The Crypto Dollar Economy

Jeremy Allaire: Hello, I'm Jeremy Allaire. This is The Money Movement, a show where we explore the issues and ideas with this brave new world of digital currency and blockchains. This week we are going to continue on this theme of digital dollars. This is a theme we've been exploring now for months. As you're going to hear today, we're going to talk about crypto dollars, not digital dollars. We'll talk about what the difference is and the meaning behind that. Obviously, last week, and in earlier episodes, we've talked about stable coins extensively.

We've talked about future central bank digital currency models, hybrid central bank digital currency models. We've explored the role of the private sector versus governments operating and administering some of this themselves, what is that balance and set of trade-offs? This week we're going to turn our attention to another lens on this. What Castle Island Ventures co-founders Nic Carter and Matthew Walsh dub crypto dollars. Over the past two years, I've gotten to know Nic and Matt a bit and early this year sat down with them for a bit of a deep dive on the whole stable coin space and was really intrigued with the conversation and the thoughtfulness that they had about this problem space.

Then later this year, Nic and Matt penned a fantastic piece, which was published in July, which is linked in the show description dubbed, crypto dollars the story so far, which I think better than most analyses, really dove into the very profound and long-term implications of this innovation on society and, in general, kind of the birth, or perhaps rebirth of a free banking era. Really, really fascinating discussion. I'm actually very thrilled to have Nic and Matt on the show. Welcome guys.

Nic Carter: Thanks for having us Jeremy, excited to be here.

Jeremy: Excellent. Hey, Matt.

Matt Walsh: Hey, Jeremy. Great to see you. Thanks for having us on.

Jeremy: Yes, absolutely. You got a great mic there, Nic.

Nic: Thank you. It's just you do so many of these and you have to make sure you have quality equipment as well.

Jeremy: Yes. Now, I know. Awesome. Well, I'm super, super excited about this conversation. Maybe just kicking off. I think you have a high-level thesis and in the work that you guys have put out and obviously in listening to a lot of other conversations that you're having as well on your own podcast and out in the world. You talk about crypto dollars. You talk about crypto dollars as being very distinct from digital dollars. I think there's a lot of different conceptions, misconceptions, stable coins, digital dollars, central bank digital currency, and crypto dollars. My feeling, of course, is that you have a very specific meaning when you talk about crypto dollars. Maybe just first, what's the high-level thesis that you have around this idea of crypto dollars?

Nic: Well, I guess I can kick it off there. Our view on the phenomenon is really that it's the most impactful thing happening in the crypto industry in 2020. Building on the shoulders of giants. I don't think crypto dollars would exist if Bitcoin didn't exist, for instance, or if crypto exchanges weren't so ubiquitous or wallet technology hadn't reached the level that it reached. In some ways, this feels a little bit like the apotheosis of the crypto phenomenon. That's not to discredit Bitcoin or any of the commodity-like cryptocurrencies, but it's just pointing out that crypto users seem to have a revealed preference for using crypto dollars, just empirically looking at the data, looking at the transaction activity.

Our view on this is that it's satisfying a really important demand that has existed for a long time and is now possible to meet those expectations, which is effectively unencumbered commerce. More global, more natively seamless commerce. I think the key differentiator for crypto dollars is that they are-- encumbrance is the key, is that they give you more transactional freedom, more transactional autonomy. Then there's some other really nice qualities like settlement quality and things like that. At the core of it in our view is that they combine the high-quality settlement assurances that you get from cryptocurrencies like Bitcoin with the low volatility characteristics of Fiat and so it's a pretty happy marriage so far.

Jeremy: Yes, totally. I think when I first started using Bitcoin and playing around with public chains in 2012. If you're a crypto user, you have these aha moments of like, "Oh my God, this is this permissionless settlement. This is software. This is all the security dimensions to it and all these other things." It changes forever. I think your experience of money and it is. It's just this different level of freedom and use and utility and other. It's this marriage of the internet and money and software. I think is in some ways, if you already deeply understand the inherent benefits of cryptocurrency, of digital currency like that, yes, of course, if you're going to have a dollar version of that, that's awesome too.

The preference that emerged within the ecosystem to use that I certainly as you know that that inspired a lot of the work behind Circle. Coming back to maybe where I started too, there are all these different definitions concepts, if you talk to a lot of people, they couldn't really differentiate them that well. Obviously, you guys are incredibly deep in the space. Maybe talk a little bit about that segmentation a little bit. Matt, I don't know if you want to take this. There's different concepts and definitions. I think because we really want us to focus today on crypto dollars, maybe we can say what's not a crypto dollar?

