Stablecoins and National Security | Former CFTC Chair Timothy Massad

✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/6 ------ 🎬 DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-the-timothy-massad-interview ------ Are stablecoins a threat to national security? How should the US government step in? We brought Timothy Massad, the perfect guest to help us answer these hard questions. He was the Obama appointed chair for the CFTC, the guy who helped designate Bitcoin as a commodity over 10 years ago. We touch on: - The importance of stablecoins. - How stablecoins compare to eurodollars. - Weather crypto and sanctions can co-exist. - A sensible policy for stablecoins. - And finally, his thoughts on what happens next. Timothy brings a whole different perspective from what we’re used to in our crypto bubble. That’s exactly why you should tune into this episode. ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 ⁠ 🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku 🌐 CARTESI | APPLY FOR A GRANT https://bankless.cc/CartesiGovernance ------ TIMESTAMPS 0:00 Intro 6:34 Timothy’s Background 9:30 Security vs Commodity 12:46 Stablecoin First Impressions 21:42 The Importance of Stablecoins 28:26 History of the Eurodollar 38:46 Economic Sanctions 47:47 Stablecoins and Sanctions 1:08:59 A Stablecoin Future 1:13:37 A CBDC Future 1:18:49 What about Privacy? 1:20:58 The Role of the Dollar 1:23:18 Stablecoins Abroad 1:25:43 Predictions 1:28:10 Closing & Disclaimers ------ RESOURCES Timothy Massad https://x.com/timmassad Stablecoins and National Security by Timothy Massad https://www.brookings.edu/articles/stablecoins-and-national-security-learning-the-lessons-of-eurodollars/ Five Perspectives on Stablecoins by Nic Carter https://medium.com/@nic__carter/five-perspectives-on-stablecoins-5bc20076270a ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Are we going to get comfortable with digital assets, with tokenized assets traveling on decentralized blockchains or not? They pose enormous advantages in terms of innovation, composability, open access. But on the other hand, decentralized blockchains may not offer the kind of governance that we'd like, the kind of ability to check identity. And our financial system does turn on the ability to know who is transacting. So how do we balance that? That, to me, is the central issue.

• 0:34Ryan Sean Adams?

  Welcome to Bankless, where today we're exploring the frontier of stablecoins and national security. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. The question today: How should the US government think about stablecoins and crypto? From a unique vantage point, something we haven't talked about before, which is national security. I think it's safe to say that many in DC have different concerns than probably the listeners of Bankless with respect to crypto. And one in particular is this: If something like stablecoins gain adoption, does that nerf the US ability to sanction? How does the US come up with policy around this? Timothy Massad is the perfect guest for the conversation today. He was the Obama-appointed chair for the CFTC.

• 1:18Ryan Sean Adams?

  This is the guy that actually helped designate Bitcoin as a commodity way back when, 10 years ago. And I would call him a maybe cautious stablecoin advocate, though there is definitely some nuance here. A few things we talk about today. Number one: Why the US can't ignore stablecoins. Number two: How stablecoins are similar to Eurodollars? Number three: Is crypto even compatible with US financial sanctions and dollar supremacy? Number four: What would sensible policy on stablecoins even look like in the US? And finally, his thoughts on what happens next.

• 1:50David Hoffman?

  In the crypto world, we tend to be in our own bubble about what we want out of the crypto industry and how we want to be regulated. As big crypto advocates, me and Ryan, we don't often get the chance to talk to people who have different perspectives. But this is what is happening here today on the show. Today, we had the opportunity to bring someone who does not think like us on to the show and have a conversation. On Bankless, Ryan and I like to host conversations with people who don't necessarily share our perspective and our values, but definitely do have a coherent opinion as to how this industry ought to and needs to integrate with the pre-existing financial system. Tim, while he does not share our perspectives, I think we can find ourselves shoulder to shoulder with him about a lot of things and a lot of opinions.

• 2:35David Hoffman?

  And I think Tim represents the type of person that crypto needs to win the hearts and minds of in order to get what we want out of appropriate crypto regulation. And with all of that in mind, let's go ahead and get right into the episode with Timothy Massad. But first, a moment to talk about some of these fantastic sponsors that make this show possible, especially Kraken, our preferred crypto exchange in 2024. If you do not have an account with Kraken, consider clicking the links in the show notes to getting started with Kraken today. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Kraken, one of the longest-standing and most secure crypto platforms in the world. Kraken is on a journey to build a more accessible, inclusive, and fair financial system, making it simple and secure for everyone, everywhere, to trade crypto. Kraken's intuitive trading tools are designed to grow with you,

• 3:18David Hoffman?

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• 4:01David Hoffman?

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• 4:44David Hoffman?

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• 5:28David Hoffman?

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• 5:42Ryan Sean Adams?

  Bankless Nation, very excited to introduce you to Timothy Massad. He is a Senior Fellow at Brookings. He's also a Research Fellow at Harvard, and he was an Obama-appointed Chair for the CFTC, where he served from 2014 to 2017. And more recently, and of interest to us is, he has taken a keen interest in stablecoins. He published this article in April that David and I caught wind of. It's called "Stablecoins and National Security: Learning the" Lessons of the Eurodollar, that's the title. And it really caught our attention after reading it because it dove headlong into what I consider kind of the elephant in the room that everyone's avoiding. How do stable coins impact national defense? Can crypto and the nation state work together?

• 6:27Ryan Sean Adams?

  So there's lots to explore in today's episode. Tim, welcome to Bankless.

• 6:32Speaker 00

  Thank you, Ryan and David. It's great to be here.

• 6:34Ryan Sean Adams?

  Well, we are excited to dive into this. I was wondering for our audience, if you could just tell us a little bit about your background and more specifically, the background that is more most relevant to your interest in stable coins? Because you have become more recently interested in stable coins. How did that happen?

• 6:48Speaker 00

  Well, I've been interested in stable coins and crypto for quite a while, actually.

• 6:52Ryan Sean Adams?

  Okay, okay.

• 6:53Speaker 00

  I've been writing about the space for quite a while. And actually, I first testified about crypto 10 years ago.

• 7:01Ryan Sean Adams?

  Really?

• 7:02Speaker 00

  Before Congress, 2014. It's before me and Ryan got into crypto.

• 7:05Ryan Sean Adams?

  I think Tim beats me on that. I just started in crypto in 2014. So you might be an OG here, Tim.

• 7:11Speaker 00

  Right. And it was around that time that the CFTC, under my leadership, declared Bitcoin a commodity. And we can get into why we did that because a lot of people actually don't understand why we did that.

• 7:25Ryan Sean Adams?

  Thanks, by the way. Appreciate that.

• 7:28Speaker 00

  And then when I left the CFTC in 2017, I was thinking about what I wanted to do next. And I became a senior fellow at the Kennedy School at Harvard. And I decided to start, you know, doing some writing about crypto. So I actually published my first paper on the need to strengthen crypto regulation in 2019. And I talked about this problem of, you know, is it a security? Is it a commodity? How do we deal with that? We don't have a regulator for the cash market and commodities. And actually, in that paper, it was funny because I was going back to it the other day. I also talked about the fact that, well, we shouldn't let regulation push everything

• 8:11Speaker 00

  towards centralized intermediaries because one of the benefits of this technology is the potential decentralization aspects of it. So an important issue, perhaps, it's going to be debated.

• 8:26Ryan Sean Adams?

  As we're recording this.

• 8:28Speaker 00

  As we're talking, right. But anyway, then I started writing about stablecoins in early 2021, I think, because I was sort of watching what was happening and wrote a piece, I guess, initially for Bloomberg or Brookings, I can't remember where the first one was, where I talked about the fact that, look, these things exist, we need to bring them within the regulatory perimeter, if you will. They have certain risks, but they also have certain benefits and opportunities. And that's continued to be my view, that stablecoins do pose certain risks that need to be addressed, but they also could enhance payments and they could be an important competitive

• 9:13Speaker 00

  instrument in payments. And, you know, they do effectively kind of support the dollar in a way. This most recent paper, as you note, focuses on the national security aspects and, you know, we can talk about what those are and what I said in that paper.

• 9:30Ryan Sean Adams?

  Okay, a quick, quick side quest before we get into the main event. We talked about the Eurodollars and stablecoins and kind of the paper, which is, so, under your leadership, the CFTC declared that Bitcoin was a commodity. And this is, of course, very relevant to current debates. We even, also, as we speak, there's the question of whether the SEC is going to allow Ethereum to have an ETF. And I think this will be resolved by the time listeners listen to this. So listeners in the future, you have the advantage of knowing what's actually going to happen right now. I'm wondering if you have any weigh-in on this debate, specifically with Ethereum.

