How the U.S. can win the digital currency race

Jeremy Allaire: Welcome to this special edition of The Money Movement. I'm joined here today with Dante Disparte, chief strategy officer and head of global policy at Circle. I'm Jeremy Allaire, co-founder chairman, and CEO at Circle. We want to bring you into a conversation that we think is of vital importance, a national conversation, part of a broader international discussion about the future of digital currency, its role in the global economic system, and specifically, the question of how the United States can win in what is increasingly being considered a digital currency space race for preeminence of currency on the internet.

We're going to explore this topic through a number of different lenses and discuss in detail what we believe the possibilities are for the United States. First of all, I want to welcome you, Dante, to the conversation.

Dante Disparte: Thanks, Jeremy. Great to be back on The Money Movement and share a virtual stage with you again on this important topic.

Jeremy: Just to frame this a little bit, we're entering potentially an epic of global competition for internet currencies. There's very clear that a lot happening here, but digital currencies themselves are proliferating. We're seeing these technology breakthroughs in how value is stored, transferred, used on the internet. We've watched the internet sweep over the world of information, communications, commerce, and we're now at the front edge of the internet sweeping over and transforming economic and financial systems. Clearly, this is the economic infrastructure layer of the internet is being built.

In parallel to this, there is a race and it's increasingly clear that there's an open question of what will be the dominant currencies of the internet. Will the currency of the internet the US dollar, will it be the Chinese digital yuan? Will it be Bitcoin? I think people are starting to grapple with the implications of this, how profound this is, and that this potentially hastens a reconfiguration in the international monetary system. This is a high-stakes competition that is going to shape political and economic systems and value systems in this digitally native global economy. The question that I guess we're asking is, can the US win this digital currency space race?

Dante, I'd love you to share your thoughts at a high level. What are the stakes? What is happening here? What is playing out? As we see, China launching an eCNY embedded in its form of governance. We see ideas being discussed around, should the federal government be building technology in this category to compete? Then obviously what's happening with crypto more broadly? What do you think this global competition and the framing of this question really looks like?

Dante: First you laid the stakes out really powerfully about exactly where we are at the point in time. One thing that's interesting to note is this question of what should be Central Bank policy response and therefore the national economic policy response be to a world in which you have all of these alternative methods of transferring value at scale? Up until very recently, many of the things that you have been building and that Circle stands for might've been considered fringe finance. Cryptography, payments on the internet, blockchain-based payment systems, even Bitcoin only up until very recently did this start to really garner the attention of the world. It's an industry that is not too big to fail in systemic risk parlance but is now too big to ignore.

There's also a point in time in which central banks started paying very careful attention to the question of digitizing their national thrift. It was around 2019 that the idea of a Central Bank digital currency stopped being an abstraction that was very interesting to technocrats and started becoming a real experiment. Something like 90% of the world's central banks are debating this question of should they digitize their currency and if so, how do they do it and what does that form factor look like? I've argued and you and I have argued that at current rate, the United States is not necessarily losing this digital currency space race in no small measure because the sum of digital currencies in circulation today reference the dollar.

If in fact, that form factor is starting to already take shape, then at current rate, the US may be very well winning this digital currency space race, but that leadership is not assured as a long-term posture.

Jeremy: I think this concept that we're already winning, I'm going to come back to that as we talk about the digital dollar ecosystem as it exists today. I think this bigger concept that there's a new infrastructure layer, a new economic infrastructure layer, and it's not just about the digitization of national currency, it's about a fundamental infrastructure that value coordination, capital markets, commerce, the innovation curve of the internet applied to the financial system, which magnifies this beyond just a, "Hey, this is a payment system innovation." and into a, "Wow. This is actually potentially the future of the way economic activity in the whole world works." is in some ways framing how strategic and important this is at a national level.

It leads to this second critical theme. We know this is of incredible national competitive and whatnot importance, but this second piece which is, what can we learn from the open internet? We have this robust infrastructure globally that was built up over 20, 30 years of open source technology, of open protocols, of open permissionless access. We're seeing that repeated again. The open internet of value has animated really over the last decade. I got going on Circle nine years ago and this industry precedes Circle certainly. Over the last decade, literally, tens of thousands of software engineers, entrepreneurs, mathematicians, professionals out of law and finance, and just other creators in literally every corner of the world working feverishly to build this new internet native system of value exchange.

