Stablecoins and National Security | Former CFTC Chair Timothy Massad

are we going to get comfortable with digital assets with tokenized assets traveling on decentralized blockchains or not they pose enormous advantages in terms of innovation composability Open Access but on the other hand decentralized blockchains may not offer the kind of governance that we'd like the kind of ability to check identity and our financial system does turn on the ability to know who is transacting so how do we balance that that to me is the central

issue welcome to bank list where today we're exploring the frontier of stable coins and National Security this is Ryan Shan Adams I'm here with David Hoffman and we're here to help you become more bankless the question today how should the US government think about stable coins and crypto from a unique vantage point something we haven't talked about before which is National Security I think it's safe to say that many in DC have different concerns than probably the listeners of Bank list with respect to crypto and one in particular is this

if something like stable coins gain adoption does that Nerf the US ability to sanction how does the US come up with policy around this Timothy massed is the perfect guest for the conversation today he was the Obama appointed chair for the cfdc this is the guy that uh actually helped designate Bitcoin as a commodity way back when 10 years ago and I would call him a maybe cautious stablecoin Advocate though there is definitely some Nuance here few things we talk about today number one why the US Can't Ignore stable coins number two how stable coins

are similar to Euro dollars number three is crypto even compatible with us Financial sanctions and dollar Supremacy number four what would sensible policy on stable coins even look like in the US and finally his thoughts on what happens next in the crypto World We tend to be in our own bubble about what we want out of the crypto industry and how we want to be regulated as big crypto adoc K me and Ryan we don't often get the chance to talk to people who have different perspectives uh but this is what is happening here today on the show today

we had the opportunity to bring someone who does not think like us onto the show and have a conversation on Bank list Ryan and I like to host conversations with people who don't necessarily share our perspective and our values but definitely do have a coherent opinion as to how this industry ought to and needs to integrate with the pre-existing Financial system uh Tim while he does not share our perspectives I think we can find ourselves shoulder-to-shoulder with him uh about a lot of things and a lot of opinions and I think Tim represents the type of person that

crypto needs to win the hearts and minds of in order to get what we want out of appropriate crypto regulation and with all that in mind let's go ahead and get right into the episode with Timothy mid but first i'm one want to talk about some of these fantastic sponsors that make the show possible especially Kraken our preferred crypto Exchange in 2024 if you do not have an account with Kraken consider clicking the links in the show notes so getting started with Kraken today if you want a crypto trading experience experience backed by worldclass security and awardwinning support teams then head over to Kraken one of the longest standing and most secure crypto Platforms in the world kren is on a journey to build a more

accessible inclusive and fair Financial system making it simple and secure for everyone everywhere to trade crypto kraken's intuitive trading tools are designed to grow with you empowering you to make your first or your H hundredth trade in just a few clicks and there's an awardwinning client support team available 24/7 to help you along the way along with a whole range of educational guides articles and videos with products and features like Kraken Pro and Kraken nft Marketplace and a Seamless app to bring it all together it's really the perfect place to get your complete crypto experience so check out the

simple secure and Powerful way for everyone to trade crypto whether you're a complete beginner or a Season Pro go to kraken.com banlists to see what crypto can be not investment advice crypto trading involves risk of loss cell is the mobile first evm compatible carbon negative blockchain built for the real world driving real world use cases like mobile payments and mobile Defi and with Opera min pay as one of the fastest growing web 3 wallets cell is seeing a meteor rise with over 300 million transactions and 1.5 million monthly active addresses and now cello is looking to come home to ethereum as a

layer two optimism polygon matter labs and arbitrum have all thrown their hats in the ring for the cell layer 2 to build upon their Stacks why the competition the cell layer 2 will bring huge advantages like a decentralized sequencer offchain data availability secured by ethereum validators and one block finality what does that all mean for you with cell layer 2 gas fees will stay low and you can even pay for gas natively using erc20 tokens sending crypto to phone numbers across wallets using social connect but cell is a community governed protocol this means that cell needs you to weigh in and make

your voice heard join the conversation in the cell forums follow cell on Twitter and visit c.org to shape the future of ethereum arbitrum is the leading ethereum scaling solution that is home to hundreds of decentralized applications arbitrium technology allows you to interact with ethereum at scale with low fees and faster transactions arbitrum has the leading defi ecosystem strong infrastructure options flourishing nfts and is quickly becoming the web 3 gaming Hub explore the ecosystem at portal. arbitrum doio are you looking to permissionless launch your own arbitrum orbit chain arbitrum

orbit allows anyone to utilize arbitrum secure scaling technology to build your own orbit chain giving you access to interoperable customizable permissions with dedicated throughput whether you are a developer an Enterprise or user arbitr from orbit lets you take your project to new heights all of these technology leverage the security and decentralization of ethereum experience web 3 development the way it was always meant to be secure fast cheap and friction free visit arbitrum doio and get your journey started in one of the largest ethereum communities bankless nation very excited to introduce you to

