The Stablecoin Trade: With Dan Matuszewski

This week on The Money Movement, we are blessed and excited to have our special guest, legendary crypto trading OG Dan Matuszewski of CMS Holdings, on the show. By way of background, Dan has been deep in trading crypto since 2012, and built a legendary trading desk here with us at Circle, and went on to found and run a proprietary crypto fund CMS Holdings.

Listen to the episode today to hear our conversation with Dan Matuszewski.

Jeremy Allaire: Hello, I'm Jeremy Allaire. This is the Money Movement Show where we explore the issues and ideas driving this brave new world of digital currency and blockchains. This week, we're going to be focused on what I'm calling the Stablecoin trade. The Stablecoin trade is looking at this world of Stablecoins through the lens of really where they came from, which was trading in crypto markets.

The history of Ctablecoins, their role in these digital asset and crypto markets, how they've evolved, their current evolution, and then obviously, where they're going, the broadening role, what all that looks like. Very excited this week to help us navigate this and talk through this. We're joined by Dan Matuszewski. Just a little bit of background. I know Dan from having worked together for years, building circle trade.

Dan is someone who has really been in these crypto markets really, as long as anyone, truly, one of the OGs in trading in this space. Dan has probably held and traded more Stablecoins than almost anyone in the world and has obviously witnessed their explosive growth and so, he's going to be giving us a tremendous perspective and experience. Welcome, Dan.

Dan Matuszewski: Welcome.

Jeremy: Yes, nice to see you.

Dan: I'm glad you [unintelligible 00:01:39]. Yes.

Jeremy: Absolutely. It's great to see you.

Dan: I like your dome thing in the corner there.

Jeremy: Yes, it's--

Dan: [unintelligible 00:01:46] dome. It's nice.

Jeremy: Yes. It's alluding to a few things. Yes, it's good. [laughs] Thanks, man. Awesome. Look, we got a ton we want to cover and we'll get to all that, but I just think it's always fun. I want to have you just share a little bit of your history, your story, how did you arrive into crypto? When did you arrive into crypto? Why did you think it was going to change the world? What brought you here?

Dan: Fair. To be fair, I didn't think it was going to change the world when I first got into it. I was working at a hedge fund called Bay Hill Capital, which is about 45 minutes south of Boston, in the middle of nowhere, it was trading equity options. Basically, let's give 500 names, like all the options that are on that. We had like a ball product that we had built around it. That was my job at the time. I had found out about crypto and crypto [unintelligible 00:02:49] Bitcoin, that was the whole game then. Probably through, I think, it was one of those crazy anarchist blogs, probably like Zero Hedge.

It was a known thing. It lived in the fringes of markets and people knew about it, and it had gotten a lot of like color in the larger financial world when it hit $1, and then when it hit $10. We knew about it, but there was an exchange called BitFloor, which was in New York that blew up. Roman went to work at GDEX, there is a whole history of that thing. Had a maker-taker exchange model. You got paid to provide liquidity.

At the time at the fund, I was at, I specifically dealing with the hedging of the options so trading the stock throughout the day to do that. I had gotten very into the lower-level trading activity with the markets. I was good, like dealing with routing and different order types. I was like, "All right, well, this crypto thing is small. I can trade it because there's no conflict of anything I'm doing in my day job. Maybe I can make a little money doing it." That was really how I got started with this [unintelligible 00:03:50].

Jeremy: Turned out okay?

Dan: No, don't get me wrong [unintelligible 00:03:52].

Jeremy: [laughs]

Dan: I didn't know a ton about Bitcoin before I started trading it. I was like, "All right, well, you can send it." Like I don't know, I had to get like thesis, and then you just go down that rabbit hole. Then you're like, "Well, what is mining?" Then you inevitably lose money, trying to be a miner. Then you try to figure out well like, "Oh, maybe I can move it to this exchange and do this [unintelligible 00:04:11]." That was the gateway drug in the all the larger crypto.

Then I just jumped in full-time. It was cracking, raised some money. I had gotten to know Jesse because I was doing a lot of the volume on cracking at the time, like a significant amount. It was very small, the whole exchange going [unintelligible 00:04:27] doing a tiny amount. I was a portion of it. Then I was like, "All right, well, if I'm going to really do this, there's only a couple places that make sense right now."

The exchange is a clear business model. You're either on miner or you are a developer for one of the software providers or you were working at one of the exchanges. That's still true to this day in the sense that the exchanges is a big business that generates all the revenue in the industry. I went to work for Kraken, was there six months. You guys raised money at the time when [unintelligible 00:04:57]. I was living in Boston still. You guys were down the street from me. You were in four-point. I was over on two street.

Jeremy: Oh, I remember.