• 10:12Ryan Sean Adams?

  It seems like the CFTC has already also said it's a commodity, but maybe there's some territory war, turf war. I don't know what you can get into here, but you are no longer on the CFTC. So maybe tell us how this all works. Like, what's your take on this?

• 10:26Speaker 00

  Well, the funny thing is, this is one of the facts that people don't understand. Something can actually be a commodity and a security. But, you know, look, let me, let me maybe say a couple of things. First, when we declared Bitcoin a commodity, we weren't, I didn't do that in order to, you know, start a turf fight with the SEC.

• 10:49Speaker 00

  We did that because the definition of a commodity under our federal law is a long list of things that everybody would say, oh, yeah, that's a commodity, you know, cotton, oil, other agricultural products and so forth. But then the definition in the law also says, and anything else, and I'm paraphrasing, but anything else that is the subject of a contract for future delivery, meaning a futures contract or a swap. There were people who wanted to do Bitcoin swaps in 2014. And they came into our office and asked us, well, you know, we want to launch these, what do you think? And we said, well, if you do that, it's a commodity. And it's subject to our approval.

• 11:31Speaker 00

  And that's what led to the determination, which was upheld by the court. And then, you know, we were the first agency to start bringing enforcement actions. But we also did approve Bitcoin swaps. So as to Ether, look, I think I get the reluctance of Chair Gensler to say whether Ether is a security or not. I think that probably goes to issues of, well, isn't there some group of people that seems to be involved here? And you can look at things that have happened, right? Well, look at what happened after the Dow attack. And, you know, the reversal of,

• 12:17Speaker 00

  The Dow attack back in whenever that was 2016. Look at the merge. And you sort of say, well, wait, is there a group of people that's kind of in charge here? On the other hand, obviously, it is very widely distributed. And it's probably, you know, water under the bridge at this point to to assert that this is that this is a security. But as to the ETF, I don't know. I really don't know. I'm not sure that they will approve it.

• 12:46David Hoffman?

  Timothy, can you just place us in your head when you were learning about crypto? You're reading about crypto, learning about it for the first time. The bulk of this podcast, I think, is mostly going to be focused on stable coins.

• 12:57Speaker 00

  Yeah.

• 12:58David Hoffman?

  Do you just remember what your first impressions were when you read about stable coins? And like, was there some sort of like, maybe maybe a eureka moment or an aha moment of like, oh, this is? This is what this is. This is the this is how this is going to go. Just maybe if you could remember your first impressions about stable coins and crypto.

• 13:16Speaker 00

  Well, I think particularly with stable coins, I thought, oh, this is a really interesting application of the technology.

• 13:24Speaker 00

  Because I think up to that point, I was intrigued. But, you know, when I was sort of looking at unbacked crypto assets and looking at what was happening in the market. It seemed that while there was a lot of investor interest, it was largely driven, you know, by speculative forces, by supply and demand forces. There wasn't a clear use case to a lot of the tokens that were being issued, I would say. That's not to say that Bitcoin isn't, you know, a very, very interesting thing. And as is Ethereum and as are other, you know,

• 14:04Speaker 00

  blockchains and layer ones.

• 14:07Speaker 00

  But I think when I first started learning about stable coins, I thought, oh, wow, this is, you know, this is essentially on-chain money. And it was around that same time, I think, that, you know, people were. Talking about CBDCs and so forth. I first really got into it with the Facebook announcement of Libra. And actually, that was the first paper I really wrote about stablecoins. They didn't call it a stablecoin, of course, but that's what it was. And I found that fascinating. I found their proposal fascinating because everybody, you know, I think there was a lot of opposition to it, of course, and it never got off the ground.

• 14:51Speaker 00

  A lot of that opposition was due to who Facebook was, right? Meta now, of course. But it was because, you know, people were upset about the power that Facebook had, about its failure to protect privacy, about things that people felt it did in the 2016 election. And that was kind of overhanging the whole issue. Plus, Libra, in its first iteration, was a basket of currencies.

• 15:19Ryan Sean Adams?

  I was just about to bring that up. I recall this, 2019. It wasn't even the dollar. It was a basket of different fiat currency.

• 15:26Speaker 00

  Well, I read about this, and I actually went out and talked to them. I met with David Marcus and others. And I said, you know, why are you doing it this way? And they basically said, well, give us some time. He wouldn't tell me what was going on. But it was like, a couple of months later, they came out with the revision where it was, you know, individual tokens for individual currencies, which I thought, well, that makes a lot more sense. And so I wrote a paper for Brookings about all this, where I basically said, look, I understand the objections to Facebook. I understand the need to protect privacy and to think about the data that comes from all this.

• 16:07Speaker 00

  But I basically was still in favor of creating a regulatory regime to allow this because of potential competition in payments and because of potential benefits to financial inclusion. Okay? And at that same time, I looked at what was happening with China, with WeChat Pay and Alipay, and also how the Chinese government had responded to those in terms of creating a regulatory framework. And I said, look, we can basically learn from what they've done. Because they put in, you know, kind of some prudential measures and that's what we would need for this sort of thing. So that's where I was. And of course, you know, that announcement

• 16:49Speaker 00

  transformed things in a lot of ways, right? It caused central bankers around the world to realize, gee, we got to pay attention to crypto and to digital assets. It caused a lot of central banks to start to do research and development on CBDCs. And of course, it started to focus people's attention on stable coins. And then, you know, it was a little bit after that, that I started sort of looking at Tether and getting worried about Tether because there was so little transparency there. And it wasn't clear what they were investing the assets in. You know, and all this is very funny when you look back because, you know,

• 17:32Speaker 00

  again, I'm not saying we, you know, Facebook didn't have its issues. And obviously, I was concerned about the data and privacy issues. But on the other hand, what they were proposing was, in the second iteration, a lot safer than a lot of things, you know, that have since been launched. So it was kind of ironic.

• 17:52Ryan Sean Adams?

  Just to tie a bow on that for people like who don't, and even my memory is kind of hazy. I actually just don't know what happened. But like, why did the Libra DM project from Facebook actually die? Like, why did they abandon it? I think my impression largely was like, basically, and this is probably a gross oversimplification, but I think this is in a lot of listeners' minds, the US government didn't want them to have it. Congress didn't want them to have it. And they realized that like, this wasn't the hill to die on. So they just moved on to like, you know, AI and like the metaverse and stuff like that. And they just like abandoned the project. Is that accurate?

• 18:27Speaker 00

  Well, that's, yeah, Ryan, that's basically accurate. What happened was that they first sort of set up shop in Switzerland. They set up the corporation there. But the Swiss authorities sort of said, and again, this is by now, we're in Libra 2.0, you know, or what was then called DM, which was the individual tokens representing individual currencies. And the Swiss authorities sort of said, look, we're not going to approve this unless the US government approves it. And there were a lot of conversations with Treasury, with the Federal Reserve, and ultimately,

• 19:06Speaker 00

  Those authorities were not willing to to grant permission. What's very interesting about all this, of course, is that unlike perhaps its pattern in other ways, this is one occasion where Facebook asked for permission.

• 19:24Speaker 00

  And so they didn't get it. And I remember watching the hearings shortly after they made the announcement. Zuckerberg testified, David Marcus testified, and they were asked by congressperson after congressperson, well, are you going to do this if you don't have all the regulatory approvals? And they said, oh, no, no, no, no, no, we're going to get all the regulatory approvals. And I was sitting there thinking, well, what are those? There's no framework for this. There's no regulatory framework. You don't even know what approvals, you know, you really need. But because they said they would not do it unless it was blessed by regulators, they were kind of in a box. The other thing that's

• 20:03Speaker 00

  really ironic about it all to me is when you go back and watch those hearings, congressperson after congressperson said, this is going to undermine the US dollar. And and that was in the first iteration, right? When it was a basket of currencies, it was the dollar, it was the yen, it was the pound. I went to China like two months after that, to a to a, you know, fintech conference in Shanghai. And I talked to a lot of Chinese officials, and they were all very worried about Libra, because they said, this is going to promote the dollar. And they saw, they said, you know, the dollar is going to be the biggest

• 20:47Speaker 00

  component of the basket. So this is going to promote the dollar. So they were very worried. And that was one of the things that caused them to accelerate their CBDC research.

