Stablecoin regulation has become a hot topic, and for very good reason. For one thing, it's an extremely fast-growing space. Stablecoins are also a primary way that the crypto industry interacts with the banking system. And beyond that, as we know, crises often originate from assets that promise to be safe. (Remember money market mutual funds that broke the buck during the 2008 financial crisis.) But are regulators equipped to deal with stablecoins under existing law? On this episode, we speak with Timothy Massad, the former chair of the CFTC and a current research fellow at Harvard's Kennedy School of Government. He explains why he believes regulatory progress can be made right now with the laws that currently exist, and what a new arrangement for issuers would look like. This transcript has been lightly edited for clarity.
Points of interest in the pod:
Why is stablecoin regulation so hot right now? — 3:48
How Facebook’s Libra sparked political interest in stablecoins — 4:50
The difference between stablecoins and money transmitters — 7:06
Resolution frameworks for stablecoin issuers — 8:43
Regulating stablecoins under existing banking laws — 12:30
Why would banks want stablecoin issuers as subsidiaries? — 17:17
Why not give stablecoin issuers deposit insurance? — 26:13
Portfolio restrictions for stablecoin issuers — 28:34
How to judge operational reliance of blockchains? — 30:40
On the idea of an SRO for crypto — 35:36
---
Tracy: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:16)
So, Joe, didn't we say recently that we were going to be talking about stablecoin regulations more ?
Joe: (00:21)
There there's never enough. You know, I actually, I think there are lots of reasons to continue to focus on stablecoin regulation.
Tracy: (00:29)
Why?
Joe: (00:30)
Well, I think the biggest one in my mind is this sort of thing I internalized from the great financial crisis, which is that things blow up when they're promised to be stable.
Tracy: (00:40)
Yeah. I think that's exactly right.
Joe: (00:41)
And to me, it's like, I know I do not expect to experience in my lifetime, like a Bitcoin crisis because people know that…
Tracy: (00:49)
Dogecoin crisis?
Joe: (00:50)
Or a Dogecoin crisis, people know that these coins are extremely volatile. They don't bucket them into, you know, parts of their portfolio that are expected to be safe. And so they can fall like a stock can. Whereas we know that, you know, when something is like Triple A or dollar-pegged or whatever, that's where trouble can theoretically start.
Tracy: (01:09)
Yeah. So two things there. I totally agree. The other thing is if you think about crypto broadly, stablecoins are really the way in which the traditional financial system interacts the most, or one of the most important ways with crypto. So stablecoins are interesting because they build up these reserves of financial assets, things like commercial paper. And there's a concern there that maybe if you had a stablecoin experience a big amount of trouble, that it could affect the CP market more broadly and affect the financial system more broadly.
Joe: (01:44)
And also there's a good argument that stablecoins are the one killer app of crypto. Where do people actually use crypto? It's like Tether, USDC. These are huge things. And so you're just like, well, what do people use crypto for? Well, stablecoins are popular and widespread. And, therefore, you know, it's an area to be putting a lot of attention on.
Tracy: (02:05)
Well also I think that they promise something. The fact that they promise something, which is stability, kind of makes them easier to regulate. You know, what are other crypto tokens actually promising? They’re not necessarily promising that safety net as you were discussing, but stablecoins are. And so it naturally draws in regulatory interest.
Joe: (02:26)
And this is a real key point that you bring up, which is that yeah, there is this promise there -- this expectation. You can also sort of judge whether the promise is being kept. Like, ‘does this coin have a dollar in the bank or not?’ is a pretty simple binary question. What would be the equivalent for Dogecoin?
Tracy: (02:48)
Well, it’s more difficult to answer than you might expect sometimes. But, we are going to be discussing all of this with someone who I think comes at it from a very interesting perspective. So we recently spoke to Senator Pat Toomey about this. Yes. He was talking about the stablecoin bill going through Congress, but what if there was another way to regulate stablecoins?
Joe: (03:10)
Let's find out.
Tracy: (03:11)
Alright, without further ado, then we are going to be speaking to Timothy Massad. He is of course a research fellow at the Harvard Kennedy School and also the former chairman of the CFTC under President Obama.
Joe: (03:23)
Literally the perfect guest.
Tracy: (03:24)
Yeah, definitely. Tim, thank you so much for joining us.
