On Ep. 28 of Tokenized, Cuy Sheffield, Head of Crypto @ Visa is joined by Elise Soucie Watts, Executive Director @ Global Digital Finance and Rob Hadick, General Partner @ Dragonfly to discuss Circle Payments Network launch, regulatory challenges and yield-bearing stablecoins vs. payment stablecoins.
On Ep. 28 of Tokenized, Cuy Sheffield, Head of Crypto @ Visa is joined by Elise Soucie Watts, Executive Director @ Global Digital Finance and Rob Hadick, General Partner @ Dragonfly to discuss Circle Payments Network launch, regulatory challenges and yield-bearing stablecoins vs. payment stablecoins.
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This episode is brought to you by Visa
A world leader in digital payments, Visa is bridging the gap between traditional financial institutions and innovative blockchain networks, helping players in the payments ecosystem navigate the ever-evolving world of tokenized fiat currencies with confidence and ease. Learn more at visa.com/crypto.
Tokenized is also presented by Avalanche.
With Avalanche’s purpose-built Layer 1s, institutions can tailor digital asset strategies to their exact needs—while still tapping into the power of public blockchain innovation, developer communities, and seamless interoperability. Learn more at avax.network
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We’d also like to remind you that the views or opinions of our contributors today are their own and do not necessarily reflect those of the companies they are representing. Nothing we say should be taken as tax, financial, investment or legal advice, do your own research!
Music by Henry McLean
Elise Soucie 00:00
I think that a concern for me, for a state level regulated stable coin is, does that mean that then that state would have to agree to reciprocity arrangements with, say, the UAE, the UK, the EU? Because basically what genius does is it would enable for a federal level agreement that says, if a stable coin is regulated in the US, we can enable this reciprocity with extra restriction over there. How does that work if you're only state level regulated? Because, to me, that would destroy one of the massive use cases for stable coins, which is obviously cross border, cross border use cases and cross border payments. You Kai,
Speaker 1 00:49
welcome to tokenized. The show focused on stable coins and the institutional adoption of tokenized real world assets. I'm Kai Sheffield, head of crypto visa, and in a tokenized first I'm taking the reins of the show, as Simon is unfortunately unwell, but joining me today is Elise Susie watts, Executive Director of Global Digital finance, with her third appearance, I believe the first, third appearance on tokenized Elise, please help me get through today in the hosting chair. How are you doing today? I'm
Elise Soucie 01:22
doing really well. Thanks. Thank you so much for having me, and I will try to do Simon justice. He is missed, but thank you so much for having me back. And we have a lot of really fun things to talk about that
Speaker 1 01:32
we do. And joining us is also Rob haddock, General Partner at dragonfly, and I have to say, one of the smartest VCs in the space on all things stable coin payments. We've had some amazing discussions before. Pumped to have him on the show. How are you doing, Rob,
Rob Hadick 01:49
I'm doing great. Thank you for taking my few dollars to go and say how great I am and letting me bribe you there. But excited to be part of history on your first day hosting of watch. I'm sure will be many, many more.
Speaker 1 02:01
There we go. And just one last bit before we get into the content, I need to remind you that the views or opinions of our contributors today are their own and do not necessarily reflect those of the companies they're representing. Nothing we say should be taken as tax, financial, investment or legal advice. Do your own research. All right, let's get into the stories. And I'd say one of the biggest pieces of news in the past few weeks is from CoinDesk and practically any other publication as well, that stable coin giant circle is launching a new payments and remittance network. It's dubbed the circle payments network, and aims to bring financial institutions together in a compliant, seamless and programmable framework. CPN does not move funds directly, rather, it serves as a marketplace of financial institutions and acts as a coordination protocol. Some of the partners involved include Zodiac markets, BV and K, BCB group, conduit and dozens of others. Let's start with you, Rob, this seems like one of the biggest stories in stablecoin payments, maybe of 2025, and something that was kind of long anticipated, helped frame like, how should we think about the CPN and why are they doing this? What does this actually mean for the space?
Rob Hadick 03:19
Yeah, so I absolutely agree with you that it's probably, maybe the story, or at least one of the few stories of the year around stable coins payments. As you know, Kai, stable coins have been something that we've been talking about for a long period of time, but it hasn't been something that's really been used in payments until, I think, really over the last call it 15, maybe 18 months, we've really started to see that volume pick up, you know, circle. They want to be a big part of that. You saw their s1 a few weeks ago or a month ago or so, there was a lot of conversation during that period. Post the rest one around, wow, they are paying a lot for distribution, and the revenue quality might look, or the revenue mix might look something like an asset manager. And so they clearly understand, and you know, they've had this conversation with investors every time they've been out that for a public market story, they need to start thinking about, Okay, well, how does that revenue quality change? Is there a way that I can be looked at as a payments company, a technology company, not maybe an asset manager who just makes net interest merchant? And clearly this is good for that story payments companies, the P multiples are about 25% higher than being multiples of asset managers. They want to go and convince people that we should get it a valuation that is conducive or similar to, you know, something that is a high growth technology and payments company and so, so this makes sense. It's really ambitious, and I'm really excited about what they're doing, trying to bring all of these people together that said, I will say I was in the room during the product launch at their office, I guess, two days ago now. And one of the first things that Jeremy Aler said was, we don't want to compete against our customers. And then the chief product officer said the same thing when he came on stage, you know, maybe 20 minutes later. And then. Then the CTO said the same thing, and then the GC said the same thing. And it was clear to me that it was a little bit of like, you know, he doth protest too much, right? Like it was. There's an obvious concern here that there is going to be that competition that is happening, and they may be in a situation where it's hard to align those incentives. And so that's one of my biggest concerns about this.
