Circle's CEO, Jeremy Allaire on USDC, SVB's Collapse, & the U.S. Banking System

Transcript

bankless Nation we have a special episode for you today what is next for usdc that is the stable coin at uh the center of much of crypto today and David we brought on the perfect guest to give us the scoop and to tell us what's next for usdc and to tell us what happened last week in the crazy weekend where usdc was trading 10 cents off of its peg in the middle never thought it would have happened Banks melting down all sorts of chaos so who do we have on today Jeremy alaire the CEO and and I believe co-founder of circle uh the producers of usdc uh a probably one of the most important pieces of infrastructure in this D5 landscape traded all the way down to 88 cents uh

I've seen die trade off of its Peg I've seen other stable coins trade off its pick never seen uscc trade off of its Peg so I really just want to get the update uh what how has Circle reacted to the events of this banking crisis and what has changed for Circle moving forward and so we're just going to get the update from Jeremy Aller guys we're going to get right to the episode with Jeremy but before we do we want to speed run the sponsors who made this episode possible stick with us Kraken is our strategic sponsor for 2023 why because Kraken has been around for over 12 years and has proven itself to be deeply aligned with the crypto industry trusted centralized crypto platforms are hard to come by these days which makes the few remaining ones even more valuable with over 9 million users

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bankless Nation we are joined by Jeremy Lair he is the CEO and founder of circle the company behind usdc Jeremy I know things are really busy over there we appreciate you making the time to update the crypto community and what's going on how are things I mean you feeling okay it was a pretty crazy weekend last week and how are things now it's it's um you know it's been really dramatic um and you know it wasn't just last week I mean it started as you know you saw a bank failure with silvergate bank which as you know um is a bank that many digital asset firm crypto firms and others you know work with um it's been you know I know something you guys have been talking about for a little while uh this sort of you know Bank de-risking like all all kinds of

impacts of the banking system on on crypto that's been kind of a theme since the start of the year um and then you know of course um you know these sort of systemic Financial stability issues that emerge out of nowhere um or seemingly out of nowhere which you know we can we can talk about whether Regulators who are asleep at the wheel on that as well um but you know it's been a it's been a dramatic period of time and so you know we began last week with uh basically silvergate shutting down and us having to like decommission rails for lots of companies and a lot of really kind of challenging situations and then on Wednesday we went into a period where it was announced that you know Silicon Valley Bank had uh had

significant withdrawals and uh was needing emergency funding and they were saying we're going to get the emergency funding and at that point I think um you know a lot of a lot of people began to freak out and then ask a question you know is there a broader set of risk in commercial banks in the United States especially kind of mid-sized commercial Banks and uh and you know you began to see kind of panic emerge and that then manifested itself in you know ultimately the closure of multiple Banks and the Federal Reserve uh you know stepping in basically saying we're going to provide 700 billion dollars of liquidity to the Commercial Banking sector and ensure all uninsured deposits uh I think that the

the real risk was that you know the the the sort of asset and liability management uh as that kind of imbalances that were really the result of rising interest rates and then essentially Banks holding long bonds and then having liquidity crunches against that you know was was undermining Financial stability so um that's like the macro kind of going into Wednesday in terms of what people are seeing so for us pretty dramatic um and I think it's actually worth level setting you know before kind of going into that a little bit about the way usdc operates right which is when we launched usdc five years ago we really wanted to build something that

was regulated uh and that was supervised and that had um you know the approval of of kind of payments and banking Regulators to operate connected to the banking system like the key concept was we need a way to be able to seamlessly you know kind of create and redeem dollar digital currency um connected to the banking system and at the time the regulatory framework for that in the US was basically you know what's called stored value electronic money law which is the same law that governs your PayPal balance your venmo balance cash app Apple pay and like every payment processor you use they're sort of all governed under that the non-bank payment systems of of the United States and that's a good regime

because you're required by law to hold one for one redeemability you have a very narrow set of financial instruments that you're allowed to hold and that's by law you can't if you go outside of that you're going to lose your licenses lose your bank accounts Etc and you know we obviously also wanted to be more transparent like if you ask PayPal uh you know what what what's in your reserves like people don't even think to ask that there's 35 billion dollars like what is it corporate bonds what is it no one asked that question but in in crypto everything's public everything's transparent people want to understand risk and so we began you know the whole trend of monthly attestations from public accounting firms and sort of saying yes the money's there here's how many tokens that kind of thing that I

