The Money Movement / Episode 23

Episode 23

The Crypto Dollar Economy

Summary & Key Takeaways

Full Transcript

Join us as Jeremy discusses the crypto dollar economy with Matthew Walsh and Nic Carter of Castle Island Ventures. Nic and Matt have been highly active in the crypto finance space, and tracking closely the macro themes around digital dollar stablecoins and the role they play in the broader crypto economy.

In their recently published in-depth report, Crypto Dollars: The Story So Far, Nic and Matt explore the realm and implications of this breakthrough innovation in models of money and payments. We'll explore all of this in-depth this Friday!

Crypto Dollars | The Story So Far - https://www.castleisland.vc/cryptodollars

About the show
The global economy is experiencing unprecedented challenges and change. Business leaders everywhere are grappling with how to transform their companies to become more digital, resilient and efficient. As we face this change, a new global movement is building around the promise of digital currencies and blockchains — forming a new architecture for the global economy and creating new opportunities for companies everywhere. The Money Movement explores and chronicles the issues and ideas driving this brave new world of digital money.

The Money Movement is brought to you by Circle. Our mission is to raise global economic prosperity through programmable internet commerce. Learn more about Circle Business Accounts and Platform APIs at circle.com.


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Jeremy Allaire: Hello, I'm Jeremy alair and this is the money movement, a show where we explore the issues and ideas with this brave new world of digital currency and blockchains

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Jeremy Allaire: This week we are going to continue on this theme of digital dollars and you know this is a female we've been exploring now for months.

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Jeremy Allaire: And as you're going to hear today. We're, we're going to talk about crypto dollars not digital dollars and we'll talk about

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Jeremy Allaire: What the differences and meaning behind that. But obviously last week and and in earlier episodes.

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Jeremy Allaire: We've talked about stable coins extensively. We've talked about future central bank digital currency models hybrid central bank digital currency models.

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Jeremy Allaire: We've explored the role of the private sector versus, you know, governments operating under and administering some of this themselves. What is that balance instead of trade offs.

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Jeremy Allaire: But this week, we're going to turn our attention.

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Jeremy Allaire: To another lens on this what castle island.

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Jeremy Allaire: ventures co founders Nick Carter and Matthew Walsh dub crypto dollars.

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Jeremy Allaire: So over the past few years, I've gotten to know Nick and Matt a bit and early this year, sat down with them for a bit of a deep dive on the whole stable coin space.

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Jeremy Allaire: And and was really intrigued with the conversation and the thoughtfulness that that they had about this problem space and then later this year.

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Jeremy Allaire: Nick and Matt penned a fantastic piece, which was published in July, which is linked in the show description dubbed crypto dollars. The story so far.

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Jeremy Allaire: Which I think better than most analysis really dove into the very profound and long term implications of this innovation on society.

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Jeremy Allaire: And in general, kind of the birth or perhaps rebirth of a free banking era, really, really fascinating discussion. So I'm actually very thrilled to have Nick and Matt on the show.

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Jeremy Allaire: Welcome, guys.

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Nic Carter: Thanks for having us. Jeremy excited to be here. Yeah.

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Jeremy Allaire: Excellent. Hey Matt.

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Matt Walsh: Hey Jeremy, great to see it.

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Jeremy Allaire: Yeah, absolutely. You got a great mic there, Nick.

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Nic Carter: Thank you. It's just you do so many of these and you have to make sure you have

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Nic Carter: You know quality equipment as well.

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Jeremy Allaire: Yeah, now I know

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Jeremy Allaire: Awesome. Well, I'm super, super excited about this conversation.

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Jeremy Allaire: So maybe I'm maybe just kind of kicking off.

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Jeremy Allaire: You have this. I think you have a high level thesis and and and in in in the work that you guys have put out and and obviously and listening to a lot of other conversations that you're having as well on your own podcast and out in the world.

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Jeremy Allaire: You talk about crypto dollars and you talk about crypto dollars as being very distinct from digital dollars. I think there's a lot of different conceptions misconceptions stable coins digital

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Jeremy Allaire: Dollars central bank digital currency and crypto dollars. My feeling, of course, is that you have a very specific meaning when you talk about crypto dollars. And so, you know, maybe just first, you know, what's the high level thesis that you have around around this idea of crypto dollars.

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Nic Carter: Well, I guess I can kick it off there. I mean, our, our view on the phenomenon is really that it's the most impactful thing happening in the crypto industry.

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Nic Carter: In 2020 and it is, you know, building on the shoulders of giants. I don't think crypto dollars would exist if bitcoin didn't exist. For instance, or if crypto exchanges weren't so ubiquitous or

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Nic Carter: You know wallet technology hadn't reached the level that it reached. But in some ways, this feels a little bit like the apotheosis of

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Nic Carter: The crypto phenomenon that doesn't really that's not to discredit bitcoin, or any of the commodity like crypto currencies, but it's just

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Nic Carter: Pointing out that crypto users seem to have a revealed preference for using crypto dollars just empirically, looking at the data, look at the transactional activity. So our view on this is that it's satisfying

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Nic Carter: Really important demand that you know has existed for a long time and it's now possible to meet those expectations which is effectively unencumbered commerce and more global more natively seamless commerce.

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Nic Carter: And I think the key differentiator for crypto dollars is that they are as encumbrances. The key is that they they give you more transactional freedom more transactional autonomy.

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Nic Carter: And then there's some other really nice qualities like settlement quality and things like that. But at the core of it.

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Nic Carter: In our view is that they combine, you know, the high quality subtle and assurances that you get from crypto currencies like Bitcoin with the low volatility characteristics of fiat, and so it's a pretty happy marriage so far. Yeah.

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Jeremy Allaire: Totally. I mean, I am

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Jeremy Allaire: I think when I first started using Bitcoin and and and playing around with public chains in 2012

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Jeremy Allaire: Like, yeah, yeah. If you're a crypto user, you had you had these aha moments of, like, oh my god, this is this permission. The settlement. This is this. This is software. This is, you know,

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Jeremy Allaire: In all the security dimensions to and all these other things and and it changes forever. I think your, your experience of money.

