On Ep. 21 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Nick Philpott, Co-Founder @ Zodia Markets to discuss Trump's crypto reserve announcement, Stablecoins in commodity trading and global trade, and more!
On Ep. 21 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Nick Philpott, Co-Founder @ Zodia Markets to discuss Trump's crypto reserve announcement, Stablecoins in commodity trading and global trade, and more!
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This episode is brought to you by Visa
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Sy Taylor 00:00
Let me just close my door. Actually, my kids will be home soon, and I don't know, all good.
Petrit Berisha 00:07
And then for your benefit, Nick, I'm sure you've done a bunch of these before, but like, we're totally recorded, so we can edit anything in post. If you want to re say anything or do a do over, you can just do a little clap, start again. Simon will, uh, Simon will take care of you.
Nick Philpott 00:25
I'm, I'm in Malta at the moment, and I'm what didn't have, what doesn't happen tonight, a religious procession literally walked past my door with a band Wednesday, last night. So I'm praying that that doesn't happen again.
Sy Taylor 00:41
Yeah, there's no ash Thursday.
Petrit Berisha 00:46
Over to you sir, alrighty.
Sy Taylor 00:50
Welcome to tokenized. The show focused on stable coins and the institutional adoption of real world assets. My name is Simon Taylor. I'm your host for today, and the author of FinTech brain food and head of strategy at sardine joining me, as always, is my friend, my co host, Kai Sheffield, head of crypto visa. How you doing, my friend? I
Cuy Sheffield 01:12
am great. There's a lot going on. I'm super excited for this episode. Nick's, you know, a fascinating person doing incredible things of the space. Let's get into it. Yeah, I think
Sy Taylor 01:23
audience, you're gonna absolutely love. Nick Philpot, who is co founder at zodia markets. Welcome to the show, sir. How are you doing? I'm very well. Thank you, and you. I'm really good. I'm glad to have you with us. Tell us a little bit about you and what you're what you're building at the moment.
Nick Philpott 01:38
So Nick Philpot, I'm the co founder of a company called Zodiac markets. So it's like zodiac, but without the C at the end. And we are an institutional match principal broker. We offer execution services in digital assets against other digital assets, or digital assets against fiat currencies. What we specialize in, especially is fiat currencies. We offer 21 today against stable coins, and we particularly are able to do that at high velocity and in very large sizes, and also particularly in emerging market currencies and obviously, tight spreads. Last thing to add is we have a sister company that is called zodia custody, which is the name implies provide safekeeping, and we are both majority owned subsidiaries of Standard Chartered Bank, which is where I used to work.
Sy Taylor 02:26
So for everybody in stable coins going, I can't find tight spreads. I can't get the Fiat to stable coin bridge figured out. I've been saying, well, you should chat to Nick, but there are, of course, many competitors you have as well, but I think it'd be really interesting to kind of unpack some of the news with you as an excuse to kind of share some of your expertise. And why don't you tell the audience the degree that you studied as well. What was it you studied at school?
Nick Philpott 02:54
So I did two degrees modern history, undergraduate and post graduate at St Andrews University, and amongst other things, I specialized in British imperial business history and Renaissance bankers. I also did a bit on the Eastern Front of World War One, but particularly foreign investment into Russia pre World War one as well. So
Sy Taylor 03:16
cross border payments nerd all the way through right to the very, very cool.
Nick Philpott 03:24
I didn't do a degree. I did a very elaborate, very expensive hobby.
Sy Taylor 03:29
Well, I hope you break some of that enthusiasm to the first story, which is covered everywhere. This is the story of President Trump wanting to launch a strategic crypto reserve. He announced on truth social on Sunday night that the US would launch a crypto reserve that holds Solana Cardano and ripple. And he quickly, of course, then clarified that it would, of course, hold Bitcoin, ether and other valuable crypto currencies. And this is in the same week that a lot of other things have been happening. So the SEC has dropped cases against the likes of Robin Hood, consensus, Coinbase, Kraken, they've announced that meme coins are not securities. So there's a lot of stuff happening all in the same place at the same time. Nick, from your perspective, is all of this news, this blizzard of news, a good thing for the industry? And how do you, how do you, how do you think about things like this?
