In theory, what gets people most excited about crypto is lines going straight up. But one of the biggest successes in crypto is the rise of stablecoins. Basically, stablecoins allow people to hold dollar-linked assets directly on the blockchain. This is potentially important for P2P payments, trading, cross-exchange arbitrage and more. But by holding actual money, the big stablecoin issuers potentially have a massive amount of power in a space that's supposed to be all about decentralization. On this episode, we speak with Jeremy Allaire, the CEO of Circle, which issues the USDC stablecoin. We talked about regulation, the business model of stablecoins, and the influence he has within the broader ecosystem. Transcripts have been lightly edited for clarity.
Points of interest in the pod:
How does Circle make money? — 3:17
What do stablecoins do exactly? — 8:11
Is Circle still going public? — 12:44
How to regulate all the different types of stablecoins — 17:25
On technological innovation vs. regulatory arbitrage — 25:40
How Circle handles government restrictions — 31:50
Competition from central bank digital currencies — 36:23
On Circle’s role in an Ethereum fork — 41:57
How does Treasury volatility impact USDC? — 45:15
Are there retail use cases for stablecoins? — 49:02
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Joe Weisenthal: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
So, Tracy, here's the thing that I've been thinking about a lot with respect to crypto. You know, in the early days when it was just Bitcoin, maybe a few other coins, it seemed like there was this sort of pirate mentality, cypher punk, the Silk Road was one of the first apps where people actually used crypto, but it feels like as the industry's grown up, the effort to avoid or evade the existing regulatory system has really fallen into the background.
Tracy: (00:41)
Yeah, I think that's right. I mean, I guess stablecoins would be the prime example of this, right? And one thing about stablecoins that makes them really interesting to me is that they're basically the way in which crypto, or big chunk of crypto, actually interacts with the traditional financial system. So a lot of them have financial assets that are backing them. So they kind of interact with banks through their reserve funds. And then the other question I have is if you're going to create a stablecoin that has a bank charter, and that invests a lot in traditional financial assets like t-bills or commercial paper, then what is the benefit versus going into something like a money market fund or just a bank deposit, right?
Joe : (01:28)
If you're going to interact with regulated institutions, which you implicitly are if you buy a stablecoin and the stablecoin issuer holds money in a regulated bank, then there are going to be all kinds of rules. If you're going to interface therefore with regulated finance, my question is what is the point of crypto?
Tracy : (01:45)
Yeah, exactly. That's exactly it. And the other thing I would say is there's been a lot of talk about stablecoins this year because we had the big crypto crash. And whenever that happens, we tend to see some disruptions, I guess, in the pegs of a lot of stablecoins. And of course the famous example this year was, well, there were two, but we had the algorithmic stablecoin, Terra/Luna, which basically crashed and died, but we also had Tether and there are lots of questions swirling around Tether whether or not it can hold its peg. But of course, those are only two stablecoins within a very vast ecosystem of stablecoins. And today we're going to be talking about another one.
Joe : (02:27)
Yep. We are. And so, you know, Tether is the biggest stablecoin that's out there, but close on its heels and maybe even more important in the world of DeFi, is USD coin, USDC, which is issued by the company, Circle. And it's extremely powerful. It's really big, it's growing in influence. It may surpass Tether very soon or very plausibly at some point. So I'm very excited to say that we have the founder, the co-founder and CEO of Circle on the, on the podcast as our guest, Jeremy Allaire. Thank you so much for joining us.
Jeremy Allaire: (03:04)
Thank you guys. Super excited to be here.
Joe : (03:06)
I'm really excited about this conversation, becauseI just have like there's so many questions, so much interest in stablecoins, but to start off, what is Circle and how does Circle make money?
Jeremy : (03:17)
Yeah, so first of all, just a very quick backdrop. We started Circle, I co-founded Circle nine years ago and the basic idea was, and my background before Circle was starting internet software platform companies, software infrastructure companies, working in areas like delivering software on the internet, delivering communications on the internet, always interested in how public internet infrastructure could change the way certain things happen. Like now you guys do this podcast instead of just writing. So I was really drawn into crypto technology and what this was 10 years ago and then crystallized the ideas behind Circle nine years ago. And it was actually interesting hearing your introductory remarks because when we started, it was actually, you know, was right when the federal government said, ‘Hey, if you want to interact between the banking system and these virtual assets, you gotta be regulated as a money transmission company.’
And that was the first regulation, actually was then. And that's when Silk Road was taken down. And, but you know, we were coming into this with this idea, which at the time we called a hybrid model of digital currency. And the idea was how could we take what we think of as traditional money – i.e. government debt money and, and sort of represent that as a digital currency, but operate it on these new public protocols, on these new public internet infrastructures. Because I had sort of seen these public infrastructures enable free global communications and seamless distribution of software to any internet connected device. And you know, all these transformations have happened in data software and media communications. And I thought, wow, if you had public infrastructure that's all built on open source and anyone can run the nodes and you could have a way to provably represent something and transact it directly between nodes on the internet, that would be really powerful.
