On Ep. 53 of Tokenized, Simon Taylor, GTM @ Tempo is joined by Morgan Krupetsky, VP of Business Development for Onchain Finance @ Ava Labs and Raagulan Pathy, Founder & CEO @ KAST to discuss the flash crash, market liquidations, $300 trillion PYUSD accidentally minted and more!
On Ep. 53 of Tokenized, Simon Taylor, GTM @ Tempo is joined by Morgan Krupetsky, VP of Business Development for Onchain Finance @ Ava Labs and Raagulan Pathy, Founder & CEO @ KAST to discuss the flash crash, market liquidations, $300 trillion PYUSD accidentally minted and more!
Timestamps:
Tokenized is sponsored 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 presented by Bridge, a Stripe company.
Just like the internet made information global, stablecoins are making money global. And Bridge, a Stripe company, is the infrastructure powering that shift. Built for speed, scale, and simplicity, Bridge helps businesses send, store, convert, and spend stablecoins instantly, all without borders or having to navigate the complexities of crypto. Learn more at bridge.xyz
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With over $100 billion in monthly stablecoin volume, Fireblocks powers stablecoin strategies at scale with infrastructure that enables PSPs, fintechs, remitters and banks to issue, move, hold, and manage stablecoins. And it’s all done securely, at scale, and with built-in compliance. Learn more at fireblocks.com
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Music by Henry McLean
Unknown Speaker 00:00
Simon,
Sy Taylor 00:10
welcome to tokenized. The show focused on stable coins and the institutional adoption of tokenized real world assets. My name is Simon Tai. I'm your host for today, author at FinTech brain food, and head of market dev over at tempo. And joining me, are some incredible guests, because there's no Kai today. He's doing that traveling thing. But first up, we've got Morgan kripetsky, who is VP of Business Development for on Chain Finance over at our friends Ava labs. How you doing? Morgan? I'm good, Simon, thank you for having me. It's really good to have a friend of the show on the pod. So thank you so much.
Unknown Speaker 00:46
I've been counting down the days.
Sy Taylor 00:48
Yeah, I'm here for it. Keep counting down until the next time as well. We'll get you back. Sure. Also joining us is raghuvan parthi, who is founder and CEO over at CAST. How you doing? Ragulin, good, good. Thanks for having me on the show. So before we get into any news, I want to know which one of you accidentally minted $300 trillion was that you rigoulin
Unknown Speaker 01:11
fat fingers, as they say
Sy Taylor 01:12
in fat fingers. Of course, listeners, if you have not seen there was a fat finger error by it appears to be somebody at Paxos to temporarily mint $300 trillion worth of pyusd. Of course, it was quickly fixed, but we'll let that one slide. Shall we because of how quickly they fixed it? Of course, before we get into the content, I've got to remind everybody that views and opinions of contributors today are their own and might not reflect those of companies they represent. Please don't take anything we say as tax financial or investment advice, do your own research, folks. All right, the first story that we're going to cover is, well, we're a little bit late to this news, but the flash crash, it was all anybody was talking about with block works Das, this week, we saw an absolutely massive crash in markets. A lot of leverage getting pushed out, but it really goes back to the de pegging of a major synthetic stable coin and so much more. So this is the kind of thing that makes headline news. It's the kind of thing that the payments industry and the banks are going to look at and see Morgan. Can you give the audience a high level overview of what actually happened here, and what were the consequences?