Nick Philpott 04:31
I mean, it's generally positive. I the way I look at a lot of these things is try to reinterpret the framing. So everyone tends to look at it from a particular point, a common point of view. So they all tend to form similar sort of opinions. So people start looking what strategic reserve, and it's often a case of the choice of terminology. So then you compare it with things like the petroleum reserve, which is maintained by the United States in anticipation of a major war, which. As many people would think, well, that's slightly odd. What would you need Bitcoin for to fight a war with? But actually, if you frame it slightly differently and think, Well, plenty of countries have sovereign wealth funds. So Norges pension, which is technically a pension fund in Norway, that's sort of perfectly normal, and yet it holds a stake in pretty much every company, publicly listed company on earth, then you've got sovereign wealth funds such as Kuwait Investment Authority, mubadala, ADIA and so on and so forth. Again, all pretty normal, and people sort of make their peace with it in digital assets, you've got probably the two main jurisdictions that people are aware of. So El Salvador, very famously, AAB, their sovereign wealth fund, partly acquired, partly mined. And then you have the kingdom of Bhutan as well. I understand that one is mostly mined as well. So really, what we're seeing is a continuation of sort of similar activity that many countries engage in, albeit in different asset classes, with different things, with different objectives. I think this is sort of fairly normal. I mean, my personal opinion, I'd quite like to understand the thought process that's gone into the asset selection. So why those particular five assets? But beyond that, I mean, if this is something that an administration wants to do, then obviously I'm British. It doesn't really matter directly to me, but fine by me. And I think it's positive for the industry, of course, because it's going to create interest amongst other sovereigns, whether US states or other nation states, and it's going to hopefully, hopefully create demand, not only for the asset itself, but for the risk management tools that we need as an industry to try to help control risk, control volatility and so on and so
Sy Taylor 06:43
forth. Kai, I'm sure you've been given a lot of questions this week. How have you been thinking about it? I think first,
Cuy Sheffield 06:49
it's really hard to speculate. You know what this is going to look like, just from a few a few tweets. And I think by the time this episode comes out, we may know, you know all of the details. So like, whatever we say, like, we'll probably be wrong. I think from a from a high level, it's interesting. Just take, take a step back and say, you know, leading into the election there, there was this feeling like it was, you know, crypto versus non crypto. And so you have kind of the industry, in some ways, you're coming together, trying to raise money, trying to advocate. You had fair shake. You had a lot of kind of coordinated action trying to create a regulatory environment that would be positive for crypto. Now, with the success of that, arguably, with one of the most pro crypto administrations that we've ever seen now we're starting to see it's less about crypto versus non crypto. And people are realizing crypto itself is not this monolith. Crypto actually has many different factions of people who believe very, very different things. And so a concept like a strategic reserve, which I think for many people in crypto, started as a Bitcoin strategic reserve, now being extended to a crypto strategic reserve with a number of other assets inside of it has become, I would say, very controversial inside the crypto ecosystem, because you have people Who you know, say, wait a minute, like, how do you decide which coins that you buy? What does it mean the ones are included, which is, aren't? Are they actually strategic? You know, many of these coins aren't really similar to gold. You can make the argument bitcoin is kind of digital gold. And so I think something, if you're on the outside and you don't follow this space closely, you might say, oh, there's all, the all the crypto bros, you know, they're all trying to do the same thing, and now it's like, it's very clear how different the views are from different parts of the crypto ecosystem. And so I think the most interesting thing to see will be, how does the Trump administration reconcile those views? And, you know, are they siding on one side versus another. Are they trying to keep everyone happy? And what does the the ultimate policy look like, given that, you know, there's so much controversy in Opposing Viewpoints inside just the crypto ecosystem itself?
Sy Taylor 09:12
Yeah, I wonder if we're seeing the death of crypto as the monolith and the birth of sort of a bifurcation. Nearly everybody in crypto, apart from, like, a few bag holders, seem to have publicly distanced themselves from this idea. You know, especially some of the more well known personalities, like an Austin Campbell and Nick Carter, have been quite outspoken, uh, kind of, kind of against this idea. But have been really good, strong public advocates for on Chain Finance and the beginning of regulated on Chain Finance, and if we see that the SEC is bringing clarity to what is a security what is not. We've even seen the CFTC come out and say that sports betting is not a financial contract, so Robin Hood cannot list. It, and we see a genius Bill give us real clarity around stable coins. We have potentially stuff that activity that is regulated, that would happen on chain, and that would be a level of clarity that would be really, really fascinating to watch. I mean, Nick, what would you what would be the impact of something of all of those other things kind of outside of of this idea of a strategic reserve. Well,
Nick Philpott 10:25
I think it's so a lot of that sort of decompression, if you like, or removing of tensions. I think it's generally positive. You mentioned the the ceasing of the cases against Cumberland and and the like. I think that's, that's net positive. Because I think it's everyone just sort of going, Okay, let's calm down a little bit. And I think even, you know, the the uneducated observer would have thought, well, it's slightly strange that entities that have deliberately tried to get licensed, and indeed have licenses in other places around the world, Coinbase and Kraken, for example, are being being sued or taken to court, and yet, at The same time, someone like FTX way back when gets a bit of a pass, you know. So it smacks of double standards in some in some cases. So I think trying to just bring everyone around the table is very positive, but I think it's the first step in what needs to be a longer term evolution. So, for example, de banking, so the inability of digital asset service providers to get bank accounts in the first place, and when they've got them to be de banked by their banks. We've got an example, a client right now who banks with a local bank. They're in an emerging market, and one of the big US clearers has ordered that bank to de bank them because they're engaged in crypto. So they're just going to assume that they're financing terrorists or laundering money, because that's what everyone in crypto does. Obviously, it's an absolute it's a slightly farcical situation. Is slightly ridiculous in this day later. Yet it continues. So not only do we have to get to a point where actual, sensible regulation starts to be crafted, but that whole sort of knee jerk reaction amongst risk teams, compliance teams, financial crime compliance teams and the like needs to simmer down. I think the other part is that I take a slightly controversial position that, and this is my own personal view, that the need for regulatory clarity is overdone. I think many people use that as an excuse to do nothing or have done over the course of the last year, last few years, because a lot of regulations can be synthesized down to Don't lie, don't cheat, don't steal. A firm such as ourselves can look at FX rates, credit, various other Prudential regulations and go Well, in absence of anything else, we're going to do this, like this. Do that, like that. You know, the FBO rules, the protection of client asset rules, asset segregation rules, don't necessarily apply to us in the letter of the law, but we try to pretend that they do, because a lot of the stuff that they contain is sensible anyway, and our clients institutions are going to expect us to do that, regardless of whether we're regulated. So it's good to see, you know, what I'd like to see is people start to just do the things the right way from the outset, rather than sitting there waiting for regulators to come and do it for them.
