Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisn't Thal and I'm Tracy Halloway. So, Tracy,
Speaker 1: you know, we recently had the collapse of the stable
Speaker 1: coin us T and the total disaster of that didn't
Speaker 1: turn out to be a particularly stable coin in the end.
Speaker 1: You're not gonna say it. You're not going to say
Speaker 1: unstable coin. You're so close, so close to to saying
Speaker 1: the cliche. Okay, Yes, so Tara slash Luna collapsed and
Speaker 1: that kicked off I would say soul searching. Maybe not
Speaker 1: soul searching, I think so searching is a fine word. Well,
Speaker 1: a vast amount of criticism of the stable coin space,
Speaker 1: and we saw some other stable coins, notably Tether start
Speaker 1: to cobble a bit, although it looks like it's gotten
Speaker 1: back closer to its PEG since all of this happened,
Speaker 1: but lots of people asking tough questions about the space.
Speaker 1: Are stable coins sustainable? Are they inherently susceptible to some
Speaker 1: sort of bank run like phenomenon? And then secondly, is
Speaker 1: this whole terror Luna collapse going to expose the sector
Speaker 1: to more regulation? Is there going to be even more
Speaker 1: attention trained on this, yeah, right, because if there are
Speaker 1: different models of stable coins, so this is really important.
Speaker 1: So there are stable coins where a issuer has a
Speaker 1: dollars equivalent of assets in a regulated bank. There are
Speaker 1: stable coins in which the issuer has in theory a
Speaker 1: dollar or more than a dollar's worth of crypto assets
Speaker 1: held up in some smart contract. And then there are
Speaker 1: these so called algorithmic stable coins in which I don't
Speaker 1: know through magic, they they don't really seem to work,
Speaker 1: but they keep trying. Whether it's like somehow the price
Speaker 1: is supposed to just stay there even without the money,
Speaker 1: but what if The point is, if you sell something
Speaker 1: that is nominally supposed to be worth a dollar and
Speaker 1: it doesn't stay at a dollar, then regulators are going
Speaker 1: to get interested. And of course we saw in the
Speaker 1: financial crisis that one of this sort of loci a
Speaker 1: source of instability, yeah, was money market mutual funds, which
Speaker 1: we're supposed to stay at a dollar and didn't the
Speaker 1: reserve the reserve funds. And so any time you have
Speaker 1: something that's supposed to hold a dollar or supposed to
Speaker 1: be stable and is not, this is a major source
Speaker 1: of regulatory interest, regardless of what the model is that's right,
Speaker 1: and regulators are well aware that when you have something
Speaker 1: that's supposed to be worth a dollar, if it dips
Speaker 1: below a dollar, like reserve primary did back in two
Speaker 1: thousand eight, it can actually have massive consequences for the
Speaker 1: rest of the financial system. You get a contagion effect.
Speaker 1: And I think this is partially why they're worried about
Speaker 1: the space. But the other thing I would say is
Speaker 1: this is why when people say, oh, Tera Luna, you
Speaker 1: should have known better. This was a terrible, you know,
Speaker 1: volatile asset, It's like, well, the marketing actually matters here.
Speaker 1: If you say this thing is always going to be
Speaker 1: worth a dollar. Yes, obviously people can do due diligence
Speaker 1: and decide for themselves whether or not that's true. But
Speaker 1: you're putting it forth as a stable, one dollar pegged asset,
Speaker 1: and that comes with some sort of responsibility that regulators
Speaker 1: might well want to enforce. Absolutely. Like that to me
Speaker 1: is the key thing, Like, Okay, yes, at some level, right,
Speaker 1: people can learn about the smart contract risk, and they
Speaker 1: can learn about you know, what theoretically isn't isn't back
Speaker 1: into coin, but call something a stable coinet falls that
Speaker 1: seems like a problem, so we need to learn more
Speaker 1: about the space. And the other question I have like
Speaker 1: why is it growing? I thought the whole point of
Speaker 1: crypto was to make a lot of money and have
Speaker 1: the number go up, So why the attraction to a
Speaker 1: coin that doesn't go up? Is another well? Also also
Speaker 1: to get away from fiat dollars, right, and instead of
Speaker 1: away from it, it seems like we've just created the
Speaker 1: shadow banking system, almost like the euro dollar market, just
Speaker 1: to create more dollars that are pegged to dollars. Anyway,
Speaker 1: I have so many questions. Let's let's get attitude. So
Speaker 1: I'm really excited about our guest because he has a
Speaker 1: great position within this world to understand the sort of
Speaker 1: intersection of crypto and traditional banking, which is kind of
Speaker 1: what a stable coin is. It is this attempt to
Speaker 1: sort of like bridge. Okay, you have the US dollar
Speaker 1: and you have crypto, and you sort of make a
Speaker 1: crypto version of the US dollar. We're gonna be talking
Speaker 1: to someone who is a great viewpoint on that. We're
Speaker 1: gonna be speaking with Allen Lane. He's the CEO of
Speaker 1: silver Gate Bank, which is a bank that has kind
Speaker 1: of become the bank that banks crypto. It's been banking
Speaker 1: and working with crypto companies since it is active in
Speaker 1: the sort of like plumbing the backside of the stable
Speaker 1: coin space. So we're gonna get all into the business
Speaker 1: of stable coins. So, Ellen, thank you so much for
Speaker 1: joining us. Yeah, thank you for the opportunity. It's it's
Speaker 1: great to be here with with both of you. Ellen,
Speaker 1: why do people why are people so excited about stable coins?
Speaker 1: I thought the whole point of cryptocurrency was like a
Speaker 1: number shooting up to the moon. What's so exciting about
Speaker 1: a coin that just stays flat at the U. S dollar? Yeah, yeah,
Speaker 1: you're you're you're referencing the number go up, right, you know,
Speaker 1: I mean point of a coin that doesn't go up. Yeah, well, um,
Speaker 1: you know. As a regulated financial institution UM Silvergate is
Speaker 1: a California State chartered bank. We are a member of
Speaker 1: the Federal Reserve. Our deposits are insured by the fdi
Speaker 1: C and so we're very interested in the stability of
Speaker 1: the US dollar and and making sure that anytime any
Speaker 1: of our customers show up, they you know, that they
Speaker 1: can get their dollars back out and and so you're
Speaker 1: absolutely right. I heard in your introductory comments that we've
Speaker 1: been banking this ecosystem since in your ray of two
Speaker 1: thousand fourteen, which is an important data point because back
Speaker 1: then it was bitcoin only, and so we entered the
Speaker 1: space really focused on this this new digital asset called bitcoin,
Speaker 1: and some of the companies that were being formed at
Speaker 1: the time to provide services to this budding bitcoin space,
Speaker 1: and many of them were struggling to find and maintain
Speaker 1: bank accounts, and so that was really where we started.
