How Web 3.0 will shape the future of money

Jeff and Jeremy talk about the fast-moving digital currency revolution, the evolution of money itself, and Web 3.0 ideals to create an open internet of value.

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In this episode, Jeff is joined by Jeremy Allaire - technologist, internet pioneer, and serial entrepreneur. Jeremy is the founder of Circle, a global financial technology firm enabling a multitude of organizations to harness the power of digital currencies for payments, e-commerce and a wide variety of financial applications. Jeff and Jeremy talk about the fast-moving digital currency revolution, the evolution of money itself, and Web 3.0 ideals to create an open internet of value. Jeremy and Circle itself are changing the relationship between commerce and currencies. The conversation concludes with the exciting opportunities afforded by the programmability of money through smart contracts. If you're interested in the future of finance, this episode is a must-listen!

For your convenience, full text transcript of this podcast is also available.

Introduction

Jeff Saviano

Hey, Better Innovation. It's Jeff. Well, today's the day we are back for a live interview in our Better Innovation studio. That's right. A real studio, not the virtual one that we've been using during the pandemic. I'm so thankful and appreciative to our team that figured out how to pivot to a remote virtual format this past year and a half or so.
But there's nothing like actually sitting down face to face with our guests and that's what we did today. We have a really interesting show in store for you, our listeners. Today, we sat down with Jeremy Allaire, the co-founder chairman and CEO of Circle, a global financial technology firm. Circle is enabling businesses and other organizations to apply stablecoins and public blockchains across a wide range of payment and commerce applications.
What makes Circle really unique is that it is the pioneer of USD Coin, also called USDC. They're the fastest growing, fully reserved and mind you, regulated digital dollar stablecoin in the world today. USDC grew by close to 500% in 2020 from just over $400 million to over 2.9 billion. That growth rate will be even higher in 2021. Prior to Circle, Jeremy was pivotal to the launch of other Internet ventures like Brightcove, Macromedia and Layer Corp., which he founded with his brother.
We recorded this interview just a few days before Jeremy appeared before the US House Financial Services Committee. He provided testimony in a hearing on digital assets and the future of finance. That hearing was designed for members of the House Committee to better understand the challenges and benefits of financial innovation across the U.S. today. And that's the topic that Jeremy and I explored in our great conversation.
This episode is all about the future of money as impacted by digital currencies. We're incredibly focused on this topic across my advanced technology lab team at EY. In particular, as it impacts public finance, tax and trade applications All topics that Jeremy and I dove into in our discussion. Jeremy is the leader in this space. What a treat to bring this interview to you today.
Sit back and enjoy. Jeremy, welcome to the show.

Jeremy Allaire

Thank you. My pleasure to be here.

Jeff

I got to tell you; it is so great to have you on Better Innovation. And it's also so great to be back live in a studio again doing this in person. We haven't been live in a studio since February 2020. So, this is one that we've been looking forward to for a long time.
Oh, awesome. I'm honored to be one of your first, you know, more recently live events. It's really nice.
You're like a real person. You're not a three by three on my computer screen. And that's that is so cool. One of my last live interviews actually was with a mutual friends, Head of Policy and Strategy, the great Dante Disparte.

And just want to publicly thank my friend Dante for bringing us together today. And so great to have him. I'm sure you would agree. As part of your company, part of the Circle.

Jeremy

Dante is a tremendous executive leader, strategist communicator, policy advocate. He's really phenomenal. We're really privileged to have him on the team.

Jeff

Yeah. He's been so helpful to us, too, over the years. We were just catching up before the interview today as we launched collaborations with the World Bank and MIT and so thoughtful and just so helpful in the consortiums. And he's a joiner bringing people together. And we've really enjoyed that about Dante. Jeremy so much I've been wanting to ask you for this interview. Lots of great stuff for us to get to, but I thought it'd be nice for the audience to get to know you a little bit better. Maybe a way to start, if you could just if you could just please tell us about yourself. And my crack research team tells me that you grew up in Minnesota and I'd love to know. How did growing up there and some of the early influences in your life chart your personal journey?