So we got this idea of a hybrid model that connected the traditional banking system to these new public blockchain rails and infrastructure. And so we were always pursuing that, first with the consumer app, which tried to do it by building on top of the Bitcoin network, which was not a great idea, just because Bitcoin didn't evolve. So back in 2013, you know, the idea was, ‘oh, Bitcoin's first mover, there's a lot of open source developers. There's going to add a lot of capabilities back.’ Then there was this idea of ‘Hey, you could issue other assets on top of it.’ And you could extend its programming model to support more sophisticated programming and this idea of programmable money, which was really a motivation behind Circle, but it sort of struggled and it went a different direction.
Basically the technology was really, you know, there was sort of an ideological kind of framing of that. And then the sort of second generation of blockchain technology emerged in the form of Ethereum. And that actually created the building blocks where we could actually create a protocol for dollars on the internet. And that gave birth to USDC, which you referenced, but fundamentally Circle -- just to come back to your core question -- we are a financial platform company. We're regulated in the United States. We're regulated in other parts of the world as well. And we operate this stablecoin market infrastructure known as USDC. We also just recently introduced a euro stable oin called Euro Coin or EUROC and this stablecoin market infrastructure. We sort of face the market on what I'll call a wholesale or institutional level. And so lots of other companies can connect and build on top of it and we issue and operate this.
And we also alongside that run a set of services that are really for businesses, developers, startups, fintechs, others that want to really integrate this kind of technology into their own operations in different ways. But fundamentally, you know, the 55 billion USDC in circulation are close to that today. You know, we generate interest income from those. And so in the current rate environment, that's significant. And then we have these other kind of what we call transaction and Treasury services and crypto services that are kind of financial infrastructure as a service that we also monetize.
Tracy : (07:34)
So you mentioned the idea of being able to send and verify transactions through internet nodes as being very, very powerful. Can you explain that a little bit more? Because you know, when I look at financial services today, if I want to deposit my money, I can do it in a bank. I can put it in a money market fund. If I want to send money, I can send it through a bank. And, you know, I think we'd all agree that might not be the most efficient way of doing it, but I can also send money through something like PayPal. So what exactly is the value-add here from sending money via the blockchain, via Ethereum in the case of Circle? What are we adding and how does it differentiate itself from traditional financial services?
Jeremy : (08:21)
Yeah. So I think it kind of come back to a few things that are kind of first principles that we've been going after. I think the first is the internet itself, you know, is essentially this collection of open protocols that anyone can connect to. And as long as your computer can speak to those protocols, you can do a lot of things. You can have direct peer-to-peer communications. You can put a piece of software on a server and then anyone with a browser can connect to that software. So it provides software distribution. It provides protocols for sending messages, emails, text messages, other things. So all these protocols exist and alongside those, there's what is often referred to as the payload of those protocols. So there's sort of different types of data. So the internet has basic, you know, data -- zeros and ones, and it has more structured standard forms of data like an MP4 audio file or a piece of content on the web or all these different types of formats.
But the internet up until roughly 10 years ago, lacked any protocols that allowed you to directly represent value -- to directly, in an open protocol -- and this is the key concept in using an open protocol -- to exchange that value. There was no built in data type on the internet for money. And so there's obviously, with the advent of cryptographic record keeping and effectively these kind of provable distributed ledger systems, you now actually have a building block that is on the public internet that allows people to represent incorruptible incontrovertible data. And that's what money is. It's a record keeping system, and it's a way to sort of adjust the entries of that. You've never had that on the public internet. So along comes something like Bitcoin, which is a native form of money on the internet.
And so naturally the next kind of logical step was well, what about if we could take the fundamental powers of that cryptographic money, which is accessible to any internet-connected device that can transact at the speed of the internet with very high security, assurances and privacy assurances with theoretically the ability to over time drive the cost of confirming and settling with finality those transactions, to something approaching zero? Well, then that becomes incredibly powerful. That becomes as powerful as when, you know, software made voice communications free on the internet. So what if you could actually have protocols that could represent what we think of as a dollar, and we'll come back to that because that gets into a lot of what makes a stablecoin stable? What is money? What are dollars? All that fun stuff. But you know, if you could actually have that and have a public protocol, like we have HTTP for the web, anyone can connect to it.
We can exchange data. It's given us all the world's knowledge instantly at effectively no cost. What if we could have a protocol for dollars and euros and pounds and other currencies, but let's just start with dollars, and make that accessible so that any person, any entity, and any software developer can directly transact those over the public internet, and doing it with all those kind of built-in features. So the way I put it is the existing financial system doesn't have internet superpowers. And now we have through public blockchain infrastructure and mechanisms like stablecoins, we now actually have dollars with internet superpowers, and that's really exciting for a whole host of reasons.
Joe : (12:27)
So I want to dive into a bunch of those questions and some of the opportunities. Before I do, I want to take care of one sort of, maybe it's a housekeeping question, or a sort of nuts and bolt question, but are you still going public via CND? Is that still on?
Jeremy : (12:44)
Yes, very much so. So we are in registration with the SEC. We initially announced that about a year ago and in February, because the sort of initially announced deal had a sort of time it had to be completed in, we were not going to hit that exact time. We kind of renegotiated the deal, and did what I like to call a re-SPAC. So we re-SPACed instead of de-SPACed. So, we re-SPACed and I think on a note-worthy basis, the value of the company went up by a hundred percent, which is not what you've typically seen in SPAC deals. They've typically, in fact almost universally, gone the opposite direction, but that was, we moved from a $4.5 billion valuation to a $9 billion valuation. And our financial outlook, you know, sort of had materially improved.