Dan: I shot a cold email in and got to know you guys. Then inevitably, made my way over, and then obviously, worked Circle, traded that, built that desk out over the time. Then now, I work with Bobby Cho [unintelligible 00:05:17] DW Julian who was with us at Circle at the end. Then we're just basically trading the equivalent of what like a hedge fund strategy would be, but using principle capital currently so that's like [unintelligible 00:05:30]. I've been doing it now eight years going on. I've seen some things and some iterations.

Jeremy: [laughs] You know where the bodies are buried.

Dan: Some of them.

Jeremy: [laughs] Actually, just on the origin story as we say, like I remember when we first met and we obviously, we were all fired up about like, "Hey, look, this digital currency thing is actually going to become like the way that the payment system works." It's going to be like the way that value moves around and how do we like take fiat, make a digital currency? How do we do all this sort of stuff? Obviously, for you, you were more focused on like, "Hey, look, there's this great opportunity to trade Bitcoin." This is in Boston and this is a good group of people and all of that.

Back in the early days, there was the crypto macro thesis, like by definition, Bitcoin itself is a macro thesis. How early on did you actually buy into, let's just say, the long thesis? The long global macro thesis that says like, "The world it's going to go to shit and this is going to grow as a store of value?"

Dan: Probably way later. What I will say is, the guy who started BAY HILL, this guy Alec, he's like the main trader in the Eurodollar Options pit way back in the day in Chicago. He was there when the Euro got created. I remember him saying this, he's like, "Look, I've seen the birth of a currency." He is like, "I've seen how this all plays out and what has to happen." He's like, "All I know is, if this is going to work out, this thing has to go up tremendously in value." He's like, "This doesn't make any sense where it is currently." He's like, "It's either going to be a zero. This thing's got to go up much higher."

I will say the first time I really thought it could be very large is when he started advocating the possibility of it. Then, you just handicap it. You're like, "All right, well, I think it's got this chance of getting there may be", which is an impossible task, but you start to get the idea of like, "All right, well, then?" Anyway, there's a baseline you got to go." I don't think I really started seeing it as a true form of value storage, or even like this great idea like this is the maybe end result of where money has to go until way later, like 2015, 2016."

You started seeing material amounts of it in dollar terms being kept by counterparties. Then specifically stuff out of Asia where we would see people that were only crypto-native. They just lived their entire balance [unintelligible 00:08:00] was constructed out of it. I was like, "All right, well, there's really people that are doing this. This is going to work. There's a trend there." When it was smaller, I was not buying that thesis yet for a bit.

Jeremy: I've always believed it. [laughs]

Dan: No, I mean like [unintelligible 00:08:19], it's right or it's much more likely to be right now than it was like at that time.

Jeremy: This actually, it's a good segue so 2015, 2016, people in Asia moving into this, moving into Bitcoin, right? Basically, a relatively unfriendly environment in Asia for getting dollars in and out of these exchanges that are over there. Tether is born and it's born out of a need out of Asia more than anything else. I want to get into Tether in a minute and talk about that separately. Just like you saw the birth of Stablecoins. There are obviously, there were a few different attempts at this in the very early stages, the first stages. As a trader, when these very first emerged, what did you think?

Dan: Well, Tether when it first emerged, wasn't really that useful from what I remember. It was around, but nobody was paying in any mind. It really started to get big when Bitfinex lost their banking in Taiwan because they had a couple of times when these banks that they use and they had a ton of activity flowing through there. You could generally interface dollars to trade Bitcoin in Asia via that vehicle. People could keep dollars there too. People talk about this capital flight scenario of people trying to get dollars out of Asia, but most of the demand-driven side for Tether was speculative training activities-

Jeremy: Earlier on.

Dan: -[unintelligible 00:09:58] that.

Jeremy: Earlier on.

Dan: It really is, right? Once Bitfinex got jammed up on the banking side and started to move more into the Tether denominated stuff, that was when it started to become really useful and that shoehorned people into it because they were like, "All right, well, now, I'm dealing with it anyway. I can use it other places." When you started to see, was smaller exchanges that were trying to set up couldn't or wouldn't get at banking, it's hard, right? You know this.

Jeremy: Yes. Absolutely.

Dan: It's a [unintelligible 00:10:24]. It's just a huge regulatory battle and such a heavy headache in the gate that they're like, "All right, well, we can just bootstrap this with using Tether," and that's really likely what happened. People were like, "Well, you can either go get a bank and get a full compliance department to handle that or you can just slap Tether on it [unintelligible 00:10:39].

Jeremy: It's like it was crypto shadow banking for a lot of different market participants to get on these rails. I think obviously, people figured out like, "Wait a minute, these dollars move fast, relatively speaking. If I'm a trader, I can go across exchange, I don't feel like holding working capital and all these places and getting credit lines and all these places." You still might want to do that but just in terms of, as venues grew, which 2017, was this really significant kind of growth in venues and diversification of that obviously continued. The utility value kicked in from a trader perspective, I think, right?

