level that you cross when it's big enough and the risk is great enough that you do want to be able to identify, you know, who's acting. I don't know exactly how to get there, but I think that is one of the important questions. Tim, I'm wondering what your perspective is as to the role of the dollar or the utility of the purpose of the dollar. Different people might have different opinions on this, right? like the United States government might perceive the dollar as a tool, a geopolitical weapon

to kind of command the interests of the state. There's also a perspective out there that, you know, the dollar is actually meant for servicing the local economy of the United States and helping the citizens of the United States, you know, engage in commerce. There's different perspectives out there as to like what people's like position is. Like, what is the dollar for? I'm wondering if you have a perspective as to that. I mean, it is our national currency. It's a form of sovereignty, the fact that it has become the world's primary currency for international finance, for commercial transactions, is of great benefit to us. It's a huge benefit to us and one that, you know, we should by all means try to preserve. The fact that it's the world's preferred

reserve currency, currency for investment, is also a huge benefit for us. I think, you know, there is a difference in my mind between the dollar as what's called the world's reserve currency and the dollar as the primary means of payment. Meaning, and I've had this conversation with Governor Waller, actually, again, whose views I respect, who's kind of said, look, you know, there's no threat to the dollar as the world's largest reserve currency. So, you know, we shouldn't be worrying about this. And, you know, in terms of where are people going to park their money, invest their money,

Yeah, I mean, Treasury securities, you know, China is not going to replace us anytime soon in that regard. But, you know, we can see people move away from using the dollar for payments, and that's the thing that worries me. And that's the thing I think we want to make sure, again, that our cross-border means of payment are up to date, you know, that the Fed systems are as up to date as they can be. That may or may not involve distributed ledger technology. I'm not sure. But, you know, those are. are the things we need to be focused on. So far, we've been talking this conversation about what the U.S. wants, maybe from the perspective of what the government wants, what Congress wants, what American citizens want, what people in the crypto community and the U.S. want. I want to actually turn the question to other countries. Like, what do they want? It was very interesting early in the conversation,

Tim, that you were talking about your colleagues in China, who are basically looking at Facebook's digital currency effort and basically saying, we better speed up. Like, this is concerning to us. What do you think the perspective of, say, a Europe or a China or a Russia has on this entire, like, conversation? Where do they fall in this whole thing? Do they want the U.S. to have a central bank digital currency? Do they care? What about stable coins inside of their local economies? Is that sort of a threat to them?

Yeah, how do you think about this? I'll focus on, you know, countries that we consider our allies, you know, or at least having values similar to ours like the U.K., Europe, Singapore. I think those countries want to see the U.S. lead here. They're a little confused as to why we seem to be moving more slowly to set up regulatory frameworks for stable coins, for crypto generally. All those countries, I think, are moving forward with frameworks on this. And I try to explain, you know, we'll get there. Sometimes it just takes us a while. But we will get there.

On a CBDC, you know, look, that's become. unfortunately, kind of a hot political potato in this country for reasons I understand. I mean, no one wants the Fed collecting information about all of us. That's terrible. We don't want that. We don't want anything like what China has. And no one wants to undermine funding of the banking system. But as I said earlier, I think some level of research on how we make sure our payment system is as modern as it needs to be as important. And I think other countries would like to see us do that. They would like to see us be at the table. when some of these issues on cross-border payments and payment platforms are discussed. So I think they still want the U.S. to lead. And I think we're still capable of that. And hopefully we will.

This has been a fantastic conversation, Tim. I learned a lot. And I appreciate the dialogue. You know, maybe there's some daylight between us and on some of these issues and the specifics of them. But I certainly appreciate your willingness to engage the crypto community. And I think that this speaks very highly for how we move forward together. I guess as a we close, one question I have for you is in the realm of predictions, in the realm of what happens next. Right. And of course, anyone's guess. So you could take this question as open as you like, but the questions of will we get any stable coin legislation anytime soon? Will this become an election issue? Right. You know, does this need to be so partisan or with that calm down? Will we get a

stable coin ban? Do you have any predictions for the next few months or years that might play out? Well, you know, I try not to make predictions. Look, I'll focus on stable coins since we've kind of concentrated on that. I think we will get a stable coin regulatory framework. I'm not sure that we'll get it this year. I'm still hopeful that we might get it this year. I think Patrick McKinrey and Maxine Waters have been, I heard him, you know, interviewed by you all recently. You know, they have been negotiating a while. I'm hopeful they can come to terms. And I think if that happens, and if we also make some other adjustments in our regulatory framework in terms of banks' interaction with stable coins, that would be a big boon. Now,

interestingly, though, I don't think it means that people keep their money in stable coins. See, my ideal is you create this framework. You allow stable coins as a payment instrument. You allow banks to interact with firms like Circle. But you don't permit, you know, the stable coin issuers to pay interest because you want them just as a payment mechanism. not as a security, not as an investment. And so what it means then is people keep their money in money market funds or banks or wherever they want to keep it, but they have the ability to quickly move it in and out of a stable coin to make a transaction.

That's the world I would like to see. And then, you know, it becomes a means of fast payment of atomic settlement potentially. I think that's very important. That could really save us a lot of cost in our financial system. So that's kind of, that's at least the world I want to see. I don't know how quickly we'll get there. I like that world too. And I can tell you, Tim, from my experience, like, that's how I use them today. I mean, not for regular transactions, but when I'm transmitting money or paying for something, I'm using stable coins. And when I'm storing my value, I'm holding it in T-bills, money markets, and then ether and Bitcoin, you know what I mean?

So that's how that works. And see, the funny thing about that is that would actually address a lot of the reasons the bank regulators have been very worried about stable coins because they're worried about all that money sitting. in a stable coin, which I wouldn't worry about too. But, you know, again, if we created this framework and we allowed that kind of interaction, you know, you would not have a lot of money necessarily parked in stable coins. You would just, you know, move in and out of them as a payment mechanism. Well, I think this is one of the most interesting conversations going on right now. And we appreciate you continuing the conversation. I'm sure there will be much more in the days, weeks, and months to come. So thank you again so much.

Thanks, Tim. Well, Ryan and David, thank you. I've really enjoyed it. Bankless Nation, some action items for you in the show. notes. You got to read Tim's article that we were talking about today. It's called Stablecoins. National Security. We'll include a link to that in the show notes. Also, I highly recommend an article put out by Nick Carter recently. It's called Five Perspectives on Stable Coins. He goes through the different perspectives that have surfaced. And as always, have to end with this. Of course, nothing we said about Stablecoins or anything about crypto or ever say is financial advice. You could 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. Thank you.