Speaker 1 02:23
What did it happen? Maybe it's worth mentioning in the beginning to say the synthetic stable coin that you were referencing was, you know, Athena's usde, and it actually did not, in fact, de peg, which we can kind of talk about in more detail later on. But I feel like, as I was kind of diving into everything there's, it was like a perfect storm of so many different things that I had to literally write it down and make a list of all the things that coalesced. Like you mentioned. It happened on Friday. There was a crypto market flash crash. It was the biggest liquidation of positions in crypto market history. Some called it a 10 sigma event. It started right after Trump posted a late Friday tweet threatening, I think it was like 100% tariffs on Chinese imports, export controls on critical software. And it really hit when US markets were closing, and many other global markets were already closed for the weekend, and so generally, from a market perspective, this is generally when liquidity is just naturally expected to be naturally thinner, and price action therefore exacerbated during this time. And so it ended up triggering massive liquidations and leveraged crypto positions, especially in perps markets, which, overall, the whole thing kind of unfolded in under 30 minutes across both centralized and decentralized exchanges. Market Depth totally evaporated almost instantly and really forced kind of a wave of liquidations, again, largely in perps, which really kind of triggered a death spiral. So some of the things that we saw on that happen, we saw prices collapse in minutes. Some alt coins fell by 60 to 80% almost seemingly in a straight line. Market makers probably pulled support given huge volatility and really kind of instability and trading APIs, which thin liquidity even more. And that's why you kind of saw that straight line drop in price action. Liquidity engines were dumping positions into a market, therefore effectively with no bids. We also saw funding and index oracles desync and so some perps contracts showed that prices were, in fact, much lower than actual spot markets. And this further reinforced the downward spiral in terms of liquidations. And it all happened so fast that traders had a basically impossible time of even deploying new capital to shore up the margin on their positions in time, and so especially with certain chains or exchange APIs again, being congested, even trades that actually weren't that levered, like even two times on top 10 coins were liquidated. Yeah. And so because of this congestion, liquidations couldn't execute fast enough. This led to the depletion of exchanges insurance funds in some cases. And then this all coalesced to a lot of exchanges triggering, really what is considered a last resort mechanism, which is ADL or auto de leveraging, which basically means that they had to start liquidating traders profitable positions, which is something that it's like unheard of in tradfi. And so you saw, once all these liquidations were clear, prices were very quick to bounce back up, obviously not to the levels that they came from. But you know, there's a quick kind of bounce back. Last I would say, on on Athena's usde again. I know there were some reports that noted that it de pegged, but it actually didn't, and I think it brought to light some other kind of market structure issues, but it came down really to binance's usde Oracle feed that was referencing not the deepest pools of liquidity, which happened to be on chain, but instead its own Internal and relatively illiquid order book. And obviously we saw what looked like a deep pegging and therefore further liquidations where traders were using usde as collateral. So looked at collateral impairment. So it was a whole kind of perfect storm of things that could have gone wrong from like a market structure and microstructure perspective, and really brought to light some of these issues.
Sy Taylor 06:20
Is fascinating how quickly it all happened when you are dealing with instant global 24/7 like the Wall Street would have probably been closed by the time this happened, and would have had to figure it out on Monday. But in crypto, it never sleeps. In 24/7 it never sleeps. And that sort of power of a pricing feed the power of like, is this price, right? And like, imagine if somebody priced in tradfi the US dollar at 54 cents, what that would do to financial markets. It's kind of like that, because usde gets used as collateral, which people forget. But it isn't the same as, you know, the genius compliance stable coins. It's really sort of more wrapped. It's really something that's a little bit different. It uses a Delta neutral hedge to achieve a higher rating. And so there's a lot of these things that are used as collateral, that are called stable coins, but that have a different risk weighting in the minds of certain exchanges in certain parts of the world, and in a different opinion about price, can have a lots of unintended consequences, which, you know, if you're a payments company thinking about this, you know, you really have to wonder, is this a payments instrument? Probably not. Is it a markets instrument? Maybe. But Rex, given a the nature of what you guys do and what cast does, how are you viewing this? And how are you viewing the lessons on the market structure side.
Speaker 2 07:41
Yeah. So before I found the cast, I also set up and ran circles business in Asia for two and a half years. So I was there during the D peg of USDC. And so I've seen the different aspects of this. I think there's a couple of points here that get missed. I think firstly, is that up until a couple of years ago, binance was more than 80% of total trading volume of everything, like sex decks, the whole lot, right? And so some of the decisions they make around referencing their own order book are basically because they are the market at some point right now, that's reduced over years, but even now, they're probably like, 50% give or take, right? They're very, very substantial. So their own book might be more reliable. The second thing is, is, like, there's some controversy around calling usde a D peg, because a D peg is a situation similar to, like, where you've got USDC, like, if you've got a billion dollars of USDC, there's a billion dollars of cash sitting underneath it, right? So it's only if there's, like, a removal of that cash, that there's an actual D peg versus in the case of usde, there's not a billion dollars of cash for a billion dollars of usde, it's a long, short position. And so, by its nature, it's always somewhat off peg. If you look at it now, I think Athena's done a great job in terms of managing risk, but I think, to your point, it's very hard to say whether you call it a D peg or not, because it's referencing an instrument that's different to a cash backed stable coin right now, the third and final point, I think, on this, which I think got missed amongst all of this, is that when I was at Circle, circle had about a billion dollars of cash when that D peg happened. And of course, they obviously have very strong relationship with Coinbase, which had probably another $7 billion of cash, and that was against $45 billion of USDC. So arguably, there was, like maybe 20% coverage for the USCC outstanding. One of the weak things about usde, as much as I love the Athena guys, I'm big holder of Eno myself, is that they only have 66 million in reserves against 13, $14 billion of usde, which is less than point 5% so even though they got out of this totally fine, I guess the biggest question is, is that reserve big enough for the scale of usde today, when it was at a few billion, maybe it was fine. I think the question now is. Because if you want they're the third biggest stable coin. If you want to sustain that, perhaps that reserve needs to become much bigger. And I think ultimately that's the biggest thing I've taken out of it. Because if there was a scenario in which the perpetrating Long, short faulted, and that default was bigger than 66 million, then you'll be into an actual deep ex scenario, because you would have less money there than actually it was quoted, and then you get this, like downward spiral that happens.
