Speaker 1: Hello and welcome to another episode of the all thoughts podcast.
Speaker 1: I'm Tracy allowatt and I'm Joe Wi. Isn't they so, Joe? UH,
Speaker 1: didn't we say recently that we were going to be
Speaker 1: talking about stable coin regulations more? There's never enough, you know.
Speaker 1: I actually I have. I think there are lots of
Speaker 1: reasons to continue to focus on stable coin regulation. Why? Well,
Speaker 1: I think the biggest one in my mind, is this
Speaker 1: sort of thing I internalized from the great financial crisis,
Speaker 1: which is that things blow up when they're promised to
Speaker 1: be stable. Yeah, I think that's exactly and to me
Speaker 1: it's like, I know, I do not expect to experience
Speaker 1: in my lifetime like a bitcoin crisis, because people know
Speaker 1: that bitcoin crisis or a dogecoin. People know that these
Speaker 1: coins are extremely volatile. They don't bucket them into, uh,
Speaker 1: you know, parts of their portfolio that are expected to
Speaker 1: be safe, and so they can fall like a stock can,
Speaker 1: whereas we know that, you know when something is like
Speaker 1: triple a or dollar peg or whatever, that's where trouble
Speaker 1: can theoretically start. Yeah, so two things there. I totally agree.
Speaker 1: The other thing is, if you think about crypto broadly,
Speaker 1: stable coins are really the way in which the traditional
Speaker 1: financial system interacts the most or one of the most
Speaker 1: important ways with crypto. So stable coins are interesting because
Speaker 1: they build up these reserves of financial assets, things like
Speaker 1: commercial paper, and there's a concern there that maybe if
Speaker 1: you had a stable coin experience a big amount of trouble,
Speaker 1: that it could affect the CP market more broadly and
Speaker 1: affect the financial system more broadly. And also there's a
Speaker 1: good argument that stable coins are the one killer APP
Speaker 1: of Crypto, that where do people actually use crypto? It's
Speaker 1: like tether, U, s DC. These are huge things, right,
Speaker 1: and so he's like, well, what do people use crypto for? Well,
Speaker 1: stable coins are like popular and why spread and therefore,
Speaker 1: you know, it's an area to be putting a lot
Speaker 1: of attention. Well, also, I think that they promise something,
Speaker 1: which is the fact that they promise something, which is stability,
Speaker 1: kind of makes them easier to regulate. Like, you know what,
Speaker 1: what are other crypto tokens actually promising? Like they're not
Speaker 1: necessarily promising that safety net as you are discussing, but
Speaker 1: stable coins are, and so it naturally draws in regulatory interests,
Speaker 1: and this is a real, key, key point that you
Speaker 1: you bring up, which is that, yeah, like there is
Speaker 1: this there is this promise, there is this expectation. You
Speaker 1: can also sort of judge whether the promise is being kept. Like,
Speaker 1: does this coin have a dollar in the bank? Is
Speaker 1: like a pretty simple binary question. What would be the
Speaker 1: equivalent for doge client? Well, more difficult to answer than
Speaker 1: you might expect. Sometimes Fair enough, but we are going
Speaker 1: to be discussing all of this with someone who I
Speaker 1: think comes at it from a very interesting perspective. So
Speaker 1: we recently spoke to Senator Pat to me about this.
Speaker 1: He was talking about the stable coin bill going through Congress,
Speaker 1: but what if there was another way to regulate stable coin?
Speaker 1: Let's all right, without further ado, then, we are going
Speaker 1: to be speaking to Timothy Massad. He is, of course,
Speaker 1: a research fellow at the Harvard Kennedy School and also
Speaker 1: the former chairman of the CFTC under president, literally the
Speaker 1: perfect guest. Yeah, definitely, Tim thank you so much for
Speaker 1: joining us. Thank you for having me. I'm a big
Speaker 1: fan of the show. Thanks. Thank you for saying that. Yeah,
Speaker 1: text and the mail. Uh. So, why don't we go ahead?
Speaker 1: And this is a question I asked senator to me
Speaker 1: as well, but why the interest in stable coins? Like,
Speaker 1: what is it that is drawing this regulatory scrutiny at
Speaker 1: this moment in time? Sure, well, they're not that big
Speaker 1: relative to the financial senator, but they are growing very
Speaker 1: quickly and that's one of the concerns and obviously recently
Speaker 1: when we had that fall in crypto prices and we
Speaker 1: saw the crash of terra, which is an Algorithmic stert
Speaker 1: staple coin, that heightened the concern. There's a view that,
Speaker 1: you know, these things could grow very quickly and, frankly,
Speaker 1: that there's an opportunity here. They could help modernized payments
Speaker 1: and increased competition. So I think it is right for
Speaker 1: regulators to be focused on them and of course facebook's
Speaker 1: proposal of libra was really what uh captivated or really
Speaker 1: regulators to focus in on this. I actually hadn't realized that.
Speaker 1: talked to us a little bit more about that because
Speaker 1: you know, remember the Libre Splash was during the team
Speaker 1: boom and it just seems so unwieldy and I'm not
Speaker 1: really surprised it never got off the ground, but I
Speaker 1: don't think I had appreciated the degree to which that
Speaker 1: was a catalyzing moment for regulators. Can you talk about
Speaker 1: what happened there? But yeah, it was. It was really
Speaker 1: a huge moment, not just for the regulation of stample
Speaker 1: coins but also for the development of Central Bank digital currencies.
Speaker 1: You know, before were facebook announced that chair Powell testified
Speaker 1: and he kind of brushed off a question about cryptocurrencies
Speaker 1: by saying, you know, we don't, we don't regulate that.