Tim: (03:28)
Thank you for having me. I'm a big fan of the show.
Joe: (03:31)
Pleasure. Ah, thanks. Thank you for saying that. Check’s in the mail. Thanks.
Tracy: (03:36)
So why don't we go ahead -- and this is a question I asked Senator Tommey as well, but why the interest in stablecoins? What is it that is drawing this regulatory scrutiny at this moment in time?
Tim: (03:48)
Sure. Well, they're not that big relative to the financial sector, but they are growing very quickly. And that's one of the concerns. And obviously recently, when we had that fall in crypto prices and we saw the crash of Terra, which is an algorithmic stablecoin, that heightened the concern. There's a view that, you know, these things could grow very quickly and frankly that there's an opportunity here. They could help modernize payments and increase competition. So I think it is right for regulators to be focused on them. But of course Facebook's proposal of Libra was really what captivated or really [prompted] regulators to focus in on this.
Joe: (04:31)
I actually hadn't realized that, talk to us a little bit more about that, because, you know, I remember the Libra splash was during like the 2017, 2018 boom. And it just seemed so unwieldy and I'm not really surprised it never got off the ground, but I don't think I had appreciated the degree to which that was a catalyzing moment for regulators. Can you talk about what happened there a bit more?
Tim: (04:50)
It was really, a huge moment, not just for the regulation of stablecoins, but also for the development of central bank digital currencies. You know, before Facebook announced that, Chair Powell testified and he kind of brushed off a question about cryptocurrencies by saying, you know, we don't regulate that. We regulate banks. When Facebook made its proposal, and you will recall the initial proposal was for essentially a stablecoin, they didn't call it that right? But it was a stablecoin based on a basket of currencies, not just one currency, but the dollar, the euro, the pound and a few others. And so central bankers around the world immediately were alarmed because they thought, boy, this could actually displace sovereign currencies. Facebook has, you know, 2 billion+ users. What if they all use it?
It also prompted some countries to really accelerate their CBDC development. In particular, China. I was over in China shortly after the Facebook announcement was made. And, you know, everyone in Congress sort of looked at Facebook and said, ‘oh, you're going to undermine the US dollar. Well, every government official I spoke to in China had the opposite reaction. They saw Libra as essentially a way to backdoor dollarize other economies because the dollar would be the main component. So they got very worried about it and they accelerated their CBDC research because of that. Interesting. So, you know it was big from the standpoint of causing people to recognize stablecoins as an issue and also from CBDC.
Tracy: (06:38)
Right. So fast forward to today and we have the president's working group report that came out last year. I think we have this bill that may or may not be working its way through Congress. We have a lot of people talking in general about stablecoin regulation. Would you characterize stablecoin regulation as different to crypto regulation more broadly? Is there a different set of requirements that you're trying to satisfy here?
Tim: (07:06)
Well, it is different because stablecoin are seen primarily as payment mechanisms. And the first thing to realize is that the regulation today is really inadequate. It's a very light touch. These are regulated under state law, under what we call money service business laws or money transmitter laws. Those laws originated with the telegraph. Okay. And what they required was, you know, if you walked into a Western Union office in Kentucky and you wanted to send money to your cousin in Illinois, Western Union had to make sure it had money on hand. So money service business laws require very minimum capital. They require security. Again, we're talking about amounts in the range from zero to, you know, maybe a million dollars, maybe $2 million at the high end for some of these states. And some of them do have permissible investment rules.
That does mean if you're registered as a money service business, you have to register with FINCEN, right? Which is a department of the Treasury, which enforces anti-money laundering rules. So that's a good thing. We are imposing those kinds of restrictions on stablecoins based in the US, but this is not a sufficient framework to suggest it's sufficient. It's sort of like saying, ‘well, you know, there's no difference between an Excel spreadsheet and a blockchain. What can that do?’ You know?
Joe: (8:39)
Some people say that
Tim: (8:40)
Yeah, I know some people do
Tracy: (8:41)
Some of them are sat in this room right now.
Tim: (8:43)
Right, right. We need a comprehensive framework. What would that involve? Prudential regulation first to make sure that these stablecoins are fully reserved, meaning they have cash or Treasury securities backing them. But more importantly, there's no ‘stable’ in a stablecoin today because there's no resolution framework.
