Odd Lots - The Booming Crypto Use Case That's Happening Right Now

Episode Date: September 6, 2024

Pretty much since the moment that cryptocurrencies came into existence, there's been a chorus of skeptics who argue that they solve no real world use cases, except for gambling and speculation. For a while, there was a lot of hype about things like Web3 or DeFi, but for the most part, these still remain in the realm of pure speculation and gambling. And so, the ultimate use case for crypto remains elusive. Our guest on this episode argues otherwise. He thinks that stablecoins, such as Circle or Paxos, which are backed by actual dollar instruments in regulated institutions running on public blockchains (like Ethereum or Solana) are solving a genuine problem in transmitting money, beyond just speculating on other cryptocurrencies. Austin Campbell is an adjunct professor at Columbia Business School and the founder of Zero Knowledge Consulting. He also comes with a long resume at both crypto and legacy financial institutions. He explains why stablecoins are having a moment and explains the problems they currently solve (particularly internationally) and why legacy payments infrastructure is unlikely to serve the same needs.  Read more: The Case for Stablecoins Being the New Shadow Banks How Stablecoins Became a Powerful Force in Crypto  Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at  bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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The coins have been falling. The cryptos. That's right. The coins have been falling. Let's see. I'm bringing up Bitcoin right now. Let's see. It's down from a little over 17.

and it is now down to 56,000. So fun times in Crypto Land. There's sort of two things. We have not done many crypto episodes. I think we did one. We did one a couple months ago with a member of the Outlaws Discord talking about trading. The thing that's really stood out to me about this rally is like since 2022 is I have to say I've found it kind of boring. And the reason I've found it boring is like sure the price has gone up from the lows. and that's always exciting. But unlike even 2021, 2021, and people are like talking about defy and Web 3 and stuff, I just feel like there hasn't been much new or exciting, like sort of narrative-wise within crypto.

And so like there's not even like a thing to shoot down right now. No, I actually, well, I agree that none of the narratives have been very interesting. However, the thing about Bitcoin especially is the narratives always keep coming. And that's kind of the thing that I find fascinating about it. So let's see, last year when you have the banking drama, people were pitching Bitcoin and some other things as like a safe haven from the financial system. And then fast forward to late last year, suddenly they are the beneficiaries of the financial system because everyone's excited about the ETFs coming on stream and, you know, BlackRock

is going to buy Bitcoin and all that stuff. And then fast forward to this year. and it's like a Trump thing now? Oh, yeah, right. Right. It's so, it's so funny how much the narratives shift and are often very much at odds with each other. But the reason that can happen is because some people might argue that like Bitcoin is kind of this weird postmodern thing. Yeah. It's just a token.

Like it's just a symbol and people aren't really using it for anything other than betting. You know what cryptocurrency actually has retained a real story? value property. Tell me. Tether. I'm looking at it on the screen. It's a dollar right now, and it's been a dollar forever. So, you know, and a circle, USDC, also very big. The big stable coins have so far proven to, in fact, be stable. Some caveats there. I mean, we still remember 2021 and early 2022 when there was some discrepancy there. But yes, okay, stable coins by and large have remained stable. And I do think, you know, one of the, you know, as you mentioned, narratives in crypto are always shape-shifting, always evolving, but one of them has been this idea that stablecoin,

specifically Nick Carter, who we've had on the show in the past, has been pushing this a lot, which is this idea that like stable coins and the ability to transact dollar denominated assets anywhere you want, that'll be the killer app of crypto. And to me, it's like, I'm always like a little unsatisfied by it because it's like, well, you're still like... Venmo exists. PayPal exists. And then also those dollars at the stable coins, at least the centralized ones, like Tether, like USDC, they're in a bank somewhere, right?

So you're still relying on existing legacy financial market infrastructure. And if your whole point is to get away from that, then isn't it kind of like cheating to say, oh, crypto's killer app is going to be dollars that you hold in a regulated bank? Yeah, dollars that are like backed by T bills are the big innovation here. Okay, well, I think we should get into this because as you say, stable coins, they're still around, contrary to what a lot of people were expecting, especially with something like Tether, which has just behaved very weirdly over the years. And there are a lot of questions there about what exactly is backing their stable coin.

But you're right, still kind of stable. People are using them, some people. So we should talk about it. And there's one other reason to talk about stablecoins, which is I think there's this view that if crypto were to ever pose a systemic risk to the actual financial system, it's not going to be Bitcoin volatility. It's the lesson that we all learned in 2008, 2009, which is that systemic risk comes from the assets that you don't presume to be volatile. Right. And so this is a reason why legislation exists about regulating. Should they just be regulated

like money market mutual funds? Things like this question, because, we know that you really get into trouble when assets that are supposed to be dollar good or AAA or whatever don't behave as such. And so if there's ever going to be a time where there's going to be a link between the real economy or the real financial system and crypto would probably be something with stable coins. Yeah. Let's get into it. All right. Well, I'm really excited. We do have the perfect guest, someone who's been out working in this area for a while. Someone who knows both sides of both fies, sort of tradfai and crypto, who's worked in both. world who's very interested in the stable coin world done a lot on that. We're going to be speaking