Speaker 1: We regulate banks when stable when facebook made its proposal,
Speaker 1: and you will recall, the initial proposal was for essentially
Speaker 1: a stable coin. They didn't call it that, but it
Speaker 1: was a stable coin based on a basket of currencies,
Speaker 1: not just one currency but the dollar, the euro, the
Speaker 1: pound and a few others. And so central bankers around
Speaker 1: the world immediately were alarmed because they thought, boy, this
Speaker 1: could actually displace sovereign currencies. FACEBOOK has, you know, two
Speaker 1: billion plus users. What if they all use it? It
Speaker 1: also prompted some countries to really accelerate their CBDC development,
Speaker 1: in particular China. I was over in China shortly after
Speaker 1: the facebook announcement was was made and, uh, you know,
Speaker 1: all every want in Congress sort of looked at facebook
Speaker 1: and said, Oh, you're gonna undermine the US dollar. Well,
Speaker 1: every government official I spoke to in China had had
Speaker 1: the opposite reaction. They saw libra as essentially a way
Speaker 1: to backdoor dollarize other economies, because the dollar would be
Speaker 1: the main component. So they got very worried about it
Speaker 1: and they accelerated their CBDC research because of interesting. So
Speaker 1: you know it was. It was big from the standpoint
Speaker 1: of causing people to recognize stable coins as an issue
Speaker 1: and also from cbdcs right. So fast forward to today
Speaker 1: and we have the president's working group report that came
Speaker 1: out last year. I think we have this bill that
Speaker 1: may or may not be working its way through Congress.
Speaker 1: We have a lot of people talking in general about
Speaker 1: stable coin regulation. Would you characterize stable coin regulation as
Speaker 1: different to Crypto regulation more broadly, like, is there a
Speaker 1: different set of requirements that you're trying to satisfy here? Well,
Speaker 1: it is different because stable coins are seen primarily as
Speaker 1: payment mechanisms. Um, and the first thing to to realize
Speaker 1: is that the regulation today is really inadequate. It's a
Speaker 1: very light touch. Um, these are regulated under State Law
Speaker 1: under what we call money service business laws or money
Speaker 1: transmitter laws. Those laws originated with the Telegraph okay, and
Speaker 1: what they required was, you know, if you walked into
Speaker 1: a Western Union office in Kentucky and you wanted to
Speaker 1: send money to your cousin in Illinois, Western Union had
Speaker 1: to make sure it had money on hand. So money
Speaker 1: service business laws require very minimum capital. UH, they require security, again,
Speaker 1: very we're talking about amounts in the range from zero to,
Speaker 1: you know, maybe a million dollars, maybe two million dollars
Speaker 1: at the high end for some of these states, and
Speaker 1: some of them do have permissible investment rules. That does
Speaker 1: mean if you're registered as a money service business, you
Speaker 1: have to register with Finsen, right, which is a department
Speaker 1: of the Treasury which enforces anti money laundering and rules.
Speaker 1: So that's a good thing. We are imposing those kinds
Speaker 1: of restrictions on stable coins based in the US. But
Speaker 1: this is not a sufficient framework. To suggest it's it's sufficient.
Speaker 1: It's sort of like saying, well, you know, there's no
Speaker 1: difference between an excel spreadsheet and a blockchain. What can
Speaker 1: that do? You know? Um, we people, yeah, I know,
Speaker 1: some people do right, right, right, Um, we need a
Speaker 1: comprehensive framework. What would that involve? Prudential Regulation First, to
Speaker 1: make sure that these stable coins are fully reserved, meaning
Speaker 1: they have cash or Treasury securities backing them. But, more importantly,
Speaker 1: there's no stable in the stable coin today because there's
Speaker 1: no resolution framework. You know, if a bank fails, right,
Speaker 1: we have a well developed framework. The FDI C steps
Speaker 1: in very quickly, usually on weekend. Depositors are insured and,
Speaker 1: you know, life goes on. Everybody's fine. If a stable
Speaker 1: coin were to default, were to collapse, um would be
Speaker 1: handled as a normal bankruptcy, which means the automatic stay applies. Right,
Speaker 1: so holders are not going to get their money for months,
Speaker 1: years potentially, and what we call the Perry Passu rule applies.
Speaker 1: So even though I'm a holder of a stable coin,
Speaker 1: I'm in the same category as all other unsecured credits.
Speaker 1: So if the stable coin issue or has leveraged itself, well,
Speaker 1: you know I'm going to be competing with all of them.
Speaker 1: So that's a big problem. We need a framework that
Speaker 1: ensures good resolution and oversight as well as we've got
Speaker 1: to deal with the operational risks here, because the stable
Speaker 1: coins are trading on a number of decentralized block change
Speaker 1: and we got to look at how resilient, how reliable,
Speaker 1: are those? This is really interesting sort of this second
Speaker 1: have your point, because I guess intuitively, probably everyone sort
Speaker 1: of gets like, yeah, we should have some required disclosure,
Speaker 1: something to make sure the money is actually there. That
Speaker 1: seems like, I guess that's the obvious thing, that's that's
Speaker 1: the easy one, right. The second point, though, is not
Speaker 1: something I had really I've heard many people talk about,
Speaker 1: which is like all right, well, what is the mechanism
Speaker 1: that keeps it stable, particularly in the event of like
Speaker 1: something bad happening? And I see, I have seen some people,
Speaker 1: like on twitter for example, like talk about, say, like
Speaker 1: circles or tether. It's like capital cushion or the equity component,
Speaker 1: and it's often pretty thing. So what do you talk
Speaker 1: to us a little bit more about what you see
Speaker 1: as lacking, or what you see is the risks on
Speaker 1: that sort of like second component? Sure, Um, well, certainly
Speaker 1: capital helps prevent a bankruptcy, right, because it gives you
Speaker 1: a way to absorb lawsuit. But the point is that
Speaker 1: even with that you still need a resolution framework, you
Speaker 1: still need a way so that you know, this is
Speaker 1: a financial institution, we don't want it to and it's
Speaker 1: a payment company, we don't want it to go through
Speaker 1: the normal bankruptcy where where people are held up. So
Speaker 1: that's why I think we really need a more comprehensive approach.