Speaker 1: We've obviously evolved quite a bit over the last eight years,
Speaker 1: and and happy to talk a little bit about that,
Speaker 1: but I don't want to derail the state the stable
Speaker 1: coin conversation. Well, I mean, I'll take you up on
Speaker 1: both those topics. So, you know, a regulated bank interested
Speaker 1: in the stability of the US dollar and presumably you know,
Speaker 1: relatively interested in kind of boring investments. You got into
Speaker 1: crypto in when stable coins didn't really exist, and you've
Speaker 1: since evolved old from becoming just a bank for crypto
Speaker 1: related businesses to one that is more intricately involved in
Speaker 1: the stable coin business. Can you explain that transition to
Speaker 1: us and what exactly is is the opportunity there for
Speaker 1: you when it comes to stable coins. Let's go back
Speaker 1: briefly to to our entrance into the space, and it
Speaker 1: was really preceded by intellectual cure curiosity on my behalf. Personally,
Speaker 1: I was looking at bitcoin in two thousand thirteen and
Speaker 1: this meme was with bitcoin you could be your own bank,
Speaker 1: and you know, being a career banker, I thought that
Speaker 1: was interesting. And so as I went down the bitcoin
Speaker 1: rabbit hole, as they as they say, back in two
Speaker 1: thousand thirteen, I was really intrigued by this concept of
Speaker 1: the fact that bitcoin had a fixed supply. And you know,
Speaker 1: we're talking a little bit here about the stability of
Speaker 1: the US dollar UM, and we know that the FEDS
Speaker 1: mandate is to try to to try to maintain inflation
Speaker 1: around two percent. You know, there's obviously we're quite a
Speaker 1: bit above that right now. But even with just that mandate,
Speaker 1: the fact that inflation at a target rate of two
Speaker 1: percent means that by definition, even though I mentioned at
Speaker 1: the outset that we're interested in the stability of the
Speaker 1: US dollar, the fact is the US dollar is destined
Speaker 1: to go down and value um if the FED hits
Speaker 1: their target by two percent a year UM. And so
Speaker 1: I fell down the bitcoin rabbit hole. Um, I was
Speaker 1: intrigued by it. I didn't buy as much as I
Speaker 1: should have. And that's probably the pointers there you go.
Speaker 1: That's that's probably every bitcoiners, um you know thought, no
Speaker 1: matter when you get in. But the fact of the
Speaker 1: matter is at once we got into the ecosystem and
Speaker 1: we were trying to help our customers. So the first
Speaker 1: thing we did, Tracy, is is we were just a
Speaker 1: bank willing to talk to these these new companies. And
Speaker 1: I should mention right up front. Silver Gate is institutionally focused,
Speaker 1: so we do not bank consumers directly. Uh So this
Speaker 1: is an important distinction because many of our customers provide
Speaker 1: services to consumers, but we are an institutionally focused bank.
Speaker 1: And so we were opening bank accounts for businesses who
Speaker 1: were providing services to the bitcoin ecosystem. And what did
Speaker 1: that look like back in two thousand fourteen, Well, it
Speaker 1: looked like Genesis, which at the time was still called
Speaker 1: second Market. Um. They were enabling some of their customers
Speaker 1: to um, you know, to buy and sell bitcoin. And
Speaker 1: we went deep on this early so um you know,
Speaker 1: because we needed to satisfy ourselves in our regulators that
Speaker 1: we knew what was the use of proceeds. You know,
Speaker 1: what was this money being used for. These businesses are
Speaker 1: deemed to be money service businesses. And so what we
Speaker 1: would do is when when Genesis then called Second Market,
Speaker 1: would actually UM try to transact on behalf of a customer.
Speaker 1: So one of their customers wanted to buy our self
Speaker 1: bitcoin and that meant that they were sending a wire
Speaker 1: transfer across our platform. We asked at the time, okay,
Speaker 1: give us the bitcoin address you know for this transaction.
Speaker 1: And what we wanted to see on the blockchain was
Speaker 1: if someone was sent in a hundred thousand dollars to
Speaker 1: buy ourselves bitcoin. We wanted to go out to the
Speaker 1: blockchain and see that there was in fact a transaction
Speaker 1: that represented a hundred thousand dollars of value. And I
Speaker 1: think at the time Second Market was was somewhat amazed
Speaker 1: that this this bank in southern California was actually asking,
Speaker 1: you know, for blockchain addresses, UM and I think we
Speaker 1: have a pretty deep understanding of of this ecosystem. To
Speaker 1: now get to the point of the story around stable Coin,
Speaker 1: you first have to understand what is silver Gate known
Speaker 1: for today, and that is a platform. It's a global
Speaker 1: payments platform that is referred to as the SIN, which
Speaker 1: is an acronym S E N. It stands for the
Speaker 1: silver Gate Exchange Network. And what that is is it
Speaker 1: is a two sided network where we connect digital asset
Speaker 1: exchange platforms such as coin base and Gemini and crack
Speaker 1: in and f t X. And as soon as I
Speaker 1: start naming, I'm I'm worried, I'm gonna let leave somebody out,
Speaker 1: We've We've got all of them, all of the major ones,
Speaker 1: anybody that is serious about regulation, and that's an important
Speaker 1: distinction because they have to satisfy not only their own
Speaker 1: legal and regulatory requirements, but then we have to verify
Speaker 1: that that that their compliance programs are sound. So that's
Speaker 1: one side of the network, um. And then on the
Speaker 1: other side of the network is institutional investors other folks
Speaker 1: who are providing access to to bitcoin and other digital assets,
Speaker 1: and we connect them across our platforms so that they
Speaker 1: can interact twenty four hours a day, seven days a week.
Speaker 1: It is only fiat currency, though, and that's that's another
Speaker 1: important distinction, especially as we moved to the stable coin topic,
Speaker 1: because our customers are dealing with US dollars and and
Speaker 1: now euros. We we launched the euro sand platform back
Speaker 1: in February so that we can provide this service over
Speaker 1: in Europe as well. But it is a seven A
Speaker 1: p I enabled connection, so that our customers can move
Speaker 1: US dollars amongst themselves around the ecosystem any time or
Speaker 1: the day of the day or night. We launched this
Speaker 1: back in two thousand seventeen, and it was really a
Speaker 1: game changer for the industry and for Silvergate because we
Speaker 1: were the first bank in the world to actually bring
Speaker 1: this the legacy banking system that only operates forty hours
Speaker 1: a week Monday through Friday, into the seven digital asset
Speaker 1: market that trade around the clock around the world. So
Speaker 1: can you describe how stable coin issuers use your services directly?
Speaker 1: Where are you in the ecosystem because obviously, as you mentioned,
Speaker 1: you have a lot of clients who are in the
Speaker 1: broader crypto space f t X and all these exchanges
Speaker 1: and so forth. How would a stable coin issuer what
Speaker 1: value do they get from silver Gate? Yeah, so, so
Speaker 1: they use the sen and our a p I for
Speaker 1: the important you know that that on ramp and off ramp.
Speaker 1: I've often tried to just describe what we do is, Hey,
Speaker 1: we are the regulated on ramp from the US dollar
Speaker 1: and other fiat currencies into the bitcoin and digital asset market.