with Austin Campbell. He is an adjunct professor at Columbia Business School. He is the founder and managing partner of zero knowledge consulting, and he has previously done Stinsett City, JPMorgan, and Stone Ridge. So he really does know both worlds really well, which is where stable coins sit neatly in both worlds. So Austin, thank you so much for coming on odd lots. Yeah, thank you for having me, excited to be here. You've been in both worlds. You have zero knowledge consulting, crypto stuff. You've been at legacy finance, having traded at City, JPMorgan, done tech stuff there. What interests you about crypto? Why is this even an interesting topic that we should be talking about? Well, as I've joked with some of my other friends. I kind of had crypto come to me,

as opposed to most people who themselves went to crypto. So back in the day at J.P. Morgan, I ran a trading desk called Stable Value Products and Stop me, if you've heard, this story before, but that was stuff where you were having a large pile of highly diversified bonds that were supposed to largely be safe with some guarantees on top of them, and people were supposed to be able to transact in and out at a fixed stable value. Well, this sounds a lot like a stable coin, only no, I'm talking about a trillion dollars of stuff in 401k markets, largely in the United States. So I found these interesting because it's sort of crypto encroaching into a very trad-fi space and being totally honest, probably largely misunderstanding it for a long

time. Crypto came to me too. It is also something that's been inflicted on me throughout the years. Okay, but on that note, remind me, when we talk about stable coins, what exactly are we talking about here? How do they differ from some other cryptocurrency or token? And crucially, how do they differ from, you know, me having a digital deposit line, a number that appears is in my account, and then hitting the send button and sending money to someone else's account. Yeah, so the answer is they are both similar to that and different in some very important ways. So I'll start with answering your literal question, which is what we mean when we say stable and crypto is unfortunately like a horrible variety of things, many of which have not proven

to be stable over time. So I would tell people you're talking about everything from things that look like money market funds and maybe bank deposits, probably stable, all the way to things that look like self-referential equity sorts of structures, like structured notes, derivatives. That was like the algorithmic stable coin from Terraform Labs, which it was a coin, but definitely not so much on the stable part. I would say what's important about them and where they differ to your question from a traditional bank account is you kind of have this bifurcation of where the money rests and is invested and where the token can move around to. Because the big contrasts,

by putting them on a blockchain is if I have a bank account at, say, J.P. Morgan, and I want to send money to somebody at Bank of America, simplifying away a lot of the details here, J.P. Morgan has to essentially take money out of their accounts, whatever they were invested, and send it over to B of A, who's going to reinvest it. In token world with a stable coin, it just sort of sits at rest being invested the whole time, and the token represents an ownership interest in that moves around on a blockchain, which is also a very open access platform. It really is, in many ways a bifurcation of rights that were not possible in the traditional system and changes how you can move money around and at what velocity. Oh, I see. So if you have a bank transaction,

if you're moving money, then there's sort of two separate things happening. So you're transferring the information about the money and the instruction and then the value, whereas with the token, you can kind of transfer both at the same time. So the instruction, the information, plus the value. Yeah, it would be as if, so if we're all trading around tether on a blockchain to use the previous example that was raised, that is almost as if everybody, like everybody, banks at J.P. Morgan, right, so that everything is just an internal ledger transfer there. Got it. Like instantaneous intra-bank transfer. So, for instance, if you're with J.P. Morgan, you can more or less instantaneously transfer money into another J.P. Morgan account,

but if you're transferring it to like somewhere in Europe, you have to provide all these additional instructions. It sort of feels to me like if you wanted to transfer money to me, rather than transferring the money to me, it's like you're transferring the password to your account. And so the money does not have to move. But now because of tokenization and blockchains and digital signatures, you can transfer the if you want to send me $100 worth of a coin, Tracy can send me a password for $100 worth of a coin. And then when I want to spend it, I'm transferring that password.

Would that be a good way to think about it? I think that's a good mental simplification, yes. In many ways, like, if we really think about what legally they entitle you to, it's just I can go to the stable coin issuer and redeem this thing against them to get cash back. Right. And I'm just transferring the ability to redeem that cash around exactly, as you said, kind of like a password or it's like a vault receipt. Yeah.

Like a bar, right, a vault receipt or a key or something like that. And of course, they talk about key. all the time in crypto. So the big thing, when people talk about, they show these charts of tether volume going to the moon or circle and all these lines that have generally gone up over time. My first reaction is, yeah, I guess that's kind of interesting, but if people are just using these coins to trade crypto itself, then it still feels very recursive to me. So it's like, oh, there is a use case, stable coins. But if the use case of stable coins is to then do. a levered-long eath trade or a levered-long salonnet trade or whatever it is, then I don't find

that interesting. It's only, I don't find that that interesting. It's only particularly interesting to me if people are using these dollar-denominated assets for something other than trading crypto. Is that happening? So one, yes. Post the 2022 crash, we saw a very interesting phenomenon. And you referenced Nick Carter, who's been on earlier, and he has some very good data about this that's publicly available. But the correlation between crypto trading volumes and stable coin settlement volumes has really broken down significantly post-2020, where now there appear to be a decent body of people who are using stable coins for, I will generically wrap it in the basket of something else. And that something else mostly seems to come in two forms.