Speaker 1: We've suggested this could be done administratively. I've talked a
Speaker 1: senator to me about his legislation. I think it does
Speaker 1: some of the things I'd like to see. It doesn't
Speaker 1: do all of them, but you know, that would involve
Speaker 1: not just prudential requirements on investments, but it would involve
Speaker 1: creating a framework for resolution. It would involve overside, it
Speaker 1: would involve audits, it would involve standards on operational resilience
Speaker 1: and on concentration of power. I mean one of the
Speaker 1: big issues here is should we allow stable coin issuers
Speaker 1: to be affiliated with commercial companies? What if Amazon wants
Speaker 1: to launch a stable coin? Feel about that? Well, talk
Speaker 1: to us about your proposal done, because I think when
Speaker 1: comes to crypto regulation there's often the sense, maybe it's
Speaker 1: unspoken sometimes, but the sense that the existing regulation isn't
Speaker 1: enough to tackle this new technology, this fast changing and
Speaker 1: evolving industry. Um, you know with pat too, me the
Speaker 1: Howe test came up, a number of times, this idea that, well,
Speaker 1: how are you going to use something from the nineteen
Speaker 1: thirties in order to regulate block chains and cryptocurrencies and
Speaker 1: tokens and things like that. But you're suggesting that it
Speaker 1: can be done. So walk us through the proposal. So
Speaker 1: let's talk about stable coins first and then the broader
Speaker 1: crypto market second, because we have a similar proposal but
Speaker 1: it's a different paper. Unstable coins, what I'm saying, with
Speaker 1: my co authors, how Jackson and Dan Owry, to law
Speaker 1: professors is that while legislation would be great, Um, we're
Speaker 1: not sure it will happen, number one, and we're a
Speaker 1: little concerned that it won't be comprehensive. So what we're
Speaker 1: saying is financial regulators today have the authorities they need
Speaker 1: to create a framework to try to bring this activity
Speaker 1: within the banking perimeter. Wouldn't be regulated exactly as a bank,
Speaker 1: but what you would do technically as you set up
Speaker 1: what's called a National Trust Bank, which then has a
Speaker 1: trust below it that is the payment vehicle, and then
Speaker 1: what this gets you is it gets you supervision by
Speaker 1: a banking regulator. But it can be done in a
Speaker 1: way where there's not deposit insurance, right, because we don't
Speaker 1: want that. We want the stable point issuer just to
Speaker 1: hold cash and treasuries and so forth. It doesn't need
Speaker 1: department insurance. It could be coupled with access to a
Speaker 1: Federal Reserve Master Account, which is very useful for settlement efficiency.
Speaker 1: And you know, the office of the controller, which would
Speaker 1: do this, can set a variety of other standards on
Speaker 1: all the other issues we need to worry about, such
Speaker 1: as operational resiliency, such as basic consumer disclosure, consumer protection
Speaker 1: and so forth. But the point is that admit this
Speaker 1: strative Lee. This could be done. It would require all
Speaker 1: the bank regulators to get together and cooperate, something that
Speaker 1: doesn't always happen in our system very well, but it
Speaker 1: could be done today under existing law, and again, we're
Speaker 1: not against legislation. That would be fine, but let's not
Speaker 1: wait around. We could today. WHO WOULD BE? Who is
Speaker 1: the regulator of a bank such as do? So? It
Speaker 1: would be primarily the office of the controller of the currency,
Speaker 1: because that it would issue a National Trust Bank Charter.
Speaker 1: But you would also need the cooperation of the Fed
Speaker 1: and the FDI C to really make this work. Ideally,
Speaker 1: you know, you need the SEC and the CFTC to
Speaker 1: go along to just to not do things that are
Speaker 1: inconsistent with what you're trying to do under the bank
Speaker 1: loans Um. But you know, we created the Financial Stability
Speaker 1: Oversight Council to bring the regulators together. We've suggested well,
Speaker 1: it could, it could help coordinate this as well. Is
Speaker 1: there anything about this proposal that would impinge on the
Speaker 1: current business model of major stable coin issuers? Because I
Speaker 1: think if you all talk to them, if we had
Speaker 1: Jeremy a layer of circle back on, you say yeah,
Speaker 1: more clarity, more regulation, totally fine, etcetera. Is there anything?
Speaker 1: Is there a Trojan horse that I'm missing that he
Speaker 1: would say no, this is not gonna work. There are
Speaker 1: things that they might not like. Um, the way we've
Speaker 1: proposed it, because we've said this could be done administratively
Speaker 1: and because we wanted to be very conservative and suggest
Speaker 1: something that the bank regulators could say, Oh yes, this
Speaker 1: uses building blocks we've that are tried and tested in
Speaker 1: our regulatory framework. We can do this. Is We have said,
Speaker 1: this trust bank would need to be a subsidiary of
Speaker 1: an insured depository stitution. It still wouldn't have insurance, but
Speaker 1: it would be chartered that way, which brings in banking
Speaker 1: regulation overall. So what stable coin issuers will say is
Speaker 1: twofold one. They'll say our business model is narrowed, we
Speaker 1: don't need to be subject to lots and lots of
Speaker 1: bank regulations, and I'm sympathetic to that. Um, I would
Speaker 1: be willing to go down a path of saying, yeah,
Speaker 1: let's customize the rules a little bit for these guys.
