The Breakdown - Jeremy Allaire on the Regulatory Fallout After Terra

Starting point is 00:00:00 We looked at it very closely for over six months. And our view is that it was literally a ticking time bomb. And we thought it had about 30 or 40 days. And then it happened faster because of risk off in the crypto markets, this peg defense mechanism, which was built on the idea that Bitcoin go up, really challenging when Bitcoin go down. 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.

Starting point is 00:00:35 The breakdown is sponsored by nexo.io, near an FTX, and produced and distributed by CoinDesk. What's going on guys? It is Friday, May 13th, and today I have on Jeremy Aller, the CEO of Circle. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to get deeper into the conference, conversation. Come join us on the Breakers Discord. You can find a link in the show notes or go to bit.l.ly slash breakdown pod. Also, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. Now, obviously, we have lived through quite the week in crypto history. And if you've listened to any of my shows about it, you know that I think that the Terra ecosystem

Starting point is 00:01:22 implosion has potentially big implications for the regulatory discussion around crypto, defy, and certainly around stablecoins. To get a more insider perspective on that from someone who spends a ton of time with those people upon whom this situation might have made an impression, I invited Jeremy to come talk about where the state of the stable coin discussion was before this all happened and what he's seen this week in terms of any implications. He actually has a more optimistic take than you might think. So without any further ado, let's dive in. All right, Jeremy, welcome back to the breakdown. Actually, this might be your first time technically on the breakdown, even though we've had lots of conversations in various mediums before. Exactly. I'm psyched to be here,

Starting point is 00:02:07 man. Yeah, so it's obviously been a crazy week. I thought you'd have a pretty unique and invaluable perspective to share. And I want to get into all that, but what I actually want to do is maybe, you know, help contextualize some of the speculation that's been going on. Certainly the thing that I immediately started to think about when this all started happening, with obviously the UST Luna situation this week was the regulatory implications. But I guess, you know, you're at a position to know a lot more about kind of where regulators were coming into this as relates to stable coins. So I guess let's talk, let's back up. So, you know, last week and before, what was your sense of kind of where the state of the discussion around

Starting point is 00:02:51 stable coins was, you know, in the U.S. in particular, but, you know, globally if it's relevant as well? Yeah. So as expected, we've been deep in this for a long time. And as I like to point out, USDC has been regulated for four years. We launched by working with regulators, the same regulators that regulate PayPal and Venmo and Cash App and Apple Pay and all these technologies that we use in our everyday daily lives and have consumer protection mechanisms around full reserves and around statutory requirements about what you can do with the money and all this stuff. So UCC's always been regulated, and we've been working with regulators around stable coins for like four years. Over the past two years, as regulators saw these grow and grow and grow, there was a sense that, wow, these could go beyond

Starting point is 00:03:44 just sort of a electronic payment technology into actually being like a bigger, potentially even systemic market infrastructure that gets used in a lot of things. And so probably the most noteworthy, you know, thinking came out of the White House and the Treasury Department with input from the Federal Reserve and others, which was last year sort of saying, these are big. There's a lot of risk. There's run risk. And there's, you know, as a result of that, there's, there's risk that this could impact the broader financial system. And there's a lot of opportunities. This is a major innovation that could impact dollar competitiveness and could impact how future financial markets and other things work.

Starting point is 00:04:32 And so as a result, regulators, the key regulators in the U.S. said, we need new laws, like the existing framework for like looking at banks or payments companies, they don't quite fit. And so these like large scale dollar stable coin issuers, we need new laws. And they said, Congress, we want you to act. We want you to come up with some new statutes that define how to deal with dollar stable coins in the U.S. financial system. And so that work was underway. And Congress is working on it. Democrats, Republicans, both sides of the aisle, really good engagement. We're starting to see legislative drafts, many of those picking up speed over the past month or two in particular. And really a sense that there's an opportunity to get something done here. So that was coming into a week ago. Now, what's interesting is as I look back as well, there was a curiosity around algorithmic stable coins.