We've seen this open internet of value in this commitment to build it and following the path of the way the internet has grown as well, this open global transparent interoperable decentralized system. This is a particular vision of the world and it is in fact, an evolution of the world we live in. This, I think, in some ways, when you look at what's happened, dollar digital currencies, aka stable coins, they're actually at the forefront of this, they're actually one of the biggest pieces of this and are growing extremely fast.

Actually, it may be that this open internet of value and what's been building up from all of these people all around the world is actually offering the United States a rapid path to establishing the dollar as the currency of the internet. I oftentimes feel like the discussion around building a CBDC or what should this response be, or the policy responses about containing risk misses this big picture of what's being built, an open internet of value. How are you thinking about explaining that pillar of the model that can actually lead the US to win and then maybe already is leading the US to win?

Dante: First of all, you rightly summarized that in a world in which this is now a near $3 trillion innovation and asset class, the simplest way of reducing the message to policymakers, central bankers, regulators, and others is to say, "It is the rails, stupid, not anything else." I don't mean that pejoratively. It's that the competition is not the form factor nor the economic soundness of a stable coin. I think we've largely settled what that may look like that it should be as close to cash-like in its properties as possible and should solve for the buyers and spenders' remorse that plagued very early cryptocurrencies and negated the payments advantages, but that the rails and the idea of building a non-proprietary technology, this third generation of the web is in fact, the most powerful innovation that underpins all of it.

That we're still very much, as I said recently in some hearings in the Senate and you had to testify in the House not long ago about, the idea here is that while the internet of value may very well be in its dial-up phase, the underpinning of the public infrastructure and public blockchains is itself part of the digital public goods and the digital comments on which the financialization, the economic activity, and the remaining activity of a world in which if data is in fact, the new form of [inaudible 00:09:50], then these public blockchains are the barrels that will ultimately allow for all of these other economic activities to take root. I think that's the fundamental breakthrough.

Candidly, it says powerfully aligned to many first principles that underpin the United States. The idea of the motto of this country is, E pluribus unum, out of many one, that you have a chance to really build this in a manner in which unlike the tech titan wave, in which all the value went to a small handful of poster codes in the United States. The blockchain ecosystem and this third generation of the web is really being built across the country from sea to shining sea and increasingly, not only is a dollar the currency of reference but the US is increasingly the jurisdiction that these developers are calling home. I think that's powerful. We don't want to let that pass us by.

Jeremy: I think embracing what the public good of the internet can bring in and embracing that with the economic system, with the dollar, is really profound. We'll come back to the values that are rooted in this and contrast that with the values of an alternative vision of the world, one that is often embraced by authoritarian governments. I think it's helpful here in making the case that today's digital dollar ecosystem, when you look at it, what's happening today, almost by nearly every measure, the US and the US dollar are winning.

As we think about, should the government administer something, which is something that could take many, many years to develop, poses a whole set of its own risks and pitfalls which we'll talk about, the market in the open internet are racing ahead. We can talk directly about from our own vantage point, what we see. I'll summarize a few things, and then we can reflect on it. USDC, which is already regulated, is a full reserved dollar digital currency. There's an entire global ecosystem developing around these digital dollars and these digital dollars are held in the current custody of the US financial system. When you think about the scale, it's incredible and we're still in the early stages.

We've seen over 100 billion USD issued. There's over 48 billion in circulation today. That's over 10,000% growth over two years. This is happening at an incredible rate. In 2021, in just the year 2021, we saw over $2.5 trillion on blockchain payments and settlements with USDC, and nearly five million active wallet addresses. Many of those active wallet addresses with custodial services and other services that touch tens of millions of users. We're seeing this incredible amount of emerging activity. I think the power of the openness is a huge part of that. There's not a single company building a digital wallet to support the digital dollars that are out there.

There are today, just looking at the Apple App Store and the Google Play Store, there are over 220 different digital wallet apps that can transact in USDC and those are available in 175 countries. Already, digital dollars in the form of digital currency, there's hundreds of third-party wallet applications available nearly all around the world to any user. That's also connected to dozens of leading regulated exchanges that are accessible in over 180 countries that allow for trading, converting, and providing liquidity and convertibility into key currency markets around the world. The market for these digital currency dollars and how they can move around the world to countries in other currencies is already there.

