Stablecoins & the Future of the Financial System with Heath Tarbert* of Circle

Heath: What's at stake in my view is the very future of the financial system and sort of America's role in it.

Jeremy: Hi, I'm Jeremy Allaire and welcome to The Money Movement. We're kicking off a new season here and I'm very excited to welcome our guest, Heath Tarbert, Chief Legal Officer and Head of Corporate Affairs at Circle. Heath, welcome to the show.

Heath: Great to be here, Jeremy.

Jeremy: I wanted to have a setting that was really appropriate for you for this episode. So we-

Heath: Well, you've outdone yourself. This is a marvelous place that I'm a big fan, of course, of The Money Movement, even before joining Circle. So I don't know what episode we're up to, but it's quite a bit.

Jeremy: Well, I don't know what it is, it's sort of maybe in the eighties. I'm really excited about this conversation for a whole bunch of different reasons. Obviously we've had a chance to work together and obviously was aware of your work well before you joined Circle as well. And actually that's maybe a great place to start the conversation, which is just for everyone who's tuning in, just a little bit about your journey through your career. You've had an amazing career. How you found yourself going down the rabbit hole of this whole technology space and your interest there and just maybe set the stage with that.

Heath: Sure. I guess the common motif throughout my career has been sort of the intersection of law, finance, policy, and technology. Obviously went through undergrad, studied accounting and finance, onto law school, both here in the US and in the UK, came out and practiced corporate law for a few years. And then it became clear that I really wanted to do more policy and get sort of a DC type practice. So I was fortunate enough to clerk for the US court of appeals for the DC circuit and then the US Supreme court. And that left me, you know, my early thirties. And so I was like, what should I do next? So I decided to join what is perhaps one of the most prestigious and also lowest paying law firms in the world, which is the White House counsel's office. So it's about.

Jeremy: I didn't know that they weren't that good.

Heath: Its government pays about 15 lawyers, one client, the president of the United States, and I arrive in August of 2008. Well, they had looked at my bio and said, well, you've been at, you've had a finance background, corporate law. We're going to give you the financial markets portfolio. Every associate council, the president sort of took a different piece of the government, whether it be homeland security, health and human services, the defense department. So I took the financial markets portfolio. And famously they said, but don't worry, Heath. It's at the end of an administration, the end of the Bush administration, right? Nothing's likely to happen.

Jeremy: It's August, 2008.

Heath: It is August, 2008. So at that point, of course, a few days into it, Fannie and Freddie are put into conservatorship, then the Lehman fails. And essentially I become the White House Associate Counsel on the Financial Crisis, full time, 15 hours a day. And it was an exhilarating experience. But at that point, I sort of said to myself, well, this is where I want to spend the next couple of days. In finance. In, at least in financial regulation, preventing future crises, dealing with that, I think that was sort of a watershed event for me personally and professionally. I went on to be special counsel of the Senate banking committee during the Dodd-Frank legislation.

I then went into private practice for representing approximately 200 different clients, financial infrastructures, banks, non-bank institutions all over the world in applying financial regulation. And then in 2017, in the last administration was nominated and confirmed to be assistant secretary of the treasury for international markets. And then subsequently the 14th chair of the CFTC, the commodity futures trading commission. And it was really in those last couple of jobs where I first sort of really got into understanding digital assets, public blockchains and really seeing their promise. So this has been an area where I have been fascinated for the last five years or so, and the opportunity to work for a firm like Circle was just so unparalleled that I couldn't pass it up.

Jeremy: Well, we are very grateful for that. It's an amazing journey, obviously. And I think that last vantage point in public service where you're, you know, you're looking at the very fundamental structure of the way the markets work or the way the international financial system is structured. And I was living a parallel life at the time. And I remember going and presenting to the FSB and I think you were represented in the US. At the FSB around the same time. And this dialogue around stablecoins had started and we had obviously been big believers in that for a very long time and what that could be. But it was, it took a wake up call like Libra to, you know, or a big tech saying we're going to do something and it's called a stablecoin for everyone to tune in. But now it really feels like the whole dialogue on this has evolved a lot. I mean, the understanding within the policymaking community is obviously very different. The situation has evolved a lot. We're going to talk a bunch about that in today's program as well.