Jeremy

Yeah, I mean, I was actually born in Philadelphia, and spent the first 11 years growing up in in sort of inner city Philly and then moved with my family to Minnesota to a small town.
And that was a big change. And yeah, I mean, I think there are a few notable things. I think my dad, you know, got an Apple II computer for us and I think it was 1982 or 1983 and that was a big deal. And, and so my brother and I became, you know, computer tinkerers very early on and got really excited about actually like the entrepreneurs of the time, it's Kapor who had invented, you know, Lotus and Bill Gates and you know, Steve Jobs. These were big names back then. And so we were excited about it and experimented a lot with different things. And so that was sort of like an initial excitement about technology. And then, you know, I think that there are different inspirations. My own interests were really around what was happening in the world kind of politically, economically. How were kind of the structures of the world evolving?
That was a big focus of mine in college. So I grew up in a small town and then went to college at a liberal arts college called McAllister in Saint Paul, Minnesota. And was studying political science and philosophy and economics. And that's really where I got introduced to the Internet in a very big way back in 1990 but the other inspiration I would just say is, you know, I think both my parents actually were principally like social workers and did a lot of different things, but you know, I think they kind of experimented with new shapes of their career.
And I've got, I saw them reinventing themselves and trying new things and being entrepreneurial really. And so that gave me, I think, inspiration that, you know, one didn't have to just like take a job and have a job that you could do a lot of a lot of different things. And you know, one other instance I'd say, which was really important in my upbringing was I had a Montessori education and for, you know, for quite some time.
And I think that, you know, it's sort of, you know, free range kids kind of learning encourages independent thought, encourages risk-taking and I credit that a little bit with some of my entrepreneurialism. It is so interesting you put all that in a pot and you stir it around and you can see where some of your work perhaps may have been derived and especially I just find it so interesting about your parents that you of that generation, I think I am to where many of our parents generation were at companies for like 30 years. And, you know, there were they were to get a pension, but just to be able to be exposed to that where you see that reinvention.

Jeff

And I also find it interesting your background in college the policy and technology and we're certainly finding that now in the worlds that that growth avenues travel down that path of intersection of policy and technology. It seems as though from the outside in that so much of your life's work has been dedicated to realizing and then taking advantage of the vast powers of the Internet.
You've been personally aligned with some of the biggest initiatives and internet history, not just once, but actually quite a few times. And I love to just give you one quote. I love this quote from Mark Twain said that, “history doesn't repeat itself, but it often rhymes.” And I'm just so curious, what have you learned about your growth through the internet industry, and perhaps how is that rhymed to influence the launch of Circle in all that you're doing today

Jeremy

Yeah, you know, I think I was really drawn to the Internet when I first encountered it in 1990 and there were things about it that just really struck me, the idea of an open global network that anyone could join, that really just depended on computers and software and as I studied it back then, this sort of idea of open protocols, these sort of software based or these, you know, protocols that were defined in that could connect people. And this idea that this was going to be this open global permissionless decentralized network was really powerful. And I thought about it through the lens of how could that shape society and the economy and ultimately political systems. And I was really drawn to it in that regard. And I think I was not in college to become a tech entrepreneur.
Right. I was interested in a lot of general things. But I think that intersection of seeing the power of open global networks and what that meant for the world just was so compelling. And I think what's been consistent for me and this goes back to 1993 when you know, I was already excited about kind of these open apps that could connect people messaging, early internet messaging apps, content sharing apps like Gopher, which most people don't remember.
There were early versions of web browsers, but they were awful. And then, you know, graphical web browsers got on to Windows computers and in 1993 and I looked at the basic technology HTML, HTTP, these basic building blocks and could see that this could unlock on a global level information, media communications software distribution figured that out pretty quickly and pursued it.
And I guess to come back to your question a little bit, that's really been the thread that I've pulled consistently which is open global infrastructure built on open intellectual property, open source software, open protocols and standards and the ability to connect people and entities through those is so powerful and it's transformed very clearly the world enormously in these multiple generations.
The Internet, you know, and it's gotten richer and richer. And that was really the insight in for me as I started learning about crypto and Bitcoin in 2012 and then got incredibly, you know, really down the rabbit hole. The important thing that I saw at the time was the Internet, there were missing layers of the internet in a sense. These networks and protocols were really great at exchanging data and information and media and content and communications activity, but there was no layer of the Internet for storing, transmitting and exchanging value and all of the systems for storing, transferring and exchanging value in all of its permutations existed outside of the internet entirely. And what Bitcoin represented was an internet native protocol layer that was open, permissionless, decentralized, based on open source, based on open protocols, the same model that gave us the Web and gave us so much more than that being applied to the sort of foundational elements of money.
And it just struck me that this was sort of the next logical infrastructure layer of the Internet and would have in my view, when I was thinking about starting Circle, I guess my take was, I'd sort of watched the prior 20 years, and I guess my view was the next 20 years, the impact of this technology would be far, far greater on the world than the Internet of Information.

