Odd Lots - Former CFTC Chair on How to Regulate Stablecoins Without Passing Any New Laws

Episode Date: September 22, 2022

Stablecoin regulation has become a hot topic, and for very good reason. For one thing, it's an extremely fast growing space. Stablecoins are also a primary way that the crypto interacts with the banking system. And beyond that, as we know, crises often originate from assets that promise to be safe (remember money market mutual funds that broke the buck during the 2008 financial crisis. But are regulators equipped to deal with stablecoins under existing law? On this episode, we speak with Timothy Massad, the former chair of the CFTC and a current research fellow at Harvard's Kennedy School of Government. He explains why he believes regulatory progress can be made right now with the laws that currently exist, and what a new arrangement for issuers would look like.See omnystudio.com/listener for privacy information.

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And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So and welcome to another episode of the Oddlots podcast. I'm Tracy Alloway. And I'm Joe Weizenthal. So Joe, didn't we say recently that we were going to be talking about stable coin regulations some more? There's never enough.

You know, I actually have, I think there are lots of reasons to continue to focus on stable coin regulation. Why? Well, I think the biggest one in my mind is this sort of thing I internalized from the great financial crisis, which is that things blow up when they're promised to be stable. Yeah, I think that's exactly right. And to me, it's like I know I do not expect to experience in my lifetime like a Bitcoin crisis. Because people know that Bitcoin crisis or a Dogecoin crisis. People know that these coins are extremely volatile.

They don't bucket them into, you know, parts of their portfolio that are expected to be safe. And so they can fall like a stock chain, whereas we know that, you know, when something is like AAA or dollar pegged or whatever, that's where trouble can theoretically start. Yeah, so two things there. I totally agree. The other thing is, if you think about crypto broadly, stable coins are really the way in which the traditional financial system interacts the most, or one of the most important ways, with crypto. So stable coins are interesting because they build up these reserves of financial assets, things like commercial paper. And there's a concern there that maybe if you had a stable coin experience a big amount of trouble,

that it could affect the CP market more broadly and affect the financial system more broadly. And also there's a good argument that stable coins are the one killer app of crypto. That we're, where do people actually use crypto? It's like Tether, USDC. These are huge things, right? And so he's like, well, what do people use crypto for? Well, stable coins are like popular and widespread. And therefore, you know, it's an area to be putting a lot of attention.

Well, also, I think that they promise something, which is, the fact that they promise something, which is stability, kind of makes them easier to regulate? Like, you know, what are other crypto tokens actually promising? Like, they're not necessarily promising that safety net, as you were discussing, but stable coins are. And so it naturally draws in regulatory interest. And this is a real key, key point that you bring up, which is that, yeah, like, there is this promise. There is this expectation. you can also sort of judge whether the promise is being kept.

Like, does this coin have a dollar in the bank or not? It's like a pretty simple binary question. What would be the equivalent for Dogecoin? Well, more difficult to answer than you might expect sometimes. Okay, fair enough. But we are going to be discussing all of this with someone who I think comes at it from a very interesting perspective. So we recently spoke to Senator Pat Toomey about this.

He was talking about the stable coin bill going through Congress. But what if there was another way to regulate stable coins? Let's find out. All right. Without further ado, then, we are going to be speaking to Timothy Mossad. He is, of course, a research fellow at the Harvard Kennedy School and also the former chairman of the CFTC under President Obama. Literally the perfect guest. Yeah, definitely.

Tim, thank you so much for joining us. Thank you for having me. I'm a big fan of the show. Thank you. Oh, thanks. Thank you for saying that. Yeah. Text in the mail.

Thanks. So why don't we go ahead and this is a question I asked Senator Toomey as well, but why the interest in stable coins? Like what is it that is drawing this regulatory scrutiny at this moment in time? Sure. Well, they're not that big relative to the financial sector, but they are growing very quickly. And that's one of the concerns. And obviously, recently when we had that fall in crypto prices and we saw the crash of Terra,

which is an algorithmic steric. a stable coin, that heightened the concern. There's a view that, you know, these things could grow very quickly and, frankly, that there's an opportunity here. They could help modernize payments and increase competition. So I think it is right for regulators to be focused on them. And of course, Facebook's proposal of Libra was really what captivated or really caused regulators to focus in on this. I actually hadn't realized that. Talk to us a little bit more about that, because I remember the Libra splash who was during like the 27, 2018 boom, and it just seemed so unwieldy, and I'm not really surprised it never got off the ground.