Dan: Yes. Well, once you started using it, you're like, "This is pretty useful," and everybody has that. It, depending on how early you needed to be forced into it, obviously, if you couldn't secure or keep your own banking, you got pretty comfortable with it pretty fast. There's also this size thing, once Tether got to a certain size, people became a lot more comfortable with it because the risk associated with it seems to come much less.

Also, as it starts to be taken on more venues, it's a liquid OTC, it's liquid on screens, you become much more comfortable with it as an asset that you're holding. Tether is unique in the sense that Tether prices as a risk asset as opposed and Dai too but like Tether really of the dollar-based stable points, it's like USDC is just a dollar, right? You're just moving it out, you don't think about it.

Jeremy: [unintelligible 00:12:09]. [chuckles]

Dan: Yes, but Tether has a history of moving, and that matters, and the closer to the peg and the more that's on it, that's the bigger [unintelligible 00:12:19].

Jeremy: Yes, yes. I think for a lot of people who are looking at this for the first time, they're like, "Why would anyone ever want to rely on something like that when it's like we don't even know what's there? We didn't even know what the assets are?" It turned out actually, it was the assets were a mixed bag, still kind of are, but people just didn't care.

Dan: Yes. They definitely don't, they're willing to tolerate a lot of non-optimal transparency on it. I think the reason for that is because there's enough market participants that can create and redeem it at a dollar that it just stays pretty tightly wound to that peg now. [unintelligible 00:13:07] it doesn't matter if you can't directly hold it back to a dollar, as long as there's people that can and it keeps clearly being kept in line, people are less concerned with it. It's good enough and it's taken everywhere so, I don't know. I don't see that changing unless there's a material regulatory action that forces people to rethink that risk.

Jeremy: Yes. We'll come around to that in a few minutes, I want to talk about where we are today and where we're going. Just in this space [unintelligible 00:13:37] because we're going through a little bit of history here. Obviously, that's the first kind of liquid dollar Stablecoin that has been out there. You have these crypto collateralized projects and there've been a bunch of those over the years but Dai being the most prominent one. How do you look at that category and we'll get to USDC in a second but how do you look at that category as a trader, specifically?

Dan: Yes. The problem, not that there's a problem with Dai, the issue with using it as opposed to the dollar ones, is it's much more likely that Dai's going to trade away from its peg than anything else. Just because the creation and redemption mechanisms to keep it in line are less robust than you're going to have for say, Tether or USDC. Those are just going to get smashed in line so much farther. The other always lingering risk with that stuff is that there's still unknown unknowns in that smart contract. We saw this in the crash in March where they liquidate a bunch of CDPs at zero or whatever it was.

There’re still some bugs that have to get shook out of this thing as opposed to Tether in USDC. You just put dollars in the bank, they give you the tokens and it's somewhat centralized. You can trust it a little bit more than some decentralized system where like, "Yes, we don't entirely know how this thing's going to work on a certain stress test." It's like that's the big issue I think that has. Deputy said though, Dai is the most censorship-resistant Stable coin dollar that you have out there. That has some value to it.

Jeremy: Yes. The spectrum are very censorship-resistance and then you have at the other end, something that's regulated, audited, compliant and you know exactly what it is and it's under a regime and supervised and all that stuff, which is where USDC is. I think the key concept here though is specifically as a trader, specifically in what I call the crypto capital market, the market infrastructure layer, the dollar market infrastructure layer, it, obviously, from a trader perspective, you need that redeemability and it needs to be redeemable into actual bank accounts.

Dan: It's going to be liquid and use. We don't do a ton of business in Dai. We do, but we're using Dai usually if it's a last resort, if we're able to use Tether or USDC, that's just how we're going to operate [unintelligible 00:16:05].

Jeremy: Yes, yes, yes. Cool. I guess related to that obviously, you were working closely with us as we launched USDC and had the construct of Center and this. As you know, our vision has been how do you actually create a standard for fiat digital currency and a standard that creates interoperability that eventually is used for payment and settlement really broadly among all the leading FinTech wallets, digital wallets.

It, ultimately, becomes an actual medium of exchange outside of trading but at the same time, as we know, the bootstrap use case for USDC has been trading. Maybe just talk a little bit about your view on a little bit of the origin of USDC because you had a front-row seat and you were helping create those markets. Little bit on the origin there and then I think we'll move into the where it's headed thing.

Dan: Yes. Remember it was like a race, everybody knew there was the PACs product, there was the GUSD and there was UCDC. Like everybody, because you would hear it rippling between all the regulators, all what was going on and we all knew they were coming down the pipe, but it was like, "All right, who's going to hit it first? Who's going to have the product? Who's going to have the iteration of it?"