You know, if a bank fails, right? We have a well-developed framework. The FDIC steps in very quickly, usually on a weekend, depositors are insured and, you know, life goes on. Everybody's fine. If a stablecoin were to default, were to collapse, it would be handled as a normal bankruptcy, which means the automatic stay applies, right? So holders are not going to get their money for months, years, potentially. And what we call the Pari Passu rule applies. So even though I'm a holder of a stablecoin, I'm in the same category as all other unsecured credits. So if the stablecoin issuer has leveraged itself, well, you know, I'm going to be competing with all of them. So that's a big problem. We need a framework that ensures good resolution and oversight as well as we’ve got to deal with the operational risks here, because these stablecoins are trading on a number of decentralized blockchains. And we’ve got to look at how resilient, how reliable are those?
Joe: (10:03)
This is really interesting, sort of this second half your point, because I guess intuitively probably everyone sort of gets like, yeah, we should have some required disclosure, something to make sure the money is actually there. That seems like, I guess that's the obvious thing. That's the easy part. That's the easy one. Right? The second point though, is not something I have heard many people talk about, which is like, all right, well, what is the mechanism that keeps it stable, particularly in the event of like something bad happening? And I have seen some people on Twitter, for example, talk about, say Circle’s or Tether’s capital cushion or the equity component. And it's often pretty thin. So why don't you talk to us a little bit more about what you see as lacking or what you see as the risks on that sort of second component?
Tim: (10:51)
Sure. Well certainly capital helps prevent a bankruptcy, right? Because it gives you a way to absorb losses. But the point is that even with that, you still need a resolution framework. You still need a way so that, you know, this is a financial institution. And it's a payment company. We don't want it to go through the normal bankruptcy where people are held up. So that's why I think we really need a more comprehensive approach. We've suggested this could be done administratively. I've talked to Senator Toomey about his legislation. I think it does some of the things I'd like to see -- it doesn't do all of them -- but you know, that would involve not just prudential requirements on investments, but it would involve creating a framework for resolution. It would involve oversight. It would involve audits. It would involve standards on operational resilience and on concentration of power. I mean, one of the big issues here is should we allow stablecoin issuers to be affiliated with commercial companies? What if Amazon wants to launch a stablecoin? How do you feel about that?
Tracy: (11:57)
Well, talk to us about your proposal then, because I think when it comes to crypto regulation, there's often this sense, maybe it's unspoken sometimes, but the sense that the existing regulation isn't enough to tackle this new technology, this fast-changing and evolving industry. You know, with Pat Toomey, the Howie Test came up a number of times, this idea that, well, how are you going to use something from the 1930s in order to regulate blockchains and cryptocurrencies and tokens and things like that? But you are suggesting that it can be done. So walk us through the proposal.
Tim: (12:30)
So let's talk about stablecoin first and then the broader crypto market second, because we have a similar proposal, but it's a different paper. On stablecoins, what I'm saying with my co-authors Howell Jackson and Dan Awrey, two law professors, is that while legislation would be great, we're not sure it will happen. Number one. And we're a little concerned that it won't be comprehensive. So what we're saying is financial regulators today have the authorities they need to create a framework to try to bring this activity within the banking perimeter. Wouldn't be regulated exactly as a bank, but what you would do technically is you set up what's called a national trust bank, which then has a trust below it that is the payment vehicle. And then what this gets you is it gets you supervision by a banking regulator, but it can be done in a way where there's not deposit insurance, right? Because we don't want that.
We want the stablecoin issuer just to hold cash and Treasuries and so forth. It doesn't need deposit insurance. It could be coupled with access to a Federal Reserve master account, which is very useful for settlement efficiency. And you know, the Office of the Controller, which would do this, can set a variety of other standards on all the other issues we need to worry about -- such as operational resiliency, such as basic consumer disclosure, consumer protection and so forth. But the point is that administratively, this could be done. It would require all the bank regulators to get together and cooperate something that doesn't always happen in our system very well. But it could be done today under existing law. And again, we're not against legislation. That would be fine, but let's not wait around. We could do this today.
Joe: (14:34)
Who is the regulator of a bank such as this?
