WEBVTT - Former CFTC Chair on How to Regulate Stablecoins Without Passing Any New Laws 0:00:10.520 --> 0:00:13.600 Hello and welcome to another episode of the all thoughts podcast. 0:00:13.640 --> 0:00:17.080 I'm Tracy allowatt and I'm Joe Wi. Isn't they so, Joe? UH, 0:00:17.200 --> 0:00:19.079 didn't we say recently that we were going to be 0:00:19.079 --> 0:00:23.040 talking about stable coin regulations more? There's never enough, you know. 0:00:23.160 --> 0:00:25.520 I actually I have. I think there are lots of 0:00:25.560 --> 0:00:30.680 reasons to continue to focus on stable coin regulation. Why? Well, 0:00:31.120 --> 0:00:33.760 I think the biggest one in my mind, is this 0:00:33.800 --> 0:00:36.440 sort of thing I internalized from the great financial crisis, 0:00:36.479 --> 0:00:39.559 which is that things blow up when they're promised to 0:00:39.560 --> 0:00:41.879 be stable. Yeah, I think that's exactly and to me 0:00:42.040 --> 0:00:45.040 it's like, I know, I do not expect to experience 0:00:45.440 --> 0:00:48.800 in my lifetime like a bitcoin crisis, because people know 0:00:48.960 --> 0:00:52.760 that bitcoin crisis or a dogecoin. People know that these 0:00:52.800 --> 0:00:56.560 coins are extremely volatile. They don't bucket them into, uh, 0:00:56.680 --> 0:00:59.240 you know, parts of their portfolio that are expected to 0:00:59.240 --> 0:01:02.120 be safe, and so they can fall like a stock can, 0:01:02.240 --> 0:01:05.000 whereas we know that, you know when something is like 0:01:05.080 --> 0:01:08.440 triple a or dollar peg or whatever, that's where trouble 0:01:08.680 --> 0:01:12.280 can theoretically start. Yeah, so two things there. I totally agree. 0:01:12.520 --> 0:01:15.640 The other thing is, if you think about crypto broadly, 0:01:15.760 --> 0:01:18.440 stable coins are really the way in which the traditional 0:01:18.480 --> 0:01:22.080 financial system interacts the most or one of the most 0:01:22.200 --> 0:01:26.360 important ways with crypto. So stable coins are interesting because 0:01:26.480 --> 0:01:30.360 they build up these reserves of financial assets, things like 0:01:30.520 --> 0:01:35.280 commercial paper, and there's a concern there that maybe if 0:01:35.280 --> 0:01:39.160 you had a stable coin experience a big amount of trouble, 0:01:39.680 --> 0:01:42.320 that it could affect the CP market more broadly and 0:01:42.360 --> 0:01:45.840 affect the financial system more broadly. And also there's a 0:01:45.840 --> 0:01:48.559 good argument that stable coins are the one killer APP 0:01:48.640 --> 0:01:51.240 of Crypto, that where do people actually use crypto? It's 0:01:51.280 --> 0:01:54.840 like tether, U, s DC. These are huge things, right, 0:01:55.160 --> 0:01:57.680 and so he's like, well, what do people use crypto for? Well, 0:01:57.920 --> 0:02:02.520 stable coins are like popular and why spread and therefore, 0:02:02.840 --> 0:02:05.040 you know, it's an area to be putting a lot 0:02:05.040 --> 0:02:08.160 of attention. Well, also, I think that they promise something, 0:02:08.320 --> 0:02:12.040 which is the fact that they promise something, which is stability, 0:02:12.120 --> 0:02:16.000 kind of makes them easier to regulate. Like, you know what, 0:02:16.000 --> 0:02:19.400 what are other crypto tokens actually promising? Like they're not 0:02:19.440 --> 0:02:22.480 necessarily promising that safety net as you are discussing, but 0:02:22.600 --> 0:02:26.520 stable coins are, and so it naturally draws in regulatory interests, 0:02:26.560 --> 0:02:29.480 and this is a real, key, key point that you 0:02:30.120 --> 0:02:33.880 you bring up, which is that, yeah, like there is 0:02:33.960 --> 0:02:37.520 this there is this promise, there is this expectation. You 0:02:37.520 --> 0:02:41.120 can also sort of judge whether the promise is being kept. Like, 0:02:41.720 --> 0:02:44.440 does this coin have a dollar in the bank? Is 0:02:44.440 --> 0:02:47.360 like a pretty simple binary question. What would be the 0:02:47.400 --> 0:02:50.639 equivalent for doge client? Well, more difficult to answer than 0:02:50.680 --> 0:02:54.280 you might expect. Sometimes Fair enough, but we are going 0:02:54.320 --> 0:02:56.800 to be discussing all of this with someone