On The Brink with Castle Island - Peter Johnson (BH Digital) on the Relentless rise of Stablecoins (EP.451)

Episode Date: September 13, 2023

Peter Johnson, co-head of Venture at Brevan Howard Digital, returns to the show to talk about his latest theses on stablecoins. In this episode:  The origins of Peter's interest in stables  We review Peter's prior stablecoin predictions  USDC versus USDT market share trends  Peter's main takeaways from the Relentless Rise paper Stablecoin usage on BSC and TRON  Peter's views on PYUSD The emergence of interest-bearing stablecoins  How synthetic USD stablecoins might work Stablecoin comparisons to the Eurodollar market We make some predictions  Further reading:  BH Digital, The Relentless Rise of Stablecoins  

Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guests and host may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Hello and welcome back to On the Brink.

I'm Nick Carter. This is the second episode in the Stablecoins 2.0 mini-series, a series where we explore the changing trends in stable coins. For the first one, we heard from Martin Carricka, the founder of an interest-bearing stable coin. Today we hear from Peter Johnson, the co-head adventure at Brevin Howard Digital, and one of the loudest most strident voices on stable coins over the years, Peter also invests behind his convictions. So he's one of my favorite commentators on the stablecoin space, period. Peter and his team came out with a great white paper recently entitled The Relentless Rise of Stable Coins, which will link in the show notes here. In this episode,

we talk about Peter's prior predictions on the stable coin space, how those fared. His main learnings from the relentless rise white paper. Stapagicorn trends in the U.S. and why he's excited about PYUSD, the emergence of new stable coin models, in particular synthetic USD stable coins, comparisons to the your dollar market. And then I also ask Peter for his future predictions on the stable coin space. I want to thank Peter for coming on. He's one of my favorite allocators in the venture space and one of the most clear-point voices on stable coins. Let's dive right in. All right, so I'm sitting here at Peter Johnson, the co-head of venture at Brevin Howard Digital.

Do I get that right? That's right. And one of the main stablecoin megables historically, is that also fair to say? That is very fair to say, yes. I have spent an immense amount of time on stable coins. I think you have spent even more time on stable coins, though. So it's great to be talking to you about it. I don't know. I think you're ahead of me right now. You came out with this great report. We're going to dig into that. I think you're probably earlier on the record being a stable coin

bold than I was. Maybe earlier, but I think you've been louder. I was trying to look back at your old stable coin predictions. I feel like every year you do predictions and every year at the learning about stable coins in there. There is. Not every year. Started in 2019, which is, when I really started doing predictions. All right. So should we dig those up then? Let's do that. We've got your, the assent of Bitcoin and Stable Coins, Jump Capital's mid-20-20 Crypto Theses. And what did you say about stablecoins? I think Stable Coins that year. So first year, 2019, I said there was going to be significant stablecoin growth. And it went from $3 billion to $6 billion that year. And then 2022, I think I said there was going to be exponential growth. And it went from

six to $30 billion that year. And then 2021, I said staple coin market cap would go over $100 billion. And it got to $140 billion. And then 2022, I said it was going to go to $500 billion. And that one was totally wrong. Yeah, that didn't happen. I should have actually dug these up more carefully, but I would say directionally, very correct over the years. You called it a killer app in that 2020 article. which I think now people are acknowledging stablecoins are the killer app. So that's great. Anyway, the point is you've been early and right on this, for sure, with the exception in 2022, but that was just a crazy year.

We're going to just forget about that one entirely. I think that's good for the industry. So what was it about stablecoins that got you so fired up in the first place? Was there a moment that you specifically can recollect when it comes to stable coins? Or was it a gradual awakening? more of a gradual awakening. I do recall. So I joined Jump in 2013, first employee at Jump Capital, which is Jump Trading's venture capital arm, and started Jump's crypto venture investing strategy in 2014, 2015. And early on, like I had a lot of conversations with my partners at Jump about

Bitcoin and the value proposition there. And I was able to, I think pretty convincingly, convinced them that the value proposition of open network permissionless value transfer, like everyone pretty much got that. The part that was more difficult to convince people of was that Bitcoin as a unit of value was going to be accepted, that people were going to transact in Bitcoin. And so from those conversations, it became pretty clear to me that crypto as a payment rail would be better if it was transacted or denominated in dollars, which I think is a pretty obvious conclusion. So then when 2017, 2018 came along, Tether really exploded, went from close to nothing

to $3 billion. Outstanding, that's when it became pretty clear to me, like, this is a killer use case or a killer use case for crypto. This is really working. That's when I really started to spend a lot of time on it. And it was probably around that time that I mean, you started interacting and talking about it. What is your best explanation for why it's better to transact in dollars than a very unit of account. I have my own reasons, but what would you say yours are? It's like a completely obvious question, but also, I think it's kind of obvious. It's like, why would you want to transact with something that you don't know what the price of something is going to be, what the value is going to be from day to day? Like, that's just not the way that commerce works. I don't think

it will work that way. So the case that's something like Bitcoin will be used for buying coffee with Bitcoin was kind of the old thing that people would say. I think he's just kind of a fairy tale because nobody wants to transact in a unit that's moving around all the time. The devil's advocate there is, well, people transact in unstable sovereign currencies all the time. Virtually any other non-developed world sovereign currency is variable. But I guess in those cases, I think the really precise point I would make is sovereign currencies are advantaged from an accounting and tax respective. So you're not on the hook. You don't have to deal this complicated capital gains accounting when you accept some fiat currency and then you spend it on something later. With Bitcoin,

you do. So I think that specifically is something that disadvantages native crypto assets as a transactional medium. Yeah, I would completely agree with that. I also think that currencies that are highly volatile or have high inflation, people and businesses in those jurisdictions would rather transactant dollars. They would prefer to not have something that is highly volatile if they could. Totally. What is the main value prop of Stables over legacy transactional rails for you? Is it the notion that everybody is united on a kind of a single flat network as opposed to this kind of highly intermediate network, or is it the programmability, the fact that it's open read, open right access? What's the killer thing as you compare it to like the way that actual dollars move

around? Yeah, I think that there's a couple things. There's access and efficiency. And to me, the access one is by far the dominant value proposition in that stable coins give effectively anybody in the world with an internet connection access to US dollars. They can save, transact, spend, in US dollars. And that is something that for vast parts of the world, they cannot currently easily do. And that is the killer use case. And that is, if you looked at where stable coins started, it was access. It was access to traders and exchanges that couldn't get US bank accounts.