Tim: (14:37)
So it would be primarily the Office of the Controller of the Currency because it would issue a national trust bank charter, but you would also need the cooperation of the Fed and the FDIC to really make this work. Ideally, you know, you need the SEC and the CFTC to go along too, just to not do things that are inconsistent with what you're trying to do under the bank laws. But you know, we created the Financial Stability Oversight Council to bring the regulators together. We've suggested, well, it could help coordinate this as well.
Joe: (15:13)
Is there anything about this proposal that would impinge on the current business model of major stablecoin issuers? Because I think if you all could talk to that, if we had Jeremy Allaire of Circle back on, he’d say ‘Weah. More clarity, more regulation, totally fine. etc.’ Is there anything, is there a Trojan horse that I'm missing that he would say, ‘no, this is not going to work.’
Tim: (15:34)
Yeah, there are things that they might not like. The way we proposed it, because we've said this could be done administratively, and because we wanted to be very conservative and suggest something that the bank regulators could say, ‘oh yes, this uses building blocks that are tried and tested in our regulatory framework. We can do this,’ is we have said this trust bank would need to be a subsidiary of an insured depository institution. It still wouldn't have insurance, but it would be chartered that way, which brings in banking regulation overall. So what stablecoin issuers will say is twofold. One, they'll say ‘our business model is narrower. We don't need to be subject to lots and lots of bank regulations.’ And I'm sympathetic to that. I would be willing to go down a path of saying, ‘yeah, let's customize the rules a little bit for these guys. They don't need all of these things.’Our proposal already does that in terms of capital requirements and so forth because the trust itself would be off balance sheet.
The second thing they will say is, you know, if you're going to make this a subsidiary of a bank, that limits potential competition. The whole point of stablecoins is we want to be competing with banks. I'm sympathetic to that too, because I do regard stablecoins as potentially helping us bring more competition to payments. I think both those things can be dealt within the process. It really depends on how much flexibility regulators want to build into the system. But those, I think, would be the two main objections they would have.
Tracy: (17:09)
This was going to be my question actually, which is what's in it for a bank to allow a stablecoin issuer to be a subsidiary?
Tim: (17:17)
Yeah. Well, you know, I think a lot of banks are looking at stablecoins and sort of thinking about, ‘do we enter this space? Do we not enter this space?’ I think with interest rates moving up, it becomes interesting also -- how does that affect the stablecoin issuer's business model? Right? Because some of them now are going to be making a lot of money on their deposits. Of course their deposits are still, you know, a very, very, very small fraction of the total deposits in the banking system. $150 billion in stablecoins versus $19 trillion in bank deposits. But you know, I think banks are really thinking about how do we maintain our competitive edge in payments.
I mean, all of this also goes to a broader issue right? Of how do we think about banking? Banking has traditionally bundled credit creation -- creation of money -- really, right? Because most of the money we use really represents private IOUs. It's only paper money that represents a liability of the government. And payments, right? Banks have bundled all those functions. They've been entitled to certain regulatory advantages in order to do that, such as deposit insurance, such as access to Fed master accounts. And really stablecoins and other innovations in payments are really raising the question of should we unbundle this a bit and let non-banking entities come in and do payments? And this, by the way, there's a report that's going to be put out by the Treasury department called ‘The Future of Money and Payments,’ which is a report required by the executive order, which, presumably we'll talk about this and you know, we'll see if it takes a firm stance. I mean, the scope of that report is very, very broad. If you look at the executive order, it's supposed to talk about future payments and CBDCs and how can they affect competition and financial inclusion and so forth. And truthfully, you know, I'm very interested in what the report will say, but you know, it may well be a committee product that doesn't take a firm view on some things, but just covers a lot of territory. We'll see.
Tracy: (19:32)
Hmm. Interesting. Just on the banks versus stablecoin point, this is something that came up in our episode with the Circle CEO, with Jeremy Allaire, there is a sense that, okay, maybe sending money via stablecoins is more efficient than sending it through a bank, which, you know, it takes days and maybe they charge you fees or they charge you a bad exchange rate or something like that. But the question always is how much of stablecoin advantage is genuine technology innovation versus regulatory arbitrage? And I'd be curious to get your thoughts on that.