Speaker 1: And then likewise we are the off ramp from that
Speaker 1: the digital asset market back into fiat currencies and the
Speaker 1: way that's done. And so let's talk about the stable coins,
Speaker 1: the stable coin issuers who use our platform. So, UM,
Speaker 1: they are all of the regulated US dollar backed stable
Speaker 1: coin issuers. And UM, by that distinction I heard in
Speaker 1: your opening remarks, you were you were distinguishing between the
Speaker 1: different types of stable coins, the dollar backed ones are
Speaker 1: the only ones we back. UM, So we don't bank
Speaker 1: bank the algorithmic stable coin offerings, nor do we, um,
Speaker 1: you know these other you know stable coins that are
Speaker 1: maybe collateralized by other digital assets. Um, those are those
Speaker 1: all they don't need a US dollar bank because they're
Speaker 1: not backed by U S dollars. So by definition, but importantly,
Speaker 1: we also don't bank Tether. And believe it or not,
Speaker 1: we had the opportunity to work with Tether very early on,
Speaker 1: but because they weren't inside the United States, and you know,
Speaker 1: again we're very serious about regulation and and so we
Speaker 1: looked at it and we thought, you know, this is
Speaker 1: an interesting idea Tether was launched before Circle um launched
Speaker 1: the U S you know USDC, so we thought, yeah, gosh,
Speaker 1: that's an interesting idea. But they're offshore. We can't really
Speaker 1: get our hands around, you know, their regulatory status in
Speaker 1: the United States and so so we were not able
Speaker 1: to bank them back then, so back in two thousand seventeen,
Speaker 1: nor do we bank them today. So that's what we
Speaker 1: don't do. What we do is for U S d C,
Speaker 1: for the packs dollar, which is issued by pass, for
Speaker 1: the Gemini dollar issued by Gemini, and for true US
Speaker 1: d UM they use the san and our a p
Speaker 1: I for the minting and burning of their tokens, so
Speaker 1: they're they're those tokens are issued when a dollar hits
Speaker 1: their silver Gate bank account, and it's all programmatic and
Speaker 1: so so if if somebody wants to purchase U S
Speaker 1: d C from Circle, what they would do is they
Speaker 1: would send dollars into circles bank account at silver Gate,
Speaker 1: and when those dollars hit the bank account, then at
Speaker 1: that moment, there is an a p I call from
Speaker 1: silver Gate to Circle that says we just received X
Speaker 1: amount of dollars from this customer, and at that point
Speaker 1: Circle knows we have the dollars in our possession, so
Speaker 1: they turn around and they meant the U s DC
Speaker 1: token and send it to the wallet address of that
Speaker 1: that institution that is looking to purchase the U s
Speaker 1: DC And then the same thing happens in reverse. So
Speaker 1: if someone wants to redeem their USDC and go back
Speaker 1: to U s dollars, they send the USDC to to
Speaker 1: the wallet at Circle Circle. At that point, once they
Speaker 1: have possession of the U s d C, they then
Speaker 1: send an instruction to us via a p I and
Speaker 1: we then in turn will send the dollars back to
Speaker 1: that prior USDC tokenhore. So, can I ask a step
Speaker 1: back question, a broader question about the space? Is there
Speaker 1: an irony here that you know, a lot of crypto
Speaker 1: is sold on the basis that you can have financial
Speaker 1: assets that sit outside of the traditional financial system. And
Speaker 1: you mentioned one of the things that got you interested
Speaker 1: in crypto in the first place was this idea of,
Speaker 1: you know, be your own bank with bitcoin. But you know,
Speaker 1: fast forward some years and you are a bank that
Speaker 1: deals in the crypto space. Isn't there a fundamental tension
Speaker 1: there about having a financial system outside of traditional regulation,
Speaker 1: but still needing to be plugged into a regulated financial entity. Yeah. So, um,
Speaker 1: so get an important distinction. What would be that these
Speaker 1: entities that we're banking aren't operating outside of regulations. That
Speaker 1: would be the first thing I would say. But to
Speaker 1: the broader kind of fundamental question, I distinctly remember when
Speaker 1: I was talking with our team internally about this back
Speaker 1: in two thousand thirteen, and um, you know I and
Speaker 1: this meme was be your own Bennic, and my thought
Speaker 1: process was, well, if this takes off, you know, it's
Speaker 1: going to take years. It's going to take decades. I've
Speaker 1: been in banking for forty years, so I've seen all
Speaker 1: the different things. I mean, I was there right as
Speaker 1: reg Hugh was being repealed, which limited the amount of
Speaker 1: interest that you could pay on deposits. I was there
Speaker 1: when the first A t M s were being installed.
Speaker 1: So I've seen all of this quote unquote innovation. Bitcoin
Speaker 1: is the true innovation in my opinion, but it's not
Speaker 1: going to displace government, sovereign government's desire to issue their
Speaker 1: own currencies. And so I view bitcoin as you know,
Speaker 1: you guys are very familiar with the meme. Digital gold,
Speaker 1: you know is a way to save a portion of
Speaker 1: your wealth. And I think that we still need to
Speaker 1: operate in the financial world with fiat currencies, the world
Speaker 1: that we actually live in UM and and just like
Speaker 1: some some people might might try to, you know, try
Speaker 1: to save some of their wealth in gold or in
Speaker 1: some other you know, in stocks and bonds, etcetera. I
Speaker 1: think bitcoin UM is certainly an alternative, but I don't
Speaker 1: think it's going to replace the dollar. And so I
Speaker 1: actually think silvergate is perfectly positioned to UM. You know,
Speaker 1: kind of have a foot in, you know, in both ecosystems.
Speaker 1: So you're the owner of the assets that were DM
Speaker 1: so Facebook for a few years at least, I think
Speaker 1: starting in twenty I think starting they tried to get
Speaker 1: their own stable coin off the ground. It's gonna be
Speaker 1: sort of a global thing. It just never really worked.
Speaker 1: Why couldn't What was the problem from your view? Why
Speaker 1: didn't that work? And one of the asset what constitutes
Speaker 1: the assets that were left over that you've played, Why
Speaker 1: it didn't work? You know? Unfortunately, I think it's because
Speaker 1: it was Facebook, you know, I I will say early on,
Speaker 1: I think you know, they not only you know, kind
Speaker 1: of raised the ire of the US government, but of
Speaker 1: of you know, a lot of governments when they when
Speaker 1: they announced that they were going to issue this and
Speaker 1: make it a you know, backed by a basket of currency.
Speaker 1: So it's like, well, let's let's not only you know,
Speaker 1: upset the US, you know, the US government, but let's
Speaker 1: upset you know, all of these other sovereign nations who
Speaker 1: are issuing their own currencies, and let's make it a basket,
Speaker 1: you know. So so I I think they quickly realized
Speaker 1: that that it needed to be backed by a single currency. Unfortunately,
Speaker 1: by that time, you know, I think they were just
Speaker 1: in the crosshairs and no matter what they did, you know,
Speaker 1: they tried to move off shore. Um. You know, they
Speaker 1: were a Swiss entity for a while trying to issue
Speaker 1: a U. S Dollar back token. That you know, if
Speaker 1: you just stop and think about what I just said, um,
Speaker 1: you know, that's you know, that's gonna be problematic, a
Speaker 1: Swiss entity issuing a U. S dollar back token. And
Speaker 1: so you know, there are a lot of challenges. But
Speaker 1: at the end of the day, what we saw as
Speaker 1: the opportunity, and I should mention we were not involved
Speaker 1: with Facebook um at all during any of that we
Speaker 1: ended up coming on the scenes late, so they had
Speaker 1: as as you'll know. Just remind you that they started
Speaker 1: out as Libra. They then switched to ink too d M.
