BBW24 – Day 3 – Stablecoin Adoption: The New Standard for Digital Transactions

all right good to see everyone again we have some fantastic guys here that know a lot about stable coins I'm really excited to kick it off so I'm just going to run it straight down you guys do a quick intro a little bit about your background and why stable coins what interests you uh so I'm Mark lurry I'm a entrepreneur Once Upon a Time Venture investor um and on my third uh Venture back startup now um Shipyard builds decentralized exch changes so uh we built an exchange called Clipper it is a DEX for blue chips with uh better yields and because better yields better prices and because better prices lots of Trades um and we swap a lot of stable coins um because you know probably over half of trade volume in defi is between stable coins and ethereum um and that's also led to uh a number of other projects we do um related to stable coins um because they're one of the biggest growth areas and opportunities in crypto awesome awesome good afternoon everyone excited to be here hovan gavlan with newv Technologies uh we my team and I we oversee nve's digital assets business ranging from Canada down to Argentina the essentially addressing the America's markets we specialize in uh working with uh digital asset use cases traditional payments anything Global Payments and ways that we can make things essentially faster cheaper more secure and so stable coin is one of these avenues that we're exploring happy to be here with you guys my name's Evan I'm an engineer with Fidelity digital assets I've been building software in the cryptocurrency space focusing on Defi and trafi for a few years now uh and you can't have well you can you shouldn't have Defi and trafi without stable coins which is why I'm obsessed that's awesome so here we have Dex trafi and trafi bizdev and trafi engineer so it should be a really interesting discussion to talk about stable coins so Mark I'm going to kick it to you can you kind of do a baseline a level set of what a stable coin is how does it work so stable coins can mean a lot of different things to a lot of different people and the word is thrown around a lot so here is what you need to know about what a stable coin actually is um the uh the classic example of a stable coin is tether which is usdt or Circle which is usdc um there's about 200 billion somewhere between 150 and 200 billion depending on the week of stable coins outstanding and the way this works is if you want to get a stable coin you can go to tether or Circle and you wire them a dollar and they will give you one token usdt or usdc respectively okay and then you can send that around to whoever you want and if anyone wants to they can always give it back to tether Circle and tether Circle will wire them a dollar so it's basically like a dollar that you can send around okay now um why is this useful well it's the only way you can really send dollars instantly it's kind of a bearer asset you can send around right going through the banking system can take a few days um ven moing you don't see it in the background but that actually can take some time to settle um and uh you know the alternative is you have gold that's a bearer asset or dollars cash but then you have to physically transfer it so this is a way to digitally transfer dollars kind of as a bearer instrument that has a lot of benefits which I'm sure we'll get into um these are some of the most profitable and biggest companies in crypto so Circle and tether they take that money right call it about $200 billion worth and they don't just hold in the bank account they buy us treasuries which yield about 5% and they just keep that 5% that's a great business so tether is earning 5% on say $150 billion uh they earn over a billion dollar a quarter supposed they have under 100 employees they're minting money and that's big business and that's why hundreds of stable coins are being minted and everyone with their own distribution wants to get in on the game okay now that's stable coins and there's a bunch of opportunities to disrupt the financial system and make it better but there's also these kind of derivative concepts of stable coins that you know people call stable coins but aren't necessarily stable coins so for example algorithmic stable coins um are ones that aren't backed by dollars in a bank or us treasuries probably the most popular is D this is from maker Dow and it's backed by Bitcoin and eth that's kind of held in a smart contract and you can redeem the the die for $1 worth of this kind of underlying assets essentially that's a simplification but there's about5 billion of that outstanding and that doesn't rely on any banks which has a lot of um interesting properties from a compliance perspective then there's newer stable coins like Athena and this is really a structured Financial instrument so Athena takes your dollar and it buys some eth and then earns yield on that eth and it goes short eth on an exchange and gets paid a funding rate and combines that together and you basically have delta neutral yield on your dollar is that really a stable coin it's not the same as Dollar in the bank but it generally makes money so people call all these and there's about two to three billion of that so people call all these things stable coins but they're really very different concepts and I think most of what you'll hear at this conference and in this panel is really around the traditional uh concept of stable coins which is backed by a dollar in a bank or really you know a investment grade asset um held in in a custodial account cool so the yield is of interest is there something here around a reduction in transaction fees or something else that maybe the industry would be interested in yeah so you know if you send dollars today across borders it goes through