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Jeremy Allaire: And it and it is. It is. It's this this different level of freedom and and and and use and utility and and other and sort of if you it's this marriage of the Internet and money in and software and so that that like I think is, is, is, you know, in some ways, like if you if you're already

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Jeremy Allaire: deeply understand the inherent benefits of cryptocurrency of the digital currency like that.

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Jeremy Allaire: Yeah, of course, if you're going to have $1 version of that. That's even that's awesome too. Right. So the this sort of preference that emerged within the ecosystem to use that I certainly as you know that that inspired a lot of the work behind circle but um I think

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Jeremy Allaire: You know there are so you're coming back to maybe where I started to which was there are all these different definitions concepts. If you talk to a lot of people. They couldn't really differentiate them that well, obviously you guys were incredibly deep in the space but

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Jeremy Allaire: Maybe, maybe talk a little bit about that segmentation, a little bit right Matt and if you want to take this to you know there's there's

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Jeremy Allaire: Different concepts and definitions and I think because we really want to focus today on crypto dollars, like maybe we can say what's not a crypto dollar

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Matt Walsh: Yeah, definitely. Maybe I'll just a little bit about what you're just talking about in terms of how we got here first and

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Matt Walsh: It can talk a little bit about how you think about the segmentation, but

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Matt Walsh: I was thinking back last night, getting ready to do this around the first time that I met you fidelity and sort of the original idea behind circle and

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Matt Walsh: How, in a lot of ways, right now, what's happening in the industry is exactly what you sort of predicted would happen

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Matt Walsh: I think the implementation details have shifted so you know if you think about those early days, we thought

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Matt Walsh: We'd be doing a lot of this on bitcoin and there was a big push around colored coins and the open assets for the call. And would this be a proper conduit to actually get some of these crypto dollars into practice.

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Jeremy Allaire: Yeah.

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Matt Walsh: And then, you know, as we all know what happened there. And we end up with a year some standard and pushing this long.

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Matt Walsh: So the way that we're sort of looking at the space now is that there's there's various different trade offs and people meditation details around how you access this market. Nick, do you want to talk a little bit maybe about the kind of the framework and how to segment the market.

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Nic Carter: Yeah i. So, I mean, you asked earlier about, you know, what's the difference between digital dollar and a crypto dollar. And I think that gets the core of it really

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Nic Carter: You know, digital dollar always confused me a little bit because it seemed a little bit redundant, to be honest, because most dollars.

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Nic Carter: Are liabilities of the commercial bank system and they exist in digital format. In fact, the overwhelming majority of all of the instruments that we call referred to as dollars are totally digital

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Nic Carter: And I guess there's a couple trillion and fiercely their

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Jeremy Allaire: Electronic Records for them.

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Jeremy Allaire: Right, right.

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Nic Carter: Yeah, I mean, they're, they're not electronic bear assets, per se, but they exist in digital format.

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Nic Carter: Solely in digital format. So I guess you can convert them into cash if you really wanted to

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Nic Carter: You know, physical cash, but for the most part they exist electronically, which is why we chase a little bit of the digital dollar conception or Appalachian and I know crypto isn't the most popular prefix people kind of associated with

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Nic Carter: Yeah insalubrious activity and so on. But to us. It's a more apt way to describe the phenomenon and just and carve it out, relative to

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Nic Carter: Dollars that exists in the bank sector, and I think the key differences are the crypto dollars aspire to be digital bear assets, you know, something that if you know the private key. You're presumed to be the owner right in the eyes of the blockchain.

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Jeremy Allaire: There's that's not. It's like, it is a native digital asset is a native data type, as it were, like, on the internet, right.

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Jeremy Allaire: Yeah, very, very differentiated, you know, from again the sort of legacy electronic money.

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Nic Carter: And you can fully assign control with the by broadcasting some data online without the reliance of third party. So that, to me, you know, that's

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Nic Carter: What the cypher punks wanted to create they wanted to create digital cash if you go back and read the discussions, a lot of it's about dollar denominated or stable cash. It's not necessarily about

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Nic Carter: Volatile cash, which has all these additional assumptions about new monetary policies. So I think that's part of the reason the cyberpunk some of them rejected Bitcoin

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Nic Carter: Because bitcoin, by definition was going to be volatile. Not that that's a problem, per se. It's just, that's not exactly what some of the cyberpunk sir trying to create an 80s and 90s. If you look at

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Nic Carter: Digit cash, you know, that was a that was a stable instrument as well. So it to me. The, the bear asset nature is like the really, really key differentiating factor I

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Jeremy Allaire: I see that to obviously I think that part of why people kind of go to digital dollar when referring to digital currency based versions of dollars and

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Jeremy Allaire: It's a look at, you know, you sort of watched this happen in in the internet space, you know, I remember you know

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Jeremy Allaire: In digital media, for example, like you sort of say, hey, we're like, we're actually doing, you know, digital digital media, digital video or you know video on the internet or, you know, all these things and

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Jeremy Allaire: Yeah, the satellite companies were like, Well, we do digital broadcast like our satellite network is digital and and the cable companies when we're doing digital video on demand. It's on our

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Jeremy Allaire: Our cable. It's entirely digital. I remember, they'd market like it's digital TV or

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Jeremy Allaire: You know, digital, you know, satellite radio became digital and it was like it was using. I mean, it was basically saying like they're using, you know,

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Jeremy Allaire: They're using you know software based protocols and and and and package which data or whatever the hell they're doing to deliver those things, but they're still like closed.

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Jeremy Allaire: walled off controlled inner mediated they're not public on the internet, they're not able to attach to permission. This networks, they're not something that anyone anywhere can participate in.