Tim: (20:08)
Well, I think that's a great question. I mean, look, for most of us, the payment system works perfectly fine. I mean, we have our credit cards, we have mobile banking and you know, I can deposit a check at three in the morning, and I get an instant, you know, I get an email right back to say, ‘oh yes, we've got your check.’ Now in reality, of course, if I'm a low income person, I may not even have that access. And if I deposit that check, it might be five days before it clears, right And that's why our payment system is actually relatively slow and inefficient compared to what it could be and what at least some countries have advanced in terms of having more of a real time system that doesn't hurt most of us.
Again, because we have all these options. We have credit cards that give us, you know, free revolving credit, but it really does hurt low income people. They're actually subsidizing our credit cards, right? Because they pay all the same prices we pay, but they don't have those credit cards. So when you look at it from a societal standpoint, we do need to modernize the payment system. And while yes, the advantages today to most of us of a stablecoin payment versus, you know, a bank, may not matter that much unless maybe we're doing a cross border payment where the fees can be high. You know, I think long term, this could be significant. I think obviously digital forms of payment have the potential, also blockchain forms of payment have the potential to be programmable. But I guess at the end of the day, I would say as a former regulator, I don't really know the answer to the question ultimately.
And I don't think government is smart enough to figure it out. I think the market has to figure out, do these things really have long-term utility? I'm skeptical of a lot of things that go on in crypto as to their long-term utility. But I don't think that's the government's job to decide. I think that's the market. We'll figure it out. The government's job is to create a framework where, you know, innovation can go, can take place, but that we ensure, you know, financial stability and consumer protection and transparency and integrity. And we're not doing that today. We're not doing it with stablecoins. We're not doing it with crypto more broadly. And we can, you know, you asked about that or happy to turn to that if you like.
Joe: (22:29)
So you mentioned that what really got crypto and stablecoins in particular on the map of regulators obviously was the failed Libra attempt. And you also threw in there earlier in the conversation, it was like, ‘well, what if like Amazon wanted to do a stablecoin?’ And I don't know much about this, but there is something like that prevents or makes it hard for like a retailer or a non-bank company to become a bank and Walmart, every once in a while, I think, makes noises about wanting to become a bank and like set up something in Utah. It never really seems to go anywhere from what I understand. Would your proposal essentially foreclose the possibility of an Amazon stablecoin at some point?
Tim: (23:08)
Yeah. Yes it would today. That's an excellent question. We do have a separation between banking and commerce. That's primarily through the Bank Holding Company Act and our proposal would have that apply. Now you could revisit that as well. And you know, some of the proposals in Congress have suggested, well, maybe the Bank Holding Company Act shouldn't apply, but we should still have some limitation on commercial affiliations. I think that is important. It's a difficult question as to exactly where you draw the line. But I do think that we need to be concerned about the concentration of power that could result from, you know, a major commercial firm, like an Amazon, which has lots and lots of information from its customers. Also then engaging in payment, you know, financial services and payments type of services.
Joe: (24:04)
Well, let me ask you kind of a follow up question, which is in your mind, how do you actually distinguish the difference between say a stablecoin versus say a Venmo or a PayPal, which are not, you know, you could sort of abstract them away. They're pretty similar. You have a dollar in a PayPal account, it's supposed to be backed by a dollar. It's a liability of PayPal, etc. What do you see as the bright line difference for them? And it seems important if we're going to be deciding who gets to even issue these?
Tim: (24:34)
Absolutely. Because from a regulatory standpoint, you're basically right, that the same framework I talked about that applies to stablecoins is essentially what applies to those other types of payment providers. From a business model standpoint, they're different, of course, because PayPal, Venmo are then connected to the banking system. They are running through banking system, whereas a stablecoin is not, you know, in terms of what we've seen to date. So, you're right that we do need to think about those issues together when we think about how to regulate these things.
Tracy: (25:32)
I have a devil's advocate question, which is, you've mentioned a number of times, that under your proposal, there wouldn't be deposit insurance for stablecoins. Why not? Because I mean, the trade off between banks and getting deposit insurance from the FDIC is, well, you know, we agree to restrictions on what we can and can't do. We agree to hold a certain amount of capital, to be regulated, to be under scrutiny. And in return we get this government backstop. So if you're going to make requests of stablecoin providers and say that there are going to be portfolio constraints or more disclosures, then why not give a carrot to reward them for doing that?