Jeff

And before we get to this notion, such a big idea of this, I've heard you talk about the Internet of Money and the flow of value and now Web 3.0 and what that means. Let's stick with those early ventures and maybe talk a bit about as you mentioned the first initiatives and your first exposure with the Internet, the exchange of communication vehicle and pictures and video.
That seems to be such an inspiration for some of your later work. Talk a bit about the earlier ventures.

Jeremy

Well, I mean, even before working on a technology startup in this space, you know, I was hands on with the Internet in 1990, 91. And I think what was amazing to me about it was so I was sort of interested in the kind of collapse of the former Soviet Empire and what was happening in the transformation of political and economic systems in the world.
And what I experienced was really profound. There were individuals who because of their universities inside of the Soviet Union that had access to the Internet and the Internet was mostly a connection of research institutions around the world, but their research institutions behind the Iron Curtain and in these places and even, countries and universities and the like in Sarajevo and in the Baltics and in other places.
And there were open protocols for sharing messages and communications that existed. And you just needed a piece of software and you could do it. And all of a sudden, I found myself having direct communication with people who were publishing their own accounts of tanks rolling through the streets, people being arrested, civil disobedience acts in the face of the Soviet, military.
And that was mind blowing. Like, CNN didn't have cameras there. There was no one who could see it. But it was citizen journalism. And it was profound that an open network that allowed for that disintermediation, as we called it back then, to happen. And to me, it was just that was like the insight that this is such a transformative technology.
And then the first venture, really, which was called a Layer Corporation, but was most well-known for a product called Cold Fusion, which was the first, you know, commercial what's called application server. Basically, it was a technology that allowed individuals, businesses to create interactive software applications that could be delivered in a Web browser. Back in 1995 and grew incredibly fast because people wanted to build these dynamic interactive web applications and was a precursor to what we now think of as like cloud and SAS and all of that.
But I think the insight was everyone's going to have a web browser it's a thin client, meaning, you don't need anything other than the browser. Everything gets distributed to the browser on the fly. And so you could actually write software on a server and that was an open network. Again, the idea was if you had $1,000 an idea, you could build a global online service and you could just put it on a machine that's hosted and anyone could interact with that online service instead of these closed walled gardens.
Like back then, AOL Prodigy, CompuServe and around the world, different kind of closed networks. And, the dialog at the time was, you know, there's going to be this information superhighway that was Al Gore's, you know, phrase and basically all the big media and communications companies were like, you know, drooling, like, we're going to control this. We're going to control everyone's access.
Interactive services are going to be a proprietary thing. Time-Warner is going to run those or AT&T is going to run those. And no, it was actually the open networks and open protocols that anyone could connect to that got global scale. And that's what society and the economy wanted. They wanted that openness. And I think there's obviously a lot of similarities to what's now happening in the reinvention of the global economic system on the Internet with blockchain technology.
But I think, you know, that was sort of what inspired that. And you know, building the kind of content and software Internet in the in the mid-to-late 1990s. So that was sort of the sort of first venture and became a public company which we had, you know, millions of developers using our tools, tons of companies all around the world operating with our software.

Jeff

And those open protocols, that's such a important aspect of the architecture of course of the internet and that you don't have you don't have individual control, you don't have any company controlling it.
And certainly as we talk about the Internet of Money in the now the flow of value that that that will become particularly relevant. If it's okay Jeremy, let's pivot to stablecoins. And I've had so much fun getting ready for the interview today. I've been listening and watching your interviews. Thank you. You've been accompanying my workouts for the past couple of weeks, so I've had some stablecoin Jeremy Treadmill sessions where it's been great to listen to some of your other interviews.
And now you've got a great way of explaining complex technologies in a way that is easy to understand. Some in our listening audience probably aren't overly familiar with the concept of a stablecoin. Can you explain what a stablecoin is? Why don't we start there?

