Steakhouse Financial - Cryptodollars and the Hierarchy of Money

I'm super excited to kick the day and the conference actually so I will speak about crypto dollars and thearchy of money and the whole idea of this presentation is to give you some concept to think about the presentation you will see for the next two days so it will be an opportunity for you to just think well maybe I'm saying some stuff that are wrong you agree disagree but at least you have the framework to try if I succeed to think more critically about what you will see for the next two days oops so first uh if you want to have the slide you can go to my Twitter it's the last post so you will get you can download the slide uh and watch them later or while we are doing the presentation so I'm doing a crypto what I call crypto banking which I'm good at because that's I'm probably the only one using this term for this what it means I started to work at m 3 years ago doing a lot of financial reporting Hew set and so on and I co-funded with my two other partners stos financials two years ago which is a Crypton Financial advisory and we work for some of the best defi protocol so the first concept I want to submit to you and again it will be my definitions but you might disagree but it's important just for the rest of the presentation the difference between between stable coins and crypto dollars so I will Define stable coins as onchain issued liabilities that promise to maintain value relative to reference assets so anything that said well I promise to keep the the peg that's for me a stable coin some will not keep the peg obviously and the difference is when you are speaking about crypto dollars those are stoc coins that are redeemable for what I will call higher level money and we will see later the hierarchy but it just something closer to the reference asset if you are a stable coin in dollars for instance it could be any reference asset but we will always use the dollar it's just to say well if you are for instance usdc you can redeem in for a bank deposit which is still not the pristine collateral the pristine Val reference of money so crypto dollars are a subset of stable coin I'm not saying that all stable coin are not important they are but for this presentation I will just focus mainly on the crypto dollars so thearchy of money here is you can hear what uh the term is was created by pering that you can see on the bottom a nice Muk if you have some time to follow uh this is thearchy of money during the gold standard we are no longer in the gold standard but it's making stuff more easier to follow so real money was gold gold was the most important stuff then you have curreny US dollar uh pound sterling that were pegged to Gold until there were runs so there were IOU of gold so obviously it worked until it didn't then underneath you have Bank deposits bank deposit are promised to give you currency on demand and it works until it doesn't and at the bottom you have the crypto dollar well as you can see that when you are going up it's more like like money and we call we speak about money and when you are going down it's more looking like credit because it's an IOU of an IOU of a I so there is more risk what is interesting is you can see that at the top we have gold but we are quite limited uh in the supply of gold and at every layer of thearchy you can create new money you can increase the money supply and you can so that's the concept of elasticity where each layer can increase and discipline when there is a crisis or something that why people are redeeming and people want to go up to the Archy because they have a stress and they want to be more safer so oops another uh concept for the related to this money creation is fractional versus full reserves stable conss banking whatever full Reserve which is this balance sheet here you have lower lower level money so the stuff on below which in your case will be stable coins or crypto dollars and on the asset you have higher level money higher level money for instance for usdc you will get bank deposit T bills that we will include in full reserve and uh same for pi USD for fractional Reserve banking it's a bit different you have the lower level money so your stable coin but you don't have 100% backing by higher level money so you might made some investment on the side which have longer maturity it's less liquid than money because you you cannot redeem for just I don't know a loan in the US and so there is some risk and that's why usually when you are fractional Reserve you have some Equity buffer to sustain the fluctuation of of those investment you can also have no reserve and that's for instance makeer at the beginning or liqu Ste where you don't have any of the higher level money so you cannot redeem those are just stable coins that are not crypto dollars and obviously there the peg is a bit more difficult to to manage I just don't see the time so I don't know how much I'm doing on time uh so just to show you thearchy of money with some fancy color so similar to what we saw two slides ago at the top you have a the FED reserves so the dollar notes and the reserves at the FED underneath you have the US Bank deposit which are fractional reserves you can have usdc which is full reserves and D underneath which is currently more fractional Reserve because there are some Crypt loans and you cannot redeem die for Crypt loans that wouldn't make much sense but you can from D redeem into usdc from usdc you can redeem to bank deposit and from the bank deposit you can go to your bank and get US dollar notes we also have here the Euro dollars which are just non US Bank deposit and T for instance is more likely using more deposits uh another concept that is important for crypto dollars is the difference between the primary and secondary Market why is that if you look at the literature A lot of people are saying well stable coin are not stable they're not always at $1 for instance it's always fluctuating but is it really what is interesting is that they are always taking the single high market price because it's the easiest one to find you go on Unis swap on curve whatever deck you want or even on centralized exchange you will not get one to one there will always be a small spread just because that are arbitragers uh market makers so primary Market is the value uh that you get at the issuer of the stable coin and if you look carefully at Circle you always get $1 per usdc and the opposite for $1 you always get one usdc and I found no case in time where it wasn't the case uh if you look at die at maker you can always