Starting point is 00:05:33 And, you know, as you know, in crypto, things move fast. There's innovations that are flying all the time. And I think there's a sense of we're not sure how to think about these or what the regulatory implications are. Let's focus on the stuff we understand, which is these fiat-backed, dollar-backed, full reserve models like USDC. So it was clear to us, however, that Tara Luna, UST was a taking time bomb. Our own internal analysis, we looked at it very closely for over six months.

Starting point is 00:06:07 And our view is that it was literally a ticking time bomb. And we thought it had about 30 or 40 days. And then it happened faster because of risk off in the crypto markets, you know, effectively, this peg defense mechanism, which was built on the idea that Bitcoin go up, really challenging when Bitcoin go down. And so just not a good model. And so then you get a loss of confidence, all these things. So death spiral, insane, et cetera. Now, that has been a shock to the system. And I think has punctuated for regulators. And you've heard, this in two days of testimony this week from Secretary Yellen and from lots of questions

Starting point is 00:06:55 from the members of Congress who are actually working on stable coin statutes right now, all those people who are writing these down, basically saying more urgency. And now we've got to think about how to deal with the risk of Algo Stablecoins. And I think that's going to now find its way into law. And there's very likely going to be policy that sort of defined. if you're going to issue a dollar stable coin that is used by entities in the United States of America, and by virtue of that exported globally, here's the framework for it. It will probably define constraints where money service businesses, exchanges, payments companies,

Starting point is 00:07:40 other financial institutions can't touch certain things as well. So I think that'll be the interesting question in terms of what changes in that. But I think the urgency is now higher. As you may recall, you know, when the PWG report came out, it specifically said, we think this is urgent for Congress to act. Well, now it's urgent, urgent, as I was sharing in an interview earlier today. Looking for ways to step up your crypto game? Then go with NXO. For starters, you get free crypto for each purchase or swap.

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Starting point is 00:09:21 There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. If on the one side of the spectrum is this is bad because it creates context, for some number of politicians who are perhaps less inclined towards this space to say, look, this is why we should just not be dealing with it at all. And on the other end of the spectrum is the full positive where it actually helps them distinguish between things that might have been better to

Starting point is 00:10:11 distinguish in the first place. You know, I think you can make a strong argument that stable coins of the sort of full reserve backing sort are fundamentally different than DFI products. Where does this fall? Is it potentially net good? in the sense of creating or dramatizing the difference so that that distinction happens, but it's going to take more work to at least explain it or, you know. I think that's exactly right. And if you look at the coverage that's out there, media coverage, and frankly, the most important thing is what is the market think?

Starting point is 00:10:40 Because what's happened is market participants have gone, holy shit, I got to take like these things seriously. I can't just like float around and say, oh, they're all equal, right? Not all stable coins are created equal. And you're seeing a flight to quality. every other major stable coin is down over the past six days. USDC is up over the past six days. And so I think there is a flight to quality.

Starting point is 00:11:05 And I think, you know, people are going to pay more attention. What is this? What is this instrument? Is this, you know, safe and sound? Who's supervising it? What do I know about this? What kind of disclosure is there? So all this is going to matter for marketing.

Starting point is 00:11:24 participants. And for market participants on this on the on the issuer side like circle, right, we need to continue to up our game in terms of transparency, visibility. So we're going to be rolling out some I think really helpful things very soon that give people like full visibility into all the like minting redemption and everything that happens so they can see oh wow, this thing, this thing has perfect liquidity on a one for one basis and there's billions and billions and billions flowing in and out every week, which is actually the case. So we're going to provide that information to the market so people can see that, which is really important. Now, from a policy perspective, which I think was the heart of your question, I do think that this is clarifying.

