On Ep. 25 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Sergio Mello, Head of Stablecoins at Anchorage Digital and Arnold Lee, Co-Founder of Sphere Labs to discuss Circle's IPO filing and $4 billion valuation, stablecoins as the intersection of TradFi and DeFi and regulatory clarity for stablecoins.
On Ep. 25 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Sergio Mello, Head of Stablecoins at Anchorage Digital and Arnold Lee, Co-Founder of Sphere Labs to discuss Circle's IPO filing and $4 billion valuation, stablecoins as the intersection of TradFi and DeFi and regulatory clarity for 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.
This podcast is also presented by BVNK.
BVNK is the leading provider of stablecoin payments infrastructure—helping businesses move money faster, settle globally, and even launch their own stablecoin products. Head to BVNK.com to learn more!
This podcast is also supported by Canton Network.
The groundbreaking Layer 1 public chain where traditional finance and crypto are converging. Visit canton.network to learn more.
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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
Sergio Mello 00:00
This IPO is a fantastic moment for the industry. It's the moment we've been waiting for, the intersection and the convergence of traditional finance and decentralized finance is happening. First of all, stable coins are the object of that intersection, or the Flashpoint, and so they materialize, and the fact that they're growing, it's in itself, a clear sign it's measurable and quantifiable. And second, the fact that one of the two companies, let's say, that has been successful at launching a stablecoin in the past four years, goes public means that the public markets are now able to have a stake in the creators of the first flashpoint of decentralized finance into Trad fight.
Sy Taylor 00:52
Welcome to tokenized. The show focused on stable coins and the institutional adoption of real world assets. My name is Simon Taylor. I am your host for today. I'm author at FinTech brain food and head of strategy over at sardine. Joining me is my co host, my friend Kai Sheffield, head of crypto visa. Kai, how you doing? My friend? I
Cuy Sheffield 01:13
am great. It's a big week for the space. We got a lot to cover. Oh
Sy Taylor 01:17
yeah, we're gonna get into that pretty quickly. But joining us on today's episode is Sergio Mello, who is head of stable coins at anchorage digital. How you doing? Sergio?
Sergio Mello 01:27
Hello, friends. How are you good to see you here? Really good to
Sy Taylor 01:31
you, my friend. We feel like we kept bumping into each other at various conferences. But now look here we are in virtual presence, talking stable coins. Alongside him is Arnold Lee, co founder of sphere labs. How you doing? Arnold
Arnold Lee 01:44
Doing well, thanks for having me really excited to talk about all things stable coins and tokenization today. Oh, and there's
Sy Taylor 01:52
a lot before we get into the show. I just need to remind everybody that this episode is sponsored by our friends at bvnk, and if you've been listening to this podcast, you've probably heard us say, every business needs a stable COIN strategy. And if you're looking for the best place to start, that's bvnk. Bvnk is the leading provider of stable coin payments infrastructure, helping businesses move money faster, settle globally and even launch their own stablecoin products, all with licensing and compliance, so you can build with confidence. We're proud to partner with bvnk on tokenized to learn more. Visit bvnk.com and just one last bit before we get into the sweet, sweet content we've got today, I need to remind everybody that views and opinions of contributors are their own and might not reflect the companies they're representing. Please don't take anything we say as tax, financial investment or legal advice. Do your own research, folks. Okay, the news absolutely everywhere is that a certain stable coin giant by the name of circle, has filed its s1 and is set to IPO targeting a $4 billion valuation. This would be the biggest crypto listing since Coinbase, and they're working with various investment banks like JP, Morgan, Chase and Citi. Some key stats, 1.7 billion in 2024 revenue, a roughly 39.3% gross margin and an operating profit of somewhere around 157 267,000,001 of the most fascinating things from the s1 filing is, of course, that circle paid out $900 million of its 1.7 billion to its distribution partner, Coinbase. And there's so many other bits we could unpack here, but Sergio, I'm going to come to you. You're in the eye of the storm with stable coins at the moment. What are your thoughts on news like this, and more generally, about the stable coin space? Well,
Sergio Mello 03:58