Speaker 1 05:24
I want to go back to Elise jump in. How do you think about what problem it solves in some of those dynamics? Rob called out, yeah,
Elise Soucie 05:32
I would just pick up on that last thing that Rob was saying, which is, I do think that it's really interesting that competition aspect, and when you think about this from a regulatory perspective as well, there's a reason that in tradfi that market participants, the giant market participants, do very different things in segmented ways, like you don't have your visas of the world also being asset managers, And you don't have, you know, Blackrock performing the exact same function as like a high street retail bank. And there is a reason for that, and it's not just competition against your partners and your clients, but it's also from a regulatory perspective, they tended to have not been that comfortable with a we do everything type of financial institution. That's why you have to have these really tight, like Chinese walls for different parts of the business. And I'm really intrigued to see how this will evolve. I agree with you rob and their points about why this could be a good thing, and I completely understand why they're doing it. But at the same time, I'm really interested to see what the regulatory response will be, because, remember, we don't actually have a market structure bill in the US yet, and we also don't have the completed and finalized version of stable coin regulation. So what will that mean, both for stable coin issuers as well as both the banks as well as these other hybrids of what traditional finance looks like? So while I definitely applaud the ambition, and I think it is an extremely exciting story. And as I said, understand why circle is doing this, I wonder what the regulatory response will be as I think we will see more and more crypto firms trying to occupy that space where they are doing multiple parts of the market that we haven't seen in a typical way, historically,
Speaker 1 07:21
that's a great point. And maybe take a step back. Rob, how do you think about what problem does this solve, compared to how stable coin payments have been operating even over the past year before this network? And then what use cases are they focused on? Which use cases do you think have the best chance of success in the network?
Rob Hadick 07:40
Yeah, so I'll maybe answer that in reverse order. On the use case side, it's very clear that the goal here is to reinvent the way cross border payments are happening. So, you know, and they were very explicit about this during the product launch. But also, I think where we've seen actual adoption has been okay, well, listen, we, you know, have correspondent banking doesn't work particularly well for especially for SMBs, especially for kind of longer tail use cases. It is too costly, takes too long to settle and there's a way to bring stable coins as part of that workflow, both for people who are maybe already using stable coins, but also for people who we talk about the stable coin sandwich. We can debate how much or how good that is for at least today, relative to things like wise, but that's clearly the focus of this today. I think what they're trying to really solve is that today there's really strong, quote, unquote, payment orchestrators, but they're all regional. So for instance, there's bridge or conduit in the US and Latin America. There's people like triple A and Singapore. There's people like reap in Hong Kong, and connecting all of them to each other in a unified fashion that is able to have this same compliance standards, the same messaging standards, and to be able to reach each other with good like real time quotes. That's really something that they're trying to solve. We've seen other startups try to solve that as well. It's not clear to me, though, that as people get bigger, getting back to my earlier point, that they won't just try to surpass the CPN, right? So on day one, there's a lot of incentive for people to quote, ie, listen, I'm somebody who could take flow from CPN, but if I get big enough, if I am bvnk, for instance, right? Why wouldn't I want to go around CPN unless they have some sort of value added service that is actually worth the extra cost of the network, right? And if they're going to have something that's worth the extra cost of the network, then they also have to solve this compliance layer travel rule. They also have to solve the value added services on the software side. Reconciliation is a really big problem there, and that's where I think they need to focus. The focus is, oh, I'm an API of APIs, and I'm connecting a bunch of people. People are just going to go around them and because that's where they're going to get the most
Speaker 1 09:52
value, yeah, one of the interesting takeaways for me is this broader recognition that stable coins themselves, they're really their payment. Infrastructure. They're an underlying rail. But stable coins are not really payment networks. There's a lot more to a payment network than just the value transfer of how to move value from A to B, how to solve compliance edge cases, when things go wrong, like there's so many other components of what's the economic model. What are the rules in the governance so Elise, how do you think about, from what you've seen in their both the kind of the value add services and their articulation of what they provide on top of just an API to connect together a bunch of APIs? Do you think that that solves a real problem for the space and and when regulators look at the space board, will things like travel rule and some of the protocols that they're putting here be important for them? Yes,
Elise Soucie 10:48
and I mean to answer that question, so the compliance layer is absolutely the value add that if you can crack that and actually crack it for firms, then they will probably be lining up, because that is something that is very costly. It is very time consuming. And so if that is like, a direct benefit that can be gained, great. However, for you to actually have that compliance value add, that means it has to work in all the jurisdictions within which the CPN would operate, right? So it can't just be like, Okay, we've done your compliance here. It has to be everywhere for every single participant in the network, because otherwise, if it's not there, then you lose the efficiency of the network, like to your exact point, there's so much more that goes behind a payments network than just, you know, the actual physical payment. And so I think that travel rule absolutely matters. And also, one other thing to consider, you know, I talk about the jurisdictional implementation, is that not yet every single jurisdiction actually has their rules in place for stable coins. So you kind of have this bit of a chicken and egg problem where you have a network that could actually fulfill some of those requirements for regulators, but the regulators might not actually have all of their requirements in place yet. Fat F was one of the very first to set out crypto asset requirements. And obviously travel will being implemented around the globe now, but there's a whole lot of other compliance requirements that are kind of come down the pipeline. I mean, for example, take a jurisdiction like the UK, they don't have stable coin requirements yet. The EU obviously does, but that's still being implemented across various member states and jurisdictions like Poland, for example, don't yet have their legislation in place, and so I do think that there's still a little bit of friction there when it comes to actually operationalizing this, but if they can make sure that that's ready at the level where each jurisdiction is, then it definitely could solve that in terms of the client demand, I think,
