OpenUSD - Bringing the Rest of Fiat Onchain

Sy Taylor  0:09  

Simon, welcome to Tokenized, the show focused on stable coins and the institutional adoption of real world assets that are tokenized. My name is Simon Taiyor, I'm your host for today, author at Fintech Brain Food, head of market dev at Tempo Nokai. Today, he's out seeing clients about a big piece of news, apparently. Apparently, something happened that we might get into in the not too distant future. But fortunately, joining us are two debutantes. First up is Stephen Richardson, who is Chief Strategy Officer and Head of Banking over at Firebox. How you doing, Steven?

Stephen Richardson  0:41  

I'm good, thanks for having me.

Sy Taylor  0:43  

Thank you for being here. Thank you for bearing with the heat and cranking the AC. I know it's hot in New York today, so appreciate you. And also making a debut is Ido Ben Natan, who is the CEO and co-founder of Blockade. How you doing, Ido?

Ido Ben-Natan  0:56  

Doing well, thanks for having me, Simon.

Sy Taylor  0:58  

Thank you again. Lots to get into this week, but before we do, we're going to remind viewers and listeners that views and opinions of our contributors today may be their own and might not reflect those are companies they represent, and please don't take anything we say as tax, legal, or financial advice. Always do your own research, folks. And with that, I don't know if you guys caught the news, but Visa, Mastercard, Stripe, BlackRock, and 140 other companies partnered to launch Open USD, and the company Open Standard behind it. Other companies like Airwallex, Amex, US Bank, BBVA, Standard Chartered, were involved in the launch, and there's some interesting points that came from what this actually is. So, unlike Circle or Tether, the reserves are intended to be shared with distributors almost entirely, versus those companies for whom it's a revenue source, potentially making it more attractive to banks, non-banks, or anybody with distribution. Governance is open and neutral with a separate board of directors and CEO to any one company, meaning no single chain or distributor is particularly advantaged by it. There are no mint and burn fees, so instead of paying five bits or 10 bits when redeeming the stable coins, it's set at zero, and this opens up potentially new use cases when dealing at scale, reserves are held at financial institutions, meaning banks and the asset managers get to benefit from those reserves in some way. And the idea here is that there will be broad acceptance through this distribution network, and that acceptance could be a real key wedge. Zach Abrahams, the CEO of Bridge, will be the interim CEO and the stablecoin will launch natively on Tempo, Solana, Stellar, Polygon, among a handful of others. So, coming to Stephen Fireblocks is a launch partner, and you're a recovering banker, so tell me your views on this one.

Stephen Richardson  2:56  

Yeah, look, I think it's an interesting model. I think we were excited to be a launch partner, you know, as an infrastructure provider, I think our job is to ensure that our clients across the spectrum are able to access different capabilities that come out into the market, right, and what we're seeing from Open USD is a different flavor of the basis of utilizing stable coins with different economic models and kind of different approach at a not a consortium level but a framework level to be able to use this stable coin and I think for us it provides a basis for what we're seeing in the market today which is a really strong traction by payments companies and by financial institutions alike to be able to engage with stable coins and do so in a way that is behind or utilizing a really strong ecosystem, and I think when you look at the initial launch partner basis, it represents a very, very diverse ecosystem, both for US domestic companies, but I think you're seeing a large lot of international companies that are participating at the launch level, even though I think it's focused on the US to start, so I think what we're waiting to see is kind of how this ecosystem evolves outside of the US and how they go through the broader licensing and all those things, but it's, it's very exciting to be a part of this to start.

Sy Taylor  4:15  

Yeah, I actually had the CEO of a remittance company reach out to me and say that it's important to them, how many non-US banks are involved in this, particularly because baked-in off-ramps is a major, major feature, and I know SoCal has been working pretty hard on that level as well. The proof will be in the pudding on, can we do that? Ido, your thoughts on this

Ido Ben-Natan  4:40  

one? Yeah, I think OUSD is just like another step in having many, many more financial institutions, traditional companies just like come in and adopt, you know, on-chain infrastructure to go and kind of process payments, do all sorts of different things. I think that for me the most exciting piece to this is it offers a new kind of. Economic model for how the revenues are distributed from a few to many, right. So it kind of incentivizes the use of stable coins in interesting and different ways, but I think even more exciting than that, it's it's just like the sheer number of companies that are kind of on board and kind of open to the kind of that that further level of distribution, and just like getting more users and and kind of more people embedded in touching some of these different kinds of things.