think was was sort of the state state of play five years ago and there was really only one bank that would actually provide the capabilities needed to do this which was silvergate bank that was you know and in many ways it was sort of the birth of usdc that then created the basis for silvergate actually to to to to to grow in some ways because you know people who needed to get in and out of digital dollar liquidity in in the form of usdc could do that 24 7 through there so if you fast forward as this has scaled out over the past few years you know our goal was we just we want to as as uh one of my colleagues says is sort of from our perspective it's a race to the top not a race to the bottom and race to the top was like how

do we keep increasing transparency how do we keep you know increasing the quality of the reserves with an ultimate end state which we've we've stated publicly for years now which is that we believe the base layer of you know kind of dollars on the internet needs to be uh essentially straight through government obligation money meaning it should be cash at the Federal Reserve and it should be you know these sort of t-bills these short duration t-bills and that's basically cash or cash equivalency and like a digital cash instrument could do that like we shouldn't depend on the you know the risks inherent in the fractional Reserve banking system uh to underpin that now legally that has or and from a kind of Technical and Regulatory perspective

that was impossible for us but we've been moving over time as more Banks got comfortable with firms like Circle to expand the number of banks that could hold you know reserves we expanded the number of banks that could handle transaction processing with usdc and there's some big breakthroughs actually kind of um you know over the last six months and two really noteworthy ones one was um we we moved you know essentially 80 percent of the reserves to be exclusively in these short-term t-bills but we set it up in this structure in a in a strategic partnership with BlackRock BlackRock is the largest asset manager in the world 11 or 10 trillion-ish assets and we created

something called the circle Reserve fund which basically is an SEC registered and supervised Reserve fund it is a government money fund it it exists exclusively for usdc reserves and it's held entirely for the benefit of usdc holders and that allowed us to basically offer um total transparency so anyone in the world can go any day of the the week and look at the usdxx ticker and they can see exactly the portfolio of T bills their maturity Etc and so they could see okay 80 of this is this highly liquid thing and it's also independently it's SEC supervised it's independently audited and so that's like part of the race to the top how do we keep increasing that

then we have this 20 which is in commercial Banks and you know our goal is also a race to the top race to the top there we know that sitting inside of that is Commercial Bank risk and so you what you you sort of prudently you look at okay we want to have a rated publicly traded financial institutions we want to have like the best possible kind of quality there um and you know I think our goal over time was like how do we get more and more of this at like the largest cash custodians in the world so if we're going to have that we have that in place so we actually began work with Bank of New York melon bny melon it's like the first you know Bank in the United States Alexander Hamilton founded it and they hold 24 trillion dollars of assets so

they're they're they're they're they're globally systemically important bank and that's important so we have this relationship developing and and actually literally as everything went down last week uh we we you know it was it was kind of like okay it looks like commercial Banks more broadly including banks that we've worked with were going to fall over and so we began the process success of basically moving cash into Bank of New York melon right we want to be the the most solid you know kind of Dollar Cash infrastructure in the world um and you know we we began that process on Thursday and we completed that process on Friday and in the middle of it spb got shut down and so wow yeah so I was like okay uh we've got 3.3 billion

dollars in transit and it's actually we can see in the fedwire system like the receiving Bank like is acknowledging yes this is incoming but it the the wires like stuck it just hasn't settled on chain so it's not pending time on on the FED wire Ledger right because someone someone hit a stop button and said no uh we gotta we gotta like stop the blood from flowing from this bank and figure out what we're gonna do and so you know a huge flurry of activity obviously we we publicly disclosed this because we felt that uscc holders should know you know as soon as we publicly disclose what we knew and the details of what we knew we repegged to 98 cents which was great but before that it was like you said it was like people are

like oh my God is this over you know you know just like and and you know the way these digital asset markets and Define everything it just moves at the speed of the internet and so it's just like that kind of thing now the reality is like the actual risk of that not being fully reserved and available is extremely low and we you know there's only so much you can do to reassure people and and so you know for us basically um we you know we we took we took an incredible number of actions we also we we were concerned that Signature Bank was potentially at risk and so we undertook to do the same thing with Signature Bank and in fact it turned out they were shut down by the end of the weekend and that was again another rail that existed so a rail for for the on