And stable coins allowed them to transact in dollars, have dollars as a base pair, etc. And I think that that has brought into uses outside of trading. But the core value proposition has largely been access. I think over time we're seeing more usage because it also can be more efficient than the corresponding banking system, for example. But I think that at least to date, and in the near term, the really groundbreaking thing that Sable coins do is that they give effectively anybody with an internet connection access to dollars.

And I don't think people appreciate how important this is because the vast majority of people listening to this are basically Americans. And it's such like a cliched point, but you really do have to externalize yourself from the American economic context to understand this. A U.S. dollar bank account in an emerging market is something that only the elites have, just factually. And nobody else has it. And now that's completely, completely changed. 100%. You talk to people in the U.S. about stable coins.

And I would say most people, the value proposition, it doesn't really resonate with them. Because they have access to dollars, the US payment system works great. Why would they use stable coins? And I would agree with that. Why would most people in the US use stable coins? It doesn't add significant value to them. But you go to Mexico City or Bogota or Bonaceroes, and you talk to people there about stable coins.

A lot of them are already using stable coins. Huge numbers of them are using stable coins. And the value process is extraordinarily clear. Like, you don't need to sell them on this. You just say, hey, there's an app that you can get dollars. Are you interested in that? And yes, I'm very interested in that. And there's another point which is in some of these places, dollar accounts have been things offered by banks.

You couldn't have had a dollar denominated account. Historically in Argentina, I think not today. Obviously, that ended in chaos back in 2001. In Turkey, I think you can still have one. But it's not a credible dollar account. it's an access to dollars that's intermediate by a local banking system, which is often Ponzi-like, effectively, or on the verge of collapse, right? So the difference is you have dollars in a digital wallet, and your relationship is ultimately indirectly with the issuer, USDC or Tether,

and it's not with a local bank, which is beholden to the local political trends. So I think that's a really key thing is yes, maybe, in some cases you could have a dollar account, at a bank, but those dollars are not yours and your access to them can be withdrawn. 100%. Like the value proposition, if you don't have access to dollars, it's pretty obvious. There's also a very strong value proposition for people around the world that have access to US dollar accounts, but do you trust the financial institution that dollar account is at?

And how does that dollar account interact with other dollar accounts in different countries? I think one of the things that we're going to talk about is like, are there like tangible examples of people using stable coins that really stuck out to me, and there's a lot. But one that I thought was really interesting is there's a guy that I used to work with who came from Eastern Europe, and he would go back and forth between Eastern Europe and the U.S. He had dollar accounts in his home country and in the U.S. But moving dollars from the foreign bank account to the U.S. bank account was highly costly. And the least expensive, fastest way for him to do that was to go into the bank in one country,

take out physical cash, get on a plane next time he's going across the ocean, go to the bank account in the other country, and defaise that cash. That was the best way he would do that, and he would do that on a regular basis. And once you start talking to people about these issues, that is actually a fairly common story I hear of people taking out physical cash, getting on a plane, and bringing it to a bank in another country, because that's the most efficient way to do it, which is absolutely crazy. Yeah, I mean, Miami is a big hub for this in Latam, folks. And, Latin America literally bring lots of cash in Miami, go to Bank of America. Actually, specifically Bank of America is one of the ones that was favored by foreigners deposit

the cash. And then you of your offshore, so to speak, bank with dollars in it. So I want to talk about the defy mullet, this idea of fintech on the front end and stable coins or crypto on the back end. So I think we're both very excited about this theme from an investment perspective. Tell us a little bit about that, about the notion of these money, either remittance apps or eMoney or mobile money apps that look like traditional kind of Web 2 FinTech experiences but are powered by Stables. How widespread is this? I think I did a tweet

about it recently. People are asking me, well, does anyone actually use this? So how advanced are we? How developed is this kind of cohort? Yeah, we're definitely starting to see these takeoff. And it is. A lot of them look like traditional fintech apps, but they're using stable coin like infrastructure on the back end. And why do they do that for a variety of reasons? One is that you can offer dollar accounts to a lot more people with that. It's faster and cheaper, oftentimes to send remittances for the reasons that we discussed, going through the corresponding banking system.

It's slow, is very expensive. Those types of things. It gives people the option to self-custody if they want to. A lot of these apps will give you the option that you can be custodial, it can be not custodial. And it makes it very easy to move from your local currency to stable coins and transact in whatever currency works best for you. And that's just a huge value proposition to a lot of people and a lot of places. And we're seeing more of those types of applications. And that's an area I'm really excited about is that application layer.

We'll talk about the data that we're seeing, but we're clearly seeing massive use of stable coins. And a lot of that currently is going through crypto exchanges. It's just going through crypto wallets. It's user experiences that are not built for purpose. And as we get more applications that are built to broaden the user base that is comfortable using this, I think we're just going to see more and more usage. Yeah, I think what people don't realize about Binance is they were that first global bank for people that wanted to hold these basically offshore crypto dollars.

