Episode 95 of the Public Key podcast is here! Stablecoin regulations have been slowly popping up around the world. In this episode, we speak to the newly appointed Vice President and Deputy General Counsel, Global Policy at Circle, Corey Then and our very own VP of Global Public Policy, Caroline Malcolm, to discuss stablecoin regulation, USDC’s integration into international markets and the threat of de-dollarization.
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Public Key Episode 95: The Rise of Stablecoins and the Future of Global Finance
Stablecoin regulations have been slowly popping up around the world and in this episode, Ian Andrews (CMO, Chainalysis) speaks to the newly appointed Vice President and Deputy General Counsel, Global Policy at Circle, Corey Then and our very own policy expert, Caroline Malcolm to discuss stablecoin regulation, USDC’s integration into international markets and the threat of de-dollarization.
Corey explains how USDC works and its role in the digital asset ecosystem, as well as Circle’s business model and how it differs from other stablecoin issuers. .
Corey and Caroline simplify the global regulatory landscape for stablecoins and discuss the importance of regulatory harmonization and the need for the US to enact payment stablecoin legislation, while maintaining high standards for AML/CFT requirements.
They also touch on the competition between stablecoins and Central Bank Digital Currencies (CBDCs), as well as the potential for stablecoins to facilitate dollarization in economies facing high inflation or restrictive capital controls.
Quote of the episode
“I think the arc of history here bends towards well regulated digital dollars and policymakers around the world have come to recognize that and are really beginning to work together to come up with responsible legislation.” – Corey Then (Vice President and Deputy General Counsel, Global Policy, Circle)
Minute-by-minute episode breakdown
- (2:00) – Overview of how USDC works and Circle’s business model
- (4:40) – Progress in the regulation and standards for stablecoins globally
- (6:50) – Circle’s role in leading stablecoin policy and increasing regulation concerns in USA
- (19:50) – The emergence of BRICS and how does that impact global stablecoin ecosystem and industry players
- (25:21) – Grassroots adoption of cryptocurrency and stablecoins in markets with high inflation and capital controls
- (30:50) – Importance of following AML and CFT regulations for stablecoin issuers
Related resources
Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.
- Website: Circle: We’re building a new internet financial system
- Blog: Transparency Report:USDC is always redeemable 1:1 for US dollars, and EURC is always redeemable 1:1 for euros.
- Video Series: The Money Movement (A conversation with Jeremy Allaire and Sheila Warren)
- Report: The State of the USDC Economy Report
- Placeholder: NEWLY RELEASED BLOG ETC
- Event: Chainalysis Links Conference NYC 2024 (Apr. 9-10, 2024) – Early Bird Pricing On Now!
- YouTube: Chainalysis YouTube page
- Twitter: Chainalysis Twitter: Building trust in blockchain
- Tik Tok: Building trust in #blockchains among people, businesses, and governments.
- Telegram: Chainalysis on Telegram
Speakers on today’s episode
- Ian Andrews * Host * (Chief Marketing Officer, Chainalysis)
- Corey Then (Vice President and Deputy General Counsel, Global Policy, Circle)
- Caroline Malcolm (Vice President, Global Public Policy, Chainalysis)
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Transcript
Ian:
Hey, everyone. Welcome to another episode of Public Key. This is your host, Ian Andrews. Today, I’m joined by two terrific guests, Corey Then, who’s VP of global policy at Circle, and my colleague and friend, Caroline Malcolm, who is VP of global policy at Chainalysis. Corey, Caroline, welcome to the program.
Corey:
Thanks, Ian. Really happy to be here.
Caroline:
Great to be with you, Ian and Corey.
Ian:
Well, Corey, super excited to talk. I think this has been the story of the year in 2023. I’ve been blown away at the shift in the overall digital asset ecosystem where I think now, over 60% of all on-chain transactions involve stablecoins, which is just mind-blowing to think about in that transformation happening in just the last few years. I’m sure almost everyone listening to this podcast has heard of Circle and your token, USDC. It seems like it’s everywhere, but I would imagine most people don’t really understand the business of USDC. Can we maybe start with just a quick overview of how does that actually work? What do you all do that makes money?