• 20:57Ryan Sean Adams?

  Oh, wow.

• 20:58Speaker 00

  So it's it's a fascinating history.

• 21:00Ryan Sean Adams?

  It's ironic. It's interesting how all this works. And I do think, by the way, I'll just say this, like, out loud, part of the takeaway from crypto was, yeah, like, ask for forgiveness rather than permission, because if you go to Congress, they're not going to have the vision. They don't have a startup mindset of what this thing could become. It's really not in their DNA or their function. I want to ask you this question.

• 21:21Speaker 00

  Well, let me just, as a former regulator, let me make clear, I'm not encouraging people. Just go out and do things, break things, ask for forgiveness later.

• 21:32Ryan Sean Adams?

  All right, fair enough.

• 21:33Speaker 00

  I'm not endorsing that, I'm just commenting on what their strategy was.

• 21:37Ryan Sean Adams?

  Not endorsing the bankless lifestyle, that's fair enough, that's our job over here. Let's get this piece out of the way before we get into your paper and the background and Eurodollars. I think there's still a lot of people in the US government who don't care about stablecoins, right? Basically, okay, so in the crypto space, we're all very excited right now about stablecoins. We're at all time highs in terms of like number of transactions, in terms of number of holders. We're almost at all time highs in supply, closing in on $200 billion, which would be a new landmark for the amount of stablecoins out there. But many in government just see $200 billion and they're just like, we handle trillions. Like, wake me up when this actually matters. And they go back and they look at Diam and Libra and it was much ado about nothing.

• 22:23Ryan Sean Adams?

  Nothing actually happened. Here we are five years later and they say, Tim, stablecoins are just too small to care about, it's a niche. Like, why are you spending time on it? Why should any of us spend time on it? What do you say to that?

• 22:35Speaker 00

  So, yeah, it's a good point. And what I say to that is, I think it's important as a competitive factor in payments. And because we don't really know what the potential is. Let's step back for a moment. The US, despite having the world's largest economy, most innovative economy, strongest economy, has a lousy payment system. It's slow, it's costly, and it has, we have problems with access. Now, most of us don't realize that, right? We think, everything's fine. I've got my credit cards, I've got mobile banking, I've got maybe Venmo or Apple Pay,

• 23:19Speaker 00

  Google Pay, whatever, and boy, I'm making payments and they're going quickly and, you know, what's the issue? Well, the issue is, it's actually costing all of us more than we realize because merchants are paying the cost of those, you know, of those credit cards. That's number one. It is slower than what we could have, and that is particularly a problem for people who don't have much money. If you don't have very much money in your bank account and you go to cash a check... You're not gonna, that check isn't gonna clear for three days. And so that is why a lot of people in the lower quadrant of income in this country

• 24:02Speaker 00

  use non-banking services like check cashing services and payday lenders, right? Because they get paid on a Friday, but they need to pay their bills and they can't wait three days, or they can't risk getting an overdraft charge. So they go to a check cashier, they get cash right away. That check cashier may even send checks to pay their bills. A lot of them do that, but it costs them a lot. It costs poor people roughly 10% of their income just to use their income. So that's a big problem.

• 24:34David Hoffman?

  But just to really reiterate, there are costs of our high friction, slower banking system. It's just obfuscated from the, it's obfuscated away for most people that have any sufficient amount of money. And the long tail is severely penalized by comparison.

• 24:51Speaker 00

  Right. So stable coins, when you really get down to it, stable coins are like another form of narrow banking, if you will, right? I mean, in other words, banking, traditionally, we have bundled the functions of deposit taking, credit creation, and payments all in a bank. You had to be a bank. You had to get a charter as a bank and you were regulated as a bank. Your deposits were insured. You got, you know, the backing of the Fed and that's, you know, a good system. It's a, it's a great system. We have a very, you know, healthy, strong banking system. But with these technological developments, it's possible to have, to sort of unbundle some of those things.

• 25:36Speaker 00

  And payments is one thing that I think can be unbundled, if you will. And I think having sort of non-bank payment providers that are properly regulated can be a good thing for competition, can be a good thing for innovation. And obviously, the other aspect of this with stable coins is because it's on chain, you have all these potential. You know, innovative facets of being on chain, right? Atomic settlement, programmability, all those things. So all that's good. So that is why I have argued now for several years that we should bring these things within the regulatory framework. We need a strong regulatory framework,

• 26:18Speaker 00

  prudential measures, you know, to ensure that they invest the reserves appropriately, but also measures to prevent illicit activity. But they can be a force for competition, for innovation, and that's all to the good.

• 26:36Ryan Sean Adams?

  I think as a US citizen, this was most impressed upon me as I was learning about the like Chinese digital, you know, RMB type system, digital yuan system, and the how inexpensive it was to use something like Alipay or WeChat as a percent. So when we are doing payments in the US, there's like a transaction cost that credit card companies pay, the merchant that they charge, that merchants pay. It's about 3%. In China, when you're dealing with kind of a digital currency, they don't have this network set up. It's fractions of a percent. So imagine this, behind the scenes, there's a 3% tax on all of these payments that the system is bearing in addition to some of the other things that you mentioned.

• 27:19Speaker 00

  Right, and the thing is, we could have fixed this without stablecoin. Okay, we could have done what most other developed countries have done in the world, as well as emerging markets, and implemented a fast payment system. We didn't need blockchain. We didn't need stablecoins to do that. But we haven't done it. And so, stablecoins are out there. And so I look at them as like, okay, this is something that can be a force for innovation. I'm not sure at the end of the day, stablecoins will scale and will be that influential. And but what I've seen From both the Libra announcement and what Circle is doing and other things is it got

• 28:03Speaker 00

  the attention of banks, it got the attention of central bankers. And so now, there's a lot more talk about, okay, what do we need to do here? There are big banks now who are doing very interesting things on their own in terms of looking at tokenized deposits and other innovations. Finally, I would say.

• 28:25Ryan Sean Adams?

  Yeah, absolutely. And we would say finally as well. Okay, so let's get into some of the framing of your paper in order to kind of talk about stable coins and maybe some of the national security concerns. I think we have to do some background context. And a great lens on this, a lens that we enjoy, and I think you highlighted in your paper, is the Eurodollar. A lot of people don't know the history of the Eurodollar. In fact, but I think there are some great analogues to stable coins and the Eurodollar. In fact, one of our colleagues doesn't like the term, Nic Carter, doesn't like the term Eurodollars at all. Or, sorry, stable coins at all. He prefers crypto dollars to describe this because of the close analogues. That hasn't picked up, so we're not calling this the crypto dollar

• 29:09Ryan Sean Adams?

  episode, but we'll call it stable coins. Can you give us the history of the Eurodollar? So how did that come about? It seems like there was some US resistance to it at first, and then gradual acceptance. How did that happen? Why did people demand it? Just give us the full history here, Tim.

• 29:27Speaker 00

  Sure. Okay. So first of all, let's define what we mean by Eurodollars. Eurodollars are any deposit of dollars outside of the US. And today, we use the term Eurodollars. Those deposits could be in a Japanese bank. They could be in any bank outside of the US, outside of the US-regulated banking system. But they started in Europe. And the way they started... Was some of the communist bloc countries were trying to figure out where should we keep our dollars? They had small amounts of dollars, Russia in particular, and they didn't want

• 30:07Speaker 00

  to keep them in the US for fear that US authorities would seize them someday. And so they found a bank in Paris that would accept the deposits and they put them there. And that bank's text address, I think, is what led to the name Eurodollars, because it was the Eurobank or something like that. I can't remember now. So initially, the market was very, very small. And US regulators kind of ignored it because it was small, but it grew because banks overseas in Europe found a way to use those dollars. They could use

• 30:46Speaker 00

  them for foreign currency transactions, and then eventually they started using them for loans. And so the market started to grow. And so it started to get the attention of people at the Federal Reserve and at the US Treasury.

• 31:02David Hoffman?

  Would you say that the supply of Eurodollars grew because Eurodollars found a way to become financialized?