And so that was sort of happening, but we did a couple of other things. One was, you know, most SPACs also have a fundraise attached to them called a pipe. And we had originally done about a $400 million pipe, and that's a conditional financing. Once the transaction completes, then you get the money. We eliminated that. We said there's no cash condition. We're going to eliminate the pipe. But instead we wanted the ability to raise capital privately because we had a lot of interest in the company. And so why wait another six, nine months or whatever it was. And so about a month or so after the re-SPAC, we announced a $400 million financing with BlackRock and Fidelity and Marshall Wace. And so that was a private financing. So they purchased equity in the company privately, but we are, you know, in our SEC comment and review cycle. And we anticipate de-SPACing in Q4, that's the current thinking right now.
Tracy : (14:33)
Given the criticism around a lot of specs at the moment, do you kind of wish that maybe you you'd considered another venue for raising money, or like, how do you feel about the process in retrospect?
Jeremy : (14:45)
Well, it's interesting is that, you know, we made a decision that we wanted to be a public listed company. We also, prior to doing our SPAC transaction had raised $450 million in a private fundraise. And then we've now just, you know, recently raised this $400 million and we have a kind of robust financial outlook as well. So the capital raise wasn't really the essence of it. We wanted to become a public company. And at the time the SPAC, de-SPAC model seemed like an efficient way to become a public company. In retrospect, a crypto company in a novel new industry, plus a renewed amount of scrutiny on SPACs, you know, 20/20 hindsight you could say, well, maybe that wasn't the right thing, but I think no matter what, because of the novelty of our business and the nature of our business, right, it's just a longer review cycle to kind of become a listed company, which I think is totally appropriate, because it's a whole bunch of different types of accounting issues and risk issues and disclosures and the like. And so the bottom line for us is we wanted to become a public company.
We think as a kind of financial infrastructure company that lots of other people are building on top of, it’s actually really important to have that level of transparency, visibility, assurance, accountability. And that's what's really important for us at the end of the day. And so we're totally committed to that. And so, you know, in a sense, because we were able to restructure even the deal that we had in ways that were, I think very favorable for the company, we were like, let's just continue down that path and just see it through.
Joe : (16:23)
There's a lot of flavors of stablecoin. So I want to get into, like, what even is a stablecoin? But as Tracy mentioned in the intro this year, we've seen the collapse of the Terra stablecoin. There's always scrutiny about Tether. But, you know, in thinking about how this is going to evolve, I have sort of a two part question on regulation, but A) what is a stablecoin? Like what is the closest thing? Some people compare them to money market funds. What is a stablecoin? And then because there are so many flavors and because, you know, I could be an anonymous person on the internet based anywhere in the world and create some sort of algorithmic-based stablecoin or DeFi-based stablecoin where I hold other crypto assets and Maker and Dai is an example of that, is there any prospect of a unified stablecoin regulation that actually captures all these definitions and who should be responsible if someone in the US goes onto an exchange and buys something that's called a stablecoin, who should be responsible for ensuring that, well, it stays stable.
Jeremy : (17:25)
Yeah. There's a lot of topics in there. So I think, and I think we'll get to the regulatory piece and sort of, you know, how, you know, the average Joe, no pun intended, can differentiate all these things, you know, as well. And how do regulators differentiate these? I think the first thing I would say is we didn't pick the name ‘stablecoin.’ You know, that was sort of like, the market came up with that concept. And what's interesting is if you kind of go through Circle’s own, you know, marketing and how we look at this, we keep talking about dollar digital currencies or fiat digital currencies, as opposed to the word ‘stablecoin.’ And I'm not sure if the word stablecoin will be here forever. Although I didn't think the phrase ‘worldwide web’ was the best thing to describe this great internet thing that we were building, but it persisted.
So whatever the name, it does then come into a ‘well, what is this?’ And how do you differentiate these things? I think the really important thing to understand about the approach that we took, which was, you know, prior to launching USDC, we became broadly regulated in the United States as an electronic money transmitter. And that is a tried and true framework for payment system innovation in the United States, virtually every contemporary electronic payment system innovation, whether that be, you know, things that maybe don't feel that innovative now, like, you know, prepaid debit cards, but then PayPal Cash App, Venmo, Apple Pay, Stripe itself. In many of the services it provides, all kind of fit under this kind of framework.
And under that is the framework that USDC is regulated. And so, you know, despite the, I think the representation that these are unregulated, it's just not true. We've been regulated since day one on this, and money transmission regulation is designed to protect individuals. So that, and it's the same kind of framework, it's called e-money in Europe, and similar, you know, kind of regulations in Asia and Japan and others. But basically we are required by law to hold a one-for-one reserve against that electronic money instrument. We have to do it in segregated accounts that are not accessible to the company for its own operations, which are segregated in the event of something like an insolvency. So there's a framework that's there for this kind of money. And it's used every day. We all use it every day.
