The Breakdown - A Former US Senator and Ambassador to China on the Need for Stablecoin Regulation

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, January 16th, and that means it's time for Long Reads Sunday. Today, we are reading a piece by a former U.S. ambassador to China, a former U.S. ambassador to China, a former as Senator Max Baucus. The piece is called the urgent need for regulatory clarity on stable coins. But before we get into that, if you were enjoying the show, I would love if you could go subscribe to it, give it a rating or a review, or join us for the conversation on the breakers

Starting point is 00:00:52 Discord. You can find the link in the show notes or you can go to bit.combe slash breakdown pod. Now, as it relates to this piece by Max Baucus, the urgent need for regulatory clarity on stable coins. We have obviously spent a ton of time over the last year talking about exactly this issue. We've discussed central bank digital currencies, both what's happening in places like China, as well as the U.S.'s ongoing debate about whether they should have a U.S. digital dollar, a Fed coin. Just this week, Congressman Tom Emmer introduced a bill that would prohibit the Fed from issuing a CBDC directly to retail and tried to make a case for a totally different set of values cash-type values, Bitcoin-type values, frankly, to be embedded in any sort of digital dollar that we

Starting point is 00:01:40 ever decide to do. With that setup, let's see what former U.S. ambassador to China and U.S. Senator Max Baucus thinks. Recently, leaders from six cryptocurrency companies testified before Congress about the opportunity and promise of digital currencies and also answered lawmakers' questions about the risks that come with their use. Stablecoins were at the center of much of the discussion as these fast-growing crypto assets are at the center of a debate around the regulation of cryptocurrency. Tether, the largest stablecoin issuer, agreeing in October to pay the Commodity Futures Trading Commission $41 million for misrepresenting the dollar reserves behind its digital tokens, provides glaring evidence that regulators and policymakers need to come together and quickly align on how to regulate this quickly expanding market

Starting point is 00:02:25 before it impacts the broader financial world. Stablecoin is a type of digital currency whose value is back to. by traditional fiat currencies, have quickly become a cornerstone of the crypto economy. Recently, the total supply of stable coins pegged to the U.S. dollars surpassed the $113 billion mark, making it one of the fastest growing asset classes in history. As ambassador to China in 2016, I would often hear about the blockchain and cryptocurrencies. In numerous meetings with world leaders, I would learn of the role they could play in creating a decentralized financial system, empowering communities, sparking innovation,

Starting point is 00:02:59 and financial inclusion. left government service in 2017, Stablecoins specifically caught my attention as they are intended to be stable in price and designed to hold their value over time. Stablecoins have also caught the attention of regulators and policymakers around the world, including U.S. Securities and Exchange Commission chair Gary Gensler, U.S. Treasury Secretary Janet Yellen, and Federal Reserve Chairman Jerome Powell. All three have made their voices heard. Yellen has urged policymakers to act quickly to establish a U.S. regulatory framework. Powell is called for stricter regulation, speculating that a central bank digital currency, CBDC, could present a suitable alternative to

Starting point is 00:03:36 stablecoins. Regulatory attitudes around stablecoins center around three main points of debate. Each of their outcomes will shape the future of stable coins for good. One, should stablecoins be treated like securities? There is a longstanding debate about whether stable coins and crypto should be treated as securities. However, there is no single litmus test to determine whether an asset class is a security, just as there is no single type of stable coin. Recently, Gensler hinted that some stable coins may be securities and investment companies, but stop short of making a more decisive statement. While the debate around stablecoin classification is ongoing, the asset class, along with users

Starting point is 00:04:13 from around the world, will surely benefit from greater regulatory clarity. Two, are stablecoins truly 100% backed by fiat currencies? Asset-backed stable coins are digital currencies that are issued against traditional fiat currencies held in a one-to-one peg. In theory, one-US dollar-backed stablecoin should be equal to one-eastern. US dollar. However, as we've seen in the case of tether, this is not always the case. In fact, many popular stable coins are backed by a similar combination of cash and commercial paper, which is unsecured short-term debt issued by companies to meet their financial obligations. This is misleading to potential

Starting point is 00:04:46 investors who may expect to be able to redeem their stable coins in exchange for the back currency at any time, and it likely represents a contagion threat given the use of commercial paper. Greater regulatory clarity is needed to ensure stablecoin offerings remain transparent and compliant. 3. Can stablecoins be used to sidestep public policy goals? Some regulators believe that cryptocurrencies may be used to circumvent investor protection mechanisms and public policy initiatives. From what I've seen in the industry, stablecoin transactions are rather visible nowadays, thanks to to blockchain analysis. In one recent case, hackers stole and then subsequently returned, nearly $600 million in funds from a decentralized finance platform, thanks in part to stable

Starting point is 00:05:24 coin issuers who froze a portion of the stolen funds, something that can't easily be done with traditional fiat currencies. Many of the largest crypto trading platforms often employ robust anti-money laundering and tax compliance initiatives, in addition to instituting mandatory know-your-customer protocols to identify users on their platform. Many of these initiatives consist of proactive efforts on the part of responsible industry participants to stay on top of the shifting regulatory landscape and to prevent users from abusing the platform for nefarious purposes. Nexto is a trusted and easy-to-use crypto platform where you can buy cryptocurrencies at the touch of a button and start earning up to 17% annual interest that is paid out daily.