• 31:08Speaker 00

  Well, they had use. I mean, banks, you know, banks found a way to use them. They realized, hey, you know, we can do things with these dollar deposits, which is what banks do. And so they started to grow. And but even then, the policy, the US policy was still not quite sure what to do. The Kennedy administration actually did some things that actually encouraged the growth of the Eurodollar market, not because they wanted per se to encourage that growth, but they were trying to address a balance of payments problem that we had in terms of foreign investment. But basically, we didn't really do much about it. Then people started to get worried because it did start to get

• 31:52Speaker 00

  quite big. And even some European leaders were worried because they thought, wait a minute, we have these banks that have a lot of dollars. But how are we, how is our central bank going to support those? Right? I mean, a central bank. The function, one of the functions of a central bank is to act as lender of last resort to banks if they get in trouble or if the financial system gets in trouble. So leaders of some of the European countries were suddenly realizing, well, we can't do that because we can't print dollars. So what do we do? And so people started to get worried, but then the 1973 Middle East War broke out, the Am Kipper War.

• 32:37Speaker 00

  And as you may know, right after that war, OPEC dramatically raised the price of oil. Oil is priced in dollars. So suddenly you had this problem of how are people around the world going to pay for oil, finance the trade in oil? And eurodollars became kind of the way to deal with that. And that's where the term petrodollars came from because you sort of recycled these eurodollars around the world, right? Essentially just using dollars abroad outside of the US banking system to pay for oil. And so the market grew again. And by the time of the financial crisis, the global financial crisis, that is, in

• 33:22Speaker 00

  2008, there were more dollar deposits outside of the US banking system than there were in the US banking system. Wow. So it's quite a big market. And now, you know, we do effectively stand behind it through swap lines. You've probably heard about swap lines during the financial crisis. Well, that's one of the reasons for swap lines is that there are all these dollars outside of the US. So why the analogy then? Well, stable coins like eurodollars can be thought of as dollar liabilities of a, of an issuer, of a bank, or a, you know, a financial institution that are created outside of the

• 34:07Speaker 00

  US regulatory system.

• 34:10Speaker 00

  That's the similarity. And so you also have this similarity in how the market is kind of evolving. It's small. It's very small today, as you pointed out, Ryan, relative to the, you know, the total financial market. So a lot of people are saying, well, why do we need to pay attention to that? It's very small. But the point, one of the points in my article was, yeah, it's small today, but it could grow and it could grow from unexpected events. And so that's why we need to pay attention to it. And then, of course, I get into how it's different than Eurodollars, which we can talk about.

• 34:49David Hoffman?

  When you were learning about stable coins, back when you were like learning about crypto and you saw the evolution of stable coins, did you just see the history of the Eurodollar markets just like flash before your eyes?

• 35:00Speaker 00

  Well, I'll tell you what happened was I had been thinking about this parallel, but I didn't know a whole lot about that history. And a good friend of mine, who's now at the New York Fed, Josh Younger, was also interested in this. And he had started to do some research on the Eurodollar market. And so I benefited greatly from learning from him as I, and I credit him in the paper. So he taught me a lot about that history. But yeah, I mean, as I started thinking about it, it just seemed like, wow, this is really kind of similar. I bet there's something here to, there's something to be learned by looking at that history.

• 35:40Ryan Sean Adams?

  I want people to hear about kind of the pivot that happened in the early 1970s that you were talking about, Tim. And you cite this in your article about Eurodollars really being a villain. They were villainized by the US. And there's like this New York Times article, I believe, from 1971. The villain of the crisis, Eurodollars. Almost feels like, you know, somebody might say the villain of stable coins at some point in the future, right?

• 36:06Speaker 00

  Right.

• 36:06Ryan Sean Adams?

  And then you also have, quote, "A French minister calling it a Hydra-headed monster."

• 36:11Speaker 00

  Yeah.

• 36:12Ryan Sean Adams?

  And then all of the sudden, yeah, all of the sudden this changed. 1973 with the oil shocks and the US kind of wakes up. And realizes, ah, this could be good for US dollar like supremacy in the form of the petrodollar. And so I guess I want to ask you the question about Eurodollars. Was it a net good for the US, a net bad? What were kind of the trade offs? What were some of the bad outcomes for the US? And like, what are the good outcomes for the US?

• 36:42Speaker 00

  I would say it is definitely a net good because it has helped cement the role of the dollar internationally as the world's primary currency of international finance, of of commercial transactions, as well as the primary reserve currency that, you know, people want to invest in dollar assets. Now, you know, obviously, that's due to other factors as well. The strength of our economy, the strength of our government, our rule of law, the certainty that comes from that. All those things are important. But, you know,

• 37:21Speaker 00

  Eurodollars played an important role in cementing that that role of the dollar internationally, and particularly the role of US banks in commercial transactions. And that's one of the things I really focus on in the paper is that a lot of cross border financial transactions, particularly, say, just foreign exchange transactions, converting one currency to another, involve US dollars, even if those aren't the two currencies that are really being converted. In other words, if you're trying to convert UK pounds to Singapore dollars or something, just to, you know, create an example, you might well be going

• 38:05Speaker 00

  through dollars. In other words, converting one of those currencies first to dollars, and then from the dollars into the other one, because there's more liquidity. And that's just, again, kind of a factor of the evolution of all this, the prominence of the dollar, the way it's built up, the liquidity that comes, you know, from the dollar as against other currencies. So it's very important. And it also means that most financial transactions have touch points with US banks, because at some point, they have to route through US banks under our financial system. That is something that a lot of countries don't like, but that is the reality today.

• 38:46Ryan Sean Adams?

  Right. So euro-dollar is good for the US dollar. And today, it's actually like it's absolutely the dominant medium of exchange and like for payment settlements is something north of like 70, 80% of all worldwide transactions are a dollar-denominated. There's massive demand for dollars. And you point this out, which I think isn't immediately noticeable by people who come to this point in the story, is the US also gained a, as a byproduct of this, almost accidentally, a new economic weapon, let's call it, sort of a national security weapon. The modern ability to sanction dollar-denominated transactions. You say this in the paper, "Luckily for US officials, even if not by conscious design, the growth

• 39:31Ryan Sean Adams?

  and maturation of the euro-dollar market has enhanced the ability of the US to project power by non-kinetic means." Of course, in a world where we're talking about the 1970s, 1980s, like even into modern times, the catastrophic potential of a nuclear exchange, having a weapon that is non-kinetic and where that allows you to project geopolitical power is quite an advantage. So I want to ask you about that, Tim, that byproduct. So it's almost like the ability to sanction anyone who is using the euro-dollar. How did that work out? And how does that work out now?

• 40:08Speaker 00

  Right. Okay. So again, keeping in mind that so many commercial transactions are denominated in dollars, and that means that they have touchpoints with US banks. In other words, there's at some point in that chain of a transaction, a US bank is involved. That enabled the US government to say, ah, well, we can impose sanctions.

• 40:33Speaker 00

  Through those banks, in other words, we can restrict the ability of people to deal with the US financial system, right? We can sanction them. And, you know, we started doing this early on with Iran and, you know, it's kind of grown, basically, over time, where we've relied more and more on this, on this power. And to the point where, you know, we've obviously sanctioned individuals and businesses, but in some cases, you know, it's been trying to cut off countries. So, you know, we did this with North Korea and

• 41:18Speaker 00

  Iran in the early 2000s. And of course, we've done it recently with Russia in, first in 2014, and then, and then in 2022, over the Ukraine war. And, you know, what's interesting is, it was kind of early on, maybe an adjunct to the exercise of military power, or maybe we're using something to supplement military power, as in, say, the first Iraq war. But now it's kind of, you know, the tool that we're using in place, because we don't want to use military power. So, you know, we're using, we're using sanctions instead. They've

• 42:02Speaker 00

  been very, very effective. But of course, they've also provoked some consternation among other countries. And frankly, it's, it's led some other countries to look at how that can they create payment systems that aren't dependent on the dollar.

• 42:21Ryan Sean Adams?

  Yeah, just like the behind the scenes piping of all of this is, a lot of the dollar-denominated settlement, the euro dollars, you know, like the US dollar, this all happens in a international standard, basically a network called SWIFT. And the US basically has the ability to just block, censor, like reroute sanction SWIFT transactions, which gives them a tremendous amount of, of, of power to economically sanction actors or countries, or just like, basically anyone attached to SWIFT.

• 42:52Speaker 00

  Yeah, so SWIFT is a messaging system, right? It doesn't actually transfer the value. I mean, this is one of the interesting things about payments today. Is and the difference with blockchain, of course, is that there's kind of transfer of the information or the message about the payment and then transfer of the value as well. The transfer of the value is really just adjusting balance sheets of banks, right? Because it's not, it's not really that money actually goes somewhere. It's that, you know, JP Morgan and Deutsche Bank or whatever settle up in terms of, you know, in terms of their depositors.

• 43:31David Hoffman?