And so that does exist and that is a reasonable framework for these. But I think it is a new arena and there's a different level of transparency that's required. Like, no one's asking PayPal right now ‘Hey, that $35 billion of balances that hang out in PayPal, like, what are you invested in? Are you taking risks?’ No one asks that because they understand that it's a regulated company that is not allowed to do much beyond just like cash and cash equivalents, and sort of short-term stuff, but because this is crypto and because these are these digital tokens that people are holding and because of the history of hacks and thefts and fraud and all the other stuff, people are paranoid -- justifiably. And so there's just a lot more scrutiny on these things. And I think that's appropriate. We actually just recently started publishing and we're doing it monthly. And we intend to do it daily. Literally the CUSIPS, the serial numbers of every single three-month or less Treasury bill that we hold. So people literally could see what is the risk of this.
And so, you know, that's sort of a framework that's there now, when you zoom out and you say, wow, there's all these different things. From a regulatory perspective, there has been an attempt and it started a couple years ago when the G-7 and then the G-20 and the financial stability board, these sort of supernational groups of regulators said, ‘Hey, we need a framework’ to regulate what they called global stablecoins. And then they kind of came up, ‘here's our policy recommendations’. And then that kind of dropped down to the major G-20 countries. And then each country's kind of been working on this.
And the recommendations in the US came out last fall, which was the PWG report on stablecoins. And they said, we need to regulate these. We need to regulate them within the kind of payment and prudential supervision standards of the financial system. And we need to do that. They said, quote, unquote, ‘urgently’, because there's something like a run risk that could happen, or these things could get much bigger and guess what happened? There was a collapse of one of these so-called stablecoins and that, you know, emphasized it. Now Congress is really working on this very intently and they were before the Terra collapse, like bipartisan effort in the house, in the Senate and others working on this. And now there's a definition. And, you know, there's that, you know, a rumored bill, although I think it's pretty confirmed at this point of a payment stablecoin act.
So it's clearly defining these are for payments. They exist under the payment system, banking, prudential supervision framework, and, you know, issuers of these have to sit under, will have to, presumably if these laws come into effect, have to sit under that kind of registration and supervision framework, and you're seeing similar things emerge in the UK, in Singapore, have just gone into law in the EU. There's a whole framework for stablecoins, which will go into effect in 2024. And so kind of the international regulatory community came up with the framework. It's kind of finding its way down into parliaments and congresses and others. And it's starting to define these things.
Now, I think what you'll end up with is you're going to have, you know, very clearly defined, you know, payment infrastructure type stablecoins like USDC I think clearly falls in that. And then you're going to have other things that are probably classified in other ways, they might be synthetic derivatives. They might be classified as securities depending on what the activity is. And there may be some categories which regulators are just still scratching their heads on and are not really comfortable regulating, but may put a perimeter around their use in markets. And so I would not be surprised if, you know, markets regulators in different markets said, you know, you can't put an algorithm stable point on your exchange and commingle that with these other things. And the analogy that I like to use is, you know, if you go into a supermarket and you go down one of the aisles and you've got rat poison and baby food next to each other, and they're kind of positioned similarly, that's a real problem. And so market conduct is a real issue and now regulators are focused a lot more on that. And so I think you'll see some things emerge which make it clearer for people.
Tracy : (24:28)
So I think one of the confusing things about stablecoins to lots of people, is it's kind of hard to disaggregate technological innovation from regulatory arbitrage. And you talked about, you know, the power of internet-powered dollars. So I guess my question is A) what changes in the world once we have internet-powered dollars or fiat digital currency, whatever you want to call it. And B) can you talk a little bit more about that regulatory arbitrage idea? Because I think there is a sense that, you know, if I send money through a bank, sure the bank probably has creaky infrastructure and is using like some old coding language that no one else does anymore. And it takes ages to send any money. But on the other hand, part of the reason it takes ages to send money might also be that they're doing KYC on their remittances. And they're checking to make sure that you're not sending money to a terrorist or something like that. So how do you sort of disaggregate those two things, the innovation versus the arbitrage criticism?
Jeremy : (25:40)
Yeah, so, I mean, there are a bunch of pieces to that. I think the first is, well, let's just talk about the innovation side first, which is the ability to have a representation of a dollar that you can directly transact with any counterparty in the world at a fraction of a second with settlement finality, with very high security and privacy assurances, with significant throughput with a cost that is, you know, a nickel down to a 10th of a penny, is really powerful. That does not exist in the legacy financial system. And so everything from what we think of as remittances, which is, you know, beaming value amongst businesses or individuals around the world to the entire industry of payments in the world, which is, effectively interchange or interchange plus where businesses are paying effectively in many cases, two or three of their gross sales for the right to receive a digital payment, to even the behavior of markets themselves.
So capital markets, the ability for collateral to settle, the ability for people to take positions in markets and the ability to kind of move between activities in markets. The, you know, we saw this with various things that happened in the plumbing of settlement that we're creating all kinds of issues for Robinhood and other players. One of the things that's really interesting about stablecoins is that the customers who I consider to be the most demanding customers in the world for dollar market infrastructure are avid users of stablecoins. And those are electronic markets firms, electronic markets, firms want capital efficiency, speed settlement assurance, and these are like critical to them and how they operate. And they love this infrastructure, because it's so much superior to the existing correspondent banking system. So even in the depth and the bowels of capital markets and the functioning of capital markets, I believe stablecoins can play a really big role.