Speaker 1 10:27
It is worth noting, I think that I actually don't think Athena refers to USD as a stable coin. It refers to it as a synthetic dollar. And so, I mean, obviously there's a lot of disclosures to kind of note, and the difference right between their other asset, which is usdtb, which is, in fact, you know, money market fund backed stable coin. But it is interesting. Like, how do we define a D peg? Like, is it a temporary price dislocation, which I think happened to USDC and usdt, too, exactly? Yeah. So it's like, nuanced. One thing I would also note interestingly is that usde is pegged to usdt on defi money market funds, and so there's a lot of dynamics at play, which, you know, I think at the end of the day, from a usde perspective, there wasn't, in fact, necessarily collateral impairment. But some of these things just get conflated. I think at times,
Speaker 2 11:20
I think just one thing also is that I've been following, obviously, Athena from the beginning. One thing that they did, I'm going to referencing their site from when they first launched, is they always had really good risk disclosure. So if you went to the risk section, they actually went through 678, categories of risk. I think it's much greater now. And even though they went through the situation, I personally haven't gone through this with USDC, I think these D pegs actually make you stronger, because people see that you went through it and you did positive actions and you survived it. I think also probably wake them up to some risks that even though, if they thought through all the risks, maybe there's some more that they need to do. So I think ultimately it will be net positive, even if it's a bit of a bumpy road in the
Sy Taylor 12:01
short term. It's the anti fragility of the market space again. So if you survive the tests, I mean, tether, how many times has that thing been attacked? And it just keeps on going. But I always see this, because I come from, like the payments and banking world, there's always those detractors in that world going, See, I told you, I told you that crypto stuff was all a scam. I told you it was all a scam. And to them, we say, think about how different this was from 2008 where, fundamentally 2008 we had a is anybody solvent question, and where is the collateral, and what's the collateral made of? That was not the problem here. Crypto Twitter solved this thing in less than two three hours. Binance had started refunding people within what, 20 hours. So the speed here is really quite spectacular. But I do think that market structure set of like, okay, how do we price these things? These are nascent assets, and no matter how well you try and risk disclose them, it doesn't mean that the buyer is necessarily going to understand them and price them correctly. And so just having reps in this is going to really help us, but I do think it harms the optics a little bit for financial institutions looking at the space. I mean, Morgan, I know you work a lot with financial institutions. How are you sort of helping them through contextualizing some of this stuff? I
Speaker 1 13:14
mean, I think you highlighted a lot of like, the relevant points and that, I think the event really highlighted that the market is still very small in the grand scheme of things, and immature. There's a lot of kind of growing up to do, especially as it relates to market structure and microstructure, and having institutional grade price discovery risk controls, and in some cases, people are talking about circuit breakers, potentially. Obviously, it's more difficult from a decentralized perspective. And also, I think, frankly, brings to light the need for some kind of regulation as it relates to centralized exchanges to ensure standardization and the way that collateral is maintained. And so there's a lot of like, institutional grade things that need to be put in place to really be able to attract institutional like levels of capital. You know, at the end of the day, the amount of money that it took to see this price action wasn't a lot. And so to your point, it doesn't instill that much confidence. And I think it proved that Bitcoin is an institutional asset, and that Trav I was willing to kind of go in and bid it back. But otherwise, it's still really developing. And so I think it just really emphasizes the need to kind of strengthen some of that market plumbing. Yeah.
Sy Taylor 14:19
And then contrasted to this, you have Blackrock coming out and in their earnings, talking about how they intend to gradually tokenize everything. And for their Aladdin platform, you know, they're really bringing real world tokenization to the fore. So I think that's gonna be a fascinating ride. I'm interested in the contrast between the TRad fight experiences you have, then the circle experiences you had brex Like, what do we need to do on the market structure side to kind of mature here? Do you think to Morgan's point, we need that regulation, maybe. Or what would you want to see?
