Welcome back everyone. I am Cass PNC and I am here as
usual with my partner in crime Bennett Tomlin.
How are you? I'm doing well Cass.
How are you? I'm doing good today, we're
going to be talking about the report put out by the
president's working group, which includes Janet Yellen.
So I think it's fair to say this is kind of a treasury report.
On stable coins and there's a lot of concerns buried Within
These 26 Pages. Do you want to outline?
What you what your takeaways were from this?
Or the major points of it? Sure it seems the federal
government is going to want most stable, Queen issuers to become
OCC chartered and fdic-insured Banks, effectively.
So they will no longer be allowing trust companies.
It seems Like paxos to continue just existing as trust companies
and other ones like u.s. DC and tether would have to find
a way to get Bank Charters, and not just any Bank Charters.
Because for example, paxos already has conditional
approval, but as an uninsured trust company, which would not
match up with the standards that the federal government seems to
want. There's a couple of other
important details. I think we should bring out
before we really get into it one, they recommend that
Congress. Passes legislation outlining
these new requirements. There's a couple of bills in
Congress right now that this would apply to that.
This could potentially apply 2 Episode 16.
We had Rohan gray on, one of the people behind the stable, act to
discuss, some of the importance they are.
And why treating these money? Transmitters these stable coins
more is Banks helps promote, stability and security.
And so this would seem to be a very positive development for
that bill. The other one is the Digital
asset in Market structure, investor protection act or
something, which was the surprise when that was revealed
in a house committee. A couple months ago, that rumors
are basically came directly from the treasury.
So considering yellen's involvement in this report and
that bill supposedly coming basically directly down from the
treasury. My guess is, they are leaning
towards that type of structure. The other Last Detail is they
make very clear that if Congress does not pass legislation.
And Even potentially, if Congress does the SEC and the
cftc still definitively have jurisdiction over any stable
coin, that is being used for Commodities trading or any
stable coin. That any stable coin issuer?
That's purchasing Securities to back the stable coin.
And so, regardless of whether or not Congress X, it seems that
the federal government and especially the SEC and the cftc
are going to be more proactive than they have been.
In regulating stable coins, a lot of people are Talking about
how stable coins as a whole represent.
Very little, not, not even just in terms of overall, crypto
currency market cap. But in terms of like the US
Financial system, I mean, they are not a risk to the US
Financial system. And I, I do think that, as of
right now, that's quite a fair assessment, right?
Like tether collapse ain't gonna cause the S&P 500 to dump.
It just is not going to happen, but I don't think it's
unreasonable. Able to start creating these
suggestions and these working groups because the reality is
this has been moving really fast already and they haven't done
anything. People have been dying for
clarity. People want to get the US
government to say something about it.
And now that they have I feel like they're the pushback has
been. Why are you guys harping on
stable coins? They're not that big a deal and
I'm wondering what your personal feeling is to to that
assessment. I meant I think they're right in
a sense right now. Stable coins are primarily used
as casino chips at the casino. Right.
But I think from the perspective of the federal government seeing
this growth of basically this Shadow banking sector has to
make them somewhat nervous, right?
We've seen tether over the last year, grow several fold, u.s.
DC grow at an even faster rate and assuming they continue those
rates of growth, they become these very major problems
quickly and yes, I still don't think they represent a threat to
the Global Financial system or anything like that but there are
increasingly some strange Dynamic if we assume these
stable coins represent like this major source of liquidity to
crypto and it drying up would be bad for crypto, especially due
to the amount of Leverage in it. And even the amount of embedded,
leverage in things like tethers lending agreement with Celsius.
It becomes increasingly probable that a problem with a stable
Queen could cause Significant issues across the crypto
industry significantly larger than the market cap of these
coins. The more crypto becomes
integrated in accepted into a broader economy, the larger, the
potential shockwaves of that becomes the other problem.
I think they're trying to get in front of is we increasingly see
stable coin issuers trying to position themselves as tools for
payments or remittances for a broader population outside of
this primarily outside of this much smaller group of crypto
investors and speculators. And we see this with like paxos
and you SDC partnering with these major payment providers
like visa and MasterCard and things like that.
But more broadly used. These are and are expected to be
at a dollar. The more regulations there needs
to be on it because failure to maintain that represents a much
larger issue. This is also part of the
problem. Historically with things like
money market funds, right is they act so much like cash until
they don't and when they don't, because they're this source of
liquidity in this trusted thing that looks like a dollar.