who I 0:02:56.840 --> 0:02:59.760 think comes at it from a very interesting perspective. So 0:02:59.800 --> 0:03:02.600 we recently spoke to Senator Pat to me about this. 0:03:03.000 --> 0:03:06.320 He was talking about the stable coin bill going through Congress, 0:03:06.360 --> 0:03:10.160 but what if there was another way to regulate stable coin? 0:03:10.240 --> 0:03:13.600 Let's all right, without further ado, then, we are going 0:03:13.639 --> 0:03:16.600 to be speaking to Timothy Massad. He is, of course, 0:03:16.639 --> 0:03:19.519 a research fellow at the Harvard Kennedy School and also 0:03:19.639 --> 0:03:24.200 the former chairman of the CFTC under president, literally the 0:03:24.240 --> 0:03:27.280 perfect guest. Yeah, definitely, Tim thank you so much for 0:03:27.360 --> 0:03:29.720 joining us. Thank you for having me. I'm a big 0:03:29.760 --> 0:03:33.680 fan of the show. Thanks. Thank you for saying that. Yeah, 0:03:34.080 --> 0:03:38.040 text and the mail. Uh. So, why don't we go ahead? 0:03:38.080 --> 0:03:40.760 And this is a question I asked senator to me 0:03:40.880 --> 0:03:44.520 as well, but why the interest in stable coins? Like, 0:03:44.600 --> 0:03:47.640 what is it that is drawing this regulatory scrutiny at 0:03:47.640 --> 0:03:52.080 this moment in time? Sure, well, they're not that big 0:03:52.200 --> 0:03:55.560 relative to the financial senator, but they are growing very 0:03:55.640 --> 0:03:59.720 quickly and that's one of the concerns and obviously recently 0:03:59.760 --> 0:04:02.480 when we had that fall in crypto prices and we 0:04:02.520 --> 0:04:05.760 saw the crash of terra, which is an Algorithmic stert 0:04:06.440 --> 0:04:09.800 staple coin, that heightened the concern. There's a view that, 0:04:09.920 --> 0:04:12.480 you know, these things could grow very quickly and, frankly, 0:04:12.600 --> 0:04:16.600 that there's an opportunity here. They could help modernized payments 0:04:16.680 --> 0:04:20.080 and increased competition. So I think it is right for 0:04:20.279 --> 0:04:23.760 regulators to be focused on them and of course facebook's 0:04:23.760 --> 0:04:28.799 proposal of libra was really what uh captivated or really 0:04:29.400 --> 0:04:33.120 regulators to focus in on this. I actually hadn't realized that. 0:04:34.080 --> 0:04:35.799 talked to us a little bit more about that because 0:04:36.160 --> 0:04:39.839 you know, remember the Libre Splash was during the team 0:04:39.880 --> 0:04:42.359 boom and it just seems so unwieldy and I'm not 0:04:42.360 --> 0:04:44.359 really surprised it never got off the ground, but I 0:04:44.400 --> 0:04:46.600 don't think I had appreciated the degree to which that 0:04:46.720 --> 0:04:49.120 was a catalyzing moment for regulators. Can you talk about 0:04:49.160 --> 0:04:52.040 what happened there? But yeah, it was. It was really 0:04:52.720 --> 0:04:56.000 a huge moment, not just for the regulation of stample 0:04:56.000 --> 0:04:59.160 coins but also for the development of Central Bank digital currencies. 0:04:59.400 --> 0:05:03.760 You know, before were facebook announced that chair Powell testified 0:05:04.040 --> 0:05:08.200 and he kind of brushed off a question about cryptocurrencies 0:05:08.240 --> 0:05:10.120 by saying, you know, we don't, we don't regulate that. 0:05:10.200 --> 0:05:14.720 We regulate banks when stable when facebook made its proposal, 0:05:15.120 --> 0:05:18.160 and you will recall, the initial proposal was for essentially 0:05:18.200 --> 0:05:20.360 a stable coin. They didn't call it that, but it 0:05:20.600 --> 0:05:23.480 was a stable coin based on a basket of currencies, 0:05:23.720 --> 0:05:27.719 not just one currency but the dollar, the euro, the 0:05:27.839 --> 0:05:32.120 pound and a few others. And so central bankers around 0:05:32.160 --> 0:05:36.039 the world immediately were alarmed because they thought, boy, this 0:05:36.080 --> 0:05:41.559 could actually displace sovereign currencies. FACEBOOK has, you know, two 0:05:41.600 --> 0:05:44.960 billion plus users. What if they all use it? It 0:05:45.080 --> 0:05:50.800 also prompted some countries to really accelerate their CBDC development, 0:05:50.800 --> 0:05:53.719 in particular China. I was over in China shortly