Stablecoin Interoperability: A Single-Infrastructure Model | Joao Reginatto - M^0

[Music] hello you guys can hear me over there all right thank you guys for being the the brave ones um so first of all a little bit about me so uh my name is Jo reginato um I've been in the stable coin world for um over six years at this stage I used to work for uh Circle U for eight years uh and in August last year I joined mzero labs and U and at Circle I led the the build out of USC uh and led the the product teams um around stablecoin and all the products involved in not only usdc but also Euro coin and um the the cross chain uh transport uh protocol uh product that was built um as well so I have a little bit of History um and I have a passion in particular about interoperability because I always come to stable coins from the perspective of them being infrastructure a lot more than than a retail product that people are aware of it I think that's just the tip of the iceberg um and since we live in a world that is completely non-interoperable when it comes to stable coins today I'll I'll talk a little bit about what we're doing at m0o and an attempt to improve that um so first of all there you go first of all let's look at let's look at the market as it is right now and and think about the the Dynamics a little bit I think uh again this is not news uh for for you all I'm sure uh but this is the data as it's taken from this morning so and I'm looking here at at really only the dollar denominated stable coins that are backed by uh Fiat collateral right so offchain collateral I'm not I'm discounting everything here that's um uh based on crypto collateral um whether they are endogenous or not um we we qualify those as a little bit more experimental these products are pretty robust they're pretty established uh but the the the picture of the world that we have today is is a world that is very very highly concentrated in the hands of USD as you as you can see uh and if you consider just the top two issuers between tether and circle they they hold over 95% of the market share um what are some of the characteristics of the market today uh so it's about 130 billions in size again uh discounting sort of the the crypto native stable coins which add about another 10 billion to it um it is reasonably fragmented so there's actually 22 live products today as far as uh again offchain collateralized dollar denominated stable coins um but it's highly concentrated so despite being there being 22 live products the vast majority of the market is taken by by just the two the top two issuers and even more if you consider the top three issuers then all of these models are what we call single sing single issuer models so um they're very centralized they're not um they they don't align with the ethos of of blockchain in crypto uh at all um and we were we're going to talk about why that is not and and I'm part of the problem right I helped create the second largest U but but I recognize that that is an issue that needs to be improved on and we're going to talk about that my opinion is that these products actually have little to no differentiation um you know despite what the issuers might argue there's there's very little that um differentiates them it's like oh you can trust me a little bit more or you know my licensing regime is different like that's not really a different like these products are effectively commoditized U very similar in nature if you consider like the technical layer that they have it's very simple and very much the same um they do have strong Network effects though they behave a lot like payment rails from that perspective so in the sense that you know if I'm using PayPal and I have the power to tell somebody to pay me using that payment rail that that has strong Network effects because it it kind of connects this network that uses the same payment rail together and it's very interesting from a business model point of view because uh these issuers in these models They Don't Really generate any utility utility from the P from the point of view of and maybe I'm being too rough don't generate any utility they generate some uh residual utility but the majority of the utility is generated by use case venues so a centralized crypto change for example a D5 protocol this this is where the utility is for those products um but the issuers sit outside of those of those utilities and they keep basically 100% of The Upside whilst the use case venue is generating all of the value really in in the sense that it is accumulating all of the customer deposits but it's keeping none of the upside um and despite you know some some reasonably High barriers for entry from the perspective of what it takes to build one of these centralized issues but also what it takes to break into the network effects um there are a lot of new entrance coming so if we have about 22 live products today we're going to have a lot more in the coming months because there's a lot of companies coming uh coming to Market and and we think that's a reflection of the famous quote by Jeff Bezos you know your margin is my opportunity the business for these centralized issues is too juicy for you not to see competition in the near future um let let's think critically about this market and and its uh structure when you zoom it out a bit and you know ignore you know crypto uh versus traditional uh finance and and think about you know uh structures that have been in place a lot longer so before blockchain before crypto uh