Speaker 1: They then moved to UM at some point in that
Speaker 1: they moved from the US to Switzerland. And during that
Speaker 1: entire time, we at silver Gate we're looking at the
Speaker 1: feasibility of issuing our own stable coin. So we were
Speaker 1: already banking UM, USDC and some of the other early
Speaker 1: entrants UM, and we were looking at the pros and
Speaker 1: cons of whether or not we should issue our own
Speaker 1: Why would we do that? Well, back at that time,
Speaker 1: the thought process was what we've We've got this send
Speaker 1: the silver Gate Exchange networks. So a lot of our
Speaker 1: customers are using the send to transact dollars U seven.
Speaker 1: But that's not on a blockchain, it doesn't candidate, it
Speaker 1: doesn't need to be to do an an intra bank
Speaker 1: transfer UM. But if they want to take their dollars
Speaker 1: outside of silver Gate, well then oftentimes what they were
Speaker 1: doing was they were starting on the send, they were
Speaker 1: then buying a you know, USDC UM and then taking
Speaker 1: that U S D c UM to places where where UM,
Speaker 1: where they didn't have a silver Gate bank account, for instance,
Speaker 1: and so we started thinking about whether or not we
Speaker 1: should issue our own. We did the legal permissibility analysis,
Speaker 1: UM we we believe that it's legally permissible for UM
Speaker 1: for us to issue a stable coin. We have not
Speaker 1: actually heard anything to the contrary and all the conversations
Speaker 1: we've had with our regulators, so so we do believe
Speaker 1: it is legally permissible. And we were getting ready to,
Speaker 1: you know, kind as they say, go to Washington and
Speaker 1: talk about this back in March of right as the
Speaker 1: pandemic hit and so obviously everybody's priorities shifted a little bit,
Speaker 1: and so we we cooled our heels in the first
Speaker 1: and second quarter of but we were still working on
Speaker 1: the idea. And it was late where we actually were
Speaker 1: approached by the d M Association and they wanted to
Speaker 1: talk with us because they were familiar with our ability
Speaker 1: to mint and burn tokens. And at the time they
Speaker 1: were working with four other banks. I don't know who
Speaker 1: those banks were, but four other large banks, and the
Speaker 1: concept was these four banks were going to hold the reserves,
Speaker 1: but you know, each of them was going to hold
Speaker 1: of the dollars back in these tokens, So you're gonna
Speaker 1: have this this broad array of banks holding the reserves,
Speaker 1: but none of those banks really had the capability that
Speaker 1: Silvergate has developed to be able to interact with the
Speaker 1: technology mint minting and burning and all of that. So what,
Speaker 1: you know, what what we looked at at that time was, well,
Speaker 1: this is a this is a completely separate use case
Speaker 1: from what we had been contemplating, you know, to go back,
Speaker 1: you know, to what I was saying a minute ago.
Speaker 1: We were were contemplating potentially issuing a stable coin because
Speaker 1: we saw the value in helping our customers have a
Speaker 1: dollar token that could be used in the crypto ecosystem.
Speaker 1: But what the d M Association was trying to do
Speaker 1: was really take this concept of a tokenized dollar to
Speaker 1: be able to use it for for for commerce, for payments,
Speaker 1: for remittance, you know, not cryptocurrency trading. And that was
Speaker 1: fascinating to us. And again right at that intersection of hey,
Speaker 1: we're a bank and banks participated in payment systems, and
Speaker 1: wouldn't this wouldn't this be interesting to be able to
Speaker 1: unlock the ability for people all over the world to
Speaker 1: have a tokenized dollar in an app on their phone
Speaker 1: that they could use to pay for things and and
Speaker 1: that would be interoperable. And so that is our our
Speaker 1: thesis going in and so we said, yeah, we'd absolutely
Speaker 1: like to be a part of this. Um As we
Speaker 1: worked with the d M Association over the first six months,
Speaker 1: it got to the point where they abandoned that multi
Speaker 1: bank kind of approach, and um we agreed, and we
Speaker 1: announced in May of last year May at silver Gate
Speaker 1: was going to be the exclusive issuer of the d
Speaker 1: m U S Dollar and and so um that was
Speaker 1: you know, that was at the time a big deal
Speaker 1: for us, and obviously we thought that we saw a
Speaker 1: path to us participating and you know, partnering with them
Speaker 1: to issue the d m U S D. Unfortunately, um
Speaker 1: AS is now somewhat ancient history. There's a President's Working
Speaker 1: Group of regulators. It's called the President's Working Group. It's
Speaker 1: the U S. Treasury, the Federal Reserve, the SEC, and
Speaker 1: the CFTC and um they've been looking at this question
Speaker 1: of stable coins. They were doing some work last year,
Speaker 1: you know, to address the potential regulation for stable coins,
Speaker 1: and so we were strongly encouraged to wait and to
Speaker 1: not launch last summer and to wait for that work
Speaker 1: to be done, and that report was issued on November
Speaker 1: one last year. What's it been like generally to work
Speaker 1: with regulators and you know, people like the Federal Reserve
Speaker 1: because my my general impression of it when it comes
Speaker 1: to the crypto spaces that often it's sort of like
Speaker 1: it's better to just do it without asking permission and
Speaker 1: you see no. But honestly, when you apply to the
Speaker 1: regulators officially, you tend to get rejected, whereas if you
Speaker 1: go out and do it, I mean, I'm thinking specifically
Speaker 1: of tether Um, if you go out and do it
Speaker 1: like often you you just kind of get away with it.
Speaker 1: So I'm curious what those conversations are are actually, Like, yeah, Tracy,
Speaker 1: it's it's a it's a fair question, um. And you know,
Speaker 1: at times some of our investors, you know, have asked
Speaker 1: us the same question, Well, why don't you just you know,
Speaker 1: watch something. Well, I think there's a big difference between
Speaker 1: a a regulated bank that is already operating under the
Speaker 1: supervision of you know, and under the authority of these regulators, um,
Speaker 1: these different regulatory agencies, versus a tech startup that's going
Speaker 1: to spend something up and launch it in into the Market.
Speaker 1: But to your question of what's it been like, you know,
Speaker 1: our our regulators have really come up the learning curve.
Speaker 1: I mean, we've been doing this now, as I mentioned,
Speaker 1: for for eight years. And just to go back for
Speaker 1: just a second, in two thou fourteen, we did a
Speaker 1: version of what you're suggesting, obviously at a very small scale,
Speaker 1: but we started opening accounts for for these these customers
Speaker 1: such as Second Market at the time, but we were
Speaker 1: confident that we understood how the existing regulations applied to
Speaker 1: that activity. So you know, there have been finns and
Speaker 1: guidance issued in two thousand third team there there was
Speaker 1: clear guidance for how we bank should interact with the
Speaker 1: money service business. So but what we did was so
Speaker 1: we applied these existing regulations to to the activity that
Speaker 1: these um customers were engaging in. And then we invited
Speaker 1: our regulators into our offices in the summer of two
Speaker 1: thousand fourteen and we gave them a bitcoin tutorial. Not
Speaker 1: to be unfair to them, but bitcoin was brand new
Speaker 1: and in two thousand fourteen when I asked the question,
Speaker 1: so it was the State Banking Department and the FED,
Speaker 1: and I asked the question if they had heard of bitcoin,
Speaker 1: and there they were thinking about it, well, is that
Speaker 1: kind of like, um, you know, banking marijuana companies, um,
Speaker 1: you know, and so it was kind of all, you know,
Speaker 1: it was very unclear, but I I could show you
Speaker 1: the presentation. It was like an eight page or fourteen
Speaker 1: page presentation. This is what bitcoin is and these are
Speaker 1: the types of companies that are being formed. Um, this
Speaker 1: is the finn Send guides that came out last year.