Timothy massed he is a senior fellow at Brookings he's also a research fellow at Harvard and he was an obama-appointed chair for the cftc where he served from 2014 to 2017 and more recently and of interest to us us is he has taken a keen interest in stable coins he published this article in April that David and I caught wind of it's called stable coins and National Security learning the lessons of the euro dollar that's the title and it really caught our attention after reading it because it Dove

headlong into what I consider kind of the elephant in the room that everyone's avoiding how do stable coins impact National Defense can crypto and the nation state work together so there's lots to explore in today's episode so Tim welcome to bankless thank you Ryan and David it's great to be here uh well we excited to dive into this uh I I was wondering for our audience if you could just tell us a little bit about your background and more specifically the background that is more most relevant to your interest in stable coins because you have become more recently interested

in stable coins how did that happen well I've been interested in stable coins and crypto for quite a while actually and I've been writing about the space for quite a while and actually I first testified about crypto 10 years ago if you can before Congress 2014 it's before me and Ryan got into crypto I think Tim beats me on that I just started in crypto in 2014 so you might be an OG here Tim right and it was around that time that the cftc under my leadership

declared Bitcoin a commodity and we can get into why we did that because a lot of people actually don't understand why we did that thanks by the way appreciate that um and then when I left the cftc um in 2017 I was thinking about what I wanted to do next and I became a senior fellow at at the Kennedy School at Harvard and I decided to start you know doing some writing about crypto so I actually published my first paper on the need to strengthen crypto

regulation uh in 2019 and I talked about this problem of you know is it a security is it a commodity how do we deal with that we don't have a regulator for the cash market and commodities and actually in that paper I it was funny because I was going back to it the other day I also talked about the fact that well we shouldn't let regulation push everything towards centralized intermediaries because one of the benefits of this technology is the potential decentralization aspects of it

so uh an important issue perhaps it's going to be debated uh as recording this as we're talking right but anyway then I started writing about stable coins in early 2021 I think because I was sort of watching what was happening and um uh wrote a piece I guess initially for Bloomberg or Brookings I can't remember where the first one was where I talked about the fact that look these things exist we need to bring them within the

regulatory perimeter if you will they have certain risks but they also have certain benefits and opportunities and that's continued to be my view that stable coins do pose certain risks that need to be addressed but they also could uh enhance payments and they could be an important uh competitive um instrument in payments and you know they do effectively kind of support uh the dollar in a way um this most recent paper as you as you note

focuses on the National Security aspects and you know we can talk about what those are and what I said in that paper Okay quick quick side quest before we get into in the main into the main event we talk about um the EUR dollars and and stable coins and and kind of the paper which is uh so under your leadership um uh the cftc uh declared that Bitcoin uh was a commodity and this is of course very relevant to current debates we even also as we speak um there's the question of whether the SEC is going to allow

ethereum to have an ETF and I think this will be resolved by by the time listeners listen to this so listeners in the future you have the advantage of knowing what's actually going to happen right now I'm wondering if if uh you have any weighin on this on this debate specifically with ethereum like it seems like the cftc has already also said it's a commodity but maybe there's some territory War Turf War I don't know what you can get into here but you are no longer on the cftc so so maybe tell us how this all works like what's your take

on this well the funny thing is and this is one of the fact fact that people don't understand something can actually be a commodity and a security uh but you know look let me let me maybe say a couple things first when we declared Bitcoin a commodity we weren't I didn't do that in order to you know start a Turf fight with the SEC okay um we did that because the definition of a commodity under our federal law is a long list of things that everybody would