Corey:
Yeah, thanks for the question, Ian. Very good question. We actually have a really simple business model. If you give Circle a dollar, in exchange, you get a USDC. And you can use that USDC to move money more effortlessly on, essentially, newer pipes, the new blockchains that are constantly competing to be faster and better, more functional, cheaper with each other. And that’s like the real infrastructure upgrade that’s happening in financial markets. But if you give us that dollar, we take the proceeds, and we put it in high-quality liquid assets held in reserve for our customers, and we make money, essentially, on the float.
We have a very large T bill portfolio, and we take the interest off of that portfolio. And then, we also hold reserves in cash held at US regulated banks and in reverse repurchase transactions. So, reverse repos are essentially like an overnight loan typically to banks that are over collateralized by treasuries by like 102 or 103%. All really very low-risk assets to make sure that we can always meet that, show me the money test, the Jerry Maguire test. Probably the most important thing that we do is if you come to us and say, “I want to exchange my USDC and get my fiat dollar back,” we need to be able to meet that obligation in a reasonable period of time. And that’s why we run the business very, very conservatively with very conservative backing assets.
Ian:
Yeah. Amazing. And I would have to imagine as the interest rates have run up in the last year and a half to fight inflation, that just makes your business better, right? Higher interest rate environment increases the return you get on that, those assets you’re holding in reserve, backing the USDC.
Corey:
Yeah, you’re right. It does increase the yield there. So, that’s good for business. I will say it increases the opportunity cost a little bit of holding a USDC. So, there’s a little bit of give and take there. And we’re really in favor of getting USDC in more people’s hands and growing this ecosystem, so you get advantages of scale. I wouldn’t say that high interest rates are something that we’re necessarily rooting for, but there’s an obvious benefit to them as well.
Ian:
Yeah, fantastic. We’ll get more into how people are using them and where you see the ecosystem going in the future. But Caroline, I wanted to bring up a conversation that you and I have been having offline. It feels like over the last 18 months, since Terra Luna collapsed, and this was a different flavor of stablecoin, obviously, than what we’re talking about with USDC today. But at that moment in time, there really was no regulation, I don’t think, in any market for what is a stablecoin, how do the reserves backing that asset have to be held? But it seems like today, nearly every major market around the world seems to have either adopted a framework describing stablecoins more clearly or is on their way to do so, with maybe the exception of the US, unfortunately. Give us a sense of what’s the big picture on stablecoins? Are these something that we should expect to still be here in a decade?
Caroline:
Yeah, Ian, so you’re absolutely right. 2022, even though it involved what was commonly referred to as a stablecoin, I tend to think of them more as algorithmic tokens. It definitely had a catalyzing effect on regulators, and we’ve really seen a flurry of both international guidance and standard setting as well as national-level regulation, both in terms of the broader crypto asset or digital asset ecosystem, but also, specific rules relating to stablecoins as well. Maybe a couple, just to highlight, I think probably at that international level, one of the most significant pieces that came out was really the Financial Stability Board’s work, which was reported to the G20, these high-level recommendations and what they call global stablecoin arrangements. Now, that work, obviously, really had its genesis in some of those very early projects in this space, Libra Diem, but has really evolved since then to focus on what we actually see as the business models like Corey has described that are taking place.
And those guidelines are really meant to help national-level regulators as they think about what rules to put in place. What are the principles that they need to take into account? And maybe the other international piece to mention is relating to the BIS’s Basel committee on banking supervision. It’s probably a little less well-known, but I think very impactful in terms of market because this is the rules around what banks and other traditional financial institutions, what sort of exposure they can have to digital assets, including stablecoins. And they make a distinction because they do see different risks, much lower risk, obviously, on the stablecoin side and perhaps on those unbacked other digital assets. But they really are going to be critical in terms of how much those traditional financial institutions can get into this space on their own account. We’re not talking about where they’re custodying, those rules are really about when they’re holding on their own account.
And then, as you say, we’ve seen a lot of national-level regulation. I think probably, again, with the exception of the US in particular, I think probably the one which covers one of the biggest markets in the world, and certainly one of the most active markets when it comes to digital assets is in Europe with MiCA. And that’s obviously got provisions on stablecoins and some more general provisions. But those stablecoin provisions are actually going to start to come into effect in July this year. This is very much 2024 is really the year where that rubber hits the road on a very, very big market. And obviously, we’ve seen some now specific rules in Singapore, in Hong Kong, in Japan, in the UAE, all relating to stablecoin [inaudible 00:08:06], and of course, need to mention the UK, which after a lot of talk for a number of years about being a global crypto asset hub, we’ve finally seen some detail in terms of what sort of rules they’re going to be proposing for stablecoins in general and those very large, what they call systemic or significant stablecoins as well.