Cuy Sheffield 13:07
I'd love to unpack that. The first thing you just said there, I think it's super interesting where there's been a lot of discussion around de banking and this idea of Operation choke point 2.0, that has mostly been focused on banks in the US, with customers in the crypto industry. What you're saying is you're hearing about these instances of customers outside the United States who are banking with a local bank, who then are losing access to their account, because the local banks correspondent is not comfortable with that local bank doing business with the crypto company, and so it's almost like second degree. And then the question is, is it actually de banking, or is it de risking? We've talked about on the show before, that you've got the impact of correspondence. Are such an important part of the global financial ecosystem, and it seems that many of these correspondent banks, particularly for emerging markets, it's expensive, it's high risk, it's time consuming to be able to offer those accounts. And so are they de risking in general, and saying activity in these markets we're going to move out of? Are they saying crypto is the highest risk activity, and so you can't even get a local bank account as a crypto exchange if your bank is working with a correspondent, because that's going to jeopardize their risk like love. Your perspective on how that's playing
Nick Philpott 14:35
out? Well, it's a matrix. So Jeff Kendrick, at Standard Chartered research and I co authored a paper, sorry for the shameless plug back last November and December, where we highlighted that access to correspondent banking globally, and particularly dollar correspondent banking globally, because that's the one that's most in demand, has been decaying for many years. In 2020 The g20 under the Saudi presidency, decided to give the FSB, the Financial Stability Board, the task of trying to improve cross border payments, and they've been working at that assiduously for five years. Their most recent report came out, I think it was q4 last year, and progress is pretty mixed, and what you have is still a lot of jurisdictions that are judged to be relatively higher risk, or they wind up on the fat AF gray list for a little while, the Financial Action Task Force list for a while. So many of those correspondent banks decide, okay, well, we're going to treat all of the clients in that particular country with as with a high degree of caution. If those clients then engage in crypto assets, then crypto asset clients are also treated with a high degree of caution. So it's high degree of caution squared which leads to de risk, which leads to de bank. The consequence of this, I mean, sort of pathological altruism, is the phrase I tend to level against this, is that people one of three things is going to happen. Number one is, the world will just find an alternative to dollar correspondent banking. And I think stable coins are kind of stepping forward as that obvious alternative. That's number one. Number two is, some of these reasons for de banking could be judged to be spurious in, you know, in in the public eye. So Nigel Farage is a UK politician, was de banked by his bank in the UK, and eventually that led to, I think, the chairman of two banks having to resign very publicly, or the third, and the Royal United Services Institute has written a paper on this. Is that some of those tools for very noble purposes to combat financial crime can be used for quite sinister purposes. You vote for someone I don't like, I'm going to remove your ability to make payments. So good luck paying a mortgage. So I think it's the dual nature of all of these technologies and all of these tools that can be used for dual purposes. And
Sy Taylor 16:56
since the global financial crisis, we've seen a gradual ratcheting up of the usage of sanctions as a primary mechanism for for that. And as a financial institution, your primary thing is to not get that multi billion dollar fine, so your compliance team will hire more people and be more and more risk averse, because there is zero upside to the chief risk officer for helping you do more business in really hard parts of the world to do business in. And there's zero upside to that Chief Risk Officer of running really efficient, really targeted, really thoughtful tech first compliance team. There's a massive upside to not being in the headlines, and that is that has been the job for some time, but as you say, rightly, cause and effect, what happens as a consequence is the world finds another way, be that stable coins, be that a BRICS currency, be that something else. So now you're in a position where actually the financial institutions are starting to look at this a little bit differently. And this is where I would disagree with you. Nick, I think that the regulations are incredibly important for the tier one globally significant financial institutions to see the signal that it is okay to use on chain finance. And they think that's going to happen. And so the next story is a classic example of this. So the Bank of America CEO, Brian Moynihan has said they are mulling the launch, potentially, of a stable coin if the regulators allow it. He said words to the effects of there's going to be a stable coin in which a fully dollar backed type of thing is no different to a money market fund with check access, which is no different to a bank account, really. And then he went on to say, if they make that legal, we'll go into that business. So you'll have a bank of america coin and a Bank of America us deposit, and we'll be able to move them back and forth, because until now, it hasn't been legal for us to do it. I'd love your perspective on this Nick because that is sort of outside of the US. I think something that that sort of sort of happens a little bit so. So give me some context on Euro, dollars and how and how the world works outside the US
Nick Philpott 19:13