Speaker 2 14:50
Look, I think yes, we obviously do need the regulation. But crypto has often operated with or without regulation, often because regulation. Situation wasn't forthcoming. I think crypto is a little bit like nature. It heals itself, I guess, and so in the good and the bad, right? And we've seen that before. And so I think part of this will be obviously looked at by regulators to figure out what they need to do, but I think a lot of it will go into decisions that are made around how defi is designed and how centralized exchanges operate, et cetera. At the end of the day, some decentralized exchanges, especially like the three big ones, like binance, okay, X and by bit, are doing like tremendous volumes these days, right in the 10s of billions a day, potentially in the hundreds of billions a day. And so whilst regulation waits, they're already dealing with risk on a daily basis, and trying to figure out these things. So it's in their interest to figure it out, because otherwise you could end up in a bad situation for your own business. There's no greater motivator than that. Yeah,
Speaker 1 15:50
I think it's interesting, though, in that context, like, when you compare decentralized exchanges with decentralized exchanges, or at least on chain exchanges, like at least on chain, you can see transparently, like, what's going to get liquidated at what price and when and what that looks like. It's a little bit more opaque, I think, from a centralized exchange perspective, which is why I think there does need to be some kind of standardization. I mean, obviously, to your point, they do handle a ton of volume. And I just think it's just interesting to kind of see the dichotomy between the two.
Sy Taylor 16:18
Do you know the clarity act is being considered now and being tabled and slowly, gradually working its way through the house, although the bank lobby is meaning that's going backwards and forwards. But to my mind, that market structure bill is a really crucial one. Yes, we have the stable coin act, but then we need a market structure bill, and then we need the rules to kind of follow those so it's very, very difficult to operate in that environment. And to Rex's point, crypto will always find the frontier, and it will always find the stuff that's outside the perimeter. But institutional capital is looking at this space really quite meaningfully. And there are more ETFs coming. We have dats now. There's systemic risk potentially building up. So I do think that's the time for regulators to kind of pay attention. And then the risk, I think, is people paint this as the Tara Luna of this cycle, which I don't think it is. It couldn't be more different to that because of how quickly things bounce back and how transparent it was, and how, frankly, different Athena is to Tara Luna, those two couldn't be more different in many ways, so it'd be fascinating to watch, but the next story kind of speaks to the other end of the spectrum. So story and fortune, they scooped this piece where they say Coinbase and MasterCard have apparently, according to Fortune, both held advanced talks to buy stablecoin startup bvnk for around about $2 billion which would be double the 1 billion that strike paid for bridge about 12 months ago. Fortune says that the terms of the winning bidder have not yet been finalized, but the sale price is in that range of 1.5 to 2.5 billion. The timing of this was interesting. It came about 24 hours after announcing a strategic investment from Citibank and fortune says Coinbase currently as the upper hand. So rags, I'm going to start with you on this. Why would bvnk be useful to somebody like a Coinbase or a MasterCard? And what do you think that says about stablecoins more broadly?
Speaker 2 18:19
Well, I mean, I'll say it in reverse, like stable coins are obviously hot and really, and bvnk has a lot of on and off ramps. They have a lot of volume. You know, they have a lot of venues that they've built, and a lot of customers as well. And I think honestly, for both Coinbase and MasterCard, they are not in the business as deeply as they would like, despite Coinbase, obviously having a share of USDC revenue, etc, all right, and I think, very similar to stripe, we'll find more and more companies who are like, well, I can't build this team quick enough. I can't get the licenses, I can't get the customers, and I can't, by the way, reinvent my culture quickly enough as well to adopt to what I need to do. So it's just going to be easy to be easy to buy someone, and I think we're just going to see more and more of these happen. To be honest with you, there's not that many players with scale, I would say that are actually available for purchase. BB and k is one of the ones with some decent amount of scale, even though there's a lot of competitors, most of the competitors of bridge and BB and K, I know, because we work with most of them, a lot smaller and very much startup phase. But I think it's just simply like these companies, Coinbase is now what 1213, year old company, right? So they don't move as quick as you once would think, and so maybe it's easy just to buy a team that can move faster.
Speaker 1 19:39
I agree, if it ends up being MasterCard, kudos to them for, I don't say, trying to keep up, but maintaining relevance in a space where, if this tech overtakes adoption, both globally and locally, obviously, it's no secret the credit card networks kind of might decrease from a relevance perspective, and so kind of good for them. Them for for recognizing that obviously, visa has been pretty progressive in this space, and so I think this is like a sign of them trying to keep up, for lack of a better term, frankly, Coinbase and a lot of other companies, just stripe is obviously a good example too, just increasingly looking to vertically integrate and snapping up a lot of the different kind of infrastructure that really enables end to end, enterprise, money movement, and so I think this is just more of a reflection of that.