So it touches everything from retail payments to business payments, to how cash is managed for corporations, to the functioning of markets and capital markets. I think it can play a very significant role in reducing cost, increasing speed, increasing transparency, auditability, because of the nature of blockchains. And that's not to even begin to talk about what got me really excited about this in the first place, which is this idea of having programmable dollars on the internet or having programmable money. There's never been a mechanism where you can write tamper-resistant software that codifies economic contracts that can execute between counterparties directly on the internet, whether it's a business or a labor relationship or other. And we're starting to see that as a really meaningful thing. And DeFi is an example of that. And we could come back to that, which is the power of programmable money is when you start to see protocols developed that are building blocks and they're kind of like Lego bricks that people are putting together for the use of money.
So there's a lot that's there. Now the regulatory arbitrage question I think is a great one and there's always been this issue. And I think it's a really vexing issue. And I don't think this is just a, ‘Hey, we're just like waving our hands over here so that everyone can have, you know, some new ultra libertarian system of money.’ That's, I mean, there certainly are people who are doing that, but I think at the core, we've not dealt with how the implications of money on the public internet and the implicit, you know, the issue from a regulatory perspective is, well, governments actually care a lot about, you know, the safety and soundness of those instruments, which we kind of touched on a little bit. They also care about essentially the social contract that financial intermediaries have and the social contract that they have is that they are agents of law enforcement and they have a responsibility to police transactions and report them to the government in most parts of the world.
And so can you do that? And the answer is, yes, you can, but the answer isn't, ‘well, let's just use all the gum and baling wire of the existing financial system.’ It's actually, how do we actually use the building blocks of cryptography to enable identity, proofs of identity, proofs about individuals and entities on these networks and actually improve privacy, improve security, which are important, and important values that we should uphold, but also ensure that these kinds of compliance obligations can be met. And you're seeing that already happening today. You're seeing companies that can operate with, you know, a hundred million plus consumers that are on their platforms with very, very detailed compliance infrastructure. And we certainly do that in an institutional level. So I think it's a kind of false dichotomy in a sense.
Joe : (30:56)
I want to ask you a question specifically about that and this idea that it's like, okay, you know, and again, I sort of mentioned it in the intro, some of these getting away from some of the sort of pure libertarian cypher punk roots of crypto, but you know, if the government comes to you, Circle, and says, ‘you know what, it looks like this person who holds a bunch of USDC is a terrorist or a suspected terrorist or a drug dealer’ or something like that, I presume, okay, you could freeze those coins easily. How do you deal with that internationally? You know, what if say, and just throwing it out, the UK government wants you to freeze the accounts of someone living in the US or the Turkish government, an activist in the US. How do you deal with requests to freeze wallets and comply with governments and regulatory regimes all over the world?
Jeremy : (31:50)
It's a great question. And I think many of these scenarios have not been pressure tested. So USDC as an infrastructure, and Circles obligations specifically, we have obligations as a regulated financial institution here in the United States. We are subject to the laws of the United States, any transactions that we are directly involved in, where we are in fact, intermediating that transaction, we have very clear statutory obligations to block, to stop, to report, to do all these things. And we have a long track record of working constructively with law enforcement, including law enforcement requests from around the world. Now, when it comes to USDC in circulation, there's a very different bar there. And, you know, we are not, responsible for all the activity of someone who's using a digital currency in every corner of the world.
There are regulations, however, in markets all around the world, and these have been established through international anti-money laundering and countering terrorism, finance standards, organizations like FATF, the Financial Action Task Force. There are standards now where if you are in the business of intermediating digital asset transactions, you have to register in your country. You have to have demonstrated anti-money laundering and CTF programs. You are under supervision and inspection, and that's happening all over the world. And they're sort of, under FATF there's kind of like no place to hide. And that is now uniform, that's being rolled out everywhere. And so, as an individual, you know, if you want to operate in this new world of digital assets, you're increasingly operating in a world where the intermediaries are having to meet these statutory requirements.
We do have a certain obligation though, which is we have the ability to under what we would deem to be a binding court order from a competent jurisdiction in the US, we have the ability to block an address from transacting. And that has happened, I believe, 18 times in the history of USDC and the vast majority of those, in fact, I think nearly all of those are specific addresses that the Office of Foreign Asset Control, OFAC, has deemed to be sanctioned addresses on the blockchain. And so when what's called the SDN list, the Sanctions Named Entity list is updated, we get a real time view of that. And if that happens, then we have a sort of statutory obligation to prevent transactions from happening on that. Now I can imagine, as you just did, scenarios in the future, which are going to pressure test some of this, and I think it raises very complex questions. I think these are questions that are not dissimilar from questions raised over should Apple provide governments with a backdoor to iPhones?
They're kind of fundamental, kind of financial integrity issues. And this is an opportunity for policy makers everywhere in the world, as regulations come into this space, to really figure out what are the inherent values of an internet financial system, and what obligations do different entities have. And the preservation of security and privacy are very important in information and data and communications, but there are boundaries to that. And what are those boundaries and how are those going to be tested? So it's still the early innings on this, to be clear. And I don't pretend to have all the answers either.
Tracy : (35:56)
So setting aside regulation for a second, and I realize that's kind of a big thing to set aside, but there is this sort of other existential threat hovering over stablecoins, which is competition from central banks. So central banks considering issuing their own digital currencies in one way or another. How would the successful launch of a CBDC, how would that affect your business?