it is, yeah. So I think one of the things that many people don't realize is that distinction between USDC, which is the second largest stable coin in the world by market cap, and usdt. So circle and tether is that many of our customers in various different jurisdictions around the world view tether as a form of euro dollar. So just wind back in history, Euro dollars were created in the 1950s first loan Alta Strada Tai Talia, 1963 basically saw banks using dollar deposits outside the United States to basically execute payments or provide financing or provide loans. So it's basically offshore dollars. A lot of it came originally from the Marshall Plan. That's where how the dollars originally are. Got into the European Central Banks from where they were then propelled. So a lot of customers prefer using something that they feel has an extra step removed from the US, whether that's a perception of what you were alluding to earlier, the weaponization of the dollar, or anything like that. I sort of leave that up to the view of our customers, but that's certainly the perception now, obviously, I know that tether and the like all dollars ultimately feed back to the United States, but that shows that there's a clear demand for a Euro, dollar solution. Equally, there's a demand for something that others would view as more regulated, view as something that's a lot more palatable, perhaps to US regulators circle is issued by a US entity, or it's issued by other entities outside the US, but it's fundamentally a US, US product, PayPal, USD, Paxos dollars would also be the same in ripples, of course, as well. RL, USD, so you got that, that demand out there? I think the irony, just to wind back one question, though, is that moving away from the correspondent banking system because of some of the difficulties of getting access to bank accounts and getting access to dollars, ironically, has landed us with a technology that is probably a better tool to use in the fight against financial crime, because when you're bought a client, you Tai their real world identity, which you establish through KYC, know your customer and client, due diligence, sanction screening and the like, to their on chain identity that then gives you a degree of their financial history based on that wallets activity, which you can then use private sector suppliers like chainalysis, TRM labs, elliptic and so on to help you with that analysis. And then, of course, when the coins land in your wallet, either you or your custodian are also able to screen the coins so far superior tools to Fiat and last but not least, when we onboard customers, we do Penny tests, so we'll send a few dollars to them, we'll get a few dollars back again, just to verify that they control the accounts and the wallets that they claim to control. I think all of these are new tools that our industry tends to use, and I think it's an enhancement in the fight against financial crime. It's
Cuy Sheffield 22:00
it's interesting that many of these tools have been used for a while. They continue to improve. But from banks that I've talked to, the tools aren't enough. When you don't have regulatory clarity, it's like you could say all you want, okay, we've we've got the most sophisticated blockchain analysis. But if there's not clarity that that suffices your obligations, then it doesn't matter how good the tech is. I think, going back to the Bank of America kind of comments, it's interesting in the realm of our theme of the year, of every bank needs a stablecoin strategy, there are a few options that banks have today. It seems like one option is go out and partner with stable coin issuers and hold the reserves, and that's kind of more of a traditional Fiat banking business. The second option is partner with an existing stable coin issuer and integrate that stable coin directly into your products. Use that stable coin within your products enable access to customers. And then the third option is create your own stable coin, or tokenized deposit, or some form thereof. And those are kind of the three things that banks can do once there's regulatory clarity. I'd love to hear Nick You mentioned something the other day when we connected that the opportunity of the first where, I think you said there are eight ways that banks can make money holding reserves behind a stable coin. And, you know, I thought maybe there are one or two, but, like, there are eight ways. And do you see, if you're advising a bank or you're talking to a bank today, how would you think about, you know, really focus on the Fiat side of it, and being the Reserve Bank Fiat custodian versus actually go all the way into and to issue your own stablecoin. How do you think about those trade offs and ways that banks make money on the Fiat custodian side
Nick Philpott 23:53
of it? So banks and fintechs has put it that way, startup type companies, or just more agile, so slightly more technologically focused, companies should and can co exist. They should partner. So in light of what I said to you the other day, I think there's an opportunity for banks. A lot of banks instinctively think, well, we should do our own stable coin. Tether is the most successful financial also most successful company in terms of per capita employee income in human history, potentially. I mean, what do they make? Like, $13 billion with 100 staff last year, or something ridiculous. And I can see why that's a natural reflex. But the eight sort of different ways actually would be through providing banking services to stable coin issuers. So for example, Standard Chartered. This is public knowledge. Is a banker to circle. It's put PR and press releases and things out that it that it is a service provider. So circle is obviously largely a Blackrock money market fund. So it's coins are backed by Fiat and backed by US Treasuries. So revenues number one. As a bank, you can provide custody service. Is to custody the treasuries that are in the reserve backing the coin. You can then broke the treasuries to the reserve manager of the stable coin. You can do repo, repo and reverse repo. We'll stick that in a single bucket again for the reserve manager. Number four is you generate income from the cash buffer. So obviously, stable coins have got issuance and redemption, minting and burning, whatever phrase you want to use, buying and selling. So there's always a cash buffer enabled to do that and banks, as with your deposit you have in your high street bank, your Main Street bank, pardon me, you'll learn debt, interest, margin for that when you do the minting and the burning with firms like ourselves or with others who can mint and burn directly with circle USDC, then the bank gets payment income. So that's number five. If the bank owns a stake in a company like ours, then you get the revenue that we generate from when we're on selling or distributing the stable coins to others. If we do that against the foreign currency, Mexican pesos, Turkish Lira, emirate, dirhams, pounds, euros, whatever else. Then we'll break down our trade into a mint and burn trade and an FX hedge. We'll send the FX hedge, very likely back to our parent, Standard Chartered, so that generates revenue for the FX desk. And last but not least, if Standard Chartered owns a stake in a custody company. So like Zodiac custody, our sister company, or indeed Standard Chartered new digital asset custody business out of Dubai, which is powered by zodia custody, then they can earn revenue from that. So eight different opportunities. If they then took a stake in the stable coin issue as well, we could even push nine through. Many of the banks have ventures, arms and I think many stable coins, particularly non dollar stable coins, I think are very keen to find support. So I think there's opportunities there, but eight or nine different revenues.