  Yeah, two banks agree to adjust their own internal, internal line items at an equal amount according to the message that was passed.

• 43:39Speaker 00

  That's right. And so what SWIFT does, SWIFT just communicates the messages about those payments, although SWIFT is actually now looking at getting into actual settlement, which is interesting. But SWIFT is a huge network, 11,000 banks. What happened after 9/11 was the US government was able to get information from SWIFT about transactions and it then used that information to basically incorporate into its, into its sanctions effort. That was a big deal that SWIFT agreed to that. It was actually kept secret for a few years and then it came out later that SWIFT had agreed to that.

• 44:21Ryan Sean Adams?

  So at this point in the conversation, I think listeners should take away that the US has this superpower basically to economically sanction things by, by route of euro dollars through mechanisms like SWIFT. I think it's beyond the scope of, of maybe the conversation to sort of weigh in on how effective these types of financial economic sanctions are. And yet I'm also tempted to just like ask you what your personal take is, or at least if you don't have a personal take on this, maybe what's the debate? Because I could see, I mean, I could see some contours of the debate being sort of a layman to this being, it's very easy to sanction a small actor, small players. So terrorist groups that kind of like exist, you know, within a nation state apparatus or rogue nations

• 45:05Ryan Sean Adams?

  like something like North Korea that are completely very much isolated. But when you start talking about giant, large block. Like maybe like Russia or maybe a China Russia type block alliance. Then rather than sanctions actually working, what they will do is incent these geopolitical actors to just like route around SWIFT, come up with their own SWIFT network. So what's the current debate on the effectiveness of sanctions?

• 45:30Speaker 00

  Well, it is a very big debate and I take no position on this. I make it very clear in the paper that I'm not taking a view one way or another as to when and you know, when it's appropriate to use sanctions, under what circumstances and what should those sanctions look like? That is a complicated debate. I don't consider myself a national security expert sufficient to weigh in on that. But it is now an increasing debate and one of my, you know, former bosses, Jack Liu, who was Secretary of the Treasury after Tim Geithner, and I served under him for a little while, gave a very good speech several years back.

• 46:10Speaker 00

  Probably 2016, probably shortly before he stepped down on this issue. And other people have weighed in as well. But as you know, Ryan, it is something that has caused some countries to say, hey, we have to somehow move away from the dollar. And whether that's through

• 46:33Speaker 00

  central bank digital currencies or multi-country payment platforms involving CBDCs or even fast payment systems. I mean, there's a lot going on in this area around the world that people in this country, you know, particularly our Congress should be aware of. There's a project, for example, called Embridge that involves China, Hong Kong, Thailand and the UAE that is looking at creating a platform where they can make commercial payments by by using, by having this shared platform that relies on CBDCs, central bank digital currencies. And they're getting more bank, more countries involved in that. Now, that's not real yet.

• 47:17Speaker 00

  And I think the governance issues on platforms like that are very difficult, probably more difficult than the technological issues. But things like that are happening around the world. As my friend Josh Lipsky at the Atlantic Council says, you know, people are building the pipes. They may not be flowing water through the pipes yet, but they're building the pipes. And we in the US need to be aware of that and think about the consequences of that.

• 47:47Ryan Sean Adams?

  It certainly sounds like the US would love to maintain the geopolitical power to economically sanction. I think a realist would look at some of these things and ask themselves, how long can that power actually be preserved in the face of alternatives? And I even think the most strident folks around that are true believers in economic sanctioning would probably admit that it's an exhaustible resource, right? Like, just the game theory of it is such that other countries would try to route around if they could. I guess this sort of brings us to stable coins. So, one difference between the Eurodollar and stable coins is in the Eurodollar apparatus, because the origination, the setup was basically US banks.

• 48:31Ryan Sean Adams?

  The US still was able, through the export of its dollar, to preserve the might of its sanctioning facility. In fact, almost enhance that ability. With stable coins, it might not be so clear cut. And I want to dig into the crux of this issue. So, is there evidence today that foreign actors are using stable coins for any sort of sanctions evasion? We've seen news headlines of this. There was talk of Hamas maybe using this. Some of this was like based on spurious evidence, and it came out that like, well, Hamas was actually not using stable coins and crypto at scale. It doesn't mean that some foreign adversary couldn't in the future, though.

• 49:13Ryan Sean Adams?

  So, take us to the state of stable coins in this conversation around economic sanctionability.

• 49:18Speaker 00

  Well, I think people are using them to escape sanctions. What's hard is to quantify by how much. In the case of Hamas... You know, I've talked to people at Chainalysis and TRM and other places. And yeah, initially, there was a report that said this was, you know, pretty significant. Then people realized there were some problems with the analysis. They were, they were sort of counting the total held in certain accounts at intermediaries rather than just the part that was going to Hamas or something. So, you know, those estimates were scaled back. But I think, you know, the conclusion is generally that Hamas is using crypto and

• 50:02Speaker 00

  stable coins to some extent. Similarly, there were reports that there were Russians that were using Tether to buy arms and evade sanctions. So I think it is happening. It's again, hard to quantify it, but the reason is that stable coins, as we know, settle on decentralized blockchains. And therefore, transactions don't have to pass through a bank. Now, if you want to convert that stable coin into, back into fiat currency, back into dollars, you either have to do that on a trading platform like Coinbase or Kraken,

• 50:46Speaker 00

  or you've, you know, got to figure out a bank that will do it for you or whatever. So that off-ramp conversion, you know, is a point at which you could say, well, we should be able to catch the perpetrator then, right? And yeah, we should. But the point is that as stable coins grow and as the crypto universe grows, you have the risk that people can transact without doing that conversion, without going through an off-ramp, as apparently the Russian smugglers were able to do. Or, you know, they're going through off-ramps that aren't

• 51:25Speaker 00

  Abiding by those sanctions, you know, you can have offshore entities that aren't abiding, you know, there are international rules, something called the Financial Action Task Force, FATF, has issued guidance, you know, on how virtual asset service providers and exchanges and so forth have to have to apply certain laws to prevent illicit activity, to prevent money laundering, but, you know, not all jurisdictions are enforcing those. So the risk is that you can have activity that doesn't go through an off-ramp, particularly as the universe, crypto universe grows, or goes through an off-ramp that isn't following

• 52:10Speaker 00

  those rules, and therefore can circumvent sanctions. And that's kind of the thing I talk about in the paper, and the need, therefore, to look at this. And, you know, I view it, again, it's not a reason to say, oh, stable coins are bad, let's, let's hope that they don't grow, because I don't think that's a good policy, but rather, it's a reason to say, we need to create a regulatory framework around this, and to look at how we do prevent illicit activity with these.

• 52:42Ryan Sean Adams?

  Okay. And so, do you think that this issue is kind of alive and well, and maybe one of the primary issues that any US legislation would have to face and surmount, and like the US government would have to get comfortable with in order to start promoting stable coins? You think this is the big one, the ability to kind of like sanction, preserve that?

• 53:02Speaker 00

  Well, I think it's pretty big. I think it's pretty big. And I think we've seen a lot of people in Congress pay attention to this, whether it's, you know, I mean, I talk about this in the paper, I mean, Senators Elizabeth Warren, who I also had the privilege of working for briefly, and Roger Sherman, introduced, you know, a bill that would try, that would impose anti-money laundering responsibilities, and Bank Secrecy Act responsibilities on crypto generally. And I think they're very concerned about stable coins from this aspect. I think a lot of people are concerned about this.

• 53:41Speaker 00

  So I think that the issue is what I've said when I've talked to people who work for congresspeople is, look, I don't expect Congress to figure out exactly how we will do this because the technology is going to evolve, the technology is going to change. But what we need to do is create a regulatory framework where there is an authority, whether that's the Federal Reserve or somebody else, with authority to figure out what those requirements should be, what those rules should be. And, you know, Congress can give some general direction. And I talk about some of the ways we might do this. I mean, obviously, the holy grail of, in some ways, might be some sort of digital

• 54:25Speaker 00

  identity system, right, where a stablecoin smart contract won't process a transaction unless your identity has been vetted by some authorized vetter and you've pinged your, you know, enough information about that so that the, you know, transaction goes through. I mean, that's, that's one solution. There are, you know, there are others that people are talking about. So I, you know, I do think we need to, to talk about this. Look, I mean, to step back from this, you know, I, I would say the following generally about crypto, the, you know, we're bogged down in this debate about whether something

• 55:09Speaker 00

  is a security or a commodity. And I've argued why we shouldn't be bogged down in that and there's a way to get around that. To me, that's not the big issue. The big issue is the rails. The big issue is when we talk about tokenization and we talk about digital assets, are we going to get comfortable with digital assets, with tokenized assets, traveling on decentralized blockchains or not?