But I don't think I had appreciated the degree to which that was a catalyzing moment for regulators. Can you talk about what happened there a bit more? Yeah, it was really a huge moment, not just for the regulation of stap of coins, but also for the development of central bank digital currencies. You know, before Facebook announced that, Chair Powell testified, and he kind of brushed off a question about cryptocurrencies by saying, you know, we don't, we don't regulate that. We regulate banks. When Facebook made its proposal, and you will recall, the initial proposal was for essentially a stable coin. They didn't call it that. But it was a stable coin based on a basket

of currencies, not just one currency, but the dollar, the euro, the pound, and a few others. And so central bankers around the world immediately were alarmed because they thought, boy, this could actually displace sovereign currencies. Facebook has, you know, 2 billion plus users. What if they all use it? It also prompted some countries to really accelerate their CVDC development. In particular, China. I was over in China shortly after the Facebook announcement was made. And, you know, all, everyone in Congress sort of looked at Facebook and said, oh, you're going to undermine the U.S. dollar. Well, every government official I spoke to in China had the opposite reaction.

They saw Libra as essentially a way to backdoor dollarize other economies because the dollar would be the main component. So they got very worried about it. and they accelerated their CBDC research because of that. Interesting. So, you know, it was big from the standpoint of causing people to recognize stable coins as an issue and also from CBDC. Right. So fast forward to today. And we have the president's working group report that came out last year. I think we have this bill that may or may not be working its way through Congress. We have a lot of people talking in general about stable coin regulation.

Would you characterize stablecoin regulation as different to crypto regulation more broadly? Like, is there a different set of requirements that you're trying to satisfy here? Well, it is different because stablecoins are seen primarily as payment mechanisms. And the first thing to realize is that the regulation today is really inadequate. It's a very light touch. these are regulated under state law, under what we call money service business laws or money transmitter laws. Those laws originated with the telegraph. And what they required was, you know, if you walked into a Western Union office in Kentucky and you wanted to send money to your cousin in Illinois, Western Union had to make sure it had money on hand.

So money service business laws require very minimum capital. They require security. Again, very, we're talking about amounts in the range from zero to, you know, maybe a million dollars, maybe two million dollars at the high end for some of these states. And some of them do have permissible investment rules. That does mean if you're registered as a money service business, you have to register with Finsen, right? Which is a department of the Treasury, which enforces anti-money laundering and rules. So that's a good thing.

We are imposing those kinds of restrictions on stable coins based in the U.S. But this is not a sufficient framework. To suggest it's sufficient, it's sort of like saying, well, you know, there's no difference between an Excel spreadsheet and a blockchain. What can that do, you know? Some people say that. Yeah, I know. Some of them are sat in this room right now.

Right, right. We need a comprehensive framework. What would that involve? Prudential regulation, first. to make sure that these stable coins are fully reserved, meaning they have cash or treasury securities backing them. But more importantly, there's no stable in a stable coin today because there's no resolution framework.

You know, if a bank fails, right, we have a well-developed framework. The FDIC steps in very quickly, usually on a weekend, depositors are insured, and, you know, life goes on, everybody's fine. If a stable coin were to default, were to colise, lapse, it would be handled as a normal bankruptcy, which means the automatic stay applies, right? So holders are not going to get their money for months, years, potentially, and what we call the peri-passu rule applies. So even though I'm a holder of a stable coin, I'm in the same category as all other unsecured credit. So if the stable coin issuer has leveraged itself, well,

you know, I'm going to be competing with all of them. So that's a big problem. We need a framework that ensures good resolution and oversight, as well as we got to deal with the operational risks here because the stable coins are trading on a number of decentralized blockchains, and we've got to look at how resilient, how reliable are those? This is really interesting sort of the second have your point, because I guess intuitively probably everyone sort of gets like, yeah, we should have some required disclosure, something to make sure the money is actually there. That seems like, I guess that's the obvious thing.