Tim: (26:13)
Yeah. Good question. So keep in mind, deposit insurance enables banks to basically create money, create credit, right? Because they can take in my deposit and then lend it out and that's creating money. And that happens over and over and over again, subject to, you know, minimal reserve requirements or whatever. But as the depositor, I don't worry because, you know, I know if the bank fails, my money's going to be insured, so it's not going to be like, you know, Jimmy Stewart in It’s a Wonderful Life. You know, going ‘where's my money, where's my money.’ ‘Oh, it's invested in so and so's mortgage.’
Joe: (26:52)
It’s in UniSwap. It’s in SushiSwap. It’s in Do Kwon’s account in Korea. Sorry.
Tim: (27:00)
When I teach my classes and I use a slideshow, I actually have a little slide of Jimmy Stewart in the bank facing all those people with a little balloon coming out, you know, a cartoon thing saying, thinking ‘They'd go away if I told them we had blockchain.’ But the point is that, first of all, we don't want, we're saying stablecoin issuers should not be creating credit. Okay. So again, we're separating the payment function from the other things banks do. Stablecoin issuers would not be creating credit. They're not intermediating in the sense of bringing borrowers and savers together. They're a payment vehicle. So that plus the fact that we can ensure that, you know, your money is safe, if you will, by the investment restrictions, means we don't need deposit insurance. And the final reason is of course, that I don't want to subject the deposit insurance fund to the risk of these things, because it is a new area. We don't know exactly how it will develop. And I recognize that some of the concern of the bank regulators and, you know, they've kind of acted in a way of like, ‘Gee, you know, we're not so sure about all this stuff, we don't really want to legitimize it or authorize it.’ So those are the reasons why,
Tracy: (28:18)
What kind of investment or portfolio restrictions would you be envisioning? Because I know we were kind of joking earlier about to some extent, this [stablecoin regulation] is the easy part, but still there are big questions over what a stablecoin like Tether is actually holding.
Tim: (28:34)
Right. There are. So it would be some version of cash and high-quality liquid assets. Okay. Whether it's exactly like 2a7 for money market funds or whether it's more restrictive, you know, you can debate that, but basically cash and Treasuries, you know, is what is what I would say. It wouldn't include commercial paper. It wouldn't include other things. And you're right. Tether, you know, has had other investments. It had investments in cryptocurrencies. It's only recently that that Circle limited its investments to basically cash and short-term Treasuries. And by the way, for a stablecoin issue to say, ‘oh, well, we've put our money in FDIC insured banks. So, you know, that's why we don't need to be regulated.’ I mean, yeah, that's safer than, you know, putting it in a mattress, but it doesn't help people, again, in the bankruptcy situation. The fact that that money is in an FDIC insured bank isn't going to help me as a holder get it, isn't going to put me better off relative to unsecured creditor of that stablecoin issuer.
Joe: (29:39)
Yeah, and I think that's one of the things we're seeing in the Voyager bankruptcy. It’s not a stablecoin per se, but it's like, oh yeah, the fact that they held their money in an FDIC insured bank is not really helping many people. You know, you joked, about, ‘oh, could a blockchain have saved George Bailey,’ and you briefly brought it up, but I actually do want to talk about this aspect, which is the operational risk of public blockchains, which is another way that clearly stablecoins differ from say Venmo or PayPal, which are, you know, we know those rails. You know, they're always launching new chains, there's Ethereum and Solana, but there's, I think there's like thousands and the big stablecoin issuers are all on multiple chains at this point. From a regulatory standpoint, how should regulators be thinking about what chain, they're issued on and the risks that they pose?
Tim: (30:30)
Yeah. Yeah. Great question. And let me, by the way before I answer that, just note since you've mentioned PayPal a couple times, I do some advisory work to PayPal.
Joe: (30:37)
Good to know. Thank you. We appreciate that.
Tim: (30:40)
So I think that's a huge issue and, you know, I've talked with Senator Toomey about this, because I said, you know, ‘your bill is very good. It has a lot of things, but you haven't said anything about the operational risk of these blockchains.’ And he said,’ yeah, I know. I'm not quite sure, you know what to do on that.’ And I think regulators aren't quite sure what to do about that. So we do need standards. We need standards that would impose some obligation on the stablecoin issuer as to what blockchains it supports, right? Because if you read Circle’s disclosure, you know, it will say, well, we support the trading of USDC on eight blockchains, so there would have to be some sort of due diligence standards and so forth. And then I think what you would want is, you know, some requirements that a stablecoin issuer might have to freeze its tokens if certain things happen. So freeze the tokens on that blockchain, right?