Rob Hadick 12:44
I think there's also a little bit of a it's unclear exactly how it's going to work today, right? Because I expect that whoever's the ofI is the originator and the BFI the beneficiary financial institution, like, they're going to still be doing all their KYB and they're going to have to do the local regulation, right? And so there's you have to right exactly you have the liability for it, yeah, and they have the liability. So, okay, so there's a messaging, you know, or standardized messaging, that maybe you can pass those two things through to each other, but it's unclear to me how many extra bits on a transaction is that going to be worth, versus maybe the big of eyes and the big BFI is facing off against each other, and that's the thing that we have to, I think, figure out, which is, what kind of value can you add to that that makes it worthwhile to pay this amount of extra money?
Speaker 1 13:29
Which seems like that's how most of the companies are operating today, is through these bilaterals, where you have two stable coin payment companies that are contracting directly with each other, doing diligence directly on each other and then starting to transact between each other. Here it's saying, Okay, well, that's a lot of work to do bilaterals with 30 different partners. Isn't it great to just have a single connection or a single partner, but the devil's really in the details of what does that mean from your compliance obligations? What happens if something goes wrong? What's the liability structure? So I think that will be really interesting to see how it plays out. I think the other question that I had is like, how do the beneficiaries differentiate from each other? If someone on the network, if you want to send money into a certain market, and there are multiple beneficiaries there, I get how, as an originator, competition is great, then you could say, Okay, well, like the lowest cost or the best rate, is what I'm going to go through, but as a beneficiary, if you're just a taker of that bid, what if your value prop is that your compliance is better, or you've got access to more rails, or you've got features, when things go wrong and like, fall backs, How do you be able to convey those differentiating capabilities through kind of a request that comes out with an originator that wants to get to the market where it's not just, Oh, who's doing it the cheapest and so how do you both think about that? Like is, is it going to drive down the end costs for that last mile, or are there still going to be areas to differentiate? On the last mile side? Well, I would
Elise Soucie 15:01
just add as a starting point, I think that this is partially a problem of the maturity of the market, right? So this isn't something that, you know, large banks necessarily think about, like, right? You're not looking across the globally systemic, important banks and being like, I think this one is majorly more compliant than this other one. Like that's just not they all have to meet a certain level of compliance. And of course, you're always going to have failures. You're always going to have hacks. But in general, they're all up to that same high standard, because the stable coin market isn't quite there yet. We don't have everyone up to that same standard. We don't even have the same like disclosure templates for stable coins, let alone everyone being at the same level of compliance. So I also think that this is something that will probably go away with time. What it means for the CPN right now? I'm not sure. I think that this is something where it really does remain to be seen how well this will work out at the moment just because of where we are. But Rob, what do you think I
Rob Hadick 15:58
would even just build on what you said, which is that compliance, standards and really technology in these things, it's a threshold. Once you get above that threshold, what you compete on is very different. And to your point, Kai, you're probably mostly just competing on price at that case. And you know, as we've seen, people like BV and K and bridge and these others, they've been charging things like, call it 25 to 55 bips on some of these, like cross border transactions, that's clearly unsustainable. And so they're going to have to come down. And it's not the fact that their cost is that high, is that they have the deepest liquidity. So they know that they have the lowest cost, and they know what margin that they can put on top of it, relative to call it people who are startups, who don't have the deep liquidity. And so I think what's really clear is, for some of those people who are competing in this space already, and maybe are directly competitive with this, they're going to have their margins cut down quite a bit, and then they're going to have to compete on other things, which is why I think there's still this expectation, potentially, that theoretically, that they might also compete. Call it outside of the CPN. And I would add one thing to this, which is that circle's already been putting out there some maybe illustrative fees, and I've looked at a few of them, and I know for a fact that what they're saying, they can quote, in certain regions, certain corridors, certain currencies, is higher than what I know. Some of these providers that are even within their initial launch list are quoting bilaterally right now, and so clearly they don't feel comfortable quoting call it the same level, or as low as possibly. They can go as they do bilaterally when they have deeper relationships, deeper liquidity. That is going both ways. This is
Speaker 1 17:38