One is a lot of peer-to-peer transfers of stable coins. So that's people probably using it for things like business payments, individual payments, like settlement of, call it real world activity where one leg is in crypto. And the other part that they seem to be using it for significantly is just dollar access, because something we take for granted in the United States, because our banking system, you know, for all our criticisms is pretty good and largely works. It's easy for us to get dollars. And more importantly, it's easy for us to get dollars in a way that we feel good about being safe and secure. But if you live in like Argentina, if you live in Venezuela, if you live in like Southeast Asia, it can be much harder to get your hands on dollars. And this is

definitely a tool where people are using that. Like when I was at Paxos and we were looking at our stable coins there, I would estimate probably 95% of our holders were non-U.S. persons. And many of them seem to just buy the coins and hold them. Huh. It almost sounds like a shadow dollar system, almost like a euro dollars type thing. But where is the dollarness of stable coins coming from. So I think in the intro, you know, we kind of mentioned the T-bills backing something like Tether. There have been rumors at various points in time that there are less safe things, perhaps, backing Tether. Talk to us about how that dollarness is achieved. Yeah, so that's been done a little bit differently across multiple stable coins, which I think leads to the earlier

point of a need for regulation in this space. So we can look at the three big models. The answer to Tether is they kind of won't totally tell you. They give suggestions about what they're doing, but they very much operate in the Swiss Bank style of we're going to be very private. You just have to trust us. We have the money. Now, recently at Bitcoin Nashville, Howard Lutnik from Cantor Fitzgerald gave a talk about how they manage a significant portion of Tether's Reserve. So now we know a significant portion of it's probably an overnight reverse repo in the United States, likely secured by mostly treasuries. That's a good sign. But Tether is unwilling to disclose this with specificity or disclose all of their partners. They also, you just reminded me,

they also referred to it once as reverse repo notes, which was really weird because that does not exist. And they had it in like their financial statements. And everyone in the repo market was going, what the heck is a reverse repo note? What you are experiencing, I would suggest, is crypto people attempting to talk about finance, which goes usually about as well as finance people attempting to talk about crypto. Yeah, fair enough. The two sides have a long history of talking past each other. All right. So what are the other models? You mentioned Tether. What are the other models for holding dollars? So Circle's current model is basically, hey, we're largely going to outsource this to BlackRock, right? They have a captive fund with BlackRock. BlackRock is

actually doing largely overnight reverse repo in there. And that is essentially saying this should look like some sort of tokenized government money market fund type construct. So we're just going to have a professional do that. Previously, Circle had had some call it misadventures in the bank deposit world, and I think they had to learn some hard lessons there, back to crypto people not understanding finance. But I think mostly now it is BlackRock. The last model, which is what we did at Paxos, was essentially running the thing internally like a traditional cash stability product. So when I was at Paxos in 2022, we started disclosing everything down to the Q-Sip so you could see what we hold. And it was a mix of insured bank deposits, T-bills, and overnight reverse repos spread across a number of

of different custodians and banks to diversify the risk. I would tell you in the future, if you're looking at what makes for a quote-unquote safe stable coin, it's going to look more like that model or maybe what Circle is doing now, not what they have done in the past. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris.

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the sort of dollarness or the one-to-one dollar value breakdown? Because we have seen, you know, like little glimmers of that happen in the past. I think I mentioned 2021 and then in 2022 as well. There was a bit of a breakdown. What's happening? So the interesting part about crypto is it's sort of a microcosm of traditional finance. There's a couple of things that have happened in the past. One, which I think is what you're probably alluding to, is fears about the balance sheet and solvency of the issuer. So Tether has had multiple periods in the past where they've depegged for moments in time. Circle certainly had a very large depeg around the Silicon Valley Bank incident where people didn't know if their reserve was

totally money good. So echoes of 2008 right there. It's the classic, can we trust you if we come to redeem our deposits with you. The other one that happens, which is fascinating, is you have stable coins that depeg to the upside in times of crisis, right? Like, again, back to my experience, we had BUSD trading at like a buck 06 on Binance when Terra went down. And the reason there is they serve the opposite function, which is the flight to safety, especially if that happens during off hours because one of the things that's true about stable coins is I'm trying to weld essentially New York banking hours to the 24-7ness of crypto. So if something blows up at, I don't know, 3 a.m. on a Friday, I might have an entire weekend of people trying to flee to