after 0:05:53.880 --> 0:05:58.839 the facebook announcement was was made and, uh, you know, 0:05:59.279 --> 0:06:01.920 all every want in Congress sort of looked at facebook 0:06:01.920 --> 0:06:05.960 and said, Oh, you're gonna undermine the US dollar. Well, 0:06:06.560 --> 0:06:09.600 every government official I spoke to in China had had 0:06:09.600 --> 0:06:15.200 the opposite reaction. They saw libra as essentially a way 0:06:15.240 --> 0:06:21.520 to backdoor dollarize other economies, because the dollar would be 0:06:21.920 --> 0:06:24.680 the main component. So they got very worried about it 0:06:24.720 --> 0:06:29.920 and they accelerated their CBDC research because of interesting. So 0:06:30.000 --> 0:06:32.360 you know it was. It was big from the standpoint 0:06:32.400 --> 0:06:36.400 of causing people to recognize stable coins as an issue 0:06:36.440 --> 0:06:41.000 and also from cbdcs right. So fast forward to today 0:06:41.240 --> 0:06:45.040 and we have the president's working group report that came 0:06:45.080 --> 0:06:47.680 out last year. I think we have this bill that 0:06:47.839 --> 0:06:50.320 may or may not be working its way through Congress. 0:06:50.360 --> 0:06:52.760 We have a lot of people talking in general about 0:06:52.920 --> 0:06:57.719 stable coin regulation. Would you characterize stable coin regulation as 0:06:57.880 --> 0:07:02.320 different to Crypto regulation more broadly, like, is there a 0:07:02.400 --> 0:07:07.040 different set of requirements that you're trying to satisfy here? Well, 0:07:07.120 --> 0:07:10.680 it is different because stable coins are seen primarily as 0:07:10.800 --> 0:07:15.520 payment mechanisms. Um, and the first thing to to realize 0:07:15.600 --> 0:07:19.440 is that the regulation today is really inadequate. It's a 0:07:19.520 --> 0:07:24.559 very light touch. Um, these are regulated under State Law 0:07:24.720 --> 0:07:27.559 under what we call money service business laws or money 0:07:27.560 --> 0:07:31.960 transmitter laws. Those laws originated with the Telegraph okay, and 0:07:32.040 --> 0:07:34.800 what they required was, you know, if you walked into 0:07:34.800 --> 0:07:37.720 a Western Union office in Kentucky and you wanted to 0:07:37.760 --> 0:07:41.440 send money to your cousin in Illinois, Western Union had 0:07:41.520 --> 0:07:45.320 to make sure it had money on hand. So money 0:07:45.320 --> 0:07:52.920 service business laws require very minimum capital. UH, they require security, again, 0:07:53.000 --> 0:07:57.560 very we're talking about amounts in the range from zero to, 0:07:57.960 --> 0:08:01.000 you know, maybe a million dollars, maybe two million dollars 0:08:01.040 --> 0:08:03.640 at the high end for some of these states, and 0:08:03.800 --> 0:08:08.480 some of them do have permissible investment rules. That does 0:08:08.840 --> 0:08:11.680 mean if you're registered as a money service business, you 0:08:11.720 --> 0:08:15.120 have to register with Finsen, right, which is a department 0:08:15.120 --> 0:08:19.640 of the Treasury which enforces anti money laundering and rules. 0:08:19.880 --> 0:08:24.200 So that's a good thing. We are imposing those kinds 0:08:24.240 --> 0:08:27.520 of restrictions on stable coins based in the US. But 0:08:27.720 --> 0:08:31.480 this is not a sufficient framework. To suggest it's it's sufficient. 0:08:31.560 --> 0:08:33.800 It's sort of like saying, well, you know, there's no 0:08:33.880 --> 0:08:36.839 difference between an excel spreadsheet and a blockchain. What can 0:08:36.880 --> 0:08:40.480 that do? You know? Um, we people, yeah, I know, 0:08:40.600 --> 0:08:46.240 some people do right, right, right, Um, we need a 0:08:46.280 --> 0:08:50.200 comprehensive framework. What would that involve? Prudential Regulation First, to 0:08:50.280 --> 0:08:55.079 make sure that these stable coins are fully reserved, meaning 0:08:55.120 --> 0:08:58.920 they have cash or Treasury securities backing them. But, more importantly, 0:08:59.559 --> 0:09:02.200 there's no stable in the stable coin today because there's 0:09:02.200 --> 0:09:06.080 no resolution framework. You know, if a bank fails, right, 0:09:06.120 --> 0:09:08.880 we have a well developed framework. The FDI C steps 0:09:08.920 --> 0:09:13.120 in very quickly, usually on weekend. Depositors are insured and, 0:09:13.240 --> 0:09:16.560 you know, life goes on. Everybody's fine. If a stable 0:09:16.600 --> 0:09:22.120 coin were to default, were to collapse, um would be 0:09:22.240 --> 0:09:26.679 handled as a normal bankruptcy, which means the automatic stay applies. Right, 0:09:26.720 --> 0:09:29.520 so holders are not going to get their money for months, 0:09:29.720 --> 0:09:34.079 years potentially, and what we call the Perry Passu rule applies. 