Swift which is basically a coordinating system um which is jointly owned by the banks of the world that can take a couple days it can cost 20 bucks and there's a non-trivial failure rate in the single digit percentages and for emerging markets that's like even you know it's even worse sometimes you can't get payments through at all okay not to mention it has to go through a bunch of compliance departments and often have reviews so um so if you do it with stablecoin it settles through this uh International permissionless blockchain anyone can have a wallet so that's basically instant in minutes if not seconds depending on your chain and is only a few dollars to a few cents depending on your chain and so those are really really interesting properties that make stable coins increasingly used around the world for payments and I'd say you know there's really three distinct use cases that take advantage of this um about a third is used for payments so a third of all stable coins are held in individual people's wallets and it has moved in the last 30 days another third of all stable coin balances are held in individual user wallets and has not moved in 30 days that's used really as a store of value or like a dollar denominated bank account if you live in Argentina you might want to store dollars you're probably doing it with usdc or usdt and then another third is held in financial applications like coinbase exchanges Defi and that's really like you can think of that as a trading instrument you want to you think eth's going to go up tomorrow so you buy eth you think it's going to go down you swap back into Dollars then the next day you go back to e so it's really a trading instrument probably rotating very quickly and those are three distinct use cases that like these properties of a stable coin but it's important not to confuse the conversations because one thing with three use cases is often difficult to understand um each of its characteristics are beneficial in a different way for the different use cases cool so it seems like there's a lot of interest here for trafi so Evan I'll kick it to you you mentioned uh when we were talking before that you build the backend rails for Fidelity can you talk a little bit about what non-confidential what you guys are interested in and why these aspects of stable coins are good for business yeah absolutely so launching a token is technically very simple right like we might have heard of like pump. fun and similar web applications where it's like three clicks fill out a couple forms you can launch a token uh and that token will move really freely instantly right away uh and that has a bunch of great Pro properties where the big concern then is compliance right like I could tokenize the money in my wallet today but that would be really sketch if I started issuing like money in evans's wallet coins and started trying to uh Square them up with everyone so all the work is in compliance things like travel rule do we know where money is moving from place to place uh things like uh kyc uh if the Department of Justice says hey uh imagine you're a stable coin issuer and you're stable coin falls in the hands of the Lazarus group or something uh you need controls around how these coins move you can't say if you're a US domiciled business you can't say to the Department of Justice oh it's crypto champ you know it's uh you know it's not our case uh so that is the biggest concern and where a lot of the uh improvements can be made right there's almost I've seen a lot of defi companies or like bridging trafi def companies that are basically regulatory arbs that are like oh oh to do this kind of transaction was a bank wire and a building full of accountants and another building full of uh lawyers uh but now using stable coins and maybe a permission list or uh ZK proof there's a bunch of different startups doing a bunch of different problems uh we can get this transaction cost down we can get this transaction time down uh and a lot of weird interesting things result you know as you can increase the velocity of money reduce friction as money moves around uh price becomes a more perfect signal and oh everything gets weirdly financialized uh so the the more friction we can remove from the system the more products uh can be exposed and you know the less work we can all do which is always nice makes sense havanas you're in bizdev so I feel like this could be an easy conversation can you take us through your thoughts and and what you're thinking of on the yeah I mean I like to kind of look at it from like a uh inspirational or Mark Market driv perspective personally for me this is as big as the internet and you know I'm going to let that kind of sink in for a second uh this has the potential to be the currency of the internet and I was joking with uh Garrett earlier I was like hey man it's Friday the 13th I want to wear my hockey mask here and show up what do you what do you think but I think that's statement in of itself is kind of SC scary enough uh in terms of you know the Innovation ahead of us so ultimately there's this underlying um demand and desire whether it's the uh you know under underserved underbank markets around the world and I think uh being able to kind of uh complete that Gap you know fit fill that Gap with technology and with with the AR rails of traditional and the backbone of traditional Finance I think this is what really intrigues the the market you know you look at things across the uh look got technology and the way things have disrupted across the world we've got a we've got a cyber truck in that in that parking lot right so we've got we've got smartphones we've got all kinds of all kinds of things uh that's that's around us but overall the way that we send money across across borders and the way uh money moves around the internet is