say oh yeah that's a commodity you know cotton uh oil uh other agricultural products and so forth but then the definition in the law also says and anything else and I'm paraphrasing but anything else that is the subject of a contract for future delivery meaning a Future's contract or a swap there were people who wanted to do Bitcoin swaps in 2014 and they came into our office and asked us well you know we want to launch these what do you think and we said well if you do that it's a commodity um and

it's subject to our approval and that's what led to the uh determination which was upheld by the court and then you know we were the first agency to start bringing enforcement actions but we also did approve Bitcoin swaps so as to Ether look um I think I get the reluctance of chair Gensler to say whether ether is a security or not I I think that probably

goes to issues of well isn't there some group of people that seems to be involved here in and you can look at things that have happened right look at what happened after the Dow attack and you know the reversal of of um uh the Dow attack back in whenever that was 2016 look at the merge um and you sort of say well wait is there a group of people that's kind of in charge here on the other hand obviously it is um very

uh widely distributed and it's probably you know water under the bridge at this point uh to to assert that this is that this is a security but as to the ETF um I don't know I really don't know I'm not sure that they will approve it Timothy uh can you just Place us in your head when you were uh learning about crypto you reading about crypto learning about it for the first time the bulk of this podcast I think is mostly going to be focused on stable coins yeah uh just remember what your first impressions were when you read about stable coins

and like was there some sort of like maybe maybe a Eureka moment or an AA moment like oh this is this is what this is this is the this is how this is going to go just maybe uh if you could remember your first impressions about stable coins and crypto well I think particularly with stable coins I thought oh this is a really interesting application of the technology um because I think up to that point I was intrigued but you know when I was sort of looking at unbacked crypto assets and looking at what was happening in the market it

seemed that while there was a lot of investor interest um it was largely driven you know by speculative forces by supplying demand forces there wasn't a clear use case to a lot of the tokens that were being issued I would say that's not to say that Bitcoin isn't you know a very very interesting thing and as is ethereum and as our other you know uh um blockchains and layer ones um but

I think when I first started learning about stable coins I thought oh wow this is you know this is essentially onchain money and it was around that same time I think that you know people were talking about cbdcs and so forth I I first really got into it with the Facebook announcement of Libra and um actually that was the first paper I really wrote about stable coins they didn't call it a stable coin of course but that's what it was and I

found that fascinating I found their proposal fascinating uh because everybody you know I think there was a lot of opposition to it of course and it never got off the ground a lot of that opposition was due to who Facebook was right meta now of course but it was because you know people were upset about uh the power that Facebook had about its failure to protect privacy about things that people felt it did in the 2016 election and that was kind of

overhanging the whole issue plus Libra in its first iteration was a basket of currencies I was just about to bring that up I recall this 2019 it wasn't even the dollar it was a bask of different Fiat C basket of this and I actually went out and talked to them I met with David Marcus and others and I said you know why are you doing it this way and they basically said well give us some time he wouldn't tell me what was going on but it was like a couple months

later they came out with the revision uh where it was you know individual tokens for individual currencies which I thought well that makes a lot more sense and so I wrote a paper for Brookings about all this um where I basically said look I understand the objections to Facebook I understand the need to protect privacy and to think about the data that comes from all this but I basically was still in favor of creating a regulatory regime to allow

this because of potential competition in payments and because of potential benefits to financial inclusion okay and at that same time I looked at what was happening with China with um WeChat pay and Ali pay and also how how the Chinese government had responded to those in terms of creating a regulatory framework and I said look we can basically learn from what they've done because they put in you know kind of some credential measures and that's what we would need for this sort of thing so that's where I

was and of course you know that announcement transformed things in a lot of ways right it it caused Central Bankers around the world to realize gee we got to pay attention to crypto and digital assets it caused a lot of central banks to start to do um research and development on cbdcs and of course it it started to focus people's attention on stable coins and then you know it was a little bit after that that I started sort of

looking at tether and getting worried about tether because there was so little transparency there and it wasn't clear what they were investing um the assets in you know and all this is very funny when you look back because you know again I'm not saying we you know Facebook didn't have its issues uh and obviously I I was concerned about the data and privacy issues but on the other hand what they were proposing was in the second iteration a lot safer than than a

lot of things you know that uh have since been launched so it was kind of ironic just tie a bow on that for people like who who don't and even my memory is kind of hazy I I actually just don't know what happened but like why did the Libra DM project from Facebook actually die like why did they abandon it I think my impression largely was like basically and this is probably a gross oversimplification but I think this is in a lot of listeners Minds the US government didn't want them to have it Congress didn't want them to have it and they realized that like um yeah this