Matt: Yes, definitely. Maybe I'll just opine a little bit about what you were just talking about in terms of how we got here first, and then they can talk a little bit about how we think about the segmentation. I was thinking back last night getting ready to do this around the first time that I met you at Fidelity and the original idea behind Circle and how in a lot of ways right now what's happening in the industry is exactly what you predicted would happen. I think the implementation details have shifted those.

If you think about those early days, we thought we'd be doing a lot of this on Bitcoin. There was a big push around [unintelligible 00:07:48] coins and the open assets protocol. Would this be a proper conduit to actually get some of these crypto dollars into practice? Then I guess we all know what happened there, and we end up with the ERC20 standard and then pushing this along. The way that we're sort of looking at the space now is that there's various different trade-offs in implementation details around how you access this market. Nic, do you want to talk a little bit maybe about the framework and how we segment the market?

Nic: Yes. You asked earlier about what's the difference between digital dollar and crypto dollar. I think that gets the core of it really. Digital dollar always confused me a little bit because seemed a little bit redundant to be honest, because most dollars are liabilities of the commercial bank system and they exist in digital format. In fact, the overwhelming majority of all of the instruments that we refer to as dollars are totally digital. I guess there's a couple of trillion in physical cash.

Jeremy: There are electronic records for them.

Nic: Yes. They're not electronic bearer assets per se, but they exist in digital format solely in digital format. I guess you can convert them into cash if you really wanted to physical cash, but for the most part, they exist electronically, which is why we chafe a little bit at the digital dollar conception or [unintelligible 00:0916]. I know crypto isn't the most popular prefix, people associate it with insalubrious activity and so on. To us, it's a more apt way to describe the phenomenon and carve it out relative to dollars that exist in the bank sector. I think the key differences or the crypto dollars aspire to be digital bearer assets. Something that if you know the private key, you are presumed to be the owner in the eyes of the blockchain.

Jeremy: It is a native digital asset, is a native data type as it were on the internet, right?

Nic: Yes.

Jeremy: Very, very differentiated from, again, this legacy electronic money.

Nic: You can fully assign control by broadcasting some data online without the reliance of a third party. To me, that's what the cyberpunks wanted to create. They wanted to create digital cash. If you go back and read the discussions, a lot of it's about dollars denominated or stable cash. It's not necessarily about volatile cash, which has all these additional assumptions about new monetary policies.

I think that's part of the reason the cyberpunk, some of them rejected Bitcoin because Bitcoin by definition was going to be volatile. Not that that's a problem per se. It's just, that's not exactly what some of the cyberpunks are trying to create in the 80s and 90s. If you look at digital cash that was a stable instrument as well. To me, the bearer asset nature is the really, really key differentiating factor.

Jeremy: I see that too, obviously. I think that part of why people go to digital dollar when referring to digital currency-based versions of dollars, you just watch this happening in the internet space. I remember in digital media, for example, you'd say, "Hey, we're actually doing digital media, digital video, or video on the internet, or all these things." The satellite companies were like, "Well, we do digital broadcast. Our satellite network is digital," and the cable companies were like, " We're doing digital video on demand, our cable is entirely digital." I remember they'd market like it's digital television. Satellite radio became digital. It was basically saying they're using software-based protocols and package rich data or whatever the hell they're doing to deliver those things.

They're still closed, walled-off, controlled, intermediated. They're not public on the internet. They're not able to attach to permissionless networks. They're not something that anyone anywhere can participate in with music and sound and text and communications. The real distinction is when you are, in my mind, something that is natively digital is on public networks. It is on the permissionless internet. It is attached to open-source software reference and implementation. For me, that's a huge difference and I think in a lot of people's minds digital currency does represent that, conceptual model is that. I like crypto dollars too.

Matt: The other thing is, Jeremy, it's programmable. That's something that none of these "Digital platforms" that are not built on public blockchains really ascribe to be. I think the surface area for the types of things that you can build on the internet just gets a lot larger by virtue [unintelligible 00:13:07]

Jeremy: Absolutely. The mashing stuff up and the composability and the fact that it's actually built on open software that people can connect to and so on is just tremendous. It's really tremendous.

Nic: Well. Our view is that this is not a debate between analog and digital. We've left the world of atoms behind, we've been in the world of bits for a long time. It's who controls the network, is there one nexus of control or is it distributed?