going to be fascinating to see how it plays out. But I think as a takeaway, it just, it's another example of more maturation of stable coins coming into payments with additional rules and compliance and value added on top of it and and I think it's a competitive ecosystem with many companies that are going to be offering solutions here. Speaking of stable coins, of the next story is, PayPal is to pay 3.7% annual yield on their stablecoin pyusd, to encourage broader use. So the yield will be accrued daily, paid monthly in pyusd and launched this summer. And so it's seen as a move to make the stablecoin more appealing amongst a competitive market. CEO Alex Chris said, stablecoins offer a chance to reshape the economics of the payments landscape. And also breaking today is that PayPal and Coinbase have announced expansion of their partnership to increase the adoption of pyusd. So this includes Coinbase offering one to one pyusd to USD conversions and collaborating on new on chain use cases. So Elise, starting with you of like, how do you feel about this broader trend of stable coins paying yield? We've seen Coinbase in the US offering 4% if you hold USDC on a Coinbase account. What's your take on this, and how is this going to play out in the regulatory discussions with the bills that are going through Congress right now. So I
Elise Soucie 19:05
have a potentially unpopular opinion on yield very stable coins, which is that I really feel that they are a very different instrument to stable coins, which are used for payments now. I understand that that is not trendy at the moment, and everyone seems to be doing yield bearing stable coins. However, there are some complexities when you start to add in yield, not just from like a design priority perspective, but also usability. And then there's that kind of legal and regulatory ambiguity. So like regulators, and they have historically, might view a yield bearing instrument as an investment product, not as a payment instrument. And so you kind of could cross into this complex territory here and in a lot of jurisdictions, they have said that they will not permit stable coins to be yield. Sharing. So I think it's really interesting that we're seeing a lot of these kind of popping up. Actually, interestingly, one jurisdiction that did say that they would consider the payment of interest was Abu Dhabi. They had their consultation on Fiat reference tokens last year, and this was something they were willing to consider. And it may be that we'll see other jurisdictions consider that too. But I just want to note that there's some regulatory complexity there also, and I won't dwell on this too long, because I don't want to make it too boring for the audience. However, you also have to think about accounting and tax implications. So if you have a stable coin that is accruing yield, each transaction might end up actually being a disposal event for tax purposes, which then would actually complicate it in its use for day to day payments. So yeah, I have mixed feelings about yield bearing stable coins. I understand it from a competition perspective. I completely understand that there's this improved merchant value proposition. I understand that there's market precedent and there's this momentum behind it, but I do think that there's some complexities that we haven't really quite worked through yet. So Rob,
Speaker 1 21:07
it seems like there's a nuance here, of there are categories of yield bearing stable coins, where the yield goes to the end holder. And so we've seen, I think USDM and mountain protocol and Paxos is a product usdl, where, like the stable coin, is designed that whichever wallet it's sitting in, it automatically updates some value and accrues the yield. Then you've got payment stable coins. Who are? They're designed to just be used to transfer value, where, just holding it in a wallet, you don't get yield. But the payment stable coins themselves, the issuers of generate the yield, and then the issuers distribute that yield in the form of either incentives or part of the just the business model of the product. And so this seems like this in between, where pyusd itself is not necessarily a yield bearing stable coin, where anywhere that holds for you see, anywhere gets it, but if you hold it on the PayPal platform, then they will pay yield on it. If you take it off the PayPal platform, they won't. And so how do you think about this spectrum and nuance of trying to land somewhere in the like, yield if it's on platform, but if you move it on the platform, it's not yield. And like, how does that play out? Well, so
Rob Hadick 22:22
the legal opinions that all of these, you know, issuers are getting today is that if you share a portion of your revenue with your end user as a, you know, a form of a reward, then that's fine. That is legal, right? And so there's a marketing question here around, okay, well, you're getting, you know, yield as part of your pyusd. And you know how you share that? And then there's a legal question. And right now, the legal opinions have been, okay, you keep dollars on my platform. I give you some dollars back. That's great. That's totally fine. To your point around, okay, well, like I have this product that will give yield to whoever the end user is, no matter where it is, you know, no matter what they're doing with it, that today has been okay, well, that's probably security, so you have to be regulated and, you know, in some place, and do it in a way that makes sense. I think Elise just talked about what's happening in the UAE, right? So that is a place where maybe we'll allow that. But for most of what we've seen today, these formation has been okay, well, I'll just do a revenue share. I mean, this is what circle is doing, right with Coinbase users, and we're going to end up doing probably with binance users, as they're just going to do a revenue share with Coinbase. Coinbase is then going to give some of that revenue back. And that's all fine and dandy. So it's a nuance. Maybe it's a nuance without an appropriate distinction, and maybe the regulators won't care about it in the future, but that is what they've decided to do today. But for PayPal, it's kind of the best of both worlds, right? If you looked at their q4 earnings report, one of the things they talked about a lot was we need to figure out how to monetize Venmo better. Venmo is 70% of their transaction volume. It's 5% of the revenue. That's not a public number. That's kind of in my estimation, but 5% of their revenue, right? And it's clear they're not monetizing it. Well, if they get more people to call it, and they don't have a cash we program, by the way, so if you're some sort of asset manager or whatever, you just cash, sweep it, and you keep some of that, that yield. Well, you don't. Venmo doesn't have that. They can't do that. And so now all of a sudden they're like, monetizing idle cash in Venmo using pyu state because they have treasuries on the back end. And maybe they can figure out a way to get people to use it in more locations, more merchants, et cetera. And now they're doing 100% of keeping the revenue if it's usable, off their platform, right? So it's kind of the best of both worlds for PayPal. We'll see if the regulators come and say, I don't love this, but you know, it's kind of wait and see right now. Yeah.