Jeremy : (36:23)
Yeah, I would kind of maybe reframe it a bit, and this is certainly a topic that falls into the frequently asked questions, topics, in our world. I think today, central banks and the regulators that are embedded in central banks, their highest priority right now is putting in place supervisory frameworks for private sector digital currency activity, and innovation in the form of stablecoins. And I think you've seen this in the testimony of Chairman Powell and Secretary Yellen, who've said private sector stablecoins bring a lot, there's a lot of value. We need to have a clear regulatory framework. And I think increasingly the view is that private sector innovation is happening now, sort of open internet infrastructure in the form of blockchain to digital assets is a very significant dynamic economic sector that is growing and is a source of competitiveness increasingly around the world.
And the focus is on let's work with this private sector and public infrastructure model and develop that. Now there continues to be what I'll kind of characterize as research in the realm of CBDC, it's not clear to me that many central banks ultimately want to be in the business of providing retail payment systems. It is not a fundamental core competency. And in fact, I think one could argue that the vast majority of individuals and entities and businesses would rather that there be an air gap between their wallet or their pocketbook and their money and the government. And that is actually how 95% of money and circulation works today. It's intermediated. And so I think that would continue, Now, could there be wholesale upgrades to central bank clearing systems that use cryptographic money and distributed ledger technology? Yes. You know, as I like to say, the dollar is actually a cluster of Oracle databases running on microcomputers.
That is actually what the architecture of the dollar is. You could really benefit from upgrading that, like there's a better maybe wholesale architecture. And in fact, a lot of the buzz now is like wholesale CBDC. Like maybe there's a way to do something that could work between central banks and so on. And actually, you could make a pretty good argument for like modernizing infrastructure. But I think our view and granted, I am certainly biased in this, but our view is that the velocity of technical innovation that's happening right now in blockchain infrastructure and in the delivery of this technology out to kind of global scale users on the internet and businesses on internet that's like a here and now thing, it's happening. It's going to scale out in the next few years.
That's why regulators are so focused in on it, because this could become internet scale in the next few years. And that is how digital currency is going to become something that people are using in everyday life. And it's interesting, you know, if you look even, you know, recently I think there was a report from Japan where the central bank in Japan basically determined that there's just no interest in a CBDC from the government, but at the same time, there are startups in the digital asset space and certainly other banks that are launching yen stablecoin projects. And so I think that this is something you're going to see play out more, especially over the next year or two, which is private sector activity in this space is going to grow. This is, you know, would you like to go back to Ma Bell or do you want, you know, Skype and Signal and you know, kind of software on the internet for how you're doing communications and I think it's a similar kind of dynamic that will play out here.
Joe : (40:19)
Yeah. I'm kind of convinced that the whole CBDC conversation is just an excuse for regulators and central bankers to sound interesting on panels. But anyway, sorry to be so cynical, I want to move on, you know, you mentioned that the primary public blockchain over which U DC has traded is Ethereum, but not just on Ethereum. You're actually, I think, I'm looking at your website, on nine chains right now, Algorand and Solana and Tron, and some of these others, Avalanche. And presumably more. I want to ask, it's been a while since there's been a really big contentious chain split in the crypto world. And the biggest one that really was a big fight was Bitcoin and Bitcoin Cash. There was also Ethereum and Ethereum Classic, that was before you came on the scene. What would you do if there's another one?
And it's possible that with Ethereum, we could see it because with the merge happening there could theoretically be new chains where the new proof of work, of a new proof of stake chain. You know, in past forks, maybe not a big deal because everyone had the same asset represented on both chains and it doesn't really matter. You know, you just see which one wins out. I would assume you have to choose. And people have written about this. You could be in a position where you Circle are the kingmaker of a fork, deciding which chain someone's USDC holdings actually have claim to the dollars in your bank account. And so with this Ethereum merge happening in some of the ambiguity about that and the possibility for contentious split, maybe in some of these other chains, how do you think of your role as a king maker and who gets the dollars?
Jeremy : (41:57)
It's a very nuanced issue in question, obviously we look very clearly at the broad community and the activity of that community. Where is the leadership from a technical perspective in that community? Where are the major projects and protocols and applications and infrastructure providers and tooling companies and everyone, what are they focused on? And we want to be aligned with the overwhelming kind of consensus in the community. Now we have to make decisions that are rooted in safety, soundness, security. So those are paramount. We can't do anything that would jeopardize the safety or security of the USDC as a protocol. And so for example, if the merge went forward and then it failed and it needed to be rolled back, these are things we have to have very, very, very detailed operational playbooks that are deeply aligned, and where we're working in concert with all of the other actors in the ecosystem during that process.
And that's exactly what we're doing, without getting into all the details. So there's a kind of operational risk management piece of this and fundamental safety sound and security piece of this. So those are the most important things, but overall, the focus is on, you know, where is that community going? And in the case of Ethereum, it's pretty clear where that is. And it's not possible for us to kind of, like you said, it's not possible for us to have, you know, USDC on these, you know, kind of forked itself, right? You can't do that. But if, for example, there's a large community of miners and developers and others that are very committed to a proof of work Ethereum and sort of Ethereum Classic continues to actually grow and flourishes and so on, we would analyze that as a new chain, is that a chain that has a robust developer ecosystem? Is that a chain where there's going to be more and more people building applications, and we'd evaluate that against a whole set of criteria that we'd use to evaluate any new chain, but that would be treated completely as a new chain. So, you know, we're committed to the merge. We think it's a very, very important infrastructure improvement for Ethereum, but obviously we have to look at it first and foremost, from the perspective of fundamental safety, soundness, security.