It causes the Is knock on consequences as that liquidity,
dries up and at some point, Regulators have to get involved
with all of this. I mean, it's an inevitability if
these things intend to continue to exist at all.
You would expect Regulators to come in to regulate them.
So I'm not exactly sure why. Anyone is surprised that the
treasury is interested in u.s. dollar, derivatives and is
perhaps Concerned about US dollar derivatives, I would
suggest that it's almost bullish in comparison to what we saw
with the reaction to like, Liberty reserve where the
reaction to Liberty reserve was not to do a working group and
examine it thoughtfully. And try to figure out a way to
create a regulated market for it.
It was to shut that the down, they aren't suggesting that
actually in this and I think that that could be perceived as
bullish for the space. In general.
Yeah, though, I do think it's probably pretty bad news for
paxos tethering, U STC, mainly because it is very challenging
as I understand it to get an OCC Charter and then also to qualify
for FDIC insurance, right? And there's a whole bunch of
existing entities like JP Morgan and all these other places that
already meet those characteristics.
And so there's going to be potentially a window and
opportunity in which each pack cents USD seen, especially
tether may not be able to compete with more traditional
Financial entrance into this space.
But I do want to say that that is still a much different tone
and take than what we saw with Liberty reserve, where these
people are still in prison, or one of them is still in prison.
And one of them was released shortly after he was in prison.
My point being that these people won't necessarily have to worry
about that kind of consequence, even if they have to unwind the
business and move on Because they've been profitable, they've
many of them have done. Very sketchy accounting
practices and kind of business practices in general.
And if they can get away with that without going to prison or
having their money taken from them, I would clock that as a w,
but I don't know what that means for them.
I think for them if the business fails they feel like they're a
failure. Yeah, and I think also that
tether May occupy a unique space different from USDA.
See and paxos just based on the existing information we have
from enforcement and stuff and beyond that, I actually, this is
part of what my main point was going to be on this discussion,
which is the, you can look through this whole document from
the president's working group. And it's very interesting and
there's a lot of explanations of what stable coins are how they
operate. I mean, these are things that
people who are in the ecosystem in general already, understand
because you have to because they're being discussed Lie.
But more interestingly for me was the footnotes and that seems
to always be the case with whether it's court documents,
the president's working group, whatever, when you start getting
into the footnotes of this, you start getting into some really
crazy stuff and stuff. I'm learning for the first time,
which is, for instance, the pass-through deposit insurance
coverage. I don't know if you read that
little bit, but they talk about how oftentimes accounts that
are, you know, a fund are not insured.
Word for each individual up to 250,000 dollars.
But rather the fund itself is just ensured FDIC for 250,000
dollars. And so all the people who are
within this fund, if this fun goes under something happens,
like the insurance is 250. It is not 250 for every single
person and I was not aware of that.
That is fascinating to me. Additionally, some of these
footnotes seem to be explicitly referring to tether.
Like they talked about how most holders of the coin in some of
these cases aren't able to get a Redemption because Redemption is
only one hundred thousand dollars for instance or more.
And most of the people who hold the coin don't have that much,
who could that possibly be referring to I wonder.
And like the fact that they're implicitly referring to tether
over and over and over again, leads me to believe that as much
as tether wants to play this whole like we're so happy to
hear. R from the president's working
group and we're looking forward to meeting these requirements.
They are fucked. Yeah the tether casts a large
Shadow over this documents and like you're saying you see it in
so many of the comments in here. Stable coin, Redemption rates
can vary considerably, not the passed through Insurance.
The potential for fraud they discuss how a certain laxness in
accounting standards are in record-keeping, could cause
there to be a mismatch between the As in the number of issued
tokens there, a lot of the behavior they describe as like
the potential risks of stable coins there just directly
listing things tether has done that part to me while I'm
bullish on this response compared to against a Liberty
reserve or some other quite obviously criminal entity.
It doesn't sound good for tether to me because it sounds like the
treasury has a really Keen interest in tether and we know
the SEC. He is interested in them.
We know the cftc has been interested in them.
We know the New York AG is still interested in them and we know
that the doj is interested in them, so it becomes this weird,
like you guys can pretend to be bullish, but I don't know how
this document could possibly be perceived as bullish for, for
tether. I guess I'd be interested to
hear how they could could kind of finagle it that way.
I would love to hear vandevelde discuss exactly how he feels.