Jeremy

Sure. So the basic idea, it comes back to some of the themes that we even talked about already.
So, the basic idea is, you know, digital currency technology, you know, what people call crypto and blockchain technology and so on, makes it possible to have representations of value and then to have protocols. Like we have protocols for exchanging information, like web protocols or SMS for messages or there's email protocols and so on. Create protocols to enable these representations of value to be transmitted and exchanged and transacted over the public Internet, over the open public Internet, which we're all accustomed to, with so many things.
And so, the idea that we had and this goes back to the founding of the company is, what if you could take what we think of as traditional money? In other words, you know, the liabilities of a central bank, that's like that's what a dollar is or the liabilities of a government like US Treasury bonds. What if you could take that kind of traditional money and express it in the form factor of a digital currency and so effectively give it the superpowers of the Internet?
And what does that mean well, what if you could have a dollar that could be transmitted at the speed of the Internet, that could be connected to any piece of software or hardware on the Internet could connect to it and transact it openly? What if not only was it at the speed of the Internet, what if it had higher privacy and security assurances than our existing payment technologies, that cryptography and cryptographic methods actually give us these incredible improvements in security and privacy and other things.
What if the ability to transact that was as cheap as exchanging data on the Internet, which is effectively free? And so those are the ideas and we believed it was going to be technically possible to do that. In 2013, when we started, it was not technically possible to do that. We had a reference in something like Bitcoin, which was accompanying that with a non-government money and not really in a way that could scale to support what we think of as everyday payments.
So, we experimented with different approaches to this and then in 2017. So, I guess that’s four years ago began designing what's now known as USDC, which is USD Coin and which is popularly referred to as a stablecoin and the concept is really that the name comes from the fact that well cryptocurrencies like Bitcoin are very volatile. And so what if you had a cryptocurrency that was stable like a dollar like price, stable like a dollar.
And so that's, that's where the concept came from. But we refer to USDC as a dollar digital currency because that's what it really is designed to be. And, the way it works is essentially you transfer existing money from the banking system into an account. We put that into reserve and we hold it on a one for one basis in dollar assets.
And we issue or we mint digital currency tokens for every dollar that you transfer in. There's no fee to do that. You can just say transfer in $100,000 and you'll get 100,000 USDC And now it's almost like you uploaded your dollar to the internet, like, you know, taking your music from your CDs and making them into MP3s.
So you have, you now have that and it works openly. And interoperability through any digital wallet that supports these open protocols like we have for other things on the Internet. And so that's sort of what it is and how it works. And I think people often ask, well, why would I do that? I have, you know, I have a bank account or I have a credit card or can I send a bank wire or or other things like that is I think it's sort of like saying, well, I have the Postal Service and I have faxes and I have catalogs get sent to me and I can find every product that ever went there. I have 500 channels on my cable subscription. Why would I need anything more than that? I think the reality is once you have the ability to store and transmit value at Internet scale with the efficiency of the Internet, it unlocks an incredible amount of economic value for the world. And my own view is that it not only will it lead to dramatically larger volumes of payment and value exchange activity, just as we've seen an explosion in communications activity and information exchange.
But it also unlocks things that were never before possible. So the other really key building block here is blockchain technology, not only does it provide this way to represent an asset and transfer it and transact it, it also creates a way to program it. And so, this idea of Programable money was another kind of core concept in the founding of Circle, and it was something that inspired a lot of people getting into this industry.
You know, this idea that you could write a contract in code, what is called a smart contract, and that that contract could interact with these digital assets, including like a digital dollar like USDC. And so that Programable money, I think, is opening up an incredible array of innovation in finance, commerce, trade, banking, all these areas.
And we're in the very early stages of seeing that.

Jeff

We're really excited about Programable money. We're going to come back to that. So many applications, Jeremy, we're seeing in our work mentioned a few things that want to just want to double click on one of them. The importance of the collateral. So, as you explain the process, is somebody as part of the transition from your analog dollars if you will, into a stablecoin that you're holding that as collateral.
Why is the collateralization important?