Elise Soucie 24:39
And to be clear, great distinction that you make, Tai and like, I agree. I think that's super important. I think, though, that this draws out the point where we need to be really careful, though, with our terminology, because to the regulators. And while I'm not saying it's illegal, I definitely don't think it is. And I do think it's a super smart decision. And obviously, as you say, like, make use of it and make, hey, you all the sunshine. Points. But at the same time, there's gonna come down to some very technical differences when regulation starts rolling out, and it says, for example, like, we do not permit yield bearing stable coins. Okay, what does that actually mean?
Speaker 1 25:12
Interesting to see the terminology of rewards and kind of positioning of like loyalty in terms of what Coinbase does PayPal, it looked like they were actually saying, this is yield. And so they're using different terminology and me and positioning. This is basically a high yield savings account in pyusd. I think the current bills that we've seen, both the genius Act and the stable act, have provisions that say that a payment stable coin can't pay yield, or define a payment stable coin as not paying yield. I think the big question is, if that stays as written, how does that become interpreted? What does it mean to actually pay how you define paying yield? Does it mean you can't pay yield to anyone, even a distributor? Does it mean you can pay yield to a distributor, but it can't be passed back to a consumer? It probably means you can't pay directly to a consumer, because then I think that's the most clear, that it would be a security and so then what if you structure as a marketing agreement instead of, like a yield agreement? So I think there are going to be these, like, really big, open questions of both how the bills are written and then how the bills are interpreted to see how the market structure plays out, and where the value of the yield that's generated from stablecoins, where that ultimately goes, and it might take a few years for that to really play out. Before we get into part two of the show, we'll take a quick break so Simon can tell you about the folks who made tokenized possible.
Speaker 2 26:35
This episode, if it's not obvious, is brought to you by our friends at visa, a global leader in payments, Visa's tokenized assets platform, vtap uses smart contracts and cryptography to help banks bring fiat currencies on chain. Vtap allows financial institutions to issue Fiat back tokens, improving financial efficiency and enabling programmable finance. You can check out the links in this episode's description to express your interest in vtap tokenized is also brought to you by avalanche, major banks, FinTech challengers and industry leaders are using avalanche to create new business models on a fully customizable blockchain infrastructure. Think of it as more than a blockchain. Think of it as an entire network built for financial institutions to innovate with purpose built layer ones. Institutions can tailor digital asset strategies to their exact needs while still tapping into the power of a public blockchain innovation, developer communities and seamless interoperability join the institutions shaping the future of finance on avalanche, and you can learn more at avax dot network,
Speaker 1 27:56
our next story from The Wall Street Journal circle, bitgo and other crypto firms plan to apply for bank charters or licenses. Amongst them, crypto exchange, Coinbase, stable Coin Company, Paxos, are considering a similar move. Some crypto firms are interested in National Trust or Industrial Bank charters that would enable them to operate more like traditional lenders, such as by taking deposits and making loans. Others are after relatively narrow licenses that would allow them to issue stable coins. Right now, Anchorage digital are the only firm in the US that has a federal bank charter. So this is interesting trend in I think fits into the broader backdrop of the regulatory environment with the updated guidance and approach in the new administration, maybe at least like, what do you think happens here of, why are crypto companies looking to get charters? Are they going to become fully chartered banks? Are these going to be narrow charters? Like, how do you see this playing out two or three years from now? Will it be common that there are plenty of these companies that now are classified as a bank in some form of charter?