Then again, talking about the infrastructure and the openness, USDC is programmable, blockchain protocols, DeFi protocols, NFT markets, all of these developments of new value-added ways to utilize money on the internet. There's literally over 200 blockchain protocols that support USDC today, and hundreds of regulated financial institutions in the form of vasts which are the regulated digital asset firms that exist in nearly all of the financial centers in the world supporting USDC. Here we are, trillions of transactions, 100 billion-plus of issuance, a proliferating ecosystem of firms.

I guess the point here is, digital dollars are winning. No other country can say that there's an ecosystem like that behind its digital currency on the internet. I think, this is again, when people often talk about, should we build something? What should we do? There's a lot there already. The kind of question I have for you is, "What does this look like in three to five years?" because if the federal government's going to build a technology and again, there's a whole set of questions around what that even means, what does it look like if we unleash and continue to see the development of the open innovation on the internet and open-source innovation and private market innovation? What does this look like in three to five years? Are we going to achieve the objectives that people are focused on?

Dante: No question. I think everything you summarized is a conversation that you and I often have and is a recurring conversation about what happens when money collides with Moore's Law, collides with network effects, and open innovation? The ability to report that this is already a global phenomenon, that it's already catalyzing competition. Candidly, a number of policy priorities that I think are very consistent with what you're hearing from Central Banks, including the Fed in the United States, about what is the motivation in the tenants of a Central Bank digital currency to the extent a lot of those policy priorities can be met by a free market then always been on a free market?

One of the challenges, obviously, that Central Bank digital currencies potentially pose irrespective of whether there are retail innovation or a wholesale innovation, is it means the public sector has to make a hundred-year technology bet at least. In that spirit, it's always better to bet on a free open market that's competitive and that can operate enshrined around a series of rules and principles and regulatory standards around protecting innovation, promoting inclusion, lowering fundamental cost, increasing competition, and openness.

There is no better standard candidly than open innovation to build a global payment system in an economic system that raises prosperity.

I think that whole premise were only in the opening rounds and in three to five years, the technology starts to fade to the background, and the experience given companion innovations around digital identity and other things that are on the near horizon, is you start to create a world in which there's no longer an excuse for global payments to be as free and interoperable as possible and then all of the other economic activities that we've discussed to come to the foreground.

Jeremy: It's so interesting. You're emphasizing the power of free markets, the power of open innovation, the power of these value systems of openness and privacy preservation and the like, which have in some ways, they've helped America lead for decades now in internet technology industries, and standards and they work. In fact, those are underpinning already what is allowing this flourishing market for digital currency and blockchain technology to build today.

There's a kind of alternative view and it still feels like a lot of the policy narratives and discussion is how do we constrain what's happening here or how do we nationalize the technology, and infrastructure, or launch and administer government-controlled digital currencies. We're seeing that happen in countries where the government nationalizes and operates a lot of things in contrast to the west. What do you think is behind that kind of posture, that kind of instinct from a policy perspective to seek to, as you like to say, out China, China? [chuckles]

Dante: Well, as a person who has spent an enormous amount of time on global risk and man-made risk and political risk, the tendency of repressive countries whenever there is a civil manifestation or a civil demonstration of Democratic values or tendencies, the first thing they cut is the internet. That tells you a lot. The idea that there is a potential for an internet of value to emerge that enshrines in individuals armed with little more than a mental memory wallet of their keywords and passphrases and safety keys of their digital wallet, the ability to transfer their value across borders, as you like to say, that there is no such thing as across border.

When was the last time you sent across border email? That to the extent, your value can now travel with you irrespective of the country you live in. It's a very, very powerful ideal. We have a shot. That's why I think the west is winning the digital currency space race at the moment. We have a shot at really enshrining that over the long haul and with it also, ensuring that many other countries around the world are not left behind. It tells you a lot, that the first instinct of repressive countries given the shot, is to cut the ties to the internet because of what it fundamentally represents.

There's no stronger value, no stronger democratic tendency. This is frankly why blockchain is such a powerful movement than to-- It also enshrine the democratization of assets and economic value. We live in a world where I think brick and mortar infrastructure, brick and mortar banking, brick and mortar public policy has all reached a point of diminishing returns. Then the COVID-19 pandemic has really demonstrated for us how true it is that but for technology, at the core of so many systems, we would have a massive global business continuity problem.