That's the easy part. That's the easy one, right? The second point, though, is not something I had really, I have heard many people talk about, which is like, all right, well, what is the mechanism that keeps it stable, particularly in the event of, like, something bad happened? And I see, I have seen some people like on Twitter, for example, like talk about, say, like circles or tether's like capital cushion or the equity component, and it's often pretty thin. So what do you talk to us a little bit more about what you see as lacking or what you see as. the risks on that sort of like second component. Sure. Well, certainly capital helps prevent a bankruptcy, right, because it gives you a way to absorb losses. But the point is that even with that you still need a resolution framework. You still need a way so that, you know, this is a financial institution. We don't want it to, and it's a payment company. We don't want it to go through the normal bankruptcy where people are held up. So that's why I think we really need a more comprehensive approach. We've suggested this could be done administratively.

I've talked to Senator Toomey about his legislation. I think it does some of the things I'd like to see. It doesn't do all of them. But, you know, that would involve not just prudential requirements on investments, but it would involve creating a framework for resolution. It would involve oversight. It would involve audits. It would involve standards on operational resilience and on concentration of power.

I mean, one of the big issues here is, should we allow stable coin issuers to be affiliated with commercial companies? What if Amazon wants to launch a stable coin? How do you feel about that? Well, talk to us about your proposal then, because I think when it comes to crypto regulation, there's often the sense, maybe it's unspoken sometimes, but the sense that the existing regulation isn't enough to tackle this new technology, this fast-changing and evolving industry. with Pat Toomey, the Howey test came up a number of times, this idea that, well, how are you going to use something from the 1930s in order to regulate blockchains and cryptocurrencies and tokens and things like that? But you're suggesting that it can be done. So walk us through the proposal.

So let's talk about stable coins first and then the broader crypto market second, because we have a similar proposal, but it's a different paper. On stable coins, what I'm saying with my co-authors, Hal Jackson and Dan Aury, two law professors, is that while legislation would be great, we're not sure it will happen, number one, and we're a little concerned that it won't be comprehensive. So what we're saying is financial regulators today have the authorities they need to create a framework to try to bring this activity within the banking perimeter. Wouldn't be regulated exactly as a bank, but what you would do technically is you set up what's called a national trust bank, which then has a trust below it that is the payment vehicle.

And then what this gets you is it gets you supervision by a banking regulator, but it can be done in a way where there's not deposit insurance, right? Because we don't want that. We want the stable coin issuer just to hold cash and treasuries and so forth. It doesn't need deposit insurance. It could be coupled with access to a Federal Reserve Master account, which is very useful for settlement efficiency. And, you know, the Office of the Comptroller, which would do this, can set a variety of other standards on all the other issues we need to worry about, such as operational resiliency, such as basic consumer disclosure, consumer protection, and so forth. But the point is that administratively this could be done. It would require all the bank regulators to get together and cooperate something that doesn't always happen in our system very well. But it could be done today under existing law.

And again, we're not against legislation. That would be fine. But let's not wait around. We could put this today. This is Caroline Hyde. And I'm Ed Ludlow inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headline. from the world's biggest tech companies.

From finance to defense, AI to entertainment, and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the Tech News. cycle. That's the Bloomberg Tech podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today wherever you get your podcasts. Who would be, who is the regulator of a bank such as this?

So it would be primarily the office of the controller of the currency because that it would issue a national trust bank charter. But you would also need the cooperation of the Fed and the FDIC to really make this work. Ideally, you know, you need the SEC and the CFTC to go along too just to not do things that are inconsistent with what you're trying to do under the bank laws. But, you know, we created the Financial Stability Oversight Council to bring the regulators together. We've suggested, well, it could help coordinate this as well. Is there anything about this proposal that would impinge on the current business model of major stable coin issuers? Because I think if you all talk to them, if we had. Jeremy Allaire of Circle back on.