Yes, look, Tether had a bunch of shocks in it, right, where its D peg, it would trade down to 80 cents or it would trade up rich a couple percent. There was a need in the market or at least a perceived need in the market for a much more pegged Stablecoin out there that would in effect, have to be, not have to, but likely be much more regulated compliant in the version of these a whole second iteration of Stablecoins that you saw come out there.

I think that was what really drove the market demand for it. The idea was that your balances in your exchanges that you natively face your bank accounts with, anyway, should just be a Stablecoin and that should be a seamless thing. There shouldn't be this concept that these dollars are any different if you can just move around and that's super useful. It's an extremely, extremely powerful thing.

Jeremy: [unintelligible 00:18:26].

Dan: As a trader in this ecosystem, we just live in Stablecoins anyway. We try to avoid going back and forth to our bank because money that's kept in the bank is generally less useful than money, we have actionability towards. Also, the interest rates in crypto are just massively better than you're ever going to have in your bank account anyway. Yes, you're taking risk on it but dollars are effectively saying dollars anyway every time.

Jeremy: You basically have like today, whether to take the leading dollar stable points and how they can be deployed, right? You basically have a payment system that works everywhere in the world with final instant irreversible settlement in minutes with very high security with very low cost, relatively speaking? That's great from a trading perspective. Just executing with that but then you actually have these new capital markets like debt markets that effectively have been created in an institutional setting and a retail setting.

You have the retail versions of it and the people who pile into the retail versions of it on exchanges and other DeFi stuff and then you have actual institutional demand for borrowing against this. These are basically, these are internet credit markets that now exist in digital dollars and they're obviously delivering attractive yield. You know we're doing stuff in that now, too?

Dan: Right, right. It's important to know the main reason that there's a very, very high implied interest rate with all of the dollar products that exist in DeFi, but even the bilateral-

Jeremy: Absolutely.

Dan: -[unintelligible 00:20:00] lenders is because there's an incredible demand for leverage from the mostly retail user base that's trading crypto, right?

Jeremy: Yes.

Dan: You see this largest in the implied interest rate via the futures curve. The fact that a September delivery of Bitcoin trades at a pretty nice premium to the current spot price, so you can just buy spot, sell future and collect that difference. You need cash in order to do that. You get this like lending rate that works its way. It's very high right now because like the market's been running up, it's something like 20% for E which is a dollar rate.

You can lend your dollars out for 4% just to September, which is crazy time but that trickles into like people looking to borrow. If I can go borrow $50 million at 4% or 5%, that's great for me because I'm going to net four times that over like the same timeframe. That's what drove the trading entities into borrowing a ton of money and then that sucks the money back into the Stablecoin ecosystem. That's the cycle as I see it, like playing out.

Jeremy: You're seeing effectively, that's like people are staying sticky in the Stablecoin, circulation grows, it's getting deployed and cycled as it were in this different kind of strategies?

Dan: Yes. It stays right. You get the money in and then it just doesn't tend to go the other way as much. We've seen big destruction of like Stablecoins throughout history and their markets and stuff, but like the net is clearly like off the direction of get more money in this ecosystem.

Jeremy: Yes, yes, absolutely. Obviously, from these trading markets, these lending markets, these are obviously big pieces, but I think today we're certainly seeing we have a front-row seat on this. People are starting to discover that this stuff is actually useful for payments and settlement. You can actually, whether you're a business or you're an individual or you're someone who lives in somewhere where you'd rather have dollars.

There's all of these places where people are saying, "Hey, these are actually, like dollars are a good store of value. These digital dollars are actually even a better store of value because they're self-sovereign and you can have the utility value of the internet, but they transition from market infrastructure into payment system." That's obviously, from our perspective, that's the long thesis and there's all this noise around this stuff around the world with like CBDC and our Stablecoins, private sector Stablecoins is going to be effectively permitted as payment systems in the West and the US and so on. What are you thinking on this jump from markets infrastructure to actual payments infrastructure?

Dan: I'll say we probably don't have the ground-zero look at it, but from what we get told anecdotally from the people that are on the large side, you got to realize the Stablecoin markets, they work in the fashion where you have large individuals incorporate that will generate huge blocks of it. They're selling it to secondary brokers who are then the end middlemen that distribute it everywhere. There's this network that's built. We tend to only know the people that play in the larger ticket realm.

What we hear is that specifically, like over the course of this year is that there's been like a pretty large demand for dollars and a lot of regions where it's either hard to hold dollars like structurally or they can't, or if they can, they're worried about like seizure and/or risk of that money sitting in accounts that are visible via [unintelligible 00:23:48]. This is really good for Stablecoins because you can just hold them natively to yourself, you don't have to trust anybody else.