redeem for one usdc currently or mint the other way on S Market it could be different why because it's driven by supply and demand and you are expecting Arbitrage opportunities for people to Arbitrage so both the primary and secondary markets are important for crypto dollars but obviously if you don't have a strong primary Market you might fail to have a sary market but it it's not because you have a good primary Market that you will be good on sary Market nles let's say you are issuing on ethereum and some people want to buy or trade your stable coin or crypto Dollar on another layer two or another layer one there are bridging issues there are delays and so the price can fluctuate although there is some Market element that makes it a bit difficult to have a proper price first the spread that you have on decentralized Exchange and if you look at just at the die uh you can see that at one point there is many prices and sometimes it's quite fluctuating just because arbitragers cannot do the Arbitrage quickly enough or there are some other technical reasons so we discuss that the crypto dollars can be redeemed for higher level money for D let's say it would be usdc for usdc it's bank deposit so now we can look well is it us this fa is it import that important and what is happening so here on the right you have two charts where you can see in a blue the growth outflow meaning for a 30-day period how many percentage of the market circul outstanding Supply was redeemed and in purple you can see the net redeem meaning over 30 days how much of the outstanding Supply was redeemed minus what was minted which is more or less what is a decrease uh in the outstanding Supply what you can see is that there is a lot of redemption Prim as a primary issuer as a primary market up to 60% when there is a stress when there is some volatility in the market it's more likely than people are redeeming but it's not because a lot of people are redeeming then they want to decrease the supply of your stable coin actually if you look at the net outflow you can see that most of the time both for D and usdc on the bottom it's usually way below 20% it's only when there is a big stress which uh for usdc was obviously svb after svb a lot of people redeemed funn funnily enough if you look at D there was a lot of redemp gross Redemption during the svb incident but no uh not net outflow because actually there was a lot of inflow So 20% seems the threshold where you are usually quite safe or somewhat safe except on major events so that makes the qu POS the question well maybe fractional Reserve is enough because most of the time you have only 20% net redemptions so what is the right threshold obiously it's not 20% because we can see that it goes up to 30% from time to times but maybe fractional reserves is enough to remain safe one key item that I'm quite interested in is what they call singleness of money if you look uh so sness of money allows within thearchy of money to move from One Financial instrument to another frictionlessly so we saw a few slides ago thearch of money the question is can we go from d the stable coin to a dollar note easily or not and what is important if you look in trfy you have uh Euros for instance because we are in Belgium uh you have Euros you don't have BNP pariba Euros you don't have Euros you just say well I have Euros because it's so easy to transfer uh one Euro from y bank account to another or to a Euro physical Euro that you don't think too much about well is it the same or is it different when we are going to uh to defy it's actually quite different you never pay in Euros in defi if you go on Unis swap even if you use Circle pay or any payment method that there is you never pay for Euros or at least what you pay usually is well you will pay in Euro a the angle stable coin Euro C the circle one or EUR CV the ass one and they're all EUR based stable coin then so there should be one euros and at the primary sh they one Euros but you cannot pay for instance with your CV one to1 uh when the price is expressed in the circular stable coin so that is quite an issue and what I'm proposing is that the problem is not the L of cbdc obviously Central Banker was where are always saying that cbdc are needed but it's not because the singleness of money existed way before central banks so there was already already ways to fix the problem actually regulation is quite of an issue for uh for the singleness of money because for instance if you look at a regulated stable coin under mic or under other framework they are not allowed usually to keep uh crypto dollars of their competitor but even if they could usually they don't want to I worked quite a lot to try to have a defi stable coin keeping some liquidity reserves in other stable coin from their competitors and I can tell you it's quite challenging for one stable coin to keep some uh exposure to another stable coin just because of the competitive competitive U issues if you look at the so just uh yeah let's start with this one so if you look on this one you have the BNS which are you can convert from one to another it's stfy so it's slow it's painful and sometime it's a bit costly still one to one but with a fees as threat Riders all all the time and just on the line below you had f b stable current so you have the P USD usdc and usdt and from those you cannot convert one to one just not possible you can go on curve you will get a great price but it's not one to one so they are not the same if you go one level below you have the defi stable coin and just represented D and USDA so the angle one and you can see that those have liquidity reserves in usdc so you can always go from D to usdc one to one at the same time you can go from USDA to usdc one to one and so that means that with these those two properties you can now go from USDA to die one to one and here is a transaction that I made that I didn't execute because I didn't have 1 million but you could use 1 million USDA to 1 million die and it's exactly one to one two years ago it was possible to convert up to 4 billion from for instance die to usdc now it's no longer the case but I hope it we will improve the system and there are many ways to to get better so I will just leave you to this slide just to think again again about thearchy of money so we have the old one the fed the Central Bank the US Bank the non US Bank which are Euro dollars maybe in the future we will get just the crypto dollar of money with fatback stable coin fully reserves under the central bank and then the factional reserve underneath thank you [Applause]