what what lessons can we learn from that I think the the first one is that tokenization is not necessarily a new thing right if you assume that e-money issuance is also some form of tokenization is also taking a form of money uh from a counterparty and issue an electronic instrument on on top of that um in a way that is tokenization that that has existed for many many decades around the world in different ways uh obviously issuing these instruments on a blockchain is is kind of the novel element um but it's not as Innovative as some people claim to be particularly in the way that these products have been architected um the other thing that we can think about is what what are the equivalent to these table coin issuers in traditional markets so what is a circle what is a tether in traditional markets are those um e-money issuers so it's PayPal an equivalent is uh square cash an equivalent um is um Starbucks an equivalent I mean Starbucks if if they're you know dollar balance product that I'm sure most of you use to buy a cup of coffee um if that was issuing an electronic instrument that was you know available on on a blockchain and people decided to call that a stable coin it would probably be the fourth or the third largest stable coin comparably uh so are those equivalent to to stable coin issuers Are banks equivalent to stable coin issuers are what banks do in the form of issuing deposits equivalent to what these stable coin issuers are doing our payment rails equivalent uh right so is is a is an a is a is a a Swift and fed wire equivalent um to stable coin issuers I think the answer is not really yes and not really no for any of these stable coin issuers are kind of a novel thing that was invented um but also a little bit of a weird animal because it is novel and I think what what what we will talk about later is that the market is evolving for that novelty to go away and for us to go back into more traditional business models because if you think about it uh what is the typical business model of these traditional constructs and what is the technology stack of these traditional constructs it's a lot more sophisticated a lot more complicated and and a lot more valuable than than what stable coin issues as they are today uh are so let's talk a little bit more about interoperability in particular then um and and this is not obviously we don't have time to do a lot of history uh discussion here but historically um you know for for a couple hundreds of years already we have grown accustomed to despite uh you know the the some some people especially on on policy and Regulatory elements um enjoying that or not but the vast vast majority of the money that we use today is issued privately right it's it's called private money um and uh you know cash for example which is something that is issued directly by governments is actually a a very small part of what we use on a on a day-to-day bases I mean the the money that you have on your bank accounts the money that you have on digital wallet products uh those are all issued privately and uh and and the way that this started you know particularly if you want to think about the US um is is in the form of commercial Banks you know narrow Banks the the the the Cowboys of the time issuing issuing their own their own uh instruments uh to be behave like money so the early IUS and and issuing those deposits in a way that was somewhat structured and over time somewhat similar um but it was highly fragmented so you have all these all these Banks they're issuing their own private version of money they're not interoperable right so if you're dealing with a bank in Arkansas versus a bank in Texas like they are completely different and they they they don't interoperate you you got to have to trade effectively one instrument for another um and obviously as the economies around the world evolved like this proved to be an extremely Lim mited model right it's obviously bad for you to have a very fragmented uh version of of money in a society it's it's going to be on the way of economic growth and and and activity growth So eventually if you want to consider that a technology stack it has evolved around the issuance of private money to include things like Central Banking to include things like uh Clearing Houses and Etc and and so um you all of a sudden there was a lot more standards around it there was a lot more sophistication around how these instruments should should be issued uh how they should be governed and how they should interoperate um and and if you think then um today you know the way the banking system works um most most of the time around the world you continue to have all these versions of private money being issued I mean effectively when you have money at JP Morgan Chase it is not the same money that you have if you have a deposit on Bank of America right um and and a good example to illustrate that is about a year ago if you had dollars on Silicon Valley Bank were those dollars effectively the same as dollars that you had on W Fargo uh no they were not the same because they were about to disappear for a while right so um so privately issued money still exists today the difference is that we just have better technology stack I would argue in traditional markets than what we have in stable coin markets today in terms of uh governance in terms of ensuring interoperability the technology stack is more robust and is more sophisticated and and the reason why we're talking about this is effectively to illustrate