There's been a lot of demand from regions like that for people looking for it [unintelligible 00:23:58]. I think a lot of people try to push Bitcoin as this narrative of this store value. They're like, "Well, you can hold Bitcoin." The reality is people want dollars. They want stability. Bitcoin moves around a ton. This idea that like, "Oh, you can just keep your wealth in that," it's like people can't do that If it like moves around 50, 60% every year and a half. Yes, it has generally gone up. What if it didn't over that eight-month period and you needed that money?

Jeremy: People who have meaningful long-term savings that want to allocate some of that savings into these long-term risk assets, that's a great place for Bitcoin or speculated. For the average person around the world, who's like, "I need a now store of value and that I got to pay my expenses and not have massive appreciation and so on," they're looking at things obviously differently.

Dan: They're looking for dollars. That's what they want. They want to keep their value in dollars stables, they ultimately want them. That's been the big driver, a lot of the new issuance because look, all this new issuance clearly isn't going to crypto. Crypto's having a year, but it's the money getting pushed into this system is orders of magnitude more than we saw in even 2017.

Jeremy: Now, we're definitely, we're witnessing that firsthand, which is pretty cool. We talked about it a bunch. Coming back to like regulation. There's lots of regulation in this space. All kinds of stuff going on, but Stablecoins basically, are now very much a front and center topic. The FSBs doing this stuff, we've been involved Iin that. There's going to be a global regime around private sector Stablecoins, which I think is, ultimately, a really positive thing because of essentially what that means is that like G20 and beyond, private sector Stablecoins are going to be essentially a valid payment system.

A valid infrastructure that you can build financial markets around, that you can build payment systems around, you can do all this stuff around. There's going to be a bunch of rules around what it is to be an issuer, what kind of licensing you need, what kind of ruleset you have to follow, which you know we have self-governance around that now through Center, but there's going to be governance, governance around that over the next year. Do you think that's a huge positive? Do you think that negatively affects things like Tether? What do you think happens there?

Dan: I don't know because it depends on how they treat it. There's a bad world in this too. There's a world where you have to have travel rule level enforcement of every transaction, and then it's like, "Does this even work? How can you even be using this stuff on-chain if everything?" That's definitely the [unintelligible 00:26:53], this is going to be terrible, but then the good could be is like, "All right. As long as you police the on and the off-ramps, everything that happens inside is fine." I don't know where that's going to shake out.

I do not understand enough of how the nuances of those conversations go of where they're trying to land that thing. I would assume you guys are more on the, "All right, if it's coming in out of the banking sector, we got it. Then once it's out, it's like good to go." I can very much see people being like, "What about all these transactions that happen in the middle? Why is that not subject to the same level of oversight that we would do if it were in a traditional banking side?" That concerns me is that they'll use it as a way to block some of this stuff.

The problem is it's all dollars at the end of the day so they do have some jurisdictional ability to take it on, which concerns me. This is why people gravitate sometimes towards Tether is because they assume nobody really knows how this is ever going to play out, that Tether is going to be a much more resistant to changes that potentially move it more towards that more heavily regulated side. That being said, there's still dollars at the end of the day. It's not like they're going to be like on some dip. It's not like their dollars are different than USDC dollars. We'll see how all that plays. That's what scares me is like a user of all these things is like, "How are they going to craft this stuff on it"?

Jeremy: There's a lot of industry work happening around that right now to come up with technical solutions to how you can deal with things like record-keeping on transactions that are happening on public chains but still, enable the seamlessness of the experience and what you're trying to do. I think that my take is that over time, jurisdictional arbitrage on businesses that intermediate crypto dollars is going to be difficult over time.

Dan: Yes.

Jeremy: Yes, which is--

Dan: Exactly. It's that like in-between zone. It's like where you're not big enough, but you're still trying to, that's where I think it's all at risk.

Jeremy: Obviously, you take something like Libra and because the potential systemic scale of it is so large, it's lockdown. It's basically a lockdown network, right?

Dan: Right.

Jeremy: Well, [unintelligible 00:29:09]--

Dan: What I think it's going to be a very interesting one that's going to butt its head is so like part of the thing with dollars that has always stopped dollarization of other areas has been you have to get physical currency right. That slows it down. If this stuff's all digital and there's just dollars whipping around, lower-grade currencies are just going to get Newt if this thing gets enough critical mess. I'm very curious how those places are going to react to this stuff.

Jeremy: Well, this is--

Dan: It's very possible they're like, "No, you can't do this [unintelligible 00:29:40]".

Jeremy: This is like I use the analogy of what happened with over the top is this concept that existed in media communications on the internet, which is basically like there used to be all these regulated firms in every country that handled who could broadcast information, who could publish, who could intermediate like voice conversations. That was a pretty regulated space, very regulated with big national monopolies in some cases, government ran infrastructure in lots of places. Then boom, software on the internet and everything went over the top and anyone could broadcast and anywhere anyone can share information anywhere, anyone can communicate with anyone instantly peer-to-peer, censorship-resistant, all this stuff launched.