a safety and willing to pay a premium for that. All right. So here's my other question, my other big question is like, let's say we accept that the best stable coin model is something like with what circle it's doing now or something like USDC where there are assets held in regulated financial institutions. Why do we need public blockchains to solve that? If Tracy and I are trading claims from or transferring claims that are claims on a dollar held at a bank, why do we need Ethereum and Solana to do that? Why not some other solution? Because we've already accepted the premise of centralized legacy infrastructure. So I think this goes back to our discussion on bifurcating, call it the investment from

the technological rights of transfer. And essentially what you're asking is what system should we live in and whose rules should we play by? Because let me give you a couple of examples. If you're in the United States and you just want to pay people through regular channels through like a sandwich, you know, or something as your like core of the transaction, I'm at a deli, right? I don't think you need a public. blockchain, like our infrastructure largely works. But on the other hand, let's say that I am a supplier in Thailand who needs to receive a payment from somebody in Finland for goods, and it's denominated in dollars. Sending that through the traditional infrastructure will take

days and have relatively large fees attached to it. And in some jurisdictions, I'm not sure I trust my banks at all. But wait, before you go on further, like, I get that there are all kinds of aspects of legacy finance that don't seem as efficient as they should be. And people like, oh, T plus two and T plus three and settlement and blah, blah, blah. But like, why isn't that just a matter of, okay, eventually the banks will upgrade their software? And these are things that are being solved. Some of it's regulation, right? Well, I think some of it is regulation. Some of it is, quite frankly, I don't think the banks have a lot of incentive to solve it. They are largely the beneficiaries of the current system. Like, you know, if you're looking at correspondent banks, they would

prefer these payments to take as long as humanly possible. And then I think a third part that, again, we really take for granted in the United States is you're assuming that the financial system you're dealing with is legitimate in the first place, right? So in the U.S., where things largely work and we have good rule of law, that's totally true. But there are many people who live in situations where the government itself is the bad guy, and therefore going only through regulated banks captured by them is an excellent way

to basically have all my money expropriate. right? Like if I am, say, to take an actual example of humanitarian aid with Bitcoin, if I'm a woman in Afghanistan trying to work and I don't want the Taliban just taking all of my money, I can't hold it in the local system. Right. This actually reminds me of a very old episode we did with, I think it was Jill Carlson from the Open Money Initiative. Do you remember that show? Where she was making the argument that, you know, for people in Venezuela or other countries, there is that use case where you can use this as a store of value that's separated from the government. But I guess my question is, like, it feels kind of weird to have this shadow financial system exist.

And is there some, like, I guess what are the downsides to this? Let's just get to that. Yeah, and I would say you end up with, in the current world, three kinds of downsides. So I think some of them don't need to exist. there are a choice we've made based on some misunderstandings. So downside number one is with the lack of good regulation around stable coins globally, you have a lot of people reaching for these things of let's be generous and say highly variable quality. And the downside has been a lot of damage to people who were not super financially sophisticated who got wiped out on their holdings.

Again, see like the Terraform Labs incident. These are, I would say, strictly bad. That shouldn't be happening. Two, I think a public blockchain that operates where the criteria for being able to use that are basically the following is, do you have the internet and do you have something of value to trade, is in some ways a challenge to rule of law in many places? Now, I view that, quite frankly, as a positive in many areas, but there are also areas with pretty good rule of law where that could be a negative, right? You could look at that as pulling in both directions. I think that becomes a question of, how do you regulate these? What do we think of as systematic legitimacy. I think the third part that is a downside that people often under-discuss is that you are

inheriting a completely different set of problems by using these, which is, one, people really underestimate the public part of public blockchains, right? It becomes much easier to track and trace people using these systems, especially once you have one or two pieces of information about where the money started and from whom. And two, they are not totally free of regulation. I will remind everybody that all the fiat-backed stable coins have freeze and seize capability, which in many ways is even more powerful than traditional finance. So like if I am at one of the stable coins and I see somebody who has that stable coin in a wallet where I don't like them for some reason, maybe it's an OFAC violation, maybe I just don't like the color of their hat. I have the ability to freeze

their money in that wallet so they can't move it. And I have the ability to actually burn that money and take it back from them unilaterally. In that case, does, does, does, does, do stable coins solve the problem of, say, humanitarian aid to someone in an oppressive regime, if, as you say, the publicness of public blockchains remains underappreciated. These things are much more easily traceable, that the idea that this is private money is largely not true, that analytics firms have gotten extremely good with very little amount of data to say, I could say that this person owns this token. does that not undermine the claim that stable coins are a powerful tool in these sort of oppressive regimes?