but they weren't built for that specifically at all. I mean, onboarding with an exchange is this complex, complicated, scary thing. So I think people have now realized this and begun to build these specific dollar app style experiences and without doing it through the exchange front end. So very exciting to me. Yeah, and I've actually been surprised. And I think you have been too about the speed that this has occurred. I thought a lot of these would get built years ago, but it's taken longer for whatever reason

for these applications that are more specific to non-speculative use cases to really emerge. But I think we're starting to see a lot of them now, which is really exciting. Yeah, we've invested in these for years, and now it seems to be an inflection point. I don't know why now. I mean, currencies have been unstable forever. The dollar has been something that people have wanted in emerging markets forever, stable coins have worked for years and years. But I'm encouraged by it. It's my favorite sector at the moment. Me too. We've seen a shift in the founders that are building these types of applications

and that I think the first generation of founders building these were often more maybe revolutionaries would be one way to say it, is that they wanted to kind of fight the governments in the countries that they were building them in. And I think the next generation is a little bit more pragmatic, and they also often time come from fintech backgrounds. Like they've built successful consumer fintech products before, and they know how to run that same playbook, but run it on better rails. And I think that that is the way to have success for it. And I think one precondition here is the first and last mile has to be built out, which is those connections to the local fiat. So if you want to do an end-to-end remittance, you need to be able to go from local fiat to

crypto to local fiat. So obviously it's trivial to do the intermediate payment, but then it's the first hop and the last hop that are the difficult hops. And I'm curious for your view on this, because my understanding is that where centralized exchanges don't exist, of course, the peer-to-peer exchanges fill that gap. And that's definitely what we see is we see a lot of these kind of stable coin-based remitters will utilize the P2P markets. in countries where centralized exchanges are not permitted for whatever reason. But also the P2P exchanges have been challenged of late. So I think Paxville, I'm not sure of their status, but I think they're kind of troubled local bitcoins. I think indicated they're going to shut down.

Binance P2P has been receiving tons of scrutiny. I think finance P2P is the number one. So what do you make of this? The necessity of these P2P markets in places where the centralized Exchanges aren't prevalent, but the fact that they're also kind of under the cash right now. Yeah, so both the centralized exchanges and the peer-peer networks are key infrastructure on why you can build these applications now. Like, you couldn't do this several years ago because there wasn't stable coin liquidity in basically every major country in the world. And now there is.

So, like, you can go in and out of stable coins in almost any exchange in the world, except for places where regulation doesn't allow it, and then you have the P2P networks. which are flourishing in a lot of these places, but are under pressure, oftentimes from regulators. So, yeah, I think that that is a, like a threat to some of these models is that, you know, if you've choked out the centralized exchanges and then if governments are able to choke out the peer-to-fure networks, that makes it really hard to operate in some of these jurisdictions. Yeah, we've seen governments being pressured, though, actually, by populations that have already embrace stablecoins in these kinds of networks pushing back at proposed bands. So I think it is a bit

of a give and take, which is pretty encouraging. So I want to talk about your relentless rise of stablecoins white paper that you published. I was very impressed by it. Thank you for doing that. This was a lot of work and presented some novel data that I've never seen before, especially on a cross-stable coin cross-chain basis. So I guess to start, what was it that prompted you to write this now. Thank you for saying that. That means a lot coming from you. What prompted me to do the paper is that I was continually hearing two narratives from both people inside and outside of the industry. These are two narratives that I've heard for a long time, especially the first one. And the first narrative is that crypto was all about speculation, is that there's no real world

reviews cases. We're still searching for, you know, killer application for crypto. It's all just gambling. And the second narrative was that stable coins, and this is a more recent narrative, but that stable coins were not getting traction or that stable coin usage was declining. And I think that that narrative was from people just looking at incomplete data. So I thought both of these narratives were likely untrue. And I thought that looking at the data would help uncover, like, are these true or not? And overall, like you, try to be very data driven in the way that I look at trends and certainly thesis driven, but then you look at the data to validate if your thesis is right or not. So this started about a year ago. I put out a short article, which was called Where's the VIF?

And that was basically using data to highlight non-speculative use cases of crypto, stablecoins and how brands were using digital goods and a couple of other things. And as part of that, I got the data on the percentage of stable coins, which were held on exchanges, which was pretty easy to get for Ethereum, was harder to get for Tron. And that got me on the path of wanting to look at all sorts of different data and holders of data, what were the entities that were holding distributions by coins and my blockchains and all these things that I ended up looking into because I thought that would help. If you looked at all of these things, there's going to be some truth that hopefully

comes out of it and what is actually going on. And with blockchain data, it's often not definitive, but it's pretty indicative if you get enough data. So I said, okay, let's find a way to get all this data and look at these trends. And what I found, which was interesting, is that there really wasn't this data available, especially for Tron, is that most people that were looking at stablecoin data and quoting stablecoin data, they were looking at ETH, mainchain data, if they were a little bit better and what they were doing, they were looking at DL2s and some of the other EVM chains,

but they weren't looking at Tron data, which is just a massive gap. Tron is 40% of weekly active addresses, but half of volumes are on the Tron blockchain. So if you're not looking at Tron, like you're just missing a huge part of this story. So that was a big part of the work was figuring out how to get the Tron data. Ended up working with Coin Metrics and Allium for that. Both great companies, in particular, Ethan at Allium, just stepped up, really helped get that data. for us and index and run the queries. We ran all the queries ourselves at Brevin,

but the data providers were really helpful in getting this data, which I was surprised that it seemed like maybe no one else had asked for this data before, which is really shocking. So we got that data, ran the queries ourselves, and got to the data for the report. We would have also liked to get Solana data. We did not get Slana data into the report.

Slana data, much like Tron Data, except even, I would see, to more extent, it's just a lot of data. It's hard to store. It's hard to index. It's costly to work with data providers don't really have it easily available. We could have gotten there, but it was, after working on this for several months, we put our deadline on ourselves and we can think of the Salina data in there, which I'm okay with Solana.

Staplecoins on Solana, it's about 2% of supply and less than 2% of supply, 2% to 3% of transaction volume, so it's not a huge gap. But yeah, so that is kind of what led to doing the report and how we got it done. I mean, having obviously been inside of coin metrics for all these years, I can attest to how difficult it is to work with some of these larger blockchains. But you can't ignore them. And I think Tron has been the elephant in the room for stable coins. I mean, it's all about Tyler on Tron. That's just a fact. Huge amounts of Tether on Tron. Yeah.