And this of course could even be used if, what happens is even if a blockchain isn't supported by a stablecoin issuer, someone wraps the stablecoin and trades it on that blockchain, right? In which case the stablecoin issuer could say, ‘Hey, I didn't authorize this, but it's still happening.’ So, you know, I think you'd have to have some standards that say, look, if this happens, then you might have to freeze a stablecoin. Now of course the risk is still, you know, lack of resilience, lack of reliability, a hack or so forth. And that's why, you know, this area is so new. I do think we have to move cautiously, because it's not clear that some of these blockchains are resilient enough and people don't, you know, always appreciate that.
Tracy: (32:26)
So one thing on stablecoins is it does seem like there is this sort of regulatory dagger hanging over the industry at the moment. And you started off by noting that this is a very fast growing market segment. How do you think stablecoin issuers feel about regulation on the whole? Because again, one thing we hear is that the industry wants clarity. They want rules to come out, so they know how to go forward. How much pent-up demand do you see in the wings from stablecoin issuers, you know, if a rule came out tomorrow, would we suddenly see 50 or 100 new stable point issuers out there?
Tim: (33:02)
Yeah. I'm not sure that we would. You know, I think people are still trying to sort of figure out, you know, other financial institutions are still trying to figure out the space. And of course it would depend on what the rule is, but certainly some players are eyeing this very closely and thinking about it. So, you know, it would really depend on the content of the rule and you know, how burdensome it is and so forth. One thing we have to keep in mind though, you know, maybe make two points. On the one hand, you know, I think bank regulators sometimes kind of lull themselves into maybe feeling like they don't have to act that quickly because they say, ‘well, it's still not very big, right?’ I mean, Circle claims it did $3.6 billion in payments since the beginning of 2021. Well, you know, the Fedwire system does like a hundred times that amount every day or something.
So they're small, but nevertheless they are growing. And also there's nothing that prevents really a stablecoin issuer from incorporating abroad and then still issuing a dollar-based stablecoin. So, you know, other jurisdictions are moving faster. I mean, you can sort of think about this in parallel to, you know, the growth of the eurodollar market. I was talking with my friend, Josh Younger, who I know has been on your show numerous times, about this idea, of how this has kind of got similar parallels in some ways. So, you know, I think we do need to act. It is, you know, it's maybe not a financial stability risk, but it's growing quickly, and we need to move forward.
Joe: (34:39)
So one of the thoughts that I took away from our recent conversation with Senator Toomey and Tracy and I were just talking about this, is it feels like stablecoin regulation is kind of low hanging fruit. It doesn't seem that hard to do. Maybe it's a lot harder, but whether it's your proposal or something legislative, it's like, okay, come up with a banking framework and a way to make sure that they have the money there. It seems like as soon as you go past that with crypto regulation, it strikes me in my mind as orders of magnitude more complex, because how do you prevent someone, you know, or how do you even begin to think about regulating…
Tracy: (35:16)
Or someone launches a joke token, what's the responsibility there?
Joe: (35:19)
Yeah, in India or Estonia, somewhere outside the US, and it gets traded on a DeFi exchange and it gets marketed towards American investors or consumers. Just conceptually, and we just have a couple minutes left, but how should we begin thinking about like that? It just seems so much harder.
Tim: (35:36)
It is harder. And, you know, for one thing, we do have a gap in the law, right? There's no federal regulator of the trading and distribution of crypto tokens, which aren't securities right now. The CFTC doesn't have that power. I, you know, when I was chairman, we declared Bitcoin a commodity, but that simply gave us essentially jurisdiction over swaps and futures based on Bitcoin. That's problem number one. Problem number two, of course, is it a security? Is it a commodity? And we're kind of stuck in the mud on that because, you know, I'm very sympathetic to [SEC] Chairman Gensler's view, that a lot of these things probably are securities, but I'm also sympathetic to the view that, you know, the rules, maybe aren't perfect. I mean, there are some issues where you'd like to customize them.