first of all, I wish I could say that I enjoyed the calm before the storm in the past four years, it was definitely calm. It was an enjoyable but finally, the gates are open and after the races. So this IPO is a fantastic moment for the industry. It's the moment we've been waiting for the intersection and the convergence of traditional finance and decentralized finance is happening. First of all, stable coins are the object of that intersection, or the flash point, and so they materialize. And the fact that they're growing, it's, in itself, a clear sign it's measurable and quantifiable. And second, the fact that one of the two companies, let's say, that has been successful at launching a stable coin in the past four years, goes public, means that the public markets are now able to have a stake in the creators of the first flashpoint of decentralized finance into tradfi. So it's all coming together. This is really the core, central piece of the puzzle. You know, when you have a big picture and a puzzle, and there's one you. The eyes of the main character that is missing, and then when you finally click the PC, this is that moment. So it's a fantastic moment for the industry. I have a few more comments about it, but generally speaking, it's positive. What is interesting about it is that it introduces a level of transparency on one of the creators of the stable coin industry. And that is also great because it gives the opportunity for all the contenders for the space, which is a trillions dollar space, to see how it works and see the mechanics. And as you highlighted, Simon, the most interesting part of it is that the money in stable coins is in distribution. Is not an issuance per se. Issuance is a mechanical, very delicate and should be regulated operation. It's critical, but really the money is not there. And speaking from a bank perspective, I can attest, it's a bit like the banks, right? Your custody is incredibly important, but it's hard to make money on custody. Only where you make money is on everything that is taxed before and after custody, payments, lending, etc. So it's a fantastic moment. It's really something that that we will remember in the history of finance as the catharsis. All right,
Sy Taylor 06:11
Kai, big news, of course, this week the circle s1 filing. How are you finding people are reacting to it? What are your thoughts on this? More broadly,
Cuy Sheffield 06:20
I agree with with a lot of what Sergio said. I was approaching it from the other lens, that if stable coins are fundamentally a new product, it's like a new construct that hasn't really existed in the world of Trad, Fi and fintech for very long, and we've gone from 12 months ago, there were many people in traditional payment companies and banks that were either disinterested or had dismissed stable coins and thought they weren't going to get regulatory clarity, or maybe they would just become a niche thing in crypto, and so they hadn't really rolled up their sleeves and spent a lot of time to understand them and figure out kind of what Are these things as a product? How do they work? Where's the demand coming from? What are the use cases? And so I look at the s1 as a fantastic opportunity, and really Crash Course for many traditional finance investors, operators, payment companies, that get to look under the hood of one of the largest stable coins with as Sergio mentioned, a lot of transparency into what does the business actually look like. And I think there are a bunch of really interesting takeaways and implications from that, but I can't think of a better place to start and just source of information. If you're inside a bank or a FinTech or a payment company, and you're saying, Okay, let's understand what these stable coin things are like, go read the circle. That's one. It's like, it's the best information that we have. That's like, a view into what is a stable coin. How does it work? I think that's going to become very helpful in getting a lot more people up to speed on the space and a forcing function for them to do the work. When you've got a public company that's coming to market?
Sy Taylor 08:02
Yeah, there's so much to crawl through there. Arnold, have you had a chance to look at any of this and what were your thoughts? Yeah,
Arnold Lee 08:07
not a chance to look deeply, although I've seen some of the highlights. And broadly agree with Tai I think it's still a very nascent transition period for institutions who are more used to thinking about these filings and like the traditional breakdown of, I don't know how much revenue relative to, like, optics this company is doing, but I thought it was, like, super interesting. The step function that happened during the last cycle for circle is revenue. And it kind of, to me, speaks how wide the ocean is, or how big it is when it comes to just adding more supply. To me, the unfair advantage of circle is Lindy. You can, like, create a new stable coin, but to get it integrated and to, you know, all these different chains, all these different ecosystems, when you have the addition of a lot more, people say, another step function, with another cycle, adopting stable coins, I think that's like hard to capture in their current financials, because, you know, it could be quite the step function, and, you know, translating into a corresponding increase in revenue. But as of the world today, it's been pretty interesting to hear about some, I suppose, things that you wouldn't expect from a stable coin issuer at that size. And I think transparency is super helpful for the industry, even for those who might be jumping in after recent news and last year, whether on the acquisition side or just like general regulatory clarity.