Sy Taylor 20:28
It's interesting to me how many of these orchestrators are looking for the exit at the moment. And I wonder why is there sort of a capped upside to being an orchestrator? The stripe, example, would say, far from it, like actually you can build down the stack and start to own more of the unit economics and become $100 billion company. So stripe was the orchestrator of tradfi, and they did a tremendous job. So you could go on to be very, very large. But then maybe it's about the founders. Maybe it's about something else. As I looked at both of these buyers, I saw something quite different. So yes, Coinbase has what's 80 million consumers. They have a bit of a payments business, and they have possibly the best on off ramp network in the world, but they're trying to become much more infrastructure with base, with their institutional side and so on, and this is like a missing piece of that puzzle, whereas MasterCard is an interesting one as well, where they actually operate payments infrastructure in some markets. So in the UK, the faster payments so the real time payments network is operated by VOCA link, which is a MasterCard company. So it's not out of the realms for them to do something like this as well. But are we in a stage where people with licenses are just going to start to build down? Because if you think about what an orchestrator does, it's licenses, plus on off ramps, plus custody, plus liquidity, plus a handful of other things that you need to your wallet services. People could build that. It's hard. It takes time, and doing it across multiple chains is complex, but I'm interested. Rex, you've just built a business. You have a lot of experience in this market. Do you see them having a durable role? Do you think that this is a sign that they're looking to exit too soon? Like, how do you view this? So
Speaker 2 22:21
there's a couple of points here. I mean, when I was building cast, I chose to go direct to the consumer, because I felt that you could own the consumer and build an experience around them. I mean, you're not going to get disintermediated, right? The biggest problem that these providers have is that they can get disintermediated. You know, for us, for example, if we get enough scale in a single market, we'll just start doing it ourselves. A lot of times we partner, but that's a huge risk for them. The second thing is, is that my inbox on x and LinkedIn is filled every day with a new partner saying, hey, I'll give you the same rails for cheaper, right? If you're using bridge now, we have a really good relationship bridge, because I think the durability of the product and quality is excellent, but it's not for the fact that people are offering something cheaper, right? Also for these companies, I think as a standalone company, there's some risks. They could get de banked, and a lot of them are relying on just a few venues from which they're getting a lot of their revenue. So it's a bit of a de risking factor. If you become part of a bigger org, also for their partners, their banking partners, they're also like, Oh, you're part of strike. Now, okay, well, that's a little bit safer. We're not going to do we're not going to de bank you as easily, because that's a much bigger conversation. Because I'm de banking strike. Now I'm not debanking bridge or I'm debanking Coinbase or MasterCard. I'm not debanking BB and K, you know? And so I think there's an element of like, you can grow up to a certain size, and then as a founder, if I was in one of these companies, I'd be like, do I want to take money off the table here whilst I've got it as big as I can before the competition tries to bleed me out? Plus, I'm maybe not sleeping all the time because I'm worrying about the risks in the business, and I can continue building in a much bigger company, de risked, to a large extent, with a lot more funds, and probably complete the vision of what they were trying to do, but just in a bigger house. Basically
Sy Taylor 24:11
fascinating. One of the things that stood out to me about BB and K's Citibank funding announcement was that since genius past last 12 to 18 months, the vast majority of their growth had come from the United States itself, and companies looking to move dollars around the world and do corporate treasury management. And that also, I think, ultimately said that was by far the fastest growing use case is in B to B. And historically, the on off ramp had been very consumer focused, and B to B seems to be growing. I mean, Morgan, I know use cases are near and dear to your heart. How much do you see corporate treasury in your day to day life, and how important do you think that is in coinbase's decision making? Yeah.
Speaker 1 24:54
I mean, I think to your point, the people have woken up or re awoken up, reawake. Into stable coins. So I think with that, the B to B cross border, wholesale payments, treasury management conversation has really heated up over the past six to nine months. And so I'd be surprised if Coinbase wasn't necessarily thinking about that. And I think that also feeds into why a lot of basically any company that has distribution is thinking about launching their own stable coin. And so I think we'll see a lot more of that. And obviously there's a lot more to it than just launching your own stable coin in terms of seeing it win, but I do think we will start seeing more of those types of enterprise type flows and use cases, although I hate that term kind of really rising to the surface. And I'm excited for us as an industry to be able to point to some of those things more concretely, because it's all those things that we said that this tech was capable of, but never had concrete evidence. So I'm glad that it is kind of back in the forefront, just on the orchestrator question. The one thing that I would mention on that is, I think the one thing that is very difficult to build in which some more crypto native companies might take for granted, is distribution. And I think like to rags point he obviously is working on exactly that. And I'm sure rags you could talk to like how difficult it is. But a lot of these companies, whether it is Coinbase or MasterCard or Citi or whoever it is, already has distribution. So for an orchestration layer, which might, over time, be increasingly commoditized. I think that is a huge kind of reason why, potentially, some of these companies, in a time when maybe valuations are pretty elevated, are considering M and A. I've