Sy Taylor  5:24  

I think that's so interesting that, like, some folks - I think Rob Haddock and a few others have pointed out that a list of logos is not necessarily distribution, and there's still a lot of work to do to get that done. The Circle CEO, Jeremy Allaire, put out a tweet saying, obviously, like, a lot of investors have asked him for his thoughts on Open USD, and his point was just paraphrasing here, that stable coins, they have big network effect, and so their strength is that network, and in his second paragraph, he talks about having hit that scale today, and there was something like 80% of transactions volume was going through circle. This is something where they are massive. They're the second largest. This was it. Yeah, in Q 2016 according to third-party analysts, Artemis, who track stablecoin adoption, USDC handled nearly 30 trillion in on-chain transactions, representing 80% of all dollar stablecoins transacted on blockchains, and USDT handled the remaining 20% Obviously, a lot of people using Circle. He also goes on further down to talk about, well, Freemint and Bern. There are structural market realities around the fact that some stable coins impose large redemption fees and have those facilities, but it seems easy to say that one can offer free redeems. However, market reality likely forces other behavior. This can be addressed and is addressed by Circle through contractual mechanisms rather than a blanket fee exemption, and he goes into several other points, like everybody wins in shares. This sounds good in principle, but the reality is quite different today. So-called actually shares most of its income with distribution partners, giving away all of that income is a recipe for starving an infrastructure. And then lastly, he's quite bearish on consortiums. He says a consortium where everybody has a voice, maybe I'm cynical, but how's that going to get anything done? And so you know, we should give Jeremy his flowers here that the Circle team has really largely popularized the idea of a stable coin that is enterprise friendly. I don't know until USDC came along, there was even an enterprise conversation. Ido, your thoughts on Jeremy's pushback here.

Ido Ben-Natan  7:42  

Yeah, I think network effects are real. You think about even like day to day, right? You can't go and use an alternative payment method if the other counterparty is not accepting it, right? And then vice versa, right? If other counterparties are accepting this payment method, then you'll go and do it. And so I agree with Jeremy when he goes and says the fact that one institution or one organization accepts USDC and one other organization can send you a cc times 1000s of other organizations is like a really powerful thing, and I do honestly believe in that. I think he said something else in the tweet, if I recall correctly, where you know, I think like the market cap of stable coins today is like orders of magnitude smaller than what it will be in the future, and so I think both things can be true. The network effects can be real today, and this can be something that grows the pie holistically, because other network effects are true as well. And so I assume the world is like, if you imagine this almost like map of like, where do people use stable coins today in a map in a more abstract sense, not geographically necessarily, but for certain use cases across different organizations, across different things, then where USDC is today is probably pretty sticky, and I believe in that, but it's also probably nowhere near where all those stable coins are going to be in the future.

Sy Taylor  8:56  

I think it's such a great point. My read on Open USD was exactly that, that this is for the payments flows that don't use stablecoins today, not the ones that do. If you're doing it, then it's hard to find the network effects, but all of the money in all of the world is a lot more than stablecoins. I think the other Artemis number that sticks in my brain is the amount of actual payments volume to date on stablecoins is around $400 billion which is not 30 trillion, and that 400 billion is a fraction of a fraction of what Swift does in a single day, of around five to 6 trillion. JP Morgan does 10 trillion per day, like those companies and those networks are really big, but they're not as big as all of the other networks when you combine them, so there's this open interoperable layer I think is going after something rather large if it can execute it. Stephen, your thoughts on Jeremy's comments? Anything that stood out to you?

Stephen Richardson  9:56  

Yeah, look, I think I agree a lot with what Ido said. I mean, at the end of the. A right, I think there's a basis in which we believe a lot of on-chain infrastructure for payments and financial services will continue to grow, right. And so I don't necessarily think that it's a winner-take-all basis. I think if you look at today, Tether covers a lot of like emerging markets use cases across the board, you're seeing USDC for like more corporate payments and traditional financial institutions, and you're, you're seeing kind of this basis for what looks like a very strong framing of folks coming together. I think it's true that, you know, when you look at some of the complications behind operating stable coins, this idea of building global liquidity tends to be one of the biggest challenges that's overlooked, right, and so we've seen plenty of stable coins come in that are backed by very strong players, and they've struggled to gain market adoption, because at the end of the day, the liquidity off of that basis is very, very difficult to maintain and manage, right, and so it'll be interesting for me to see the international players that come in that can basically stop gap that liquidity, right? If you have a set of banks operating across Korea and Japan and Philippines and Vietnam and all of these different places where it's been challenging to manage the dollar-based corridors that basically you've seen Tether and USDC execute really well, whether that's through exchanges or OTC desks or whatever that might be, they've managed to build those distribution and liquidity networks very strongly right now. What I will be interesting is whether or not you know Open USD does that at like what we think is like the crypto native level, right? These OTC desks, these crypto exchanges, whether they try to approach it more from, like, the large scale institutional basis, like banks and financial institutions that have this apparatus and do this work today on traditional fiat pathways, right? And that will be a very interesting dynamic to understand how it shapes out, and I think kind of circle manages the best of both, right? They have banking partners that they have brought on through their direct minting capabilities, and all these different things, they have everything at the exchange level across the board, and they're kind of managing that growth both at an institutional level and at, let's say, a crypto native and further down the chain basis, right. So I think it'll be a very interesting strategic approach to watch over the next few months, right. And understanding how much momentum do they carry by being US-centric first to start, you know, basically because of the licenses and other things, you know, that's kind of what we'll be watching. But to be truthful, like, there was a lot of questions and a lot of interest that we saw by our global client base, in terms of what this means, how they think they should interact with it, and from my perspective, they're going to be different bases of utility as far as those stable coins are concerned, and really you're going to match the use case to the basis of the stable coin to understand how you do utilize it.