Sy Taylor 09:24
Yeah, it's fascinating point you make that really this s1 is looking back at last year, and the growth has been coming, and a lot of that would show up in q1 and q2 for them. And there's momentum building there, and there's a distribution advantage, but that distribution is expensive. They're having to give away kind of a lot of revenue. And then, yeah, as you said, the staff cost is pretty expensive. These are not cheap resources. They're all on shore that there's a lot going on here. There's a really interesting line in the s1 that circle estimated a 1% decrease in interest rates because. Could result in a $441 million decrease in stable coin reserve income. So even if the total volume of stable coins goes up, they are very, very rate sensitive. Do you think that that sort of model, Sergio, of relying on rates, is gonna survive? Is that going to be the core monetization route for stable coins in the future? Or are we going to have to see a bit of a diversification there? And if so, do we need regulation to help?
Sergio Mello 10:29
Yeah, this ties into what I said earlier, that the money is in the distribution and the issuance layer is as delicate as it is hard to monetize, which puts stable coin issuers in a difficult spot, because they really have to decide how to structure their their strategy to make sure they're sustainable for the future. I am convinced that it is possible that in the future, near future, regulators will accept that the currently accepted HQ away mix for stable coin Reserve may be slightly expanded with a slightly different risk profile. Ultimately, what we want as stable coin users is an instrument that is as close to risk free as possible, while allowing us to settle instantly on the internet. And it's a compromise in any case, so look, if the compromise bar has to move a tiny bit just to make sure it's still a profitable and usable and convenient tool. I don't see that as a problem. So if rates go down to three to one, I think we can adapt for that. If they really go to zero, okay, maybe we'll have to reconsider. But this is not the moment to make such prediction. It's a moment to understand the money. First stable coin business comes from the layers above and below issuance. So it's about making sure that a there's a scale, because again, the circle today is at 50, 60 billion. If they were at 500 billion, it'd be 10 times my so that's how we solve the problem in one way. And second, as we talked about stack function growth. We have to understand that this new inflow of capital, differently from the past six years, will not come from more people, lending and borrowing on defi, but will come from traditional finance, money and to money supply that will, instead of circulating on Swift and traditional rail, would circulate on the chain. So this will be 10, 2050, 100 times faster growth that we've seen in the past four years.
Cuy Sheffield 12:29
To your point on scale. And back to your question, Simon like I think it's very clear that a decrease in interest rates leads to a decrease in reserve income if the supply holds steady. However, I found it interesting that multiple times throughout the s1 they pointed out that it is really, really difficult to try and predict what the connection between stable coin supply and interest rates are going to be. What impact would lowering interest rates or raising interest rates have on supply, because there are many different factors. And so they point out, maybe if you lower interest rates, then the opportunity cost of holding something that feels like digital cash that is not interest bearing goes down, and so then the supply goes up. Or you could have a scenario where interest rates could go up, but the supply could still go up, because there's enough demand and utility for how the money moves. And so I think that is one of the most important questions for investors in how big could USCC and stablecoins in general get? What is that total addressable market for supply? Because I think most people would assume that interest rates will come down. It's just a question of, will the supply growth outweigh the kind of lowering interest rates on the kind of per dollar amount they make on the reserves? Arnold, curious, how you think about that? Yeah,
Arnold Lee 13:51
I think it's super hard to reason about, as you mentioned, because say, rates go down, then it's really attractive beyond a story of value to hold money on chain, because the industry has very high beta assets, and so if interest rates go down, people need to figure out where to park their capital. One could reason that maybe they want to put it into eth or into Seoul or, you know, start using defi, because that level of return is hard to get elsewhere. I think we'll kind of see this experiment play out, just because a lot of the adoption has happened in a historically low rate environment, and then, like the switch flips to these rate hikes, enabling, you know, these order of magnitude increases and revenue for companies like circle, but to Sergio is point. I think the really interesting thing for beyond issuance will be the order flow, and sort of, like the breakdown of where that order flow happens when you have these proxy dollar accounts that, like people couldn't historically get access to the way that they transfer the money, correspondingly, is really difficult to reason about, because someone in Brazil might not have access to transferring flow in a way that a market. Maker would be able to get exposure to in the traditional FinTech,