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Jeremy Allaire: You know with with music and sound and text and communications like the real distinction is when you are, you know, in my mind, like something that is natively digital

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Jeremy Allaire: Is on public networks, it is on the permission this internet. It is attached to open source software reference implementations that sort of

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Jeremy Allaire: And and and so for me, um, you know, that's a, that's a huge difference. And I think a lot in a lot of people's minds digital currency does kind of represent that conceptual model is that, but I like crypto knowledge to so I

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Matt Walsh: The other thing is Jeremy's it's programmable right and so that's something that none of these quote unquote digital platforms that are not built on public blockchain really strapped to do so.

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Matt Walsh: I think the surface area for the types of things that you can build on the internet just gets a lot larger.

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Jeremy Allaire: Yeah, the matching stuff up and visibility and the fact that it's actually built on, you know, open software that people can connect to and and so on is just tremendous religion.

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Nic Carter: Yeah for you. Our view is that this is not a debate between analog and digital. It's when we've left the world of atoms behind. We've been the world of bets for a long time. It's who controls the network is that, you know, is there one nexus of control or is distributed

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Jeremy Allaire: Yeah. So I guess I'm in your in your paper and the discussions that you've had on you know what makes

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Jeremy Allaire: Sort of crypto dollar special there's a set of attributes that you've sort of defined to say this is what makes you know this is what defines these this is what makes them what they are.

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Jeremy Allaire: And in presuming that makes them those better we touched a little bit on on those, but maybe we could enumerate some of that and talk about it.

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Nic Carter: Yeah. So honestly, I don't think we've even fully understood what makes them special there's probably more features that we're going to discover, but the three that we lay out our

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Nic Carter: The permission listeners. So the encumbrance or the relative lack of encumbrance. The fact that they operate on open networks and the audit ability as well, which is pretty underrated in my opinion.

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Nic Carter: Obviously, I'm a little biased because we spent a lot of time looking on chain data, which to me is still pretty magical compared with the amount of data we have about

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Nic Carter: You know, you look at the data from the Federal Reserve Bank of St. Louis, you know, there's some pretty interesting data there. But it's all kind of inferred. And you can't really directly apprehend, a lot of this information about

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Nic Carter: Yeah and there's a delay and you can't account for all the dollars in circulation. I don't know if they could even

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Nic Carter: You know, determine how many dollars exist to the nearest billion for instance with crypto dollars. You can audit them to the last 10th of a penny. You know, so that that's a significant difference

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Nic Carter: We've already touched on the transactional freedom, but I think that's really, really key. And I think it's a different model from say PayPal where PayPal is actively you know

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Nic Carter: Evaluating the risk of every single transfer that happens on the network. This seems a little different to me. And then you have the fact that it's on an open network and any

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Nic Carter: Talented developer can just build a product, you know, effectively a smart contract and deploy it to the world and not even have a relationship with their end users and they can reference an existing

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Nic Carter: Contract, you know, that's the composer ability thing, which is pretty magical and she started to think about it and it just means that the pace of development is so much faster than the banking sector, which seems pretty sclerotic to us these days.

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Yeah, Matt.

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Matt Walsh: Say, I think there's. We're also just going to start to see a lot of competition on various axes of risk. And so there's

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Matt Walsh: There are some really fundamental trade offs between using different types of stable clients to it. So I think you're going to start to see

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Matt Walsh: Differentiation based on the censorship resistant properties of these networks, you don't start to see differentiation based on some of these platforms are a lot more likely to have institutional participation.

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Matt Walsh: Definitely, put your SEC on that platform. So I think that the addressable market of just dollars that can participate on those networks that a lot of larger networks like UCC versus money.

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Jeremy Allaire: Like account dollar money markets and imagine if more of that was on, you know, digital currency will

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Matt Walsh: Totally know the trade offs versus using something like tether where, you know, we can argue whether or not you know that platform is fully back but there's certainly there will be censorship resistant kind of trade offs there between us more centralized

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Jeremy Allaire: Project and the interesting thing on that is when people talk about blacklisting and like you know stable coins at Hadley's

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Jeremy Allaire: Censorship mechanisms built in. And I think it's if it's been publicly disclose that center consortium is improved one blacklist.

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Jeremy Allaire: But it turns out there's dozens and dozens of them done by tether or sometimes we don't know why we don't know who is it done for a friend who lost some money on the exchange. We don't really know. There's no transparency, there's no policy. There's no accountability.

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Jeremy Allaire: There's not censorship resistant at all.

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Nic Carter: Yeah yeah i think i looked yesterday, and there are hundred addresses blacklisted on Teller so far.

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Jeremy Allaire: I mean, look, I think, I think it just, it does underscore the fact that I think what you know people perceive as maybe censorship resistant maybe isn't

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Matt Walsh: And I think the big question there. And everyone's mind in the industry is what would happen in the event of an enforcement action and sort of what role with the parent company play and how how they fight that

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Matt Walsh: And then the last one is just, I think we're going to start to see a lot more experimentation around some of these algorithmically designed platforms. And the key risk there. It's just around whether or not they break and whether or not taking

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Matt Walsh: A whole bag. And so it's fascinating just the innovation, a lot of those dimensions. And I think, depending on the use case, you would gravitate as a developer towards one category versus the other. Yeah.

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Nic Carter: On on that topic of blacklisting. One thing I've noticed recently is it's pretty arbitrary who can get access to kind of like the rollback feature kind of thing.

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Nic Carter: And you see people to lose money with tether. Maybe there's a bug. If they're loud enough on Twitter, they can get the attention.

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Nic Carter: Of, you know, the team behind it and get that transaction nullified. And, you know, not lose their dollars, effectively, but if you're, you know, smaller fish.

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Nic Carter: You have the lesser ability to kind of lobby. And so it's very vague and very unclear to me what the actual

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Nic Carter: line of demarcation is or what the protocol is for having these, you know, having tether itself overruled the ledger of record, which is the blockchain which is not a great situation, I would say for users.

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Jeremy Allaire: It's one of one of the reasons why center consortium publishes it's blacklisting policy on the transparency page on center. Yo, and it's extremely clear that

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Jeremy Allaire: I mean, basically, if the network is is the fundamental security of the network with jeopardized say you know admin keys privilege keys, things like that.