and off ramps for creating and redeeming usdc was to send essentially shuttered as well and so to open up minting and Redemption on Monday morning we needed to stand up multiple new settlement infrastructures over three days and you know we had a lot of that already underway because we were sort of marching towards more and more redundancy given the kind of Bank risk issues that exist in the sector and we were able to come online on Monday um and and meet our obligations and everything else and I think you know there's a a lot of uh of of plan a plan B plan C type of activities going on uh you know over the weekend but the interesting thing is coming out the other side of this is you know we certainly have survived this sort of systemic shock

um and the the lesson uh that you know uh I I don't know if I said this earlier but it's sort of you know we're in this world now where um everyone's talking about how we need to save the banks from crypto and and right now we're trying to save crypto from the banks and I mean like quite literally and so and and I think on the other side of this though we're now in a place where usdc is actually the most secure digital Dollar on the internet we have cash at bny melon and we have the ability to kind of you know settle through settlement Banks but we cash to be in right well we have the circle Reserve fund SEC supervised with you know only these t-bills with daily transparency it is by far the best most stable thing out

there and we've had a really positive response from Regulators from others in terms of how we've handled this but you know truly extraordinary um and I'm actually I'm in London right now and and and you know meeting with uh happened to be in London um I I was able to still go but um meeting with a lot of major regulators and you know I think this is a this is a this is a real test it was a really really major test of of a critical infrastructure and you know I'm sure the conversation will lead us into kind of what the future holds for this no I think that's exactly right and it's just hearing this peek into what the strategy of circle behind the scenes is is kind of just gives me a lot of confidence that you guys really know

your about stuff about how and it really seems like this was a very intentional strategy to allow for optionality in in an unknown set of possible crises and then lo and behold one day actually arise where a crisis does come and there seems to be that there was sufficient optionality in circle's choices that they were able to navigate whatever crisis was thrown thrown you away uh so uh you know tip of the Hat when when we were watching Circle the usdc trade down to 88 cents to me I was like man best deal in the world this is a pan this is like even if the worst case scenario about silvergate and uh Silicon Valley Bank and Signature Bank happened like 88 cents still seems insane and that seems to be like drawn

out in in the strategy that you're you're giving us here Jeremy so uh the question is exactly what you alluded to how has the circle strategy adapted now that this new phase change of banking inside of the United States has changed like what's the new strategy like what are the choices that are being made in the uh the circle war room yeah I mean look there's a bunch of things so I think the first is we want to make sure that as a dollar market infrastructure on the internet that um everyone understands that with the the cash Reserve is in the you know the safest kind of custodial infrastructure in the world and and obviously continue to reinforce what we've already done with t-bills and and what that is and so that's really key the next piece though

is you know um there's there's there's really this need for more banking optionality for the crypto industry and you you know I think there's been a kind of reconfiguration of risk and that's come from Regulators it's come from the banks themselves and so it's really key for us to bring online new settlement Banks so they're sort of the money in transit piece of this which is you know I want to put a wire or a transfer in and I want to get usdc or I want to redeem usdc it's that settlement layer between you know kind of how money moves in and out of the system we need to you know we had redundancy there which allowed us to be resilient in the face of this we need to have more redundancy and and that's also because you know uh you know

digital asset firms need more banking options and so that's that's a really key piece and then the other is um you know we we really want to bring that kind of that Transit and settlement closer to people around the world so one of the big things about usdc is it's it's it's a digital dollar that people want all around the world and digital asset markets are highly Global D5 is highly Global and so we want to make sure that you know people aren't sitting around waiting for a wire to get to the United States um that you know if there's people in Singapore or Hong Kong or Dubai or in London or in Brazil that or wherever it is that we can be kind of out on the edges and make sure that we've got really good high quality kind of on and off ramps in in more parts of the world