Speaker 1: They don't need all of these things. Our proposal already
Speaker 1: does that in terms of capital requirements and so forth,
Speaker 1: because the trust itself would be off balance sheet. The
Speaker 1: second thing they will say is, you know, if you're
Speaker 1: going to make this a subsidiary of a bank, that
Speaker 1: limits potential competition. The whole point of stable coins is
Speaker 1: we want to be competing with banks. I'm sympathetic to
Speaker 1: that too, because I do regard stable coins is potentially
Speaker 1: helping US bring more competition to payments. I think both
Speaker 1: those things this can be dealt with in the process.
Speaker 1: It really depends on how much flexibility regulators want to
Speaker 1: build in the system. But those, I think, would be
Speaker 1: the terrain objections they would have, and this was going
Speaker 1: to be my question actually, which is what's in it
Speaker 1: for a bank to allow a stable coin issuer to
Speaker 1: be a subsidiary? Yeah, well, you know, I think a
Speaker 1: lot of banks are looking at stable coins and sort
Speaker 1: of thinking about, do we enter this space? Do we
Speaker 1: not enter this space? Um, I think with with interest
Speaker 1: rates moving up, Um, it becomes interesting also, how does
Speaker 1: that affect the stable coin issuers business model? Right, because
Speaker 1: some of them now are going to be making a
Speaker 1: lot of money. On the of course, their deposits are still,
Speaker 1: you know, very, very, very small fraction of the total
Speaker 1: deposits in the banking system. Hundred fifty billion and stable
Speaker 1: coins versus nineteen trillion and bank deposits. But, you know,
Speaker 1: I think banks are really thinking about how do we
Speaker 1: maintain our competitive edge in UH in payments? I mean
Speaker 1: all of this also goes to a broader issue, right,
Speaker 1: of how do we think about banking? Banking has traditionally
Speaker 1: bundled credit creation, creation of money. Really Right, because most
Speaker 1: of the money we use is really represents private eye, I. O. U. S.
Speaker 1: it's only paper money that represents a liability of the
Speaker 1: government and payments. Right, banks have bundled all those functions.
Speaker 1: They've been entitled to certain regulatory advantages in order to
Speaker 1: do that, such as deposit insurance, such as access to
Speaker 1: fed master accounts and really stable coins and other innovations
Speaker 1: and payments are really raising the question of should we
Speaker 1: unbundle this a bit and let non banking entities come
Speaker 1: in and do payments? And this, by the way, there's
Speaker 1: a report that's going to be put out by the
Speaker 1: Treasury Department called the future of money and payments, which
Speaker 1: is a report required by the executive order, which presumably
Speaker 1: will talk about this and you know, we'll see if
Speaker 1: it takes a firm stance. I mean the scope of
Speaker 1: that report is very, very broad if you look at
Speaker 1: the executive orders. Supposed to talk about future payments and
Speaker 1: cbdcs and how can they affect competition and financial inclusion
Speaker 1: and so forth. And truthfully, you know, I'm I'm very
Speaker 1: interested in what the report will say, but you know,
Speaker 1: it may well be a committee product that doesn't take
Speaker 1: a firm view on some things but just covers a
Speaker 1: lot of territory. We'll see. Interesting just on the banks
Speaker 1: versus stable coins point this, this is something that came
Speaker 1: up in our episode with the Circle CEO, with Jeremy Ahlaire.
Speaker 1: There is a sense that, okay, maybe sending money via
Speaker 1: stable coins is more efficient than sending it through a
Speaker 1: bank which, you know, it takes days and maybe they
Speaker 1: charge you fees or they charge you a bad exchange
Speaker 1: rate or something like that. But the question always is
Speaker 1: how much of stable coins advantage is genuinely genuine technology
Speaker 1: innovation versus regulatory arbitrage, and I'd be curious to get
Speaker 1: your thoughts on that. Well, I think that's a great question.
Speaker 1: I mean, look, for most of us the payment system
Speaker 1: works perfectly fine, right. I mean we have our credit cards,
Speaker 1: we have mobile banking and you know, I can deposit
Speaker 1: a check at three in the morning, uh, and I
Speaker 1: get an instant you know, I get an email right
Speaker 1: back and said, Oh, yes, we've got your check. Now.
Speaker 1: In reality, of course, if I'm a low income person,
Speaker 1: I may not even have that access and if I
Speaker 1: deposit that check, it might be five days before it clears, right,
Speaker 1: and that's why our payment system is actually relatively slow
Speaker 1: and inefficient compared to what it could be and what
Speaker 1: at least some countries have advanced in terms of having
Speaker 1: more of a real time system. That doesn't hurt most
Speaker 1: of us, again, because we have all these options. We
Speaker 1: have credit cards that give us, you know, free revolving it,
Speaker 1: but it really does hurt low income people. They're actually
Speaker 1: subsidizing our credit cards right because they pay all the
Speaker 1: same price as we pay, but they don't have those
Speaker 1: credit cards. So when you look at it from a
Speaker 1: societal standpoint, we do need to modernize the payment system.
Speaker 1: And while, yes, the advantages today to most of us
Speaker 1: of a stable coin payment versus, you know, a bank
Speaker 1: may not matter that much unless maybe we're doing a
Speaker 1: cross border payment where the fees can be high. Um,
Speaker 1: you know, I think long term this could be significant.