that we need to to go through that exercise in history in stable coin um in the stable coin sector as well because if we think about stable coin interoperability for a second uh these products are definitely definitely not interoperable this is an argument that I have sometimes with people and people say no but I can trade you know between USC and usct yeah but trading is not really interoperability right um I mean if if I send you an email from my Gmail account to your Yahoo account and and you lose like a couple of characters at the end uh you know in in like as title of you know the cost of interoperability is that really interoperability no there's no standard um you know there's maybe an underlying standard in things like uh the blockchain asset standards like erc20 but there's no standard at the stable coin level and and and users have to really go through a price Discovery exercise to convert from one form of these guys to another form so if I have usdt and I want to get to uscc on the other side of FX if they have to trade one for the other and that involves price Discovery involves going to market and involes somebody assigning uh ascribing value and price to to my to my assets um and and if you want to create a new stable coin issuer like it just has a lot of um barriers for entry at least in the way that people have thought about it um because people have thought about it okay I'm just going to copy this model and I'm going to create my stable coin and my stable coin is going to be incrementally better uh but for me to have a business I actually need to gain acceptance and Adoption of that and so people need to rec recreate all the set of use cases uh you know uh push for traction push for trading liquidity and effectively this leads to Market fragmentation like what I'm advocating is that people got to stop doing that like please stop issuing new stable coins if they are completely fragmented and not interoperable first of all you you're unlikely to win because the the the difficulty of breaking into the network effects of something like USC and never mind tether is enormous and and but most importantly because you don't have to do that why do you have to care about use cases all around the world I'm I'm going to propose a different strategy here and obviously everything that leads to Mar Market fragmentation is going to be objected by market participants Market fragmentation is essentially bad in most of the time and the counterforce of that effectively is Market concentration so it's what I said you effectively we have 22 live products uh but in a sense you know the top two products uh have 96% of market share and uh just just for you guys to think about a quick case study here what what binance did with bu USD in 2022 and 2023 is actually really really interesting and we we believe that it is actually the way that the market should evolve so binance if you think about it had a self-branded dollar product it was recognizable within its ecosystem of services right there was a lot of synergies for example you got you got free trading on binance if you used BD as opposed to some other product uh they implemented over time this this seamless autoc conversion process right so if I deposited tether I would have a dollar balance on binance and behind the scenes they would actually autoc convert that tether that I deposited into B USD again moving a little bit away from this idea that stable coin are retail products that customers actually have a choice and they say no no no I'm going to hold this thing on my wallet and not the other thing because I'd like this color better than the other that is a false prerogative the reality is that you're going to use services and whatever that service tells you to do you're going to do it and so it is the prerogative of service like binance to completely autocon convert all of these deposits into whatever form of dollar is better for them which in their case was B USD because they would make the treasury yield on top of 100% of the customer deposits which is precisely what a rational company should optimize for right um they own the business model and they didn't need to to push adoption into other venues so think about it B USD was completely irrelevant outside of binance nobody cared about BSD outside of binance probably nobody cared about BSD period unless they were using bin and services and again why should it be different why should Chase go to Bank of America knock it on the door and saying you should definitely use my my dollar infrastructure like it it doesn't make any sense uh these these these venues should be completely independent so let's talk about what we do at at m0o then um uh what what is m0 m0 is is and I should say it will be because it's in the process of um of launching in in a couple of months but it will be an onchain protocol combined with a with a set of offchain standards and apis that effectively allows multiple institutions to issue a fungible crypto Dollar in our case we call it m uh so effectively is turning the turning the infrastructure of stable coins upside down and and uh and acknowledging a certain belief system so this is what we believe in that money issuance uh infrastructure should be democratized so if you think about it there's no way today for me to knock on tether's door to knock on circles door and say I would like to issue your product as well can I there's no con first of all they're going to tell you no but second of all there's no construct for that