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Jeremy Allaire: Obviously, there, there, there would be a justification, but but but other than that. The language is very clear, which is a, a, a final binding court order from a competent US jurisdiction presented to center Consortium's you know

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Jeremy Allaire: Governing Body.

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Jeremy Allaire: That's pretty specific.

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Jeremy Allaire: You know someone who's loud on Twitter is that doesn't that doesn't meet that criteria.

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Nic Carter: And that's a quite a high standard to me.

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Jeremy Allaire: It's a very high standard to me.

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Jeremy Allaire: It's a very, very high standard to me and I think it has to do with, you know, how do you ensure that people can trust this as as a reliable instrument and and and i think

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Jeremy Allaire: You know, there may be policies that emerge in the future that are outside of us that that that define other things that might need to be in place, but right now.

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Jeremy Allaire: You know center from sports teams have governance mechanism on this and and governance, a lot of different things, but one of those is that policy and and transparency is really key around that.

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Nic Carter: So I guess the higher the barrier to climb as to asking for blacklisting. The just generally higher quality, the settlement assurances are

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Jeremy Allaire: On the next right so that's exactly right. Yeah. Um, yeah, that the another theme, maybe just to touch on it and there's so many things we could, like, dive off on and stuff, which is fun, but

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Jeremy Allaire: The, the subtitle is The story so far in your paper. And I agree with you, LIKE, THIS IS WE'RE EARLY IN THIS STORY. I mean,

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Jeremy Allaire: Most of the growth in this is literally in the last, you know, nine months, you know, obviously, there's been experiments in this for five years, but like the story so far as we're really, really early.

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Jeremy Allaire: Maybe talk a little bit about the, you know, from your perspective, the why. Now, why is this happening so pervasively right now and we'll go from there.

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Matt Walsh: I can have been there. First, maybe you might have some different answers. But I think there's a few things that are really top of mind. One is that

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Matt Walsh: Just the overall strength of the US dollar as sort of the unit of account in the kind of the supreme apex predator of money and on the global stage is really a big reason why there ought to be a lot of support behind things like $50

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Jeremy Allaire: An hour back instruments.

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Matt Walsh: You look at some of the

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Matt Walsh: Some women coming out of China and just what that would pretend to do on the geopolitical state scale if certain types of transactions at a global level or commodity sales, for instance, we're going to nominated

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Matt Walsh: Not US dollars. So I think there's a lot of potential being paid from the higher end of the US government around that use case.

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Matt Walsh: Along those lines, kind of the story. Why now, you know, I think there was a big move made here by some of the larger payment providers in the United States. And so if you look at some of the

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Matt Walsh: Pain powers that be said is the Facebook's of the world that all have teams and really smart people mobilized around this. I think it's seen as a next frontier opportunity that can really expand access to financial services in ways that you really couldn't do.

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Matt Walsh: Before this, and it can expand the aperture of what is possible will be doing some of these program ability issues really look at some of these technologies becoming

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Matt Walsh: Foundational for the next generation of internet services being built on top of that.

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Matt Walsh: I think the third thing that I would say in terms of why now is that there are a lot of forces from a capital markets perspective.

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Matt Walsh: That make this a really interesting new market to enter. So when you think about some of the opportunities. Just around the market structure here again in the lending and borrowing.

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Matt Walsh: You have a lot of firms that are moving into looking at this as an extension of things that they're already doing. And the capital market space. Yes, look at the the infrastructure behind us dollars is really hasn't been changed a lot in the last 50 years right we have

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Jeremy Allaire: We have a big industry.

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Jeremy Allaire: The base layer every other function and the capital markets is built upon

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Matt Walsh: Right and

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Matt Walsh: You know, we have these well functioning. We both markets and money markets and I think a lot of ways. This is the next generation of that we were just at the very early stages here.

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Matt Walsh: But that is all getting built. And so when you think about stable coins and yield generation. Some of these interesting things you can do.

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Matt Walsh: It's fairly obvious. If you're a market participant what these, you know, the addressable market is huge. So it's pretty clear to have some really large businesses built in some of these categories. And so I think that's another thing that's pushing this industry for this sector.

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Nic Carter: Mm hmm. Yeah, I can chime in on a couple more specific things. I mean, first of all, we're just seeing this secular move towards people understanding how to use digital bear assets for the first time.

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Nic Carter: And before 2009 that was never a thing that anyone had to worry about, pretty much, and the technology didn't exist to to facilitate that we had to start pretty much from scratch on

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Nic Carter: And so it took a decade or so until we had the tools suitable to transact with value in the form of information.

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Nic Carter: And that was a really difficult and challenging time. A lot of people lost all their bitcoins and so on learning about lesson.

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Nic Carter: And now the software stack is kind of progress, such that we can transact safely and not have to worry about it too much and

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Nic Carter: You look at the data, I mean the Cambridge study says is about 100 million individuals worldwide that have ever used a cryptocurrency of some sort.

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Nic Carter: There, that's, I mean, there's obviously caveats that estimate, but I considered two feet to be fairly reliable and five years ago that figure was much, much less so.

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Nic Carter: That number is just increasing you know that's to the general growth characteristic of the industry.

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Nic Carter: We've got a lot further to run, but that just means it's a much larger installed base of potential users for these things.

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Nic Carter: So that's, that's one reason why now, I think, is that there's just more people and more capital that's willing to allocate their assets to public blockchain based digital assets.

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Nic Carter: One catalyst. So it was very clear to us was after the shock the risk off event in March 12

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Nic Carter: Some of the traders. We talked to were firmly of the opinion that

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Nic Carter: There were some crypto businesses that have had their capital denominated in dollars, but not in crypto dollars and they were unable to move fast enough to

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Nic Carter: You know exploit that situation where BitCoin work down to, you know, 3.5 K or something crazy, right. And so then after that, they realized, Okay, we need crypto native liquidity.