Speaker 1: This is how we're thinking about banking the companies. We
Speaker 1: engaged very early with our relators and then over the
Speaker 1: last eight years they've been in at least annually, and
Speaker 1: most years they've come in for an interim visit to
Speaker 1: kind of look and make sure that you know that
Speaker 1: we're doing everything appropriately. So our regulators have had a
Speaker 1: long time to go to school on the different things
Speaker 1: that that we're doing. Um, I'll just mention one other
Speaker 1: thing off topic. But we also offer loans collateralized by bitcoin,
Speaker 1: and that was a that was another path that we
Speaker 1: went down with our regulators starting back in two thousand
Speaker 1: and nineteen, where we did the legal analysis. You know,
Speaker 1: we satisfied ourselves that it was permissible to lend against
Speaker 1: bitcoin as collateral. We then engaged with our regulators. We
Speaker 1: told them how we were thinking about doing it, all
Speaker 1: the risk mitigains that we had in place. We launched
Speaker 1: a pilot in early ran that pilot for several months, UM,
Speaker 1: and then came out of the pilot. Now back then
Speaker 1: in in two thousand and twenty, and we sit here
Speaker 1: today now with over a billion dollars in send leverage commitments.
Speaker 1: We call the product send leverage. And so that's another
Speaker 1: example of engaging with our regulators. And so Tracy, they've
Speaker 1: they understand this this technology, they have bigger questions. So
Speaker 1: when we get back to d M, and I want
Speaker 1: to tie in the last part of your question, UM,
Speaker 1: which was, Okay, we bought these assets, UM, what what
Speaker 1: did we buy? And what do we plan to do
Speaker 1: with it? So when the President's Working Group Report was
Speaker 1: issued in on November one of last year, it clearly
Speaker 1: UM stated a preference for stable coins to be inside
Speaker 1: the banking system. So we're a bank, so we can
Speaker 1: check that box. UM. The other thing that it clearly
Speaker 1: said was there was a desire to see that these
Speaker 1: payment networks were essentially not UM, you know, kind of
Speaker 1: controlled by I forget the terminology that was used. But
Speaker 1: I'll just say big tech okay, um, you know, we
Speaker 1: can go back and look at the actual language, and
Speaker 1: so look at we look at that guidance and then
Speaker 1: you know, kind of breathed a sigh of relief that
Speaker 1: we had not gone ahead and launched. So to your point, Tracy,
Speaker 1: they didn't tell us no, you can't do this, you
Speaker 1: know in the summer. What they strongly encouraged us to
Speaker 1: wait until this guidance came out. And once the guidance
Speaker 1: was out, it was pretty clear that nan if we
Speaker 1: had launched with with DM, we would have then been
Speaker 1: operating a stable coin that was in direct contravention of
Speaker 1: what the regulatory guidance was. And so so we were
Speaker 1: glad that we hadn't moved forward at the time. And
Speaker 1: now to your question, so what did we buy? So
Speaker 1: at the same time that we read the report, the
Speaker 1: d M folks read the report, they were looking at that,
Speaker 1: and we called them up and we said, well, what
Speaker 1: do you guys think And they said, yeah, you know,
Speaker 1: we think we're gonna We're gonna pause. This effort. Looks
Speaker 1: like we're kind of dead in the water. My words,
Speaker 1: not theirs um and so we're going to engage strategic
Speaker 1: advisors to help us figure out what to do with,
Speaker 1: you know, with this because the one thing I can
Speaker 1: say with confidence is, you know, they didn't spend Facebook,
Speaker 1: who was the initiator of this. They didn't spend two
Speaker 1: or three years and you know, you know, millions and
Speaker 1: millions of dollars with some of the best software engineers
Speaker 1: in the world. They didn't build this technology to turn
Speaker 1: around and sell it to somebody else. Um. But yet
Speaker 1: that's where they found themselves. And so we looked at that.
Speaker 1: We had been ready to go, um, we had done
Speaker 1: all that work to integrate with them, and so we
Speaker 1: looked at the tech and and we said, you know,
Speaker 1: this is actually purpose built for payments. They had some
Speaker 1: of the you know, best technologists in the world building it.
Speaker 1: They had a lot of digital first retail platforms ready
Speaker 1: to engage with it to start offering it to their
Speaker 1: retail customers. And so let's let's see if we can
Speaker 1: acquire this technology and and then you know, we'll just
Speaker 1: come back to where we were a couple of years ago,
Speaker 1: and we'll issue it ourselves. And so that's what we
Speaker 1: bought in January. So we bought the protocol itself, which
Speaker 1: is open source. And you know, some folks have said, well, gos,
Speaker 1: what did you really buy because isn't this open source?
Speaker 1: It's it's absolutely open source, and we think it needs
Speaker 1: to be. People need to be able to look at
Speaker 1: the blockchain, just as we looked at the blockchain back
Speaker 1: in two thousand fourteen when we were looking at bitcoin
Speaker 1: transactions because we wanted to verify that leg of the transaction.
Speaker 1: So it's open source, but importantly, there are proprietary regulatory
Speaker 1: compliance elements that have been built on top of it
Speaker 1: to satisfy the Know your customer, the anti money laundering,
Speaker 1: the b s A requirements, um So buying all of
Speaker 1: that together in furtherance of then us being able to
Speaker 1: issue our own stable coin, and again for the use
Speaker 1: of payments and remittance and not for a cryptocurrency you
Speaker 1: use cans. So I want to ask another regulatory question,
Speaker 1: which is what, in your view should back stable coins?
Speaker 1: Should they be entirely say, short term treasuries like one
Speaker 1: to one because this is a big question. And then
Speaker 1: also if there is going to be sort of non
Speaker 1: perfectly liquid assets like maybe there's some commercial paper or
Speaker 1: maybe there's some more longer dated treasuries. Is their risk
Speaker 1: of contagion to the broader financial system if in a
Speaker 1: crypto crash and people want to pull out, stable coin
Speaker 1: issuers have to liquid date some of their assets rapidly.
Speaker 1: Like I know, you're not in the business of actually
Speaker 1: holding them, because if you talk of the assets, because
Speaker 1: you're in the uh, the API, the minting and burning
Speaker 1: of stable coins. Nonetheless, I want to get your take
Speaker 1: on if I buy a stable coin, what should I
Speaker 1: expect in terms of what's backing it? And then this
Speaker 1: sort of like potential spillover effects of crypto volatility into
Speaker 1: assets that don't necessarily have that you know, uh, into
Speaker 1: the into the broader financial assets. Yep, yep, great question. Uh.