Tracy : (44:32)
So since Joe asked you a technical question about forks, I'm going to ask you a technical question about Treasuries. So, you know, you said earlier in the conversation that Circle is now publishing its reserves on a regular basis, and you're doing it with a lot of granular detail, including publishing the CUSIPs and a big portion of your holdings is Treasury bonds, and t-bills in particular. And I'm just wondering, the recent volatility that we've seen in the market for US government bonds, the jump in yields, how does that impact the backing for USDC, and how do you sort of manage that type of volatility?
Jeremy : (45:15)
So at the short end, which is basically, you know, three months or less, is very, very different than, you know, two years, five years, 10 years, etc. So obviously we focus on the most liquid, the most stable, components of that, at the end of the day. However, because we are buying short-term government obligations from the government, effectively, that are due at face value, unless you believe that the US government itself is not going to pay those bonds in the next month or two months or three months at the outer limit, you know, that's really your fundamental risk, right? That's what you're testing for, how, how something might trade in the market, is different than when the actual obligation comes due and you get paid the face value plus interest. I mean, that's the way those work.
And so we are effectively consuming that government obligation risk, that short term government obligation risk. We, you know, if the price of a three-month t-bill trades in the market differently, I think the question would be if we were forced to redeem a hundred percent of the reserves in a day, could we do that? And the answer is yes, with the exception of the bank settlement system itself, which can't do that. And so we do daily stress testing to obviously understand what that, you know, those anomalies would be. And we ensure that we are able to withstand something like that, both with cash and with those obligations. But I think that the important thing is, you know, the way that USDC is structured today as an electronic money instrument, under, you know, money, transmission statutes with the particular reserve model, you're talking about government default risk in a 90 day window. I mean, that's really what you have to hone in on. And if that's the case, we probably have bigger issues than whether USDC can redeem a hundred percent.
Joe : (47:21)
I have one very short question. Are you a customer, or sorry, a client or a trading partner of the primary dealers, is that how you get your paper?
Jeremy : (47:29)
So what we have publicly disclosed is that BlackRock is the asset manager that administers the buying and selling of US government Treasuries. And so BlackRock might face the direct Treasury auctions or the market as a whole. And so BlackRock access our asset manager and Bank of New York Mellon is the sole custodian for those securities.
Joe : (47:56)
One final sort of broader question is I sort of get why stablecoins are attractive, particularly for DeFi type things in which the programability of the economic relationship is distinct. And maybe that's hard to do in a sort of open permissionless way with a dollar that I might hold with PayPal or something like that. I'm curious whether there's any organic retail demand actually for stablecoins as payments. Is this a use case that's actually taken off? And it seems like there's a number of drawbacks with a stablecoin. You have to buy them. I don't get interest if I hold USDC, at least not natively, I might have to take some additional risk. And also with like dollar payments or traditional fiat payments, I often get rewards and people get frequent flyer miles or cash back, or things like that, which again, I don't think is the case with, stablecoins. Is there a retail proposition or is it primarily institutional/specific programmable things like DeFi in which the growth is going to come?
Jeremy : (49:02)
In our experience, we are seeing rapidly evolving and expanding use cases. So we're seeing use cases in large corporate enterprises that are looking at this as a way to make payouts to contractors, suppliers, and others internationally, because they could do it more efficiently and reach more places. We have lots and lots of companies in emerging markets that are building kind of neobank-like products where they want a fast, cheap dollar settlement mechanism that is ultimately liquid to the US dollar banking system. We are seeing some of the biggest payments companies in the world, Visa, MasterCard, Stripe, Worldpay, MoneyGram, actually embedding and using USDC as a payment settlement mechanism itself. So that's more at a sort of settlement infrastructure level. We are absolutely seeing interest from major retail type companies, but there's still a lot of pieces that are missing for that to really take hold.
So my sort of high level view on this is, you know, there's sort of the infrastructure level, meaning we need these blockchains to reliably support very high throughput. We're actually right on the cusp of that. We're seeing, you know, blockchains that can do Visa-scale throughput, but we're seeing more and more of that infrastructure there. So we need to see that and that's sort of a happening now. It's kind of like going from dial-up to broadband, the broadband is getting rolled out as we speak and then the applications follow. We also need to solve some of the user experience issues. And so the user experience of digital wallets that make payments with stablecoins, a lot of the digital wallets, the orientation of those is still towards people who are buying or trading or using DeFi. And what we really need are the wallet apps that we all know and love to just allow this as a payment rail. And that will unlock more of that consumer piece.