I think that exists today across a spectrum of activities, and so the Central Banks of the world would be wise not to try to keep up with international competition for digital currencies that are entirely centralized, allow the free market to bloom. You'll have an embarrassment of riches and economic activity on the other side of it, and you'll have an air gap between the central bank, your wallet, and how you spend your money, which is a feature, not a bug.

Jeremy: I think there's multiple policy responses here, and we're seeing that squarely in front of us. We've got the White House, the administration, Congress thinking about, "Wow, private market innovation with crypto infrastructure, stable coins, how do we think about this? How do we regulate it? How do we enable it?" There's a whole policy response there and on the other side of this, you've got an open request for comments on should the Federal Reserve build a central bank digital currency? Looking at that, I want to focus on the latter here first.

There are real risks and pitfalls with central bank digital currency. You've just touched on some of those. What are some of the other fundamental risks that you see that policymakers need to be thinking about? Obviously, there's a question of how to foster and enable and ensure that what's already happening can secure the role of the dollar, which we can touch on a little bit more because there is room for more national policy on that front. What are the fundamental risks that exist in a path where say, there is a three to five-year project to try and have the federal government build a technology?

Dante: I think there are a couple. One, we would transmit to the taxpayer hundreds of billions of dollars of open R&D, open research and development, open infrastructure that's been developed in a free market that is going from the dial-up phase to the broadband phase of this internet of value without the taxpayer paying a single penny. Transmitting that from an open market free market set of economic and competitive activity to taxpayer born R&D and science projects is, frankly, patently unAmerican. It blends competition because ultimately the public sector then has to pick technology winners and losers and do so in a manner that would survive technological obsolescence.

Then you have all of the other attendant risks that come with that. The transmission of monetary policy in the United States and in many other countries around the world flows through the two-tiered banking system. A central bank digital currency potentially introduces a safer or at least a perceived safer asset, which would then put downward pressure on the two-tiered banking system and traditional bank deposits. It then raises privacy questions, deep platforming questions, cyber risk questions, and a whole host of other questions. The last point I would make is that the dollar is a global reserve currency and is used all over the world, and the ability to guarantee that the dollar would be present and acceptable in those last-mile domains where it may exist all over the planet rides in no small measure on consortium rails, or the combination of private sector activity and public oversight. I think that too is negating the upgrade of the dollar to exist in cryptographic form as a digital currency or a stable coin, that it's now enabling the dollar to live in a 24/7 always-on manner. I think those are just a small slew of the policy responses.

You also know, Jeremy, that you're living in the policy upside down when Fintech's banks and crypto companies all have common cause in thinking a central bank digital currency is a bad idea. The bank policy institute, the America's Bankers Association, all wrote long letters in opposition to a CBDC on the grounds that it would ultimately fundamentally blunt competition and economic competitiveness in the country in the long run.

Jeremy: I think the case can certainly be made that there is this incredible innovation that's happening, and that's actually how you're going to win. The question is what ensures the preeminence of the dollar in the age of the internet, in the age of the internet economy? That's really the question, and this is when you read an editorial from Financial Times or you read stump speeches by various policymakers and others. What people care about is the dollar and in a world where the technological innovation in the form factor and in the availability, in the openness, is already being driven. It's being driven at an incredible pace.

It seems like the policy response isn't that the federal government needs to go build this. It's actually, it's happening, and it's here, which leads to the other piece of this, which is, the answer is not do nothing. The answer is not laissez-faire. There's just this endless free market innovation, and there are no policy and regulatory issues at all. There are significant issues, but we're at a crossroads in what that policy posture should be. I think we're of the view that it is actually time to establish policies that help the dollar become the most trusted and widely used currency on the internet.

I think the real thing that we're starting to see emerge is not a bipartisan view, a nonpartisan view that the US needs to lead in this space. It needs to embrace and safely regulate an industry that is already demonstrating incredible capabilities and potential and can accelerate the US economic competitiveness and the role of the dollar. There are fundamental risks, and there have to be policies and likely federal statutes and supervision at the Treasury department level and others. What are the policy pillars that are needed to both in trying and enable and allow this industry and technology to flourish and safely grow?