Ian:
Yeah, it’s amazing to see the progress. Corey, I’m curious to understand your role more at Circle because one of the things that I’ve noticed from the outside is you position the company as being the most trusted of the stablecoin issuers. I think you’ve gone to great lengths to undertake or maybe leap over some of the regulatory hurdles, and you’re a US-domiciled company. What does it look like to lead policy for the organization?
Corey:
Yeah, well, thanks for that question. It’s a fascinating job. It’s a fantastic job. We like to say, “The sun never sets on Circle.” So, we are a global company. That is one of the key features of this innovation is the borderless nature and upgrading things like the correspondent banking system where money moves slowly and is expensive. And really, what we talk about doing is essentially, just changing the form factor of a dollar to something that moves as easily as email. Today, if I have Gmail and I have a friend with Hotmail in Europe, who should probably upgrade to Gmail anyway, but let’s just say I do, when I hit the Send button, I don’t expect that it’s going to take three days or a week to arrive. I don’t expect it’s going to be expensive, and I don’t expect that there’s going to be a problem like a walled garden problem where the Hotmail can’t accept the Gmail.
But that’s the way money moves today. Essentially, what we are doing is breaking down borders and breaking down walled gardens. We are active in every one of those countries that Caroline just mentioned, Japan, Hong Kong, Singapore, Europe. Latin America is becoming increasingly important, especially Brazil, which is a huge market, but even markets like Venezuela and Argentina, where there’s a real thirst for US dollars. Africa is a huge growing market, especially a place like Nigeria with a population of like 150 million people who have a thirst for and upgrade to their money and better access to the financial system as they grow.
Our collective job really requires us to be very flexible, and facile, and to move quickly. We are working towards a world where hopefully, we get regulatory harmonization between a lot of these places because the last thing that we want is a sort of Balkanized system that decreases the value of the innovation. So, we have to be everything, everywhere, all at once, and we’re just in constant active engagement to explain our product, explain what it’s already doing. USDC is in 190 countries five years after its launch. And then, also, that vision of the future of money, and where we’re going, and why it is going to increase commerce, and be really beneficial to all these different jurisdictions around the world? It’s the most fascinating job I’ve ever had. I worked in the White House, that was pretty darn good as well, but the global nature of it is really challenging and fantastic.
Ian:
Two follow-up questions on that. I love the vision of making money move at the speed and simplicity of an email. Who’s not on board with that idea? And when you encounter somebody like that, sketch out what their case is, why that’s a bad idea.
Corey:
So, I think any challenge or innovation, there are entrenched interests, and you can guess as to who some of those are. We are trying to add payment system optionality. We are not trying to displace any of the current players, and in fact, we think a lot of them will be good partners over time, but there’s just, anytime there’s a new innovation, it takes a lot of explaining for people to understand how it’s going to fit into the existing system. I think the borderless nature of this innovation also has certain people in the US Congress and beyond, who look at that as a potential problem, especially on AML, KYC types of issues. And that’s why, and I’m happy to explain in more detail what we’ve done at Circle to address some of those concerns, but I do believe that they’re all bridgeable, and that we’re ultimately going to get to a system that makes sense, and that’ll at the same time, upgrades the financial plumbing that we all work through every day.
Ian:
And second follow-up question is on this, you mentioned a potential for a Balkanized system. MiCA, as Caroline mentioned, I think introduces a framework for a euro-denominated stablecoin. I think we’re seeing the same thing in Japan with a yen-dominated stablecoin. Other markets are putting in place legislation. In Circle’s view of the world, do you create a Circle token that matches that local currency or does that actually create the Balkanization that you’re trying to resolve in the current fiat system?