Sy Taylor  12:56  

Yeah, 100% Stephen Sokol and Tether are undefeated when it comes to competitors coming at them historically, right? I mean, USDG is probably the most notable example of a consortium that was put together that shared its reserves, and Circle also weathered the collapse of three banks in a single day, and is still here talking about it. So, we got to give them their flowers, but I think still a lot of banks look at that and go, sure, okay, but also the peg dropped to like 88 cents, and as a CFO, you're thinking there's some depository risk here, you're thinking hang on a minute, when you hold a token and there's one company, doesn't matter where those are custodied, there's one company governing how that's redeemed and how that's managed. That company is a single point of failure. And can you start to move that around?

Stephen Richardson  13:50  

Maybe one comment there, right? Is that if you look at things in the past, right, there's like all these views around things like duration mismatch and all these different things that you put it into money market funds, you put it into funds, you put it into tokenized treasury into treasuries in general, right? The changes, but as all these different capabilities start to get on chain, what does that do? It changes the speed of settlement. So, think about a world in which today you can look at what's happening on Canton with folks like DTCC and tokenization of treasuries and all those components. Well, that means you have more instantaneous settlement, right? So your allocation of funds and the backdrop of those funds start to get tokenized. So really, like what you saw in, like, deep pegging was the basis of all right, there's all this cash, there's all this pressure against the cash, and these assets are have a duration mismatch, right? Like, how much can you offload to the cash that you need now? As the backend basically funding components come on chain, you actually compress that window, which then makes it more likely that again they can meet their cash needs the same on the same basis. I think it's really interesting to watch, because as much pressure as we saw on Circle. They were still able to always pay out their liabilities, right? I think if you think of traditional banking, to see that kind of pressure on a bank would make that bank insolvent, right? That's just the underlying truth of it for all the people that have questions about whether or not Circle is structurally sound, and I think when you start to see more of these tokenized assets come on chain and you see those backing those reserves, you'll further limit this question of whether or not they can pay out or meet the obligations that they have.

Sy Taylor  15:26  

I think you make a great point, Stephen, and this is why I say they're undefeated. I don't know that there are any other companies in the world that could weather three banks failing in a single day that were key to their cash redemption, like it's an incredible testament to how they've become, but I also do think there's an optics issue and a perception issue in banks, particular seeing a stablecoin issuer as a competitive balance sheet, and if I have a competitive balance sheet that's draining deposits from me, how is that helping me versus so it was Eric from Canton last week was talking about how the business model is almost antithetical to how the distributors want to make money, because you're making money on the float and you're trying to move away from that by going into where your distributors go with chains, with custody, with pot, and so this is the interesting tension that Eric pointed out that I thought was quite interesting, and why I suspect a lot of the banks might be interested in it. The other thing Theo Golden from Baillie Gifford pointed out was it's nice that the fees are negotiable, but really, if I'm arguing over one basis point to win a deal, having something that starts at 10 basis points, is I've got to go a long way to negotiate that down to zero, and often in reality it's not clear that that happens. There's a good tweet here from Alex over at Ramp, very large fintech company, came to stablecoins, offers global stablecoin accounts, and he talks about several reasons why they chose it. The sharing reserve revenue with partners by default is a big one. He points out this is table stakes, and I sincerely wish that some of the larger projects were more open to doing this, but we quickly found out that the path for any of the current top 10 coins, coins, sorry, was long and an uncertain one that we were not willing to go down, so as much as it's negotiable, it also appears to be very, very difficult. He talks about free minting and redemption. This is a really big one. Most of our customers that are benefiting from stablecoins don't necessarily know if there's a given payment they send is going through stablecoin rails or not, we use stablecoins to make payments faster and more efficient, and the stablecoin sandwich use case is a big one for us. Yields compressing and issuers jacking up redemption fees to prop up their own business model is an existential threat to that use case, and one we'd rather not have to think about. Really interesting there that they see that potential future problem of interest rates impacting their business, and then interoperability. Although I do think that, oh, USD is going to be a top five stable coin, I don't mean interoperability with change, DeFi, and exchanges, I mean interoperability with other payments processes, banks, and liquidity venues, the consortium infrastructure opens up the possibility to settle with Visa directly, and I think this to the point you were making, Ido, is about some of those other forms of liquidity, you make a really good point there, and then obviously independence and openness, one of the things we were quite allergic to when looking for stable coin issuance partners was projects pushing us towards a specific chain or custody solution alongside issuing that stablecoin, so I do think like even the perception of credible neutrality here is incredibly valuable to somebody like a ramp who is very opinionated over what they want their stablecoin stack to look like. Does this resonate for you, Ado.

Ido Ben-Natan  19:01  

Yeah, I think it makes a lot of sense. Ramp is obviously like a super sophisticated organization as well, too. Alex's tweets are probably of the most cutting edge of the group of the group of other kind of folks looking at this. What's really, really important about this kind of infrastructure is the interoperability and connectivity that it ultimately enables, right, and so for Alex, I too am also like very much looking at what do the other providers, MZero, Agora, some of some of these we work with, right, will do to go and kind of respond to what kind of Open USD does in the space.