He said, yeah, more clarity, more regulation, totally fine, et cetera. Is there anything, is there a Trojan horse that I'm missing that he would say, no, this is not going to work? There are things that they might not like. The way we proposed it, because we've said this could be done administratively, and because we wanted to be very conservative and suggest something that the bank regulators could say, oh, yes, this uses building blocks that are tried and tested in our regulatory framework, if we can do this, is we have said this trust bank would need to be a subsidiary of an insured depository institution. It still wouldn't have insurance, but it would be chartered that way,

which brings in banking regulation overall. So what stablecoin issuers will say is twofold. One, they'll say, our business model is narrower. We don't need to be subject to lots and lots of bank regulations. And I'm sympathetic to that. I would be willing to go down a path of saying, yeah, let's customize the rules a little bit for these guys. They don't need all of these things. Our proposal already does that in terms of capital requirements and so forth because the trust itself would be off balance sheet. The second thing they will say is, you know, if you're going to make this a subsidiary of a bank, that limits potential competition. The whole point of stable coins is we want to be competing with banks. I'm sympathetic to.

that too because I do regard stable coins as potentially helping us bring more competition to payments. I think both those things can be dealt with in the process. It really depends on how much flexibility regulators want to build into the system. But those, I think, would be the two main objections they would have. This was going to be my question, actually, which is, what's in it for a bank to allow a stable coin issuer to be a subsidiary? Yeah. Well, you know, I think a lot of banks are looking at stable coins and sort of thinking about do we enter this space, do we not enter this space? I think with interest rates moving up, it becomes interesting also. How does that affect the stable coin issuers business model,

right? Because some of them now are going to be making a lot of money on their deposit. Of course, their deposits are still, you know, very, very, very small fraction of the total deposits in the banking system, 150 billion in stable coins versus 19 trillion in bank deposits. But, you know, I think banks are really thinking about how do we maintain our competitive edge in payments. I mean, all of this also goes to a broader issue, right, of how do we think about banking? Banking has traditionally bundled credit creation, creation of money, really, right? because most of the money we use is really represents private IOUs. It's only paper money that represents a liability of the government.

And payments, right? Banks have bundled all those functions. They've been entitled to certain regulatory advantages in order to do that, such as deposit insurance, such as access to Fedmaster accounts. And really, stable coins and other innovations in payments are really raising the question of should we unbundle, this a bit and let non-banking entities come in and do payments. And this, by the way, there's a report that's going to be put out by the Treasury Department called the Future of Money and Payments,

which is a report required by the executive order, which presumably will talk about this and we'll see if it takes a firm stance. I mean, the scope of that report is very, very broad. If you look at the executive order, we're supposed to talk about future payments and CBDCs And how can they affect competition and financial inclusion and so forth? And truthfully, you know, I'm very interested in what the report will say, but, you know, it may well be a committee product that doesn't take a firm view on some things, but just covers a lot of territory. We'll see.

Interesting. Just on the banks versus stable coins point, this is something that came up in our episode with the Circle CEO with Jeremy Aller. There is a sense that, okay, maybe sending money via stablecoins is more efficient than sending it through a bank, which, you know, it takes days and maybe they charge you fees or they charge you a bad exchange rate or something like that. But the question always is how much of stablecoin's advantage is genuinely, genuine technology innovation versus regulatory arbitrage. And I'd be curious to get your thoughts on that. Well, I think that's a great question. I mean, look, for most of us, the payment system works perfectly fine, right?