Sy Taylor 26:51
I was talking to a company that's a much earlier stage organization. I've seen all kinds of things on stable coins in the past month. One is building a side call for smaller US banks to denominate in stable coins. So it's an entirely alternative to their existing books and records and ledgering system as a way to kind of build a stable coin, native business, as it were. Another one I've seen is a stable coin native Neo bank that is intentionally going for a chartered license in the United States, which I thought was brave, but actually, now that the markets turned that would be entirely fascinating. So there's the things happening at the grassroots as well as there are the things sort of happening out there in the in the wider world. But I asked you a second ago, and I want to come back to it, which is this idea of the offshore dollar. And you know, Singapore has been a major jurisdiction for the likes of usdg. And usdg is kind of an emerging stable coin, but I believe, or as I understand it, by dollars held in Singaporean banks. So I'd love to understand a little bit about what it is Singapore and Dubai and others have been doing with their regulatory framework, and what you see from some of the some of the banks and some of the regulators in that part of the world that maybe we'll start to see elsewhere.
Nick Philpott 28:13
Yeah, I mean, Singapore has got a good ecosystem. I mean, they originally came out with their crypto asset regulations under their payment services regulation, which was, I don't think we'd seen that in any other jurisdictions in the world. So that helps number one. Number two, they're obviously blessed with a very good talent pool locally, so you can find decent financial markets, payments, general financial services expertise in the jurisdiction, plus also, it's got banks that actually have the sort of the clearing relationships in order to be able to move dollars offshore. And then, last but not least, it's got banks who, like Standard Chartered or indeed throw DBS in there. DBS have their exchange, who have gone through that hard work of understanding the risks that are involved and actually taking give you that they can support digital asset businesses. And then it becomes a symbiotic relationship. The bank learns from the fintech. The FinTech receives help from the bank. Potentially, there's also a ventures player in there as well. And I think that model has been very much you see that also in the United Arab Emirates, slightly more complicated, because there you've got offshore centers, DIFC and adgm. We're in the latter Abu Dhabi global markets, and then you have onshore as well. So that's regulated by vara, the virtual assets regulatory authority. So generally, similar kind of rules, but slight nuances in each market. You know, we've been delighted with that. One of the other things I would, I would flag, is that it's, it's perfectly good writing the best regulations in the world, but the problem is, you still need to execute on them. So it's a matter of public record. Yeah, certainly the FCA wound up in front of some. Parliamentary committees, some of the waiting times for registration under AML d5 or the money laundering regulations in the UK were sub optimal. Let's put it that way, they were measured in months just to get to the starting line. So it's all well and good having a good regulatory framework, but you need to have the team to be able to back it up. And if I could sing the praise of a regulator, which is quite probably a sentence I don't think you may have never heard on your podcast, but, I mean, the fsra in Abu Dhabi was just astonishing. We asked if we could start the licensing process. They said, oh, we need to get teams in place and all the rest of it. Could we start into the wild? We said, okay, bracing for the worst. How long are you thinking week after next? I mean, I nearly fell off my chair, and they were straight at it. And very, very thorough, thorough process. So really, really impressed. So, and I think praise and credit where credit is due,
Cuy Sheffield 30:56
it's it's such an important point, and particularly for folks that are closely following the genius act and US legislation that there's this multi step process, there's what's in the bill, and then how does the bill get interpreted by the regulators? And so like, there's still a lot of work around how, even if legislation passes, how it gets interpreted will be really important, and there will be entities, whether it's the OCC whether it's state regulators that have to make decisions for certain aspects of the bill, that will have significant impact on the market. And so it is really interesting. Just as a reminder of you've had jurisdictions like Singapore, who've been working on this for years. And I think it's a pretty big testament to that framework, with the global dollar network and usdg Deciding to issue out of it, and then also to just see the role that standard charter and DBS have been playing in the stablecoin ecosystem, where it's been. It's seemingly a very steady, you know, stream of development over a matter of years, you know, to build the right expertise and relationships. And I think the story of the incubation of zodia is is really, really cool. And I think there are a lot of you know, banks across the world that can learn, you know, from, you know, some of the work that center, charter, DBS and others have have done and so, you know, it's a fascinating
Nick Philpott 32:26
story. Sorry, Hong Kong as well. I think is has also done a very good job. They incidentally, worked with our other parent company, OSL, which is a vast operator in Hong Kong. And I know that OSL was the first entity to be regulated by the SFC in Hong Kong. So they actually sat down with the regulators to work out how to put those regulations together. One other very quick observation is a lot of the smaller states, which are, in their own ways, sort of financial services centers. So Cayman, Gibraltar, Bermuda, for example, were also Mauritius, another one to throw in there, well ahead of the game. And actually were probably some of the jurisdictions with the fastest deployment of regulations. I think Bermuda might have taken that, taken the taken the medal, but they were well out ahead. And I think it points to the agility of some of those jurisdictions. They're a bit smaller. If you wanted to get all the banks in Mauritius around a table. Wouldn't necessarily need a big table, but it means that as a jurisdiction, they can move very, very quickly. So I do sympathize with larger jurisdictions, Singapore, Hong Kong, certainly the UK and obviously the US, because you need a much bigger table, and it's a much bigger constituency to get that unity well,