Sy Taylor  19:37  

Yeah, super interested, you know, Agora and MZ are friends of the show MZero sponsors MZero kind of early to this idea of like potential yield sharing and being sort of that interoperable middle layer, but more potentially decentralized somewhat than the Open USD model that's a consortia, and the truth is we don't know what's going to work. The interesting thing about consortia is. Well, is there are plenty of examples where consortia have been really successful. I mean, Swift, Visa, TCH, early warning services, vocal London Stock Exchange, the New York Stock Exchange, like in Tradfi, that's a great way to align incentives is to create a commercial model where it sort of makes sense. I think the open question here is, can this group align those incentives in some powerful way, but it's interesting. This certainly made some headline news. I think some of the folks that were maybe on the sidelines about whether or not they wanted to use stablecoins post the Genius Act, that's certainly changing, and my observation, having spoken to a lot of global regulators is that stable coins have gone from being, you know, obviously bad and tokenized deposits need to compete with them, especially if you're non-US, to being okay, they're a part of the mix, they're not the same as deposits, but they are this, this kind of other thing. So, Steven, any, any closing thoughts on this before we move to our next piece?

Stephen Richardson  21:00  

No, I mean, look, I think they're just going to be interesting models. I think, like, I deal with banks pretty much every day, right? And I think if you look at, like, a model of, like, Western Union, for example, and folks that have announced stable coins, they're not saying that they're not going to operate without other ones, they're just really swapping that into mechanisms that work for them on an economic level, and I think when you look at banks, in my mind it's a very similar model. They may interact with stable coins, and they may swap them into tokenized deposits to be able to generate yield on them internally and lend them and do the things that they need to do, and and manage the risks that are associated with them. That's what banks do today. So, in my mind, a little bit, this idea of like stable coins, and I know Bis and others have, like, talked about, like, the systemic risk of that, all there's of stable coins, but I think that's maybe somewhat overblown by the ability to really orchestrate the stable coins as you need to, so you know, pretty excited to see how this all starts to shape out.

Sy Taylor  21:55  

Yeah, no, it's super interesting to your point about the timing mismatch that kind of goes away when settlement becomes real time, and how stable coins' perception really is very different to all of tokenized money, and there's a reason we called this show tokenized, and not something to do with stable coins, is because that's the revolution here. There are many, like, not all stable coins look the same under the hood, never mind all tokenized deposits, never mind all tokenized money and money market funds. These things will all interoperate in some really interesting, complex ways. I did a newsletter piece today, and one of the things I had a diagram in it, which was this like universal translator for money, like you need a potentially a shared liquidity token to get between Py USD and Klarna USD and Western Union stablecoin and JPMD Circle had kind of been playing that role. Can Open USD play that role a little bit? Who knows, because of the fee structure it has, and you know, is the role for that sort of bridging asset, because to your point, Stephen, JPMD is not going to go anywhere, they're a massive bank, and you can do things with deposits that you can't do with stable coins, and vice versa. I

Stephen Richardson  23:06  

think tokenized treasuries are going to be that, in my opinion, right? So you can fractionalize them, their government liabilities, central bank liabilities. I actually think that, like, if you're thinking about this utility basis, like the idea of tokenized treasuries on a direct basis, will act as, like, this on an interoperable basis, so you can swap into a tokenized treasury, and then you can swap back out into a set of stable coins, depending on where that exists across an ecosystem, and from a credit risk perspective, right, people are comfortable with, like, the credit risk of the US government, and all these other things, so I think that becomes a really interesting thing. You're seeing it on the collateral mobility side, that's happening with like institutional trading, but I don't see why that wouldn't be applied to basically what looks like fintech issue commercial bank money, right? Like that for me is where I think it's quite interesting to kind of think about, because you don't have that today, right? So, because it's not really tokenized and it's not very distributed, right, then you back it against the physical paper, but as that starts to move on chain to Canton, to Stellar, to all of these different networks, and depending on how they're framed, it's open that actually acts as your bridging mechanism for basically this fintech issue commercial bank money, right, that is a stable coin. So I think, again, I could be wrong, but like I see that as kind of like a very interesting basis where things move forward,

Sy Taylor  24:30  

and it's how it happens in LCH today, like derivatives, off hours, cash is money market funds, right? Like, if the central bank is closed or the banks aren't available, then we use money market funds, and that could be entirely possible. So, you make a great point, Ido. Final thoughts on this story.

Ido Ben-Natan  24:48  

Yeah, I think I also agree with kind of Stephen's last point, in kind of that ability to like, there's this really interesting compression, and when the, and when the back end of all these different tokens, instead of being kind of treasuries and bank accounts, becomes treasuries. Reason chain, you really kind of get this kind of really, really interesting and unique interoperability that can exist in this space, and also, for what it's worth, like the view of some of these different banks and the on the risk of some of those different assets goes away really meaningfully if all of them are just backed by the same underlying treasuries, theoretically.