But I want to get back to, let's say you're sitting in the seat at US Treasury and you're looking at the international affairs dimension and really you're kind of like. You represent the dollar around the world, right? You're out there dealing with governments, dealing with economies, dealing with the dollar. And here we are today, and there's a lot of discussion about the role of the dollar in the world. Is the dollar in decline? There's alternative payment system. I think it's at the core, obviously, of what we do. And obviously, as part of your professional responsibilities now, you're thinking about this a lot. But maybe just stepping away, what's at stake here? What's at stake for the dollar? Why are digital dollars so important? And what does this country need to be thinking about right now?

Heath: Yeah, what's at stake, in my view, is the very future of the financial system and America's role in it. It's interesting people understand the dollar to be the world's reserve currency. But I think very few Americans actually understand and grasp the importance of that. So over the last 60 years, in fact, I think it was the French finance minister back in the 1960s or 70s that called it the quote unquote exorbitant privilege. That the United States had a major privilege over every other country because the dollar is the world's reserve currency. So if you look back. Funding, social security, our education system, our infrastructure, all of that benefits through lower interest rates, all things being equal because the dollar is the world's reserve currency. It translates into American families as far as our household mortgages are lower. And it allows us to project power overseas, finance our military. So the dollar, I would say the other thing it does is because it is the world's number one medium of exchange, it makes it easier to buy and sell American goods. And so why is that interesting? It's interesting because the dollar plays a much bigger role vis-a-vis the world economy and transaction than the United States' GDP vis-a-vis the GDP of the rest of the world.

So the dollar plays this outside role. And it's critical from my vantage point, both as a private citizen, but certainly when I was in government, that we want to continue to keep that playing that role. Stablecoins. Interestingly enough. Private issued dollar-backed stablecoins are a way to basically get dollars to places where there's a real critical legitimate need, where currently dollars just for whatever reason can't go due to the banking system rails in those countries. So there's this insatiable need for dollars. Payment stablecoins allows that to happen and therefore help secure the dollar's places reserve currency. The other thing that I was thinking about at Treasury were the larger geopolitical and national security implications of Web 3 in particular as that was emerging. Other countries, our strategic competitors, want to win in Web 3. The currency of Web 3 is digital assets, particularly digital dollars or digital fiat currencies. That's another reason why dollar-backed stablecoins are so critical to America's future.

Jeremy: It resonates, obviously, with me. And I asked this question, would the United States prefer to have the currency of the internet be the dollar or the euro or the yuan, the digital dollar, digital euro, digital yuan? And I think, obviously, we believe the digital dollar is critical for all the reasons that you outline. And on top of that, obviously, there's technical innovation that's happening here. The competition amongst currencies is a technological competition. And in some ways, the private sector and what's happening with blockchain technology is creating a literal new form factor for currency and new superpowers, programmability, and all these other things that just are part of, how do you upgrade the medium of exchange to be better? And so we need America to win in that and advance that and be a leader in that. And so it leads into my next question, which is industry, technology and financial industry and just industry broadly in the United States market-driven, free market-driven system. Industry drives ahead and is inventing and pushing and creating and innovating.
And obviously, in the internet and technology space, that's been pretty profound. I mean, like, huge sweeping changes through major industries. And here we are now where the industry, the new financial technology-driven industry is driving. And then you have an incumbent industry, which is in some ways defending its business. But then at the regulatory level, how do you balance the equities of, we've got to keep this existing system safe and sound and so on, but also wanting to see that innovation flourish? And I think crucially, in your last role as chairman of the CFTC, you had to deal with this intersection of industry and regulation. It's the heart of that job in some ways is reconciling what's happening with, in that case, many industries that care about commodities trading and so on. But I'd love to get your thoughts on that. How do industry and regulators work together? Because we get things done when we work together, mentality as opposed to us versus them or this oppositional thinking. And so how do you think about the oppositional thinking versus the how do we get things done together between industry and regulators?

Heath: Yeah, so I'd say first of all, there has to be an open dialogue and a robust dialogue and a frank dialogue between regulators and the industry. Now, what should each side be focused on and do? Well, first, let me start with regulators, since I came from a regulator a while back. Regulators need to understand that they can't stop technology. This is going to happen. It's kind of like a river. You can help change and direct its course, but you can't stop it. So you can focus on directing it to make sure there's consumer protection, financial stability risk or address, and all sorts of other regulatory objectives. But it's critical that regulators are proactive and not reactive. Enforcement is no substitute for rulemaking in terms of providing guidance to the industry. And then I would also say that regulators need to understand that the real key is to make sure that similar risk are regulated similarly. So it's the question that you ask about traditional finance versus the new finance. If the risks are very similar, then you should try to ensure that they're dealt with similarly so you don't have regulatory arbitrage. But the real key, I think, is making sure that you are technologically neutral as a regulator and you have certain regulatory objectives. But otherwise, you let the industry continue to innovate.