Speaker 1: I think obviously digital forms of payment have the potential.
Speaker 1: Also blockchain forms of payment have the potential to be programmable.
Speaker 1: But I guess at the end of the day I
Speaker 1: would say, as a former regulator, I don't really know
Speaker 1: the answer to the question ultimately, and I don't think
Speaker 1: government is smart enough to figure it out. I think
Speaker 1: the market has to figure out do these things really
Speaker 1: have long term utility? I'm skeptical of a lot of
Speaker 1: things that go on in it though, as to their
Speaker 1: long term utility. But I don't think that's the government's
Speaker 1: job to decide. I think that's the market will figure
Speaker 1: it out. The government's job is to create a framework where,
Speaker 1: you know, innovation can can take place, but that we ensure,
Speaker 1: you know, financial stability and consumer protection and transparency and integrity.
Speaker 1: And we're not doing that today. We're not doing it
Speaker 1: with stable points, we're not doing it with Crypto more broadly,
Speaker 1: and we can. You know, you asked about better. Happy
Speaker 1: to turn to that. So you mentioned that what really
Speaker 1: got crypto and stable coins in particular on the map
Speaker 1: of regulators, obviously, was the failed libra attempt, and you
Speaker 1: also through in their earlier in the conversation. It's like, well,
Speaker 1: what if like Amazon wanted to do a stable coin?
Speaker 1: And I don't know much about this, but there is
Speaker 1: something like that prevents or makes it hard for like
Speaker 1: a retailer or a non bank company to become a bank.
Speaker 1: And Walmart, ever once in a while, I think, makes
Speaker 1: noises about wanting to become a bank and like set
Speaker 1: up something in Utah and never really seems to go anywhere.
Speaker 1: From what I understand. Would your proposal essentially foreclose the
Speaker 1: possibility of an Amazon stable coin at something? Yes, it would. Today.
Speaker 1: That's an excellent question. We do have a separation between
Speaker 1: banking and commerce. That's primarily through the bank holding company
Speaker 1: APP and our proposal would uh have that apply. Now
Speaker 1: you could revisit that as well and you know some
Speaker 1: of the proposals in Congress have suggested. Well, maybe the
Speaker 1: bank holding company Actiondn't apply, but we should still have
Speaker 1: some limitation on commercial affiliations. I think that is important.
Speaker 1: It's a difficult question as to exactly where you draw
Speaker 1: the line, but I do think that we need to
Speaker 1: be concerned about the concentration of power that could result from,
Speaker 1: you know, a major commercial firm like an Amazon, which
Speaker 1: has lots and lots of information from its customers Um
Speaker 1: also then engaging in, you know, financial services and payments
Speaker 1: types type of services. Well, let me ask you the
Speaker 1: kind of a follow up question which is in your mind.
Speaker 1: How do you actually distinguish the difference between, say, a
Speaker 1: stable coin versus, say, a Venmo or a paypal, which
Speaker 1: are not you know, you could sort of abstract them away.
Speaker 1: They're pretty similar. You have a dollar and a paypal account.
Speaker 1: It's supposed to be backed by a dollar, it's and
Speaker 1: it's a liability of paypal, etcetera like. What do you
Speaker 1: see as like the bright line difference for them? And
Speaker 1: it seems important if we're going to be deciding who
Speaker 1: gets to even issue these. Absolutely, because from a regulatory standpoint,
Speaker 1: you're basically right that the same framework I talked about
Speaker 1: that applies to stable coins is essentially what applies to
Speaker 1: those other types of payment providers, um. From a business
Speaker 1: model standpoint, they're different, of course, because paypal Venmo are
Speaker 1: then connected to the banking system. They are running through
Speaker 1: the banking system, whereas a stable coin is not, Um,
Speaker 1: you know, in terms of what we've seen today. So, uh,
Speaker 1: you're right that we do need to think about those
Speaker 1: issues together when we think about how to regulates. I
Speaker 1: have a devil's advocate question, which is you've mentioned a
Speaker 1: number of times Um that under your proposal there wouldn't
Speaker 1: be deposit insurance first. Stable winds. Right. Why not? Because
Speaker 1: I mean the trade off between banks and getting deposit
Speaker 1: insurance from the FT I C is. Well, you know,
Speaker 1: we agreed to restrictions on what we can and can't do.
Speaker 1: We agree to hold a certain amount of capital, to
Speaker 1: be regulated, to be under scrutiny, and in return we
Speaker 1: get this government back stop. So, if you're going to
Speaker 1: make requests of stable coin providers and say that they
Speaker 1: are going to be portfolio constraints or more disclosures, then
Speaker 1: why not give like a carrot to reward reward them
Speaker 1: for doing that? Yeah, good questions. So keep in mind
Speaker 1: deposit insurance enables banks to basically create money, create credit, right,
Speaker 1: because they can take in my deposit and then lend
Speaker 1: it out and that's creating money. And that happens over
Speaker 1: and over and over again, subject to minimal reserve requirements
Speaker 1: or whatever. But as the depositor, I don't worry because
Speaker 1: you know, I know, if the bank fails, my money
Speaker 1: is going to be insured. So it's not going to
Speaker 1: be like, you know, Jimmy Stewart, and it's a wonderful life.
