Digital Money Comes of Age with Dante Disparte of Circle

Jeremy Allaire: Hello, I'm Jeremy Allaire and this is The Money Movement. We're recording here in Miami at Bitcoin 2022. A lot of amazing things going on. I'm very lucky to have a colleague and a third or fourth or fifth-time guest on The Money Movement who's a bit of a co-host as well. Dante Disparte, Circle's Chief Strategy Officer, welcome again.

Dante Disparte: Thanks again, Jeremy, good to be back.

[laughter]

Jeremy: Now, we get to have conversations like this all day, every day, or a lot, I should say. I think there are some big themes that are important in terms of just how to think about this financial system that we're building and what it can be, and breaking some things down and understanding them. I think the goal today was really let you drive some of the conversation here and try to shed some light on what is this new, digital currency-based financial system that we're building, and why is it different? Why is it better? How's it look for people?

Dante: Yes, I think linearly, you're right that you and I get to have deep strategy conversations all the time but I think to put ourselves on the stand, and in front of the light of day and hopefully, the light of the Internet, there are some building blocks that are pretty fundamental.

In my view, if you start with what does not work in the brick-and-mortar banking system, and then as one pillar of conversation. The other piece of the puzzle is what does not work in the brick-and-mortar banking system when it takes bank holidays. Yet you then think about your and my needs are always on in terms of financial requirements, the ability to transmit value, of course, has a series of important pillars around it around trust, around composability, programmability, and all of these concepts.

In a world in which an internet of value starts to emerge, and then you could start to plug into new ways of intermediating money, then one of the core building blocks is the stable coin, and call it a dollar digital currency, in our world, of course, it's USDC. The second you start to have an opportunity for a digitally native instrument that is a medium of exchange, a unit of measure, and a store of value, that all of a sudden payments is the bottom rung of that ladder of economic mobility.

Assume we're solving for the payments problem first but in most cases, that's only the end of the beginning to quote Winston Churchill. I want to ask you the question because you're deep down the rabbit hole of what happens next, what happens when you unlock programmable, composable, and exquisite internet native money, where the buyer and the user of these innovations are not subjected to hyper volatility or buyer's remorse.

Frankly, many of the original sins of the cryptocurrency industry. What happens next, if I could ask you that question? Because if you think of all of these early internet finance, DeFi, CeFi, all these use cases, in some respects, were just round one. Where do we go from here?

Jeremy: I would start just I think with some foundational concepts. Which I think a lot of times when people hear about a stable coin, or digital currency like this, the first inclination is to think about payments, as you said, and is this a better, faster, cheaper way to make payments? How do we solved that problem kind of mentality a lot of times that comes in?

Even today, Secretary of Treasury Yellen gave a speech and talked about the limitations in our payment systems, we got to improve it. It's got to be faster, cheaper, better, more inclusive, all important stuff. I think what motivates the crypto-economic narrative, which is how do we build a significantly, really a new financial system? How do we actually build a new financial system?

It comes back to, like underlying first principles of basics, like what is money when we think about what money is. What makes something like USDC as a form of a dollar expression of a dollar different than what we might think of as a paper check that we wrote our name on, or the balance that I see when I open my say, Bank of America app?

What does that existing financial system trying to accomplish? Then how is this new financial system really different? The first principles, I think, that have informed a lot of innovation in the digital currency space, including Bitcoin itself, is an underlying belief in a more sound money, philosophy. I don't want to go too far off the reservation here but Bitcoin itself is, for many people, it's an expression of a form of sound money.

People would argue that gold is a form of sound money, it's non-government. It can't be counterfeited. It can't be debased. It's a fixed supply. It's all these things. You have that kind of thing. Then you have sound money in fiat currency and that's been a topic of discussion for a really long time dating back, especially to the bank crises that happened. You had the mutualization of risk that created the Federal Reserve. That was one big, big example.

Then you had the mutualization of risk that became FDIC insurance. If we think about modern banking, and that's the foundation of what we think of as dollars today, is I've got this dollar, but what I really have is, I've got a liability. I have an IOU from an institution, and in the United States, we call these institutions banks. What they're doing is they're taking that dollar, and their job is to, or their business model is to actually lend it out.

Because not everyone needs their money all at the same time. I might need to make a payment for my hotel tomorrow, but I actually have money sitting there so they're lending out. The sound money view which, back in the 1930s, when the Great Depression happened, and the banking system collapsed, there was a big debate, which was, is there a way to have a safer financial system?