still kind of uh it needs it needs that upgrade essentially whether that's uh replacing certain Legacy systems whether that's up upgrading them with uh added added technology so these are the main these are the main movers that I see from my perspective that are really fueling this um this fire yeah that makes sense so this is actually something we're looking at in our company too so we're a healthcare focused company we do private uh data transactions but we're also looking globally and stable coins are of interest for us because that allows us to then actually be better faster cheaper than anybody else in the market because we have web through rails and we can accept them before others so this sounds great and as a business owner I love it because anytime you can make a go faster and cheaper that gives you a Competitive Edge but it there's there's a regulatory blanket if you will that is over the entire industry even stable coins I'm going to kick it to you Mark can you walk us through kind of the challenges that we have from a regulatory perspective here and internationally yes so crypto is often thought of as the wild west um but stable coins are not really the wild west um and here are some ways to think about why that's not the case right just because something's a new instrument doesn't mean all the old rules don't apply so stable coins have found a whole bunch of applicable laws and you know Regulators that they can kind of fit under it's a little bit square peg round hole but it mostly works okay so in the US uh circle is a Money Services business it's regulated by finsen which is the US Treasury um but it has to go and get money transmitter licenses state by state so it also answers to all these State regulators and those come with a bunch of requirements right they come with uh kyc requirements and they come with moneya laundering requirements and and these tokens Implement these right another uh structure is a New York Trust Company so paxos is a stable coin issuer it's regulated by uh New York Department of Financial Services it is uh behind PayPal's dollar py USD was behind binance's dollar um and a number of others and this is just a different uh regulator and a different set of requirements which broadly speaking have some similar components kyc AML you actually have to have the Reserves um and that's why most of these stable coins actually have a lot of functionality for compliance all of these stable coins can freeze they can seize uh and of course they can monitor the transactions that that are going on so it's not really as much as the wild west as people think now algorithmic stable coins are a whole another thing but let's put that aside for now um the issue is that you know these regulations weren't really written with stable coins in mind and so there's very clear rules they just aren't very they sometimes conflict with each other and they're not it's just you know they're a little the thing is a stable coin isn't the same as Western Union and a stable coin isn't the same as a bank and so some of these requirements don't make sense and add a headache um but increasingly these laws are getting codified and solidified so in the EU there's Micah which explicitly says okay we recognize stable coins as a separate thing and here are the rules for it um in the US there's a bill uh sponsored by Senator McKenry I think which has been debated and creates this class of stable coins with separate rules that make sense for it and so stable coins are regulated today um and those are relatively clear there's just a few ways to go about it but increasingly what we have and what we need is legislation that was written with stable coins in mind as a new Financial category um and that's a lot of what we've seen around the world and increasingly uh will be in the US Evan I saw you enthusiastically shake your head what do you think that looks like tell us your thoughts a market structure bill I would Cry tears of Happiness if Congress would uh pass a market structure Bill uh to provide Clarity for the crypto Market generally but in particular stable coins which you know exactly are uh C can be shoehorned into existing uh banking regulation but it's it's a there's a lot of rule by enforcement going on there's a lot of feeling around in the dark going on you know just kind of products along and hoping you don't get sued for putting these things forward uh just front and center of my mind uh any even even a bad Bill would be better than no bill uh oh just any kind of Market structure to operate within would remove this ambiguity that plagues our industry I mean imagine you're like a major financial institution a major bank and you're like huh we want to use stable coins to settle right you know and you're compliance Department goes to it and you say okay well they say they're a money transmitter but it's kind of like 80 mostly a money transmitter but I don't know like this one element seems a little different and the compliance Department says what is it and you say well you could think of it as a Trust Company right but then that also doesn't quite make sense and so they're like you know what let's just Regulators love when you're all koi and going oh maybe it's this kind of O I can't answer any your questions yeah lawyers don't really go for that and it doesn't even need to be right right like yeah there's been times where I'm talking to a financial institution they're like is this legal and I'm like well here's the law here's where it says it's legal and they're like well uh I need you to have a a law firm write an opinion letter I'm like you want me to have a law firm write an opinion letter that like this sentence is this sentence like what why uh and then law firms are a little nervous to do it because they're liable they just really don't like doing stuff