Speaker 1: You know, where's my money? Where's my money? Oh, it's
Speaker 1: invested in selling those mortgage so that was a happy
Speaker 1: ending in that. Sorry, when I take my classes and
Speaker 1: I use a slide show, I actually have a little
Speaker 1: slide of Jimmy Stewart in the bank facing all those
Speaker 1: people with a little balloon coming out, you know, cartoon
Speaker 1: things saying with him thinking they'd go away if I had,
Speaker 1: if I told them we had blockchain. But Um, the
Speaker 1: point is that first of all we don't want we're
Speaker 1: saying stable coin issuers should not be creating credit. Okay,
Speaker 1: so again we're separating the payment function from the other
Speaker 1: things banks do. Stable coin issuers would not be creating credit.
Speaker 1: They're not intermediating in the sense of bringing borrowers and
Speaker 1: sabers together. They're a payment vehicle. So That, plus the
Speaker 1: fact that we can um ensure that you know your
Speaker 1: your money is safe, if you will, by the investment restrictions,
Speaker 1: means we don't need deposit insurance. And the final reason is,
Speaker 1: of course, that I don't want to subject the Deposit
Speaker 1: Insurance Fund to the risk of these things. Um because
Speaker 1: it is a new area. We don't know exactly how
Speaker 1: we'll develop and I recognize that some of the concern
Speaker 1: of the bank regulators and you know, and they've kind
Speaker 1: of acted in a way of like Gee, you know,
Speaker 1: we're not so sure about all this stuff. We don't
Speaker 1: really want to legitimize it or authorize it. Um. So
Speaker 1: that those are the reasons. Why? What kind of investment
Speaker 1: or portfolio restrictions would you be envisioning? Because I know
Speaker 1: we were kind of joking earlier about to some extent
Speaker 1: this is the easy part, but still there are big
Speaker 1: questions over what a stable coin like tether is actually
Speaker 1: holding right, there are. So it would be some version
Speaker 1: of cash and high quality liquid assets. Okay, whether it's
Speaker 1: exactly like to a seven for money market funds or
Speaker 1: whether it's more restrictive, you know, you can debate that.
Speaker 1: But basically cash and treasuries, you know, is what is
Speaker 1: what I would say. It wouldn't include commercial paper, it
Speaker 1: wouldn't include other things. And you're right. Tether, you know,
Speaker 1: has had to other investments. It had investments in cryptocurrencies.
Speaker 1: It's only recently that that circle limited its investments to
Speaker 1: basically cash and short term treasuries. And, by the way,
Speaker 1: for a stable coin issue, to say, Oh, we've put
Speaker 1: our money in FDI c ensured bank. So, you know,
Speaker 1: that's why we don't need to be regulated. I mean, yeah,
Speaker 1: that's safer than, you know, putting it in a mattress,
Speaker 1: but it doesn't help people again, in the bankruptcy situation.
Speaker 1: The F that that money is in an FDI and
Speaker 1: C insured bank isn't going to help me as a
Speaker 1: holder get it isn't gonna put me better off relative
Speaker 1: to unsecure creditors of that stable coin issue. Yeah, I
Speaker 1: think that's one of the things we're seeing like the
Speaker 1: voyager bankruptcy, not a stable coin per saver. It's like,
Speaker 1: Oh yeah, the fact that they held their money in
Speaker 1: an FD. I see. In Short, bank is not really
Speaker 1: helping many people. You know, you joked about could a
Speaker 1: blockchain have saved George Bailey? But you you, but you
Speaker 1: briefly brought up but I actually do want to talk
Speaker 1: about this aspect, which is the operational risk of public
Speaker 1: block change, which is another way that clearly stable points
Speaker 1: differ from, say, Venmo or Paypal, which are, you know,
Speaker 1: we know those rails. Um. What in your how? How
Speaker 1: should you know? They're always launching new change. There's ethereum
Speaker 1: in Salana, but there's like, I think there's like thousands,
Speaker 1: and the big stable point issuers are all on multiple
Speaker 1: chains at this point. From a regulatory standpoint, how should
Speaker 1: regulators be thinking about what chains, uh, they're issued on
Speaker 1: and the risks that posted? Yeah, yeah, great question, and
Speaker 1: let me, by the way, before I answer that, just note,
Speaker 1: since you've mentioned paypalates. YEA, do some advisory work to
Speaker 1: pay OK. Thank you. We appreciate that. Um. So I
Speaker 1: think that's a huge issue and you know, and I've
Speaker 1: talked with senator to me about this because I said,
Speaker 1: you know, your bill is very good, it has a
Speaker 1: lot of things, but you haven't said anything about the
Speaker 1: operational risk of these block chains. And he said, yeah,
Speaker 1: I know, I'm not quite sure you know what to do.
Speaker 1: and Um, I think regulators aren't quite sure what to
Speaker 1: do about that. We need so we do need standards.
Speaker 1: We need standards that would impose some obligation on the
Speaker 1: stable coin issuer as to what blockchains it supports. Right,
Speaker 1: because if you read circle's disclosure, you know it will say, well,
Speaker 1: we support the trading of USDC on eight blockchain. So
Speaker 1: there would have to be some sort of due diligent
Speaker 1: standards and so forth. And then I think what you
Speaker 1: would want is, you know, some requirements that a stable
Speaker 1: coin issuer might have to freeze its tokens if certain
Speaker 1: things happen. So freeze the tokens on that blockchain and
Speaker 1: of course, could even be used if what happens is,
Speaker 1: even if a blockchain isn't supported by a stable coin issuer,
Speaker 1: someone wraps the stable coin and trades it on that blockchain,
Speaker 1: which case the stable coin issuer could say, Hey, I
Speaker 1: didn't authorize this but it's still happening. So, you know,
Speaker 1: I think you'd have to have some stand or just
Speaker 1: say look, if this happens h then you might have
Speaker 1: to freeze, freeze the stable coins. Now, of course, the
Speaker 1: risk is still, you know, lack of resilience, lack of reliability,
Speaker 1: a hack or so forth, and that's why, you know,
Speaker 1: this area is so new. I do think we have
Speaker 1: to move cautiously, UM, because it's not clear that some
Speaker 1: of these blockchains are resilient enough and people don't, you know,
Speaker 1: always appreciate that. So one thing on stable coins is
Speaker 1: it does seem like there is this sort of regulatory
Speaker 1: dagger hanging over the industry at the moment, and you
Speaker 1: started off by noting that this is a very fast
Speaker 1: growing market segment. How do you think stable coin issuers
Speaker 1: feel about regulation on the whole? Because, again, one thing
Speaker 1: we hear is that the industry wants clarity, they want
Speaker 1: rules to come out so they know how to go forward.