• 55:39Speaker 00

  They pose enormous advantages in terms of innovation, composability, open access, right? We've seen that. I mean, that is, you know, clearly one of the incredible things about this space. One of the things that keeps me interested is just the amount of innovation and creativity that is taking place. I spend a lot of time on, you know, a college campus and I meet a lot of students who are quite interested in this space because of that. And I admire that. But on the other hand, decentralized blockchains may not offer the kind of governance that we'd like, the kind of ability to check identity and our

• 56:19Speaker 00

  financial system does turn on the ability to know who is transacting. So how do we balance that? That, to me, is the central issue in digital assets.

• 56:32David Hoffman?

  I'd really like to dig into this a little bit more, just because there's just a fundamental trade-off space between, you know, traditional bank transfers of dollars versus stablecoin transfers on the rails. And of course, there are some properties about, you know, payment rails on Ethereum, on crypto, that are just brand new and people still just need to wrap their heads around. Like if some illicit actor gets their hands on stablecoins, there's no one to really talk to, to prevent, to reverse a transaction. There's no reversible transactions. Like, it's actually like not easy, it's not trivial to just immediately identify an actor. Yet nonetheless, at the same time, it's also, there's so much data

• 57:13David Hoffman?

  out there because of the fact that it's a public permissionless ecosystem. And so while there's no central authority, which makes people uncomfortable, the amount of data that's out there is highly available. So there is a trade-off space that's not completely nerfing, neutering the power of regulators to really elicit the control that they want to control. It's just now it comes in a different flavor. It comes, there's different strategies. So how do you feel about just the different trade-off space about the tools that regulators have because of the affordances of crypto versus like what they're familiar with?

• 57:49Speaker 00

  Well, I think that's right. Well, you know, to maybe zero in specifically on this question of illicit activity. Obviously, the data, if this is what you're getting at, the transparency of the blockchain in terms of being able to see every transaction, every transaction is always there, is an enormous benefit.

• 58:06Speaker 00

  When you're trying to track illicit use, of course, it's pseudonymous. So you have to be able to somehow figure out the identity of a person. But that is a big asset in law enforcement. And law enforcement people will say that. On the other hand, of course, you can transfer things very, very quickly. So, you know, you could, I mean, one of the things I talk about in the paper is should we be requiring stablecoin issuers? You know, stablecoin issuers presumably can apply anti-money laundering and KYC and combating financial terrorism, what we call CFT requirements, when they issue or redeem a stablecoin.

• 58:47Speaker 00

  And, you know, if you talk to Jeremy Allaire or people at Circle or wherever, they will say they're doing that. And I believe that, you know, they are. But obviously, once the stablecoin is issued, it can be transferred to anyone. And so the question is, what responsibility do they have then? One of the things I talk about in the paper is whether the stablecoin issuers should be responsible for not simply kind of monitoring transactions, but kind of aggressively monitoring and maybe doing risk analysis of wallets and maybe even taking action to seize and freeze coins. Now, they will, I think Circle would say, well, if law enforcement comes to us and

• 59:29Speaker 00

  says, you know, gives us a subpoena, or obviously they'd do it then, or maybe if they give us enough evidence, we'll do it. But gee, you know, we can't just freeze anyone's coins on the basis of our own due diligence. So we're going to have to think about that. We're going to have to think about how do we balance reasonable expectations of privacy? And we don't want, you know, we don't want improper seizures going on. But on the other hand, We're going to need stablecoin issuers, I think, to actively monitor what's going on, on, on the chain and, you know, circles on what 12 or 16 blockchains now.

• 1:00:09Ryan Sean Adams?

  This balancing, Tim, is such an interesting conversation. I think this is the meat of the conversation. I just want to, at this point in the conversation, just thank you for, for engaging us in this way. I mean, you're coming on a crypto podcast. You can imagine we're not super favorable towards the, the Senator Warren bill to kind of extend the Bank Secrecy Act and effectively KYC, you know, validators and like mining equipment and all of these things. We think that there's a better way, but I appreciate that you're coming here and like, we're all collectively addressing what I called in the intro, the elephant in the room, because I think it's an elephant in the room. And I actually want to press into that more because it's not just stablecoins. With stablecoins, there's the ability to freeze, as we mentioned. There's lots of different abilities that a circle

• 1:00:53Ryan Sean Adams?

  might have to kind of like control these things. Once it's on chain, less so, but there's still some capabilities here. With crypto native assets and decentralized networks like Bitcoin, we were talking about earlier, that is a commodity, right? And Ethereum, Ether, the asset, transitioning, moving that from place to place, that's not issued by a circle. It is not the US government kind of like behind this. And so let's just full on address the elephant in the room here. Okay. In propagating decentralized networks, the fact that we have the, an open internet and open blockchain networks means that there is the ability for illicit activity to happen on a chain like Ethereum with a crypto native

• 1:01:34Ryan Sean Adams?

  asset, maybe not with a stablecoin, but, but certainly with a crypto native asset. And I think the question that the crypto industry is sort of asking those in the US government is like, oh, what do, what do we do about this? Are you effectively going to AML KYC everything? Is there, is there like some notion of an open internet that we can preserve? An open chain that, that we can preserve? And I'll just run, run this one kind of like, I guess, game theoretical outcome that, that could be the case. Right? So let's imagine we start living in more of a multipolar world where the US Has less ability to economically sanction, less of the world runs on Swift. Well, it then seems to be the case that you could have a world that runs in kind of like

• 1:02:16Ryan Sean Adams?

  the US block financial system, Swift-based, and then you might get some alternatives. You might get China or something like this. What's interesting about blockchain is it doesn't have an alliance with either. It's credibly neutral. And so, one question, you know, I don't know that this is being considered, but I would ask, like, wonder if it's considered, is if the US has to pick between the world kind of moving to a Chinese central bank digital currency type of system and a China-led Swift, or something that is credibly neutral, like blockchain, like Ethereum, which would it pick? And I know it seems like very preemptive for us to start having this conversation,

• 1:02:58Ryan Sean Adams?

  considering the size of crypto to date, but it's still like a possible outcome. Yeah, what do you say to that hodgepodge of thought?

• 1:03:06Speaker 00

  I guess what I'd say to that is, we clearly don't want a Chinese CBDC model or a Chinese-dominated Swift. But, look, I guess I'd approach it all maybe slightly differently. The fact that blockchain distributed ledger technology is sort of like the internet in the sense that it's supranational is, you know, a big thing, a big potential benefit, but also a potential risk, if you will. But the truth is, we still live in a world of nation-states, and laws are made by nation-states.

• 1:03:47Speaker 00

  And I believe in that, and, you know, I'd love to see harmonization of certain areas of the law. I did that, worked on that a lot when I was at the CFTC with derivatives, believe me. But, you know, the fact is, we still live in a world of nation-states. We have countries that obviously don't share our values, our values of democracy and openness, and I don't want to become like them. And I want us to, you know, make sure that we continue to uphold our values, and I don't believe that, you know... Blockchain technology is of such great advantage that I would sacrifice anything

• 1:04:30Speaker 00

  in terms of those, you know, values of this country and what it stands for and, you know, the rule of law and the strength of our financial system, which is in part built on transparency, just because of the potential advantages that blockchain technology might offer. And I think you have to recognize, I think the crypto industry needs to recognize that that is how financial regulators think in part, right? And meaning that, yeah, the crypto sector is small and while crypto advocates may see huge amounts of potential, given the open access, given the innovative potential, given

• 1:05:12Speaker 00

  the composability, the US government is not going to, you know, give away or it's not going to diminish the values that I think are at the heart of this country and have contributed to its strength, simply to promote that innovation. We've got to find a way to promote innovation with this technology that is consistent with our values. And that means, you know, people in government need to understand the technology better. Some of them do, some of them don't. And it means people in crypto need to understand the purposes of financial regulation and

• 1:05:55Speaker 00

  the value of financial regulation better. People in crypto can't just say no. They can't just say, well, you know, it's decentralized or it's supranational, so, you know, US laws shouldn't matter. They can't, they shouldn't say that. That's not going to get us anywhere. We've got to have responsible, reasonable people from all sides kind of get together and think about, how do we create a framework where this technology can develop?