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Jeremy Allaire: Keep working capital that that's a trend we see. I mean, we see so many

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Jeremy Allaire: You know blockchain native firms that are opening up accounts and her and who are you know their their their use cases are first party payments and working capital, not just trading and

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Jeremy Allaire: I mean, it's obviously this is like early adopter to some degree there, but it's a clearly an interesting indicator. It reminds me of another thought I was just asked a question, you know, one of the things that's been interesting about

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Jeremy Allaire: This narrowing in on us DC for a moment when you see us DC in circulation growing and, you know,

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Jeremy Allaire: It continues to grow even when the market goes down, it continues to grow when the market goes up when there's low volatility, it continues to grow.

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Jeremy Allaire: And and so in some ways people are saying is USD uncorrelated or how like what's the correlation. Why is that, and I

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Jeremy Allaire: That's something that we've noticed, obviously, as well. And there's some really interesting things going on there, which relates to your comments which is I think one was

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Jeremy Allaire: You know when when when the investment asset markets are arising more capitals coming into the market. Right. So by definition, they're sort of more Catholic comes in. It goes comes in through token ization and comes in through things like us, etc.

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Jeremy Allaire: And then once it's in the market. There's holders of it and they prefer to hold it.

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Jeremy Allaire: It's it stays it stays sticky because the people who have already decided to like $50 they want to they when they when they're receiving those on the other end of the trade or they're holding them.

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Jeremy Allaire: They want to hold them. So it's generally a sticky. But then when the market is selling off.

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Jeremy Allaire: People are selling into things like us DC and they want to they want to get out of whatever you know coin or or or whatever that they're trading and they want to get into UCC

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Jeremy Allaire: And again, they're crypto native and so they're sort of saying, Well, I'm just going to keep it in this. And then when I re enter the market.

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Jeremy Allaire: I'll be able to do that exactly to the example that you gave me. And then the other is obviously the rise of d phi and all of the

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Jeremy Allaire: protocols that are out there on the yield side. And so when when it is idle for when people are holding it, whether it's is working capital or or investment capital or what have you.

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Jeremy Allaire: They can put it in, in, in a yield protocol and like

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Jeremy Allaire: Generate you know daily yield with instant liquidity that they sure as hell aren't going to get it, they withdraw it out into native electronic you know commercial bank money.

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Jeremy Allaire: And so that makes it even more sticky. And so there's a little bit of a flywheel going on that. And then I think the thing that we're paying attention to is

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Jeremy Allaire: At what point does that go from just like you know kind of working capital management into, you know, the sort of deeper forms of

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Jeremy Allaire: Payments and settlement and Treasury and other activities that firms have

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Jeremy Allaire: Where the advantages are so superior as well and and obviously crypto native firms get that. But as when does that cross into as you were saying at the very start like this new form of commerce activity that becomes possible what

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Matt Walsh: One of the interesting things there is the OCC stats recently around stable quite some clarity and doing a lot of work, educating folks on that front. But to me, that just opens up the addressable market of deposits that are that are allowed to do these type of activities.

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Matt Walsh: It's not just the default to do that. And you can use

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Matt Walsh: Genesis or block five to God.

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Matt Walsh: Much, much bigger deal

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Matt Walsh: Than you would on nutritional money market. So to me, that OCC thing is really worth paying attention to and

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Jeremy Allaire: That's a good segue. So rise of defy one talks about it this code on there. We can decompose that into lots of different things, but

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Jeremy Allaire: I think the interesting thing is, and I'd love to hear you guys talk more about it is this idea that

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Jeremy Allaire: You know, there's this there's this program ability, there's this compose ability. Some of the first protocols that are programming underlying instruments like stable coins are

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Jeremy Allaire: Interest rate markets credit markets. And when you think about layering of the financial system.

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Jeremy Allaire: Like this is a really profound market infrastructure that's being invented and created here and maybe talk a little bit about that.

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Jeremy Allaire: You know, you know, Matt, you obviously saw this from the fidelity side of the house where I think probably fidelity is probably one of the biggest money market operators in the world.

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Jeremy Allaire: And but as you think about, you know, digital dollars crypto dollars crypto dollar money markets, the growth of those function of those. And that's it's obviously very related to defy. But how do you think about that.

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Matt Walsh: So the winter. I think about it, when we generally

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Matt Walsh: You know, discuss it is that there were really three foundational building blocks that had to be in place before we got to where we are now, one was around key management and custody. So how can you safely hold these things.

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Matt Walsh: Either for yourself or on behalf of your customers and so

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Matt Walsh: That has been, you know, built out pretty strongly over the past eight to nine years we're to a point where you have large institutions, just a sovereign wealth funds it down. It's holding these type of assets.

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Matt Walsh: The second thing was a rebel liquidity landscape just around the spotlight.

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Matt Walsh: And how do you move these assets around safely so exchanges and OTC desks and that's pretty well built out obviously there's a long way to go. And the regulatory environment is catching up and

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Matt Walsh: We're seeing a big shift between the types of institutions there.

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Matt Walsh: Then the third really foundational thing they had to have in place with the just the data and the on chain ability to query these systems and know that there were provably fair

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Matt Walsh: And index construction and getting fair pricing. I asked him compliance frameworks and things like that. Just around the price of these things and that's for bitcoins was any other

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Matt Walsh: Type of open crypto asset that's really on the foundation of the data. The exchange landscape in the custody landscape.

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Matt Walsh: Now you really start seeing unblocking at the capital markets. I want to think about rainbows and money markets, some of these things that didn't exist in traditional markets.

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Matt Walsh: Were just building that again right now is my view in that space. And so this is a really

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Matt Walsh: Compelling category. And I think we're going to start to see a lot more flows just net flow is moving into the system by virtue of this has already been built on top of plumbing that was built for bitcoin and other assets already and it's institutional tested.

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Jeremy Allaire: It's interesting, Nick, what, what are your thoughts on

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Jeremy Allaire: You know, these, these decentralized credit markets and interest rate markets. Yeah.

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Nic Carter: I don't know. I'm kind of in the Jake Czerwinski school of thought that true credit doesn't exist in defy yet.