How do we deal with these bank runs? How do we deal with these crises? How do we deal with the inherent risk of what's now understood to be fractional reserve banking, and there were two proposals. One proposal was what was called the Chicago plan. A collection of economists Irving Fisher, most noteworthy from the Chicago School, proposed a separation of the activity of the payment use of money from the lending use of money and argued that what would be safer would be if the dollars that were dollars that were issued by the federal government, so it's still federal government money.

It was based on an exchange rate to gold at the time, but that banks couldn't lend them out on a fractional reserve basis, that instead, the money was on a full reserve basis and there's a payment utility attached to that, and that lending had to be a separate activity. That was one proposal of how to deal with the inherent risk of the financial system.

The other proposal, which was advocated by the bank lobby was to keep the system but instead just come up with an insurance model. There's going to be risk, people are going to sometimes make bad decisions. When they do, we're going to neutralize that, we're going to have this big pool of insurance, and then we're going to have special supervision of the businesses that do this to make sure that they're just not doing anything really fucking crazy.

That's what has gone on so that is what we think of as dollars today. Our dollars, as I like to say, you have an IOU with Chase, you have an IOU with Bank of America, it's actually not a dollar, it's actually just you have a liability against their loan book. There's a long-winded way of coming back to this is a full reserve money, I think becomes possible in the world of digital currency.

What we see with stable coins today, is an expression of a full reserve, I think the foundation of a more sound money, full reserve banking system, where the dollars that we can utilize with the superpowers of the internet, these cryptographic currency dollars that exist like a USDC, digital currency dollar. They have this incredible utility value. They have the power of the internet, the speed of efficiency, and so on.

What's the most important innovation, in my view, and it's very foundational to this is that these are based on this full reserve model, and there's not that inherent risk-taking. That's like one, I think, really important foundational notion that's here, which begs a lot of questions.

Dante: Well, it does. I had a couple based on that history lesson of sound money and how do we get to where we are now? One point, which is a reminder of where this whole industry was born from. Bitcoin and the idea that there should be an internet of value and peer-to-peer payment systems on the internet, in some respects was a protest vote to 2008.

You started this narrative at the Great Depression, and the need for a run risk model on banking because banks were fundamentally opaque. They were taking your money, pretending to put it in the bank, but effectively leveraging it up and putting out credit into the economy [crosstalk] which happened again and then you fast forward to 2008 and you have nothing short of a great recession and a great de-leveraging, which privatized gain and socialized losses to the tune of trillions. In some respect, the digital assets industry and the crypto industry was a protest vote to that operating model.

Jeremy: It's in the ethos, right?

Dante: It is. It really is deeply in the ethos and clearly very much animating all of the fun, the conversation, frankly the breakthrough innovations taking place here in Miami but if you could flip it on its head and democratize access to value and gain and not socialize losses and privatize losses, that's part of the principle underpinning sound money. It's also part of the principle that has driven a lot of the global critics, frankly, of stable coins because so much of the early 13-year maiden voyage of the crypto assets industry has been plagued by internet funny money, vaporware, stable coins masquerading as sound and I think there has been a very legitimate regulatory global public policy conversation.

You particularly, and I have had to share those hot seats, have had to be at the center of defending the operating model, but assuming the defense is given and assuming the innovation of trusted forms of digital currency exists on the internet, what's next? Because there's other examples of the global economy, there's all these stranded assets and stranded opportunities to bank the unbanked to provide lower cost forms of payment we could agree is the bottom rung for the latter of economic mobility, but then you and I may be beneficiaries by the postal code we were born in of time value of money and leverage and interest rates working in our favor.

All these traditional banking and financial services that under the guise of consumer protection, many, many people are locked out of. Things like DeFi, things like programmable money, things like yield farming and yield markets start to flip the time value of money concept on its head, creating this notion of a money value of time or time value of money working in your favor but it's entirely programmable. It's always on. it's native to the internet.

Jeremy: Totally so there's a lot in there. I think taking this foundation of you have a full reserve money, the biggest critique that economists will make of that is well, lending is important. Lending is what creates economic activity. If it wasn't for the fact that the small business took out a loan to open up their restaurant and hire the workers, you wouldn't create those new jobs. The provisioning of credit, which is essentially the ability for someone to access money that they don't have, the time value of money in some ways is exactly that. I'm a house of hold or I'm a firm and I'd like to be able to do something.