0:09:34.200 --> 0:09:36.199 So even though I'm a holder of a stable coin, 0:09:36.679 --> 0:09:41.000 I'm in the same category as all other unsecured credits. 0:09:41.040 --> 0:09:44.320 So if the stable coin issue or has leveraged itself, well, 0:09:44.480 --> 0:09:46.960 you know I'm going to be competing with all of them. 0:09:47.000 --> 0:09:49.719 So that's a big problem. We need a framework that 0:09:49.920 --> 0:09:54.319 ensures good resolution and oversight as well as we've got 0:09:54.320 --> 0:09:57.040 to deal with the operational risks here, because the stable 0:09:57.080 --> 0:10:00.400 coins are trading on a number of decentralized block change 0:10:00.480 --> 0:10:03.000 and we got to look at how resilient, how reliable, 0:10:03.040 --> 0:10:06.880 are those? This is really interesting sort of this second 0:10:06.920 --> 0:10:10.120 have your point, because I guess intuitively, probably everyone sort 0:10:10.160 --> 0:10:14.520 of gets like, yeah, we should have some required disclosure, 0:10:14.679 --> 0:10:16.959 something to make sure the money is actually there. That 0:10:17.040 --> 0:10:19.800 seems like, I guess that's the obvious thing, that's that's 0:10:19.800 --> 0:10:22.920 the easy one, right. The second point, though, is not 0:10:23.160 --> 0:10:25.920 something I had really I've heard many people talk about, 0:10:26.080 --> 0:10:28.280 which is like all right, well, what is the mechanism 0:10:28.320 --> 0:10:31.079 that keeps it stable, particularly in the event of like 0:10:31.440 --> 0:10:34.280 something bad happening? And I see, I have seen some people, 0:10:34.320 --> 0:10:37.120 like on twitter for example, like talk about, say, like 0:10:37.200 --> 0:10:42.200 circles or tether. It's like capital cushion or the equity component, 0:10:42.640 --> 0:10:44.640 and it's often pretty thing. So what do you talk 0:10:44.679 --> 0:10:47.000 to us a little bit more about what you see 0:10:47.040 --> 0:10:49.840 as lacking, or what you see is the risks on 0:10:49.960 --> 0:10:54.320 that sort of like second component? Sure, Um, well, certainly 0:10:54.480 --> 0:10:59.120 capital helps prevent a bankruptcy, right, because it gives you 0:10:59.520 --> 0:11:03.200 a way to absorb lawsuit. But the point is that 0:11:03.280 --> 0:11:07.280 even with that you still need a resolution framework, you 0:11:07.360 --> 0:11:09.640 still need a way so that you know, this is 0:11:09.679 --> 0:11:12.439 a financial institution, we don't want it to and it's 0:11:12.440 --> 0:11:14.720 a payment company, we don't want it to go through 0:11:15.400 --> 0:11:19.320 the normal bankruptcy where where people are held up. So 0:11:19.640 --> 0:11:22.800 that's why I think we really need a more comprehensive approach. 0:11:23.200 --> 0:11:26.160 We've suggested this could be done administratively. I've talked a 0:11:26.200 --> 0:11:28.480 senator to me about his legislation. I think it does 0:11:28.559 --> 0:11:30.280 some of the things I'd like to see. It doesn't 0:11:30.280 --> 0:11:32.880 do all of them, but you know, that would involve 0:11:33.400 --> 0:11:37.280 not just prudential requirements on investments, but it would involve 0:11:37.360 --> 0:11:41.199 creating a framework for resolution. It would involve overside, it 0:11:41.240 --> 0:11:45.199 would involve audits, it would involve standards on operational resilience 0:11:45.240 --> 0:11:48.160 and on concentration of power. I mean one of the 0:11:48.200 --> 0:11:51.560 big issues here is should we allow stable coin issuers 0:11:51.600 --> 0:11:54.560 to be affiliated with commercial companies? What if Amazon wants 0:11:54.559 --> 0:11:57.800 to launch a stable coin? Feel about that? Well, talk 0:11:57.840 --> 0:11:59.920 to us about your proposal done, because I think when 0:12:00.080 --> 0:12:04.040 comes to crypto regulation there's often the sense, maybe it's 0:12:04.080 --> 0:12:07.680 unspoken sometimes, but the sense that the existing regulation isn't 0:12:07.880 --> 0:12:11.720 enough to tackle this new technology, this fast changing and 0:12:11.760 --> 0:12:15.240 evolving industry. Um, you know with pat too, me the 0:12:15.280 --> 0:12:18.319 Howe test came up, a number of times, this idea that, well, 0:12:18.360 --> 0:12:20.240 how are you going to use something from the nineteen 0:12:20.320 --> 0:12:23.800 thirties in order to regulate block chains and cryptocurrencies and 0:12:23.840 --> 0:12:27.240 tokens and things like that. But you're suggesting that it 0:12:27.320 --> 0:12:30.960 can be done. So walk us through the proposal. So 0:12:31.160 --> 0:12:33.560 let's talk about stable coins first and then the broader 0:12:33.640 --> 0:12:37.360 crypto market second, because we have a similar proposal but 0:12:37.360 --> 0:12:40.720 it's a different paper. Unstable coins, what I'm saying, with 0:12:40.760 --> 0:12:43.480 my co authors, how Jackson and Dan Owry, to law 0:12:43.520 --> 0:12:49.080 professors is that while legislation would be great, Um, we're 0:12:49.080 --> 0:12:51.880 not sure it will happen, number one, and we're a 0:12:51.880 --> 0:12:55.120 little concerned that it won't be comprehensive. So what we're 0:12:55.160 --> 0:13:00.520 saying is financial regulators today have the authorities they need 0:13:00.559 --> 0:13:03.680 to create a framework to try to bring this activity 0:13:03.920 --> 0:13:07.600 within the banking perimeter. Wouldn't be regulated exactly as a bank, 0:13:07.640 --> 0:13:09.720 but what you would do technically as you set up 0:13:09.760 --> 0:13:13.760 what's called a National Trust Bank, which then has a 0:13:13.800 --> 0:13:18.040 trust below it that is the payment vehicle, and then 0:13:18.160 --> 0:13:22.760 what this gets you is it gets you supervision by 0:13:22.760 --> 0:13:25.160 a banking regulator. But it can be done in a 0:13:25.160 --> 0:13:29.080 way where there's not deposit insurance, right, because we don't 0:13:29.080 --> 0:13:31.800 want that. We want the stable point issuer just to 0:13:31.840 --> 0:13:34.400 hold cash and treasuries and so forth. It doesn't need 0:13:34.440 --> 0:13:38.440 department insurance. It could be coupled with access to a 0:13:38.480 --> 0:13:43.200 Federal Reserve Master Account, which is very useful for settlement efficiency. 0:13:43.640 --> 0:13:46.920 And you know, the office of the controller, which would 0:13:46.920 --> 0:13:49.840 do this, can set a variety of other standards on 0:13:49.920 --> 0:13:52.120 all the other issues we need to worry about, such 0:13:52.160 --> 0:13:57.480 as operational resiliency, such as basic consumer disclosure, consumer protection 0:13:57.480 --> 0:14:00.079 and so forth. But the point is that admit this 0:14:00.200 --> 0:14:02.959 strative Lee. This could be done. It would require all 0:14:02.960 --> 0:14:07.000 the bank regulators to get together and cooperate, something that 0:14:07.040 --> 0:14:10.480 doesn't always happen in our system very well, but it 0:14:10.520 --> 0:14:13.839 could be done today under existing law, and again, we're 0:14:13.840 --> 0:14:16.679 not against legislation. That would be fine, but let's not 0:14:16.720 --> 0:14:35.440 wait around. We could today. WHO WOULD BE? Who is 0:14:35.480 --> 0:14:38.960 the regulator of a bank such as do? So? It 0:14:39.000 --> 0:14:42.400 would be primarily the office of the controller of the currency, 0:14:42.480 --> 0:14:46.560 because that it would issue a National Trust Bank Charter. 