Speaker 1: And we think a lot about this because candidly we
Speaker 1: treat sin and all, you know, so so we have UM.
Speaker 1: I don't think I've mentioned this yet, but we have
Speaker 1: over fifteen hundred institutional customers at silver Gate in this
Speaker 1: initiative who are using the sin every day and UM
Speaker 1: as an example, in the in the first quarter of
Speaker 1: this year we had a hundred and forty two billion dollars,
Speaker 1: so we're about you know, fifteen sixteen billion dollar bank.
Speaker 1: In terms of total assets, we had a hundred and
Speaker 1: forty two billion dollars move across the sin in the
Speaker 1: first quarter of this year alone. That was actually down
Speaker 1: quite a bit from the fourth quarter UM and as
Speaker 1: you know, the currency trading was down, but in the
Speaker 1: fourth quarter we had over two and so what that
Speaker 1: means is that we have to stay liquid. There's different
Speaker 1: definitions of liquidity, right. The way we define it as
Speaker 1: is that we we have a very large investment securities portfolio.
Speaker 1: So on fifteen billion in assets, we probably have twelve
Speaker 1: billion in investment securities. I already mentioned, you know, we
Speaker 1: were the collateralized bitcoin lending UM. You know, we we
Speaker 1: have about a billion dollars in commitments there. But the
Speaker 1: overwhelming majority of our balance sheet is in investment securities.
Speaker 1: Now they're not all treasuries, but but they importantly they
Speaker 1: all trade actively. You know, the types of securities that
Speaker 1: we buy as a bank, we can we can trade
Speaker 1: out of those on any given day. Obviously, if if
Speaker 1: they're longer in duration and interest rates have gone up,
Speaker 1: then you know we're gonna have to take a haircut.
Speaker 1: But we do look at at this and this is
Speaker 1: one of the reasons we don't We don't pay interest
Speaker 1: on our deposits. And we don't and and we actually
Speaker 1: encourage our customers to only keep as much at silver
Speaker 1: Gate as that they need for for their for their
Speaker 1: trading and investing activities. We you know, you you mentioned
Speaker 1: Joe that you know that we don't hold all the
Speaker 1: reserves for USDC. For instance, usdcs over fifty billion dollars.
Speaker 1: We're only a fifteen billion dollar bank, and we have customers,
Speaker 1: so obviously we don't have the majority of those dollars.
Speaker 1: They're spread elsewhere in the banking system. And there is
Speaker 1: you know, um, there are other banks that have obviously
Speaker 1: since we've got into the space, or other banks that
Speaker 1: are banking this this crypto space. UM. And candidly, I
Speaker 1: think what they're doing with the deposits, and this is
Speaker 1: not criticism, this is just a factual statement. They are
Speaker 1: doing what we did back in two thousand fourteen, which
Speaker 1: we looked at this and we and thought, heck, this
Speaker 1: is a potential source of deposits to fund our lending activities. Um.
Speaker 1: And and so if if you were to look at
Speaker 1: some of the other banks that are banking the space,
Speaker 1: and what are they doing with the deposits. You know,
Speaker 1: I think they're primarily using those in some of their
Speaker 1: lending operations. Um and and again UM that their banks,
Speaker 1: that's what they do. We have decided that the industry
Speaker 1: is relying on us as critical infrastructure to provide liquidity.
Speaker 1: And when you know, when Tera was melting down, obviously
Speaker 1: we didn't have any exposure whatsoever to Tara, but that contagion,
Speaker 1: if you will, that was spreading throughout the ecosystem and
Speaker 1: causing people to go to cash or go to stable
Speaker 1: coiner you know, go to a dollar back stable coin.
Speaker 1: You know, you you can imagine that we might have
Speaker 1: seen heightened activity across our platform um and and the
Speaker 1: industry relies on us for that critical function. So can
Speaker 1: you talk a little bit more about risk management and
Speaker 1: specifically in the context of this sort of one way
Speaker 1: risk which is basically what we saw over the past
Speaker 1: month or so when Tera Luna collapsed, which is that
Speaker 1: you had bonds and stocks falling, you had all sorts
Speaker 1: of crypto and tokens falling at the same time. There
Speaker 1: was lots of anecdotes about people potentially having to liquidate
Speaker 1: positions in order to pay off collateral on margin that
Speaker 1: they needed to to pay because of the volatility. How
Speaker 1: do you actually handle that risk, because it feels like
Speaker 1: with a lot of crypto, it's basically crypto exposure kind
Speaker 1: of squared and also pegged too, occasionally tied into stocks
Speaker 1: and bonds, so it's sort of it feels like it
Speaker 1: feeds on itself at certain times. I what I can
Speaker 1: say about the way we're set up at silver Gate
Speaker 1: is because we are not the bank that is holding
Speaker 1: like the reserves, we technically do, you know, don't want
Speaker 1: to be their primary bank in the sense that you know,
Speaker 1: where I've spent most of my career as a business banker.
Speaker 1: You know, the idea is, well, gosp let's get them,
Speaker 1: let's get the operating deposits, let's make them alone, you know,
Speaker 1: let's get the full relationship. We take a very narrow
Speaker 1: view here, which is, you know, don't keep with us
Speaker 1: excess deposits that are needed for other things, because we
Speaker 1: are primarily a liquidity source. And and so what that means,
Speaker 1: Tracy is is that when when there's this type of activity,
Speaker 1: we see a lot of money going through our bank,
Speaker 1: but um, but we actually see our deposits. I talked
Speaker 1: about this on an investor call last week. I I
Speaker 1: referred folks on that call back to our earnings transcript
Speaker 1: at the end of the first quarter. If you remember
Speaker 1: back at that time, you know, pandemic hit markets were crazy.
Speaker 1: You know, Bitcoin sold off, you know the crypto markets
Speaker 1: were selling off as well. And what we saw back
Speaker 1: at that time was a surge in our deposits. And
Speaker 1: and we reported on that because it was quarter end.
Speaker 1: We said, look, our deposits are elevated at quarter end.
Speaker 1: We believe that's temporary. Um And by the time we
Speaker 1: released our earnings the third week of April, we're already
Speaker 1: seeing deposits kind of normalized, and we reported on that fact.
Speaker 1: But critically, we are this critical um, you know, piece
Speaker 1: of infrastructure where where folks as their exiting the ecosystem,
Speaker 1: we're wanting to go to cash. Those dollars passed through
Speaker 1: silver Gate and then end up wherever they're going to
Speaker 1: put them. Sometimes it just ends up at USDC, in
Speaker 1: which case those dollars aren't going to sit at silver Gate.
Speaker 1: They're gonna sit it in Reserve, but they might pass
Speaker 1: through us on on their way. One of the things
Speaker 1: I mean, we've been bent managing liquidity this way since
Speaker 1: we launched the SIN in two thousand seventeen. Back at
Speaker 1: that time, believe it or not, we were a two
Speaker 1: billion dollar bank and we we had a billion dollars
Speaker 1: in crypto related deposits. We were holding almost all of
Speaker 1: that at the time at the Federal Reserve. Because when
Speaker 1: you're going are these times of of liquidity and stress,
Speaker 1: you want to make sure that you're not investing those
Speaker 1: those those funds um you know, into something that's more
Speaker 1: long term, because you don't know how sticky it's gonna be.