Corey:
Yeah, so we have a euro-denominated stablecoin, EURC, so have done that. I would say right now, the primary focus is on the dollar because it is the world’s dominant reserve currency. And I can talk a little bit about that as well because I think the dollar does have a challenge right now, but it’s still the dominant currency. Even in a place like Japan with a strong yen and the euro, which is obviously one of the world’s strongest currencies, there’s still a big demand for dollars. We’re hoping to get essentially regulatory equivalents for whether we’re selling to a customer in Europe, a euro coin or a USDC.
And that takes a lot of conversations and engagement. But I would say if we had a competitor in the future who’s a European-based company and they want to sell a euro coin to customers in the United States, we would also hope that they would be treated with equivalents with a USDC sale in the United States. In fact, this is why it’s really imperative that the US enact payment stablecoin legislation in the very near term because as Caroline noted, the world has begun moving forward. Japan has a law in the books. Europe has a law in the books. Hong Kong and Singapore are going to. The UAE is getting there. But in a lot of our conversations with international regulators, they say, “Look, we would like to reciprocate with the United States and we’re just waiting for them.”
Like it or not, the United States is still the world’s largest economy and a leader in many ways beyond that. So, the world is looking to us, and fortunately, there’s been a lot of good work that has been done over the last two years. I feel like on payment stablecoin legislation, we’re on the five yard line. I love football analogies, and now, we got to punch it in. We got to score that touchdown, so that the whole world can then work together in harmonizing.
Ian:
Yeah. Caroline, I know that you spend a lot of time with central bankers around the world because I sense some of the resistance that maybe Corey and the team at Circle are running into is at the central banker level. I think there’s two arguments that exist out there. One is that, hey, stablecoins are an extension of the fiat currency. So, if you’re American and you enjoy dollar dominance around the world and you want to see that continue, well, we need to move that into the digital realm because everything’s going digital. So, supporting companies like Circle and their efforts to do that, net good for everybody. The other argument is like, no, no, no, no. This is going to undermine monetary policy. It’s going to wreck the entire central banking system and cause financial chaos for everybody. Am I thinking about that, right? Is that an oversimplification of the two sides of the argument? And who are the folks that are really pro-stablecoin and anti-stablecoin? Where would we find them around the world?
Caroline:
Yeah, so I think it’s interesting that when we think about different countries’ approaches, I think countries outside of the US, one of the pieces of feedback I hear quite often is they look to the US, and as Corey has said, they don’t see any legislation in the place. And they sort of see the US as notwithstanding that has managed to have a very dominant place in terms of US dollar stablecoin. So, dominating the digital economy we see in other parts of the global economy with the US dollar.
And yet, there’s a lot of curiosity about why they haven’t sought to really action that advantage and take full use of it. And I think there’s a lot of surprise that the US hasn’t moved on stablecoin regulation because it would really help them solidify that front-running position that they do have. And I think in the absence of that, you have this much more open field where you are starting to see local regimes which might in some way favor stablecoins issued in local currencies, whether that be in terms of access to reserves, for example, or they simplify the licensing process if you are issuing in a local currency.
And I think we are starting to see countries looking to perhaps take some of that market share that we have. And I think the MiCA regime has been very, very clear, and the policy makers were very clear that they didn’t want to see the dollarization of the digital economy in the same way that they have seen in the institutional economy. Now, we’ll see how that actually plays out. Circle, as we know, have already issued a euro coin. We’ll see how that plays in terms of market adoption. But I think from a policy maker’s perspective, there are definite concerns. And I do think though that those concerns probably shouldn’t be limited to stablecoins, is very much the challenge of the internet and the borderless era. The idea of things like capital controls, for example. There’s been many, many ways to circumvent those, unfortunately, from a policy perspective, for people who seek to manage monetary policy through those types of tools.
And we just haven’t seen them be particularly effective. And I think that’s even more the case as our economies become more and more natively digital. And then, maybe the last point is just this idea around pro-stablecoin or we’re seeing countries that pass regulation. Often, I hear when people talk about countries that pass regulation on crypto or on stablecoins, that they’re sort of pro. And I think that’s very much a misnomer because that regulation is really about providing safer markets and more consumer protections. And what it does is it’s recognition of reality. It doesn’t change the reality, and we know that very clearly from chain analysis data. You don’t change the levels of adoption through regulation. You change some of the behaviors, but you don’t change the levels of adoption.