while it's in traditional markets uh is there a way for me to become a new bank hell yeah it's pretty well understood is there a way for me to become a new e-money issuer hell yeah very well understood very large markets uh so it's not it's not table it's not practical particularly in crypto and blockchain as an industry where the ethos is so different for us to say that you know there should be these uh Ivory Tower you know dollar issuer products dollar product issuers uh and nobody should touch them that that's wrong and we think this infrastructure should be democratized and available for any institution um the other thing is every use case venue should become their own isser that's something that we believe in every centralized exchange that has dollar digital dollar customer deposits uh pardon the war but they're stupid if they're not issuing their own stable coin they're losing money they're hemorrhaging money every day to these large issuers and there's no reason why they should shouldn't issue their own stable coin the problem is that people have understood this in the past in the wrong way they think about it as oh I'm going to have to issue my stablecoin and then spend a lot of time and money going around and gaining adoption uh and our answer is no you don't need to do that just focus on your own business do you have a small exchange that has $200 million in customer deposits worth of stable coin create your own stable coin and autocon convert all of that into your own and uh and make 5% on top of that um the the other the other belief that we have is that reserve and collateral quality should be standard should be pristine obviously this is the most important thing for these products uh but it should be standard enough of this thing of you know my money my money market fund is better than your treasuries and you know your your partner for holding treasuries is worse than than this other one that I that I got and you know your jurisdiction is worse than mine this is all like childish um this securitization you know properly proper uh uh custom stud of collateral has been done for decades and like I think in crypto sometimes we have to relearn what has been done for decades in traditional markets like there's no reason to innovate in this like you just find uh like a standard securitization like orphan special purpose vehicle in some very very sound jurisdictions you collateralize a stable coin with us treasuries short term probably uh and off you go like you don't need to argue with anybody that that's good or not because that has been proven to be good for for years and years and years the other belief system is that interoperability should be an ecosystem-wide goal I'm very disappointed that we as an stable coin ecosystem are not rowing behind and and arguing more about this I I think I think you know people say oh look you know it's the killer use case in crypto look at how much uh traction we have gotten with dollar stable coins and that is true but we are going to we have landed on a very very bad spot today we have landed on a spot where a single issuer has 75% of the market there's no interoperability with anything else uh just just think again zoom out and think about traditional markets would we be okay in any jurisdiction with a bank that holds 75% of customer deposits in that jurisdiction no that's an extremely bad from a concentration risk like regulator Regulators would intervene like much earlier than that and and we we got to think about that uh the lack of inoperability is really bad uh for consumers and for all the venues that utilize these products and effec have put these products uh you know as as kazars as like dictators um in in an ecosystem that from an ethos point of view should be a lot more decentralized and open and um and the other belief that we have is that the the business model for stable coin issuers um without in the absence of utility services will come to an end so somebody who is just a stable coin issuer period and they don't do anything else they don't create any utility for that product um that's going to come to an end uh pretty quickly We Believe uh so very quickly uh the way that the way that m0 works is that it it outlines a couple of uh specific actors that participate in a coordinate coordination system um there is eligible collateral that from a governance point of view there's criteria dictating what is eligible collateral and and imagine in this case short-term us treasuries to begin with that gets allocated and custo in collateral storage mechanisms that again a very very pristine but very standard no not not a lot of innovation there uh but they are separate from the issuer so imagine that similar more similar to Banks um this collateral is actually injected almost like Equity from third party providers it's not the deposit that's coming from customers you have issuers you have an external type of entity called a validator that verifies that this collateral is in place and emits proof of chain proof of reserves on chain and then that that that issuance you know of the stable coin U gets sent into the market uh and gets traded into the market so this is effectively how it works uh we we very interested in discussing with folks that are interested in becoming validators issuers um supporting collateral storage uh we're open for business and and and interested in discussing with uh with folks who are passionate about stable coins you can find some contact details and uh thanks for the time