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Nic Carter: But not that you know what's happening is an interesting but you know he wrote this great piece saying

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Nic Carter: You know credit requires a notion of identity and you know underwriting and analysis of a business or an individual's kind of cash flows and future earning prospect so

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Nic Carter: I'm still I'm still thinking carefully about whether I want to say that credit exists in d phi i know there have been some small scale experiments there.

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Jeremy Allaire: Exists in sci fi using crypto and stable points and things like that, but

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Nic Carter: Absolutely, absolutely. Yeah.

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Jeremy Allaire: Making the identity and reputation lead an untethered in the asset from collateral, which is unsecured lending right

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Nic Carter: That's not exactly yeah so that hasn't happened yet. I wouldn't say we have quote unquote maturity transformation, you don't have classic banking activities that occur in defy that said

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Nic Carter: You have these amazing interest rate swap products and you have this collateralized lending, which is, you know, like taking out a line, a line of credit against some equity that you hold. Yeah, without sending it, which is a very common.

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Nic Carter: You know tool in traditional markets, which has now been democratized through defy any asset that you hold that can

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Nic Carter: That can have a price and onchan context, the price doesn't even need to be from a exchange. It could be from one of these kind of spot facilities.

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Nic Carter: You could take the price from there. Now you can borrow against that and have you know automated risk management.

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Nic Carter: So those are some pretty interesting. And those are, in my opinion, the interest rate swaps like compound and then borrowing against

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Nic Carter: An asset, do you hold it might be a equity style of pseudo equity asset that's. Those are the two most interesting things to me the numbers is still really small in the grand scheme. I mean, you're talking about a billion ish dollars of liquidity on compound.

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Jeremy Allaire: Right.

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Nic Carter: I think the forex markets are probably to two orders of magnitude larger than that. So maybe more.

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Nic Carter: Yeah, so

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Nic Carter: We still have a long way to go, but I think some of the exchanges, see where this is going. They see that these markets are just turning to foreign exchange clearing houses.

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Nic Carter: You know, the, the most we see some of these centralized exchanges specifically optimizing for trading stable coins, they optimize so that the liquidity providers, you know,

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Nic Carter: can earn the return can measure it with the expectation that these assets are not necessarily that volatile relative to each other. So

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Nic Carter: I think some of the utility tokens which power this real true to the source of excitement. Some of those utility token theories are getting a little discredited.

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Nic Carter: And we're seeing the growth of tokens, which are equity, like, which is probably been more interesting in that you comes with but more rights and then just you know fiat currency representations fiat currency on chain. It's weird that it's all dollars it's 97 ish plus dollars.

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Nic Carter: Yeah, there's not a lot of

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Jeremy Allaire: Talk about that because, obviously, again, you're talking about crypto dollars, you know, we talked about US dollar coin, you know, etc. I think

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Jeremy Allaire: You know, from a geopolitical perspective, obviously, like all these countries around the world aren't just going to roll over and say actually everyone in my country can just transact in dollars and that's all fine.

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Jeremy Allaire: Yeah.

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Nic Carter: Some of them might some of them might

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Jeremy Allaire: Rather than mine. So this is the question just from a geopolitical geopolitically economic perspective.

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Jeremy Allaire: You know, the question I sort of ask is, is this going to be like

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Jeremy Allaire: The rise of the Internet in in earlier stages were kind of the conductivity lit up, and then all of a sudden, people are like, Oh my god, I have global free communications and I can just do it directly through my

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Jeremy Allaire: My computer and then my mobile device and I'm now I'm no longer bound by, as it were, like, the rules of the regulated communication system in Italy for

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Jeremy Allaire: You know, pick, pick your country or like the borderless nature. It happens people opt in to a new a new information system and communication system and commerce system will this will that just that rise happen and people around the world to say utility value. So, hi.

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Jeremy Allaire: I'm voting with my smartphone and participate in this economic system say the crypto dollar economy and is it just going to be so powerful that it that the government's actually even if they try to stop it, that their citizenry will say, you know, screw you.

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Jeremy Allaire: I mean, that's sort of happened and there. And those four lines in areas like communications and censorship and other things have obviously

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Jeremy Allaire: Gone different ways in different countries and I'm very interested to hear both of your thoughts on the geopolitical and political economic implications of this over time, particularly

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Matt Walsh: I think this will be very disruptive to the extent that there will be regimes that actually topple as a result of this technology, a much more so than any other technology we've seen over the past 20 years

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Matt Walsh: It will be a bumpy road, I think that this technology. There's one kind of view here that this just as a border kind of on the fringe technology.

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Matt Walsh: Men. There's another comes a lot more pervasive in some of these countries, but was clear to me is that the dollar is definitely the apex predator of fiat currencies and there's really an insatiable appetite for dollars internationally.

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Matt Walsh: So you see this reflected with no further than just the deal. You can get on some decentralized platforms to reflect some of that demand there. Yeah, there's other studies that you can look at some of just the on the ground.

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Matt Walsh: Craigslist style transactions that are happening where individuals are just trying to get US dollar exposure. So I think the dollar as a savings technology actually is a use case here.

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Matt Walsh: We're will start to see in how that gets regulated that imagine that will

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Matt Walsh: Start to see some serious clamp down at the on ramps.

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Matt Walsh: Some of these kind of his

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Jeremy Allaire: lunch yesterday with Rubio in Argentina and Brazil, like they have a US DC product you can go from local currency and do it you can generate a 6% yield.

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Jeremy Allaire: It's a seamless experience you can convert into Mercado Pago which is the Amazon of Latin America. So if you need to buy goods, you can do that too. And like, that's pretty attractive can happen.

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Matt Walsh: super attractive. I guess the question is does it collaborate or does it compete with the local currencies in these areas. And I think that's where the attention was but

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Matt Walsh: You know, part of me really thinks that the genies out of the bottle here in the sense that

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Matt Walsh: There will be ways to get exposure to this, whether it's through a regulated on ramp or whether it's through, you know, meet someone on the street and your local bitcoins style transaction, but you're getting access to dollars and

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Matt Walsh: People will seek out whatever kind of savings technology is best. And I do think that this fits into that category of being a great savings technology.