Jeremy: I guess in your paper and the discussions that you've had what makes crypto dollar special, there's a set of attributes that you've defined to say this is what defines these, this is what makes them what they are, and presumably some of those stuff. We touched a little bit on those, but maybe we could enumerate some of that and talk about it.

Nic: Honestly, I don't think we've even fully understood what makes them special. There's probably more features that we're going to discover, but the three that we layout are the permissionlessness, the encumbrance, or the relative lack of encumbrance, the fact that they operate on open networks, and the auditability as well, which is pretty underrated in my opinion. Obviously, I'm a little biased because we spend a lot of time looking at on-chain data, which to me is still pretty magical compared with the amount of data we have about-- You look at the data from the Federal Reserve Bank of St. Louis, there's some pretty interesting data there, but it's all inferred and you can't really directly apprehend a lot of this information about the dollar.

There's a delay and you can't account for all the dollars in circulation. I don't know if they could even determine how many dollars exist to the nearest billion, for instance. With crypto dollars, you can audit them to the last 10th of a penny so that's a significant difference. We've already touched on the transactional freedom, but I think that's really, really key.

I think it's a different model from say, PayPal, where PayPal is actively evaluating the risk of every single transfer that happens on the network. This seems a little different to me. Then you have the fact that it's on an open network and any talented developer can just build a product, effectively a smart contract, and deploy it to the world and not even have a relationship with their end-users. They can reference an existing composibility thing, which is pretty magical once you start to think about it. It just means that the pace of development is so much faster than the banking sector, which seems pretty sclerotic to us these days.

Jeremy: Yes. Matt.

Matt: [unintelligible 00:16:11] I think we're also just going to start to see a lot of competition on various axis of risk. There are some really fundamental trade-offs between using different types of stable coins too. I think you're going to start to see differentiation based on the censorship resisting properties of these networks. You're going to start to see differentiation based on some of these platforms are a lot more likely to have institutional participation. I would definitely put USDC on that platform. I think the addressable market of just dollars that can participate on those networks be a lot larger on networks like USDC versus something like--

Jeremy: I'd count dollar money markets and imagine if more of that was on digital currency.

Matt: Totally now the tradeoffs versus using something like Tether where we could argue whether or not that platform is fully backed, but certainly there would be censorship resistant trade-offs there, between this more centralized project [crosstalk]

Jeremy: The interesting thing on that is people talk about blacklisting and stable coins that have these censorship mechanisms built-in. I think it's been publicly disclosed that Center Consortium has approved one blacklist, but it turns out there's dozens and dozens of them done by Tether. Sometimes we don't know why, we don't know who, is it done for a friend who lost some money on an exchange? We don't really know. There's no transparency, there's no policy, there's no accountability. It's not censorship resistance at all.

Nic: I think I looked yesterday and there are 100 addresses blacklisted on Tether so far.

Jeremy: I think it does underscore the fact that I think what people perceive as maybe censorship-resistant maybe isn't.

Matt: I think the big question there in everyone's mind in the industry is what would happen in the event of enforcement action and what role would the parent company play and how would they fight that? Then the last one is just, I think we're going to start to see a lot more experimentation around some of these algorithmically designed platforms, and the key risk there is just around whether or not they break and whether or not they can whole peg. It's fascinating, just the innovation along all of those dimensions. I think depending on the use case, you would gravitate as a developer towards one category versus the other.

Nic: On that topic of blacklisting, one thing I've noticed recently is it's pretty arbitrary who can get access to the role back feature kind of thing. You see people do lose money with Tether. Maybe there's a bug. If they're loud enough on Twitter, they can get the attention of the team behind it and get that transaction nullified and not lose their dollars effectively. If you're a smaller fish you have a lesser ability to lobby. It's very vague and very unclear to me what the actual line of demarcation is or what the protocol is for having Tether itself overrule the ledger of record, which is the blockchain, which is not a great situation, I would say for users.

Jeremy: It's one of the reasons why a Center Consortium publishes its blacklisting policy on the transparency page on Center IO and it's extremely clear that basically if the fundamental security of the network is jeopardized say admin keys, privileged keys, things like that. Obviously, there would be a justification, but other than that the language is very clear, which is a final binding court order from a competent US jurisdiction presented to Center Consortium's governing body. That's pretty specific. Someone who's loud on Twitter, that doesn't meet that criteria.

Nic: That's a quite a high standard to meet.

Jeremy: It's a very high standard to meet. It's a very, very high standard to meet. I think it has to do with, how do you ensure that people can trust this as a reliable instrument? I think that there may be policies that emerge in the future that are outside of us that define other things that might need to be in place, but right now, Center Consortium is a governance mechanism on this, and it governs a lot of different things, but one of those is that policy and transparency is really key around that.