Jeremy

Well, it's extremely important. There are different models for how we use payment systems and payment technologies and how we think about our money. We have bank money where if you say put $100,000 into a bank and you look at your balance, it says you have $100,000, well, you don't actually have $100,000.
What you have is an IOU from the bank. The bank owes you $100,000 and it shows you that I it's essentially saying, I owe you this money. You don't actually have that. Because what the banks do is then they take that $100,000 and they in turn lend it out to people who want to borrow it. And that's what's called fractional reserve banking.
So, money gets lent out typically on like an eight to one multiple. So, the actual amount of money in the bank versus the amount of outstanding liabilities that they have is huge. And so what you're doing is essentially conceptually, it's almost like you're investing in the risk taking of the bank. And so that's you know, we don't really think about that.
And there are mechanisms like deposit insurance, which is if everybody can't make their, you know, make good on their on their loans and there's a run on the bank, at least there's some insurance protection up to say $250,000. Now with a Stablecoin, it's really important that 100% of the funds that are there are always available to be redeemed at all times.
It's really important that the users of these digital currency units don't have to worry about the bank like risk taking, but instead that it's what's called a full reserve model. And philosophically the whole crypto economic system, including things like Bitcoin, are rooted in what's often referred to as sort of sound money theory. And you can debate what is sound money or not, but sound money theory is, you know, either fixed supply currencies you know, which is what Bitcoin is or in a payment and banking context, it would be like a full reserve money system.
So philosophically, we also believe very firmly in this idea of full reserve banking. And you know, what that means for user in practical terms is if you put in $100,000, you know, you can always go and redeem it for $100,000.

Jeff

Even if there is a run. To use the analogy.

Jeremy

if there was a run on the stablecoin, right, people say one to one, you're there.
It's always there. Now, in the United States, the way we're regulated today is under what are what are essentially state by state banking regulations. So we're regulated by each state as what's called a money transmitter. And that body of regulation has a very strict set of consumer protection guidelines, which requires that one for one redeem ability.
So when you put money into PayPal or you have a balance with PayPal or cash app or Venmo or any of these, it's sort of the same thing, that is value that stored. And there those firms are not allowed to do anything other than hold it in cash and cash equivalents so that you when you have a balance.
No, you can always get it and use it. So that's a regulatory constraint and so we're regulated that way today. And so that's a consumer protection layer that exists today. And all of the other dollar assets that that are held in reserve are held for the benefit of the token holders.

Jeff

And perhaps then even more conservative than a traditional bank where 70 to one. It's important, isn't it, Jeremy, that it's at that point it's about confidence, it's about complying with the regulators of course and that the regulators will tell you with reserves you need to have. But from a consumer standpoint, consumers need confidence that they can and in Circle's case they could take USDC or other Stablecoins and they can transact business with you need the confidence that that if there is quote a run on stablecoins that you can convert it back into fiat.

Jeremy

Yeah. And this is one of the reasons why when we launched USDC over three years ago, first we did it under a compliant regulated framework. We worked with the regulatory, you know, state by state community in the United States. Secondly, we published monthly attestations. So, basically a global, significant public accounting firm, not Ernst and Young, another global public accounting firm who would every month look at the actual assets and statements of the assets and a number of tokens in circulation, digital currency in circulation, and attest to the fact that in fact they're fully reserved.
And we went you know, that was the sort of thing that we did above and beyond just to make sure.

Jeff

That it wasn't required.

Jeremy

PayPal doesn't issue a monthly statement for what's backing the $35 billion of balances that are held at PayPal right now. They don't do that. You got a little clause in their terms of condition that just says, we can kind of do what what we want with this.
They're bound by law to what they can do, but they don't do that. But with something like a digital currency that is going to be used widely and can be, you know, built on and integrated and so on, it's just like a different level. And because I think some of this in particular, crypto, crypto infrastructure, it's so new.
Those assurances have been really critical and I think have contributed to the incredible success that we've seen with USDC.

Jefff

So, what benefits then would have for the consumer, as you mentioned, PayPal and other digital payment systems that that have now been available for years. What are the benefits of the USDC over other digital payment forms before the invention of a stablecoin?