I don't actually have enough money to do it, but I want someone to actually give me money right now to do it. There are ways we can do that where we put an asset up, which is what a mortgage is. I have this house and I'm willing to give you my house. Mr. Bank, Mrs. Bank, take my house and you'll give me a loan that if I can't repay it, then the bank takes the house, so that's one way. A lot of the creation which I think central banks care a lot about in this says, the criticism of this concept is, you need to be able to stimulate economic activity. You need to be able to have that take place and if you don't have the risk-taking on a fractional reserve system, then you won't be able to do that.

To me, I think this gets into some core things about the innovation of digital currency which is digital currency, dollar digital currency, stable coins like USDC are on a path to become as efficient to utilize as data on the internet. What does that mean? That just means that it doesn't cost me anything to move a piece of data on the internet. It happens at the speed of light, basically, and then people can use software to integrate that and do amazing things. Now, we'll have that with money. We'll have money that moves at the speed of light, money that moves at the cost of moving data on the internet, and it will be programmable. That's really, really powerful. Just at a base layer, that's extraordinary and we're very much on that path.

Then the question becomes, okay, how do you utilize that? It's not just about making payments more efficient, it's about how does money get used in the real economy? If the underlying dollars are fully reserved, then how does that happen? People lend the stable coins. What we've seen happen and this is the break breakthrough of blockchains, it's breakthrough of DeFi is people are basically borrowing and lending of these digital currencies. When someone borrows 100,000 USDC, there's no lending it 5 times over, there's 100,000 USDC, those are fixed units. Those are tokens that exist. There's fixed tokens. Those 100,000 USDC can be lent to someone. You can't lend it out 5 times or 8 times or 10 times, which is the leverage that you have.

People are doing this lending and you're seeing that emerge and I think one of the really critical things is there a way to utilize that money and have it be lent and utilized multiple times between multiple parties and do that in a way which is really, really well risk managed. When I think about the creation of a new financial system where there is lending, where there is the ability for people to get credit, but where there's less risk, this is the problem space that people are now thinking about, how to utilize this fixed reserve of money and enable that. I think my theory is that rather than banks being in business of creating money, which is what they do, that there may be ways just given the efficiency of how you can lock and move and program money that actually you could have more velocity of money in the economy.

The money itself could be utilized even more efficiently and more broadly, but actually still on a foundation that's lower risk. To me, one of the big concepts is when the utility of-- when the use of money, meaning how it's transmitted and what we think of payments the use of money. When that becomes instant and frictionless and zero cost, then that will actually expand the use cases of money itself maybe 100,000 X or a million X compared to what we have today.

Dante: There's so much to unpack in that. There are a couple of interesting conundrums and thoughts that I've always grappled with and have always had to explain, including the central banks. A couple of, let me just air a few of them and get your reactions to this. One of them is this notion that if money is in fact a public good and banking has an implied public backstop, therefore it is also a public good. Then why do I have to ask someone for permission to send it and pay someone for permission to hold it for me? Then why are there all of these insidious fees and non-sufficient funds fees if anybody who's listening remembers what that experience looks like when you bounce a check, I know,

Jeremy: I've got young adult sons and I get exactly email notifications of the overdraft fees.

Dante: Absolutely the overdraft fees and so to the extent there is this model of basic banking that young adult son would also understand the idea that you have to have a minimum balance at all times otherwise they charge you a fee for the privilege of getting a public good, that's a conundrum. The other interesting conundrum, and this one I picked up at a conference I was with, I was speaking with the Bank for International Settlements, that if you went to a regulator or a policymaker today with an innovation called physical cash, by today's regulatory standards, it would not be approved three reasons why.

One, it's opacity, two, it's limitation it'll extend as far as my arm could reach. Then three, in a global pandemic, it's a vector for spreading disease. The last quick irony is the operating model of, should these innovations be plugged into the traditional banking system as competition to them or are these innovations completing unfinished work? As an end user, as a market participant in the digital assets economy, you're participating in not a substitution of traditional banking and credit intermediation, but an alternative and that is the point. We're completing unfinished work.

Jeremy: A lot of things there. I think there are a lot of different ways to think about what's being built. My view and I think you see this in the dynamism and the creativity of what people are doing with DeFi, with programmable money, with open software on blockchains is this incredible innovation in the kinds of things that people could do with this. I think the first instinct is, it's got to look like, smell like, act like, and be regulated like a bank utility, like banks are these public utility functions and that's what needs to happen.

I think another view is actually what may emerge here and I think what will emerge here is financial products and services that are proverbially 10 X or 100 X better and that people haven't even thought of. I think the internet teaches us a lot of lessons about this. We had cable companies and that was an innovation that happened. There were terrestrial broadcast companies, and then there were cable companies and then the internet came along and all of a sudden you could have infinite video publishing and you had infinite the celestial jukebox of video of everything and just the massive explosion. You had just software apps that basically became complete substitutes for those closed architectures that were these heavily regulated communications firms.