Nic: I guess the higher the barrier to climb is to asking for a blacklisting, just generally higher quality the settlement assurances are on the next [unintelligible 00:21:02]

Jeremy: I think that's exactly right. Yes, another theme, maybe just to touch on it, and there are so many things we could dive off on and stuff, which is fun, but the subtitle is the story so far in your paper, and I agree with you. We're early in this story. Most of the growth in this is literally in the last nine months. Obviously, there's been experiments in this for five years, but the story so far is we're really, really early. Maybe talk a little bit about from your perspective, the why now, why is this happening so pervasively right now? We'll go from there.

Matt: I can hop in there first. Maybe Nick has some different answers. I think there's a few things that are really top of mind. One is that just the overall strength of the US Dollar as the unit of account and the supreme apex predator of money on the global stage is really a big reason why there ought to be a lot of support behind things like crypto dollars, US dollar-backed instruments.

If you look at some of the movement coming out of China, and just what that would portend to do on a geopolitical scale if certain types of transactions at a global level of commodity sales, for instance, were to be denominated not in US dollars. So I think there's a lot of attention being paid from the higher ends of the US government around that use case. Along those lines kind of the story of why now, I think there's a big move made here by some of the largest payment providers in the United States.

If you look at some of the Paypals, the Visas, the Facebooks of the world that all have teams and really smart people mobilized around this, I think it's seen as an expert tier opportunity that can really expand access to financial services in ways that you really couldn't do before this, and it can expand the aperture of what is possible when we get into some of these programmability issues, really look at some of these technologies becoming foundational for the next generation of internet services being built on top of them.

I think the third thing that I would say in terms of why now is that there are a lot of forces from a capital markets perspective that make this a really interesting new market to enter. When think about some of the opportunities just around the market structure here and the lending and the borrowing, you have a lot of firms that are moving into looking at this as a real extension of things that they're already doing in the capital market space. [unintelligible 00:23:42] look at the infrastructure behind US dollars is really hasn't been changed a lot in the last 50 years. We have big industries there.

Jeremy: The base layer, every other function in the capital markets is built upon that.

Matt: Right. Then we have these well-functioning repo markets and money markets and I think in a lot of ways, this is the next generation of that. We're just at the very early ages here, but that is all getting built. When you think about stable coins and yield generation, and some of these interesting things you can do, it's fairly obvious if you're a market participant what these-- The addressable market here is huge. It's pretty clear that we're going to have some really large businesses built in some of these categories. I think that's another thing that's pushing this industry forward, this sector.

Nic: Yes, I can chime in on a couple more specific things. First of all, we're just seeing this secular move towards people understanding how to use digital bearer assets for the first time. Before 2009, that was never a thing that anyone had to worry about pretty much and the technology didn't exist to facilitate that. We had to start pretty much from scratch 2009.

It took a decade or so until we had the tools suitable to transact with value in the form of information and that was a really difficult and challenging time, a lot of people lost all their Bitcoins and so on learning that lesson. Now the software stack has progressed such that we can transact safely, and not have to worry about it too much. You look at the data, the Cambridge study says is about 100 million individuals worldwide that have ever used a cryptocurrency of some sort.

That's something, there's obviously caveats to that estimate, but I consider it to be fairly reliable. Five years ago that figure was much, much less. That number is just increasing. That's to the general growth characteristic of the industry. We've got a lot further to run, but that just means there's a much larger install base and potential users for these things. That's one reason why now, I think, is that there's just more people and more capital that's willing to allocate their assets to public blockchain-based digital assets.

One catalyst that was very clear to us was after the shock, the risk-off event in March 12, some of the traders we talked to were firmly of the opinion that there were some crypto businesses that had had their capital denominated in dollars, but not encrypted dollars and they were unable to move fast enough to exploit that situation where Bitcoin wicked down to $3,500 or something crazy. Then after that they realized, "Okay, we need crypto native liquidity."

Nic: Keep working capital. That's a trend we see. We see so many Blockchain native firms that are opening up accounts and their use cases are first-party payments and working capital, not just trading. Obviously, this is early adopter to some degree there, but it's fairly an interesting indicator. Reminds me of another thought I was just asked a question. One of the things that's been interesting about-- I'm just narrowing in on USDC for a moment, when you see USDC in circulation growing, it continues to grow even when the market goes down. It continues to grow when the market goes up, when there's low volatility it continues to grow. In some ways, people are saying, "Is USDC uncorrelated or what's the correlation? Why is that?"