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Matt Walsh: Into compliment things like bitcoin, which are obviously much more volatile.

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Jeremy Allaire: Yeah yeah

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Nic Carter: I mean, same, same feelings. Here we feel that it's going to be very disruptive.

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Nic Carter: The States probably have a certain ability to fight back and try and discourage their citizens from using crypto dollars but

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Nic Carter: There have been plenty of cases, historically, where they've capitulated when their populaces said we don't trust your monetary

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Nic Carter: Direction, and we're going to spontaneously opt for an alternative. And that's always been the dollar. You've had top down dollarisation bottom up dollarisation Ecuador and the early 2000s was a bottom up. Bottom up dollar eyes situation.

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Nic Carter: What is impaired or inhibited other the dollarisation movements Zimbabwe is great example Argentina's and other examples that

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Nic Carter: You have to hold physical dollars in Venezuela, as well, actually this is a massive hindrance to the dollarisation Venezuela right now there's not enough small bills.

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Nic Carter: So yeah, big bills circulating

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Nic Carter: It's hard to get smaller change.

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Nic Carter: So it's just, it's more challenging in Zimbabwe, you know, the state was able to kind of arrest the dollarisation, to a certain extent.

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Nic Carter: Because there is a shortage of physical dollars. It's hard to get them in there and have a lot of kind of trade relationships with us. That's why dollarisation has been easier in Latin America, but

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Nic Carter: If you do it in a virtual way it solves a lot of those problems, you don't have those issues with denomination.

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Nic Carter: You don't have the issue with dollars being captured by large financial institutions necessarily like an Argentinian at the Carlito.

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Nic Carter: Those were dollars and bank accounts that were suddenly

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Nic Carter: You know withdrawals where ceased overnight and then the peso depreciate against the dollar those dollars that people thought that access to got trapped right now. If it's a bear or style asset.

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Nic Carter: Now you don't have to rely on a bank to hold it, it's your own property as effectively the government doesn't have these high leverage tools to inhibit that dollarisation

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Nic Carter: So it's a much more organic much more distributed phenomenon. So it seems really different. And it seems like the dollarisation events here will be more successful. So that, that's absolutely our view.

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Nic Carter: It'd be hard to forecast exactly the trajectory that you can probably name some candidates states where there's a high level of crypto penetration

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Jeremy Allaire: Yeah.

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Nic Carter: High level of mobile penetration good in are not tech savvy individuals high inflation rates, right. Those would be the candidate places you'd say, well, the next 510 years I expect something to happen here. Yeah.

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Jeremy Allaire: Is it raises it raises a larger questions and you know

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Jeremy Allaire: You know, central, central banks on a global scale, you know, or what I'll call a global scale central bank on G 2010 whatever

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Jeremy Allaire: You know,

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Jeremy Allaire: Does this ultimately lead to it as this unfolds. Does it lead to the potential for a more coordinated approach to synthetic global digital currencies that

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Jeremy Allaire: That you know can exist in denominator new units of account that are that are actually not just dollars but that are synthetic

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Jeremy Allaire: And does, does this sort of, is this a forcing function on a road towards that.

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Jeremy Allaire: And maybe bitcoins even part of that because it's a really attractive non sovereign store of value, just like all Fiat used to have a peg to gold. Like, does this synthetic fiat currency basket with a peg to Bitcoin become a future the bank or

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Jeremy Allaire: You know, does does something like that emerge out of this, this sort of

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Jeremy Allaire: Little mosaic, we have

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Matt Walsh: That's where you start to get really disruptive to the United States.

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Matt Walsh: That's where I think that discussion gets really interesting. I thought it was interesting that Mark Carney sort of parting thoughts of Jackson Hole, a year or two ago really had to do with that idea of creating this that core like instrument.

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Matt Walsh: You know that in that world. I think that the US his ability to be that apex predator of money really is compromised. But certainly the the incentives to have something like that. If you're one of those countries certainly exists.

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Nic Carter: I mean, I would say the, the, the, you know, issuing the dollar was the you know the quote unquote exorbitant privilege for a while, but it's probably worked against most Americans for the last 2030 years

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Nic Carter: The dollar trades at a structural premium because it's the world's reserve currency and

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Nic Carter: That's part of the that's part of the reason the manufacturing has been offshore our experts are less competitive so

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Nic Carter: A lot of Americans don't know this, but I think they would massively benefit from weaker dollar and something like a band core

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Nic Carter: To solve effectively the trevon dilemma. Yes. So it's kind of a weird situation where lots of policymakers want the world to be united on a single ledger that basically settles back to the dollar through New York through the course.

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Nic Carter: On a big system because they get all this really granular power projection ability

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Jeremy Allaire: But

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Nic Carter: Of the same, same time, you know, the American middle class gets kind of shredded by the fact that our, our dollar is so strong. So if you know I would maybe wouldn't even necessarily object to a weaker dollar, I think it would be kind of in line with with welfare maximization.

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Jeremy Allaire: But I think like there's a there's like this, forcing function bottom up phenomenon that could be this catalyst that just forces these big, big players to kind of get together, think through how to solve for this. That's one dimension right

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Jeremy Allaire: There's, you know, I think.

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Jeremy Allaire: Coming back to the very start, and part of your thesis, which is, you know, the crypto dollars or or let's just say high quality.

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Jeremy Allaire: Digital bear Fiat instruments or synthetic data instruments, whatever you know whatever these end up being right that

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Jeremy Allaire: They very powerfully enable commerce interactions to take place. They theoretically bring

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Jeremy Allaire: The world economic system makes it more integrated enables market participants individuals creators laborers firms etc to sort of have a different level of commerce taking place.

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Jeremy Allaire: And and that you know it may be that you know just you know the the leaps forward that emerged from that over 10 years that also also become forcing functions to trying to say.