Jeremy

I like to hearken back to some of those early Internet examples because I think they're really useful. So, you know, in the early days of the Internet, everyone thought, okay, well, I can go to AOL and I can get all the content I need from AOL, right? Because AOL went out and did all these deals. Businessweek did a deal with AOL or whatever media outlet and you'd pay a subscription and you get access to AOL.
And AOL was an example of what people called a walled garden. It was sort of what was allowed inside of it. If you had an AOL account, you could message someone who had AOL, but you couldn't message anyone else. So it's a walled garden. Payment systems including almost every digital payment system. Innovation in the fintech world, what I call fintech 1.0 are all walled gardens.
You know, if you have Venmo, you can pay someone who is Venmo. The difference with a digital currency like you, USDC is it exists just like a piece of content on the Internet. It can now be exchanged directly with anyone who has a piece of software anywhere in the world, and you don't have that walled garden anymore. And so, the use cases are extraordinarily broad.
I can transact with anyone who has a digital wallet in any country. I can, you know, use that for a micropayment. I can use that for a $500 million trade with someone. So, it's really, really much broader in terms of the utility. And it goes back to why did the World Wide Web or Internet email or other things, why did those win and take over the world is because they're open permissionless, global interoperable and that everyone can plug in.
And so that's what's happened with USDC as well. There's now, you know, many, many thousands of products and services that just integrate the protocol. And they never had to do a deal with us to do that. They just implemented the protocol and now it has more reach and more utility. And that creates this kind of flywheel. And, you know, as I sort of describe it, currencies are network effect businesses.
The more people have the currency, the more utility the currency has. And protocols are network effect businesses. The more people who connect to and plug into a protocol, the more that that protocol can be used. And so, something like USDC has those implicit network effects, and it's the open Internet model and we're really passionate about this idea of an open Internet of value and open Internet of value exchange and unlocking for the global economic system. What an open Internet of communications and information did for the rest of the world.

Jeff

It removes that barrier, the barrier that existed for if somebody wanted to exchange value, whether it's through PayPal or some of those other means, then that have to either download an app or engage in a contract with some central provider.

Jeremy

That's right. And you think about the utility of PayPal, right?
Like a large institutional markets firm can't use PayPal to do a bilateral $500 million trade. Like you just can't just do that.

Jeff

It doesn’t have the functionality.
Like, it is not designed for that. You can do that with USDC and people do you know, you can't, you know, there's just so many limits to what's there. And so, you know, I think we're while we've seen, you know, well over $1,000,000,000,000 of transactions with USDC and we've seen the amount in circulation grow, you know, 1,000% last year. It's growing to over 1,000% this year. It's still super early. It's still super, super early. And we can imagine, you know, what real Internet scale use looks like in the coming years.
The growth has been phenomenal. And let's think about this from a government perspective, of course, many governments both domestic here in the U.S. and foreign, are considering the issuance of a central bank digital currency.
We've spoken to many governments about this for some of the programmability issues that we'll talk a bit about later. Can you talk a bit, Jeremy, about the differences between a Stablecoin and a central bank, digital currency? And I'm just so interested about the comparison of perhaps USDC and how that may compare to government issues. A CBDC.
Do we think that at some point we're going to come is this a VHS versus beta Betamax moment of one will prevail, Stablecoins versus CBDCs? Or do you see a world in the future where they can coexist?

Jeremy

I definitely don't think this is a zero sum game, but I think there's a lot we can take from history and in particular the history of the financial system and the history of payment technology.
The overwhelming majority of money is privately issued. The vast majority is privately issued. The over whelming majority of how payments are facilitated and the technology of payments is operated by private company innovation. You know, the government didn't build PayPal, it didn't build credit card networks, it didn't build, ApplePay, it didn't build WeChat pay. You know, the innovation in money in that sense has been extraordinarily driven by entrepreneurs, technology, innovation, private sector, etc. And that sort of an enshrined value in liberal Western market democracies, which is a kind of policymaking role for the government and rules of the role and regulation.
And then there's private sector open market competition, free competition. And you work on that and for the most part in the West that, you know, the government. Yeah, maybe in the past for a while they nationalized things, but it's been most things are no longer nationalized. The government doesn't operate most infrastructure. They don't run our hospitals.
They don't run an enormous number of the things our transportation systems are the things. So, I think that the private sector is really leading the way. And so just to give a short answer, what's, you know, how would I compare, you know, something like Stablecoins today to central bank digital currencies? Well, first of all, there are no central bank digital currencies that exist really and so Stablecoins exist.
And we make the point a lot because there's a lot of rancor in Washington about we got it. We can't get, you know, too far behind China. China is, you know, setting up a central bank digital currency. And, you know, who are we going to lose the digital currency, space race, like we'd say, like the quantum computing or the 5G or what have you. And, you know, the reality and the statement that we make is we're already winning. Dollar Stablecoins are the dominant form of digital currency in the world today, trillions of dollars of value being transacted with them. I think that the Chinese digital currency is done like $10 billion of transactions, mostly just incentivized, you know, kind of welfare payment experiments, you know, so the dollar's winning. It's the preferred currency in the Internet. There's an opportunity here for the US government, including the Federal Reserve and US Treasury, to build the regulations to give the financial market the assurances that it needs that issuers like Circle have the appropriate you know, regulation around them for this to be dependent on as a financial market infrastructure.
And that's really what has come out of the administration recently is a set of proposals for how to do that, enable that to flourish. And the dollar will be the currency of the Internet and it will maintain its leadership position in this really, really critical new economic infrastructure. This, you know, an actual economic infrastructure for the Internet.
So I really view this as a critical policy objective right now that needs to be addressed to get to one other dimension of your question, which is can these coexist? I do believe that over the long run, the database of you know, this is a funny story. Years ago, I met the chief information officer of the CIO of the Federal Reserve and I asked him, I said, what is the dollar like?
What's the tech stack like? What actually is the dollar? Dollars is an Oracle database sitting on a cluster of, you know, Sun Solaris machines. This is an old, you know, workstation. It's a database, the Oracle database and some Sun servers. And I'm sure it's redundant, but like that's the dollar. And, you know, when we talk about inflation, and quantitative easing and, you know, this injection of capital and buying all these bonds in the open market and this stuff, that sort of monetary policy, those are, if you're technical to all those are just sequel insert statements.
It's just like, okay, we need to buy $100 billion of bonds from the market. Well, let's create $100 billion data entry in that database. And now we have and we can transact it. So that's what the dollar is. Now, will the technology of the data store of what the dollar is become cryptographic money in the future? I think it probably should.
I think we should upgrade the architecture, the core architecture of what we think of as these core central bank deposits and then who transacts with those and how they transact with them, wholesale, retail, institutional, all this sort of stuff that can be worked through. And so, I do think we need to modernize the central bank money architecture and I think that will happen.
But, you know, just like today, we don't use the central bank database directly as people or firms or households. Like we rely upon all the innovation of firms. And I think Internet financial institutions that are natively built up around this are going to play a really important role in how all this is made available to the world.