That's something that we've noticed, obviously, as well. There's some really interesting things going on there, which relates to your comments, which is, I think one was when the investment asset markets are rising more capitals coming into the market. By definition, the sort of more capital comes in it comes in through tokenization, it comes in through things like the USDC, and then once it's in the market, there's holders of it, and they prefer to hold it. It stays sticky because the people who've already decided they like crypto dollars, when they're receiving those on the other end of the trade, or they're holding them, they want to hold them.

It generally stays sticky, but then when the market is selling off, people are selling into things like USDC, and they want to get out of whatever coin or whatever that they are trading, and they want to get into USDC. Again, they're crypto native and so they're saying, "Well, I'm just going to keep it in this, and then when I reenter the market, I'll be able to do that." Exactly the example that you gave, Nic. Then the other is obviously the rise of DeFi and all of the protocols that are out there on the yield side.

When it is idle, or when people are holding it, whether it is working capital or investment capital, or what have you, they can put it in a yield protocol and generate daily yield with instant liquidity that they sure as hell aren't going to get if they withdraw it out into native electronic commercial bank money. That makes it even more sticky. There's a little bit of a flywheel going on that. Then I think the thing that we're paying attention to is, at what point does that go from just working capital management into the deeper forms of payments and settlement and treasury and other activities that firms have where the advantages are so superior as well?

Obviously, crypto native firms get that. When does that cross into as you were saying at the very start like this new form of commerce activity that becomes possible?

Matt: One of the interesting things there is the OCC's stacks recently around stable coins, some of the clarity and [unintelligible 00:29:47] doing a lot of work educating folks on that front, but to me that just opens up the addressable market of deposits that are allowed to do these types of activities. It's not just the DeFi for the yield. You can use Genesis or BlockFi to generate much, much bigger yield than you would on a traditional money market. To me that OCC thing is really worth paying attention to and [crosstalk]

Jeremy: Absolutely. Well, that's a good segue. Rise of DeFi, everyone talks about it. There's a lot going on there, we could decompose that into lots of different things, but I think the interesting thing is, and I'd love to hear you guys talk more about it is this idea that there's this programmability, there's this composability, some of the first protocols that are programming underlying instruments like stable coins are; interest rate markets, credit markets. When you think about layering of the finance financial system, this is a really profound market infrastructure that's being invented and created here. Maybe talk a little bit about that.

Matt, you obviously saw this from the Fidelity side of the house where I think probably Fidelity is probably one of the biggest money market operators in the world. As you think about digital dollars, crypto dollars, crypto dollar money markets, the growth of those, function of those. It's obviously very related to DeFi, but how do you think about that?

Matt: The way that I think about it, when we generally discuss it is that there were really three foundational building blocks that had to be in place before we got to where we are now. One was around key management and custody. How can you safely hold these things either for yourself or on behalf of your customers? That has been built out pretty strongly over the past eight to nine years. To a point where you have large institutions participating in sovereign wealth funds, endowments holding these type of assets.

The second thing was around the liquidity landscape, just around the spot landscape, and how do you move these assets around safely? So exchanges and OTC desks. That's pretty well built out. Obviously, there's a long way to go and the regulatory environment is catching up and we're seeing a mixed shift between the types of institutions there.

Then the third really foundational thing that you had to have in place was just the data and the on-chain ability to query these systems and know that they were provably fair and index construction and getting fair pricing and IOSCO compliant frameworks and things like that just around the price of these things.

That's for Bitcoins well as any other type of open crypto asset. It's really on the foundation of the data, the exchange landscape, and the custody landscape that now you really start to see an unlocking in the capital markets landscape.

Think about repos and money markets, some of these things that exist in traditional markets. We're just building that again right now is my view in the crypto asset space. This is a really compelling category and I think we're going to start to see a lot more flows, just net flows moving into the system by virtue of this is already being built on top of plumbing that was built for Bitcoin and other crypto-assets already and it's institutional tested already.

Jeremy: It's interesting. Nick, what are your thoughts on these decentralized credit markets and interest rate markets?

Nic: I don't know. I'm in the Jake Chervinsky school thought that true credit doesn't exist DeFi yet. Not that what's happening isn't interesting, but he wrote this great piece saying, "Credit requires a notion of identity and underwriting and analysis of a business or an individual's cash flows and future earning prospects." I'm still thinking carefully about whether I want to say that credit exists in DeFi. I know there have been some small-scale experiments there.