The same thing with communications. We all use whether it be WhatsApp or Telegram or iMessage or pick whatever communications app, that's not AT&T or Verizon or British telecom or NTT, that's just software that we just download and use and gives us free communications. The utility of communications radically improved and it happened through this software. The same thing, the utility of money is going to radically improve. There's going to be huge new types of application services, utilities, and it's going to be way better than what we have seen from banking.

It will be something more user-controlled, greater privacy and security, significantly more efficient, inherently more global. There's going to be these kinds of innovations. It's not to say that you still need a regulatory framework around it, and you still probably need that because this is becoming such a big deal at a national and international level. If you just say, here's the rules that apply for what we think of historically banking, I think that doesn't work. It really requires a lot of imagination for a fresh start. What are the fundamental risks and how do we think about those? How can technology itself address those risks?

How can innovators innovate and solve for those problems? We didn't need local taxi commissions to come up with a way to regulate how people use ride-sharing. Ride sharing, created risk management using innovations in software and data. I think the same thing in terms of say credit intermediation that happens through DeFi and so on. That's just going to move at a pace and velocity and innovation that is faster. It already is. It's just moving way-- There's no regulator in the world that can keep up with the pace of innovation that's happening with programmable money on the internet. There's no regulator that can keep up with that.

At some level that scares the shit out of regulators. It's just like, whoa. Now the Bank of International Settlements is having a conference on CBDC stable coins and DeFi. Frankly, what that really just means is they're just grappling. What do we do about this? It's happening so fast. I think the mindset in terms of how to think about risk is different. It gets to core issues. We face this in stable coin land, as it were. People are concerned if this is going to be a dollar on the internet, how do we know it's a dollar? What kind of a dollar is it? What is the risk? What are the reserves? How do we audit that? How do we know what this is?

It's an invention of a new banking and banking model. It's an invention of a new banking payment system model. I think appropriate people are focused on the right risks. You do get to these core issues.

Dante: Well, and in there, there is a lot. I wanted to touch on the ride-sharing example just for a second because when category-creating companies in the urban mobility space, Uber, Lyft, and so on came up, the taxi cab companies, which had proverbial, if not, veritable monopolies on their trade--

Jeremy: The hotel commissions with Airbnb,

Dante: Absolutely. Everybody freaked out, but the rideshare companies were going places, taxis dared not travel and picking up people who were perhaps of the wrong complexion to go places the taxi companies perhaps dared not travel. There's also a similar paradigm taking place in this industry, which often gets a somewhat checkered scorecard on issues to financial inclusion. I was recently talking to folks in Senator Booker's office about the fact that the industry is over-index on minorities and folks who are historically underrepresented.

I think one of the very powerful examples why is the producer of Black Panther walks into a bank to take out his cash, ends up in handcuffs but yet, if there's a powerful example for why you should have personhood, a trusted counterparty on the internet being able to create credit from one another irrespective of all other factors, your credit score

Jeremy: Apolitical money.

Dante: It's apolitical money. There's a one willingness to pay a willingness to settle a willingness to trade. You talk about this idea, Jeremy, a lot of today, you don't send a cross-border email. You just send an email to a trusted counterparty. What happens if finance becomes flat and you're not sending cross-border payments, you're not intermediating across with a lot of intermediaries, but you're just trading with trusted counterparts?

Jeremy: It has, this is no longer a, what if, it has. There's nearly 200 billion, stable coins and dollar stable coins in circulation. There are trillions of dollars of transactions happening. There are literally thousands and thousands of companies around the world that are plugging into these protocols in almost every country in the world and people are exchanging value directly and they can take self custody of their digital currency, and that's extremely empowering. If I'm that minority or I'm fleeing a country right now, which happened to be 4 or 5 million people fleeing a country right now.

They can take control of their wealth using self custody of digital currency. They can take that with them and no one can take that from them. I think that's incredibly empowering and it does create new questions, new issues. Money is inherently borderless now, it just is. There's no turning that back. There's no turning that back. Bitcoin itself is intergalactic. Digital currencies that exist on public blockchains are inherently intergalactic. They just exist cryptographically, mathematically on these networks. There's no turning that back. That's really, really powerful and really, really empowering. Policymakers are going to have to adjust.