The world rolled over in a sense because people were like, "This is just better. I want this, its better. It's faster. It's cheaper. It's easier. I like it." It's almost impossible for these national governments to say, "No, you can't use Skype or no, you can't use Twitter". You've had obviously interventions that have happened. You've got firewalls that are doing stuff. Is the market moving?

Dan: No, no, no.

Jeremy: I'm just kidding. [chuckles] I'm just kidding. I'm joking with you. I was debating with people before we started, while we are talking, are we going to cross 12,000 or 425 on Bitcoin, on Ethereum? I haven't looked so anyway. [laughs]

Dan: [unintelligible 00:31:14].

Jeremy: I also said, they're over the top kind of concept and digital currency is over the top. This is this kind of thing where Stablecoin can exist on the internet and as you said, if I'm in Zimbabwe or I'm in Argentina or pick your place, it has that kind of power. Our people are just going to vote with their smartphones, what economic system they want to participate in, in a sense, right?

Dan: Right. I don't know, this is like, this is all getting out there too, right? This is really just being, what are the knock-on effects? It's just, money is such a more powerful thing than, not that media is not a really important thing, but controlling your money and your ability to police and/or your currency is such an important part-

Jeremy: [unintelligible 00:32:07].

Dan: -of the nation like [unintelligible 00:32:08].

Jeremy: Fiscal policy, taxation, all this [unintelligible 00:32:11], yes.

Dan: Everything changes if suddenly, you don't really have a handle on it, or you're stuck using somebody else's and you didn't want to, I don't know. I don't know how it's going to play.

Jeremy: This is like the big, long macro thesis on digital currency, which is, this is building a new global economic order that is going to be more global digital currency based.

Dan: Right, and is it going to just be dollars or it will be crypto, right? This is the other thing it's like, "Is it really going to be dollars at the end of the day once everybody has dollars?"

Jeremy: Or something synthetic.

Dan: Yes. I don't know. That's way out there and that's cool to make those projections, but I think in the short-term, you're going to have something like you'll definitely have some resistance.

Jeremy: Yes. Yes, yes, for sure. Well, actually, so just maybe actually in the short-term, this is one of the things that we're seeing is big FinTech's, big payment companies, banks, other people are basically waiting into, they're waiting into Stablecoins. One of the really critical things is, and we had this OCC guidance a couple of weeks ago that said, "Hey, banks can custody crypto." That presumably also includes Stablecoins.

We're seeing this very strong engagement now from lots of different players in the traditional "digital payments", FinTech, and even banking sector who are like, they're waiting into this, and including with things USDC, what does that look maybe a year from now where all of a sudden, these rails are just connected up and people can use them in more of the mainstream products that they know and love and use today instead of just their crypto wallet that maybe is a little bit more trading-focused?

Dan: It's going to be great, right? If all this stuff is actually connected and you're able to whip dollars around [unintelligible 00:33:59], it's going to be so much better. The current experience is terrible. If I got money in Bank of America and, I got to give it to somebody in PayPal. It's like, yes, you can do it but it's crappier than it needs to be and it's weird because it's one of these things that technology just never-


Jeremy: [unintelligible 00:34:19]? [laughs]

Dan: -yes, like, "Why can't I do it?" I could send money from finance to [unintelligible 00:34:24] and nobody cares. It's like, "Why is that so easy yet, two mega-companies that have hundreds of billions in revenue can't?" I don't know. It's clearly [unintelligible 00:34:35]-

Jeremy: Very close.

Dan: -the other way.

Jeremy: We're getting a lot better.

Dan: There's no chance it doesn't get there. It's like, "Who's going to push it so that it becomes standard and everybody has to have it?"

Jeremy: We're working on it.

Dan: No, it's going to be so much better. I say this all the time, I was like, "It would be amazing to just have a bank account that was USDC plugged in." If I could just use my Bank of America account and also I got to send 50,000 USDC somewhere, boom, just like that. That would be such a powerful, useful value add [unintelligible 00:35:06].

Jeremy: Maybe you could tap some crypto yields at the same time.

Dan: Yes, and that's probably going to take a little more. I'm sure they're risk and compliance guys are going to like, "It took them this long to get comfy on that side, let alone like--" What do you do?

Jeremy: Most young people, when you, whatever demand deposit account, you're a grown man with a family, Dan, but most young people with a demand deposit account, that's Square Cash, Venmo, Revolut, PayPal, that kind of thing. The front edge of banking is FinTech products and Neobank type products. Maybe they'll be the first to tip the scales.

Dan: That makes sense. Probably Square's the furthest along [unintelligible 00:35:49].

Jeremy: They're already doing crypto.

Dan: Right. They have Bitcoin, you can go in and out, it's not much of a leap to go like, "Well, how do you go from there to dollars?" Conceivably, they've already taken care of defraud issues on the Bitcoin side. Dollar stable points not like a ton of difference. Yes, that would be good to have them be the first person to do it. Yes.