I mean, we have our credit cards, we have mobile banking, and, you know, I can deposit a check at three in the morning, and I get an instant, you know, I get an email right back and says, oh, yes, we've got your check. Now, in reality, of course, if I'm a low income person, I may not even have that access. And if I deposit that check, it might be five days before it clears, right? And that's why our payment system is actually relatively slow and inefficient compared to what it could be and what at least some countries have advanced in terms of having more of a real-time system. That doesn't hurt most of us, again, because we have all these options. We have credit cards that give us, you know, free revolving credit. But it really does hurt low-income people. They're actually subsidizing our credit cards, right?

because they pay all the same prices we pay, but they don't have those credit cards. So when you look at it from a societal standpoint, we do need to modernize the payment system. And while, yes, the advantages today to most of us of a stable coin payment versus, you know, a bank may not matter that much unless maybe we're doing a cross-border payment where the fees can be high, you know, I think long term this could be significant. I think obviously digital forms of payment have the potential also in blockchain forms of payment have the potential to be programmable. But I guess at the end of the day, I would say as a former regulator, I don't really know the answer to the question ultimately. And I don't think government is smart enough to figure it out.

I think the market has to figure out. Do these things really have long-term utility? I'm skeptical of a lot of things that go on in crypto as to their long-term utility. But I don't think that's the government's job to decide. I think that's the market will figure it out. The government's job is to create a framework where innovation can take place, but that we ensure financial stability and consumer protection and transparency and integrity. And we're not doing that today.

We're not doing it with stable coins. We're not doing it with crypto more broadly. And you can, you know, you asked about that. I'm happy to turn to that. you like. So you mentioned that what really got crypto and stable coins in particular on the map of regulators obviously was the failed Libra attempt. And you also threw in there earlier in the conversation, it's like, well, what if like Amazon wanted to do a stable coin? And I don't know much about this, but there is something like that prevents or makes it hard for like a retailer

or a non-bank company to become a bank. And Walmart every once in a while, I think makes noises about wanting to become a bank and like set up something in Utah and never really. seems to go anywhere from what I understand. Would your proposal essentially foreclose the possibility of an Amazon staple coin at some point? Yes, it would today. That's an excellent question. We do have a separation between banking and commerce. That's primarily through the bank holding company app. And our proposal would have that apply. Now, you could revisit that as well. And, you know, some of the proposals in Congress have suggested, well, maybe the bank holding company act shouldn't apply, but we should still have some limitation on commercial affiliations. I think that is important. It's a difficult question as to exactly where you draw the line. But I do think that we need to be concerned about the concentration of power that could result from, you know, a major commercial firm like an Amazon, which has lots and lots of information from its customers. also then engaging in financial services and payments types type of services.

Well, let me ask you kind of a follow-up question, which is in your mind, how do you actually distinguish the difference between, say, a stable coin versus, say, a Venmo or a PayPal, which are not, you know, you could sort of abstract them away. They're pretty similar. You have a dollar in a PayPal account. It's supposed to be backed by a dollar. it's a liability of PayPal, et cetera. What do you see as like the bright line difference for them?

And it seems important if we're going to be deciding who gets to even issue these. Absolutely. Because from a regulatory standpoint, you're basically right that the same framework I talked about that applies to stable coins is essentially what applies to those other types of payment providers. From a business model standpoint, they're different, of course, because PayPal, Venmo are then connected to the banking system. They are running through the banking system, whereas a stable coin is not, you know, in terms of what we've seen today.

So you're right that we do need to think about those issues together when we think about how to regulate these things. Hello, I'm Michelle Hussein, and for more than 20 years, I was at the BBC. withdrawal from Afghanistan. But all the time I was delivering the headlines, I wanted to go further than the news of the day, to spend more time with the people shaping our world. And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage, Russia needs to be taught a lesson, to tech journalist Karaswisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run-up in their stock prices. This will be a place. where every weekend you can count on one essential conversation to help make sense of the world.

So please join me, listen and subscribe to the Michelle Hussein show from Bloomberg weekend, wherever you get your podcast. You certainly ask interesting questions. I have a devil's advocate question, which is you've mentioned a number of times that under your proposal, there wouldn't be deposit insurance for stable coins. Right. Why not? Because, I mean, the trade-off between banks and getting deposit insurance from the FDIC is, well, you know, we agree to restrictions on what we can and can't do. We agree to hold a certain amount of capital to be regulated, to be under scrutiny, and in return, we get this government backstop. So if you're going to make requests of stable coin providers and say that there are going to be portfolio constraints or more disclosures, then why not give like a carrot to reward, reward that? for doing that.