This is going to impact, Heather, and I welcome.
Vanderbilt at any time to come on this podcast to discuss, that
kind of thing with us. And even like in tethers
statement. This was one of the Tarsus tin
shortest statements I've ever seen tether issue in response to
something. I'm 100% sure was a troll.
It was a response to Hindenburg research saying now you're
supposed to say we welcome this and so what do they do?
They immediately said we welcome this and they think it's funny.
Any it is funny. You're just making fun of people
who are criticizing you. I mean, it's funny until your,
you know, under investigation for bank fraud or wire fraud
until the treasury is calling you out by name.
Until the SEC says, we can't respond to your voice your foil
request because we're investigating that entity.
When those things start happening the tether leadership
can feel free to laugh it off if they want to I hope they do.
Yeah, this report. Me seemed bad for tether, just
let out bad. I can't imagine together with
their history with their settlements, with all the male
Behavior, with what the reserves are invested in ever being able
to get an OCC Charter? I'm looking through this and
again I just want to re-emphasize.
This is it to me is bullish for cryptocurrency and indeed stable
coins. Also the idea is they are
accepting almost that. This new industry is.
Going to exist as long as they can see.
And they're looking to try to regulate it and figure out some
way to understand it. And that's, that's a really good
thing to think. Like that that means your
industry is a force and the government cares more than they
ever have. Before again though, it does not
seem good for tether, it does not seem good for tether because
everything they're worried about are the things that tether has
done to lie. And deceive and trick, the
general public at large not once or twice or three times or four
times like over and over and over and over and over and over
again. It's this is not like a one-time
off thing but it's nice to see the treasury of the US
government being like, yeah, we're aware of all the stuff.
Get that tether is doing. We see it?
We're concerned. They should be concerned.
Yeah, they should have probably been concerned a little bit.
Earlier than they were but you know, better late than never.
Honestly, some of the new information.
We've got to know about together in the last several months to me
really make something like this. Seem inevitable, like early on
into others history. At least the story is that
tether was fully backed by cash and a Trust Company holding a
bunch of Assets in trust to back.
A token is one thing. But for a lot of its history
tether has been engaged in basically outright Shadow
banking, doing lending creating deposits, doing all these things
that are so very Very Bank like that.
It really seems inevitable that some day someone was going to
say. It really seems like you're a
bank. Why are you not a bank?
Why do you get to do these things?
That only banks can do? And there's a whole bunch of
people in the cryptocurrency ecosystem right now, worried
about the fact that stable Queen issuers are going to have to
become Banks, basically, because becoming a bank is not easy, and
the regulatory load on banks is much higher than it is for
these. Kind of trust companies, isn't
this when you would go and buy a bank Charter, Are like from an
existing Bank. Maybe, I don't know you.
You think so? I mean, I would suspect that if
these guys have as much money on the books as they claim they do,
they could buy some, you know, at least medium sized Community
Banks and get the charter. They need to do most, if not all
of what their Desiring to do, but I think a lot of them aren't
operating even the way a bank would really, I think they're
operating the way a hedge fund. Would ya?
And I think this is kind of what might be frustrating.
Paxos in circle, is that they do not seem to be engaged in the
same. Kind of lending practices, the
same kind of Securities investment, the same kind of
things that tether has so brazenly, done, I should caveat,
that was saying, there was a period where Circle was invested
in a whole bunch of Securities, but we've not seen reporting
suggesting that they're doing, like, what tether is in creating
tethers in response to like these secured lending agreements
or especially not doing the type of unsecured lending and stuff.
We've seen tether doing and so it seems that tether casts a
shadow over this report. That tether might be one of the
main animating forces Behind These governmental agencies
being worried about this. And so now everyone gets to be a
bank like they probably always should have been.
So if you're over at paxos or Circle or Center, I can see you
being frustrated because you perhaps hope to have a few more
years. Before you had to be that and I
think that like they knew they were going to at some point have
to become a bank. And that's why paxos already
went through the process to get a conditional, OCC Charter, as a
trust company. And why circle is trying to get
a bank Charter. And I discuss this when I was
writing about this is, I think they knew it was inevitable with
the things that they wanted to do that.
The federal government would at some point, say that sounds like
a bank. Here's something I want I wanted
to touch on which is Tara, Sarah USD and the Tara company do Quan
and some others seem to have been served by the SEC recently
for what they're doing, do Quan done went on flourish in and
said that there is no chance that the SEC can stop Tara and
that he can't really be prosecuted for this and is
countersuing. I want to clarify neither of us
are lawyers before we A word about this.