Sy Taylor 26:32
seen a few people say that the bridge acquisition could go down as like a, WhatsApp, Instagram level of value over the long term. And I put BV and K in that category, I think they announced something like 20 billion of total processed volume. Now, if you compare that to stripe doing 1.4 trillion, it's not a lot, but it took stripe a long time to get there as well. And so that is a really big number for pure payments, and it's really nice as a payments nerd to see people talking about total processed volume and not total value locked, that just seems like a really reasonable thing to be talking about. So signs of real world adoption. Everybody said stable coins were the killer app, but it's here, folks, and you can see it in the numbers, all right. And speaking of the numbers, I do need to thank our sponsors, and we will be right back 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. This episode is also brought to you by bridge a stripe company businesses need easier global money movement. Bridge is the stable coin orchestration platform that makes it simple to receive store issue and spend using stable coins. Companies like X, Shopify and airtm already use bridge to lower their costs, simplify their global Treasury operations and expand their global reach. Learn how you can grow your business with instant global money movement using stable coins at bridge dot XYZ, tokenized is also sponsored by fireblocks. Fireblocks is the stablecoin infrastructure of choice for global businesses, from visa to WorldPay to bridge to Revolut with over $100 billion in monthly stable coin volume. Fire blocks powers stable coin strategies at scale with infrastructure that enables PSPs, fintechs, remitters and banks to issue, move, hold and manage stable coins. It's all done securely at scale with secure built in compliance with fireblocks, you get complete control to build your own stablecoin orchestration layer, create payment accounts, manage liquidity and access on and off ramps in over 60 currencies. Makes it easier for you to build and scale and expand your business globally. Learn more@fireblocks.com Tai com, thank you very much. Sponsors. We appreciate all of you. The next story came from just about everywhere. Major banks are exploring issuing a stablecoin pegged to g7 currencies. So UBS, Santander, Bank of America, Barclays, BNP, Paribas city, Deutsche Goldman, MUFG, TD Bank announced they're jointly exploring a one to one reserve backed stable coin for g7 currencies. Their reports say this will be on public blockchains, and it really does underline a trend. Of bank consortias getting involved in stable coins. We had the nine European banks doing the euro coin. We had swift announcing its blockchain. And we've also seen Korean banks try and make a move into this space. So FX is a complex market, and in stable coins, we've seen a lot in the long tail markets. We haven't really seen the g7 come to it. Morgan, what do you think about moves along these lines from the big banks?
Speaker 1 30:26
Yeah, so I think there's something to be said about banks really having done a 180 since the election to wanting to explore public chains. And I think they've gotten really excited, mostly to kind of like, tap into the activity and liquidity and users within these ecosystems. And so a lot of them are just trying to figure out, like, what are we deploying? What are we issuing? How do we leverage all the innovation and activity that's happening on public, permissionless networks, which is great to see, because it's been a total change in tone, and welcome in that respect, from a stable coin standpoint, I still do, like, anecdotally, get the sense that they, for a variety of reasons, prefer tokenized deposits. But I it almost feels like issuing stable coins are almost at this point, like a hedge to tokenized deposit adoption. Because obviously, you know, we were talking about earlier, there's so many more companies issuing stable coins, and I think it's obviously not taken away market share yet. But I think if and when we get to that point, these stable coins kind of will be there, almost like as a hedge to some of that activity, right?
Speaker 2 31:26
Your thoughts, I think it's dead on an arrival, is my thoughts. I mean, like, there's a few things that I'll tell you. Firstly is that 99% of stable coins are just four stable coins, right? And that is USDC, usdt, usde and die, right? And then 99% of stable coins are USD. So doesn't take a genius to do some maths here. Of like, what the chances of first starting non US dollar stable coins and then a bank doing it, or group of banks doing it? I think it's just basically like someone sitting in the corner of a bank saying, hey, look, we need to make it look like we're doing something, but the chances of actually delivering something seem pretty unlikely to me, if you if you want to ask me the truth. Also, by the way, like people forget that the major feature of stable coins is because banks are just ridiculously permissioned. And got more and more permissioned over the years, made people's lives pretty much hell. And so the biggest feature of a stable coin is that it's largely permissionless, right? And I just did not see a world in which one bank, let alone a group of banks, are going to successfully launch something on the public internet that's as permissionless as a USDC or usdt, for example.