Sy Taylor 33:39
and certainly everybody I'm speaking to says Washington is very busy right now. Most of the major crypto businesses have teams of people up and down the hill, kind of on looking at the genius bill, but it does have, as drafted, certainly in the versions that lawyers and the public has seen, some fascinating pieces to it. Number one is this idea of a payment stable coin issue or a psi that broadly, sort of follows the regulatory framework you see of how the federal versus state level works under DoD Frank, which is, you know, sub ten billion assets mostly left to the states. More than 10 billion has federal plus state level. And of course, as many listeners in the US know, federal and state are not always aligned and not always the same thing, but there have been some stable coin issuers like our early USD, like Paxos and others that have a depository license out of the and a bit license out of the New York Department for financial services. So there's a pattern there. You could be a depository, you could be a bank, or you could be something else, but you must have one to one backing with some sort of asset, and that some sort of asset is essentially opening the door for the high quality liquid assets. Being the primary source of backing for these stable coins, and in so doing, they make the tokenization of real world assets something that is a regulated and potentially expected activity, and that could be, could be really significant to watch. Well, we could go on about this one for a little while. Brian Moynihan says things occasionally, but I've got to pause us here to thank our sponsors, so we'll do that just now, already. Thank you very much to our sponsors. This story comes from the block and also FinTech brain food, which is the stripe co founders, John and Patrick, say stable coins improve the usability of money in their annual letter, the brothers know that stable coins represent an improvement on the basic usability of money, much in the same way that bank notes were an advancement from coins and fiat currency was an upgrade to the gold standard. And they also wrote stable coins have four important properties relative to the status quo. They make money movement cheaper, they make it faster, they make it decentralized and open access, and thus globally available from day one. And of course, they are programmable. So they did, this is a company, lest we not forget that did $1.4 trillion of payments volume in 2024 and also acquired stable Coin Company bridge for 1.1 billion. And I spoke to John Collinson for the brain food newsletter a couple of weeks ago, and he had some very interesting things to say, not least on stable coins, where he mentioned that he really does believe that they are going to be a growing part of the payments ecosystem. So I think that they're an interesting one to watch. Kai, we had Zach from bridge on the show recently. Are you seeing this across other payments institutions and payments companies more broadly. I know you say every bank needs a stable COIN strategy, but what about the payments companies?
Cuy Sheffield 37:08
Yeah, I think it's important to recognize that most payment companies were actively experimenting with stable coins in some degree, all the way, I would say, from the like beginning of 2000 2024 so it wasn't like payment companies have just started experimenting stable coins. I think what happened was the experiments were relatively controlled, relatively few resources, kind of in the corner of the payment company seeing kind of what's possible here. And I think, as we talked about many times on the show, the conviction that stripe showed with the bridge acquisition was a major turning point to go from Skunk Works, Innovation Research, let's experiment, to major business strategic priority. And I think that that has happened for many payment companies across the world. And I think we'll start to see throughout the rest of the year, more and more examples of stable coins being used at scale. I think it's it was also really interesting just hear stripe in the annual letter articulate this idea of stable coins as an important export to the rest of the world, and I think it's it's fascinating, and one of the things I've thought about for a long time is payments sit on this layer on top of money. And you could go an entire career the past few decades and really just be a payment person, and just think about payments, of the movement of money, but not think about money itself. And like is the underlying nature of money, of what currencies are, what currencies demand is. Is that going to change? And it hasn't really fundamentally changed that much over the past few decades. And I think now we're at the first point where we've got the technology and the infrastructure now, we're starting to get the regulatory clarity where the form that money is delivered in, that money is held in, is actually changing, and then that could have a significant impact on payments and the way that money moves on top of that. And just to like, ask the question of, how much demand will there be for dollars in the world? How much demand for dollars exists today? How challenging is it to get access to dollars? And then, if you're a payment company, and there's new technology that enables Global Access and easier use of dollars, what does that mean for currency preference, for different payment rails? And so I think it's become very well established in consensus that payment companies already have a stable grid strategy, and they're executing it. I think now it's, you know, banks are, are the kind of last to move to say, you know, banks have to develop a stable grid strategy then figure out what they want to do, and in many ways, they have to follow fintechs and payment companies. And if banks don't. Well, I think you could see a world where the fintechs who embrace stable coins are going to become more and more competitive with banks who don't use stable coins. And so I think that will be another major forcing function for banks to start to participate.