Jeremy: We'll see that.

Dan: It'd be useful. I would 100% switch all my banking over whoever does that.

Jeremy: Well, tying into the more of the crypto trading thesis, undergirding all this stuff are blockchains that can actually run tokens in smart contracts and that part of the, obviously, the E-growth, there's a lot of things driving that, but part of it is Stablecoins are now and actual will killer app. Majority of transactions on chains are Stablecoin transactions. When you light this stuff up and you start lighting it up in consumer use cases, people go, "Oh, wow, okay. This is consumer scale."

Obviously, there's scalability issues, throughput issues, cost issues, all the stuff that's happening. There really is super intense competition for third-generation change that could actually scale. That's, obviously, a place where people are taking positions. We're doing multi-chain with USDC largely because we see that there's a lot of innovation happening in terms of scalability if you want to have apps and services that have tens or hundreds of millions of users like pushing on-chain transactions, you can't do that on Ethereum today.

Dan: Right. Yes, it's choking under the current load and stuff's already really expensive. I agree. It's unclear if it's going to be E 2.0, whatever and whatever that looks, or if it's going to be some other second-generation, higher throughput performance like [unintelligible 00:37:40].

Jeremy: Right, or a multi-chain, a multi-chain world. You're going to have interoperability and have a standard that seamlessly across those?

Dan: Yes. I definitely think it's going to be a multi-world. It's just, it's unlikely that you're going to be able to get everybody to coagulate around one, especially because it's so [unintelligible 00:37:59] first right now.

Jeremy: Yes. It's definitely our bet. Cool. I think we're going to run up on time here, but this couple kind of high-level things. Your broader view, right now as a trader in the crypto markets, it is their own world. You've got all these different tokens, you could decide what you want about the different projects and the integrity and/or quality or meaningful value of those but you have this completely nascent, pure-play digital asset market.

As a market infrastructure like we were just talking about, it's got huge advantages over what we think of as classic market infrastructure. Do you think do these merge? Do all financial assets eventually merge into this space? Do they converge over time? Is the buildout that's happening in crypto markets actually the buildout of the new financial markets or do you think these are just parallel for a really long time?

Dan: I would parallel for a really long time because I don't think traditional assets and settlement clearing, you don't think about it. You don't go and trade a bunch of stocks and then be like, "Oh, where is it posted and, what is the mar--?” You just don't. It's just you push the button and it's done, it's large, I don't want to say it's a solve problem, but there's not a pain point there where people are like, "Well, I need to own my shares of Apple and have them custody local." It's just not a thing.

I don't see a ton of push from that community to suck in any of the larger thesis that are going on in digital assets. I see some world way in the future where they're like, "This is silly, why do we have these two things running independently?" [unintelligible 00:39:54] do you think you have much more likely is your interactive brokers' account let you just deposit USDC. That'd be a bridge way to come through. I just--

Jeremy: As a payment settlement medium that obviously connects first, right?

Dan: Yes. I think that's going to be it for a while because it's just, it's not a pain point for a lot of people for most of the major asset classes, as far as I know, they go on. Maybe portions of it that are just busted from a back-office side and they'll pull it in. This was the whole enterprise block-chain push of like four or five years ago. That may bear fruit for a couple of things like. In aggregate, I don't think guys are sitting around being like, "Thank God, we can finally use like X block-chain to settle our [unintelligible 00:40:33]."

Jeremy: Yes, [unintelligible 00:40:34]. Certainly, in that, in that realm. I guess the areas like can you open up liquidity on things that in the past didn't have the option for that? I mean, even l today, front page, Wall Street Journal's got the growth in essentially fractional buying of shares of Amazon and Tesla opening up on brokerages and stuff. Basically, slicing and dicing things in ways that are transmittable, settable, by a global retail base.

Dan: Oh, it'd be great. Look, I mean, if you think about it in terms of like the fact that you could open up an asset class to a larger retail worldwide participation, yes, that's monstrous. There's just regulatory, I don't see that happening anytime. Look, we can't even get an ETF, let alone-- It's just so hostile-


Jeremy: [unintelligible 00:41:25] I mean [unintelligible 00:41:27]--

Dan: -[unintelligible 00:41:27] old school products.

Jeremy: Yes, look, I believe that the inertia of the existing apparatus is very significant. I think there is this interesting phenomenon, where basically the COVID effect, there's this things accelerate in certain areas. E-commerce just grew in a quarter, the amount it grew over the last 10 years. It was just poow, crazy, and you see all the numbers of a lot of these largest players out there.