Sy Taylor 32:36
Yeah, I'd be very this is like
Speaker 2 32:39
so many things to overcome. So I mean, congrats to the PR teams of the blockchain teams of all these banks and getting announcement out, but I see it going absolutely
Unknown Speaker 32:48
nowhere. Rags. How do you really feel? Yeah,
Sy Taylor 32:53
that's a great thing about being a founder. I can pretty much say whatever. Yeah, no, I love that. I really do. I completely disagree. But if we change the definition of what they're doing, because if they were building a stable coin, that would be ridiculous. That would be stupid. Don't build a stable coin, guys, you obviously don't have a chance. That's not what stable coins are for. I agree with rags on that point. What they're building is a settlement instrument between deposit tokens. Because the fundamental problem is, my deposit token can't show up in somebody else's wallet, because once it's done that, it's left the bank and it's not my deposit anymore. So what does that mean? How do I have a deposit that lives on chain outside of the bank? That's a legal question that has not been resolved. So banks already do tokenized deposits. We had JP Morgan on the show a few few weeks back, and they were talking about doing a trillion dollars of total processed volume. That's trillions in italics, that they're already doing internally with tokenized deposits. The question is, there's only so much fun you can have on your own blockchain, right? So what? How do you make that open loop, and especially when your largest corporates are pushing you to do it? So last week, we were speaking to Eric from velocity, and he was saying that in a previous employer, corporates like ant financial were essentially saying, Yeah, you won't have our business anymore unless you start letting us move tokens around 24/7, so it's the banks customers that are pushing them to tokenize. And I think that's a big change, yeah, I mean, but
Speaker 2 34:27
there's still also elements of like, if you're on a public blockchain, they're suddenly going to see very big institutional flows. So are they ready for that? For a start, you know, rather than a private network. And I think also some of the other challenges, you know, like, I mean crypto, but before I was in crypto, I was in tech, and I was working a place like Amazon Web Services. I know how efficient databases are, so I don't like, I love blockchains, but I don't love building blockchains for the sake of building,
Sy Taylor 34:53
yeah, you've worked in tech. I'm sorry, man, you come from the wrong No, databases are extremely efficient. Efficient. I led payments change for a bank for a little while, and the amount of mainframes they have in the amount of different countries, and you could roll in the best database you want in the world. But my God, trying to get those to talk to each other is an absolute bleeding nightmare. I agree with you on that. And if you're going to create a sub ledger, you might as well do one that could go open loop later if your corporates were already pushing you to do it,
Speaker 1 35:23
Simon, you're making the case for avalanche all once, I really
Sy Taylor 35:26
am, or tempo l once. But you know, I mean, like,
Speaker 1 35:30
listen, there's obviously a question around public, permissionless, private, permission interoperability and all that stuff. That's like a potentially different discussion. But I also think to your point, Simon, like, if that's what they're going to use it for, tell it for, tell it for the interoperability of tokenized deposits, then at some point they really need to integrate these stable coins into their day to day flows and operational flows. And what I'm seeing is that, I will not name names, but there have been companies out there that have spent time launching their own stable coins and just thinking like, oh, liquidity will come, use cases will come, integrations will come and and that's obviously not the case. So I think, like, you need to obviously ensure there's sufficient liquidity. You have to do business development to create integrations, on and off, ramps, custodians, exchanges, all that stuff, and use cases. And again, like you don't need to think of use cases. You have the use cases. But I think the effort needs to be made to actually integrate them into banks, enterprises, companies, operational flows, which is another question, which I don't think can be driven by the innovation and blockchain teams of these companies.
Speaker 2 36:33
I think the one thing we'll all agree on is that if they actually achieved it, I think it's for the net good, for sure, right? And if they actually did tokenize everything. They did put it on a public chain. It was largely permissionless. We could see it. I mean, it's absolute utopia, right? We want the financial services industry to become that. That's ultimately we want it to go so we're all rooting for it to happen, but we've also seen a lot of stop and start and projects and various versions of it. And so that's what I'm like,
Sy Taylor 37:01
yeah, no, I've lived that roller coaster as well. Had a blockchain R and D at a bank in the mid 2010s So, and seen various cycles of they come, they go, they come, they go. But I do think throughout all of that and financial and they keep pushing and they keep getting licenses, and it keeps happening. And we do now have HSBC and JP Morgan and city doing g7 currency FX on their internal blockchain, trying to figure out to Morgan's point. Okay, now, how do I make this work harder than one, and how do I solve some of these gnarly legal challenges and some of these gnarly privacy challenges, dedicating meaningful resources to it over multiple years? And maybe that goes away with the market cycle. To your point, I don't think it does, because the clients are pushing for it, and the one thing bankers do is listen to their clients, especially their biggest clients. That's kind of what makes the world go round. And two, the exogenous world of stable coins for the long tail is more efficient, like FX in tradfi in the g7 is wildly efficient. I mean, one to three basis points on FX is what you're paying, and that's like 99% margin for most of the banks. Like, it's insane the level of financial compression they've been applied to those transactions because they built the hub and spokes model. But that's great, unless you're trying to get from Malaysia to Thailand, and if you're an APAC, as you know well, rags, that just becomes wildly inefficient, which is why stable coins win. And multinational corporates do operate in those jurisdictions. They do have to manage their treasury. They do want to do that from a wallet, and banks do have to figure out how to integrate that into their flow, so you can't separate the internationalization
Speaker 1 38:42
for that. Although, interestingly, like, I think it's less the FX trading and more just the settlement component that is extremely inefficient. I mean, I think, you know, the segment, I was at a large bank in the FX desk for 10 years. And yes, it's very fun to trade Nigeria and Ghana and Malaysia and all these crosses, but it's really post trade that all the kind of scary things come to light.