And it's just very different behavior patterns too. Like USDC holders, users are very different from Tron users and holders. You look at the time zone analysis. You see it's just a very different. completely different geographies. You look at the average transaction size. Different sizes, different usage modes. Stablecoin transactions tend to be smaller. ETH, TRON or USDA, on ETH, transactions tend to be larger. So people treat it as an aggregate, homogenous mass. It's just not, there's all these different sub-nitias within the stable coin space. So I thought you did a really good job of picking those out and making that more legible. I think one of the best charts is actually the weekly active addresses and weekly active transactions for stablecoins. That's just

continual linear growth. And you'll really that against the stable coin market cap. Stablecoin market cap's actually trending down, flat to down. I'd say down. It is about one, depends on what you count. Peaked it, let's say, 185 bill, around 120 bill today. still been declining, actually. But despite that, you see usage in other ways, transaction count with the active addresses is rising. So it paints a very different story from the more common data people have access to its stables. What do you attribute that to the discrepancy there? Yeah, so I think that part of, like you said, part of the discreferency is people looking at incomplete data. Like if you're just looking at Ethereum blockchain data, you're going to see a very

different story than if you include Trondida, if you include VSD data, et cetera. And I think that what we've seen is like the weekly active addresses, number of transactions, that just it's straight up, like with some bumps, but it just relentlessly grows. And volumes have been very resilient. So volumes since the beginning of 2022 on exchanges, centralized exchanges and decentralized exchanges are both down over 60% while stable coin on-chain volume. are, let's call it roughly flat, and then active addresses and number of transactions are meaningfully out.

So I don't know how you can look at that data and conclude anything other than stable coins are being used for a lot of things other than just trading. Comparing those two datasets, I think leads to that clear conclusion. Yeah, if I could tattoo those two charts into the eyelids of every pundit that weighs in on crypto, it would be those two. crypto exchange volume, the speculative proxy for speculation, versus stablecoin usage. And they've decoupled, as you say. This means that there's something real. We don't know what every transaction is for. I mean, I would love to know. We don't know. I don't think anybody has been

able to tell me that, but we know that there is some desire to use stablecoins and to pay for it with fees on public blockchains for transactional purposes that is not perfectly correlated to the mere exchange volumes, that much we know. 100%. Yeah, I think it's, I don't know how you argue with that. So actually, this is the question I get all the time, which is like, who are these people? Who are these TetherTron users in Asia, Africa, Eastern Europe, Latin America? What are they doing?

Why do they like stable coins? I've never been able to give clear answers so that we just have. of anecdotes, anac data, so to speak. These got stories of importers importing Chinese goods to Nigeria, settling in stables. There's stories, we know that there's Fintech apps, people using all these emerging markets, holding dollars through that. What would you say to that? Because I get this question all the time.

Yes. And I would love to be able to say more definitively, like what exactly it is. Unfortunately, based on the stable coin, based on the on chain data, you can get these trends, but you can't say exactly like, what is this transaction for? What I can say is talking with a lot of different people in these different countries. There are a bunch of different use cases, but they're definitely real. And there's definitely strong usage of especially each other entron. That's the default in a lot of these countries. And they're using it for a variety of purposes. Talk to people that are in Latin America and they want to buy online advertising into the

US and they need dollars to pay for that. So how do they do that? In some cases, they can do that with stable coins. There's people that are doing work for U.S. companies in different countries and they want to get paid, and stable coins are a great way to do that. There's people in, in Argentina, and they just want to get out of the local currency oftentimes. So the use cases are various. There are just people that already have dollar accounts in multiple countries, but moving the dollars between those accounts is slow and it's costly. And then they see. what they can do with stable coins, and they're just like, this is a more efficient way to do something that I can do, but is not a good way to do it. It varies by country. It varies by the issues in

that country, like what those people are looking to do. But it definitely is, it's very significant. It's really interesting to go to, I was recently in Mexico City in Bogota, and you go to some of these meetups and you just talk to people about these things. And it is almost shocking. When you talk to people like, hey, like, do you know, stable coins already use stable coins? And some of it might be biased by the meetup you're at, even if they're not crypto meetups, they're tech meetups. So these are tech forward people. But generally, people are like very, like they're oftentimes users of stable coins.

Even if they're very skeptical of crypto, a lot of people in these countries, a lot of people have gotten burned by crypto. And they're very skeptical of crypto assets. But access to dollars resonates with them very strongly. So in 2020, I had this thesis about crypto, I looked at prior dollarization events, and it had occurred to me that the scarcity of dollars was one reason some of those dollarization had failed or been incomplete. And I thought that because now stablecorns were distributing dollars directly without intermediation

through the banks, which was one means through which dollarization had been controlled, was the banks themselves. I thought it would be more rapid and more prone to occurring dollarization events, particularly bottom-up style dollarization, the likes of which we saw in Ecuador in the early 2000s. And I would say this hasn't happened yet. I mean, I don't know if I can consider a thesis void if it's only, I've only had it for three years. What do you make of this? Do you think that, do you think stable coins make dollarization more likely to happen and less frictional when it does occur? How do you see the existence of stablecoins as interacting with the

monetary privilege of some of these weaker from a monetary perspective, emerging market nations. Yeah, I also had that in one of my predictions, I think probably a few years ago, and it hasn't happened as quickly as I might have expected. There is more use of dollars in a lot of countries because of stable coins, and I think it's happening in a ground-up fashion, but we haven't seen like mass dollarization. Like I thought there was the potential to maybe occur. And yeah, I think that there are political forces that obviously deter that from how to that. happening on a mass scale, while you can have people increasing to use dollars on a day-to-day basis without seeing widespread crypto dollarization, I think that's probably where we're at right now.

Yeah, I've been interested to see what happens in Argentina. Potentially, Millet's platform is one of dollarization, and a lot of Argentines are able to access dollars through the stable coin vehicle today. I mean, we know that for a fact, even if the dollar access is. a gray or black market activity. So I don't know if that's evidence, maybe that you could point to show that they want dollars, if it makes dollarization easier.

That's something I'm tracking. We'll see what happens there. But it does occur to me that dollarization is often, the vast majority of the time, in fact, done from the top down, and it's a political decision that's made. But there are examples like the Ecuador one, which is considered more bottom up. So in the white paper, we talked about some of these things.

You compared stablecoins to fiat settlement networks. So obviously there's subjectivity in the data, like the adjusted transaction volume figures that exist to determine sort of the fiat value of transactions on a blockchain that you can never know the ground truth there. There's always subjectivity. But sablecoins have had some key milestones relative to their fiat counterparts. So what did you find there? Yeah, and I think that these are some of the stats that really catch people's eyes.