But my proposal that I'm working up with Howard Jackson at Harvard law school is we say, look, we're stuck in the mud on that issue. Let's take a different approach. Let's have the SEC and the CFTC create a joint self-regulatory organization that’s going to set the standards for the trading of all crypto assets. We don't care whether they're securities or commodities. We're going to basically prod or jawbone, whatever word you want to use, industry participants to join this SRO. We're going to have the agencies tightly oversee it tightly, watch it. It's not just going to go off on its own. The agencies, the regulatory agencies, are going to appoint the members. They're going to approve the rules. You know, and SROs have been very, very important in our regulation of the securities and derivatives markets since that regulation began. And William O. Douglas, former Supreme court justice, who was the chairman of the SEC, I guess he was like the second or third chairman, basically was the guy who initiated the self-regulatory organization movement.
And he basically said, look, it only works if government has what he called a well-oiled gun. You know, standing by. In other words, the agencies really have to oversee this, but we think it could set some standards because, you know, when you look at the trading and distribution of crypto, oh, it’s just, it's awful. I mean, the lack of standards, you know, you have exchanges that have their own proprietary trading operations that don't prohibit wash trading, you know, where someone can basically inflate the price or the volume of the security. You have other conflicts of interest. You have exchanges that have interest in the crypto tokens they’re listing. You have, you know, no sort of order execution rules. You have no requirements on pre- and post-transparency.
And crypto has created, you know, despite the claim of the original white paper that said, ‘oh, we're going to eliminate intermediaries. We're not going to have to rely on these large intermediaries anymore.’ It created a whole new class of intermediaries, right? The exchanges and other actors. And so we need standards there. And so what we're proposing is look require, or basically push them to become members of this. And then they'll also want these rules to apply to the DeFi platforms. And the [industry] needs to figure out a way to do that because they don't want to be, you know, at a competitive disadvantage. So, you know, it's not a perfect solution, but compared to where we are, we could go much, much further, we think faster, if we were to do this.
Tracy: (39:14)
That’s really interesting. I was sort of wondering when someone would make that suggestion rather than just have this bunfight between the CFTC and the SEC going back and forth.
Joe: (39:22)
Right, we’re all the same government here.
Tracy: (39:23)
Right, right. Let's just band together and create a new agency. Tim, I'm so sorry. We could talk to you for another hour, but we are going to have to leave it there due to time constraints, but fascinating discussion. Thank you so much for coming on Odd Lots.
Tim: (39:38)
Thanks. Thank you for having me. It's been a pleasure.
Tracy: (39:52)
I thought that was really, really interesting. And he kind of answered a long-running question that I've had about stablecoins in general, which is, and this came up with the Circle CEO, which is, it feels kind of redundant if you have this new technology, but in order to make it work, you have to team up with a bank and get, you know, a bank license and all of that. But the way Tim described this sort of unbundling of credit creation versus payment services, that makes some sense to me.
Joe: (40:22)
Can I just say,I'm just going to -- full disclosure here…
Tracy: (40:28)
Are you going to leave Odd Lots to join the new crypto inter-agency organization?
Joe: (40:33)
Full disclosure here. It's not always the case that I get really excited by FINRA conversations. It’s like macro and commodities and markets and stuff, yeah, that gets me going. It got me going on finreg. And even if we weren't talking about stablecoins, he is, I really just enjoyed hearing him talk about the, essentially, the theory of finreg or financial regulations in a very engaging way.
Tracy: (40:59)
Yes, absolutely. Also, the little bit about Facebook and Libra galvanizing political interest.
Joe: (41:04)
And very interesting that from the perspective of the Chinese that was seen as a way to further reach the dollar, which I think is really interesting. Think about it. If you're in any other country, how do you hold dollar assets is not a trivial question, right? How do you hold a dollar-denominated asset safely? And there is this clear potential people are talking about, of like stablecoins actually really deepening and cementing the dollar’s global reach. So it's really interesting that that was like sort of the aspect of Libra that they thought about.
Tracy: (41:32)
They oh, totally. But this is also why people were making jokes about like the East India company and stuff when Facebook announced this, but absolutely fascinating conversation. I think we're going to have more on stablecoin and crypto regulation, more broadly, to come. But for now, shall we leave it there?
Joe: (41:47)
Let’s leave it there.
You can follow Timothy Massad on Twitter at @timmassad.