like that um or it's very expensive and so you know they just that just calling a spade a spade I don't know if that's the correct usage of the idiom actually but sounds good would be very valuable because it would just remove people's natural anxiety to things that are new even if technically There Are Rules yeah makes sense havanas you mentioned proliferation of stable coins I this feels very safe to me this feels like so a lot of folks external to web 3 don't like fluctuating tokens you have to have a conversation with the Su nobody wants that this seems like a different a different area a different opportunity so you really like you kind of see a vision of proliferation can you walk us through that like you know what are you thinking about in terms of growth is it safe like does it feel safe and that's why yeah I mean I think to to answer this question we want to kind of break down the the landscape the regulatory landscape a little bit so we've got you know we've got the FED we've got we've got the OCC uh we've got the FDIC each playing their own unique and uh complex roles in in the government and then you've got the SEC and the cftc getting a little fomo on the side right so so in in a nutshell it's it's not the most easiest uh to get all these parties to come to one consensus uh all while you know kind of keeping the resilience of what what blockchain really is you know and ultimately you know anytime you have a new technology there's there's old systems and there's this new notion that no one's really explored so stable coin on I think no I don't I don't think from from this perspective like stable coins and other coins we uh we shouldn't categorize them in the same category we heard about like the different categories earlier this week uh so I think you know stable coins in and of themselves they have this this structure that's that's uh you know intended to be safe it's intended to be uh useful and overall from from my side of things I think I think based on the way that it's backed the way how it's backed one to one how it has its required reserve the important part is to have the right framework in place and have the right structure in place to be able to uh prevent sort of any kind of illicit activity or any kind of Bad actors uh you you know um Mark you mentioned about the uh the algorithmic ones you know we saw we saw kind of like tether playing exploring this not tether I'm sorry um teral Luna kind of exp explore in this department a couple years ago and it ended up failing uh you know miserably and it kind of gave stable coins this bad rap but this in this case in this instance I don't think this is in in in the same conversation and in fact those that were in the industry and Engineers or had you know kind of a deeper knowledge saw the collapse of Luna coming because their business model was fundamentally flawed like it everyone knew this was coming a year and a half before and they had thrown Sirens out and no one really paid attention so I think it did give a bad reputation to algorithmic stable coins and I think there's kind of more of a future there so I'm going to kick it down the line what do you guys think from a future perspective what are you thinking what are you seeing in terms of opportunities well or use cases yeah I I think um I think stable coins are going to be built into the fabric of everything as they um you know as Clarity comes uh and I don't think that's going to happen fast because there are a lot of rules that just like aren't helpful and are don't give them the same parity in the financial system but once they are I mean it's you know most of the apps you have are going to use stable coins in the background um but there are going to be a few unanticipated side effects of stable coins one is dollarization like what you see is stable coins are 99% US dollar but there are stable coins for other currencies and no one use uses them because it turns out that people prefer dollars globally and so you might see dollar increase in dollar dominance and that's going to create some geopolitical tensions around the world um and then uh other things you're going to see are uh you know the regulatory system is going to need a complete overhaul so right now we have these things this thing called the bank secrecy act and it says you have to do kyc and you have to do all these things and it the spirit is to prevent moneya laundering but it actually prescribes how you do that and that doesn't really make sense it's not it's not the only way to stop moneya laundering right there's other ways right and so over time as this becomes more and more of the economy you know the global regulatory system is going to have to adapt either by passing new you know a whole new regulatory framework or by backing off the specificity of the rules and that's going to have big impacts because a lot of the cost and frustration with banking is actually in compliance to those rules and so I you know that will lead to a lot more people being banked around the world and that has really positive benefits for everyone do you think we'll see a bit faster adoption if applications implement it first so if it's kind of the backend rails where the end users don't see what's happening could we see a faster adoption than Enterprise adopting it if yes uh but I think it's going to be a a little bit of a step function like the Enterprise won't pay attention until there's enough consumers and people that the fastest movers of the early adopter are individuals they don't have to get anyone's permission you're already seeing that okay and as this volume picks up and holdings pick up I mean it's big business now the Enterprises are like oh we got to we got to get into this and get behind this when they turn on you I mean you see an order of magn Step magnitude step function and then