I would say, one, it depends how good your OPSEC is. So the answer is maybe if you're not very careful with them, the answer will be yes to that. And then two, it does reveal sort of one of the underlying assumptions, which I think is something Tracy was driving towards earlier, which is that stable coins where the reserves are kept in, call it traditional institutions, are only as good as the rule of law in those places. So the question to you of how good are these for humanitarian aid in many ways simplifies to how are we feeling about the U.S. legal system? That's a fun thought just then. I want to get into the financial stability aspect of this, but before I do, you mentioned regulation. Who should regulate stable coins, given that, you know,

the issuers tend to be in different places around the world. Tether, where's Tether again, in like the Caymans or something? British Virgin Islands, I believe, is their main entity. So, and there is this sort of like supernational aspect to some of this. You're talking about dollar-like cross-border payments. So who ultimately gets to decide what a good stable coin is or how the rule should be enforced? All right. So let's zoom out a little bit and look at the traditional financial system and ask how that question

would be answered and then we'll zoom back in on stable coins. So in traditional finance, there's two. layers to that regulation. Layer number one is for issuers, it's usually the local jurisdiction, and in particular for things that are stable coins, usually the banking regulators in local jurisdictions that would look at these sorts of things, right? So like, if you're in the United States, you probably don't have much of a say of how Deutsche Bank is running their operations in Germany. That will be the boffin, right? So that's part one. Part two is then in your local area, if the issuer is from a foreign jurisdiction, are they permitted? Do you give them

equivalency for their regimes? Do you trust them? Right. So this is sort of the patchwork of our current regulation. And again, zooming out, stable coins work very much the same way. You would look at each one in the jurisdiction in which you're issued, right? You look at regimes that exist. You've got like Bermuda, you've got like Singapore, you've got Hong Kong, who have all booted things up. Do you trust them? Do you think they're good? And then the leverage that you would have in a place like the United States is do we think companies operating here should be able to accept or interact with those things? Say more on that.

So is the idea that cryptocurrency exchanges in the United States, there would be some rule that says you're not allowed to trade this or you're not allowed to call this a stable coin on your website. Like, I mean, this gets to the issue of we can't even really talk about regulating stable coins when both Circle and the Terraluna coin. We're both called stable coins on the internet, but we're radically different financial products. Yeah, no, that's exactly correct. And so if you look at something like McHenry Waters, right, which is one of the stable coin bills running around in front of the U.S. legislature right now, they are trying to define, in their words, what a stable coin actually is.

And many of these bills include either bans on stable coins. They're outside of that box. So that probably means both issuers and people using them for payments. it has stable coins, or if not bans, at least prohibitions on like calling them stable coins, representing them as safe, using them for payments. I tend to fall into the second camp, which is people should be able to experiment and try things. They just need to be honest about it and not lie about stability or get special treatment unless they've actually done the right things.

So so far in the real world, we've seen a stable coin that was affected by the collapse of a bank. So Circle and SVB, which is kind of funny. But I'm going to ask you the complete opposite question, which is if we have the collapse of a stable coin, what impact would that have on the traditional financial system? So the answer to that is we need to ask what we mean by, quote, unquote, the collapse of a stable coin, right? Because you're kind of looking at two scenarios, and this reveals where, you know, I said earlier, I think the discourse around these has been a little bit broken. This is why. So one would be the complete liquidation of a stable coin, but with sufficient reserves. So Circle, as of the time of us recording this, is somewhere in like the $34 billionish range.

But they have the super majority of that money in a reverse repo fund that's being managed by a professional asset manager. If they had to liquidate 100% of that thing, they could. And so the answer you're asking is, what does liquidating $34 billion of overnight reverse repo look like? And by the way, who's on the other side of that? Because that money has to go somewhere. It's not being vaporized, right? Like, this is the classic problem of plus one minus one. I don't think that's really a systemic problem unless we're in a period of such

deeply impacted liquidity that we can't move 34 yards of that stuff. But in that case, I would tell you the problem is unlikely to be just the stable coin. The other option is, did a stable coin hold reserves that themselves lost value? So, like, let's hypothetically say that the guys, Circle to use them again as the example, not an insult to Circle, decided instead of holding like overnight reverse repo, we're going to yolo into Tesla. And then that goes really badly, right? And so in that case, you're going to have a bunch of people coming to redeem. And what's going to happen is you'll have a ton of cell pressure on that asset as people bail out. And then you're going to

have the classic problem of at the end, it's worth zero. I think that largely becomes a problem if you're using it for payments or using it for savings or using it with an expectation of safety. So in that case, there's this sort of intrinsic linkage between the safety of the reserves and the ability to cause shocks that tether has been the main focus of these concerns. And it's been the main focus of these concerns because people don't know what tether is holding. Right. But like, take Paxos, for example, BUSD was shut down by the NYDFS. And at the time, it was 22.5 billion. And now today is under one billion.