Basically, do governments say shit? We need to be at the front edge of what this next technological shifts are, and we're going to lean into it because we have to, because that's what companies need to do right now, what societies need to do right now. Like there's a bigger like, "You know what? We got to stop hanging on to the past and just accelerate because we got to get to just more efficiency because that's what happens when you have global depression."

Dan: Maybe, I don't really see any crypto, though. If anything, it's just being ignored. People are just stop talking about Libra. That conversation just died. Everybody's focusing on other stuff from the regulatory side of it. I don't know, I would say--

Jeremy: I'm talking over several years here. I'm not talking about [unintelligible 00:42:56].

Dan: Oh. I would say if there's anything is doing that is the fact that China's pushing it forward. Nothing is a better incentive to get your regulatory act together than some other country potentially getting it together. I think that matters way more. I don't know, the COVID stuff like I just [unintelligible 00:43:12] payments were a pain point for people. They even managed to give everybody those checks. That seemed like an impossible Herculean task at the time. I don't know, I'm not sure that's where they're trying to push. I think they are looking at it like the whole work from home angle where they're like, "All right, this is a thing. How do people do we fix this?" Companies obviously, had to deal with that internally. I don't know. I'm clear that the payments was like, "All right, we got to fix this".

Jeremy: Yes, yes. It's interesting. Maybe to rap a little bit, give us your long thesis right now.

Dan: On [unintelligible 00:43:51] points are-

Jeremy: [unintelligible 00:43:51].

Dan: -on crypto. In crypto, I mean, look, I'm a believer in the asset because the hole will grow over time. I think if you're out there punching individual bets on names, that's probably not a good plan. liquidity will continue to aggregate towards the largest most used pieces of the pie. Look, there's clearly demand worldwide for like assets that are like, specifically like shielded not only from inflation but from their own governments in some capacity.

I don't see that trend going the other direction anytime soon. You're seeing a huge rally in metals, too. That's not random. I think it's continues going on and there's a big push from the Fed to even just change their thought process and inflation entirely. I don't know. I think this has got a bid in it until that changes in the world. Yes, I don't know.

Jeremy: Okay, so three years, total market cap of fiat back digital dollar Stablecoins?

Dan: Oh, so what we at right now? What's the number [unintelligible 00:44:53]?

Jeremy: 12 billion. 12 billion.

Dan: 12 billion. I think three years, I think you'll crack 50.

Jeremy: Crack 50?

Dan: Yes, but at some point, there's a number, right? There's a number of the dollars in Stablecoins, that it look like tips, there's going to be a regulatory conversation. If that number, I feel like hits 25 maybe 30, there's going to be like, "Hey, can you pause this for a sec? We have to talk about this?"

Jeremy: Actually, those conversations are happening.

Dan: Yes, so it's getting there. The trend is in that direction. I am also cognizant of it, it isn't going to just be like, "Oh, like straight line." There's going to be some things in between.

Jeremy: How long until it's a trillion dollars in Stablecoins?

Dan: Well, truly that's a lot. How much cash is there even in the US system?

Jeremy: Well, either in cash but you also have money markets, global money markets are what? 5 trillion?

Dan: I think you got 10 years for a trillion.

Jeremy: 10 years for a trillion. I'm going to stick around for that.

Dan: Yes, [unintelligible 00:45:50] long in the scheme of things, bitcoins only got 10 years on it.

Jeremy: We've been at this seven, eight years so [unintelligible 00:45:56].

Dan: Yes, [unintelligible 00:45:57] 10 years on that. That's a lot of value.

Jeremy: Yes. We'll see. I think it's faster. [laughs]

Dan: Hey, I love to be proved wrong.

Jeremy: Awesome, Dan, such an awesome conversation, so great to have you hanging out here today. Thank you so much.

Dan: Thank you for having me.

Jeremy: Yes, absolutely. Some awesome perspective from Dan. Really, obviously, just incredible view on the history of all this and what's going on and where it's going. Next week, we're going to turn our attention back to this rising role, a lot of what we talked about here, this rising role of digital dollar Stablecoins in the mainstream financial system. Several weeks ago, as mentioned, the acting head of the OCC, the largest regulator of national banks in the United States, Brian Brooks, issued guidance that said that banks, national banks in the United States could hold, in custody, cryptocurrency, crypto assets on behalf of their customers.

Question I'm asking is, you know, what might this mean for banks and financial institutions adopting Stablecoins? Next week, very excited to have, as a special guest, Brian Brooks, to talk about the role of the digital dollar and digital dollar Stablecoins[unintelligible 00:46:50] in the US financial system. We're going to get his view on the latest OCC guidance and what this means for crypto dollars in the banking system, how Stablecoins can drive court payment systems innovation in the US and globally. Until next time, stay well, stay safe and stay informed. Thank you.


[00:47:53] [END OF AUDIO]

Jeremy Allaire
Co-Founder, CEO & Chairman at Circle
Dan Matuszewski
Partner, CMS Holdings

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