Sy Taylor  25:17  

Yeah, it's a great point. Again, coming back to Eric on the last show, he was sort of saying that the amount of cash supply and the amount of time people are sitting in cash really compresses, because if I can swap into money market funds, why wouldn't I do that regularly? And so I swap into cash, move the money, swap back into money market funds at the other side. Just didn't need to take a quick pause here, while we hear from our sponsors. This episode, if it's not obvious, is brought to you by our friends at Visa, a global leader in payments. Visa's tokenized assets platform, VTAP, uses smart contracts and cryptography to help banks bring fiat currencies on chain VTAP allows financial institutions to issue fiat back tokens, improving financial efficiency and enabling programmable finance. You can check out the links in this episode's description to express your interest in VTAP. This episode is sponsored by Stripe. Here's a problem many businesses are up against. Managing money is pretty painful with slow apps built by banks on infrastructure from the 70s, designed before the internet was even a concept. It's often slow, cumbersome, and doesn't work well across borders. Stable coins are changing this. Stablecoins are fundamentally a better way to store, manage, and spend money all around the world. They're offering a borderless alternative for those looking to move money instantly, spend anywhere, and earn on their savings. Stripe helps businesses unlock these benefits to build global by default fintechs designed once to work everywhere. Learn more about how you can use stablecoins@stripe.com forward slash crypto. This episode is sponsored by MZero. Launching a stablecoin used to mean accepting somebody else's technology stack, one fixed provider, bundled layers, no flexibility when your business changes or the market moves MZero is modulus stablecoin infrastructure that keeps every single layer independent. You can choose your unregulated issuer, design how your stablecoin behaves, and even tap into shared liquidity from across the network. Your stablecoin becomes built around your business, and it's configurable, so you can optimize the tech as you grow, make your own money. Get started@mzero.org Okay. Thank you to our sponsors. Next up was the Bank of International Settlements, saying that stablecoins fall short as money, and they warn of some emerging market risks, so they judge that today's dollar peg tokens fail against foundational properties that any monetary system must keep, including singleness, elasticity, interoperability, and integrity. And it's fair that if things are not trading off equal to $1 $1 should be $1 A stable coin is always a little bit off it. Those are observations that are probably fair in the author's US calibrated model. The net effect of stable coins on an output turned slightly negative over the media term, as higher bank funding costs and weaker lending outweighed the fiscal room created by stablecoin demand for government debt. The drag stayed really small, even as the authors imagined stablecoins hitting 1 trillion, 2 trillion, and 3 trillion. So it's kind of negligible, but it was there. Bis also said that stable coins account for a significant share of illicit on-chain activity, because they circulate on permissionless blockchains where self custody exists, so either your thoughts on any three of these points, really? From BIS,

Ido Ben-Natan  29:08  

yeah, I think like stable coins are no different than any kind of new financial system, right? We see fraud in ACH, we see fraud in cash, we see, you know, illicit proceeds in cash, all these different things, like, have existed across what even other consortiums, right? Like, obviously, you know, people didn't want to put their credit cards on the internet in the 90s, right? And, and we had massive fraud across, across those things too.

Sy Taylor  29:31  

And then there was a massive fraud issue during e-commerce. Yes, there was, yeah, and Zelle, and yeah,

Ido Ben-Natan  29:37  

Zels, you know, you still see a lot of these different things. And so I think, like, their fear of these things is real, it's true, like it's not something to be avoided, but I also think it's not unique, like it's not anything that's like special at stable coins or anything else. And so financial innovation will happen, we have to do it safely. The only thing that is maybe different about stable coins is kind of crypto makes money move. Like data, so it moves just much faster. It becomes like much, much easier to get in and out, and kind of move things like in a really, really, really fast way, as opposed to other forms of money movement, which were slower and could kind of enact tighter controls because of that. And so, yeah, I think, in short, like, I don't think they're wrong, I think I think they're right, and I think we as an industry need to do something about it and make it better. It's part of the stuff that we do. Block it.

Sy Taylor  30:22  

Yeah, absolutely. Steven, your thoughts on what they shared here?

Stephen Richardson  30:26  

Yeah, look, I think there's like, in my view, around on around this, there's like two things that I guess I would address, right? I mean, I think there's this under, there's this underlying view that hey, you push things into stable coins, those funds move outside of banks when banks can't lend. I think there's not a progressive view that, in essence, what we've seen in the DeFi space, that basically, as you aggregate liquidity, lending starts to sit on top, and there are new ecosystems for lending. So, like, imagine a world in which, as you start to have things like on-chain identity, and all these different things, you know, Robinhood, Revolut, all these folks are building wallet apps that now contain stocks, stable coins, a more comprehensive view of personal liquidity that today, if I bank, you know, I'll use example, I live in Singapore, I'm American, my banks don't speak to each other, like there's no comprehensive view of my global liquidity, and then I have things on crypto exchanges and XYZ, but there's this view that eventually that you start to build like completely different ecosystems that look differently than them with their service today. So I now have a wallet, it's holding stable coins, it's holding tokenized stocks, it's holding money market funds, it's holding all these different things, and Coinbase, or someone comes to me and says, I'll actually let you borrow against those funds that you have held within your wallet, I'll create smart contracts that encumber those assets, and now I'm borrowing similar, but not going to a bank, right, and so I think there's just like a gapped view around like what the technological evolution starts to look like, I think they view it as a zero sum game, like once this moves into a stablecoin ecosystem, it's no longer in the banking ecosystem, which means it can no longer be lent, right, versus it's saying there's actually different ecosystems and services that will start to emerge that provide the exact same services that you traditionally went to a bank to do, and just moves that value attribution somewhere else, right, and again they should be concerned about what does that systemically do for banks and the concerns that they have, but I think that if banks start thinking about themselves as like more technology focused enablers that are focused on how these systems will change, they may eventually offer wallets themselves that start to aggregate these assets, and then lend and do all those different things against them. So, I guess that's why, like, the point number one is that I think the framing of this is quite small, right? It assumes it's the technology is somewhat static, and then the use cases are static and 00 summed. I think the second thing that I always say is, like, today when we go and talk to banks, and I say, okay, I everything you do with fiat today is based off a risk-based system, because you don't have visibility. So I go into my bank today, I take $200 out, and I'll be facetious here, and I give it to someone, and they do something illicit with it, and they return me $500 I made $300 in profit. I put it back in my bank. My bank makes a risk-based decision. Do I, Stephen Richardson, generally work within a framework of depositing $500 into my bank account? And if I do, they leave it alone, right? When you think about crypto and stable coins, right, the amount of visibility that we have into on-chain transactions and illicit activity is consequentially more significant than what we do in the traditional fiat space,