So, if you want to make safer markets and more consumer protection, then you need that regulation in place. So, this idea that countries that have gone ahead and created regimes for stablecoins are somehow pro-stablecoins, I’d probably push back on that because I think it does misrepresent what the regulation is really about. I think it’s much more realistic and it’s very forward-looking, but I don’t think you’re pro-crypto if you pass crypto legislation. I think you pro-consumer, pro-safe markets, but I don’t think you necessarily need to be pro-crypto, whatever that means.
Ian:
That’s a great clarification there, on my point. Corey, did you have, you want to add to that?
Corey:
I was just going to say, I think Caroline hit the nail on the head when she said, “It’s a recognition of reality,” right? USDC, again, in those five short years, has been used to settle more than $13 trillion worth of transactions. I think almost 5 trillion of that was last year. So, it’s logarithmic growth, and obviously, there are other large stablecoins out there, so people are using these. It’s not going to go away because there are some inherent advantages. I just think recognition of reality is the right way to think about this.
I also think that there are a little bit of split decision with central bankers and even within probably the United States Fed, but I’ll also say, I know from firsthand conversations that some people at the very top of these organizations look at this as a way to compete internationally just building, especially with the dollar on its inherent advantages and just giving it a technological upgrade from either cash, which continues to decrease in circulation. It’ll probably always be here, but there’s multiple trillions of dollars still of US cash out there, or something that moves electronically, but on old pipes that are the province of only a few to be able to use and that live in Oracle databases in ones and zeros instead of on a blockchain.
Ian:
Yeah. When I think about competition in this context of the global dollar dominance, it seems like there’s maybe China and their efforts to move people to a digital yuan, but there’s also been quite a bit in the press at least, about this coalition of the brick countries coming together in order to create a new global reserve currency. Caroline, maybe we can start with you if you have an opinion here. Is that real and is that something that US policymakers need to be worried about? And then, Corey maybe is a follow-up, how does that fit into the Circle strategy?
Caroline:
Yeah, look, I think there’s definitely, as the geopolitical order shifts and all, we’re certainly in the time of change when it comes to that, there is questions around economic dominance as well as other forms of dominance in the world. And the US has a very significant advantage when it comes to having its own currency as the baseline currency for trade all around the world. So, no question that I think there’s a number of countries who would certainly envy that position and would like to see that shift. And we’ve certainly seen efforts in that regard. For example, requirements for certain trade contracts to be denominated in other currencies other than the US dollar, for example. I wonder, though, whether that’s something that stablecoins will lead or whether they will follow in that regard? Will that agenda really be set by stablecoins? I think it’s other forces for very significant global forces that will really drive that question rather than stablecoins themselves.
Corey:
Yeah, I think what Caroline said is totally fair. I do see the Chinese are very deliberate. They have long-term strategies, and so, with the rollout of the digital yuan, some people said, “Oh, it didn’t get a lot of uptake.” They have it in the hands of 300 million people, and they’ve now begun using it in belt and road initiatives, requiring it in certain cross-border trade. I think it would be underestimating the Chinese to say, “Yeah, the digital yuan has fallen flat and hasn’t done what they hope to do.”
I do believe that we are competing technologically with our currencies. I don’t think it’s getting good US is the only thing that’s going to keep the dollar dominant. There’s all sorts of entrenched things, but if you don’t compete technologically, that will be a problem, along with some of the other challenges that we have. I also say our view, we like to think about this, one of Dante Disparte’s really great analogies is you don’t ask the FAA to make jet engines. They set really high standards for jet engine manufacturers, and then, you let Boeing, and Lockheed, and others compete. If the FAA made jet engines, I would probably drive everywhere.
And we think the same thing with currencies. You’re probably better off having really stringent rules that protect consumers and that create that opportunity for digital dollars to exist in the world, and then, have good private sector companies compete on the basis of trust, and redeemability, and all of the other features that come with this. And I think that’s why Circle, our strategy is the right one and why we play a really interesting role in global commerce, and that’s going to continue to increase over time.
Just with regard to China’s digital currency, one of the great features of this innovation is programmability, but programmability in the hands of certain governments may not be a good thing. They could, for instance, program away certain freedoms. Maybe they don’t want people to purchase alcohol, so it doesn’t work to do that. Or they want to speed up consumption because they see a recession coming. So, they say, “All of the digital you want in your account will expire at the end of the month if you don’t spend it.” It’s kind of a way of getting almost to a negative interest rate, and we don’t think that that is probably a good path for consumers globally.