So I compared stable coins to PayPal, Visa, ACH, and Fedwire, which are obviously large differences in the purpose and operations of those payment and settlement systems, but I think it gives a really good sense of scale. And what you see in transaction volume, stable coins last year actually did close to 10 times the volume of PayPal. Stapagiccoins settled over $11 trillion on chain. PayPal was about $1.1.5.5.5.5.5 was about $1.5. $1.4 trillion that went through the PayPal network. Visa did about $11.6 trillion in volume. So stablecoins and Visa almost on par right now. And then stable coins compared to ACH, stablecoins was, I think it's like 13 or 14 percent of the volumes. And then like 1% of Fedwire. So that is like transaction volumes. If you look at the number of transactions,

networks like PayPal, Visa are doing significantly more 10 to 200 times more. Number of transactions. Stable coins are doing it. let's say five times the transactions of something like Bedwire, which again goes back to like these are different purposes for these different networks. Some of them are low value, high throughput type networks. Some of them are high value, low number of transactions. So one, I think that people seeing that on-chain stable-point volumes, this isn't including any on-exchange volumes. It's just actual on-chain settlement is 10 times PayPal and the same as Visa. That catches people's the That's really interesting.

And trying to think of like the analogy of which of these it's like. It's somewhat hard because in the traditional system, these payment rails kind of play in their own box a little bit more like PayPal and Visa are more low dollar payment systems, ACH and especially FedWire are very high dollar, low throughput systems. And stable coins can be all of these things. Like you can do low dollar payments, you can do micro payments. It's great for micro-fayments, but it's also great for multi-hundred million dollar payments. You can kind of do everything with them.

I think that if you actually look at the data, like how are stable coins being used, the majority of transactions are small dollar transactions. So part of the analysis that we did, we looked at week for addresses that are active in any given week, how much are they transacting? And 75% of active addresses are sending less than $1,000 per week. So it's a lot of smaller, more retail-type transactions that stable coins are being used for. And then the averages are pulled weight up because you have these outlier big transactions. So if I had to compare what are stable coins most like if you're comparing it to the traditional

payment rails, I would point to PayPal because the majority of transactions are kind of small dollar type transactions. And they're also similar in the structure in that they're both kind of over the top payment networks. You hold actual cash in a bank account. You keep a over-the-top ledger of people's balances. You settle out when people want to settle. Difference, obviously, being with PayPal, PayPal is keeping that ledger for stablecoins. You're keeping that on a decentralized consensus ledger.

And because of that, stablecoins are open network where PayPal is closed network. Yeah, the PayPal analogy is an excellent one. I mean, many have said that PayPal itself is effectively a stable coin. It's just that its database is not legible to the general. general public. Exactly. Yeah. I wrote a piece some years ago called

Transaction Counts Inferior measure, and I plotted aggregate yearly volumes flowing through these networks versus transaction count. And there's basically an inverse relationship. You have to plot out a log scale because the numbers are so whacked out. But you got the five wires on one end, on the bottom right, relatively few, very large transactions on average. And those tend to be kind of push networks

and kind of like more final in their settlement characteristics. Then on the other end, the top left corner of the graph, you have high transaction count, low average transaction value, pull style or batched style payments that are less real time. And yeah, I could never really decide where stable coins fit in that, but you can certainly plot them on the chart. I have maybe a bit of a different opinion. I thought they were more analogized to these like larger like wire transfer of style payments because I know in theory the settlement isn't actually final, but in practice, it's generally final.

The true ledger is actually maintained by the Stable Hoan issuer, and the blockchain is really indicative, and those transactions can be rolled back in some cases. But to me, it feels like on a real-time gross settlement, final network. But yeah, of course, the issuer can unwind individual payments if necessary. I like that framework they had, which was from, I think, four to five years ago. You're comparing Bitcoin to them. It's a very interesting framework. Yeah, I need to refresh it. So let's see here. We have a lot to get through still. I want to talk about Eurodollar. So stable coins basically are Eurodollar for the most part, or tokenized Euro dollars. But they also resemble the emergence of Euro dollars from an analogy

perspective. You look at the 60s and 70s when Eurodollar emerged. There's a good odd lots episode on euro dollars recently, which really activated my almonds on this piece. So I see my own analogies, but curious if you see them, how does the rise of stable coins resemble the rise of euro dollars, if at all? Yeah, the podcast that odd lots with Josh Younger, I think it's the best podcast on stable coins that doesn't mention stable coins. It's incredible. And Tracy Alloway is talking about euro dollars as free-range dollars. And it's basically describing stable coins. So you should get Josh Younger on the podcast to make it more explicit. See what I can do.

I think that'd be really interesting. But yeah, the comparison to Eurodollar, I think, is at a high level, like a very obvious one, like Euro dollars or US dollars outside the US banking system. That is exactly what stable coins are. Most of them. Do you consider USDC in that cohort as well? I think you could argue that it is because once the stable coin is issued, then it can travel around the world.

And it's, I think, kind of at that point, outside the US banking system. But I could see the argument against that as well. But like you said, like the growth are the drivers of growth. Again, it's very similar. It's like, why do people want U.S. dollars that are outside the U.S. banking system? Like, one is just access. Like, if you don't have access to a U.S. bank account, but you want dollars, and there's a way to do that, like, that's driving this.