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Jeremy Allaire: Hey, why don't we just get to a different unit of account here. And, you know, if you read Ray Dalio his recent history book books, whatever you call it.

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Jeremy Allaire: In the super cycles and these in these monetary regimes super cycles and, you know, looking at the, the United States, looking at China, the inevitability of China, being the dominant economy in the world. In the next, you know, five years. Seems like largest

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Jeremy Allaire: At least, and the fact that more trade will be denominated in digital yon

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Jeremy Allaire: Yeah, those issues. My come more to the forefront in five years.

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Nic Carter: Yeah I but the thing is to replace a global reserve currency. You need an incredibly overwhelming new superpower to underwrite that it doesn't seem clear the China could do that today.

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Nic Carter: There hasn't been a global realignment as of yet. Often it follows some sort of political turmoil, some sort of transition

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Nic Carter: You know, World War one was really the event, which, you know, took the pound sterling off and and installed the dollar. I don't see. I mean, that hasn't happened yet maybe something will happen. Who knows.

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Nic Carter: But I if it doesn't seem to me. It's not clear that there's an alternative to the dollar right now I know everyone likes to predict the fall of the dollar is the reserve currency, maybe the future is just a number of interlocking currencies that trade can can settle in.

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Nic Carter: Some of them politically neutral currencies like Bitcoin. Yeah, yeah.

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Matt Walsh: It would seem to me that some sort of blended currency like it back or would be more palatable. I think the other interesting thing there is just, if you think about the ability for the US government to four sections on a

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Matt Walsh: Huge scale and just large swaths of the Financial Services infrastructure landscape has really become an enforcement arm of the US government and a lot of different ways.

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Matt Walsh: In one moving off of $1 standard would do to that ability to really help disability into those types of transactions. I think that's a loaded question but there'll be a lot of pushback move towards something that is not dollar denominated

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Jeremy Allaire: Yeah, there's lots of questions. Lots of impact. We could go on and on, you know, on, on all this

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Jeremy Allaire: Well, this is, this has been this has been awesome conversation and would love to continue. Another time as well.

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Jeremy Allaire: Any, any closing thoughts. One of the things I always like to ask people is, you know, where do you see this in two to three years. Where do you see this in five to 10 years maybe from each of you guys.

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Matt Walsh: To me that is the closing thought would be that if you look at everything that we're talking about, and how big the three of us think that this is going to be

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Matt Walsh: There are entire categories of companies that don't exist yet to serve as some of these days. They're just enormous opportunities here to start businesses.

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Matt Walsh: And so that's that's really what we're most excited about is just some of these capital markets businesses this infrastructure around how to build applications on top of these things lending borrowing.

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Matt Walsh: Payments. So I think it's just a really exciting time to spend some time to get educated about it and see where those opportunities are

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Jeremy Allaire: Thank you, Matt.

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Nic Carter: Yeah, my, my parting thought is this so

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Nic Carter: The kind of current financial system as it exists today is very uneven, not just within the US but internationally.

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Nic Carter: Depending on which state you reside in your kind of access to power you have very variable access to kind of Western financial rails and, in particular, the US banking system is really the gold standard.

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Nic Carter: And it's a multi tiered model and the further the larger number of hops, you are away from New York.

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Nic Carter: Basically, the more expensive it gets. And that's why you have these really inefficient expensive remittance channels. So in the near term, I see crypto dollars flattening that topology and that's already happening.

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Nic Carter: So it's only one hop to get

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Nic Carter: Into that global clearinghouse which is on public blockchains as opposed to five hops. So regardless of the inefficiencies of the high fees of the cost of using a system like that.

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Nic Carter: It's already 100 X better. Yeah, because it's a single hop, you get to the global clearinghouse value you're there.

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Nic Carter: So that is a near term phenomenon. It's not going away. I think it's going to make cross border commerce much easier.

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Nic Carter: B2B settlement.

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Nic Carter: It's going to open up some of these labor markets which weren't really integrated. I think maybe it'll be who knows maybe it'll be bad for the wages of of white collar Americans, because it's much easier to do business.

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Nic Carter: With people abroad and higher abroad. Yeah, it may not be not good for Americans but it probably be not good in terms of creating wealth globally.

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Nic Carter: So that's kind of the near term, longer term, I think we expect and believe that most you know foreign exchange clearance will start to happen on public blockchains and right now we're talking about 20 billion free float.

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Nic Carter: That, that number could be 100 billion by the end of next year, easily, they're the only constraints. They're kind of balance sheets of the bank's backing them. Yeah, yeah.

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Nic Carter: If you hybridize it with a CBC

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Nic Carter: And you combine it with access to base money, then there's no constraint whatsoever. Right. So, that number is going to grow by at least an order of magnitude, in my opinion, probably more so, I mean, you look at the pace of growth and this is still such a small industry.

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Nic Carter: 20 billion, it seems, big, but I think it's pretty grand scheme.

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Jeremy Allaire: Completely agree and I've been more frequently, saying, you know, I can, I can see a world where there's a trillion plus dominated in in these types of digital crypto dollars.

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Nic Carter: Easily. Yeah.

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Nic Carter: There's no constraints on the ledger, the ledger doesn't really have any

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Nic Carter: Constraints at skills with value. Yeah.

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Absolutely.

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Jeremy Allaire: Well, awesome. This has been awesome conversation you guys deeply appreciate you coming on and we'll look forward to chatting again really soon.

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Matt Walsh: Thanks for thanks for having

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Jeremy Allaire: Me you absolutely

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Jeremy Allaire: So fascinating conversation.

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Jeremy Allaire: With some very, very bright minds in the space pursuing and thinking about all of these themes that that we're very much enthusiastically working on together.

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Jeremy Allaire: Next week, we're working on a very cool episode, we'll have more to say about it next week. And until next time, stay well stay safe and stay informed. Thank you.

Guests in this episode

Matthew Walsh

Co-founder and General Partner, of Castle Island Ventures

Nic Carter

General Partner, of Castle Island Ventures