Dante: First of all, I completely agree. Policymakers and regulators don't like things that get very big very quick, and when the internet collides with money, then it starts to enjoy the very properties of the internet and the type of exponential growth and scale that the internet produces. It's not to assume that it is an unchecked risk and that there are no ways of enshrining the public interest in this innovation and in this industry.

There are really three policy pillars that are going to be very enduring. One, these innovations should promote inclusion in its broadest form. That's something you hear consistently from Central Banks, and you hear it in Washington from the Fed. Two, it should promote responsible financial services innovation. Then three, it should not come at the expense of the integrity of the financial system. I think those three broad pillars can be held, but it's also important to guard against the tendency of what I call monetary airline miles.

Stablecoin innovations that are otherwise riding on closed rails and closed payment systems are going to do very little for protecting and defending the broad range US interest in web three in this open third generation of the internet. The defense of that really hinges on building for broad interoperability and proprietary rails, close payment systems, things that might look very safe, but in the long run are only beneficial to creating a walled garden for payments, are not necessarily going to advance US interest, and broad policy interests around interoperability and fundamental competition and payments and money, and all of these other economic activities.

I think that, to me, is one of the big fights that remains in the policy environment is to really outline and narrate how Web 3.0 is in its dial-up phase, but the technology is not standing still. Some of the adverse external impacts that these early generation technologies are having can all be negated and improved upon because the technologists are consistently building. I think broadly, the policy pillars can be guarded at every level, and the more the policy environment starts to favor that, the better in the long run, and frankly, the better for US economic competitiveness.

Jeremy: I think that's right on with dollar stable coins, clearly, safety and liquidity of funds that back these digital currencies ensuring that mechanisms for digital identity and anti-money laundering can function on public internet infrastructure that is not administered and controlled by a single private corporation or the government. Finding ways to deal with some of these fundamental risks, but doing it in a way which protects and preserves privacy provides the security assurances that blockchains and cryptography present, but also make it difficult for bad actors to thrive.

There's clearly the need for these and, as you were describing, the fundamental market integrity risks that exist and why you have supervised and licensed firms at a federal level. Clearly, there's room here for policy to respond to the growth and the risks that that presents, but in a way, which I think embraces a lot of the other things that we've been talking about. I think, from a concluding thoughts perspective, I know our view is the time is now. This is a pivotal moment. It's a pivotal moment where this is being considered and discussed. It's a pivotal moment, China's putting the ECNY into the hands of a billion WeChat users and I think seeks to take that approach and export it globally.

The US does need to respond but also, it's not just responding, it's actually acknowledging that the open internet and the free market alternatives are actually already thriving and winning. It's sort of established clear and sound policies, let American industry build and compete at internet speed, and win the race, to put the dollar into the hands of every internet user in the world. This is what's available to us. I really deeply hope that leaders in the financial system and the policy community can consider all this, but I'd love, Dante, for your closing thoughts on where we are and where we need to go.

Dante: Indeed, and I think the framing of this as zero-sum would be in many ways a mistake. The framing here is there's a net gain, in the same way that principles like democracy itself, and fundamental trust in the dollar as a global currency is the sum of all the parts. The former Treasury Secretary Hank Paulson wrote a piece in foreign policy that "A digital twin of a flawed currency imports all of the aspects and the institutions and value systems of those institutions in that country."

To assume that we have no need to innovate in the form factor of the dollar and to import it onto the internet in a safe and sound manner that allows for this type of competition in an always-on global economy, where you're in my banking and financial needs don't take breaks, would be a sign of hubris as a country. I think if there's one indictment I have, as someone who spent a career in trying to advance US policy on resilience and technology, and competitiveness, if there's one small indictment, it's to assume that the innovation is going to stand still and wait for us to figure it out. I think that's the one small indictment.

I think, broadly, we're winning this race today. I don't think it's zero-sum, but I do think the President's working group report missed a preamble. It should have included at the outset a preamble that outlined what the opportunities were, but it was very heavy on the risks. I think the Feds report, by contrast on Central Bank digital currencies, is right in not doing it first, but rather getting it right. A part of getting it right in the United States and a part of getting it right and competing globally is to enable a responsible private sector to thrive and to enshrine the value systems of a country and the value systems of its institutions in what that open competition looks like.

Jeremy: Well said. Good conversation. Hopefully for everyone who's listening or watching, informative for you. This is a major national debate and this is a major national issue. It will be exciting to see what unfolds in the coming year.

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