Jeremy: Generally exists in CFI using crypto and stable coins and things like that.

Nic: Absolutely, absolutely. Yes.

Jeremy: Making the identity and reputation leap and untethering the asset from collateral, which is unsecured lending, right? That's not happening.

Nic: Exactly. That hasn't happened yet. I wouldn't say we have "maturity transformation." You don't have classic banking activities that occur in DeFi. That said, you have these amazing interest rate swap products, and you have this collateralized lending which is like taking out a line of credit against some equity that you hold without selling it. Which is a very common tool in traditional markets, which has now been democratized through DeFi. Any asset that you hold that can have a price in an on-chain context, the price doesn't even need to be from exchange, It could be from one of these kind of swap facilities. You could take the price from there.

Now you can borrow against that and have automated risk management. Those are some pretty interesting, and those are, in my opinion, the interest rates swaps like Compound and then borrowing against an asset that you hold. It might be a equity style of pseudo equity asset. Those are the two most interesting things to me. The numbers are still really small on the grand scheme. You're talking about a billion-ish dollars of liquidity on Compound.

I think the forex markets are probably two orders of magnitude larger than that, maybe more. We still have a long way to go, but I think some of the exchanges see where this is going. They see that these markets are just turning to foreign exchange clearinghouses. We see some of these centralized exchanges specifically optimizing for trading stable coins, they optimize so that the liquidity providers can earn the return, can measure it with the expectation that these assets are not necessarily that volatile relative to each other.

I think some of the utility tokens which powered this were due to the source of excitement. Some of those utility token theories are getting a little discredited and we're seeing the growth of tokens which are equity-like, which is probably a bit more interesting in that it comes with more rights, and then just Fiat currency representations, Fiat currency on-chain. It's weird that it's all dollars. It's 97% plus dollars. There's not a lot of other--

Jeremy: Let's talk about that cause obviously, again, you talk about crypto dollars, we talk about US dollar coin, et cetera. I think from a geopolitical perspective, obviously, all these countries around the world aren't just going to roll over and say, "Actually, everyone in my country can just transact in dollars and that's all fine."

Nic: Some of them might.

Jeremy: Some of them might. This is the question just from a geopolitically economic perspective. The question I ask is, is this going to be like the rise of the internet in earlier stages where the connectivity lit up, and then all of a sudden people were like, "Oh my God, I have global free communications and I can just do it directly through my computer and then my mobile device. I'm no longer bound by, as it were, the rules of the regulated communication system in Italy or pick your country, or the borderless nature. It happens, people opt in to a new information system, a new communication system, a new commerce system.

Will that rise happen and people around the world just say, "The utility value is so high. I'm voting with my smartphone. I'm going to participate in this economic system" Say the crypto dollar economy. Is it just going to be so powerful that the governments actually, even if they try to stop it that their citizenry will say, "Screw you"? That happened and those fault lines in areas like communications and censorship and other things have obviously gone different ways in different countries. I'm very interested to hear both of your thoughts on the geopolitical and political-economic implications of this over time in particular.

Matt: I think this will be very disruptive to the extent that there will be regimes that actually topple as a result of this technology. Much more so than any other technology we've seen over the past 20 years. It will be a bumpy road. I think that this technology, there's one kind of view here that is just as a border on the fringe technology. Then there's another that becomes a lot more pervasive in some of these countries. What's clear to me is that the dollar is definitely the apex predator of Fiat currencies, and there's really an insatiable appetite for dollars internationally.

You see that it's reflected, look no further than just the yield that you can get on some of these centralized platforms to reflect some of that demand there. There's other studies that you can look at some of just the [unintelligible 00:39:15] Craigslist-style transactions that are happening, where individuals are just trying to get us dollar exposure. I think the dollar as a savings technology actually is a use case here where we'll start to see and how that gets regulated [unintelligible 00:39:30] that we'll start to see some serious clampdowns at the on-ramps in some of these countries.

Nic: We launched yesterday with Ripio in Argentina and Brazil, they have a USDC product you can go from local currency into it. You can generate a 6% yield. It's a seamless experience. You can convert into Mercado Pago, which is the Amazon of Latin America. If you need to buy goods, you can do that too. That's pretty attractive.

Matt: Super attractive. I guess the question is, does it collaborate or does it compete with the local Fiat currencies of these areas? I think that's where the tension will arise, but part of me really thinks that the genie is out of the bottle here in the sense that there will be ways to get exposure to this, whether it's through a regulated on-ramp or whether it's through meet someone on the street and do a local Bitcoin-style transaction, but you're getting access to dollars and people will seek out whatever savings technology is best. I do think that this fits into that category of being a great savings technology, maybe a couple and things like Bitcoin which are obviously much more volatile.