so that's another thing and that's part of redundancy as well sort of kind of making sure that you've got a layer for the on and off ramps um in in as many kind of markets as possible and I think the big bigger the bigger piece here which which does have to do with regulation is you know what we've been advocating for for years is a way for us to to have like a charter that is with the federal government that allows us to hold cash with the FED uh that allows us to have direct access to the core payment systems and uh and to make sure that this is like the safest you know instrument you know kind of digital cash instrument dollar digital cash instrument in the world we really really believe that's key and the kinds of risks that we were concerned about are

exactly the risks that have emerged and so you know philosophically um like in the founding of the company 10 years ago I'm a very deep believer in full Reserve banking this idea that we don't need to have fractional Reserve banking that we could have a full Reserve banking model where the kind of base layer of money is this straight through kind of you know what I call government obligation money and the payment system Innovation is is sort of you know built on the internet in this way in this new software mediated way and then lending can happen outside of that people could lend just like happens in defy now like if I lend usdc to to to a a lending pool like there's no fractional Reserve they can't go create

more usdc but if you lend your money to a bank they actually create more money they actually fractionally reserve and create more money and so a full Reserve model where lending markets are are mediated by software and smart contracts and by you know the sort of Primitives of defy that's the future that we'd like to see um and and have the base layer be as totally safe as possible you know Jeremy this is uh this whole conversation has really opened my eyes to all that Circle has been doing and usdc has been doing behind the scenes so I think the last place I'd I'd left Circle because I've been there's a lot to pay attention to in crypto you know like lots of distractions yes the last I left it it was still kind of okay well Circle

probably does the majority of it's It's banking at silvergate but behind the scenes you guys had been upgrading the infrastructure in a massive way to get to a race to the top a safer and safer strategy and what's really interesting is like I'm kind of picturing you like even last week at sort of the end stages of you know it's like a scene in Indiana Jones where you're running over the bridge and it's like collapsing behind you right it's it's kind of that but the end result is usdc is actually stronger as a result of this how did that happen and you fast tracked that strength which is so what's really interesting to me is so we started with like um let's call silvergate a no-name bank because five years ago sort of was you started with usdc only being a in a

no-name bank and now here we were even prior to this crisis where you actually had BlackRock which is pretty close to like t-bills and then you had bny Mellon which is like one of the big cannot fail does not fail type Banks and I'm sort of wondering is like if that's been the trajectory now I'm seeing sort of the the end state vision and I'm almost wondering if that end-state vision for Circle and usdc is something like a proxy Central Bank digital currency okay like I know we're steps before that here and maybe I'm getting too ahead of myself but it just feels like that vision of like yes you shouldn't have Commercial Bank Pro I'll call it

protocol risk because we have crypto here it should just be one to one with the t-bill it shouldn't take any risk of the banking or literally the Central Bank liability itself right can we just make that can we just uh well my question is so yeah I see that you see that a lot of people in crypto see that we also see a complete absence of a U.S Central Bank digital currency strategy even though they're writing weight white papers on it all the time China's like miles ahead of the US they need a strategy they may not know it yet will these events precipitate that conversation could it actually move forward in that direction and actually be a kind of a growth Catalyst to get us there faster I mean I think so I mean like you know

the the interesting thing is like the the whole discussion of cbdc's if you recall actually emerged because of this project called Libra uh where everyone was like that was going to be this new Global stable coin and so all the central banks were like no way like we're like we're gonna do that we're not gonna let Facebook do that I mean that was basically it so then they got really schooled on stable coins now quietly in the background like we were grinding away like getting D5 lit up with usdc and all these protocols and that was 2019 and like that's when we got real product Market fit and then obviously as like things took off in 2020 it really it really grew really fast and it turned out like Libra wasn't actually the thing it was actually something like usdc now what's happened since then though is like central banks

have sort of said okay there's a private sector uh you know open Technology Innovation model for how this can work and then there's like we could go build it ourselves and and and mostly now we're in a place where most central banks are like these will at a minimum these are going to co-exist and even if they're going to coexist stablecoins are here and now so we need to have a regular we need to have a way to regulate this now and so you know like the there's a bill that I I think will see the the light of day very soon in Congress which is like the payment stablecoin act and that that's the term of Art in Washington is a payment stable coin which is to differentiate it from say like a synthetic derivative stable coin that's endogenously backed by Luna or you know