So what should industry be doing? In some ways for industry, the challenge is not figuring out what the law or regulations are today. It's figuring out what they're going to be three to five years from now and getting there first and shaping that. And one of the reasons that I was attracted to Circle is I feel like Circle has done that as far as not all stablecoins are equal. Some are unstable and some are less stable than others. Circle has said, you have said, we want transparency. We want robust reserves. We want all of these features to be out there in the market that other market participants aren't necessarily getting behind because ultimately, it's going to lead to confidence and et cetera. And my view is it's going to lead to regulation in those areas as well. In other words, if industry steps forward, gets ahead of regulation and says, this is what sound regulation looks like. This is what the market needs to be. Not a race to the bottom, but a solid sustainable market. I believe the regulators will come along with it.

Jeremy: It makes a lot of sense. I've been thinking about this a little bit, or a lot, just in terms of the degree to which the technology innovators, as they build, are really taking into consideration risks more deeply. It's sort of a risk management mentality. That pervades the way you're innovating, even without someone officially saying you can or can't do this or you have to do this this way, which is sort of the perception of what regulation is. It's sort of very prescriptive. It doesn't have to be. But even just taking that view, you build confidence in it, and you set a standard. And then actually, the market establishes trust. And then that conveys into, ultimately, policy that reflects the practices in some ways. And there's sort of this iterative process to some of that. And in some ways, that's what's happening around the world. We've had 10 plus years of, say, the blockchain industry, the first, I think, significant companies really starting 10 or 11 years ago, and wave after wave of talking about it, and various types of involvement. And now here we are 10 years into this. And globally, there's just an incredible amount of policy. And in some ways, that policy is a response to the very significant progress that industry has made in some ways.

And a lot of disasters that the industry has produced as well. So there's both, hey, there's something durable, sustainable here that needs to fit into the system. And then there's challenges that have to get addressed and manage. But if you're looking at this, again, taking a global lens now, not just a US lens, what are you seeing from a policy perspective globally around digital currency, and digital assets, and this whole infrastructure category?

Heath: Yeah, so I'd say five years ago, The regulators sitting around the table in Basel were saying, what the hell is this? I think a couple more years later, probably into the crypto winter, they were saying, we're not sure if we like this or not. Now I feel like we've reached a point where regulators and policymakers are saying, look, this has a lot of promise and some of it has a lot of peril. And there's good and there's bad. And let's actually now go ahead and start to regulate this sector. So you're seeing many countries around the world come up with regimes, particularly in the area of stablecoins, but other aspects of crypto as well. And also they're focusing on the real world utility. I think that's a key distinction that people are seeing today. Five years ago, people were saying, look, this is really interesting stuff. The cryptology is fascinating. It's neat, but it's kind of like a hobby horse. Does this stuff have any value whatsoever? I think now you're starting to see real world utility in much of this. And that is what's driving regulators to say, okay, this is really important. It's going to happen. It has real world ramifications. Yeah. Let's regulate it.

Jeremy: It's fascinating, right? There's this kind of triangulation of like the technical innovators over here, the questioning, how do we deal with this? And then the market adopting major companies adopting and a validation of sorts that then is like, wow, if big entities are going to move into this in a major way, we better regulate this. If this is going to be used by major entities, major regulated entities, big technology companies, like this could get really big, really fast. And so it sort of creates a little bit of pressure on people. I'm referring to 2024 as the year that digital asset regulation is truly happening everywhere. Right. It's just sort of happening all over the world. It's an interesting perspective. And other topic, I think it's related to this is your views on free market competition, market driven outcomes, technology innovation, all of these forces, hallmarks of, I think, the American way of operating and this high risk financial sphere and the tension and the intersection between that in a world where 114 governments are talking about CBDCs, where the government's going to get into R&D or in various types of ways, the role of the sector, where are the swim lanes and comes back to really one of the earliest questions, which is how does the United States win as well?