But from a business perspective, it's really interesting because on the business side, you know, big retailers, e-commerce firms and lots of others, they have a very big pain point because you're talking about razor thin gross margins in those businesses. And you're looking at their cost of digital payment acceptance is a huge piece, when you look at it. So there's a lot of incentive to see something like stablecoins work at scale. And so I think you'll see more of that and you have to solve problems like that effectively. How does affinity and loyalty and rewards work with digital wallets, with crypto native digital wallets? And you're starting to see really interesting experimentation with the technology known as NFTs, which are a mechanism of entitlement and affinity. And that technology combined with stablecoins actually starts to give you some building blocks to really actually innovate in the delivery of very strong consumer value propositions, but it's still early. So I don't like to oversell on that because I still think we have another couple years before we start to see that happening in a large scale way.
Joe : (52:07)
All right. Well, Jeremy Allaire, CEO of Circle, you know, there's so many interesting things that are raised by this conversation. We’ve got to have you back sometime, a fascinating conversation about how money and finance and payments actually work. So really appreciate you coming on the podcast.
Jeremy : (52:28)
My pleasure, really enjoyed the conversation.
Tracy: (52:30)
Thanks so much, Jeremy. That was great.
Joe : (52:47)
So I think that at the current trajectory, Tracy, Jeremy and Circle is clearly on pace to be like one of the most important players in crypto. Look at the biggest coins right now. And I'm looking at CoinGecko, obviously Bitcoin, Ethereum, Tether -- a whole sort of separate conversation. And then there's USDC coin. And it's the only one of those big ones that's like heavily regulated, it's growing rapidly. It's at the core of sort of DeFi stuff. One way or another, this is like a really important player.
Tracy : (53:23)
Well, I think it gets back to the technological innovation versus regulatory arbitrage question, which is if the stablecoins using blockchain technology are genuinely a technological innovation of some sort, then in some sense they should welcome regulation, right? Because it would give everyone a lot more comfort. People wouldn't be as worried about what's actually backing the stablecoins and things like that. Although I know you made the point earlier, it is a far cry from the origins of cryptocurrency and the sort of anti-government sentiment of Bitcoin.
Joe : (54:01)
I do think that, so it's like, okay, what are the sort of characteristics of crypto that are maintained even in a more regulated situation? And I think one of the most compelling to me is this idea of sort of composability and programmability. And so yes, if you have your money, if you enter the crypto space through a stablecoin like USDC, then there's all sorts of, you know, anti-money laundering hoops that you have to go through and they verify who you are and theoretically they can freeze your coins. So then what do you have? You know, I think in theory, it gets back to this idea, it’s like, well, could someone program a bank that exists on Ethereum that then anyone can interact with once they're in the ecosystem? And of course we haven't seen that yet. I mean, as you know, it's all we have, we don't have banks yet. We just have Sam Bankman-Fried’s boxes. But if something like that became an actual sort of like useful economic enterprise beyond speculation, then the idea of like the stablecoin issuer as the gateway to that such that the bank itself doesn't have to then conduct its own, you know, sort of regulatory rails, then maybe that is the case for crypto in some way.
Tracy : (55:21)
It does feel a little bit like circular to me though -- again, no pun intended – because you know, it starts with ‘let's get away from the bank’s and then it goes back to ‘let's get a bank charter and go right back to the banks.’
Joe : (55:34)
Right. Exactly. It's like, we're just back at the banks. It's USD, it’s dolla,r it's fiat currency, it's held in the bank. So then what's left is like theoretically, this programmability and this idea that maybe because it's on an open blockchain and anyone can write a piece of software that lives on Ethereum, then maybe that opens up new economic types of relationships that couldn't more easily be done via fiat currency on Oracle databases.
Tracy : (56:01)
Yeah. But then of course the question is why don't the banks just do it, right? Like JPMorgan can start issuing its own stablecoin on blockchain?
Joe : (56:09)
Yeah. And JP Morgan could theoretically create its own Ethereum clone so that entities could write programs, because there's lots of, you know, the Ethereum virtual machine, there are a lot of Ethereum -like chains out there. Why not JPMorgan chain that competes with Ethereum, upon which they can run JPM Coin? If this keeps growing, you have to imagine the impulse on the banks. It's like they are going to want a piece of that sort of the layer one action, so to speak.
Tracy : (56:38)
Well anyway, I enjoyed that conversation. I think we should do more on stablecoins because it does throw up a lot of interesting questions, not just about the design of the financial system, but basically about the way money functions. Right?
Joe : (56:51)
Yeah. And you know, I do think the chain split question, and maybe it won't be a big deal with the coming Ethereum merge, but, you know, our friend who we had on after the Terra/Luna collapsed, Galois Capital has been tweeting a lot about howhe thinks there is more ambiguity with the coming Ethereum merge than perhaps the market appreciates and the possibility for multiple chains, maybe three chains to come out of that. And yes, you could say, okay, all the activity is here on what Vitalik [Buterin] calls the Main E chain, but there could be some contention and it could be interesting, you know, USDC would certainly be the king makers, so to speak, where they put the money, you know, they're so big, where they put the money is probably going to be the chain that unambiguously wins.
Tracy : (57:36)
I sense another episode coming up on interchangeability fairly soon as well.
Joe : (57:40)
And we really have got to do something on the merge and Ethereums and the switch to proof of work, because there's like, or sorry, the switch to proof of stake because this is a pretty big event that's coming up, supposedly in September.
Tracy : (57:54)
All right, let's do it. Shall we leave it there for now?
Joe : (57:56)
You can follow Jeremy Allaire on Twitter at @jerallaire.