0:14:47.120 --> 0:14:49.840 But you would also need the cooperation of the Fed 0:14:50.480 --> 0:14:54.400 and the FDI C to really make this work. Ideally, 0:14:54.640 --> 0:14:57.160 you know, you need the SEC and the CFTC to 0:14:57.240 --> 0:14:59.160 go along to just to not do things that are 0:14:59.160 --> 0:15:02.120 inconsistent with what you're trying to do under the bank 0:15:02.240 --> 0:15:07.080 loans Um. But you know, we created the Financial Stability 0:15:07.120 --> 0:15:10.320 Oversight Council to bring the regulators together. We've suggested well, 0:15:10.320 --> 0:15:13.720 it could, it could help coordinate this as well. Is 0:15:13.760 --> 0:15:18.680 there anything about this proposal that would impinge on the 0:15:18.720 --> 0:15:21.440 current business model of major stable coin issuers? Because I 0:15:21.440 --> 0:15:23.680 think if you all talk to them, if we had 0:15:23.880 --> 0:15:26.360 Jeremy a layer of circle back on, you say yeah, 0:15:26.440 --> 0:15:30.200 more clarity, more regulation, totally fine, etcetera. Is there anything? 0:15:30.320 --> 0:15:32.880 Is there a Trojan horse that I'm missing that he 0:15:32.920 --> 0:15:35.480 would say no, this is not gonna work. There are 0:15:35.520 --> 0:15:39.160 things that they might not like. Um, the way we've 0:15:39.160 --> 0:15:42.600 proposed it, because we've said this could be done administratively 0:15:42.680 --> 0:15:45.400 and because we wanted to be very conservative and suggest 0:15:45.480 --> 0:15:48.720 something that the bank regulators could say, Oh yes, this 0:15:49.040 --> 0:15:52.320 uses building blocks we've that are tried and tested in 0:15:52.400 --> 0:15:55.880 our regulatory framework. We can do this. Is We have said, 0:15:55.920 --> 0:15:58.560 this trust bank would need to be a subsidiary of 0:15:58.600 --> 0:16:01.920 an insured depository stitution. It still wouldn't have insurance, but 0:16:02.000 --> 0:16:05.360 it would be chartered that way, which brings in banking 0:16:05.440 --> 0:16:08.440 regulation overall. So what stable coin issuers will say is 0:16:08.480 --> 0:16:12.720 twofold one. They'll say our business model is narrowed, we 0:16:12.800 --> 0:16:15.560 don't need to be subject to lots and lots of 0:16:15.600 --> 0:16:19.320 bank regulations, and I'm sympathetic to that. Um, I would 0:16:19.360 --> 0:16:22.440 be willing to go down a path of saying, yeah, 0:16:22.600 --> 0:16:26.200 let's customize the rules a little bit for these guys. 0:16:26.240 --> 0:16:29.800 They don't need all of these things. Our proposal already 0:16:29.840 --> 0:16:32.800 does that in terms of capital requirements and so forth, 0:16:32.920 --> 0:16:37.440 because the trust itself would be off balance sheet. The 0:16:37.520 --> 0:16:41.160 second thing they will say is, you know, if you're 0:16:41.240 --> 0:16:45.920 going to make this a subsidiary of a bank, that 0:16:46.320 --> 0:16:49.800 limits potential competition. The whole point of stable coins is 0:16:49.840 --> 0:16:52.480 we want to be competing with banks. I'm sympathetic to 0:16:52.520 --> 0:16:56.440 that too, because I do regard stable coins is potentially 0:16:56.440 --> 0:16:59.560 helping US bring more competition to payments. I think both 0:16:59.560 --> 0:17:01.560 those things this can be dealt with in the process. 0:17:01.600 --> 0:17:05.439 It really depends on how much flexibility regulators want to 0:17:05.480 --> 0:17:07.520 build in the system. But those, I think, would be 0:17:07.560 --> 0:17:09.920 the terrain objections they would have, and this was going 0:17:09.960 --> 0:17:11.959 to be my question actually, which is what's in it 0:17:12.040 --> 0:17:15.439 for a bank to allow a stable coin issuer to 0:17:15.800 --> 0:17:19.879 be a subsidiary? Yeah, well, you know, I think a 0:17:19.880 --> 0:17:22.240 lot of banks are looking at stable coins and sort 0:17:22.280 --> 0:17:24.800 of thinking about, do we enter this space? Do we 0:17:24.880 --> 0:17:28.879 not enter this space? Um, I think with with interest 0:17:28.960 --> 0:17:33.320 rates moving up, Um, it becomes interesting also, how does 0:17:33.359 --> 0:17:36.800 that affect the stable coin issuers business model? Right, because 0:17:36.840 --> 0:17:38.320 some of them now are going to be making a 0:17:38.320 --> 0:17:41.359 lot of money. On the of course, their deposits are still, 0:17:41.520 --> 0:17:45.000 you know, very, very, very small fraction of the total 0:17:45.359 --> 0:17:49.399 deposits in the banking system. Hundred fifty billion and stable 0:17:49.400 --> 0:17:53.359 coins versus nineteen trillion and bank deposits. But, you know, 0:17:53.440 --> 0:17:56.199 I think banks are really thinking about how do we 0:17:56.320 --> 0:18:00.160 maintain our competitive edge in UH in payments? I mean 0:18:00.680 --> 0:18:03.320 all of this also goes to a broader issue, right, 0:18:03.400 --> 0:18:07.400 of how do we think about banking? Banking has traditionally 0:18:07.520 --> 0:18:13.080 bundled credit creation, creation of money. Really Right, because most 0:18:13.080 --> 0:18:17.200 of the money we use is really represents private eye, I. O. U. S. 0:18:17.320 --> 0:18:19.800 it's only paper money that represents a liability of the 0:18:19.840 --> 0:18:24.800 government and payments. Right, banks have bundled all those functions. 