Sy Taylor 15:03
there's such a multivariate complex set of conditions. And I think Tai to your point, the circle were quite honest about this in their s1 that it's going to be really difficult to figure out kind of what happens next. I loved the point that Sergio made about reasoning about these businesses as custodians, and that custodians don't make much money from the act of custodying the assets. It's the workflow around it. And there are sort of a number of evolving models and a number of competitors now starting to look at whether it's an offshore one that's doing yield bearing, or whether it's doing sharing, the economics. And then there's us de, the fastest growing stable coin in history. There is this experimentation now coming from the bottom up. So it is, it is a difficult one to kind of consider from my own perspective. The thing I like about this more than anything is the story of Jeremy Allaire. This is a guy who is a multi time founder. So his first startup, which was named a layer, was acquired by Macromedia and became a big part of what went on to be Flash Player. So before YouTube, before Netflix, we had Macromedia Flash. He was deeply involved in that. And then bright Cove, one of pioneers, again, in internet video. And then being early was, was kind of the consistent thing that happened. He's early to online video. He's only seen monetizing online video. Is he too early to exiting for stable coins here? And has the market kind of changed? So I wonder about what happens next, especially given the news today on tariffs, how this IPO is going to play out. It's going to be fascinating to watch. Arnold, I'm interested from your perspective, are you seeing kind of any change in appetite for adoption of stable coins, given the headlines, or is it more fundamentals, from from your perspective, in that it's really more demand driven? Yeah, so
Arnold Lee 17:09
I just got back from Argentina, and I know, like, sort of the meme is that everyone knows what tether is, and, like, everyone's just using stable coins all the time. But what was fascinating is that, at least from what I saw, in comparison to last year, last time I was there, is that people still don't really know that much about stable coins. If you think about it, from bottoms up, like the most adopted apps for retail, still emphasize these as just dollars, and to the average person, it's a proxy for having a bank account where they can get those dollars. But if you add like a letter at the end of the USD, it'll probably confuse people. And so I think the introduction of things like tariffs, frankly, is quite interesting. From like a currency volatility perspective, we've seen like order flow kind of deviate away from, you know, using USD, I don't know, for like, internal reconciliation as an example, if you're doing Treasury ops across multiple countries, you know you might have historically held more balances in COP, but now holding in USD is super attractive because, you know, who knows where the volatility will go, and USD will is just like a better unit of account, even if you're an international company, I think it's generally good for flows, and Like the total volume of flows, even though it's probably bad for economies, and it remains to be seen, like the the net effect will be, does, like, a reduction in trade activity or like, general economic depress mean that people are just going to interact less across borders? Or does it mean that the pain points of moving money in and out as supply chains get rearranged. Historically, if you're manufacturing outside of the United States now, you need to bring it back in house. You need to pick, like, a brand new vendor set of who you know to use for, like raw materials or processing. And I think their any flexibility in terms of rearranging your capital is like, quite helpful, especially if you can do it fast, otherwise the ship will, just like stay on the shore for five days waiting for the payment at all.
Sergio Mello 19:05
Can I interject and add on Arnold's remarks about Argentina and financial freedom? I think there's a misconception about financial freedom and how cryptocurrencies and web three is empowering financial freedom, and the best way I have to explain it is freedom of speech. Freedom of speech doesn't mean that the four of us every day go out in the street and yell insults to everyone. It means that we have the option to do so. And the way the web three is empowering financial freedom in the world is it gives the option of self custody of privacy, producing privacy coins, etc. And optionality is what drives innovation, what drives adoption of new technologies by incumbents, etc. Stable coin me one of the first in that direction. So Arnold, you're correct that people want USD if the letter at the end is. A distraction that 99% of world population don't need is probably not ready to take and probably is actually detrimental to overall experience. So my strong view about stable coins is that they are and will be more and more used as the layer just before retail that goes all the way covering the financial stack because of its performance in moving and storing value and but then the retail application is the moment where users don't necessarily have to be exposed to self custody. Self custody complications, let's call it, and deciding on which type of USD or which type of other stable coin to keep.