Nic: Yes. Same feelings here. We feel that it's going to be very disruptive. States probably have a certain ability to fight back and try and discourage their citizens from using crypto dollars, but there have been plenty of cases historically where they've capitulated when their popular has said, "We don't trust your monetary direction and we're going to spontaneously opt for an alternative." That's always been the dollar. You've had top-down dollarization, bottom-up dollarization, Ecuador in the early 2000s was the bottom-up dollarized situation.

What has impaired or inhibited other the dollarization movements, Zimbabwe is a great example, Argentina is another example that you had to hold physical dollars, Venezuela as well. Actually, this is a massive hindrance to the dollarization Venezuela right now. There's not enough small bills. You have big bills circulating. It's hard to get smaller change. It's more challenging. Zimbabwe, the state was able to arrest the dollarization to a certain extent because there was just a shortage of physical dollars. It's hard to get them in. They didn't have a lot of trade relationships with the US. That's why dollarization has been easier in Latin America, but if you do it in a virtual way, it solves a lot of those problems.

You don't have those issues with denomination. You don't have the issue with dollars being captured by large financial institutions necessarily like in Argentina you had the Corralito, those were dollars and bank accounts that were suddenly, withdrawals were ceased overnight and then the Peso depreciated against the dollar. Those dollars that people thought that they had access to got trapped. Now, if it's a bearer-style asset, now you don't have to rely on a bank to hold it. It's your own property effectively. The government doesn't have these high leverage tools to inhibit that dollarization so it's a much more organic, much more distributed phenomenon, so it seems really different.

It seems like the dollarization events here will be more successful. That's absolutely our view. It'd be hard to forecast exactly the trajectory there. You can probably name some candidate states where there's a high level of crypto penetration. A high level of mobile penetration, good internet, tech-savvy individuals, high inflation rates, those would be the candidate places you'd say, "Wow, within the next 5 to 10 years, I expect something to happen here."

Jeremy: I guess it raises larger questions. Central banks on a global scale or what I would call global scale central bank G20, G10 whatever. Does this ultimately lead to, as this unfolds, does it lead to the potential for a more coordinated approach to synthetic global digital currencies that can exist in new units of account that are actually not just dollars, but that are synthetic? Is this a forcing function on a road towards that? Maybe Bitcoin is even part of that because it's a really attractive non-sovereign store value just like all Fiat used to have a peg to gold like does this synthetic Fiat currency basket with a peg to Bitcoin become a Bancor does something like that emerge out of this little mosaic we have?

Matt: That's where you start to get really disruptive to the United States. That's where I think that discussion gets really interesting. I thought it was interesting that Mark Carney's parting thoughts at Jackson Hole a year or two ago really had to do with that idea of creating this Bancor instrument. In that world, I think that the US's ability to be that apex predator of money really is compromised, but certainly, the incentives to have something like that if you're one of those G10 countries, that certainly exists.

Nic: I would say issuing the dollar was the "Exorbitant privilege" for a while, but it's probably worked against most Americans for the last 20, 30 years. The dollar trades that a structural premium because it's the world's reserve currency. That's part of the reason the manufacturing has been offshore, our exports less competitive. A lot of Americans don't know this, but I think they would massively benefit from a weaker dollar and something like a Bancor to solve effectively the Triffin dilemma.

It's kind of a weird situation where lots of policymakers want the world to be United on a single ledger that basically settles back to the dollar through New York, through the correspondent banking system because they get all this really granular power projection ability.

Jeremy: Absolutely.

Nic: At the same time, the American middle class gets shredded by the fact that our dollar is so strong. I would maybe wouldn't even necessarily object to a weaker dollar. I think it would be in line with welfare maximization.

Jeremy: Well, I think there's this forcing function bottom-up phenomenon that could be this catalyst that just forces these big players to get together and think through how to solve for this. That's one dimension. I think coming back to the very start and part of your thesis which is these crypto dollars, or let's just say high-quality digital bearer Fiat instruments or synthetic Fiat instruments, whatever these end up being, that they very powerfully enable commerce interactions to take place. They theoretically bring the world economic system, makes it more integrated, enables market participants, individuals, creators, laborers, firms, et cetera to have a different level of commerce taking place.