wasn't the hill to die on so they just moved on to like you know Ai and like the metaverse and stuff like that and they just like abandoned the project is is that accurate or what you revise yeah ran that's basically accurate um what happened was that they first sort of setup shop in Switzerland they set up the corporation there but the Swiss authorities sort of said and again this is by now we're in Libra 2.0 you know or what was then called DM which was the

individual tokens representing individual currencies and the Swiss authori sort of said look we're not going to approve this unless the US government approves it um um and there were a lot of conversations uh with treasury with the Federal Reserve and ultimately those authorities were not willing to to Grant permission what's very interesting about all this of course is that unlike perhaps its pattern in other ways this is one

occasion where Facebook asked for permission and so they didn't get it and I remember watching the hearings shortly after they made the announcement and Zuckerberg testified David Marcus testified and they were asked by Congress person after Congress person well are you going to do this if you don't have all the regulatory approvals and they said oh no no no no no we're going to get all the regulatory approvals and I was sitting there thinking well what are those there's no framework for this there's no regulatory

framework you don't even know what approvals you know you really need but because they said they would not do it unless it was blessed by Regulators they were kind of in a box the other thing that's really ironic about it all to me is when you go back and watch those hearings congressperson after congressperson said this is going to undermine the US dollar and and that was in the first iteration right when it was a basket of currencies it was the dollar

it was the Yen it was uh the pound I went to China like two months after that to a to a you know fintech conference in Shanghai and I talked to a lot of Chinese officials and they were all very worried about Libra because they said this is going to promote the dollar and they saw they said you know the dollar is going to be the biggest component of the basket so this is going to promote the dollar so they were very worried and that was one of the things

that caused them to accelerate their cbdc research oh wow um so it's it's a fascinating history it's ironic it's interesting how all this works and I do think by by the way I'll just say this like out loud but part of the takeaway from crypto was yeah like um ask for forgiveness rather than permission because if you go to Congress they're not going to have the vision uh they don't have a startup mindset of what this thing could become it's really not in in their DNA or their function I I want to ask you this question let me let me just Jack Ryan as a former regulator

let me make clear I'm not encouraging people you know forgiveness later fair I'm not I'm not endorsing that I'm just commenting on what their strategy not endorsing the the bankless lifestyle fair enough that's that's that's our job over here um let's get this piece out of the way before we get into your paper and and the background and Euro dollars I think there's still a lot of people in the US government who um don't care about stable coins right basically okay so in

the C in the crypto space we're all very excited right now about St coins were at all-time highs in terms of like number of transactions in terms of number of holders we're almost at all-time highs in Supply closing in on $200 billion which would be a new Landmark for the amount of stable coins out there but many in government just see $200 billion and they're just like we handle trillions like wake me up when this actually matters and they go back and they look at DM and Libra and it was much to do about nothing nothing actually happened here we are five years later and they say Tim uh stable coins

are just too small to care about it's a niche like why why are you spending time on it why should any of us spend time on it what do you say to that so yeah it's a good point and what I say to that is I think it's important as a competitive uh factor in payments um and because we don't really know what the potential is let's step back for a moment the US despite having the world's largest economy most Innovative economy

strongest economy has a lousy payment system it's slow it's costly and it has we have problems with access now most of us don't realize that right we think everything's fine I've got my credit cards I've got Mobile Banking I've got maybe venmo or Apple pay Google pay whatever and boy I'm making payments and they're going quickly and you know what's the issue well the issue is it's it's actually costing all of us more

than we realize because Merchants are paying the costs of of those you know of those credit cards that's number one it is slower than what we could have and that is particularly a problem for people who don't have much money if you don't have very much money in your bank account and you go to cash a check you're not going to that check isn't going to clear for three days and so that is why a lot a lot of people in the lower quadrant of income in this country

use non-banking services like check cashing services and payday lenders right because they get paid on a Friday but they need to pay their bills and they can't wait three days or they can't risk getting an overdraft charge so they go to a Check Casher they get cash right away that Check Casher may even send checks to pay their bills a lot of them do that but it costs them a lot it costs poor people roughly 10% of their income just to use their income so that's a big problem but