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So let's say, you know, stable coin usage continues to grow in markets where people just want to have dollar exposure. So, you know, your obvious examples, Argentina, as your Venezuela's. And let's say people are using the popular public blockchains to exchange them, whether it's Ethereum, Solana, etc. There are people who are bullish on those chains, the tokens of those chains, because people are going to listen to the Austin Campbell. scenario where this is a lot of real dollars are being traded or exchanged over these chains. In your view, who does the value accrue do? Does there accrue much value to the token holders of these chains? I'm not certain that it does. Again, this sort of comes back to

crypto sort of reinventing things in finance and everybody talking past each other. If you're an extremely high throughput chain, but you charge extremely low fees. for that high throughput. It's not... Like a salana. It's not clear to me that value will accrue in a deep way to the salana holders. It's also not clear to me that it won't. But I would say that is an area where many things are simply accepted as given in the crypto space and I often have questions about them, which is not to say, right, skeptic in the sense of like it'll

never work, but I'm, I would say skeptical in the sense of I genuinely don't know. Like, I have a lot of questions. Could we ever have a situation where the use of stable coins grows so enormously that at some point the banks are like, actually, we're going to get in on this. Could they, in theory, like, flip a switch and come up with a stable coin competitor or immediately convert to like atomic settlement or instantaneous settlement or something like that? Or would that just be impossible either because of their technological systems or because of regulations around remittances and things like that? that. So I think the current biggest problem is the legal structure and balance sheet of banks,

right? Which is to say, stable coins are trying to be this thing that everybody can transfer between everybody and the reserves over time have trended towards being incredibly simplistic and call it mutually acceptable to everybody. That's not typically true of bank balance sheets, right? Problem number one, bank deposits are not fungible. You would feel very differently last year owning a deposit at, say, Bank of America versus Silicon Valley Bank. These will not be priced identically. And two, banks moving money around between them back to our earlier example, if they actually have to net settle, are like de-investing out of things and then reinvesting in other things. This is not really the same as moving a token around. So to answer that question,

I think there's not a reason banks can't do it in theory, but it would require a pretty radical transformation of bank balance sheets. Like, if all the banks set up, call it bankruptcy remote trusts that represent a stable coin where they're just doing T-bills, yeah, this will work fine. Those will all largely be fungible, but right now with bank balance sheets unlikely. So basically, if I, if JP Morgan and Bank of America, they're probably, their asset book probably looks somewhat similar, but they're not identical and therefore a transfer of value from a dollar of a JP Morgan deposit holder to a Bank of America means some reshuffling of the assets or the loans that they've made and they're not perfectly identical and then this creates

friction. And I would say importantly, the degree of difference between those things is going to be much larger than if we go look at like Fidelity's government money market fund versus Vanguard's government money market fund, which may not be perfectly identical, but will be way closer. There is this talk is like, just treat these as money market funds. If you're a stable coin issuer, your money market fund and all the obligations that a money market mutual fund has, that's your obligation. Does that work? like what are the differences? Why or why not? Yeah. So that's a very like U.S. peculiarity problem of it's really hard to pay for things with securities. So my question would be what do you mean by

money market fund? If you mean we can put it in like a bank or a trust wrapper and own assets that look substantially similar to a government money market fund, I would tell you that's basically what McHenry Waters does. So I think that works fine. If you want to say no, you like literally need to be issued as a security and handled in that way, then no, that creates a whole host of other problems that will break things for payments. So here we are in early 2024. We're talking about stable coins, which a lot of people thought might go away at some point or there would be some sort of volatility event that would lead everyone to question whether or not these are a legitimate store of value. And instead, they're still here. They've been pretty stable. What's next in the sort of stable coin,

either discourse or trajectory. So I think what we're starting to see right now is a growing realization among some of the regulators, mostly in Asia, who have looked most closely at crypto, that, wait a minute, using these things properly is a way to fix some of our lingering problems from 2008. Right. And then probably a increasing merging of, call it, crypto-native stablecoin thinking with traditional financial thinking into something that, one hopes will get you to best of. And those two problems, you referenced one earlier, are

atomic settlement, right, which is to say the ability to pay for something completely, perfectly, simultaneously on-chain using a smart contract so that I don't have counterparty credit risk in my trades. That is actually a pretty big upgrade to the current system if we can get that done. And then simultaneously having these very bankruptcy stable vehicles that can be held in self-custody, because what that does is eliminates a lot of the run risk of the large banks and the systemicness there, right? Like in 2008, if you owned USDC in its current form, which is basically a government money market fund under the hood, nobody's running that thing. Nobody's panicking.

They're all just sitting around looking marginally bored instead of having a giant run on bank deposits. And so I think a system that starts embracing those things and then being able to move them around easily across borders, both eliminates a huge amount of frictions and simultaneously reduces a lot of risk that's left from 08. Tracy mentioned the prospect of a JPM stable coin or something like that. I believe, like, has JPMorgan, like, have they built their own like sort of EVM-compatible chain? So JPM has a project called Onyx and a thing called JPM coin, and back to using it for financial purposes. now you have a 24-7 platform that can do atomic settlement largely of things like repo, and you can do them outside of regular market hours.