Elise Soucie 29:02
Yeah, I mean, I personally don't see why not. I do think that that's absolutely what they're going for. That's what they're hoping for. And if they don't get pushed out of the market by the banks, then that's probably what will happen. I think that as well, they are ready for this. They have the new tech. They're ready to kind of take on these new markets. And also, if you think about it as well, it's very smart from a regulatory perspective, because if they want to work with the banks and the big players, and that's where the capital is, then having a banking charter makes them more legitimate. So why would they not do it? I think that this has been something that, and I think as well, you'll see this likely in the EU as well. I think that we will see a lot of crypto firms not just getting licensed under mica, but they will have a go for method licenses as well, which, bless them, because that's a really long process. However, like I think we will absolutely see that happening. So to me, I think this is a really smart move. It ties back to what we were talking about earlier in the podcast. I do think we. Will see some firms that want to do everything and get a lot of licenses to do a lot of things. Will the regulators be happy about that? Remains to be seen, and I think that we might see a few regulatory discussions. But obviously the mood music has very much changed in the US, so we're likely to see a lot fewer lawsuits as well. So yes, I think some crypto firms, we will see them acquire a large number of licenses, probably becoming full banks, whereas others will go for really specific things and aims, kind of fill more of a niche gap in the market. But I think it's a smart decision, and I think we'll see a lot more firms doing that, not just in the US, but globally, I would say, maybe
Rob Hadick 30:38
take a little bit of a different view than Elise here. It's really contextual to me, right? And so I've done this long enough and invested in FinTech companies long enough that I've seen all of the FinTech companies try to become banks, and all the banks try to become FinTech companies. It's like nature, like it's always happens. Then that's how evolution works. Because, you know, the banks want bigger multiples, the FinTech companies want an interest margin, like it just keeps happening. I will say this as a, you know, a bit go right, or an anchorage who already has their SEC charter. It's very obvious to me why that makes sense. Because, you know, you're taking in, uh, cryptocurrencies, you're monetizing, you know, based on the Aum and bips on that, you know, maybe you're trying to do some sort of lending, you're trying to do some sort of other types of OTC, etc, but it's natural that the people that you are serving also need like Fiat, right? And they also want to connect into the other parts of the financial ecosystem, and you want to be able to serve them more fully. And you already have a product that is sort of low margin, honestly, and not a great business, right? But when you come to things like maybe a coin base, okay, well, maybe they want to be a more full fintech. That said they could use a banking as a service provider on the back end, right? And so does it make sense for them to have that drag, I don't know, or like a circle, right? You know, if they become a bank, we just talked earlier about them trying to go from, you know, maybe an asset manager in terms of their revenue mix to a payments company. Well, now all of a sudden, right? Like, what is Mika going to require of them, and what is the US regulators going to require them, and especially they get a banking charter that drag on their return on equity is going to be massive, right? And so the way you think about, okay, well, like, what is the right ability, or what is the right way to think about what your revenue mix should look like, and how big can you get based on your current revenue? Current revenue? What type of multiple does the market give that? I think it's a bit more contextual, and I actually find it to be probably the wrong move for some of these guys, especially if you want to be seen as a large tech company. And
Elise Soucie 32:35
that, I think is totally fair, completely accept that. And also I will say, when I say that this is happening globally. I absolutely do not think or recommend that any of them should be trying to do this everywhere all at once, because, to your point, they will go under like you will not be able to do that many licenses all at once everywhere. But I do think that, I still think it will be a trend, that we will at least see a lot of the big firms going for it in some way, shape or form, but to your point, I agree with the nuance that it's maybe not the right decision for every single one to acquire every single license.
Speaker 1 33:08
It also seems like, in a way, like there's a window that's open right now, where before, a few years ago, it didn't really seem like there was a path with that regulatory environment for any of these companies to go and be able to get charters, there just wasn't really an openness to it. And so now the window is open that if they want to, they can or they could. The question is, what are they ready for the additional obligations and everything that they would have to do as part of that? And then I think the other question, just long term, is, what happens if the regulatory environment changes again, and if you do the work to get a charter, then what does it look like to unwind it later, or are you going to run into more difficulty later? And so I think it'll be really interesting to see. And then I think the other piece is kind of this trend. You mentioned, banks coming fintech. Fintechs becoming banks. It's like crypto companies are becoming banks, and banks at the same time, are looking at crypto, and banks are trying to figure out what they want to do with crypto. And so it's kind of both of them could be long paths. How long will it take for banks to be able to compete with crypto companies? It'll take them time. It's also going to take time for crypto companies like, figure out how to become banks. And so, like, I feel like that is the really interesting environment that we're in. Of those two forces kind of converging on each other. But Rob, how do you think about the long term implications if you assume the regulatory environment, even if there's a window now, it might not always be kind of what it is today? Yeah,
Rob Hadick 34:36