Sy Taylor 20:40
I love that perspective. Payments, as somebody 20 years in the industry, always felt to me like they have a last mile problem, like I can probably get through the hubs, but I can't get to the last mile. Stable coins get you to the last mile, but not the front door. The front door is the retail application. So kind of having that rail above the rails, having that sort of universality of stable coins as a powerful perspective, and then you still need that end application, that thing that the user looks at, to think about the user experience. I think this is why selling money is done particularly well. They haven't advertised pyusd as being the US dollar. It just so happens to be there in the background, and their growth is spiky, well, from public markets to publicly thanking sponsors. We'll just take a quick break here and hear from the folks that make tokenized possible. 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 backed 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. This episode is brought to you by Canton network. Ever wonder where real tokenized asset volume is going Canton network, the groundbreaking layer one public chain where traditional finance and crypto are starting to converge. Why? Because Canton is the only public network with privacy, no workarounds, no compromises. This is 24/7 markets on demand, financing with real yield, where value moves as freely as information on the internet. This isn't just another blockchain. No, this is where the serious money is flowing to solve real market demand and risk. Visit Canton dot network to learn more. Alrighty, thank you to our sponsors. To the next story was from actually, Blackrock CEO letter, where he talks a lot about tokenization, his specific quotes here are, tokenization makes investing much more democratic and much more efficient. It allows for fractional ownership. It allows for democratization of shareholder voting. It potentially democratizes yield by stripping away a lot of the legal, operational and bureaucratic paperwork that gets in the way and adds cost. And he says quite bluntly, every stock, every bond, every fund, every asset can and probably will be tokenized. And if they are, it will revolutionize investing markets. Wouldn't need to close transactions that take days would clear in seconds. This is quite a lot of space in an annual letter from the world's largest asset manager dedicated to tokenization. Is this just positioning for what's to come. You know, Blackrock has been known for positioning towards ESG and then maybe sliding away from it. Or do you think that actually, given Franklin Templeton and others are getting involved here, that actually institutional defi has finally, finally arrived. Sergio, what are you seeing? What are you hearing? You
Sergio Mello 24:19
know why it's really hard to make a comment, because it's April 3 that they were recording, and I'm pretty sure that by the day this is published, there's going to be more news and more and more. And so the pace at which all of this industry is moving is accelerating and making not prediction. We're making comments during a hockey stick phase instead, your comment is outdated by the next week. That said, it's amazing that the fact that we can finally have a clear path, technologically and partnership wise, to bring real world assets on chain is fantastic. It's phenomenal from T bills to go. Build to our work to real estate, making a world a more inclusive place where you have the option connecting to what I said earlier, to access any sort of asset anywhere in the world, at your fingertips. What we need is a little bit more regulatory clarity. So really hoping for the market structures built to to have a good bipartisan support and proceed as fast as we've seen the stable coin bills proceeding, that would be really the gift of mankind, because that will allow everything to happen happily without without the drama we've seen in the past four years at anchors. We're already supporting Biddle custody bill is a very successful product by BlackRock. One metric that that I think we need to keep in mind is that today, we're looking at hundreds of billions in stable coin issuance. We're looking at low digit trillions in total crypto asset market cap as soon as the tap opens, as soon as we start having real, serious tokenization of securities and stock that will flow without friction from traditional markets to blockchain, those figures will add two or three digits. Mark my words. Two or three digits is a lot.