0:18:25.200 --> 0:18:29.399 They've been entitled to certain regulatory advantages in order to 0:18:29.480 --> 0:18:33.199 do that, such as deposit insurance, such as access to 0:18:33.280 --> 0:18:38.560 fed master accounts and really stable coins and other innovations 0:18:38.560 --> 0:18:41.640 and payments are really raising the question of should we 0:18:41.840 --> 0:18:46.240 unbundle this a bit and let non banking entities come 0:18:46.280 --> 0:18:48.520 in and do payments? And this, by the way, there's 0:18:48.560 --> 0:18:51.439 a report that's going to be put out by the 0:18:51.480 --> 0:18:54.800 Treasury Department called the future of money and payments, which 0:18:54.840 --> 0:18:59.000 is a report required by the executive order, which presumably 0:18:59.000 --> 0:19:01.280 will talk about this and you know, we'll see if 0:19:01.320 --> 0:19:05.440 it takes a firm stance. I mean the scope of 0:19:05.480 --> 0:19:08.199 that report is very, very broad if you look at 0:19:08.240 --> 0:19:11.000 the executive orders. Supposed to talk about future payments and 0:19:11.119 --> 0:19:16.160 cbdcs and how can they affect competition and financial inclusion 0:19:16.280 --> 0:19:20.880 and so forth. And truthfully, you know, I'm I'm very 0:19:20.920 --> 0:19:23.879 interested in what the report will say, but you know, 0:19:24.040 --> 0:19:27.720 it may well be a committee product that doesn't take 0:19:27.720 --> 0:19:30.399 a firm view on some things but just covers a 0:19:30.440 --> 0:19:34.520 lot of territory. We'll see. Interesting just on the banks 0:19:34.640 --> 0:19:37.480 versus stable coins point this, this is something that came 0:19:37.560 --> 0:19:41.679 up in our episode with the Circle CEO, with Jeremy Ahlaire. 0:19:42.760 --> 0:19:46.080 There is a sense that, okay, maybe sending money via 0:19:46.119 --> 0:19:49.240 stable coins is more efficient than sending it through a 0:19:49.280 --> 0:19:51.600 bank which, you know, it takes days and maybe they 0:19:51.680 --> 0:19:54.320 charge you fees or they charge you a bad exchange 0:19:54.400 --> 0:19:57.320 rate or something like that. But the question always is 0:19:57.720 --> 0:20:03.400 how much of stable coins advantage is genuinely genuine technology 0:20:03.480 --> 0:20:07.640 innovation versus regulatory arbitrage, and I'd be curious to get 0:20:07.640 --> 0:20:10.640 your thoughts on that. Well, I think that's a great question. 0:20:10.760 --> 0:20:13.960 I mean, look, for most of us the payment system 0:20:14.040 --> 0:20:18.520 works perfectly fine, right. I mean we have our credit cards, 0:20:18.600 --> 0:20:21.160 we have mobile banking and you know, I can deposit 0:20:21.160 --> 0:20:24.040 a check at three in the morning, uh, and I 0:20:24.119 --> 0:20:26.080 get an instant you know, I get an email right 0:20:26.119 --> 0:20:28.320 back and said, Oh, yes, we've got your check. Now. 0:20:28.400 --> 0:20:31.639 In reality, of course, if I'm a low income person, 0:20:32.359 --> 0:20:34.639 I may not even have that access and if I 0:20:34.680 --> 0:20:38.040 deposit that check, it might be five days before it clears, right, 0:20:38.160 --> 0:20:43.520 and that's why our payment system is actually relatively slow 0:20:43.800 --> 0:20:47.800 and inefficient compared to what it could be and what 0:20:48.320 --> 0:20:51.280 at least some countries have advanced in terms of having 0:20:51.320 --> 0:20:54.640 more of a real time system. That doesn't hurt most 0:20:54.680 --> 0:20:57.000 of us, again, because we have all these options. We 0:20:57.040 --> 0:21:00.199 have credit cards that give us, you know, free revolving it, 0:21:00.960 --> 0:21:03.680 but it really does hurt low income people. They're actually 0:21:03.960 --> 0:21:07.199 subsidizing our credit cards right because they pay all the 0:21:07.240 --> 0:21:10.040 same price as we pay, but they don't have those 0:21:10.040 --> 0:21:12.680 credit cards. So when you look at it from a 0:21:12.720 --> 0:21:17.040 societal standpoint, we do need to modernize the payment system. 