It may be that just the leaps forward that emerged from that over 10 years that also become forcing functions to trying to say, "Hey, why don't we just get to a different unit of account here?" If you read Ray Dalio's recent history book, books, whatever you want to call it in these supercycles and in these monetary regime supercycles and looking at the United States, looking at China, the inevitability of China being the dominant economy in the world in the next five years seems like largest at least, the fact that more trade will be denominated in digital Yuan, those issues might come more to the forefront in five years.

Nic: Yes. The thing is to replace a global reserve currency, you need an incredibly overwhelming new superpower to underwrite that. It doesn't seem clear that China could do that today. There hasn't been a global realignment as of yet. Often it follows some political turmoil, some transition. World War 1 was really the event which took the Pound Sterling off and installed the dollar. That hasn't happened yet, maybe something will happen, who knows. It's not clear that there's an alternative to the dollar right now. I know everyone likes to predict the fall of the dollar as the reserve currency. Maybe the future is just a number of interlocking currencies that trade can settle in, some of them politically neutral currencies like Bitcoin.

Matt: It would seem to me that some sort of blended currency like a Bancor would be more palatable. I think the other interesting thing there is just if you think about the ability for the US government to enforce sections on a huge scale and just large swaths of the financial services infrastructure landscape has really become an enforcement arm of the US government in a lot of different ways. What moving off of a dollar standard would do to that ability to really have this ability to do those type of transactions, I think that's a big open question, but there'll be a lot of pushback if we move towards something that is not dollar denominative.

Jeremy: Yes. There's lots of questions, lots to unpack. We could go on and on, on all this. Well, this has been awesome conversation and would love to continue another time as well. Any closing thoughts? One of the things I always like to ask people is where do you see this in two to three years? Where do you see this in 5 to 10 years, maybe from each of you guys?

Matt: To me, I guess the closing thought would be that if you look at everything that we're talking about and how big the three of us think that this is going to be, there are entire categories of companies that don't exist yet to service some of these needs. There are just enormous opportunities here to start businesses. That's really what I'm probably the most excited about, is just some of these capital markets businesses, this infrastructure around how to build applications on top of these things, lending and borrowing and payments. I think it's just a really exciting time to spend some time to get educated about it and see where those opportunities are.

Jeremy: Thank you, Matt.

Nic: My parting thought is this. The current financial system is that exists today is very uneven not just within the US but internationally, depending on which state you reside in, your kind of access to power, you have very variable access to Western financial rails. In particular, the US banking system was really the gold standard and it's a multi-tiered model.

The larger number of hops you are away from New York, basically the more expensive it gets. That's why you have these really inefficient expensive remittance channels. In the near term, I see crypto dollars flattening that topology and that's already happening.

It's only one hop to get into that global clearinghouse, which is on public blockchains as opposed to five hops. Regardless of the inefficiencies or the high fees or the cost of using a system like that, it's already a hundred X better. It's a single hop, you get to the global clearinghouse value, you're there. That is a near-term phenomenon, it's not going away. I think it's going to make cross-border commerce much easier B2B settlement. It's going to open up some of these labor markets, which weren't really integrated. I think maybe it'll be, who knows, maybe it'll be bad for the wages of white-collar Americans because it's much easier to do business with people abroad and hire abroad.

It may be not good for Americans, but it'd probably be not good in terms of creating wealth globally. That's the near term. Longer-term I think we expect and believe that most for an exchange clearance will start to happen on public blockchains. Right now we're talking about 20 billion free float. That number could be a hundred billion by the end of next year easily. The only constraints there are the balance sheets of the banks backing them. If you hybridize it with a CBDC and you combine it with access to base money, then there's no constraint whatsoever.

That number is going to grow by at least an order of magnitude. In my opinion, probably more. You look at the pace of growth and this is still such a small industry 20 billion. It seems big, but I think it's a pretty small in the grand scheme.

Jeremy: Completely agree. I've been more frequently saying I can see a world where there's a trillion-plus denominated in these types of digital crypto dollars.

Nic: Easily. There are no constraints on the ledger. The ledger doesn't really have any constraints. It scales with value.

Jeremy: Absolutely. Awesome. This has been an awesome conversation, you guys. Deeply appreciate you coming on. We'll look forward to chatting again really soon.

Matt: Thanks, Jeremy. Thanks for having us on.

Nic: Thanks, Jeremy.

Jeremy: Thank you. Absolutely. Fascinating conversation with some very, very bright minds in the space pursuing and thinking about all of these themes that we're very much enthusiastically working on together. Next week, we're working on a very cool episode. We'll have more to say about it next week. Until next time, stay well, stay safe, and stay informed. Thank you.

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