Cuy Sheffield 26:18
I love the prediction, like in general, I think you have to give Larry Fink in Blackrock credit that like they're not just saying this now, they've been consistent for you know, I've lost track of time, but it hasn't been a few years of Larry Fink was talking about tokenization and Bitcoin when it was not popular from a regulatory perspective, when it was much less clear from a regulatory perspective than it is now, even though there's still a long way to go for them to be able to realize that vision, I think it makes a lot of sense that, particularly if you think about if tokenization can lower the barrier to entry to creating new financial products that could be more customized and more tailored towards certain investors. That seems like a huge opportunity for BlackRock. And I'm no capital markets expert, but like, I don't think it's easy to create ETFs. I think there's, there's a lot of work that goes into that. And it's not to say that tokenization solves all of that, but if you have a technology that can replace manual back office processes, that could reduce any amount of the cost to create a new investment product, then you could have more investment products, and you could have more customized, more tailored, more niche investment products towards investors based upon what they want. And I think that's a really big deal, so I always approach it from it's less interesting or exciting to me just say every existing stock today is going to be tokenized and on chain. And yes, I think there are structural 24/7, settlement things that that might be able to address. I'm more interested in, like, what are brand new, investable assets and financial products that could be structured and created that would be very hard to do, that you don't have access to at all today, and maybe there's not enough demand to justify the cost to create a full ETF around it, or maybe the underlying assets aren't liquid enough or able to be moved. So I think that there's just a lot of innovation that it unlocks for a company like BlackRock, and then when you've got Robin Hood on the other side, the most innovative retail brokerage saying virtually the same thing. It's really powerful to hear kind of both of those voices at the same time. It's
Sergio Mello 28:28
almost a three body problem, right? You have the tokenized assets coming on. The stable coins solve for the cash leg, and as soon as you have the liquidity for those two, then the third one. Kai. So the innovation part, the new products, can finally find a fertile ecosystem with native liquidity. Today, it's hard to launch new products on chain that don't exist on trip I because there's no no buyer, there's no liquidity, there's no momentum, or there's very little at least we're at the very beginning, right? So as soon as we add those three digits, poof, everything is in place,
Sy Taylor 29:02
liquidity, because liquidity, all in all thoughts, I
Arnold Lee 29:05
think, definitely from first principles, cheaper, faster, clearing, settlement. It's a no brainer. And it's like, kind of like shifting the internal DNA to get on board with what has a lot of extra stuff attached. Because it's like in a permissionless environment, typically on chain, and, you know, regulatory clarity, I think, would make a big difference. We're developing a regulated, sort of, like focused version of Solana at the moment, and GSI B's asset managers that are similar in profile have shown, like, a surprising willingness to allocate resources and start thinking about, hey, what are the ways where we could actually experiment with this stuff? And, you know, if we like, look to the example of like futures getting created way back in the day as a way to like hedge against agricultural exposure during differing seasons, it's fascinating that like we've created, you know, staking as an industry. Property or variations of, like conditional escrow. And in traditional markets, you would have to have, like, a special plan, a structured product. And if I were Robin Hood or, you know, Citadel, I'd be like, super interested in, sort of, like, getting exposure to the types of commercial activity that it normally operationally, would be, like, super annoying for me to access. As an example, in Brazil, there's like a 90 day period for, you know, a creative and that might seem like a pretty small industry, but you can think of an analog as, like oil and gas and sort of like repayments for international investors and some of the largest shale reserves in the world, there's just so much bureaucratic red tape that has historically been a way to enforce trust fragmentation between different peer to peer ledgers, these different silos. And I think that if I were a sophisticated financial institution, being able to both create a structured product programmatically, where you can really go into the weeds of how the business logic composes on top of each other. Maybe, like, the first leg is conditional escrow. Maybe the second leg is like, hey, there's some verification of a counter party's quality or of their certifications or approvals, and then this allows us to underwrite, say, a typical 90 day pay period for a creative out in Brazil, but bake it into what is effectively factoring without having to produce 100 pages of paperwork just to be able to underwrite it and clear it with my local regulator.
Sy Taylor 31:30
Yeah, it grows the Tai of financial markets quite dramatically, doesn't it, when you start doing that sort of thing, to Kai's point, which is, what will be those new financial products. What's interesting in your comments Arnold is the serious work by large institutions on networks that they would have never touched. I was head of crypto r&d at a bank in 2015 and everything was we like the technology, but not the currency. And then, of course, when we get a Bitcoin ETF, it's like, Sure, we'll trade that, but we're going to build like permissioned ledgers. And what's happened since then has been just a gradual walk towards the inevitable, which is what makes these networks special, is network effects, and what allows you to drive workflows and contain this logic is inherent to the network and the network security model, and so that baking the logic into the network and giving you the ability to write these workflows that don't necessarily need to know who the Counterparty is to have cryptographic proofs without having to go out of bound of the transaction and Go to the legal framework and the paperwork is enormous reduction of that bureaucratic red tape that you talk about. That's a phrase that people say, but they often don't ground it in something tangible.