Yeah, good question. So keep in mind, deposit insurance enables banks to basically create money, create credit, right? Because they can take in my deposit and then lend it out, and that's creating money. And that happens over and over and over again, subject to, you know, minimal reserve requirements or whatever. But as the depositor, I don't worry because, you know, I know if the bank fails, my money's going to be insured. So it's not going to be like, you know, Jimmy Stewart and it's a wonderful

life. You know, where's my money? Where's my money? Oh, it's invested in so-and-so's mortgage. So it's a un-uswap. It's a sushi swap. That was the happy ending in that movie. It's in Doku-on's account in Korea. Sorry. When I teach my classes and I use a slideshow, I actually have a little slide of Jimmy Stewart in the bank facing all those people with a little balloon coming out, you know, cartoon thing saying, with him thinking, they'd go away if I had, if I told them we had blockchain. The point is that, first of all, we don't want, we're saying stable coin issuers should not be creating credit.

Okay. So again, we're separating the payment function from the other things banks do. Stablecoin issuers would not be creating credit. They're not intermediating in the sense of bringing borrowers and savers together. They're a payment vehicle. So that plus the fact that we can ensure that, you know, your money is safe, if you will, by the investment restrictions means we don't need deposit insurance. And the final reason is, of course, that I don't want to subject the deposit insurance fund

to the risk of these things because it is a new area. We don't know exactly how it will develop. And I recognize that some of the concern of the bank regulators. And they've kind of acted in the way of like, gee, you know, we're not so sure about all this stuff. We don't really want to legitimize it or authorize it. So those are the reasons why. What kind of investment or portfolio restrictions would you be envisioning? Because I know we were kind of joking earlier about to some extent this is the easy part.

But still, there are big questions over what a stable coin like tether is actually holding. Right. There are. So it would be some version of cash and high quality liquid assets, okay, whether it's exactly like 2A7 for money market funds or whether it's more restrictive, you know, you can debate that. But basically cash and treasuries, you know, is what is what I would say. It wouldn't include commercial paper. It wouldn't include other things. And you're right, Tether, you know, has had other investments. It had investments in cryptocurrencies. It's only recently that that Circle limited its investments to basically cash and short-term treasuries. And by the way, for a stable coin issuer to say, oh, we've put our money in FDIC insured banks.

So, you know, that's why we don't need to be regulated. I mean, yeah, that's safer than, you know, putting it in a mattress. But it doesn't help people again in the bankruptcy situation, right? the fact that that money is in an FDI-I-C-insured bank isn't going to help me as a holder get it, isn't going to put me better off relative to unsecured creditors of that stable coin issue. Yeah, and I think that's one of the things we're seeing in like the Voyager bankruptcy. Yeah. Not a stable coin per se, but it's like, oh, yeah, the fact that they held their money in an FDIC insured bank is not really helping many people.

You know, you joked about, oh, could a blockchain have saved George Bailey? But you briefly brought up, but I actually do want to talk about this aspect, which is the operational risk of public block chains, which is another way that clearly stable coins differ from, say, Venmo or PayPal, which are, you know, we know those rails. What in your how how should you know they're always launching new chains there's Ethereum and Solana but there's like I think there's like thousands and the big stable coin issuers are all on multiple chains at this point from a regulatory standpoint how should regulators be thinking about what chains they're issued on and the risks that they pose it yeah yeah great question and let me by the way before I answer that just note since you've mentioned PayPal a couple time yeah do some advisory work to pay okay good to know thank you

We appreciate that. So I think that's a huge issue. And I've talked with Senator Toomey about this because I said, you know, your bill is very good. It has a lot of things. But you haven't said anything about the operational risk of these blockchains. And he said, yeah, I know. I'm not quite sure, you know, what to do that. And I think regulators aren't quite sure what to do about that.