So, yeah, these are very real. So is there any reason why a platform like Onyx couldn't just be the chain that everyone around the world uses to transfer stable coins? Well, let me ask you a different question to reveal the problem with that question, which is if you were the CEO of Goldman Sachs, would you use a trading and settlement platform unilaterally controlled by J.P. Morgan. You get a little consortium together. Get like, get a six or seven banks to do it. Correct. So now, now you're leading down the path to like DTCC. So like let's, let's take this actually a few steps forward. If you get a large consortium of, I would suggest in the U.S., this will not work with

just banks. So let's say banks, asset managers and maybe insurance companies. That would probably work inside the U.S. But then you're going to have the problem of how do we get Europe to use it. How do we get Asia to use it? Okay. So now you're incorporating those entities. as well. So if you're telling me the, I'm going to say public here in a very loose way, blockchain of the future that everybody is using is a consortium of call it the 500 largest financial entities globally, that actually seems viable to me. Like that is decentralized in a slightly different way. I don't think anonymous public validators are necessarily the perfect answer. And by the way, even if you look at current technology, like if you're familiar with the stellar

blockchain, they have a fully doxed validator set and what I just described as a how they want it to work. So I do think in the future more institutional, if you will, chains could be the answer. I'm not like an eth-maxi on that, but I do think they need to be neutral enough that everybody trusts them. I have another question just on why others aren't doing this. We've been talking about the banks and you laid out a very clear argument why banks might be reticent to create their own stable coins, including that it would involve possibly rejigging the way their balance sheets are structured or creating some sort of shared balance sheet, which, okay, obviously banks don't want to do it. What about other financial intermediaries like a PayPal?

Is this something they would ostensibly be interested in? And could they create their own competitor? Well, I mean, I built the back end for PayPal's stable coins. Oh, here you go. The answer there is, oh yeah, they're very interested. I would say, as you look at the groups who are threatened by this, banks and payments companies are probably the most exposed to the technological change, and the majority of them are currently paralyzed by a combination of the innovator's dilemma and regulation. Whoever moves first there and gets this right is probably your leader in the next generation of how these things are going to work.

So to your point, you'd much rather cannibalize yourself than have other people cannibalize you, and there are very much people at like PayPal, Visa, and others who are thinking about this exact problem and building things right now. I would also say the other big thrust is the asset managers, because they're the ones probably with the biggest incentive to disintermediate the banks. I would say BlackRock's interest in blockchain is not a coincidence economically. Going back to the countries or the regimes in which someone might want to hold dollar-denominated assets, and let's bracket out the Afghanistan's of the world, which is an extreme scenario. But the places that just do not have stable domestic currency,

etc. They presumably don't want all of their domestic savers to like hold dollars, right? They presumably don't want people swapping their money into dollars as soon as they can. Do they have mechanisms of pushing back against this? Does an Argentinian government, like anyone can download an ETH wallet onto their phone, get ETH transferred onto it, et cetera. At some point does it scare them and do they have ways of pushing back? against their domestic savers automatically being able to hold dollars.

So, one, it 100% scares them. If you look at what's going on in Nigeria right now and them taking like executives from Binance hostage literally, like this is part of the driver. So I would say to you, there's two things you need to think about there. One is, do they have ways to stop them that involve coercive measures? Yes, but they have to be extreme. Like, again, to go back to having run a stable coin, the only country where we're we were totally certain nobody owned a stable coin was North Korea, right? And the answer is,

you have to take the internet away from your people, right, to be able to totally stop it. So there will always be some degree of leakage. Now, you can get more and more coercive and abuse human rights more and more to try to turn it down, but that's going to have other negative effects on your economy that go hand in hand with that. The other part, which I would call the positive case, is, you know, you could just run your currency better and cut it with the inflation, right? If you look at places like Switzerland and Singapore, they're not seeing massive outflows into dollars out of their local currency because people trust the local currency. In many ways, if you give people the option but not the requirement to substitute into dollars, it's going to, if people want their

local currencies to survive, have to raise the level of behavior so that you're at least close to the dollar or you are eventually going to get wiped out. Conversely, asking the same question from the other side, is there a reason that the U.S. should be concerned about this? I mean, we are kind of talking about a shadow dollar system. There is this ongoing discussion about the pros and cons of the dollar being the reserve asset to the U.S. economy. Is there a reason that people in America or policymakers in America should be concerned about this? Well, I would say from a policymaker's standpoint, my biggest concerns would be two, which is one, we restrict these things so much that something other than the dollar becomes the dominant currency on a blockchain. Because if this process

essentially continues to run of people getting access to other financial systems, but they prefer like the euro or the yen or something like that, that could have a major impact on dollar dominance. And whether you think the dollar should be the reserve currency or not, I would hope everybody is an agreement that a, call it unpredictable, sort of technology-driven catastrophic unwind of that system is probably bad for everybody. Two, there are a lot of national security implications to dollar stable coins working properly. Back to what I just said about public blockchains, if you have all of the KYC information and you know where the reserves are, you are in very good shape to interdict bad actors and retain some degree of control over a system.