Ian:
I had not even thought about those two last considerations. That’s a little bit terrifying, and I would imagine there’s some people listening who would then respond to that and say, “Yeah, that’s why currency shouldn’t be digital, and it should maybe only be issued by trusted governments.” The same trust issue you’re raising with China, I would imagine people would say, “Well, corporations can’t be trusted because they’re just people. There’s not enough of an institutional structure there.” I’m sure you’ve had to tackle that challenge before. What’s the response to that?
Corey:
Well, we’re certainly not going to do any of the things that China might do. That’s why we need stablecoin legislation, and then, a good federal and state prudential regulators. And I have no fear of that happening with a Circle, or a PayPal, or whomever might come into the US market. That’s not really a concern for us. I tend to think that there’s more risk with central bank digital currencies than well-regulated private sector-issued digital dollars and digital euros and the like. Yeah.
Ian:
You mentioned PayPal, and one of my predictions for 2023 that I made a little over a year ago was that we would see a major bank, a traditional financial institution, in the words of crypto folks, issue their own stablecoin. And I think one of the banks in Australia maybe got to that point, but I was probably largely wrong on the guess, right? There wasn’t HSBC, or Citibank, or one of the major globals. We did see PayPal come into the industry, and I think there’s been a number of other non-bank issuers who have moved into the market. What’s your expectation? Do you expect to see banks coming in? Are they partners for Circle who would maybe collaborate on either extending distribution or validating the Circle proposition? Or do you see them as competitors potentially? What’s your market perspective there?
Corey:
Well, first of all, banks are very important to Circle. We need somewhere to hold reserves. We need banks to be able to settle transactions. And banks are fundamental to society. They always have been. They always will be. They provide very needed services. I do think banks have a sort of special access to existing payment systems, and when you put blockchains into the mix, that adds that optionality. Some banks will like it, some banks won’t. But I would expect due to the innovation, that in the future, there will be banks that issue stablecoins. And right now, a lot of banks are talking about tokenizing deposits. That’s a bit different than a stablecoin because it still comes with the liabilities behind it, like any deposit might, that ends up being loaned out.
And maybe I should explain something that’s really fundamental about our business model. It’s one-to-one backing. So, a dollar comes in, and a dollar goes into reserves, and we don’t rehypothecate, we don’t lend it out. Banks in the United States, essentially a dollar comes in, and give or take $12 go out in loans. Fantastic for credit creation, but that’s called fractionalized reserving. And that’s the reason why FDIC insurance exists because in the old days, and as we learned recently as well, there can be bank runs because everybody’s afraid of getting their dollar back. So, our business model is actually inherently less risky than a bank’s. Doesn’t mean that a bank business model is bad. In fact, it’s fantastic. We all like it for mortgages, and car loans, and everything else. They’re just different.
Ian:
Yeah. And so, probably a partner in the sense that it facilitates some of the back office operations of Circle, but maybe not where you would white label the infrastructure behind USDC and have a Citi coin that was built on Circle infrastructure. That’s probably not in the works in the near future.
Corey:
Yeah. I don’t ever want to limit what our business might do in the future, because like I said, we do have good relationships with banks. But right now, we’re very just focused on expanding the USDC and EURC ecosystem.
Ian:
On that topic of expansion, one of the things that we saw in one of our big research projects is to try and look at the grassroots adoption of cryptocurrency around the world. And in the latest edition of that report that we published in the fall, it illustrated that even though overall, I think crypto ecosystem transaction volume and user activity was down in 2023, in markets that were medium income, and particularly those where they were facing high inflation or strongly restrictive capital controls, seemed to maintain similar levels of activity to previous years. They seem to be using cryptocurrency independent of the actual asset prices and broad market sentiment that we get exposed to here in the US. How do you think about stablecoins enabling dollarization of economies, say, in Latin America or some of the Eastern European countries? Is that a trend that you’re encouraging? Is it something that’s net good for people?