Sy Taylor  33:45  

and I sometimes fear that visibility is almost off-putting, because you can see everything bad, and so therefore all you see is bad things.

Stephen Richardson  33:53  

I agreed, right? It's that at the end of the day, you can actually see it, and I personally think that the reason you don't see banks issuing stable coins, or really looking at moving towards permissionless ecosystems, is because today, if I pull money out on my HSBC or Bank of America account, I do something illicit with it. No one can really see it, right? I can't point back to that direct risk, but if I issue a stable coin and it touches an Iranian wallet, or it touches an illicit wallet, Artemis and all of these folks can see that basis, right, and so it's a very different risk profile that the bank has to take on, that I think in a lot of ways they're not comfortable with. Well,

Sy Taylor  34:29  

and we're seeing this coming out in Genius as the proposed rules are coming along. I think Governor Waller of the Fed pushed back, saying, "Well, there's a giant loophole here, which is what about all of the unhosted wallets, and we seem to constantly have this, this battle with regulators, because if it's a financial institution, they're not on the hook for what happens 234, hops away from the bank with cash that's gone out of the bank, so which digital asset company, which stablecoin issuer is on the hook for everything? That happens with those coins as they move around the ecosystem, if they haven't KYC those individuals, like it's, it's very hard to know whose throat to choke, but because you can see it, you, you intuit that there must be somebody, it's like there must be something we can surely, the stable coin issue could freeze it, okay, but what are they freezing, for whom, and on what basis, and also is this a privacy panopticon? Like, do we want it to be impossible that somebody can't pay $20 to some street vendor for something that might have been boot? Like, is that something that we say the gray economy must go away, because actually that supports some things, and weirdly, central banks are quite sensitive to that gray economy, it's one of the reasons that the clearest articulation for the digital euro I've seen is actually what happens when we need to remove paper and everything goes digital. What will vulnerable people use? And I'm like, yeah, they could also use stable coins, but like digital cash is valuable, we want that thing to exist for those vulnerable populations, so I think it's, it's super important that we kind of have that, and this Bayesian updating. I think your point, Stephen, on credit supply is assumed as being something that banks do, and that central bank policy controls that through rates. You can see in this annual report how uncomfortable they are about private credit, which is sort of outside of that system, and that's probably public enemy number one if you are a central bank, but that's kind of a very US phenomenon. It's not as, not as exported, but still it's something that they're concerned about. DeFi is potentially another source of credit that's outside of the perimeter of most of the central banks, and I just wonder about that monetary sovereignty question of, like, okay, if my rates aren't impacting my economy, what am I doing here as a central bank? If there are all these other forms of credit that I can't necessarily influence, so I wonder if there's a question behind the question. There, Stephen,

Stephen Richardson  36:55  

yeah, look, I do think that a central banker's job is to mitigate risk as best as possible via mechanisms of some level of monetary control, right, and in this private credit example, right, that does fall outside of them, and I think to me it just seems like a very much a zero sum basis, it's either operating within the constructs of, you know, a structured approach, monetary approach, or it's falling outside of that, and inherently that might be a bad thing, and you know, I'm not necessarily sure I fully agree there, but you know, I think there is a question within the question.

Sy Taylor  37:29  

You can see where they're coming from. I would encourage everybody to go read this annual report. Like, the whole section on AI surprised me with how thoughtful it is, and they model multiple scenarios for stress, and what happens if the AI bubble goes pop, but what happens if we do get a productivity miracle, and they, they pay a lot of attention to, like, what productivity miracle could look like, and what would be the implication for that, and how real is job displacement, and it's incredibly thoughtful, like, it people, I think, sometimes see BIS, and they don't go deeper into the reports and really pay attention to the work those guys do, so I want to give them a shout out. Last story is Robin Hood launched just about everything yesterday, as we record this from Greenwich. The tokenized team went down in person, they had a whole The Waldus Flat pirate motif. Vlad Tenev came out looking a little bit like a pirate. They had TV cameras. These guys go hard, but the products were really interesting. So they announced Robinhood chain has hit main net, its own layer two on Arbitrum, that is public. They announced Robinhood earn this is a lend dollar backed USDG at 7% APY, which is via Morpho, really interesting detail as well. They've also got cover through Lloyds of London Insurance for any DeFi smart contract risk, which does happen, kelp, Dow, anybody, they're launching stock tokens in 120 plus countries that are trading 24/7 and usable as collateral in DeFi lending pools. Super interesting, that 120 countries does not include the US. They're also launching commodity, ETF, FX, and perp futures in Europe for gold, oil, euro, USD, and up to 10x leverage. They're just launching all of the things. My God, there's so much here to unpack. Probably the Earn product is the most interesting one that stood out to me. That's quite a heavy yield, and it's going to all 27 million users of the core app via Privy. It's not something that's just going inside the Robinhood wallet. So, Ido, your thoughts on the Earn product?