just to really reiterate the the there our cost of our high friction slower banking system is just obfuscated from um the it's obus skated away for most people that have any sufficient amount of money and the longtail is severely penalized by comparison right so stable coins when you really get down to it stable coins are like another form of narrow banking if you will right I mean

in other words banking traditionally we have bundled the functions of deposit taking credit creation and payments all in a bank you had to be a bank you had to get a charter as a bank and you were regulated as a bank your deposits were insured you got you know the backing of the fed and that's you know good system it's a it's a great system we have a very you know healthy strong banking system but with these technological developments it's possible to have to sort of unbundle some of those things

and payments is one thing that I think can be unbundled if you will and I think having sort of non-bank payment providers that are properly regulated can be a good thing for competition can be a good thing for Innovation and obviously the other aspect of this with stable coins is because it's on chain you have all these potential you know Innovative facets of being on chain right Atomic settlement programmability all those things so all that's good so that is why I have argued

now for several years that we should bring these things within the regulatory framework we need a strong regulatory framework credential measures you know to ensure that they uh invest the reserves appropriately but also measures to prevent El activity but they can be a force for competition for Innovation and that's all to the good I think as a US citizen this was most impressed upon me as I was learning about the um uh like

Chinese digital um you know R&B type system digital wand system and uh the how inexpensive it was to use something like alipe or WeChat as a percent so when uh we are doing payments uh in the US there there's like a transaction ction cost that credit card companies pay the merchant Merchant that that they charge that Merchants pay it's about 3% in China when you're dealing with kind of a digital currency they don't have this network set up it's fractions of a per. so imagine this behind the scenes

there's a 3% tax on all of these payments that the system is bearing in addition to some of the other things that you mentioned right and and the thing is we could have fixed this without stable coins okay we could have done what most other developed countries have done in the world as well as emerging markets and implemented a fast payment system we didn't need blockchain we didn't need stable coins to do that but we haven't done it and so stable coins are out there and so I look at

them as like okay this is something that can be a force for Innovation I'm not sure at the end of the day stable coins will scale and will be that influential and but what I've seen U from both the Libra announcement and you know what circle is doing and other things is it got the attention of banks it got the attention of central bankers and so now there's a lot more talk about okay you know what do we need to do here and

there you know there are big Banks now who are doing very interesting things on their own in terms of looking at tokenized deposits and uh and other Innovations finally I would say you know yeah absolutely and we would say as well okay so let's get into some of the framing of of your of your paper in order to kind of talk about uh stable coins and maybe some of the national um security concerns I think we we have to do some background context uh and a great lens on this a lens that we enjoy and I think you you highlighted in your

paper is the euro dollar a lot of people don't know the history of the euro dollar in fact but but uh I think there are some great analogues to stable coins in the euro dollar in fact one of our colleagues uh doesn't like the term Nick Carter doesn't like the term Euro dollars at all uh or sorry staple coins at all he prefers crypto dollars to describe this because of the close close analoges that hasn't picked up so we're not calling this the crypto dollar episode but um we'll call it stable coins can you give us the history of uh the euro dollar so how did that come

about it seems like there was some us resistance to it at first and then uh gradual acceptance how did that happen why did people demand it just give us the full history here Tim sure okay so first of all let's define what we mean by Euro dollars Euro dollars are any deposit of dollars outside of the US and today we use the term Euro dollars those deposits could be in a Japanese bank they could be you know in any Bank outside of the US outside of the US regulated banking system but they

started in Europe and the way they started was some of the Communist block countries were trying to figure out where where should we keep our dollars they had small amounts of dollars uh Russia in particular and um they didn't want to keep them in the US for fear that us authorities would seize them someday um and so they found a bank in Paris that would accept the deposits and they put them there and that bank's um

Telex address I think is what led to the name Euro dollars um because it was the euro bank or something like that I can't remember now um so initially the market was very very small MH um and US Regulators kind of ignored it because it was small but it grew because Banks overseas in Europe found a way to use those dollars they could use them uh for um foreign currency transactions and then eventually they started using them

for loans and so the market started to grow and so it started to get the ion of people at the Federal Reserve and at the US Treasury would you say that that the supply of Euro dollars grew because Euro dollars found a way to become financialized well they they had use I mean Banks you know Banks found a way to use them uh they realize hey you know we can do things with these dollar deposits um which is what banks do um and so they started to grow and but even then um the