Speaker 1: I just want to go back to this point earlier.
Speaker 1: It's like about contagion. Like we have seen Tether's total
Speaker 1: assets shrink in this latest market volatility, so presumably it
Speaker 1: had to sell some of its assets. I haven't looked
Speaker 1: at what's going on with us DC. I don't know
Speaker 1: if it's had to actually liquidate or if people are
Speaker 1: just hanging out in USDC. But is there risk of volatility?
Speaker 1: I mean, you expect, obviously the stable coin industry to
Speaker 1: get much bigger, otherwise you wouldn't be in it, you
Speaker 1: know today, One like, is there risk of crypto market volatility,
Speaker 1: forcing liquidations and other assets and therefore spreading volatility elsewhere
Speaker 1: into the financial system. Yeah, I certainly think that's one
Speaker 1: of the things that the regulators are concerned about. And
Speaker 1: that's you know, if you go back and look at
Speaker 1: the President's Working Group report that I've referenced a couple
Speaker 1: times already, you know, they there are concerns about contagion
Speaker 1: and you know this points of liquidity stress, etcetera. Which
Speaker 1: is which is candidly one of the reasons that that
Speaker 1: that we think, you know, from our perspective, and I'm
Speaker 1: not you know, hey, I'm a free markets guy. UM.
Speaker 1: Clearly USDC has found you know, product market fit, right.
Speaker 1: I mean they didn't you know, they weren't sitting in
Speaker 1: their garage trying to come up with something they hoped
Speaker 1: that the industry would use. They launched something, and the industry,
Speaker 1: you know, has said yes, and and they're speaking with
Speaker 1: their wallets, and there's over fifty billion dollars of UM
Speaker 1: you know backing USDC right now. What What we see
Speaker 1: is UM is that there is a there is a
Speaker 1: need for a tokenized dollar to be used by consumers
Speaker 1: to pay for things. UM. And you know, the way.
Speaker 1: And I know I'm getting off your question, Joe, But
Speaker 1: but but this is important for you know, for me
Speaker 1: to say, because the way I think about this is
Speaker 1: not dissimilar to the way I've described how we don't,
Speaker 1: you know, we don't encourage our customers to keep a
Speaker 1: lot of access deposits with us. I think about a
Speaker 1: tokenized dollar the way I think about a physical dollar bill,
Speaker 1: or let's let's say a twenty because you know, you
Speaker 1: typicularly can only get twenties out of the A t M. Right,
Speaker 1: So if I go to the A t M and
Speaker 1: I pulled twenty dollars out, well, now that's no longer
Speaker 1: in my bank. It's not f D. I c ensured.
Speaker 1: I can take it anywhere and I can use it
Speaker 1: to pay for something. But importantly, I didn't withdraw all
Speaker 1: my money out of the bank. I only withdrew what
Speaker 1: I needed to transact. So I think that that is
Speaker 1: that is the place for a silver gate issued tokenized dollar.
Speaker 1: And and we've also started talking about it internally, and
Speaker 1: we're beginning to talk with our regulators about this as well.
Speaker 1: We're getting we're getting away from calling or stable coin
Speaker 1: because obviously stable coins on a really bad name because
Speaker 1: they've proven themselves to not be stable um in many cases. Um.
Speaker 1: But but for us we're looking at this is Hey,
Speaker 1: this is a tokenized dollar right now on my iPhone.
Speaker 1: I have both the dunkin Donuts app and the Starbucks app,
Speaker 1: and I can load both of those with value. But
Speaker 1: guess what, it's not interoperable. I can't pull it back off. Um.
Speaker 1: And and I you know, I can't take my dunkin
Speaker 1: Donuts app and pay for a coffee at Starbucks. And
Speaker 1: so so what we see and this is a longer
Speaker 1: view and it's going to take a while to get there,
Speaker 1: but everything in the world is moving digital um. And
Speaker 1: people say, well, money is digital too, And that's true
Speaker 1: for all of us in the first world, but there
Speaker 1: there are many people that don't have access. They all
Speaker 1: have phones, um, but they don't have the ability to
Speaker 1: pay for things. Um. And so I just view a
Speaker 1: tokenized dollar as a way to take some portion of
Speaker 1: your value that whether you have it sitting in a
Speaker 1: bank account or whether you have it sitting in bitcoin,
Speaker 1: pull that out, put it in a digital wallet on
Speaker 1: your phone so that you can use it to pay
Speaker 1: for things, whether that be an online merchant, whether that
Speaker 1: be at a physical merchant, and so that's that and
Speaker 1: and to me that shouldn't create any concern about financial
Speaker 1: contagion and runs on the bank and all of that stuff,
Speaker 1: because it's no, it's no different than withdrawing cash out
Speaker 1: of an a t M. So Tether okay, clearly controversial
Speaker 1: in many ways. There have been questions swirling around what
Speaker 1: exactly is backing it for many many years. Now. You
Speaker 1: have a vantage point where you see the flows and
Speaker 1: the mechanics of what happens when stable coins are are
Speaker 1: moving or not moving. So you described, for instance, when
Speaker 1: we had the big run recently, there was an increase
Speaker 1: in your deposits and lots of money flowing in. Can
Speaker 1: you give us your take on tether and what exactly
Speaker 1: is going on there, because I think a lot of
Speaker 1: people are still concerned about a lack of transparency on
Speaker 1: the backing and a lot of people have also been
Speaker 1: looking at the deposit data for tether and I think
Speaker 1: their bank is UM. It's in the Bahamas, right, like
Speaker 1: Deltech or something UM And and basically saying that we
Speaker 1: don't see deposits moving in the way that you might
Speaker 1: expect when tether is actually moving. And again, this is
Speaker 1: something that's supposed to have billions and billions of dollars
Speaker 1: worth of assets backing it. So could you maybe just
Speaker 1: give us your opinion of what is going on there. So, unfortunately,
Speaker 1: my knowledge is is limited, UM, just as the rest
Speaker 1: of the of the world's knowledge is limited because you know,
Speaker 1: we don't bank them, as I mentioned, UM. But what
Speaker 1: I can tell you is that our customers who use
Speaker 1: tether um. You know, we have customers all over the world.
Speaker 1: We have customers in Europe and Asia and Latin America UM,
Speaker 1: and those customers that use tether do not have the
Speaker 1: same concern that I hear that you just you know,
Speaker 1: are articulated. And so there's a there's clearly a difference
Speaker 1: in perception between those who are inside the ecosystem and
Speaker 1: those who are outside of it. Now I don't know
Speaker 1: why that is, Tracy I, but I do know that
Speaker 1: when we talk to our customers, because we've asked them,
Speaker 1: you know, what if we were to issue our own
Speaker 1: staff This goes back obviously like two thousand and eighteen nineteen.