• 1:06:23Speaker 00

  And can develop in useful, constructive ways that are consistent with our values. That's what I'm interested in, at least.

• 1:06:30David Hoffman?

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• 1:08:59Ryan Sean Adams?

  So let's Tim, let's talk more about the the pro case for staple coins. So we were talking about kind of like illicit actions and economic sanctions and that sort of thing. I think that there's an analog that I'd like to continue, which is at first the US government wasn't so sure about Euro dollars and it turned out to be very good for US interests in the long run. And it wasn't quite clear how, but it became clear later on. And there are some that make the case. So one is Fed Reserve Governor Chris Waller just makes the case that basically if you look at the crypto economy, so you got the, you know, the US economy, the different economies, and then there's a crypto economy.

• 1:09:42Ryan Sean Adams?

  If you look at what its trajectory is, the US dollar is actually a major winner inside of the crypto economy. It's something like, you know, 90% or so of DeFi transactions happen and they're US dollar denominated. So Federal Reserve Governor Chris Waller makes the case that basically crypto and the propagation of crypto is a net winner for the US dollar. There's also Brian Brooks, who was a former comptroller of the US. He penned an op ed piece. It's basically the title of which is stable coins can keep the dollar the world reserve currency and basically through demand. So his point is that, you know, stable coins are an export of the US dollar.

• 1:10:24Ryan Sean Adams?

  They're primarily held by like people that aren't based in the US of foreigners. So it's good for US dollar of reserve currency status and supremacy as well. What do you think of those arguments? You know, do you think they hold water? Do you think they will, you know, be a positive story?

• 1:10:42Speaker 00

  Yeah, no, I do. I have a lot of respect for both Brian and Governor Waller. I've talked with both of them. I know both of them. And I do have a lot of respect for those arguments. You know, again, will stable coins really turn out to be important at scale relative to other payment mechanisms? I'm not sure. But I'd like to see us find out by, you know, by creating that regulatory framework. And I, you know, again, I mean, I wrote a paper with a couple of other law professors on how the bank regulators could set up this framework today. They don't even have to wait for Congress. And we kind of walked through, it's a very technical piece on how

• 1:11:26Speaker 00

  the Office of the Comptroller of the Currency could do this. But I think they could do it today. And I would, you know, I'd like to see that happen because I think they can be a net benefit, again, assuming we address the risks. The prudent, what I call the prudential risks, we know how to do that. I mean, and that's the risk that, you know, you take in dollars, you issue tokens, what do you do with those dollars? You got to invest them very conservatively. And you got to still have some capital on top of that because you could have operational losses. You got to have liquidity measures. And, you know, I've chatted with Jeremy Allaire, and I know he believes in all those things. So I think,

• 1:12:07Speaker 00

  you know, we know how to address those prudential issues. The big fight in Congress has been over whether states can charter stablecoin issuers even without some overlay of federal standards. And, you know, I am on the side of, well, you know, we need some federal standards. I'm fine with state chartering as long as there are some federal minimal standards, because we don't want to, to risk a situation where states keep lowering the bar or something. But as I say, I think the harder challenges come with how you prevent illicit activity, and how you ensure the resilience of, of the blockchain. I mean,

• 1:12:50Speaker 00

  the truth today is, you know, stablecoins have grown in usage, but You know, no one's gonna make, to my knowledge, no one's gonna make a hundred million dollar transfer using USDC, you know, right? Because, you know, you're just not gonna do that. Because if something goes wrong, who do you sue? What happens? You know, and when you look at the volume of stablecoins, yeah, you know, they've grown, it's significant, but look at how much, you know, look at the size of what moves through Fedwire today, right? It's like a hundred trillion a month or something. I mean, it's huge. So I'm kind of covering a few different things here, but the point is that I think

• 1:13:31Speaker 00

  stablecoins can be of net benefit to the dollar, but we need to create the proper regulatory framework.

• 1:13:37Ryan Sean Adams?

  What about the other side of this? What if the US goes full narrow bank and actually launches a Fedcoin, a central bank digital currency? I mean, there's some other countries that are doing this, you know, even Western, you know, liberal democracies that are considering this. What do you think of that idea?

• 1:13:54Speaker 00

  So, you know, it's interesting because there's been a lot of talk about that, obviously. And I guess what I would say right now, my view is, I don't see a reason for us to launch a CBDC, certainly not a retail one. What I would like to see, though, is the Fed continue to do research and think about, well, you know, if we were to do something, what might we do? How would we do it? And I would like to see the Fed really focus on what we call the wholesale settlement system, meaning how banks settle with one another. Okay? So let me explain all that.

• 1:14:35Speaker 00

  So in terms of the retail CBDC, look, a lot of reasons were thrown out. Some of them had, you know, the Fed doing retail services. I think that's a bad idea. I don't want to see the Fed doing, you know, kind of having an... You know, actual interface with consumers, that's not the Fed's job. So then people said, well, it could be distributed through banks. Yeah, maybe, but I'm not sure we need it even then. I think if we create a framework for sufficient private innovation, we can get those benefits. And that could be stable coins. It could be tokenized deposits. I mean, the thing about stablecoin legislation is what we really need is not simply legislation on stablecoins. We need federal payment regulation, right?

• 1:15:20Speaker 00

  We don't even have an e-money statute in this country, which, which a lot of countries have. You know, I did, I did some work with PayPal because, you know, that was the one consulting thing I was willing to take on. I turned down basically every other crypto company that came to me asking me to help them because I wanted to be free to just give my views on policy. But I agreed to work with PayPal when they started looking at this because I thought, well, they're a traditional payments company. And, um, you know, they're thinking about this in a responsible way. And so, you know, I was supportive of them launching a, a, Stablecoin. But, you know, they're subject to state regulation. There's not really a federal framework for them. And I told them, look, I'm still going to argue for a federal payments framework.

• 1:16:04Speaker 00

  Uh, and they said, fine, that's fine. So, you know, we, we need that kind of framework, um, in this country. We, we don't have it. But getting back to sort of what the Fed should do. One of the things I'd like to see the Fed really focus on is, all right, if we create a framework where there can be private innovation and we can have stablecoins and we can maybe have tokenized deposits. Does the interbank settlement system need to be upgraded? It's electronic, right? And some people say, well, we, we have a CBDC today. Banks have electronic accounts at the Fed. But It's not a tokenized settlement system.

• 1:16:46Speaker 00

  And I think the question, and I've had this discussion with people at banks, who said, you know, for tokenized deposits to really work well, it would be good if the Fed had kind of, you know, the equivalent, a tokenized deposit settlement. So JP Morgan and Bank of America, if they both issued tokenized deposits, can settle up instantly through the Fed in a similar kind of tokenized structure. I don't know enough about the technology to know for sure whether the existing interbank settlement system is sufficient to incorporate bank tokenized deposits and stable coins. But I think those are the issues we got to be thinking about, right?

• 1:17:28Speaker 00

  If we want stable coins to be truly safe, we could consider what the UK is thinking about, which is any systemic stable coin should keep its reserves at the central bank. Because that's the safest form of money there is. Now, again, that would come with strict oversight and supervision and so forth. But that's one of the things they're thinking about. So I think, you know, I believe we can address our payment issues and we can, you know, take advantage of these new technologies through private innovation. We don't need the government to try to, you know, lead the way on innovation. And I don't think the government is a good judge of what innovations are going to work best, right?

• 1:18:13Speaker 00

  Imagine if the government had had to decide whether we should have ATM machines, you know? And they said, well, why, you know, why do you need those? You just go to the bank, get the money while it's open. And, you know, ATM machines are probably the greatest technological advance in banking in the last 50 years. But what we do need the government to do is create the regulatory framework where this innovation can flourish. And particularly with the Fed, look at the interbank settlement system and look at cross-border payments. And how do we make sure our technology is up to date on those?

• 1:18:49Ryan Sean Adams?

  I guess maybe speaking of ATMs, ATMs, of course, quite famously, they spit out cash, which is an interesting instrument, I think, from a civil liberties perspective. And so far, we really haven't talked about that. And I don't know if you delve into any of this, but one of those, what many would argue is civil liberty is some form of privacy, you know, inside of our digital cash apparatus, whatever we choose as a society. It's like Fourth Amendment protections against unreasonable search and seizure, that sort of thing. One thing that we want to maintain in crypto is some sort of privacy for peer-to-peer transactions. Have you seen anything like that in your travels that is kind of compatible with some

• 1:19:33Ryan Sean Adams?

  of the worldviews that we've been talking about so far in this episode? Like, is there a way to thread that needle? Or do we just have to, like, sacrifice a peer-to-peer privacy of money transactions in the society that we're moving towards, like, no matter what?