Ido Ben-Natan  39:42  

Yeah, one, I agree with you, they did go a lot. I'm actually here in London, I was at the event, it was, it was great. I think the Earn product is really interesting, like one is the yield is high, it's higher than what you would get in other competitive products, and it's interesting also to see, you know, how Robinhood has come at a. Similar product offering, ultimately, and Coinbase has come out a similar product offering from different parts of the market, one coming from, you know, a very kind of TradFi kind of brokerage, the other kind of becoming almost a brokerage, coming in directly from crypto, but meeting somewhere in, in the middle with all these different offerings. I also think the insurance offering is really, really interesting and timely, just given where the market is. I'm actually in the Lloyd's office today too, and so it's very, very interesting to see how different teams in the space have not slowed down launching products, but have thought started to think about security in a much more meaningful way post a lot of the incidents that you mentioned,

Sy Taylor  40:36  

Stephen. I'm interested in this embedded wallets phenomena. I know you guys acquired a company called Dynamic. There's a lot of folks that are having a large user base that don't necessarily want to fragment that into something else, and this sort of 7% appearing in front of like 27 million users, that could be a big eye opener for people.

Stephen Richardson  40:56  

Look, I think people are looking for generative yield, right, and I think the ability to provide that across an ecosystem is important, right. So, why do people go to banks? They go to banks to hold their assets, they go to banks to acquire their assets, and they go to banks to grow their assets, right. And so, I think at the end of the day, what you're seeing is a very much a strong push towards the ability to hold their assets with these embedded wallets, right, and to be tied into a larger platform that they know and understand the ability to acquire assets via these 120 countries being able to access tokenized stocks and the ability to grow right via this yield generation through MOFO. So I think this is like a really interesting approach, right, and I think you know one of the things that people will have questions about when they enter into DeFi is just like, how safe is it, and you know, if you think about when you hold your money with a bank, you have FDIC insurance, right, and you're able to kind of have a backstop for some level of loss, obviously it's up to like $250,000 or whatever it is, but like at the end of the day you have some level of the backstop, so people understanding that, listen, you can participate in this ecosystem, and there's some level of an insurance backstop and balance sheet by operating with Robinhood. I think that clicks in their brain is what they understand, know, and understand today, and how they feel comfortable participating it from a decentralized basis. So, I think they've approached it really systematically, and hopefully in a way that answers a lot of the concerns that maybe everyday folks might have in participating with these assets.

Sy Taylor  42:29  

And one thing Robinhood does really well is its consumer education on some of this stuff, and they're really thoughtful on how all of that fits together. I think it's Steakhouse Financial, who's the curator here, and under the hood, it's like USDE and syrup USDG, and forget the other one, but syrup USDG, this is lending to institutions, this is like proper DeFi lending, you are buying almost sort of a form of private credit as an investor, it's interesting to me that, as you were saying, I know Coinbase is out here, probably one of the first doing yield on USDC at 3.5% and when they launched that product, it was probably pretty cutting edge, but Robinhood, in a way, has gone right up the risk curve to something that's that's higher yield and put it in front of its kind of core users, so it's a pretty brave move there. I want to talk about stock tokens as well. Ido, this idea that you could actually have that stock token, stocks that you own, if you switch them into the stock tokens, be collateral for something else. Interested in how many users are going to actually understand that and go out into the DeFi universe to get that done, because it feels like the start of something, but maybe only for the real nerds at this point,

Ido Ben-Natan  43:44  

right? I think it's awesome that they showed, like, this really great demo, I think, of them grabbing a stock token and sending it to someone in Africa, right? Just that interesting primitive tied to a public chain unlocks a ton of really interesting things that I think we're going to see people build, so obviously I agree with you that a lot of, you know, the more crypto-focused nerds will start thinking about, okay, great, I can start taking my, my stocks, I can start looping things and doing all sorts of stuff like that across Morpho, you know, buying a stock, lending it, buying more of the stock, etc. But then again, I think, like, those are not as interesting use cases, because we also have perps, and Robin had launched those as well, and so having leverage on your stock, or on a stock exists already today, but if you already have a lot of your portfolio in stocks and you don't want to go and sell those and incur kind of the tax loss and and everything that kind of exists, but you do want cash and you want to go and operate on some of these different things, I do see that as like a lever for people venturing off into DeFi to go and do some of these different things, especially, you know, as Robinhood has higher net worth users, and some of the, some of these different things, and I also do see it potentially coming into the application itself, and it just becoming a button, and then enabled by other users that don't need to be as, as nerdy, essentially to go and do this.