But for me, it was actually very interesting to see that like Not
only would, I think you don't want to say those things is
countersuing, just like a move to be like, come on, let's just
settle quite bold and if it if it pays off, it'll be quite a
signal to the community and so I am actually interested didn't
telegram countersue the SEC to isn't that what the defend
crypto fund was for? Well, I think specifically, in
this case, Case the claim by Daquan was that the service was
improper that the way they served him.
The document was not appropriate and as such he had not yet been
served. And so basically, the case could
not proceed because he hadn't been served pursuant to the
appropriate. Regulations was the first claim
he was making, is that accurate? I don't feel qualified to answer
that. My intuition is that the SEC and
the whichever judges would end up on this case would probably
not be Mince pie that but I haven't looked at the specific
details or the specific laws. So I don't want to go too far in
my opinion, in there. The other part that Tara can't
be stopped? I hope that's true, right?
I mean, the entire point of these partially collateralized
and all these like, defy stable coins, is that the entire reason
for them to exist is that they should be unstoppable, right?
There should be no way for the SEC or anyone else to arrest, or
serve anyone and stop these tokens.
Tokens from circulating. It's really bold.
I think. And, and fair enough, I'm not
suggesting no one should do it, but I think it's really bold to
create something that can't. You're like, this cannot be
broken. Like, this is shatterproof, and
like, once I release it into the wild, it will go on its own and
it will be fine. And I think that's almost always
wrong and you can just look it. Like most A of people saying
something is Unsinkable or not breakable or a totally safe
investment and see how false that is.
Now, I also understand that when people say to a degree that like
Dow is the stable coin, sorry, the stable coin, Dow is only
within that the the cryptocurrency ecosystem and
therefore like it's less of a risk in general.
All but also it's mostly collateralized with us DC which
is exposed to the general ecosystem of finance and
therefore helps expose like it does it does create exposure to
the general system I believe. And so it's hard for me to
imagine any of these are unbreakable my general opinion
that I've expressed previously on a podcast and stuff.
Is that algorithmic stable coins are basically never unbreakable.
There are pegged currency. Are often going to suffer under
an attack by a sufficiently. Well, capitalized attacker,
certain over, collateralized ones and even partially
collateralized ones like fraks expose themselves to basically
US Government intervention by, like you mentioned using USD see
which can be Frozen whatever and become effectively worthless.
However, my favorite things in cryptocurrency are the contracts
that cannot be stopped right now.
This isn't to say that they'll never Ever be flawed or anything
but often I think the best parts of cryptocurrency are the really
censorship resistant resilient ones and those are often
dependent on their being very little intervention you can do
after it's been deployed. Yeah I mean I don't know they're
constantly intervening in Bitcoin and etherium you have
teams of developers working on it all the time.
So this idea that you're ever Hang up, like you're giving up
control as an individual. But there's constantly people
working on it to try to, like, make it better.
And, and fair enough like Dow has that, right?
Like, Tara has that they have teams of people who are working
on their products, but like you said, there's always an
attacking force that could look George Soros is the classic
example of someone attacking a currency and winning just
through having the Amount necessary, the liquidity
necessary to destroy it, and all of these things suffer from that
same, same exact issue, which is, if anyone like George Soros
decided, fuck it. I'll throw a billion dollars in
to destroy this thing. They could probably do it.
I just think. No, billionaire has that
interest right now. And often there's no direct
incentive for it though. And we discussed this with
Francis, like in the example of a partially collateralized, one
like fracks often there. Incentive, right?
Because if you can attack the peg long enough to drive the
value of the supposedly stable token, underneath the amount of
collateral backing, it you can basically redeem it for the
collateral and make profit that way.
And so there are potentially profitable attacks on some of
these systems. They just require a sufficient
amount of capital to basically sustain the attack.
I think Daquan is probably being overly optimistic about the
resiliency of Terror. Our but as like, one of the
creators of it, he kind of has to because the worst thing you
can do to an algorithmic stable Corner.
Partially collateralized stable coin is to express doubt and its
continued functioning because that doubt will cause it to
cease functioning, right? These are perpetual motion
machines. If you look at them too hard,
they'll stop moving. And so you need to make sure
they keep moving on that. Thank you for listening and
we'll catch you next week.