And then there's also just benefits that you can have from having dollars outside the U.S. banking system. It can be more convenient, you know, offer more privacy. It can be more interoperable with your other accounts. Higher interest rates are what drove a lot of the Eurodollar. demand, and I think we could start to see that in stable coins. We're not there yet, but that's something that you've talked about driving a lot of demand in the future, and I think we certainly could see that. So the analogies on the drivers, I think, are very clear. And I think that

it also offers a good benchmark for stablecoins, because euro dollars, which is not very well-attracted. It used to be very well-tracked. But at BIS and Milton Freeman wrote about it, recent years, it's not well-attract. And I think that's because the use of derivatives makes it actually a little bit harder to define exactly what is Eurodollar. But if they take a conservative estimate, I would say there's $10 trillion of U.S. dollar deposits outside the U.S. banking system. So I'd say that that's a benchmark for where we could be headed for stable coins. And that's 100x where we are today. I think that that is very achievable on a long enough time scale. Yeah, I looked at some of those old BIS reports. They're actually quite good stuff. I hate to praise

is the BIS, but they actually were pretty good on Euro-Dollars back in the day. And I think inflation-adjusted stable coins are in the equivalent of 1967 in terms of the growth of the Euro-Dolars market. So obviously, your dollars inflected when you had the petrodollary emerged, the oil crisis, Nixon shock. That's when a real reason emerged, I think, to, you know, offshore the deposits from the US dollar system. And we haven't had that equivalent inflection moment in crypto. Even though you could say 21, 22, there was an inflection. And actually, I do think higher yields drove the growth of stable coins at that point, like crypto-native yields. It's just that they didn't prove to be very durable. And now we have a different kind of yield emerging on stables,

mostly offshore, or maybe exclusively offshore due to securities laws, which is basically tokenizing treasuries, wrapping that in a stablecoin format, which we're seeing, and also crypto-native yields, deriving from the basis trade and the fact that ether itself has a native yield to it, which it didn't before. So I've been on record saying I'm very excited about this. I think this is these kinds of protocols, stable coins that externalize the yield, pass it along, at least a significant fraction to end holders and users. I think that'll become a very meaningful portion in the market cap. I think you're maybe a little more conservative on that. But yeah, talk me through these new models for yield, which ones you like, the tokenized treasury versus the crypto-native? And where you see

that going, is that just going to be an XUS thing, eventually be in the U.S.? Yeah, I agree that. I think that these are really interesting models. And if you think about, like, where are the opportunities for disruption on the Stablecoin issuance side, I think they are interest-faring stablecoins and then new entrants that are very strong brands. I think that that's where you would see traction come in. On the interest-faring. bearing side, I think that both tokenized treasuries, the pay interest are interesting. And unlike you, I also think that the synthetic dollars using liquid-staking tokens and short-per positions are a really promising model. The issue, as you mentioned, is one of the things that I think will slow

off in somewhat is that they're more complicated from a regulatory perspective. You need to stay away from the ask. This would be largely probably considered a security in the U.S. In Europe, under Mika, Mika doesn't allow interest-bearing stable coins. So it puts challenges in those markets. Counterpoint to that is that U.S. and Europe, probably not your target market for stable coins, or at least I don't think they are. So there's significant opportunity there. And I do really like the synthetic dollar idea is something that I really liked for a long time. And I especially like it if you can do it in a fully decentralized way. Like, I think that is the way to create a fully decentralized table coin, which is something that I've wanted to happen for a long time. And for various

reasons, it has not. We're not there yet. We're not there yet. It's open and trust. on the decentralized exchanges is just not. I think it's 1.25th of maybe the OI on centralized exchanges. Exactly. That's the issue. Is that ideally this is fully on chain. It's all smart contracts. You're not taking exchange interest. But the open interest is way too small. It doesn't work at this point. You cannot do this at any scale in a fully decentralized way. The other constraint would be there's also a negative feedback loop in terms of the value flowing into these kinds of stable coins and the yield available from Ethereum itself. I mean, I think it's a big number, but as more ethist staked, the yield comes down as far as I understand it.

So whereas with Treasuries, for instance, a pretty arbitrary size there. Yeah, tokenized Treasuries is, for all intents and purposes, kind of being feelingally scalable, whereas the synthetic dollar model is at some point, like they press the funding rate down, then you have negative yield on it, and then the market cap should shrink. The good thing about that is that it is a kind of self-correcting model. Like, you get too big, it pushes the funding right down. That should push the market gap down. So it somewhat self-controls itself from a growth perspective, which is obviously different

than other decentralized stable coins we've seen in the past, which had the opposite of that. So I do think there's certainly limits on how big this type of stable coin can be now. But it is, I think it's the most promising model. And doing it with centralized exchanges is like the best way you can possibly do right now because doing it on taxes just not big enough at all. Yeah, this is something we've invested in the past with Bitcoin as the basis. But at that point, you're wholly reliant on the basis trade for Bitcoin. There wasn't any endogenous yield.

So with ETH, now the yield lifecycle being perfected, now it's really one of those things that's uniquely possible at the moment. It's always nice to see those kind of unlocks and then see how that enables actual real product innovation. Yeah, it gives you a lot more margin for error there. I think it will be really interesting to see it as, like, what is the equilibrium kind of basis and yield as these things get more efficient, and crypto is certainly not an efficient market, but as it gets more efficient, like, what is that equilibrium?

Because you would imagine that if it was way out of whack, people would just borrow dollars, create the stable coin, earn that higher yield, depress the yield, so you do carry trade, basically. Once it gets above kind of the risk adjusted return, they'll get arped out. So just like what is the risk-adjusted return that that should get ARB down to? So the other thing you mentioned was, I agree as well, large brands entering the stablecoin space. Obviously, we have PayPal USD now been announced. You also have other larger issuers, at least contemplating stable coins, thinking about it. You're pretty bullish on PayPal, USC.

I don't really have any views on it. But, yeah, you're telling me before the call you're pretty excited about it. So curious to get your thoughts on that as well. Yeah, I'm very excited about PayPal at USD. for a couple of reasons. One is just PayPal is huge. They have huge distribution. One, they're a very large company, a $70 billion market cap company. So they instantly become the most trusted issuer, I think, in this space. And they're just trusted from a brand perspective. There was a recent survey that they were actually ranked as the second most trusted brand in the

world. Wow. But yeah, I found that amazing. They've mistreated me personally. So clearly I wasn't consulted on that one. I don't think the crypto community was surveyed in that survey. But whoever was surveyed, ranked them as the second most trusted brand in the world. So there's massive trust, they're a massive company, and they have massive distribution. They have over 400 million users worldwide. They have over half a million merchant relationships, including the majority of the top 1,000 retailers in the world. So if they want to push this through their existing customers and merchants, which they have

incentives to do, they have massive opportunity to do that. And then the other part of this is for people who are not currently customers of pay They don't currently have access to PayPal in various parts of the world. You can't open a PayPal account. This gives anyone in the world you can now access dollars to the world's reserve currency, and it is issued by PayPal, one of the most trusted companies in the world. That is a combination that I think is incredibly powerful and I think will drive adoption forward meaningfully.