If everything moves offshore in a way that you have no access to it, things are worse instead. So I think we have a real fork in the road here of being able to call it enforce dollar norms in a more effective, targeted, and quite frankly, transparent way, or having that breakdown even further. And that is based on getting U.S. dollar coins onshore structured properly and in a way where we can interact with them easily. Dollar norms is a really good phrase. I might use that at some point in the future. All right. I just have one last question. You know, you mentioned that sort of like circle due to its own, I don't know, maybe misunderstanding aspects of the traditional financial system

did not have particularly good risk management, and they had some money in SVB, and for a while, they had a pretty significant depag, but then SVB got bailed out, and it was fine. When you talk to crypto people, what are their sort of frequent misunderstandings? And again, I imagine we could go hours and hours with a series of things crypto people don't get about the financial system. But what are the consistent patterns that you see failure patterns in people in crypto not getting some aspect of tradfai? Yeah. So I would say there's a couple of big themes. One of the biggest is sort of extrapolating from personal finance, which is a big problem in finance in general. Like the way your local bank account works for $5,000 is not the way that like

Ford's balance sheet works. And that is a big problem. Because when you have people being like, Well, I own USDA. Won't the FDIC protect the deposits at SVB? It's like they have 3.3 billion of deposits and $250,000 of FDIC coverage. I don't like your odds. And very basic misunderstandings like that happen frequently. Number two is this thing that happens a lot with tech, where when you look at Silicon Valley companies, right, the tech people drive it, the product people drive it, they are the rock stars and the finance people are kind of in a broom closet in the back room and not even in the decision loop. So a lot of its information accessibility,

like there may have been people who knew this, but nobody was talking to them or taking them seriously. It's kind of the reverse of what a lot of banks do, where they don't spend enough time on the tech and let the investment bankers drive everything, right? So there's a cultural problem there in crypto. And then the third part is you have a lot of people who have these ideological stances on,

I want hard money, I want to reinvent the system, we shouldn't have leverage or credit at all, without understanding the implications of what they're saying. And I often, like, I've had this discussion with students in my class. If you guys want to go back to a system where there's no lending, everything is hard money, and it's just do you have it or not, we've had that before. It's basically like European feudalism. Like, why would you want to go back there?

So there's very core misunderstandings of how the monetary system works that I would say are a subset, but unfortunately still a significant subset of people in crypto. Austin Campbell. Thank you so much for coming on Oblast. That was great. Tracy, I really enjoyed that conversation. It was just, you know, zoom out. Someone, so it was next to talk to someone who genuinely seems grounded in multiple worlds. Yeah. Which is extremely rare, frankly, honestly, in any perspective, most people have a worldview that's extremely skewed to one. Well, it was very impressive when I asked about PayPal and he's like, I built the back.

Okay. You know what I remembered while we were, you asked that question about J.P. Morgan and Eath. And I remembered in 2013 finding a patent application for J.P. Morgan to do a, at the time, it was described by me as a Bitcoin-like online payment system. But it was basically like on-chain payments. And it's so funny reading this. I just dug it up. And I was reading it. And there's a line like traditional finance companies have had to contend with new types of virtual currencies, which some people view as viable alternative payment systems that could one day challenge the biggest banks and credit cards. That was 2013. And it's funny how much has changed, but also how the conversation is still very similar. Totally. You know, so like I think Austin made

a very good case that there are some very deep institutional headwinds, so to speak, with banks going fully crypto, either launching their own stable coins or launching their own EVM compatible chains, et cetera. That being said, you know, it's hard for me to imagine the banks just sort of sitting idly by, particularly in the scenario in which, and Austin is sort of, seemed to be sort of agnostic on this question, if it turns out that a lot of value is accruing to the holders of ETH tokens or the holders of Solana tokens or the holders of Tron tokens. Or the holders of Tron or whatever chain people are exchanging stable coins on, I doubt they're going to like sort of sit idly by and just sort of let those, let they, and it's like, oh, we're just, we're just

the custodian that holds the dollars while everyone else makes the money on the payments. Well, on the other hand, I mean, if the price of developing or if the cost of developing your own stable coin is that you have to, as Austin said, radically reimagine your balance sheet and also cooperate in some ways with other banks, which banks don't tend to be very good at cooperating with each other. Maybe the business play is just become the custodian for those assets and make money that way. Yeah, it could be. It's also, we didn't really bring it up in this conversation, but like, especially in the last couple of years, I mean, the stable coin business is like the best business coin, the best business in the entire world because you're getting all this

yield on your T-Bill holdings, et cetera. And for the most part, none of them, I think there are some, like, theoretically yielding stable coins. But for the most part, they're just keeping all that yield and the endowner, you know, so it's like, do not use these as a money market mutual fund, because those are giving up the yield. You're giving up that yield. Yeah, but still a fascinating conversation. And we'll have to keep track of stable coins again. Yeah, because it's been a while, hasn't it? All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wisenthal. You can follow me at the stalwart. Follow Austin Campbell. He's at Campbell J. Austin. Follow our

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