Sy Taylor  44:56  

Yeah, the fact that you can go take it anywhere is really interesting. There's also that. Call them stock tokens, not tokenized equities. I think there's very clearly this token represents a real stock that's held somewhere else by a brokerage. It is not the stock, and I think they've been quite.. it's a bit like how whenever you talk to JP Morgan about JPMD, it is a deposit token, not a tokenized deposit, like you can sort of see these nuances of, like, it's a wrapper on top of the wrapper on top of the thing, but they're thoughtful about that. We actually spoke to the Robin Hood, head of crypto, and an international, Johann Kerbrat, on our podcast feed, which is only on YouTube, so get that in your eyes and ears if you want to hear from the source directly. I asked him a lot of questions about stock tokens and the use cases they're seeing, and he was really interested, especially to your point, Ido, about the some of the international side of it. Last question for you, Stephen, is on the perp side and consumers. I'm sort of maybe old and maybe a bit wimpy when it comes to leverage for consumers, like I don't know that I love 10x leverage to 27 million users, but I also do believe that a lot of sophisticated people don't always have a lot of money in the bank, and the way we measured sophisticated investor historically wasn't necessarily correct. So, what are your thoughts on like perps and the consumer base, because I'm a little bit worried, if I'm honest.

Stephen Richardson  46:24  

Look, I think obviously it's out in the ecosystem. I mean, you have hyper liquidity of multiple other venues that are offering these products, and I think one could argue the same for things like Calci, and the ability to like bet on all these different events, and and what that does at a systematic basis. Like, I think there's a view that these products exist. There's a view that there are trusted venues that basically offer these products, and I think one of the things, like you mentioned earlier, is that Robinhood generally does a lot on the consumer education side to help people understand the risks that they have in participating with these products. It's not up to me to determine whether this needs to be legislated or regulated further. I think that's, you know, why we put people in in seats of power, I guess, in some way. So, you know, I think it does. It does, in some ways, there is a benefit to having these somewhat regulated, you know, venues to be able to do these things, and among brands and consumer brands that you know have the kind of trust that consumers would expect and require, and then have a fiduciary responsibility to their customers to make sure that they're educated about those things, so you know, I would say, inso long as you know the regulation allows you to do it right, I mean, I think you'll see people kind of continue to move towards offering those type of products, especially when they see demand from some of these DeFi-centric platforms.

Sy Taylor  47:49  

Yeah, I think it's a fair point. Who would you rather have doing it? But also, by the same token, if they do it, will more people do it? I do think, to your point, is a good one, though. It's probably not their problem to solve. It's out there, it's there to be executed on, and the speed of execution at Robinhood is just insane. Like, these guys are shipping unbelievably. Like, could you imagine Fidelity or Schwab launching that many products in a single day? Never mind the amount of things they do. I check their market cap, and they're just shy of 100 billion. Like, if we're going to see a trillion dollar finance company, I don't know that Robin Hood's out of the question for being that. If they can start to go global, right? Like, you think about a Stripe and a few others, like who's going to hit that trillion, and JP Morgan's not there, Visa is not there, but if they can ship at this velocity and ship literally from Greenwich. There was a whole ship motif. Then it's going to be interesting times. There's a bunch of stories we didn't have time to cover this week, and so I'm just going to quickly read them off. The humanity protocol repositioned towards enterprise AI after a $36 million hack. The founder says, I mean, pivot to AI. Why not? Ondo tokenized BlackRock's IVV ETF and Micron stock under a US custodial model. Various lots of interest in Micron right now. Peter Thiel-backed crypto-friendly Error Ball Bank has eyed an $8 billion valuation as deposits nearly quadrupled, according to Bloomberg. Venice AI raised 65 million at a 1 billion equity valuation, led by our good friends at Dragonfly, and the UK regulator had watered down some landmark crypto rules as the FCA joined the Bank of England in publishing a lot of its non-systemic stablecoin regime. Well done, guys, for getting that out the door. Let's get those licenses happening. All right, that's everything we had time for this week. Stephen, if people want to find out more about you and Fireblocks, where do they go to do that?

Stephen Richardson  49:53  

www.fireblocks.com I'm also on LinkedIn, so look forward to hopefully catching up with folks. There, Stephen Richardson, check him out on LinkedIn. Ido, how about you?

Ido Ben-Natan  50:03  

Yeah, if you want to learn more about Blockade, you can check out our website, blockade.io that's b l o c k a i d, or on Twitter, where we oftentimes break the news for some of these different exploits, like the humanity protocol one that happened just this week.

Sy Taylor  50:18  

Oh, well, you got to get to that blockade Twitter account to get more detail. They say stories we didn't have time to cover, but the blockade Twitter account clearly did. That's definitely somewhere to check out. You can find me at S Y Tailor on all of the socials, screaming into the void at Fintech Brain food.com and of course at Tempo dot xyz forward slash advisory, where we have FDEs and others who will help you get more done with stable coins. If you haven't already, please, please subscribe to the podcast on Apple or Spotify, or wherever you get the podcast, and leave us a review or a comment on YouTube. It really is the best way to say thank you, and we'll catch you next time.