Starting point is 00:12:07 And I do think that that is ultimately helpful. And so in some ways, someone else was writing about this this morning. I think this is the kick in the butt needed to get some action here. And our view has been that one of the major things that is standing in the way of mainstream scale adoption of crypto economic infrastructure, whether it be in payments or markets or lending or all kinds of other innovations that people can build on top of it, just every way, everyday commerce, is clarity that these are a defined form of dollar market infrastructure that corporations and financial institutions and others can depend upon. And getting through that is what it will make this something that I think allows a billion people to use it. And so I actually

Starting point is 00:13:00 think this kick in the pants could have a silver lining to it. Yeah, I mean, it's interesting. One of the, there is a clear, uncomfortable sort of bedfellows type of thing where if you look at the, executive order, the Biden administration executive order, it's so clearly talking about two different things, but because they're nominally digital assets, they're kind of all pushed together, you know, in terms of the, you know, the central bank digital currency infrastructure and what that looks like and, you know, how it relates. And then sort of general digital market, digital asset markets, you know, kind of more broadly. And it feels like this helps define the terms of those conversations, not as unrelated.

Starting point is 00:13:45 Obviously, there's a common infrastructure and they sort of overlap in terms of use case and all these sort of things. But they really are pretty categorically different in terms of like where they might fit. Again, one is market infrastructure potentially. One is one is a new asset class and sector that old market participants are going to fit within. And it feels like this kind of this dramatizes. I mean, this, you know, Luna and UST sit exactly in the middle and are kind of the dividing line that shows how different they are in some ways, it feels like. Yeah, I would agree with that. I would definitely agree with that. And I think some of the most complex issues that the world needs to grapple with is on-chain protocols, software-based financial market

Starting point is 00:14:29 infrastructure that people can interact with, how to ensure that there's safety and soundness, so to speak, in that, how to ensure that risks, risk disclosures are available to people who interact with that infrastructure. And look, I mean, I think we're all very excited about the speed with which, you know, this, like, defy is developing. And I think that's, it's tremendous. It's just really, really tremendous. It's like internet scale, internet speed kind of stuff.

Starting point is 00:15:02 You know, I think the looming question is, is, you know, how many $40 billion losses are going to be acceptable at a societal level before there's some kind of perimeter put around how some of this is developed and deployed. I think this is one of the most frustrating parts about this for me is, you know, I've long thought that part of part of what was great about the way that Defi was developing is that there was such high technical barriers to entry for participation that the sort of, you know, cataclysmic losses didn't happen in the same way because everyone was such a sophisticated market participant that they knew the risks by and large, right? Like, you know, when you, when you're interacting with these

Starting point is 00:15:47 protocols, it's quite difficult. This feels to me like the first time because you could just buy Luna, right? Like simply by buying Luna, you were part of, of sort of this ecosystem of participants. And so it was the first time that defy risk was socialized to sort of like, you know, retail crypto traders, not defy sophisticated participants. I agree that the sort of the upshot is clarity around stable coins and getting to some common sense things. I mean, the funny thing about the stable coin regulatory discussion is that almost everyone who pays a moment of attention to it kind of comes to the same conclusions about what the common sense garb rails might be and, you know, disclosures and transparency and backing and all these sort of things. I think I think the hard thing is that

Starting point is 00:16:29 the investors need protection set just got the best screaming example, you know, for their case ever. And I think that there's investor protections unfortunately tends to be, uh, you don't get to participate if you're too small, you know? Yeah, and obviously that ability to have this be an open infrastructure that anyone who has a digital wallet that they've gotten from an app store can interact with is sort of on a first principle basis, like fundamental to the openness of the internet and the openness of this financial system. And so I think that needs to be preserved.

Starting point is 00:17:04 And so there's interesting opportunities for self-reflection and self-regulatory kind of work as well. And I think you'll hopefully see more of that emerging too. So it sounds like I know we don't have a lot of time today, but I really appreciate you jumping on quickly. It sounds like net net your feeling is, is it fair to say that you think that regulators are in a position to actually grapple with this sort of the correct way versus it just being kind of extreme reactions in one direction or the other? I do. I mean, one of the things I would say is I've been actually very encouraged over the last six months in particular with the degree to which major financial regulators, not just in the U.S., but in the U.K., in key Asian markets and other markets,

Starting point is 00:17:55 are really leaning into understanding this fairly holistically. And a lot of that is because the maturation of firms in these markets is really significant, the amount of capital, the amount of customer activity, the amount of institutional activity. So they've had to. It's like this is kind of crossed into the, this isn't the novelty of some, you know, raging group of early adopters. It's actually like, no, this is crossing the chasm, as we like to say in the tech industry. But it's sort of right on that threshold.