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Starting point is 00:07:07 FTX is the safe, regulated way to buy and sell Bitcoin and other digital assets. Trade crypto with up to 85% lower fees than top competitors. FtXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. You can trade NFTs with no gas on FTX US, and gas is subsidized when you withdraw off the platform. Help support the breakdown and visit FtX.us today. That's FtX.us. A wake-up call for investors. Though there are many reputable stable coins on the market, not all of them live up to their name. In the meantime, investors should do careful research when selecting a stable coin. There are a few features to look for in a trustworthy option, including whether it is, one, regulated by one of the main global regulatory bodies, specifically for AML and KYC,

Starting point is 00:07:57 two, subject to regular third-party audits, three insured, and four backed by a physical currency. What's next? Many regulators recognize the potential for digital currencies like stablecoins to become a regular part of our day-to-day lives, powering transactions, purchases, and more. Today, there is an unprecedented opportunity for stablecoin providers to work alongside policymakers to define the regulatory landscape going forward. In my opinion, the next stage of growth from the crypto industry will be powered not by rapid-fire innovation and overnight trends, but by responsible and mature industry players convening with

Starting point is 00:08:29 policymakers and regulators to offer users compliant and safe products and services. All right. This is from, yes, a former U.S. Senator of for Montana, as well as a former ambassador to China. However, Baucus is also now an advisor and government liaison at Binance, and so you have to read this at least a little bit as how one massive global exchange sees the world and sees how the world is changing. This notion, this idea that the next phase that the industry is moving, into is one of figuring out how to operate within public policy frameworks is something that's

Starting point is 00:09:00 widely held across pretty much all of the exchanges at this point, at least among the centralized exchanges. One of the things that's so fraught about the stablecoin conversation is just how many very common-sense solutions there are. Right now, we live in a world of voluntary reserve attestations. In other words, voluntary disclosure of what assets are actually there backing the outlying cryptocurrency. This potentially is a very easy thing to mandate, to formalize, and to put rules and guardrails around. I will say it's more complicated than some give it credit for it to figure out what the right rules and guardrails should be. In its quest to become the most regulatory-friendly stablecoin, USTC, for example, has been moving all of its reserves to U.S. treasuries and cash.

Starting point is 00:09:43 Is that exactly what the U.S. wants? Is there a risk that stable coins grow so high that they actually drain liquidity from the Treasury market? Or are stablecoin issuers, in fact, a potential buyer for treasuries in a way that other types of actors like foreign governments aren't as much anymore? Indeed, it seems to me that when you start to dig into how stablecoin issuers could interact with the existing system, there could be some benefits based on changing demand for U.S. treasuries themselves. One of the most interesting questions to me is directly centered on the U.S., and it's whether ultimately this country will decide that a central bank digital currency, a Fed coin, a digital dollar, is the right way to go, something that

Starting point is 00:10:22 is created and issued by the central bank, or whether instead it will follow the longstanding U.S. pattern of letting financial innovation come from the private sector and simply absorbing it into the formal financial system. I personally think there's a lot to be said for that second option. If you ask which government is ahead on digital currencies today, the most common answer would probably be China because they're actively testing their digital yuan in market in real life. However, if you include U.S. dollar-backed stable coins as formal digital dollars in a way that they could be absorbed into the actual system, then it's no competition at all. The U.S. dollar is vastly the most transacted digital currency out there. I believe that this fight is going to come to a head this year

Starting point is 00:11:07 and that the debate we're going to have is actually not just who gets to issue stable coins, but how the existence of private stable coins influences how the U.S. should think about its own digital dollar. What's clear is that we have a Fed chairman in Jerome Powell who is not beating down the door to expand the authority of the Fed through digital dollar issuance, which makes him unlike some of the other central bank heads out there. I think that's probably to the benefit of a productive conversation about figuring out exactly what the U.S. wants to do in this case. I do believe that whatever the answer, the outcome of this discussion about how the U.S. thinks about a digital dollar or absorbing U.S.-backed

Starting point is 00:11:45 stable coins into the formal system will have a dramatic impact on where the U.S. fits into the global monetary system going forward. It strikes me, frankly, that the rapid, rapid rise of U.S. denominated stable coins could be one of the most powerful forces for giving you a lot of the United States. For the U.S. dollar another generation or more atop the global currency heap. But there is a long way to go before we get there and a lot more debate and discussion to be had. I want to say thank you to my sponsors, nexo.io, Abra, and FTX. And thanks to you guys for listening. We are off tomorrow for MLK Day, so I will be back on Tuesday. So until then, be safe and take care of each other. Peace.

The Breakdown - A Former US Senator and Ambassador to China on the Need for Stablecoin Regulation

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