Jeff

So Stablecoins had a head start that, as you said, that there are very few CBDCs that are in issuance today. Other than pilots. And, you know, of course, there's significant pilots happening in China.

Jeremy

We need to differentiate because, you know, governments are throwing around the phrase CBDC and the vast majority of these have nothing to do with digital currency.
The vast majority of these are centralized digital money applications that would be like a PayPal, right? It's essentially like a version of PayPal, but a country running it, which is just, you know, a closed system of wallets with a centralized database that's a ledger that people are using and nothing to do with crypto, nothing to do with blockchains, nothing to do with actual digital currency.
It's just that throwing that name in front of it because it sounds better.

Jeff

So then then with that, Jeremy, should the West be concerned and view the actions in the East as a threat and the issuance of CBDCS, the way that that those governments are defining it and how they're issuing it? Is it a threat or do you look to the advancements of the Internet, the private sector involvement, that that is the path to innovation?

Jeremy

Clearly, it's the latter. I think the West should be thrilled with the fact that a value system that's built on open access, free market competition, competitive open intellectual property that is built on it on the Internet, itself, which enshrines those ideals that is already winning and growing fast and is an opportunity for those Western values to continue to be significant in the world.
Authoritarian money that has total state surveillance, that is controlling society more closely. I don't think that's the vision of money that people want. I mean, that's also one of the reasons why non-sovereign money like Bitcoin is growing so much as people want economic freedom and privacy, not because they're necessarily out to do bad, but that's those are values in in a system where surveillance is of greater concern to people.
So, but I think, you know, Western governments should absolutely get behind the innovation that's out there and they are right to identify these significant risks that exist. There are real risks and this is scaling so fast. So they absolutely are right to say we need national policies, we need real regulation that is thought through for the kind of scale that this is growing into.
And we're very supportive of that and very actively involved in trying to pursue that.

Jeff

Yeah, you've been very vocal about the need for regulation that that you've heard other discussions and interviews you've had that that you've been clear that you would embrace some form of regulation. Of course, if you have too little regulation, perhaps the public trust may suffer along with, you know, ultimately greater losses from investors.
If you have too much regulation, then we've got lots of examples how that stifles innovation. What's the message to regulators, how regulators balance those two extremes and optimize and get the balance right and get just enough regulation to ensure public confidence. But they're not stifling that great private sector innovation that we need in order to progress.