Heath: Look, at a high level, I would say the United States wins the way it's always won, which is by enabling sound regulation, but really harnessing the power of the free enterprise system and the innovation that it brings. It's what led the United States to defeat the Soviet Union. And I think it's going to lead the United States to continue to be paramount in the world of this century. So then as a regulator, how do you think about that? Well, my view has been if you look at the securities markets, the derivatives markets where I was, the banking markets, all of those markets have sound regulation. But in order to succeed, it's not just relying on government regulation, but they figure out a way to parallel government attributes of regulation with market discipline and the power of the private sector and self-regulation in some cases.

So I think in this arena, I think you want to be as technologically neutral as possible, provided the technology does meet the various attributes that are specified in the regulation. But ultimately, I think you want to unleash that innovation and you want to have, if at all possible, the degree of transparency and other aspects that allow the market to discipline this section itself. So government plays a role, but it doesn't play the only role. If you rely on government alone, my view is that STEM hopes for a soundly regulated market.

Jeremy: What's fascinating to watch even in our industry where regulatory clarity is to like to use the phrase, right? As you have that, then the market says, okay, we're here. We're ready to compete. And companies are saying, I'm going to enter this market. And there's going to be robust competition. And so set the guardrails, let the market compete, iterate.

Heath: That's right.

Jeremy: I think exploring another dimension of this topic is the appropriate places for regulation to kind of intersect with technology. And I think you've used the phrase, like, technology neutral, kind of same risks, same rules. These are principles that are often talked about. But in the case of blockchain technology, it feels to me like oftentimes, because blockchain technology has been so closely coupled with what is perceived to be financial activity, people speculating on digital tokens, the use of blockchain networks for financial types of activities, it seems to me that there's a real risk here. And this gets to, I think, the heart of some of the regulatory questions. There's a real risk here that. Because this technology layer is used for financial applications, that there's an impetus to want to specifically regulate the technology itself. My explanation about blockchains is this is just network infrastructure. This is no different than the servers and the internet service providers and the routers and the infrastructure and the software operating systems and the data centers that we have that are the cloud, that are the things that sit behind our e-commerce applications, our medical applications, our education applications, our AI applications, all these applications, including our online banking and payment systems that use internet technology. We have financial applications that run on the internet, but regulators are not saying, I'm going to regulate Comcast for money transmission or whatever the relevant analogy is. How do you think about, from a legal perspective in some ways, this separation between internet infrastructure and the activities on it? How do you think the policy world and the regulatory world should be thinking about that issue? I think it's going to be a pressing one. As large-scale financial apps get deployed on this next generation of the internet, we have to figure out where do those lines get drawn and how does blockchain infrastructure, how can that flourish without getting overly burdensome regulation on the tech itself?

Heath: Yeah, no. I mean, it's interesting, of course, because, and there aren't any easy answers, but I'll try to give you my high-level views. You've got the internet and you've got traditional finance and they're sort of merged in the blockchain. So the question is, where does the law of the internet end and the law of financial regulation end? And it's all together there. I mean, what I would say is some of this is going to be common sense. So I think about wallets, electronic wallets. Now, this is my wallet, my old wallet, and no one would say the manufacturer of this leather wallet should be subject to financial regulation. Even though the wallet is obviously critical to the way that I transact and it's part of the financial services system in a larger sense, I would think about it that way and say, well, if you're just providing technology to create a wallet, then you are not providing a regulated financial service.

If your wallet you actually control and you have the public key or the private key associated with it, then you're arguably not in the wallet manufacturing business, you're in the custody business. That's a traditional financial activity, right? So I think we're going to have to use a lot of common sense and sort of take the lessons of the past and try to apply them in this new world of blockchain without taking things too far in one direction or the other and not going sort of saying, well, it's free speech and then on the other extreme, not saying anything that touches the blockchain and the blockchain itself must be a financial activity.

Jeremy: That makes a lot of sense to me. I think the world is changing so fast and the evolution of a lot of internet infrastructure came out of a very classical libertarian view of speech, of decentralized nature, of infrastructure. And there are really powerful aspects of that, what I kind of think of as the DNA of the internet, that distributed decentralized, open source, open intellectual property world. It's very, very powerful. And actually, I would argue creates more resilient infrastructure than if you hired an army of people to go try and build something that's closed.

Heath: And we have real world examples of that, right? Look at certain countries that are our strategic competitors that have closed systems and that are trying to create their own central bank digital currencies complete with surveillance tools and everything else. And so there is a very big threat of an undemocratic Web 3 that I think everyone needs to be aware of.