that that kind of structure right a a payment stable coin where it's it's like a payment token and it has it can be used to settle a payment obligation as good as cash the payment stable coin legislation essentially creates a pathway for private sector actors to have a a formal recognition at the federal level and be connected to the federal the the Federal Reserve Bank but instead of depending on the government to build technology and innovate you're depending on public internet infrastructure public blockchain infrastructure the crowd-sourced open source development that has you know given growth to the entire internet and you're doing that and you're allowing that kind of that level of innovation which is constantly obsolescing itself

and you and you're enabling you know kind of Technology driven software-powered intermediaries to drive the the development of that that's the vision and I think I think we're much closer to that now and and I think um I think it's very it's much more likely that if if this if these incidents actually you know the the regulars say yeah we don't want these stable points to tip over when there's commercial bank failures you actually get to that point where you have a higher quality reserve and you've got good supervision because I think if we're going to be a market infrastructure a dollar market infrastructure that you know tons of people in the world depends on we should be supervised like we should be very very heavily supervised to make sure we're not doing crazy badass you know stuff um and but and and you know if you get

there and you get things like account abstraction and layer twos and all the things that are happening you can create a user experience that actually could work for billions of people and so I actually think we're like two three years away from having at scale you know a regulated model of this that can work at internet scale and work for users and that's going to happen way faster than Central Bank digital currency that that's gonna that has the potential to happen at kind of internet speed and internet scale so uh Jeremy I guess as we close I know you're very busy and you have to leave but this has been fantastic I've learned a tremendous amount during this conversation I I'm curious we're having a conversation a little bit later today with with Hester purse yeah from the SEC and of course I it feels like coming to

2023 uh crypto has never faced more regulatory headwinds like it feels like coming out of 2022 there's a lot of resistance and it's not clear to me yet how politicians and lawmakers will react on the bank of this Bank crisis right we said you know the banks failed crypto rather than crypto failing the banks is this what the narrative will say is this what the politicians will say or will they point to crypto and and aim for escape goat that to me is still um unclear but let me ask you maybe this is a question that we can relate to some of our regulatory conversations what regulation do you need what do you need most from um Congress or lawmaker takers those

that are governing this country in order to accelerate the plan that you talked about yeah I mean I think you know what we need is is is is is a bill that I think as of late last year when Congress was turning over was kind of 80 or 90 complete which is this what what we refer to as the MC Waters bill which is the the co-chairs of the house Financial Services committee chairwoman at the time uh uh Waters and Patrick McHenry worked really really closely on a bipartisan bill for stable coins that would basically create this pathway for a a kind of federally registered firm uh so you're not dealing with the patchwork

of all these states and your up leveling and sort of a race to the top set of standards and give firms like Circle the ability to have the safest foundation in terms of the the backing and payment system access and uh and and make that you know a a a model legislation that allows the dollar to be the most competitive currency on the internet and to you know give the US a chance to kind of as we like to say win the digital currency Space Race so that's what's needed so I think Congress has an opportunity right now it's going to start in the in the house Financial Services committee they have an opportunity to put something forward and I think you know there's a there's a real shot of that so that's what we need is we need to see that and that that

will also create the basis for tons of other companies to feel comfortable getting into this industry um I think that's been a that's been a huge barrier it's not not having that Clarity um and that's both competitively in the stablecoin industry as well as in you know being involved with using this as a technology for other pieces of finance and commerce so we we really need to see something like that emerge well Jeremy I know you've probably had one of uh the perhaps most memorable weekends of your life in this last weekend and this has really turned into this theme of The Bear Market is that we've got a lot of cleanup to do as a result of uh perhaps some of the short-termerism that we saw on this bull market uh in 2021 and 2022 so thank you for sticking around and fighting uh when

times go tough and thank you for for uh being quick to adapt when the time came to do that over at Circle so just thank you for everything you're doing and uh providing just the infrastructure that we need to move this industry forward you're you're welcome it's great to be on here and and uh look forward to coming on again uh as all this evolves there's this is fast moving and and you guys are doing a great job carrying out the the conversation with I think all the right people and all the right topics so great to be able to join you today uh amazing well bankless Nation there you go gotta end with our usual risks and disclaimers like we always do none of this has been Financial advice crypto is risky but banks are too aren't they when you think about it uh you

could definitely lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bank list Journey thanks a lot