0:21:17.119 --> 0:21:20.919 And while, yes, the advantages today to most of us 0:21:21.000 --> 0:21:23.840 of a stable coin payment versus, you know, a bank 0:21:24.400 --> 0:21:27.040 may not matter that much unless maybe we're doing a 0:21:27.080 --> 0:21:30.640 cross border payment where the fees can be high. Um, 0:21:30.680 --> 0:21:33.240 you know, I think long term this could be significant. 0:21:33.560 --> 0:21:37.480 I think obviously digital forms of payment have the potential. 0:21:37.560 --> 0:21:41.159 Also blockchain forms of payment have the potential to be programmable. 0:21:41.720 --> 0:21:44.080 But I guess at the end of the day I 0:21:44.080 --> 0:21:46.679 would say, as a former regulator, I don't really know 0:21:46.760 --> 0:21:49.680 the answer to the question ultimately, and I don't think 0:21:49.720 --> 0:21:52.280 government is smart enough to figure it out. I think 0:21:52.280 --> 0:21:55.320 the market has to figure out do these things really 0:21:55.400 --> 0:21:58.359 have long term utility? I'm skeptical of a lot of 0:21:58.400 --> 0:22:01.280 things that go on in it though, as to their 0:22:01.320 --> 0:22:05.080 long term utility. But I don't think that's the government's 0:22:05.160 --> 0:22:07.920 job to decide. I think that's the market will figure 0:22:07.920 --> 0:22:11.280 it out. The government's job is to create a framework where, 0:22:11.680 --> 0:22:16.240 you know, innovation can can take place, but that we ensure, 0:22:16.840 --> 0:22:21.640 you know, financial stability and consumer protection and transparency and integrity. 0:22:21.680 --> 0:22:23.879 And we're not doing that today. We're not doing it 0:22:23.920 --> 0:22:26.439 with stable points, we're not doing it with Crypto more broadly, 0:22:26.480 --> 0:22:28.800 and we can. You know, you asked about better. Happy 0:22:28.840 --> 0:22:32.320 to turn to that. So you mentioned that what really 0:22:32.359 --> 0:22:35.240 got crypto and stable coins in particular on the map 0:22:35.280 --> 0:22:38.600 of regulators, obviously, was the failed libra attempt, and you 0:22:38.680 --> 0:22:42.120 also through in their earlier in the conversation. It's like, well, 0:22:42.119 --> 0:22:44.480 what if like Amazon wanted to do a stable coin? 0:22:44.960 --> 0:22:47.679 And I don't know much about this, but there is 0:22:47.760 --> 0:22:50.439 something like that prevents or makes it hard for like 0:22:50.480 --> 0:22:53.560 a retailer or a non bank company to become a bank. 0:22:53.600 --> 0:22:55.560 And Walmart, ever once in a while, I think, makes 0:22:55.600 --> 0:22:57.960 noises about wanting to become a bank and like set 0:22:58.040 --> 0:23:00.880 up something in Utah and never really seems to go anywhere. 0:23:00.880 --> 0:23:05.679 From what I understand. Would your proposal essentially foreclose the 0:23:05.680 --> 0:23:10.200 possibility of an Amazon stable coin at something? Yes, it would. Today. 0:23:10.320 --> 0:23:13.560 That's an excellent question. We do have a separation between 0:23:13.960 --> 0:23:17.520 banking and commerce. That's primarily through the bank holding company 0:23:17.520 --> 0:23:23.520 APP and our proposal would uh have that apply. Now 0:23:23.880 --> 0:23:27.240 you could revisit that as well and you know some 0:23:27.320 --> 0:23:29.960 of the proposals in Congress have suggested. Well, maybe the 0:23:29.960 --> 0:23:32.560 bank holding company Actiondn't apply, but we should still have 0:23:32.680 --> 0:23:37.240 some limitation on commercial affiliations. I think that is important. 0:23:37.720 --> 0:23:41.120 It's a difficult question as to exactly where you draw 0:23:41.200 --> 0:23:44.600 the line, but I do think that we need to 0:23:44.640 --> 0:23:49.800 be concerned about the concentration of power that could result from, 0:23:49.840 --> 0:23:53.040