We need, so we do need standards. We need standards that would impose some obligation on the stable coin issuer as to what blockchains it supports, right? Because if you read circles disclosure, you know, it will say, well, we support the trading of USDC on eight blockchain. So there would have to be some sort of due diligence standards and so forth. And then I think what you would want is, you know, some requirements that a stable coin issuer might have to freeze its tokens if certain things happen. So freeze the tokens on that blockchain. And this, of course, could even be used if what happens is even if a blockchain isn't supported by a stable coin issuer, someone wraps the

stable coin and trades it on that blockchain, right? Which case the stable coin issuer could say, hey, I didn't authorize this, but it's still happening. So, you know, I think you'd have to have some standards that say, look, if this happens, then you might have to freeze, uh, free a stable coin. Now, of course, the risk is still, you know, lack of resilience, lack of reliability, a hack or so forth. And that's why, you know, this area is so new. I do think we have to move cautiously because it's not clear that some of these blockchains are resilient enough. And people don't, you know, always appreciate that. So one thing on stablecoins is it does seem like there is the sort of regulatory dagger hanging over the industry at the moment. And you started

off by noting that this is a very fast-growing market segment. How do you think stablecoin issuers feel about regulation on the whole? Because again, one thing we hear is that the industry wants clarity. They want rules to come out so they know how to go forward. How much pent-up demand do you see in the wings from stable coin issuers? You know, if a rule came out tomorrow, would we suddenly see 50 or 100 new stable coin issuers out there? Yeah. I'm not sure that we would. you know, I think people are still trying to sort of figure out, you know, other financial institutions are still trying to figure out the space. And of course, it would depend on what the rule is,

but certainly some players are eyeing this very closely and thinking about it. So, you know, it would really depend on the content of the rule and, you know, how burdensome it is and so forth. One thing we have to keep in mind, though, you know, maybe make two points. On the one hand, you know, I think bank regulators sometimes kind of lull themselves into maybe feeling like they don't have to act that quickly because they say, well, it's still not very big, right? I mean, Circle claims it did $3.6 billion in payments since the beginning of 2021. Well, you know, the Fed wire system does like a hundred times that amount every day or something. So they're small, but nevertheless, they are growing.

And also, there's nothing that prevents really a stable coin issuer from incorporating a abroad and then still issuing a dollar-based stable corn. So, you know, jurisdictions are moving faster. I mean, you can sort of think about this in parallel to, you know, the growth of the euro dollar market. I was talking with my friend Josh Younger, who I know has been on your show numerous times about this idea of how this has kind of got similar parallels in some ways. So, you know, I think we do need to act.

It is, you know, it's maybe not a financial stability risk, but it's growing quickly and and we need to move forward. So one of the thoughts that I took away from our recent conversation with Senator Toomey and Tracy and I were just talking about this is it feels like stable coin regulation is kind of low hanging fruit. It doesn't seem that hard to do. Maybe it's a lot harder, but whether it's your proposal or something legislative, it's like, okay, come up with a banking framework and a way to make sure.

sure that they have the money there. It seems like as soon as you go past that with crypto regulation, it strikes me in my mind as orders of magnitude more complex because how do you prevent someone, you know, or how do you think even begin to think about regulating? Or someone launches a joke token. Yeah, what's the responsibility there? India or Estonia, somewhere outside and it gets traded on a defy exchange and it gets marketed towards U.S. American investors or consumers. Like, just conceptually, and we just have a couple of minutes left, but how should we begin thinking about like that, which just seems so much harder? It is, it is harder. And, you know, for one thing, we do have a gap in the law, right? There's no federal regulator of the trading and distribution

of crypto tokens, which aren't securities, right? Now, the CFTC doesn't have that power. I, you know, when I was chairman, we declared Bitcoin a commodity, but that simply gave us essentially jurisdiction over swaps and futures based on Bitcoin. That's problem number one. Problem number two, of course, is this, is it a security? Is it a commodity? And we're kind of stuck in the mud on that because, you know, I'm very sympathetic to Chairman Gensler's view that a lot of these things probably are securities, but I'm also sympathetic to the view that, you know, the rules maybe aren't perfect. I mean, there are some issues where you'd like to customize them. But my proposal that I'm working up with Hal Jackson at Harvard Law School is we say,