that's really tough, right? And as an aside, and one thing I would note to what you just said as well, is one of the beauties of stable coins, by the way, is that I get net interest margin, and I don't have to be a bank, right? Because, like, people give me money and I go and buy a treasury, right? And so maybe that's that's short lived. I think what's clear, though, is, if you're going to be highly regulated, you need some certainty that if you move your your business in that direction. And everyone's kind of rushing to this point in time that we're in right now. And it does seem like there's bipartisan support in the US, both from Democrats and from Republicans, to get a genius act done, or something like it, to get a market structure bill done, as Elise talked about earlier, and that'll be enshrined in law. And so that gives certainty, right, and something that we didn't have the last few years. But it's not clear to me that how this evolves over time will be maybe as friendly as it is now we've seen that with banks, right like banking rules have changed over time, the three lateral agencies often have a lot of just flexibility in how they actually want to enforce the rules and what the exact rules are. And so becoming really highly regulated, if you're doing all of these other crypto things, may not be something that is best for you five years from now, six years from now, but maybe it's best for you today. So I don't know. I I'm struggling with this idea that, you know, it's, maybe it makes sense for all of these companies, and I also do, I mean, you see with Coinbase, right? They basically have this partnership with Morpho, where you can lend through the Coinbase wallet, but it looks like, you know, just in your centralized Coinbase platform, through Morpho into defi, right? And you can get yield on that, that's from a decentralized financial platform, right? Is that going to be allowed in the future? Is it going to be allowed maybe if you're a defi company, but not if you're a bank, right? How do those things interact? That's very unclear to me, and I think there might be some segmentation of the market between that decentralized and more centralized parts of the market, if this continues, and maybe my counter
Elise Soucie 36:25
to that, and again, I think that this is very far in the future. Because I don't think that this is like coming in the next, you know, year or so, but you raise a really good point. But I think it comes back to your, you know, you were saying, does everyone need to go in the direction of, you know, coming into regulated financial services. It's also like, how long will the regulators let this be an unregulated market, right? Because I think, you know, as you say, like lending, if they're like, and you're like, No, no, don't worry. It's defi lending, it's fine. This is outside the regulatory perimeter. Well, the regulators might not decide it is for that much longer, like, you know, five years from now, when they get the initial market structure finished. You saw this with Mika defi was explicitly carved out. Is the EU going to leave out defi forever? Maybe not, especially if the defi space continues to grow. And so I do think that there's a note of caution there for firms as well, which is definitely continue to look to the future and see how regulation is evolving, because regulators are always bringing things into the regulatory perimeter if they think it's a threat to financial stability, if they see the risk to retail consumers, et cetera. And so firms need to have an eye to that as well.
Speaker 1 37:32
The other context, I think, is important here, is depending upon how the bills play out if they proceed as written on the stable coin side, there is likely a federal option and a state option. And the federal option is the OCC and so I think, if you want to, and I think that at least one of the bills there are thresholds that if a stable coin is issued over a certain amount, I think it's 10 billion, that you need to go down the federal option or seek a waiver. And so you're almost kind of naturally if you get regulatory clarity around stable coins, stable coins will become more and more into the territory of the OCC at least as a federal path to be able to get a license to be able to operate them, but then you still have the state path, which has been important for a number of advocates in the industry, to have to maintain that you could still go and be registered at a state level. And that's been the whole US regulatory environment. Is the federal versus state. I'm really interested to see how the state side plays out of like, if there is this federal path, and you've got the large companies going down and saying, Okay, well, we're operating everywhere, like we want the legitimacy of we've got oversight by the OCC what ends up being the case for the state path? Are there states that compete and say it's easier there, but then, if it's easier, then isn't that the point that, like, Hey, you want to see people that go on the federal path, like Elise? Do you have a perspective on the state versus federal in who's going to supervise stable credit issuers that's being contemplated in the bill? Yeah,
Elise Soucie 39:03
definitely. And, I mean, you know, while I'm American, I live in the UK, but also I completely understand, like, the need and want and desire to preserve state sovereignty. I don't think that's going anywhere. And I do think it's important that being said, if you look at the specific provisions that were ingenious. At the very end, there was a whole paragraph there on reciprocity and how that could be enabled with other jurisdictions that had stable coin regimes that were up to the standards of the US government. I think that's hugely important. And I think that a concern for me, for a state level regulated stable coin is, does that mean that then that state would have to agree the reciprocity arrangements with, say, the UAE, the UK, the EU. Because basically what genius does is it would enable for a federal level agreement that says, if a stable coin is regulated in the US, we can enable this reciprocity with extra. Protection over there. How does that work if you're only state level regulated because to me, that would destroy one of the massive use cases for stable coins, which is obviously cross border, cross border use cases and cross border payments. And so I don't know, I have a little bit of concerns about, you know, just state level regulated stable coins, but I maintain that. I think it's really important for them to still be allowed, enabled. And if the state level requirements are kind of up to the level of the federal level requirements, then perhaps there could be something that's worked out to a later date, but we don't know what that will look like yet.