Cuy Sheffield 32:51
It's such an important point, and even going back to the last story, just like take the thought experiment of what would circle and USDC look like if it only ran on a permission blockchain. And if you actually think through that, you're like, okay, so circle in their s1 they said there are 1000s of entities that are wallets, that are applications, that are protocols that have integrated and used USDC or make USDC available. So then, now that would have mean met for circles business. They would have built a ledger that then they would have had to onboard and directly integrate with several 1000 entities for them to be able to use USC like it doesn't work now. It just It looks like a pretty traditional, centralized e money business that's very hard to scale to 1000s of third party integrations. And so I think part of the magic of what enabled stablecoins and the value of tokenization is circle was basically able to issue a product across 19 public blockchains, of which are open source infrastructure, where they're actually the cost of running and maintaining that is distributed across 1000s of nodes of individuals and entities, so circles not paying the cloud hosting costs for Ethereum and Solana to be able to run and then the integrations in terms of a company being able to use USDC is an integration with a blockchain, rather than an integration circle. And so the ability to outsource that ledger integration and infrastructure, whether it's for a stable coin or whether it's for a tokenized asset, to me, is the really big deal. That if you just take all of this and say, No, there's going to be a permission blockchain that's going to be run by one entity. You just you don't have any of the value of it. And I think people don't get how big of a deal that is, right? Like Mike Hudak said it way back when we had him on the show, like, people don't get how big of a deal that is. That's such a big deal. And. For my sentence, I was one of the folks originally in the mid 2010s pushing the shared ledger concept, because I was trying to land that point, but I think it got waylaid a little
Sergio Mello 35:10
bit. In other words, it's an outsource of trust, and it's something that it's hard to comprehend, but also it's hard to explain in a traditional risk model and and bank compliance framework. That is the challenge today. I think it's obvious that there's money. It's obvious that this is the direction. It's obvious that we're all looking in the same landscape and facing the same way. But some players, some incumbents, will actually face a lot of internal challenges in making that leap based on their current architecture and policy and culture. Frankly, anecdotally, I was speaking to large financial institution no longer a few weeks ago, and their idea was to KYC every single holder of potential selfish stable coin. And we just said, Well, look in this I also need to bring in tether to the picture, because we're talking a lot about circle. But there's two companies that paved the way for all of us here to be happy about the future of stable coin. One is circle and one is tether. Tether has, according to them, 500 million active wallets. Good luck. K way, seeing 500 million people with a single, centralized infrastructure that wouldn't happen, it's it's something that couldn't have been done before. So and again, back to the distribution. Distribution is only scalable because blockchain allowed to to outsource the ledger, the trust part, yeah,
Sy Taylor 36:38
and the accounting treatment, plus the BSA AML, treatment of cash is very different to the treatment of a bank account. And I think people are confusing those two things quite dramatically. Digital Cash is a different beast, rightfully
Sergio Mello 36:55
confusing, because what are stable coins, a fusion of a treasury instrument and a payment instrument and cash, right? It's like cash plus a money market fund. So it's understandable that people will confuse how to treat it, and it's beautiful because those who can navigate the waters quickly and nimbly, fast and get to market and find the right way to do it, sometimes taking risks, sometimes waiting for the regulation to clarify it, will reap enormous benefits. I'm
Sy Taylor 37:22
going to come back to that clarity on regulation. Point. I did just want to point out, I don't know if you guys saw it that DTCC announced their platform for tokenized real time collateral management. They've launched an app chain, which is infrastructure to support the institutional decentralized finance movement that's starting to kick off. And I think they don't announce that they're going to put this out there unless there's demand in their client base, and it's built on the Besu blockchain. So I think that's part of the EVM family. So there's definitely a movement there that you can see these things coming. It's slowly, then suddenly, and people are lining up, and regulatory clarity might come sooner than we thought. There's another bit of news coming out of now the after the OCC a few weeks ago, the FDIC, the Federal Deposit Insurance Corporation, says banks no longer need to seek a no action letter in order to engage in crypto related activities. This rescinds a 2022, notification. Of course, there is a caveat that, of course, all activities should be conducted safely and soundly, and you can see why they have to say that this is in the shadow of SVB and in the shadow of silvergate and signature and a lot of banks that were kind of exposed to and quite close to the last crypto market cycle Arnold, is this helpful in that broader narrative around regulatory clarity, or are we not there yet, until we get some sort of some sort of bill passed?