look, we're stuck in the mud on that issue. Let's take a different approach. Let's have the SEC and the CFTC create a joint self-regulatory organization. Going to set the standards for the trading of all crypto assets. We don't care whether their security is going to come out. We're going to basically prod or browbeat or jawbone, whatever word you want to use, industry participants to join this SRO, we're going to have the agencies tightly oversee it, tightly watch it. It's not just going to go off on its own. The agencies, the regulatory agencies are going to appoint the members, they're going to approve the rules. You know, and SROs have been very, very important in our regulation of the securities and derivatives markets since that regulation began. And

William O. Douglas, former Supreme Court Justice, who was the chairman of the SEC. I guess he was like the second or third chairman, basically was the guy who initiated the self-regulatory organization movement. And he basically said, look, it only works if government has what he called a well-oiled gun, you know, standing by. In other words, the agencies really have to oversee this. But we think it could set some standards. standards because, you know, when you look at the trading and distribution of crypto, oh, it's, it's awful. I mean, the lack of standards, you know, you have exchanges that have their own proprietary trading operations that don't prohibit wash trading, you know, where someone can basically

inflate the price or the volume of the security. You have other conflicts of interest. You have exchanges that have interests in the crypto tokens they're listing. You have, you know, no sort of order execution rules you have no requirements on pre and post transparency and crypto has created you know despite its claim despite the claim of the original white paper that said we're going to eliminate intermediaries we're not going to have to rely on these large intermediaries anymore it created a whole new class of intermediaries right these changes and other in other actors and so we need standards there and what we're proposing is look require or basically

push them to become members of this and then They'll also want these rules to apply to the DFI platforms and the N needs to figure out a way to do that because they don't want to be at a competitive disadvantage. So, you know, it's not a perfect solution, but compared to where we are, we could go much, much further, we think, faster if we were to do this. That's really interesting. I was sort of wondering when someone would make that suggestion rather than just have this bun fight between the CFTC and SEC going back and forth. government here. Right, right. Let's just band together and create a new agency. Tim, I'm so sorry, we could talk to you for another hour, but we are going to have to leave it there due to time constraints. But fascinating discussion. Thank you so much for coming on all thoughts.

Yeah, thanks. Thank you for having me. It's been a pleasure. I thought that was really, really interesting. And he kind of answered a long running question that I've had about stable coins in general, which is, this came up with the circle CEO, which is it feels. kind of redundant if you have this new technology, but in order to make it work, you have to team up with a bank and get a bank license and all of that. But the way Tim described the sort of unbundling of credit creation versus payment services, that makes some sense to me. Can I just say, like, I'm just going to full disclosure here. Are you going to leave odd lots to join the new crypto interagency organization?

Full disclosure here, it's not always the case that I get really excited by Finreg conversations. It's like macro and commodities and markets and stuff like, yeah, that gets me going. Tim got me going on Finreg. And like even if we weren't talking about stable coins, he is, I really just enjoyed hearing him like talk about the essentially like theory of Finnereg or financial regulations in a very engaging way. Yes, absolutely.

Also, the little bit about Facebook and Libra. galvanizing political interest. And very interesting that from the perspective of the Chinese that was seen as a way to further reach the dollar, which I think is really interesting. Think about it. If you're in any other country, how do you hold dollar assets is not a trivial question, right? Right. How do you hold a dollar denominated asset safely?

And there is this clear potential. People are talking about it of like stable coins actually really deepening and cementing the dollar's global reach. So it's really interesting that that was like sort of the aspect of Libra that they. Totally. But this is also why people were making jokes about like the East India company and stuff when Facebook announced this. But absolutely fascinating conversation. I think we're going to have more on stable coin and crypto regulation more broadly to come. But for now, shall we leave it there? Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Weizthal. You can follow me on Twitter at The Stallwork. Follow our guest Timothy Mossad. He's on Twitter at Tim Mossad. Follow our producer, Carmen Rodriguez, at Carmen Armin, and check out all of our podcast at Bloomberg under the handle at podcasts.

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