There's no putting the genie back in the bottle. They have to adjust. Countries that have mismanaged their finances, who've become extremely in debt, whose currencies are being devalued, people can vote with their smartphone to be in a safer financial system. There's no turning that back. There are going to be people who fight that, there are going to be governments that fight that, there's going to be probably blood on the streets in some countries because people are going to say, "No freaking way. I want self-sovereign money.

I want control. I'm going to do this. Don't you dare try and stop me." It's going to become that kind of issue in some places.

There is no turning back on that. It poses a lot of challenges. These themes of what will be the currencies of the internet. What are going to be the predominant currencies of the internet? Is it going to be dollar digital currencies? Is it going to be non-sovereign digital currencies? Like Bitcoin? Is it going to be synthetic digital currencies? It's going to probably be all of those, but it's just, we've entered this new era and it's here and people can deny it, but it is here.

Dante: Yes. Well, the reference point for me is if this is indeed the internet of value, we're in the dialup phase. My view also for the technology to really work, it has to fade to the background and the experience, if it is in fact, this internet of value, the experience is still clunky. If we're being honest about gas fees and the power of DAOs organizing to buy the constitution, but then the adverse consumer experience of trying to get their funds back minus $1.5 million of gas fees.

All of this is being abstracted away. I think you're the biggest mind I know on what is happening at the protocol layer, what is happening with all of the other building blocks for this era of programmable exquisite composable money. Do we get to a point where the tech fades to the complete background and you're merely making a transaction with a trusted counterparty?

Jeremy: Yes, absolutely. I think the interesting thing these are in some ways, there's the core technology issues, like scalability or privacy, these deeper technical issues that are constantly being solved and iterated on. As third generation of blockchains make this dramatically faster, cheaper, better next generation, even like the third-- I think of Ethereum too as it evolves as a third-generation blockchain architecture. We're seeing the background infrastructure really get upgraded so that we can solve that. It's also what people think of as the user interface, but really the user experience problem.

As you've noted, these technologies gain mass adoption when it fades to the background. It was when I could just download a messaging app and all I needed to know was someone's mobile phone number and it just plugged in and I could just work with that everywhere. That's all I needed to know that became the basis for billions of people being able to do mobile messaging. The digital identity and verified digital identity on top of a simpler user interface, on top of these blockchain networks, and so on. We're right on the cusp of that. I think I was in a conversation another episode of The Money Movement earlier today and people talk about the iPhone needed to happen for mobile to truly take hold.

It was this clunky clergy, we all bought smartphones, they're all awful, but we'd like, this is a smartphone, I have it, my Blackberry or whatever the hell it was, and eventually, someone got it right. They got the user interface, they blended together enough things to just make it beautiful, make it seamless, make it work, and no one has yet solved that. The consumer or the end-user application, because it's going to be a software application, that brings this to life.

There's a lot of people experimenting with it, building these new digital wallets, but they're not just digital wallets, they allow you to interact with new types of decentralized apps, they're for content, they're for identity. I think the good news and we're investing in some of the startups that are building these next-generation wallets if we want to call them that, but the paradigm of user experiences is the next leap. I think when I look at the building blocks, as you said, looking closely at those, they're all here. I think probably if there's 70,000 people here in town in Miami, I would assume that there's some of them who are building that right now, and we don't even know what that product is yet.

Dante: That's right. What is true though, irrespective of what that evolution looks like, is throughout the idea that you should have a trusted medium of exchange that transcends all of them, where you have no buyers and spenders remorse is in some respects if we are in a gold rush, sell tools, shovels, and pickaxes, don't dig for gold, and--

Jeremy: I've gone that for a living.

Dante: I know you have. I'm of the view that in many respects, a trusted dollar digital currency is a utility that ought to live across that [unintelligible 00:31:50].

Jeremy: Absolutely.

Dante: Then, therefore, on top of it, you could build the other rungs of this ladder of economic mobility that we've spoken of.

Jeremy: Yes, absolutely. There's the foundational infrastructure that is just needed, and people does need to be trusted. I think for it to work for households and firms and capital markets all around the world, it also has to have a level of supervision and assurance around it, while you're really trying to preserve as much as possible, the inherent power of a digital currency that just flows freely on the internet. That can be programmed and integrated in open software and open networks as well, and that's that balance that we're constantly fighting for.

Dante: Absolutely.

Jeremy: Well, good stuff, a lot of themes that we're exploring here, excited to have this conversation.

Dante: Likewise. This is my what? Third act on The Money Movement? [laughs]

Jeremy: It is.

Dante: Till the next one.

Jeremy: Thank you, Dante.

Dante: Thanks, Jeremy.