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| Exploring the transformation of value in the digital age By Michael J. Casey, Chief Content Officer July 2, 2021 If you were forwarded this newsletter and would like to receive it, sign up here.
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There’s not much nuance in the crypto community’s opinions about regulators. It’s all or nothing. If a policymaker “gets” the value proposition of bitcoin and cryptocurrencies, and if they embrace blockchain technology’s prospects for improving the financial system, the community will shower them with accolades. If not, they’re the enemy.
This week’s column is about the ramifications of a crypto-friendly speech by Randal Quarles, the Federal Reserve’s vice chair for Supervision. Among other things it has placed him squarely in the first category.
A couple of housekeeping notices:
First, with my co-host Sheila Warren on vacation, this and next week’s episodes of the “Money Reimagined” podcast will be lifted from the two CoinDesk TV shows we recorded during CoinDesk’s Consensus virtual conference in late May. Both are about the opportunities and challenges for crypto/blockchain technology to respond to the growing demand among investors and companies that businesses comply with environmental, sustainability and governance (ESG) standards. The format is faster than the regular audio podcast, with multiple short segments. Have a listen after reading the newsletter. Second, I, too, will be out over the next two weeks. In my place, CoinDesk Executive Editor Marc Hochstein will write the weekly column while Features Editor Ben Schiller will shepherd the rest of the newsletter.
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The Stablecoin Route to Hyper-Dollarization Illustration: Rachel Sun/CoinDesk Move over “Crypto Mom” Hester Peirce. The cryptocurrency community has fallen in love with a new U.S. regulator.
A speech this week by Randal Quarles, the Federal Reserve’s vice chair for Supervision, is being hailed by prominent crypto pundits as a manifesto for how the U.S. government could harness the power of cryptocurrency innovation to serve its international interests and establish an even wider “soft power” role for the dollar in the global economy.
What caught their attention: Quarles’ argument that stablecoins “could encourage [international] use of the dollar by making cross-border payments faster and cheaper, and it potentially could be deployed much faster and with fewer downsides” than a central bank digital currency (CBDC).
It was music to the ears of many. Supporters of stablecoins argue an accommodative U.S. regulatory posture toward private issuers of these dollar-pegged tokens, which are typically built on open-source platforms such as Ethereum, would allow superior digital dollar innovation than would a formal CBDC. Castle Island Ventures partner Nic Carter said Quarles’ remarks will be “remembered as a landmark speech.” Dante Disparte, chief strategy officer of Circle, which along with Coinbase issues the stablecoin USDC, essentially said the same.
It’s not at all clear that Quarles’ views are widely shared at the Fed. Just three days earlier, Boston Fed President Eric Rosengren issued a warning that stablecoins, which he described as “new disruptors” to credit markets, posed a risk to financial stability. (The Boston Fed has been engaged in CBDC experiments with the MIT Digital Currency Initiative.)
In this scenario, the dollar would go beyond its current role as the unit of account for global trade and a key reserve asset for capital markets and become prevalent outside of the U.S. in everyday transactions.
Note: This would not be your grandfather’s reserve currency model. U.S. industry would derive great benefit from the ubiquity of dollar usage, but it might also ultimately diminish U.S. government control over the international monetary system – or at least radically change the nature of that control.
If so, that would be a good thing. Less hardline surveillance and less Wall Street gatekeeping of the world’s transactions is precisely what’s needed to boost monetary innovation and improve financial inclusion.
Permissionless Innovation
The strongest argument for letting private stablecoin issuers drive the digital dollar’s development is summed up in the opening lines of Quarles’ speech. He cited “America's centuries-long enthusiasm for novelty,” which he argued has made “America the home of so many of the scientific and practical innovations that have transformed life in the 21st century from that of the 19th.”
Open blockchain platforms will enable far more inventiveness than closed-door CBDCs developed by central banks, which are hardly known as hotbeds of innovation. The reason there’s breakneck innovation in decentralized finance (DeFi) is because it’s a permissionless environment. Developers don’t need the approval of a corporate board to build on a particular platform. And because users can freely move assets around within the DeFi ecosystem, without going through a bank-like intermediary, there’s a fluid movement of value and investment that helps incentivize and drive that innovation.
The question is, how far is the U.S. government willing to go to facilitate this freewheeling innovation?
If anything, U.S. regulatory trends are moving toward more, not less control. With U.S. blessing, the Financial Action Task Force last year extended its “travel rule” to custodial crypto exchanges, requiring they not only apply know-your-customer (KYC) and anti-money laundering (AML) protocols but also track the identity of non-custodial wallet holders who transact with their customers. And while the non-custodial nature of DeFi platforms has left that field somewhat under regulated for the time being, many lawyers believe that tougher rules are coming for DeFi.
More specifically, a bill presented to the U.S. House of Representatives in December would require stablecoin issuers to apply for bank charters.
All this will put sand in the gears of progress. That may be a price worth paying if the regulation truly helps protect financial stability. Too much regulation, however, and we’ll fall short of the promise of enabling regular people to make fast and easy dollar-based payments around the world.
The ease of stablecoins stems from their bearer instrument character. They are a digital version of cash whose value is self-contained and can be automatically transferred peer to peer. If KYC and AML requirements are layered into those transactions, which would inherently require an entity such as a bank to police them, then the transaction loses that person-to-person feature. As such, stablecoins will essentially take on many of the same constraints that dog the current banking system, where cross-border payments remain expensive and cumbersome for billions of excluded people, especially in the developing world.