Speaker 2 39:10
Also, when I was at Circle, I honestly, like one of the greatest innovations is just being able to settle dollars. It's amazing how few banks, pretty much almost none, can settle all of their countries in just dollars between the one bank itself, right? We often say to move money from Singapore to London via circle was often faster than a bank's own internal Treasury system. I know some have slightly more advanced Treasury systems, so they can handle it. That, in itself, is a huge opportunity, even if you just speak dollars, let alone the g7 100%
Sy Taylor 39:39
and that dollar treasury management is what their corporates want. There's just time for one more story. So I do want to touch on the PayPal fat finger, if you may. So this story I picked up from Engadget, but it was kind of all over x, so in an embarrassing era, paypal's blockchain partner Paxos accidentally minted 300 trillion people. Why USD of PayPal stable coin, which he debuted a couple of years ago. Now, it's supposed to be redeemable one to one for US dollars, but 300 trillion is more than double the world's entire current GDP of 117 trillion. As fat fingers go. This was ginormous. This was a Jupiter sized fat finger rakes, obviously, with your circle background. Could you talk me through some of the mechanics of minting and burning and how something like this could even happen and what happened next?
Speaker 2 40:31
Honestly, like a lot of minting and burning is just done like a bank operation. Most of it's automated with obviously some daily reconciliation and etc. So I don't, I honestly don't even know how it happened, like, unless there was, like, a system error, etc, right? It's very unusual. I haven't, in my time at Circle seen like a accidental mint, like that. I didn't think we've really seen it before, so I don't know the details of exactly how it happened. I think it's very unusual for it to happen. But ultimately, the end of the day, like all the issuers, various risk controls, still can burn and control these things if needed, which which happened in this case, and so I don't think it's a major issue. Apart from, you know, there's going to be quite a few memes going around about
Sy Taylor 41:23
it, but I honestly don't know how I haven't seen it before. This is again, another red rag to the stable coin haters here, Morgan, but I think there was the example from I think it was Citibank who accidentally credited a client with $81 trillion once. So it's not a uniquely crypto thing, a fat finger area. But what is uniquely crypto is, I think again, how quickly it was fixed. What are your thoughts on the optics? We seem to be going through a bit of a bad phase of the optics. And how material do you think that is? Do you think we can wear this and still bring the institutions towards us? Or is this part of the drip, drip, drip of credibility kind of eroding?
Speaker 1 41:57
I mean, I think, to your guys point like, I don't think anybody's done like a or we haven't seen, like a full post mortem in terms of exactly what happened, usually, to your point, Simon, you like associate fat fingers with tradfi. But, you know, web three companies have manual processes too, in some way, shape or form. So I think that's just more of, like a general kind of question around ensuring that you have your processes mapped end to end, and robust risk and controls in place. And that is relevant to both web two and web three companies.
Sy Taylor 42:28
Yeah, the importance of that link as well. Back to the underlying sort of backing assets. I think this is one thing that the sort of stable coin haters in the bank lobby would always question, and I do think is still a valid concern, which is, how do you one to one link to those underlying assets? How do you know where they are? How's that automated? How's that audited? And it's still a risk and control process. So there is a trust element there that I think we have to overcome. Well, that was all the stories we had time for this week. I do want to make sure that everybody has the opportunity to learn more about you guys and what you get up to. So Morgan, if people are interested in Ava labs, where do they find you and more about what you do?
Speaker 1 43:07
Sure can find me on Twitter. My handles at Maureen karpetsky on LinkedIn, first last name, happy to answer any questions or continue the discussion that way. Phenomenal rags.
Speaker 2 43:18
How about you? Yeah, my Twitter name or x name is magul and Pathy and same on LinkedIn. You can also find our company, cast. So it's K, A, S, T, dot, x, y, z. Love to interact with people
Sy Taylor 43:31
more. Yeah, check it out. Folks. Really incredible. What both of these two folks are doing. And you'll find me at Sy, Tai lar on all of the socials, tempo, dot, x, y, z, or ranting over@fintechbrainfood.com and if you haven't already, remember to do all the things that hosts always ask you to do. And I'm going to really annoy you with it this week, and I'm going to say, Please, please, please, please, hit the like and subscribe button. It really does genuinely help us. And tell a friend, tell them to find The Show, and we'll catch you next time.