Rob Hadick 40:33
And I do think on the state side, to Lisa's point, we're going to see some competition, right? You see state by state competition today on things like taxes and, you know, lighter regulatory burdens and stuff like that. I've had a few conversations with some of the state regulators, and they see this as a, at least in my conversations, as a cash cow. They think this is a great thing for their tax revenue. They think this is a great thing to bring new jobs to their different states. And they want to, they want to win this business. And so I do wonder if you'll see a bit of a, you know, race to lighter regulation to encourage people. And then, okay, well, how do you treat? Call it, you know, NY DFS, who has been historically a tougher regulator, versus maybe, like a Wyoming regulator, or Nevada, or somebody like that, right? And so I think there's going to be this competition that you see kind of, you know, in every other market. But then how it to Elise's point goes global from there is going to be, I think, really tough. And it's not quite clear to me what that looks
Elise Soucie 41:30
like. Well, to give you an example, when I have to file my tax returns to the US as an expat living abroad, I have to file them federally, centrally. I don't file them to the state of Illinois, and even if I moved my US residency, where my US family is, even if they moved to Texas, I would still have to file centrally, rather than getting any sort of tax relief at a state level. So you know, as an example of
Speaker 1 41:56
the global point, this dynamic of, on one hand, States looking to compete, and they want people, and they might want companies to come there and say, take, take our state path to be able to issue a stable coin. And then, on the other hand, I think most regulators, particularly the federal level, don't want to create a way that you could have a easier path with less obligations, that then sacrifices the oversight. And so how do you compete as a state without the competition being just lowering the barrier, because you need to have some kind of common floor of a barrier. And so I'm really interested to see if, I think, to date, there's only been a state path like that's if you want to issue a stable coin, it's been basically MTLS or NY DFS. If there is a federal path that emerges, it'll be fascinating see how many companies take the federal path versus take it existing state path or new states stepping up around that and like, what would be the motivation for going the State Route versus the federal route? Any final thoughts on bank charters for crypto companies, or even back to kind of CPN and kind of where, where we are is like a moment in time in the stable coin space today. I
Elise Soucie 43:09
mean, I'm happy to start though the ROB probably has a few more views on, you know, current trends and where we're going than I do, but I do think two things that I would note from this kind of whole conversation is that one, I think that CPN is probably an example of a few more other things that we're likely to see this year and then the next couple of years, which are more and more partnerships across the crypto and digital assets home of market, and more networks emerging. Because that's, in my opinion, the sort of stage of maturity we're getting to is like, firms can't just try to, like, eat each other anymore. They are actually going to have to cooperate if they want to continue to scale. So I think that's one thing. And then two, I would just kind of hone in on again, on this reciprocity point, which I think is really important for stable coins in particular, which we've been talking about this whole episode. And I think if you can't get cross border reciprocity, and you can't get that reciprocity from a regulatory perspective. Well, that's going to make CPN a lot harder. That's going to make cross border payments in general a lot harder. It's going to make scaling of the whole industry a lot harder. And so I think that regulators and jurisdictions who you know to Rob's point see this as a cash cow need to think about that really closely as well. Is this actually not just enough for you to be a really good place for stable coins. You need to have also that partnerships and the connectivity at a government and regulatory level. Yeah,
Rob Hadick 44:30
what I would add is two fold. One is we are probably at the most interesting time for stable coins in terms of now coming mainstream, right? You know, as I mentioned earlier, I mentioned earlier, I think it's really been the last 15 to 18 months that we started to see stable coins used in things like actual payments, not just in defi, whereas trading pairs, that is clearly accelerating at a pace that I'm sure Kai you see it every day in your conversations, is just has not existed yet. And it's really exciting, but I think we're going to be hit with like a head. Alliance day after day after day over the rest of the year, and that's a good thing, but what it also means is competition is getting a lot tougher, right? And every issuer wants to be an acquirer, every ramp wants to be a network, they're all going to start coming after each other in a way where they've kind of to date. Have these little fiefdoms, and those fiefdoms are going to start eroding, and they have to figure out how they play and cooperate as at least this point, or how they decide where they want to compete. And you see this very clearly at Circle, doing CPN and tether has invested in a couple of blockchains themselves, right, and are trying to support them. And you see these things kind of come to head. And it starts to become clear that the stable coin itself, and the way that technology works allows a lot of the payments and just the financial services ecosystem to collapse on itself, which means that a lot of these guys are going to have a really tough time over the next couple of years if they can't get big now,
Speaker 1 45:54
on that note, fascinating discussion. Thank you, Rob and Elise, that's all the time we have today. If folks are interested in learning more about you and what you do. Rob, where can people find you? You
Rob Hadick 46:05
can find me on Twitter, my last name at haddock, and M my middle initial, and you Elise. You
Elise Soucie 46:11
can find me on LinkedIn, at Elise. Susie watts, awesome.
Speaker 1 46:15
And thank you everyone for listening. Hopefully Simon is feeling better, he will be back in the host chair next episode. If you like the show, please, please. Do leave us a review. Send us feedback. We are having a great time learning in public with amazing people in the space. And As Rob mentioned, it is an exciting time for stable coin.