A Fork in the Road
As last week’s newsletter discussed in a different context, the U.S. now faces two alternative paths.
First, it could follow Quarles’ advice and foster an open, stablecoin-driven system that gives more people around the world access to the dollar as their preferred currency.
This would be a very different kind of reserve currency model from the current one. It would generate seigniorage for the U.S. government and deliver competitive advantages to U.S. producers. We can think of it as an advance of U.S. “soft power,” against which China’s authoritarian government, which is inevitably pursuing a centrally controlled model for its digital yuan, is powerless to compete.
There’s a cost to this model, though: Washington would need to give up on some of the “hard power” it currently wields, including the capacity to control movements of money around the world, seize assets and put pressure on its enemies.
The second alternative is to double down on the current system but in digital form.
While there are various models for CBDCs, including ones that incorporate some degree of privacy assurance for users, international transactions would almost certainly entail similar bank-based gatekeeping powers as the existing system.
In this case, competition with China would be more of a straightforward head-to-head conflict, with the two countries’ CBDCs competing directly with each other. In that world, there’s no guarantee a digital dollar would outperform a digital yuan.
What’s it going to be? The Quarles “novelty” manifesto, or the Rosengren crackdown on “new disruptors”?
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Off the Charts A Month of Red There’s not much to say about today’s chart. It speaks for itself. CoinDesk Research Compiled by the CoinDesk Research team, the chart shows the past month’s returns for 18 members of the CoinDesk 20 list of top cryptocurrency assets. (Two of the assets in that list, USDC and tether, are stablecoins and so excluded from this chart.)
It’s charts like this that make the case for a new Crypto Winter.
The Conversation ‘The Father of Bitcoin Toxicity’ Illustration: Rachel Sun/CoinDesk If it were appropriate to celebrate “toxic Bitcoin maximalism,” then Mirceau Popescu would have won a lifetime award for service to that cause.
Popescu, who in 2012 founded MPEx, one of the first bitcoin exchanges, was the archetypal noxious maximalist: deeply passionate about Bitcoin to the point of embracing it as a life-defining ideology and dismissing all alternative perspectives; a libertarian who took his pursuits of freedom and property rights to the extremes of unapologetically hedonistic behavior and blatantly misogynist and racist commentary; a writer with an acerbic tongue who took down his critics and even threatened them with violence; and, yet, also a highly intelligent articulator of the radical proposition that Bitcoin represents to the established order.
Popescu, 41, was reported to have drowned off the coast of Costa Rica over the weekend. Crypto Twitter’s memorializing of the man captured the complex and uncomfortable aspects of his life and legacy.
Kraken and Bitcoin Magazine editor Pete Rizzo (the former editor-in-chief of CoinDesk) laid out a selection of classic Popescu quotes in a tweet thread. In a separate tweet thread started by Monero founder Riccardo Spagni (aka @Fluffypony), John Light answered a question about what made him “so unlikable.” Meanwhile, Coin Center Executive Director Jerry Brito shared an example of Popescu’s unyielding approach to authority and of stance on the sovereignty of Bitcoin as he trolled an Securities and Exchange Commission official who was seeking information over MPEx’s listing of shares in Erik Voorhees’s Satoshi Dice. (The SEC ultimately deemed the Satoshi Dice shares to be unregistered securities.) Note: The link in Brito’s tweet is to Popescu’s Trilema blog – warning, some sections are NSFW – where instead of the regular year, the dates atop each post are listed in terms of years counted since Bitcoin began. The SEC correspondence was in year 6, or 2014; we are now in year 13. And then, of course, there’s a story that’s so often attached to Bitcoin OGs. At some point, Popescu claimed to have a million bitcoin, a stash that would have put his net worth at more than $30 billion at the time of his death if he still owned that stash. Who knows the truth, but it’s a story that’s bound to get HODLers excited, effectively profiting from someone’s passing.
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Relevant Reads Regulatory Dithering What exactly is the regulatory agenda for crypto right now? Setting aside the discussion above about CBDCs versus stablecoins, so many other crypto-related regulatory issues remain unanswered as we enter the sixth month of the Biden Administration. With crypto-savvy Gary Gensler leading the SEC, many expected greater clarity on issues such as the prospects for a bitcoin exchange-traded fund and the legal status of a number of token projects that may or may not be deemed unregistered securities.
Yet, with a host of regulators’ speeches and congressional hearings – the latest of which occurred Wednesday – there’s still plenty of noise in Washington, D.C., about the need to do something … but what? There’s been so little concrete information out of the SEC and other agencies that, in a CoinDesk OpEd this week, Fordham Law professor Donna Redel and Niftys Chief Legal Officer Olta Andoni ask whether the Biden Administration “has lost the plot on crypto regulation.” Yet, the Financial Crimes Enforcement Network’s (FinCEN) seems very keen to dissuade people of the notion that crypto is not on their radar. Cheyenne Ligon reports that “cybercrime and relevant virtual currency considerations” are on FinCEN”s recently updated list of its top eight priorities. But maybe there’s a good reason for regulators to take their time in regulating crypto. In her congressional testimony Wednesday, Sarah Hammer, the managing director of the Stevens Center for Innovation and Finance at the Wharton School at UPenn, argued that the U.S. government needs to gather better data on that state of the crypto market before it makes any move. Daniel Kuhn reports.
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