Sy Taylor 40:14
One of the things John said to me was that, A, they've been surprised by the scale and speed of the volume growth in stable coins and B, how much of it is actually B to B, and not B to C or something similar, and not just payouts. And I think that's fascinating. Nick you educated me on a very classical cross border use case many months ago. Do you want to talk through sort of some of those other use cases that you're starting to see emerge for sort of commodities trading and such like, Yeah,
Nick Philpott 40:45
certainly. So I mean, I've read the stripe letter myself, and I can understand why they wrote it the way they wrote it, but I think they missed some of these use cases, and I'll run through that one, but they also missed one of the features, which is predictability, or reliability, but I'll come back to that in a moment. So simple use cases, you got to think about what payments are actually for. So two obvious ones. So number one would be to buy and sell stuff. Now payments between sort of traditional corridor, well, big corridors, so London to New York or Singapore to Hong Kong. There's probably not a lot there to fix. They work pretty well, but it's between the global South, or between the Middle East, for example, and Southeast Asia, or Middle East and Latin America and so on so forth. Payments like that are pretty poor, and as the g20 sort of work has demonstrated, in some cases, are getting worse. There are some jurisdictions that literally have no access to correspondent banking at all anymore. So how you get dollars in and out of those countries is a mystery. But for example, we've got customers now, major oil companies who on board with us. We put them through full KYC and CDD and sanctioned screening and all the rest of it. And what they do is they buy and sell stable coins with us, and then they use those stable coins to buy and sell oil cargos or energy cargos, coal bunker fuel. We've got a fertilizer trader on boarding with us as well analysis moving out into into different parts of the supply chain, so port operators, ship brokers, and so on so forth. Now, when I says, what are you actually paying for it with? Do you think that if you're buying an oil cargo, for example, the representation of that oil cargo is a bill of lading, for example, it's a document. It's been around for several 100 years. And the normal way of transmitting these bills of lading is FedEx or DHL, or, if you want to get really technological, it's a fax machine. I mean, if they say that a lot of crypto is trying to bring finance from the 20th century into the 21st century, in some senses, global cross border trade is going from the 17th century into the 21st century. If you have a stable coin that is on a permissionless blockchain that can be accessed anywhere, and then you have a bill of lading, which you can tokenize, which, incidentally, the UK passed a law, the electronic trade documents act in 2022 which specifically says you can digitize trade documents. It is technology agnostic. So you read the law, in my view, you can put it on a blockchain, no problem at all, like Ethereum. Then suddenly you have trade documents representing the cargo, and you have the means of payment on the same chain, same infrastructure at the same time. So you could do very, very simple things with that. You could do escrow, for example. So if you're filling a VLCC tanker with crude oil, it's 2 million barrels of oil. Takes quite a while to put the oil from port into the ship, so you have to put the payment into escrow pending the completion of pumping. So the nice way to do that is to be able to put the documents representing the cargo and the stable coins into escrow at the same time visible to both parties. Really, really nice use case, really, really simple, fixes a world use case and meets the global trade industry as they're coming in the opposite direction, trying to trying to digitize their supply chains. And
Cuy Sheffield 44:05
that happens today, just to clarify. So is that you're seeing it's coming, or it's already happening, and then who plays that role as like the escrow? Because you could write a smart contract. But you know, I assume you're not just trusting code for 2 million barrels of oil, exactly. Is there a type of entity that is just setting up smart contract based escrows and serving as a trusted partner that deploys a smart contract, validates once the oil goes then releases the stablecoin payment? Like, it's a fascinating use case. It's the first that I've heard. The specific one.
Nick Philpott 44:36
So the actual coexistence of bills of lading and stable coins so far hasn't happened. I mean, from our perspective, it only came up with it in a restaurant in Athens last year, in May, at a ship broking at a shipping conference. To funny story. But anyway, so. But what we're trying to do is to try to get these companies to start using stables so just just start doing the finance. Leg of the transaction there. Meanwhile, they're already digitizing the bills of lading. And incidentally, there are already companies out there who, independently of us, are digitizing the bills of lading onto the Ethereum blockchain or the polygon blockchain or various others. So it's not going to be a huge step to be able to put those two together in terms of the escrow. There's a few candidates, most oil trades or commodities trades or shipping trades are often brokered. So you have very, very large ship brokerages or oil brokerages and the like, or you can have port operators and all of the above. I think could act as very as sort of ideal providers of these escrow services. They would obviously sit on top of, I would imagine third party custodians who provide the tech, and in the actual mechanics of the port. No, you probably in some jurisdictions, you probably have some ex Special Forces guy who is literally standing on the port watching the oil go of the ship. And the moment it's finished, he goes, Yeah, it's done, and then payment completes. That is literally how the process works today.
Sy Taylor 46:01
And to be clear is, there are oil importers, exporters using stable coins. There are people doing bill of lading. What you're talking about is, is putting that all of those pieces together, so the import export is happening on stable coins. I think that's a fascinating thing. And if I was trying to compete with Swift in some way, or and, or I was in stuck in the Global South, and Swift was just not an option for me. This is the center of global trade. This is the biggest global set of trade flows possible. I would be aggressively leading into this use case, because it's that stodgy bit of banking that is still stuffed with filing cabinets and way too expensive and absolutely easy to attack as somebody who's worked in global cash management and trading working capital in my previous existence, anything disrupting this is long overdue. And yes, shout out to the electronic trade documents act. Of course, many people will forget that most global trade happens in English law, because common law is considered the fairest for global trade. So you have a legal framework in which you can already operate correct.