Jeremy: Yeah, absolutely. As I like to say, cryptography cuts both wings, right? It can be a tool of freedom and privacy and it can be a tool of surveillance. And so the crypto of it all, it unlocks a lot and unlocks security. Privacy allows you to have proofs, proofs of who you are or proofs of other things. It's an incredible technology and it can be applied for good and evil. It can be applied in a lot of different ways as well. Maybe a segue into the last big theme I want to chat about, which is, of course, the future. You've recently joined me as part of the leadership team at Circle and you've had this incredible career in many facets over a long period of time interacting with and intersecting with the traditional financial system, the role of governments. What do you envision? What do you think is possible in the next five to 10 years? How can the world be better? What can we accomplish if we get things right on all these different dimensions?

Heath: So one of the things I love about this podcast is it's called The Money Movement and it's really in double meaning. There's the actual movement of money and then there is the political, economic, philosophical movement about the future of money. In both of those things, I think you're going to see potentially dramatic changes. So on the first, you're going to see a lot more proliferation of digital currencies, particularly, I think, starting with stablecoins first. You've got back stablecoins. The utility case is very much there. And then, of course, with the permeation of those instruments, you're going to see more smart contracts. You're going to see more run of the mill, plain vanilla type of transactions, I think, going to the public blockchains.

Jeremy: Yes.

Heath: And using things like USDC and other stable payment, stablecoins as sort of the basis of that. I think you may also see additional types of digital assets that are not stablecoins, but it could become an alternative asset class. I think people are still in the wake of the crypto winter, still thinking about, well, what's its correlation? But it could very well be that there's continued investment in that area. And then I also think with AI, we haven't talked about that. That's probably its own podcast. But in some ways, digital dollars and other digital assets are sort of the native currency to AI.

Jeremy: Of course.

Heath: So I would put a pin in that for now. You got to do an episode on that. And then moving to the other connotation of movement, I think we're going to have a robust public debate on the future of money, and particularly, I think, starting with things like CBDCs. I think Americans are wary and should be wary of a government-controlled currency that enables surveillance at levels heretofore never seen. And the privacy, the civil liberty concerns on both the right and the left of what that means. Now, there may be a way to find a happy medium there, where maybe you have a wholesale CBDC. But I think we're going to have this debate not only in the United States. You're seeing candidates now, presidential candidates talking about these aspects of it. But you're also seeing other Western democracies debated as well, as you see countries like China and Russia develop there. So I feel like there's going to be a great discussion, a robust discussion. Also the future of the dollar. What's the role of the central bank? So I feel like we're going to have a dialogue about the future of money that we haven't had in the last 60 years.

Jeremy: Yeah. Thank you. I think so too. I mean, as you know from other conversations we've had, I think there's also like a deeper set of philosophical questions about what is the right structure for how risk is taken in the financial system, the role of the payment system and the base money versus lending and where does credit happen, leverage in the system.

These have been these things that have been part of boom and bust cycles and financial And there has not been, in my view, a robust debate about full reserve money. If you have an internet financial system and you have full reserve money and you have super high velocity money that's programmable, could you actually envision and create a new credit delivery system that meets the goal of stimulating the economy, transforming the time value of money, which was the sort of base there, but make it safer? So that's a big discussion. No one wants to talk about it because I don't think they realize how significant an issue this is, but it's one that we think about, obviously.

Heath: No, it absolutely is. And banks obviously play a special role and always have in our economy. That's why they're regulated as such, but there is a government safety net there. And because there's an inherent risk there, a maturity mismatch, that gives rise to both discount window access as well as deposit insurance. But interestingly enough, even before we get to the internet and Web 3 and sort of that, over the last 10 to 15 years, you've seen a migration of credit intermediation go from the bank sector to the non-bank sector. Private credit. Private credit markets, right? So in some ways, we're already heading in that direction. And in many ways, this could be the next chapter.

Jeremy: Yeah. I have another episode where I talk about long tail capital markets and just like we infinite marketplace of goods and services through Amazon or Alibaba, and we have an infinite marketplace of content and information through Google and information services. Might we have an infinite marketplace of capital that can find and match the people who need it from the people who have it in an efficient and automated way as we have these giant marketplaces and other things. And that's very different than the capital market that we have today.

Heath: Without having large systemically financial institutions sitting in the middle of it. That are potentially susceptible to financial instability risk.

Jeremy: Exactly right. Much to work on and really great conversation. Super happy to have you on The Money Movement. Super happy to be working together. And thank you, Heath.

Heath: Proud to be here, Jeremy. Thank you so much.