Speaker 1: How much pent up demand do you see in the
Speaker 1: wings from stable coin issuers? You know, if a rule
Speaker 1: came out tomorrow, would we suddenly see fifty or injured
Speaker 1: new stable point issuers out there? Yeah, I'm not sure
Speaker 1: that we would. Um, Um. You know, I think people
Speaker 1: are still trying to sort of figure out you know,
Speaker 1: other financial institutions are still trying to figure out the
Speaker 1: space and of course it would depend on what the
Speaker 1: rule is, but certainly some players are eyeing this very
Speaker 1: closely and thinking about it. So you know, it would
Speaker 1: really depend on the on the content of the rule
Speaker 1: and you know how burdensome it is and so forth.
Speaker 1: One thing we have to keep in mind though, Um,
Speaker 1: you know, maybe make two points. On the one hand,
Speaker 1: you know, I think bank regulators sometimes kind of lull
Speaker 1: themselves into maybe feeling like they don't have to act
Speaker 1: that quickly because they say, well, it's still not very big, right.
Speaker 1: I mean circle claims it did three point six billion
Speaker 1: in payments since the beginning of well, you know, the
Speaker 1: Fed wire system does like a hundred times that amount
Speaker 1: every day or something. So they're small, but nevertheless they
Speaker 1: are growing. And also there's nothing that prevents really a
Speaker 1: stable coin issuer from incorporating abroad and then still issuing
Speaker 1: a dollar based stable coins. So, you know, jurisdictions are
Speaker 1: moving faster. I mean you can sort of think about this,
Speaker 1: Um uh, in parallel to you know, the growth of
Speaker 1: the Eurodollar market. I was talking with my friend Josh Younger,
Speaker 1: who I know has been on your show numerous times,
Speaker 1: about this idea of how this has kind of got
Speaker 1: similar parallels in some ways. Um. So, you know, I
Speaker 1: think we do need to act. Um. It is, you know,
Speaker 1: it's it's maybe not a financial stability risk, but it's
Speaker 1: growing quickly and we need to move forward. So one
Speaker 1: of the thoughts that I took away from our recent
Speaker 1: conversation with centator to me, and Tracy and I were
Speaker 1: just talking about this, is it feels like stable coin regulation.
Speaker 1: It's kind of low hanging fruit. It doesn't it your
Speaker 1: it doesn't seem that hard to do. Maybe it's a
Speaker 1: lot harder, but whether it's your proposal or something legislative,
Speaker 1: it's like, okay, come up with a banking framework and
Speaker 1: a way to make sure that they have the money there.
Speaker 1: It seems like as soon as you go past that
Speaker 1: with crypto regulation it strikes me in my mind as
Speaker 1: orders of magnitude more complex, because how do you prevent
Speaker 1: someone you know, or how do you think even begin
Speaker 1: to think about regulating someone launches a joke? What's the
Speaker 1: responsibility of that India or Estonia somewhere outside, and it
Speaker 1: gets traded on a defi exchange and it gets marketed
Speaker 1: towards us, uh, you know, American investors or consumers like
Speaker 1: just conceptually, and we just have a couple of minutes left,
Speaker 1: but how should we begin thinking about like that, which
Speaker 1: just seems just so much harder it is. It is harder.
Speaker 1: And you know, for one thing, we do have a
Speaker 1: gap in the law. Right there's no federal regulator of
Speaker 1: the trading and distribution of crypto tokens, which aren't securities
Speaker 1: right now. The CFTC doesn't have that power. I you know,
Speaker 1: when I was chairman we did quite bitcoined a commodity,
Speaker 1: but that simply gave us essentially jurisdiction over swaps and
Speaker 1: futures based on that's problem number one. Problem number two,
Speaker 1: of course, is this. Is it a security? Is it
Speaker 1: a commodity? And we're kind of stuck in the mud
Speaker 1: on that because, you know, I'm very sympathetic to chairman
Speaker 1: gainstler's view, Um, that a lot of these things probably
Speaker 1: are securities, but I'm also sympathetic to the view that,
Speaker 1: you know, the rules maybe aren't perfect. I mean there
Speaker 1: are some issues where you'd like to customize them. But
Speaker 1: my proposal that I'm working up with how Jackson at
Speaker 1: Harvard Law School is we say, look, we're stuck in
Speaker 1: the mud on that issue. Let's take a different approach.
Speaker 1: Let's have the SEC and the CFTC create a joint
Speaker 1: self regulatory organization trying to set the standards for the
Speaker 1: trading of all crypto assets. We don't care whether their
Speaker 1: securities can come out. We're gonna basically prod or browbeat
Speaker 1: or jaw bone, whatever word you want to use, industry
Speaker 1: participants to join this S R O. WE'RE gonna type.
Speaker 1: We're gonna have the agencies tightly oversee it, tightly watch it.