Corey:
I wouldn’t say it’s a trend that we’re encouraging, but we actually have a really cool report coming out called the State of the USDC economy. That has just some fascinating statistics and graphs that show how the use of USDC is increasing exponentially. And you hit on one of those uses, which is as a store of value. If you are in a country with rampant inflation, you would love to get dollars. If you are in a country where you cannot trust a tyrannical government, you would love to get dollars, and people do use it for that. I was a litigator by trade. I used to have a case down in Venezuela. And I remember going there and the moment I got off the plane, I had been warned this could happen, but I was kind of shocked when it did.
The moment I got off the plane, like three or four policemen came over to me and ushered me to a side room, and they tried to get the dollars I was carrying in exchange for their… Chavez, at the time, was calling them [foreign language 00:36:26], and they had an unnatural peg to the dollar. Everybody knew they might’ve said like, “10 Bolivares for a dollar,” and it was actually 200, right? And I was like, “I’m a lawyer.” No. Right? I’m not giving you my dollars. But people want dollars around the world despite some of the countries that want to challenge that dominance. And the reality is some countries are already dollarized, and some countries actually welcome dollarization. There are some leaders. In those countries that don’t, I would say, “Look, first of all, we are open to discussions about ways that we can address their concerns.” And then, there’s also just an element of do better for your population. Maybe you’re in a world where you have to compete.
Ian:
Yeah, yeah. You’re tougher than I am. If I was ushered off a plane in a country like Venezuela and told to give all the dollars I had in my pocket, I would do it gladly. Here you go. Take them all, please. I will happily take your Monopoly money in return. Just let me go. I’ll remember if I need to travel to a hostile country, you’re coming with me, it sounds like. Caroline, earlier, Corey mentioned anti-money laundering, counter-terrorist financing as being one of the concerns that comes up when you start talking about a global borderless technology like blockchain and an asset like USDC. I think a lot of people go, “Wow, we’ve spent all this time building up the sanctions regime and everything else, and is this just going to give people an easy path to walk around it?” Talk us through how the people are thinking about applying the existing AMLs, CFT regulations into stablecoins specifically.
Caroline:
Yeah, so I think this is actually really fascinating, Ian, because of all the areas of policy, the AML, their prudential requirements, financial stability, consumer protection, so on and so forth, the one that really went first when it came to crypto, and people call it virtual assets in the AML space, is AML, CFT. This is where we saw policymakers, internationally and nationally, really move first to make sure that this emerging asset actually was going to be subject to some of those requirements. You saw it in countries like the US very early on, as early as 2013, we saw some mentioning of AML requirements applying to this space. And then, of course, we get to an international standard set by the Financial Action Task Force, FATF, in 2019, and really establishing what the rules of the road were when you were dealing with digital assets.
But the thing that I find really fascinating is that when we think specifically around stablecoin issuers, the guidance on stablecoin issuance when it comes to AML, CFT is actually not particularly extensive. It’s very extensive in what we think of as the secondary market. So, trading, centralized exchanges, it’s very clear on what they have to do. Custodians are broken to… Customer due diligence. You do KYC, you have to do counterparty due diligence, you got to do transaction monitoring. All that’s very, very clear. When it comes to actual issuers themselves, though, it’s a little bit more vague. There’s some references in the standard about some design choices that might have implications for money laundering or terrorism financing risks, for example, whether those networks allow personal wallets or whether the system is permissioned or permissionless. And it’s also identified some capabilities. So, things like blacklisting. Can you blacklist particular wallet addresses? Can you freeze or burn the currency that might facilitate the issuer in actually meeting the AML, CFT obligations? But it doesn’t really go so far as to specify in any full degree, what any specific obligations on issuers might be.
Now, obviously, when it comes to direct redemption, you can imagine they’re subject to the same requirements in terms of KYC and so forth. When it comes to their immediate counterparties that the issuers have, which are often not very many in number, they’re having to do that counterparty due diligence, KYC, although often, these are very large institutions. So, if it’s perhaps not the KYC we most think of, but we haven’t really seen that kind of clarity about what those obligations might look like. And I think as we look at the year ahead and given the global interest in the very quickly growing stablecoin market, I wouldn’t be surprised if we see that as an area where some further details are forthcoming.