Arnold Lee 38:58
Yeah, I think it's definitely helpful. And just like how, you know, companies have, or maybe fintechs have their own risk spectrum. So do you know it goes way up the stack to financial institutions. It feels like at the tippity top, regulatory clarity through an explicit bill would be like, kind of the game changer. But it certainly doesn't hurt to have guidances issued like the one above, just given, sort of like the implied takeaway from what's in writing. And the majority of stuff is probably verbal or like in conversations in person. So it's a really nice change, I think, but we still have a ways to go. It feels like before everyone feels comfortable say, issuing, migrating their core flows to Hanjin.
Sy Taylor 39:41
People forget that so much of what happens between a financial institution and its regulator is a conversation behind closed doors that isn't necessarily published in guidance. And I think there's a lot of financial institutions still worried about, okay, yes, we're potentially happy to dip the toe in the. Water here, I can see the encouraging signs. But what happens when the administration changes in 2029 so your point there about the bill is like, actually, I need the bright line rules to kind of really, really help. Is that resonating for you? Sergio,
Sergio Mello 40:13
we've been in Isle of the storm with Anchorage. Anchorage digital owns the Anchorage. Digital bank regulated by the OCC. It's the first and only US National Bank with a specific crypto charter and activities. So the ever since the January 2023, joint letter from Fed FDIC and OCC, effectively, there has been a ban for all financial institutions to get entangled with crypto, and it has been particularly difficult, and what we're witnessing now is snap back in the right place, moment where all of a sudden, within the span of few weeks, things are normal, and banks can be seen interacting with digital assets without having regrets. There's no explicit prohibitions otherwise, so there's no reason why, why institutions shouldn't use new technology to deliver their services. Of course, proper market structure law would help, but this is another debate, and opens a whole can of worms that probably is beyond this. This podcast, we should have another, another episode for that. But there are ways to interpret current market structure activities, and simply mirroring the ways that that's working in current traditional finance for crypto would already be a safe and cautious way for financial institutions to deal with it. Now we can improve it, and that's why there should be a healthy debate about the market structure built, but abiding by existing standards already sets it up in a nice way. It's not a bad place
Sy Taylor 41:47
to start. Tai any thoughts when
Cuy Sheffield 41:49
I've spent time talking to banks, really beginning of this year, as the interest and momentum towards stable coins and digital assets was ramping up, and I'd ask them like, what are the biggest barriers for you to even just get started and develop that strategy and come up with a plan and start to execute it? And what most of them cited was, well, the OCC there's a non objection requirement, and that's a pretty high burden if you have to go and seek non objection as part of your early stage product research development process like that's a very high bar. And then the FDIC with a similar request for non objection. And so I think getting the OCC updated guidance, what last week, or two weeks ago, govern on last show, and then now the FDIC, we're starting to see just more consistency across the banking regulators that it's not to say, do whatever you want and like, ignore the risks. It's to say that you're a bank, you're responsible for managing risks and anything you do. But there's not a separate process where you have to seek non objection before using one type of technology versus another, which I think many banks struggled, but that basically should have just destroyed the case to make to invest in it internal. Yeah,
Sy Taylor 43:04
it wasn't an outright ban, but it says it was effectively, yeah, you're gonna have to go through, crawl through glass and in hell in order to get this done. And is that the battle you want to fight right now? Well, that is a nice place to leave. It. Regulatory clarity may be coming soon. We're hopeful for it, if we can just make it through the macro to have an economy left in the process. But that's that's all for this week. I want to thank you so much for listening and viewers for watching on YouTube, steadily growing audience. Thank you guys for tuning in. I appreciate it. Sergio, where can people find out more about you? And Anchorage, anchorage.com.
Sergio Mello 43:42
Is the bank website, and I am Sergio fly on Twitter. X, Arnold,
Unknown Speaker 43:49
how about you
Arnold Lee 43:50
and sphere on x, at sphere or at sphere underscore labs website is fear pay.co or sphere.net and also on LinkedIn as Arnold Lee,
Sy Taylor 44:02
phenomenal. Thank you so much for joining us. Kai. How about
Cuy Sheffield 44:04
you on x at Kai Sheffield and visa.com/crypto
Sy Taylor 44:08
you'll find me at sy Taylor on Twitter, or Simon Taylor on LinkedIn, or sodium.ai or even FinTech brain food.com if you haven't already, go ahead and hit subscribe. Do the like button thing on YouTube. Do all of the above. It really helps others find the show. We'll catch you next time.