Speaker 1: What if we were to issue our own you know,
Speaker 1: how do you view tether um and they use tether
Speaker 1: because it works, and so unless and until there is
Speaker 1: a run um that actually causes them to burn through
Speaker 1: all their cash and then their securities and then you know,
Speaker 1: theoretically their commercial paper and you know, it's it's it
Speaker 1: just works. And there are, by the way, also use
Speaker 1: cases that I've heard of where people in other countries
Speaker 1: who want to hold old U S dollars because they
Speaker 1: might be in a country that that is experiencing hyperinflation. Um,
Speaker 1: they're comfortable um. And these are like consumer folks. They
Speaker 1: are comfortable holding holding color um as as a dollar proxy. UM.
Speaker 1: And you know, I I don't know that how widespread
Speaker 1: that is, but I've certainly heard that. Ellen. Thank you
Speaker 1: so much for coming on. This is just like such
Speaker 1: a big area and we know there's like tons of
Speaker 1: money going into this space and it's so crucial and
Speaker 1: so really appreciate getting your perspective. I feel like we
Speaker 1: could probably do like three hours actually on this topic.
Speaker 1: We'll have to have you back because I think, like
Speaker 1: stable coin design, stable coin regulation, the business of stable
Speaker 1: coins is not going away anytime soon. So I appreciate
Speaker 1: you coming on. Udlines. Yeah, I really appreciate the opportunity.
Speaker 1: It's um, I'm happy to come back anytime. Absolutely love
Speaker 1: this space and I appreciate all the work that you
Speaker 1: guys are doing. Absolutely, thank you girl. You know it's
Speaker 1: interesting was that Ellen said that they might think about
Speaker 1: rebranding stable coins, that it does seem like it's kind
Speaker 1: of gotten tarnish because on the one hand you have
Speaker 1: tarra usd, which is not stable, and then on the
Speaker 1: other hand, the other stable coin is tether and people
Speaker 1: are just sort of suspicious of it for obvious reasons.
Speaker 1: So it's like, if you're gonna launch something, maybe that's smart,
Speaker 1: like call it a tokenized dollar or something else, because
Speaker 1: I do think it's sort of a dirty word at
Speaker 1: this point. I agree, But you know what this whole
Speaker 1: thing reminds me of, and this is a slight tangent,
Speaker 1: but like it is actually really a parallel to what's
Speaker 1: going on here. Do you remember pure to pure lending? Yeah? Absolutely, okay,
Speaker 1: So peer to peer lending this whole idea that individuals
Speaker 1: could lend to other individuals and thereby bypass the banks completely.
Speaker 1: And the irony was always that there was actually a
Speaker 1: bank underwriting all these loans. It was called web Bank,
Speaker 1: So this kind of you know, reminds me. Um. So
Speaker 1: that's point one. And then secondly, they also rebranded from
Speaker 1: peer to peer lending to direct lending once it became
Speaker 1: very very apparent that the lending was not in fact
Speaker 1: peer to peer, So it kind of reminds it reminds
Speaker 1: me a lot of that. That's a that's a really
Speaker 1: good analogy, you know, speaking on the Tether point, and
Speaker 1: this came up. You know, I think, like going back
Speaker 1: to the first time we ever interviewed Sam Bankman Freed,
Speaker 1: it really is striking the degree of confidence that people
Speaker 1: in the industry have with tether and their comfort that
Speaker 1: they have redeeming and minting and burning tether versus the
Speaker 1: outside skepticism. It's like there's huge bid Esque spread, so
Speaker 1: to speak on tether as a concept. I mean, it
Speaker 1: would be pretty amazing if all of Tether's problems just
Speaker 1: boiled down to like a perception gap and a bad
Speaker 1: pr strategy between people who understand it and people who
Speaker 1: are outside of the space, Like that would be pretty
Speaker 1: insane and also a massive own goal for the company itself.
Speaker 1: Um But that's kind of what we hear consistently. It's
Speaker 1: like well, the people who deal with it have full
Speaker 1: faith in it, and people who are not dealing in
Speaker 1: it are extremely skeptical. Yes, But on the other hand,
Speaker 1: note that Allen is not a Tether business partner, so
Speaker 1: it is striking that. I mean, again the reasons for that,
Speaker 1: they're offshore, etcetera. But here is the company that's sort
Speaker 1: of like, is the core banking infrastructure to all of crypto,
Speaker 1: and Tether isn't one of them. So you know there's
Speaker 1: something going down there, and not necessarily bad per se,
Speaker 1: but there's a reason you know, silver Gate is not
Speaker 1: a t other business. Yeah, but I do think getting
Speaker 1: back to that rebranding point. I mean, we started out
Speaker 1: this conversation by saying that the marketing here matters. And
Speaker 1: if you say you've created a stable coin and it's
Speaker 1: one for one with a dollar and then it isn't,
Speaker 1: then that's an issue and that's something that regulators you know,
Speaker 1: will pursue and will be interested in. But if you
Speaker 1: morph into something like a tokenized dollar or I don't know,
Speaker 1: call yourself like a variable stable coin or something like that,
Speaker 1: I don't know, then then maybe that does lessen some
Speaker 1: of the pressure. But of course the question is whether
Speaker 1: or not you're sort of um abdicating your original use purpose.
Speaker 1: I also think this question of like, Okay, if something
Speaker 1: is going to be called a stable coin or whatever
Speaker 1: it is, well there's gonna need to be more rules.
Speaker 1: I think about what actually backs it and how much
Speaker 1: it has to be backed by short term treasuries or
Speaker 1: long term treasuries or things that absolutely our dollar equivalent
Speaker 1: versus other assets. Because as they get bigger as an industry,
Speaker 1: these sorts of like stresses are going to emerge. And
Speaker 1: again going back to the financial crisis, the lesson is
Speaker 1: crises happen in essentially assets that are deemed to be stable,
Speaker 1: like that is the source of trouble. And so how
Speaker 1: what they what they can really hold, how liquid they
Speaker 1: have to be, how fast they have to be able
Speaker 1: to liquidate their assets to meet redemptions are sort of
Speaker 1: like huge questions that I think we're gonna need to
Speaker 1: just get like clearer answers on. Right, So I guess
Speaker 1: there's two options here. One is you agree these are
Speaker 1: safe assets, They're supposed to be safe and there's going
Speaker 1: to have to be some sort of oversight on them.
Speaker 1: Or two you say, actually, maybe they're not that safe,
Speaker 1: and you step away from that marketing and you go
Speaker 1: in a totally different direction. But then again the question
Speaker 1: is what impact does that have on crypto? Yeah, now
Speaker 1: it's a fascinating We We really could probably talk like
Speaker 1: three hours and go down all kinds of little avenues
Speaker 1: on this, because it really is like pretty big to
Speaker 1: think about the future of crypto, the stable coin rabbit hole.
Speaker 1: It's also, i mean, it's also just interesting from the
Speaker 1: perspective of what is money and what is the financial
Speaker 1: asset and what makes something safe and contagion effect and anyway, Yes,
Speaker 1: you're right, Okay, we should stop. Shall we leave it there?
Speaker 1: Let's leave it there? All right? This has been another
Speaker 1: episode of the All Thoughts podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway and I'm
Speaker 1: Joe wisen't though. You can follow me on Twitter at
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Speaker 1: Follow the Bloomberg head of podcast, Francesca Leivi at Francesca Today,
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Speaker 1: the handle at podcasts. Thanks for listening to to