And I think the pace of it will be largely based on how fast PayPal wants to push it. PayPal, my sense is that they will push it forward, but at a measured pace because they want to, regulators are more comfortable with that. But the faster that they push users to use this, they might offer their own non-custodial wallet, offering it on more chains. It's just Ethereum main chain now, which is not great for small dollar transactions, obviously. So if they launch on layer twos, on Solana, et cetera, all of these things, I think, could really push PayPal USD into the top, potentially the top stablecoin in a not very long period of time.

I've been surprised. I know Visa has been pretty active on stable coins. Obviously, Kai Sheffield over there has been beating the drum for some time. Given Visa and MasterCard's global stature maintaining not just credit networks, but also payments networks, I've been surprised at their reticence to enter the stable coin space. To be clear, they've both done things, but I've been surprised at the pace. Yeah, I mean, they're both certainly very active. Kat Sheffield is very smart, very plugged in.

I think that they're doing a lot of things. Yeah, I think that the opportunity for them is how do they connect their payment networks or connect the local payment networks of the world, which they have and go in between those with stablecoins. Like, that's, I think, the opportunity for them. I think it also is that stable coins are potentially more destructive to those business models. I mean, if you look at the fees that interchange fees at Visa and MasterCard charts, there's just another Wall Street Journal article, I think, yesterday on like those fees are going up.

I forget the exact numbers, but they're massive, like double-digit billion-dollar type fees that Stablecoins could be very, very disruptive too. So I think that is a potential consideration there. It's interesting. Stablecoins themselves promote a new form of interchange in that some stable coins will be interest-bearing. And so if you are a float-based business, you now have a new revenue model, which didn't exist before. So I think that's going to be something that really make stable coins look much more attractive to existing fintech businesses if they have a native yield to them. So I want to talk about U.S. regulatory. It's sort of not a very fun topic. And I talk

about it every week on my podcast. So up to you what your appetite is. But I would say there have been like 10 bad developments in the U.S. as it pertains to stablecoins this year and like one or two good ones. I was actually just building a timeline for one of my talks here. What is your level of optimism in terms of the U.S. being able to ultimately be persuaded by the arguments that people like us are making in terms of the virtue of embracing stablecoins within the U.S.? I think unfortunately near-term like stablecoin regulation doesn't seem to have a path to get done. It obviously got out of committee on the house side. It can pass the house, but the way it got out of committee with the Democrats strongly opposing it and stalling their indication that it won't pass

the Senate. I think that that's pretty clear. So that's as currently proposed, I don't think that gets done, which is unfortunate. The argument against not passing clear federal regulation for stable coin issuance, I have yet to hear a sensible argument on why you would not do this. Stablecoins are one of the most positive things for the United States from a whole variety of angles. And I know you talk about this lot, but it promotes the U.S. dollar use in international trade. It's cemented as the reserve currency. It provides a huge buyer for U.S. treasuries.

Tether is one of the largest treasury holders in the world now, which finances our government. I looked it up. The stablecoin issuress would be considered the 16th largest sovereign nation in terms of holding US treasuries. It's huge. And other foreign nations are pulling back from fine treasuries. So this help fill the gap, which I think is meaningful. It also gives, and this one should, I think, resonate with U.S. lawmakers is it gives the U.S. more control. If you look at stable coins, there's a tremendous amount of transparency. I mean, just look at the data in your report. Look at the data in the report. Trying to run that for any other financial network can't be done.

Exactly. It can't be done. So a huge amount of transparency. You can see. what is happening. It's soon anonymous, yes. But at the end of the day, the vast majority of transactions and addresses can be tracked back to individuals right now by companies like TRM labs. And even if you can't get track back to individuals right now, like the data is out there forever. You probably will be able to track it back at some point. So stable coins and crypto in general are terrible to use for crime. I think that it'll actually be a boon for law enforcement agencies is that dumb criminals will use crypto and there will be a massive amount of criminals that are identified this way. But the point I was going towards is, do you want the stable coin issuers

will answer primarily to the law enforcement agency and the governments of the country that they are based in and they are regulated by? And do you want these issuers to be answering to the U.S. or do you want issuers of tokenized U.S. dollars to be playing by the rules set by a different country. Yeah, and look at what's happening with stables right now is you're seeing crypto dollars emerge. We tried to coin this years ago. It didn't work. It's a great term. People should use it. Crypto euro dollars. So Hong Kong now, I think there's already a Hong Kong USD stable coin that exists. Singapore is on the past doing that. The EU wants to promote Euro stable coins so we can forget them for now. But undeniably, and Tether, of course, is already issued

offshore. I don't exactly know where. Nobody knows maybe. I did the numbers recently about 75% of stables are what I would consider offshore. So it seems to be the case. We're still going to dollar stable coins. They're still going to reference a dollar because that's all anybody wants, 99% as a unit of account in stable coins, but it's outside of the U.S. It's foreign issuers. They may not have the best interests of the U.S. from a law enforcement perspective, from a sanctions perspective for a financial policy perspective. They're not accountable to us. So why would we want that to happen? It is happening, though. It's terrible policy. I thank you. It's remarkable. It really is there a policy that's so clearly there's the right path and there's the wrong path,

regardless of your partisan leanings, I think. And I just hope that it's a bit like the dollar market and that the U.S. eventually recognized its importance and its criticality and decided to fold it in to the financial regulatory apparatus. And now, of course, Fed is very active with swap lines because there's all these zero dollars elsewhere, they need to backstop them or support them, at least for a few allies. So I kind of think it'll be that way as well. Once stable coins reach a certain threshold of size, eventually our beloved regulators here will acknowledge their importance and start to craft regulation around them. Yes. Yeah, I think that we're still at the point right now where some folks think that stable coins are just going to go away. Maybe they read the report