Starting point is 00:18:25 And so the engagement's been really high and the understanding is much higher. And so that gives me some hope here that what you're dealing with, is not some kind of reactionary uninformed view. And so I tend to be an optimist, generally speaking. It's how I managed to get through life. But I think I'll take some of the optimistic outlook here, which is to say this is the kick in the butt, but it's not going to lead to overreactionary kind of efforts.

Starting point is 00:19:00 I hope you're right. I mean, you're in a good position to know. I think optimism tends to be rewarded. Last question while I have you, do you think that this, you know, from a sort of more internal focused view, does this accelerate, extend, you know, does it sort of put us more firmly in bare territory for a while to come? Or do you think that the sort of our cycles are so wrapped up with macro cycles that this is sort of just one more bad thing and, you know, while everything else in markets is trying to sort itself out?

Starting point is 00:19:32 it's really hard to know exactly the direction of things on that. What I can say is, you know, from what I see in terms of companies that are leaning into this space, like major companies that are not yet in crypto who want to build it into what they're doing, I don't see that slowing down. And so I view that as fundamentally strong. And then when I look at the velocity of developers and of projects and of certainly capital that has already flowed in, I'm very optimistic about what we're going to continue to see just in terms of what's being built. And so that's sort of where I focus is what's happening with customers and market participants and what's happening with building. You might see some resets on the velocity of new capital coming in.

Starting point is 00:20:28 maybe that slows down, takes a pause, valuations come in. I mean, they have to, right? Everything to just the public market and the crypto token market, right? Both of those equities, tokens, digital assets, everything's off 50 to 70 percent or whatever it is, you know. So that is going to affect, I think, the funding environment for a period of time to some degree. And whether that's a bare market, do things go choppy, sideways, et cetera, I don't know. If I knew, right, we'd all know what bet to make and, you know, we'd be sailing off into the sunset. Well, Jeremy, I super appreciate your thoughts in a crazy week. Appreciate you making the time and look forward to catching up on this in, you know, a few months as it all resolves.

Starting point is 00:21:14 Absolutely. Great to be on, Nathaniel. All right, guys, back to NLW here. One of the things I noticed when Treasury Secretary Yellen first commented about Luna, this was before it had gone to zero. It was just after the weekend. In the follow-up to her comments, the senator asking her question, Senator Toomey, made sure to clarify that algorithmic stable coins were something of a different breed. Now, Senator Toomey is just one senator, and he's obviously on the very informed end of the spectrum, as we know. But still, it does feel like this happened at a time when there is enough basis of understanding in Congress and in the Senate for there to

Starting point is 00:21:55 perhaps not just be some radical, rapid, extreme reaction. I think that regulators are going to take this incredibly seriously. And I continue to believe that it gives the investor protection set far more ammunition for their arguments. As I mentioned to Jeremy, I think that that's potentially damaging because in practice, investor protection usually means unequal access for smaller investors. At the same time, it seems unlikely that this is going to fundamentally derail conversations about stablecoin specifically or crypto assets in general. I still think that our work got a little bit harder because of all of this, but it might have happened at an okay moment, relatively speaking. At the end of the day, $40 billion of value is still evaporated off the planet, and there's going to

Starting point is 00:22:44 be reckoning for that. But maybe there is some small silver lining on the regulatory front. We will have to wait and see. For now, I want to say thanks again to my sponsors, nexus.io, near and FtX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few.

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The Breakdown - Jeremy Allaire on the Regulatory Fallout After Terra

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