• 1:19:49Speaker 00

  Well, I certainly don't think that should be the assumption that we have to sacrifice that. I mean, clearly, small value transactions, you know, don't have to be, you know, no one needs to be collecting information about those, right? So exactly how you thread that needle with digital transactions, I'm not sure. You know, because the blockchain, obviously, everything's on there, it's pseudonymous, but, you know, you have ways of identifying who addresses belong to. But I guess in terms of thinking about what the policy should be, I think the policy should

• 1:20:30Speaker 00

  be, if we can get there technologically, that sure, there's a certain level at which we don't need to, we don't need to be, we should not be, collecting information about people's... Transactions, but there's a level that you cross when it's big enough and the risk is great enough that you do want to be able to identify, you know, who's acting. I don't know exactly how to get there, but I think that is one of the important questions.

• 1:20:58David Hoffman?

  Tim, I'm wondering what your perspective is as to the role of the dollar or the utility of the dollar, the purpose of the dollar. Different people might have different opinions on this, right? Like, the United States government might perceive the dollar as a tool, a geopolitical weapon, to kind of command the interests of the state. There's also a perspective out there that, you know, the dollar is actually meant for servicing the local economy of the United States and helping the citizens of the United States, you know, engage in commerce. There's different perspectives out there as to like what what people's like position is, like what is the dollar for? I'm wondering wondering if you have a perspective on as to that.

• 1:21:37Speaker 00

  I mean, it's it is our national currency. It's a form of sovereignty. The fact that it has become the world's primary currency for international finance, for commercial transactions, is of great, great benefit to us. It's a huge benefit to us and one that, you know, we should, we should by all means try to preserve. The fact that it's, you know, that it's the world's preferred reserve currency, currency for investment, is also a huge benefit for us. I think one thing about that is it is important to, you know, there is a difference in my mind between the dollar as what's called the world's reserve currency and the dollar

• 1:22:20Speaker 00

  as the primary means of payment, meaning, and I've had this conversation with Governor Waller, actually, who's, again, whose views I respect, who's kind of said, look, you know, there's no threat to the dollar as the world's largest reserve currency, so, you know, we shouldn't be worrying about this. And You know, in terms of where are people going to park their money, invest their money? Yeah, I mean Treasury Securities, you know, the China is not, is not going to replace us anytime soon in that regard. But, you know, we can see people move away from using the dollar for payments. And that's, that's the thing that worries me. And that's the thing I think we,

• 1:22:59Speaker 00

  we want to make sure, again, that our cross border means of payment are up to date, you know, that the Fed systems are as up to date as they can be. That may or may not involve distributed ledger technology, I'm not sure. But, you know, those are the things we need to be focused on.

• 1:23:18Ryan Sean Adams?

  So far, we've been talking this conversation about what, what the US wants, maybe from the perspective of what the, the government wants, what Congress wants, what American citizens want, what people in the crypto community in the, in the US want. I want to actually turn the question to other countries. Like, what do they want? It was very interesting early in the conversation, Tim, that you were talking about your colleagues in, in China, who are basically looking at Facebook's central bank, or Facebook's digital currency effort, and basically saying, we better speed up. Like, this is concerning to us. What's, what do you think the perspective of, say, a Europe, or a China, or a Russia has on this entire,

• 1:23:57Ryan Sean Adams?

  like, conversation? What, like, are, are they, yeah, like, where do they, where do they fall in, in this whole thing? Do they, do they want the US to have a central bank digital currency? Do they care? What about stable coins inside of their local economies? Is that sort of a threat to them? Yeah, how do you think about this?

• 1:24:15Speaker 00

  Speaking, I'll focus on, you know, countries that we consider our allies, you know, or at least having values similar to ours, like the UK, Europe, Singapore. I think those countries want to see the US lead here. They are a little confused as to why we seem to be moving more slowly to set up regulatory frameworks for stable coins, for crypto generally. All those countries, I think, are moving forward with frameworks on this. And I try to explain, you know, we'll get there. Sometimes it just takes us a while. But we will get there. On a CBDC, you know,

• 1:24:56Speaker 00

  Look, that's become unfortunately kind of a hot political potato in this country for reasons I understand. I mean, no one wants the Fed collecting information about all of us. That's terrible. We don't want that. We don't want anything like what China has. And no one wants to undermine funding of the banking system. But as I said earlier, I think some level of research on how we make sure our payment system is as modern as it needs to be is important. And I think other countries would like to see us do that. They would like to see us be at the table, you know, when some of these issues on cross-border payments and payment platforms are discussed. So I think they still want the US to lead.

• 1:25:39Speaker 00

  And, you know, I think we're still capable of that, and hopefully we will.

• 1:25:43Ryan Sean Adams?

  This has been a fantastic conversation, Tim. I learned a lot and like I appreciate the dialogue. You know, maybe there's some daylight between us and on some of these issues and the specifics of them. But I certainly appreciate your willingness to engage the crypto community. And I think that this speaks very highly for how we move forward together. I guess as we close, one question I have for you is, in the realm of predictions, in the realm of what happens next, and of course, anyone's guess. So you could take this question as open as you like, but the questions of will we get any stablecoin legislation anytime soon? Will this become an election issue? You know, does this need to be so partisan? Or would that calm down? Will we get a stablecoin ban? Do you have any predictions for the next

• 1:26:28Ryan Sean Adams?

  few months or years that might play out?

• 1:26:30Speaker 00

  Well, you know, I tend not, try not to make predictions. Look, I'll focus on stablecoins since we've kind of concentrated on that. I think we will get a stablecoin regulatory framework. I'm not sure that we'll get it this year. I'm still hopeful that we might get it this year. You know, I think Patrick McHenry and Maxine Waters have been the good, I heard him, you know, interviewed by you all recently. You know, they have been negotiating a while. I'm hopeful, I'm hopeful they can come to terms. And I think if that happens, and if we also make some other adjustments in our regulatory framework in terms of banks' interaction with stablecoins, that would be a big boon. Now, interestingly though,

• 1:27:13Speaker 00

  I don't think it means that people keep their money in stablecoins. See, my ideal is you create this framework. You allow stablecoins as a payment instrument. You allow banks to interact with firms like Circle. And what that mean, but you don't permit, you know, the stablecoin issuers to pay interest because you want them just as a payment mechanism, not as a security, not as an investment. And so what it means then is people keep their money in money market funds or banks or wherever they want to keep it. But they have the ability to quickly move it in and out of a stablecoin to make a transaction. That's the world I would like to see. And then, you know, it becomes a means of fast

• 1:27:57Speaker 00

  payment of atomic settlement potentially. I think that's very important. That could really save us a lot of cost in our financial system. So that's kind of, that's at least the world I want to see. I don't know how quickly we'll get there.

• 1:28:10Ryan Sean Adams?

  I like that world too. And I could tell you, Tim, from my experience, like that's how I use them today. I mean, not for regular transactions, but when I'm transmitting money or paying for something, I'm using stablecoins. And when I'm storing my value, I'm holding it in T-bills, money markets, and then Ether and Bitcoin, you know what I mean? So that's how that works.

• 1:28:26Speaker 00

  And see, the funny thing about that is that would actually address a lot of the reasons the bank regulators have been very worried about stablecoins because they're worried about all that money sitting in a stablecoin, which I would worry about too. But, you know, again, if we created this framework and we allowed that kind of interaction, you would, you know, you would not have a lot of money necessarily parked in stablecoins. You would just, you know, move in and out of them as a payment mechanism.

• 1:28:52Ryan Sean Adams?

  Well, I think this is one of the most interesting conversations going on right now, and we appreciate you continuing the conversation. I'm sure there'll be much more in the days, weeks and months to come. So thank you again so much.

• 1:29:03Speaker 00

  Well, Ryan and David, thank you. I've really enjoyed it.

• 1:29:05Ryan Sean Adams?

  Bankless Nation, some action items for you in the show notes. You got to read Tim's article that we were talking about today. It's called "Stable Coins: National Security." We'll include a link to that in the show notes. Also, I highly recommend an article put out by Nic Carter recently. It's called "Five Perspectives on Stable Coins." He goes through the different perspectives that have surfaced. And as always, have to end with this. Of course, nothing we said about stable coins, or anything about crypto, or ever say, is financial advice. You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.