and realize that that is not the path we are on and they need to embrace them. And I do think that there will be over time that the Fed will embrace stable coin issuers. I think stable coin issuers having accounts at the Fed and reserves being held directly in Fed accounts will get there eventually. One of the funniest and weirdest, utterly bizarre things that central bankers believe is that CBDCs or better, more efficient real-time payments will obsolete stable coins. They tend to believe that this is like conflict in the private sector and the public sector, and if we just make the public sector tools better, these private sector tools will go away, which is like an utterly comedic thing to believe that some crypto person who may be a user of

tether would be like, oh, we have Fed now in the U.S. now. And maybe we have a CBDC in Europe, so I'm going to stop using my offshore crypto dollar. This is an insane thing to believe. but a lot of central bankers do believe this. Yeah, I think there's also oftentimes a conflation of what CBDCs actually could be. And that in most places, like an actual retail CBDC, the central bank has no appetite for the operational impediments to that happening

make it, I think, virtually impossible in most places, including the U.S. So when people talk about CVDCs, they're really talking about like wholesale CBDCs, which is basically FedWIRE or Fed now. And then people conflate that with retail CBDC, which are a totally different thing. So I've had you on for a very long time. You've been very generous with your time, Peter. But we're going to do a lightning round now.

And I mean, I'm just straight up stealing this from the light speed guys, but it was fun. So we're going to do a lightning round of predictions. So just go where they get on these. Size of the stable coin market and aggregate market cap within, let's say, five years. So I'm less focused now on supply, more on transaction volume. I think transaction volume over the next 24 months, get to 20 trillion in analyze volume. Over the next five years, I think we can get to 100 trillion, which would make it larger than the ACH network. In terms of the market share of interest

bearing stable, today it's less than 1% within 24 months? Any guesses? I think it could be more than 10%. I think definitely less than 50%. Okay. That's an interesting one. Tether. Will Tether exist in three years time? Yes. I think so. You said you think it will get folded up. I don't think so for a variety of reasons. I think the biggest one is Tether is a money printing machine at this point. Talking billion a quarter, they have done questionable things

in the past, which you pointed out I think can largely be attributed, or at least partially attributed to they were operating outside the US financial system and they were going where they could. But now that they are where they are, if I was them, if I'm Paulo, what am I doing?

I am running the most buttoned up ship you could possibly imagine being very close with three US regulators and making sure that that money machine does not get turned off. I don't know if they're doing that, but if I had to guess, they probably are. And I think there's also a misconception that Tether is not as beholdant or not as responsive to the U.S. or U.S. law enforcement. If you actually look at number of banned addresses, amount of money that's been frozen, they banned five times a number of addresses as U.S. D.C., they've frozen, I think, eight times as much

value. So I think they benefit from that perception, but the reality is I think they are very responsive to U.S. law enforcement. Yeah. One of the amusing things is they're actually more interventionist than other Stablecoins are. Who's your rookie of the year or project to watch? Do you have any that particularly interest or excite you from the Stablecoin protocol perspective? On the issuer side, I mean, PayPal coming in is huge. And then I think what Athena is doing is really interesting. In terms of unit of account, so right now the dollar dominates 99% plus. It's always been like that. Euro, I think, is number two. Depends if you count gold as one. I don't know if you count tokenized gold as a stable coin. What would you say is going to be the runner-up here on a go-forward basis?

I think the euro is number two from a FX perspective in the FX markets. But if you look at the fx markets, the dollars is the base pair for well over 90% of transactions. And I don't know why stable coins would be any different. And you think it'll remain 95 plus dollars being referenced? Yeah, absolutely. It's been one of those remarkable things. When I plotted out, I couldn't even see the other foreign currencies on the pie chart. You can't even see it. It's just all dollars. I mean, the reality is like the world wants dollars. The majority of global trade is in dollars. It's like people just want dollars. Okay, keep in going with our lightning round here. Crypto-back stable coins. So whether that's die,

style, granted, Dye is backed by RWA now or in the past USTC. So maybe that's a bad example. But whether it's these synthetic USDs or maybe something else like Dye, maybe the other reflexor labs guys will create a new one, what market share would you expect to see them take in the next 24 months? I don't know exactly what it is right now. So I don't have a good starting point. But I think that crypto collateralized staple coins will increase, but at a slower rate than Biafax, so they'll lose share from wherever they are now, even though they'll be growing. I don't know if you did this data for your report. I've been just, you know, my poor associates just been killing himself trying to get this data for me. Shout out Wyatt, you did

a great job. Share of transaction value between native L1 cryptos and then stable coins. I think it's around 70% right now. I don't have the exact numbers. Nobody does. Let's just say it's 70%. So this is on-chain transaction value. Where do you see that going? Obviously, it's been pretty linear growing to 70% declining, growing, 95%, where do you see it going? That's a great stat. I did not have that stat. I don't have it either, frankly. It's such a good set.

I mean, if that's true, which I hope it is, like, that's amazing. That 70% of the value transferred on blockchains is in stable coins and not like native tokens. Up from 30% in 2020, which actually shocked me how high it was back then as well. That's incredible. It's like blockchains are for dollars, I guess. That's it. Yeah.

I think it would go up. I don't see a reason why. that trend would stop. So it's 70% now, goes to 80% in the next 24 months, maybe. Yep. Stables coin legislation in the U.S. But then the next, before the election, after the election, where are you benchmarking that? Near-term, like rest of this year, I don't think it really has a chance of getting done. Next year, I'm hopeful that will get done. I just think that people will come to their senses and see that this is such an obvious thing that everyone can agree on.

and it's important to the, to get this right, and I think they will. Well, that's it for our lightning round. Maybe we'll revisit it in 2025. Let's see how you did. Peter, this has been incredible. Really love the conversations. My favorite topic. Pretty much my favorite thing.

Frankly, I think if the only thing you cared about was stable coins as an investor, that could completely occupy our time at the moment. So, yeah, I'm going to obviously put your report in the show notes. Anything else you'd say? people direct you who want to reach how to reach you. Yeah, I'm on Twitter at the Chicago VC. DM me, that's probably the easiest way. Awesome conversation.

I could talk to you for hours about stable going. I hope we get more opportunities to do this. So thank you. Yeah, this has been great. Thanks so much. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. To listen to all of our podcast episodes, please go to On the Brink,

dashpodcast.com or just click on the tab in our website. Thanks for listening.