Speaker 1: It's not just going to go off on its own.
Speaker 1: The agencies, the regulatory agencies, are going to appoint the members,
Speaker 1: they're going to prove the rules. You know, and S
Speaker 1: R O s have been very, very important in our
Speaker 1: regulation of the Securities and derivatives markets since that regulation began.
Speaker 1: And William O Douglas, former Supreme Court justice, who was
Speaker 1: the chairman of the SEC, I guess he was like
Speaker 1: the second or third chairman, basically was the guy who
Speaker 1: who initiated the Self Regulatory Organization Movement and he basically said, look,
Speaker 1: it only works if government has what he called a
Speaker 1: Well Oiled Gun, you know, and standing by Um. In
Speaker 1: other words, agencies really have to oversee this. But we
Speaker 1: think it could set some standards because, you know, when
Speaker 1: you look at the trading and distribution of Crypto, oh,
Speaker 1: it's it just it's awful. I mean the lack of standards.
Speaker 1: You know, you have exchanges that Um, have their own
Speaker 1: proprietary trading operations that Um don't prohibit Um uh wash trading,
Speaker 1: you know, where someone can basically inflate the price or
Speaker 1: the volume of the security. You have other conflicts of interest.
Speaker 1: You have exchanges that have interests in the CRYPTO tokens
Speaker 1: their listing. You have, you know, no sort of order
Speaker 1: execution rules, you have no requirements on pre impost transparency,
Speaker 1: and crypto has created, you know, despite its claim, despite
Speaker 1: the claim of the original White Paper, they said we're
Speaker 1: going to eliminate intermediaries, we're not gonna have to rely
Speaker 1: on these large intermediaries anymore. It created a whole new
Speaker 1: class of Intermedias, right these changes and other and other actors,
Speaker 1: and so we need standards. There and what we're proposing
Speaker 1: is look required basically push them to become members of
Speaker 1: this and then they'll also want these rules to apply
Speaker 1: to the defied platforms, and the needs to figure out
Speaker 1: a way to do that because they don't want to be,
Speaker 1: you know, at a competitive disadvantage. So you know, it's
Speaker 1: not a perfect solution, but compared to where we are,
Speaker 1: we could go much, much further, we think, faster if
Speaker 1: we were to do this. That's really interesting. I was
Speaker 1: sort of wondering when someone would make that that suggestion.
Speaker 1: Rather than just have this bun fight between the CFTC
Speaker 1: and sec going back from the stain government. Right, right,
Speaker 1: let's just band together and create a new agency. Um
Speaker 1: Tim I'm so sorry. We could talk to you for
Speaker 1: another hour, but we are going to have to leave
Speaker 1: it there due to Um time constraints. But fascinating discussion.
Speaker 1: Thank you so much for coming on all thoughts than
Speaker 1: thank you for having me. It's been a pleasure. I
Speaker 1: thought that was really, really interesting and he kind of
Speaker 1: answered a long running question that I've had about stable
Speaker 1: coins in general, which is this came up with with
Speaker 1: the circle CEO, which is, it feels, kind of redundant
Speaker 1: if you have this new technology but in order to
Speaker 1: make it work you have to team up with a
Speaker 1: bank and get, you know, a bank license and all
Speaker 1: of that. But the way Tim described the sort of
Speaker 1: unbundling of credit creation versus payment services, that makes some
Speaker 1: sense to me. Can I just say, like, I'm just
Speaker 1: gonna full disclosure here. This is people are are you
Speaker 1: going to leave all lots to join the new CRYPTO
Speaker 1: Inter Agency Organization? Full disclosure here. It's not always the
Speaker 1: case that I get really excited by Finnreg conversations like
Speaker 1: macro and commodities and markets and stuff like. Yeah, that
Speaker 1: gets me going. Tim Got me going Finn Regg and like,
Speaker 1: even if we weren't talking about stable coins, he's I
Speaker 1: really just enjoyed hearing him like talk about the essentially
Speaker 1: like theory of Finnregg or financial regulations, in a very
Speaker 1: engaging way. Yes, absolutely, also a little bit about facebook
Speaker 1: and Libra Galvin and political interest and very interesting that
Speaker 1: from the perspective of the Chinese that was seen as
Speaker 1: a way to further reach the dollar, which I think
Speaker 1: it's really interesting think about. If you're in any other country,
Speaker 1: how do you hold dollar assets? Is Not a trivial question. Right.
Speaker 1: You hold a dollar denominated assets safely and there is
Speaker 1: this clear potential. People are talking about it of like
Speaker 1: stable coins actually really deepening and cementing the dollars global reach.
Speaker 1: So it's really interesting that that was like sort of
Speaker 1: the aspect of libre that they totally but this is
Speaker 1: also why people were making jokes about like the east
Speaker 1: India Company and stuff when when facebook announced list but
Speaker 1: absolutely fascinating conversation. I think we're going to have more
Speaker 1: on stable coin and CRYPTIO regulation more broadly to come,
Speaker 1: but for now shall we leave it there? Let's leave
Speaker 1: it there. Okay, this has been another episode of the
Speaker 1: all thoughts podcast. I'm Tracy alloway. You can follow me
Speaker 1: on twitter at Tracy Alloway, and I'm Joe Wisn't all.
Speaker 1: You can follow me on twitter at the stalwork. Follow
Speaker 1: our guest Timothy Massad. He's on twitter at Tim Massad.
Speaker 1: Follow our producer, Carmen Rodriguez, at Carmen Armand and check
Speaker 1: out all of our podcasts at Bloomberg under the handle
Speaker 1: at podcasts. Thanks for listening.