Nick Philpott 47:10
So seven you bang on, 70% of bills of lading are under English law. So so we gotta
Cuy Sheffield 47:15
call that the alpha for the stable coin founders, is stop going to crypto conferences. Go to shipping conferences like, that's the place to be.
Sy Taylor 47:26
I haven't seen the stable coin startup attacking that space because it's one of those areas where, how many people have actually worked in that department of a bank, and also, like deep into stable coins? The answer is Nick Philpott, but
Nick Philpott 47:39
I was the only I went to this shipping conference on a whim in Athens. I'm married to a Greek so that helps. So I speak a little bit, but I guarantee you, of the six ish 1000 people there, I was the only crypto guy.
Cuy Sheffield 47:55
I'm positive, absolutely, that's how to do business development. Nick, that's how to do
Sy Taylor 48:00
it. I got to talk about this last story because it's probably close to home for Kai, but it's also just a really cool story. So avalanche, aka avax, have launched a VISA credit card for IRL payments, and this is in partnership with rain. It allows users to spend avax, usdt and USDC. The card is being launched in 35 US states, and the card is also available in Latin America and the Caribbean. And really interesting quirk, when you spend your crypto, it isn't immediately sold when you make your purchase. Instead, the crypto is sold once a day at the same time, around 9am et, based on the past days, charges before coming transactions on chain. So kind of fascinating crypto credit cards are coming. This must be kind of hard to pull off. Kai, what do you know about this one? Yeah,
Cuy Sheffield 48:55
so we're super excited about this program. I think there are a few themes that this really fits into one is just the emergence of demand for stablecoin linked cards in emerging markets. And so this program is going to be live across Latin America. And there's this concept that we hear literally consumers asking for dollar cards. That's becoming a term that people are using, I want $1 card. And so stable coin, Link cards are becoming this, this new category. So we're really excited to have a product, you know, like, like this in market. And we see a lot of demand, you know, many issuers, many wallets coming to us, you know, looking to launch, you know, stable coin, LinkedIn and dollar cards, you know, across Latin America, as well as other regions. I think another fascinating part of it is just the role that some of the blockchain foundations are playing. And the avalanche Foundation, where it's interesting, if you think about blockchain foundations, there's this huge spectrum of there's some, if you take the Ethereum Foundation, very hands off research oriented kind of long term view, they're not really doing a lot to directly. Drive adoption of eth on a daily basis, and that's become somewhat controversial lately, that I think there are people in the eth community who would like them to do more avalanche, creating a consumer facing product, enabling someone to onboard into a self custodial wallet, get a card to then spend USDC, usdt or avax on the avalanche blockchain. They're directly working on onboarding consumers, particularly in these emerging markets, with modern financial products like this card platform. So I think that's really cool to see. And then third, rain who's rain cards? Who's the enabler? We've been working with very closely for a while, and they're becoming a super easy way for many companies to issue stable coin linked in dollar cards in a bunch of different markets. And so we think that this is a brand new category for the card ecosystem. And today, if you have a stable coin in your wallet, it's just hard to spend it, and if you can connect it to a Visa card, we think that solves a major problem in making stable coins have the ability to become a day to day account of where people hold and use dollar value.
Sy Taylor 51:10
We need another two hour episode, because I got questions like, how does the interchange work, and how does the FX work, and all of that kind of stuff. But Nick, what are your thoughts on this?
Nick Philpott 51:19
I'm afraid it's a retail area, so you're sort of wandering beyond my area of expertise. It certainly sounds very impressive. It sounds very welcome, particularly the cross border aspect of it. You know, it's slightly strange that say, if I use, you know, someone in the US is using Venmo, and I use PayPal, which is very big in the UK, the two can't send funds to each other, so having something like this visa card that operates seamlessly across borders, not only state borders, but actual Caribbean and Central American borders, that sounds very, very exciting indeed. Yeah,
Sy Taylor 51:55
avax have been quietly doing a lot of things. You know, we obviously had some of their folks on the show. Recently, they've been quietly sort of showing up in spaces, so that foundation backing this and leaning into it is kind of fascinating to watch them drive it and chi, I learned something today. Dollar cards are a new category. I did not know that was going to be a thing. Well, listen, we are just about out of time. So thank you listeners. Very much for listening, and if you're watching, thank you for watching. I appreciate you whilst I look at my notes continuing to watch. But Nick, where can people find out more about you and everything you're up to at zodiamarkets?
Nick Philpott 52:32
So obviously, find me on LinkedIn. That's the social media page that both I use and the company uses. Otherwise, it's zodiacs.com or one word very, very simple,
Cuy Sheffield 52:42
Kai on exit Kai Sheffield and visa.com/crypto
Sy Taylor 52:48
sy Taylor, and you'll find me on LinkedIn, and you'll also find me@sardine.ai or FinTech brain food.com thank you very, very much, and we will catch you next time you.