Even at the national level, we’re seeing some references in terms of issuers, licensing requirements that they have to comply with AML, CFT, but very, very little detail about what that means. There’s really just one country that I can think of, and that’s Japan, which has said that they’ve made it a requirement that if you issue on a permissionless blockchain, the issuer has to have that ability to freeze or burn the transfer. But that’s really, as far as I know, the only specific requirement unique to the issuer space. Yeah, I do think it’s quite an interesting one just given that history I’ve described.
Ian:
Yeah, Corey, how does Circle approach this? And I think one of the questions I’m specifically interested in is where Caroline just took us to, this idea of primary market issuance, like the people that can create a new USDC directly with Circle versus the secondary market issuance where I might go to Coinbase and turn some fiat dollars into a USDC. How do you think about what you’re doing in the AML, CFT world differently maybe in primary and secondary markets?
Corey:
It’s a really good question. First, I should just say that we are fully supportive of… We think if you are a stablecoin issuer that is issuing a dollar-denominated stablecoin anywhere in the world, that you should follow American financial crimes compliance rules, and you should follow the standards that really the whole world is coalescing around, but that are also enshrined in this draft bill working through Congress right now as far as reserving, redemption, disclosure standards, liquidity, operational risk management. This is why payment stablecoin legislation is so important because it should be illegal to go around the world saying, “This is the equivalent of a dollar, but by the way, it might be backed by Bitcoin and Chinese commercial paper and we don’t have the staff on hand to do the types of due diligence that you would really need to do on AML, KYC, and those types of things.”
The way we approach this is, first of all, Compliance First Company recognizing that this is critical. Nobody wants to be enabling the Lazarus group in North Korea or Hamas. Nobody wants to be enabling fentanyl trafficking with China. And by the way, I think when the policymakers express concern with crypto, it’s time to start being more specific and calling out bad actors and bad companies rather than crypto writ large, because most of the bad behavior exists with a few. But yeah, we start with Compliance First Company. Out of our roughly 900 employees, we have give or take 125 in compliance. We have a huge legal team. We have a big policy team, so that’s our ethos.
We spend hundreds of hours KYCing all of our customers. So, there’s a very rigorous onboarding process. We block list certain countries where you just simply can’t use USDC. It’s too high risk of a country. And then, we are very responsive to law enforcement. So, digital dollars are sort of a digital bearer instrument. I don’t think it would be reasonable to have to follow every transaction that happens on chain. I think people wouldn’t like that from a privacy perspective, and it’s also pretty impractical. But you can work with great companies like Chainalysis to understand data flows.
And then, you can be, like I said, extraordinarily responsive to law enforcement. If they say, “Look, these addresses are known to be associated with bad actors, we’re asking you to freeze those,” we do have the technological capability to do that. And we do do it, and we do it in very short order. What we have done as a company is essentially send a signal to the market that if you’re using USDC for illicit purposes, there’s a good chance that you’re going to get shut down. And I think as a result of that, there’s been a huge deterrent factor. And folks who want to engage in illicit finance might use cryptocurrencies with much laxer controls.
Ian:
Yeah. It’s not in their best financial interest to use USDC, given the approach that you all have taken around both compliance and responsiveness to law enforcement. They’re going to see their attempted gains disappear out from underneath them, which is terrific. Well, we’re running short of time. Corey, I want to close with my traditional question. What’s on the horizon for Circle? What should we be looking for that’s exciting coming here in 2024?
Corey:
Sure. Well, look, the State of the USDC Economy report, when that comes out, I urge everyone to read it. It really is a fantastic summation of what we’re doing and where we think the future is going. But like I said, we are really just focused on growing this ecosystem because it is one of these network effects platform businesses. The more people that have it in their hands, you reach this critical mass and grow. So, I just think there’s going to be deeper and deeper penetration of USDC in all of these markets around the world. I do believe that we’re going to get payment stablecoin legislation at some point. I don’t want to make any predictions as to the timing of that, but I think that what’s the saying that President Obama used to use? The arc of history is long, but it bends towards justice. I think the arc of history here bends towards well-regulated digital dollars, and policymakers around the world have come to recognize that and are really beginning to work together to come up with responsible legislation.
Ian:
Well, fantastic. We’re rooting for you, Corey. Caroline, thanks so much for joining us on the show today. It’s been a terrific conversation.
Corey:
Yeah, thank you, Ian and Caroline. Really enjoyed it.
Caroline:
Great to chat, Corey. Thanks, Ian.