once that steps function has happened then you have the late adopting consumers who are like oh this is a real thing now that like my bank supports it and then you have another step function increase and that's probably how we'll actually see it play out as Enterprises pick it up and get into it and I I think they they know they have to um which is why they're all piloting things y do they know they have to does Fidelity know he has you have a job well yeah you never know what are you thinking from the industry what are you guys seeing I think my joke well it's not even a joke answer it's a serious answer phrase silly I think it's going to get crazy uh you know as as money moves faster or as price acts more as like a pure digitized signal and as you can move you know any asset from any chain for any one then the whole internet's going to financialized in this really weird way where political poly Market uh you know election chances are going to impact the price of RuneScape gold are going to impact money laundering operations in in the third world it's uh going to be very strange future uh but as as the money wants to move right like in particular I think you hit on something Mark that it it's the biggest thing to think about is its political impacts as the world dollariz us dollariz or not as emerging oh Castle Island Ventures has put out this great document on stable coins in Emerging Markets I high highly recommend it people are using it to hedge exposure to their own currencies as you mentioned people are using it to bridge into crypto as you'd expect uh and as a last thought I wonder if it gets easier to comply with stable coin regulations and it gets easier to issue stable coins well it's very lucrative to issue a stable coin uh if these all have liquidity against each other in the background you know is every Bank issuing a stable coin is every institution issuing their own stable coin uh I wonder because that's you know 5% on a bunch of money that's sitting there is very attractive stable coins as a service maybe yeah yeah so we're going to open it up or anything else you want to conclude with or do you want to open it up to the audience for questions questions um has there can can some any of the panelists sort of speak to um the potential around uh uh backing stable coins with tokenization of deposits transferable CDs um and also what the potential role of um uh Credit Unions might potentially play with this expanding ecosystem of liquidity providers into the stable coin ecosystems so uh I would guess that well I wouldn't guess it is the case that the major stable coin issuers take the dollars and it's it's not held in a bank account right that in a sense would be a tokenized bank deposit um and instead uh they are buying assets that yield so we would like to think that's all Us treasuries in reality it's not they want more yield and they go into money markets and they buy CDs that may have some duration risk and they might buy you know uh other investment grade assets um they may even for a small portion of their portfolio go really out the risk curve they might buy Bitcoin um which tether is rumored to have done and so really these stable coins can be backed by anything I mean in the case of D which is algorithmic but it's probably the least funky of the algorithmic ones I mean it's really what it is is it's over collateralized by like BTC and eth by a lot I mean I don't but it's probably like 60% over collateralized or something huge so like that's that's backed by Ethan you see already um I don't know about I guess rap Bitcoin probably I don't know exactly what's in their reserves but the point is that's what all these are that's separate from I think tokenization of those specific financial instruments right so tokenizing Bank deposits is something that my understanding is JP Morgan is trying to do in its closed system so you can kind of transfer those around between Banks and then tokenization of there's a lot of real world asset companies that are trying to wrap a traditional Financial instrument to deliver just that instrument to people that's not necessarily thought of as a stable coin because it's not $1 to $1 um there might be other benefits to it but it makes it a little harder to use as like a payment method and a unit of account which is a big purpose of currencies in general yeah I mean my my short answer to it would be like banks are generally conservative so it all depend on the underlying asset behind it backing it so I'd also maybe say say that to credit unions I mean the reason Credit Unions still exists I mean they're losing share to these big Banks but the reason they exist is because they have a lock on some customer base who wants to use them right and what you'll see as everyone wants to get in the stable coin business is that anyone with their own locked in distribution is going to you is going to issue a stable coin right and so just like anyone who can issues loyalty points AMX does it hotels do it everyone wants to get in on the game if they own the customer right right and so anyone who owns some customers is going to want to issue their stable coin they're not going to compete with usdc or usdt they're not going to win the whole Market but they'll they'll work within their their own users and perhaps uh individual um you know Credit Unions will do that with their users and this will give them it could give them a new lease on life if they're forward thinking about it because they're earning more they're earning the entire they basically don't have to pay interest on those what are essentially deposits um so I would encourage Credit Unit get into it but you know the tech lift is uh trivial in the scheme of Technology but material for a credit union yeah makes sense awesome well thank you guys very much really appreciate it