Jeremy

Yeah, I mean, this is the question of the day. I've been called to testify to Congress next week to the Chairwoman Maxine Waters committee. And we'll be talking about this. And I think the key here is there are fundamental risks and principles that are important from a regulatory perspective. Consumer protection, meaning, you know, the funds are good, they're safe, operational risk with the operators of this.
You know what are the requirements from an enterprise risk management perspective of the firms? What kind of capital do they need to have, those kinds of assurances. The resiliency of the infrastructure and how it's managed and run, those are really critical pieces. How do these technologies address compliance, anti-money laundering, countering terrorism finance, these kind of financial crime risks?
All of those things are critical, and those are the building blocks for sound financial regulation in this kind of space. And so you need to define those. And there are a lot of statutes that already defined many of those. And then there's new statutes that are needed. And, you know, the government has clearly said we need Congress to act to come up with new statutes.
So there needs to be some bespoke definitions here that are, you know, specific to this. But the critical thing, though, is the classically you don't want to throw the baby out with the bathwater, so to speak. And I think right now there's an inherent, let's just call it a ‘cognitive dissonance’ between the way that financial infrastructure has historically worked and this idea of open, public permissionless Internet infrastructure being the infrastructure of the financial system.
And that's the critical piece that has to be thought through most carefully, because that is in fact, the place where you get the most disruption in a positive way, the most innovation in terms of what's possible for the economic system. And so, it's really important that whatever regulation doesn't just say, you got to throw out this whole open Internet thing and you've got to go back to this kind of closed walled garden world that's tightly controlled and tightly managed.
You need to embrace the open Internet and that's really the devils in the details there. There's a lot of details there. And that to me is frankly, where a lot of the heavy lifting on the policy side is.

Jeff

And to the point of details, we now finally have some regulatory guidance that actually just came to us within the last few weeks with the release of the president's working group on financial markets. They issued a report on Stablecoins. They had three very distinct recommendations, maybe just run through them quickly. Love to get your perspective. The first was that there needs to I think you've already talked about this, Jeremy, that there needs to acknowledging some regulation of Stablecoin issuers as banks that there would need to be some regulation of that.
Again, you've been pretty vocal that I think you agree more with that. Of course, devil is in the details. But the notion that there'll be some regulation of Stablecoin issuers as a bank, you would agree with that?

Jeremy

We do agree with that. And I think, you know, there are different types of bank charters. We ourselves are pursuing a national commercial bank charter to be a full reserve digital currency bank and that's, I think, the right approach for our business.
I think there are questions about, you know, some of the recommendations within that which is there's sort of the stipulation or the recommendation that Stablecoin issuers must be insured depository institutions. And I think that actually raises a really interesting issue, which is what is FDIC insurance for? Right. FDIC insurance is insurance because banks lend capital because they leverage your capital, they take risk with your capital.

Jeff

Consumer protections or the purpose of it is protecting consumer deposits.

Jeremy

It's protecting consumer deposits because the money's not there because you're lending it out. And so it is already more than you're taking you're lending more than you're taking in. And so that is the entire contract was the run on the bank in the Great Depression. And that is why FDIC insurance exists.
But if you are a full reserve bank and you hold 100% reserves, then what are you insuring? And so, in principle, like we don't have a problem saying there should be insurance, but what's the insurance? It's not what FDIC insurance is today. And so that's one of those things where I think policymakers are actually if they are saying like, okay, you can take, you know, the $40 billion that we have back USDC and now we can to lend that out a whole bunch.
And if we just have FDIC insurance, we're all good. I don't think anyone would want that because that would mean a more risky system. And so again, something that has to be defined. And so, agree that there needs to be bank charters and we believe national and federal supervision of these large scale dollar Stablecoin issuers like Circle.

Jeff

But we believe it's probably a new kind of charter. But it's not as though Circle is unregulated today. And I just think it's important for us understand that you are regulated today. This would be a different type of regulation. That's right. So this this first recommendation that there's more good with this but need to get into the details.
The second is around similar subject to federal oversight, but for a custodial wall of providers. That's a bit different right that that if you equate that of as we've been reading about this and trying to understand what would be the implications there that that you would have some oversight over those custodial wallet providers. How does that hit you, Jeremy? Do you agree with that?

Jeremy

I don't agree with that. I think if you read through the details of the recommendation, they're basically suggesting that any custodial wallet provider including international firms, would need to become under federal banking supervision, which is, in my perspective, it's insane. There are thousands of digital wallets of crypto wallets, of custodial crypto wallets that includes every exchange, custody service, etc. And if you applied federal bank level supervision there, it would literally destroy that industry.

Jeff

Which would mean registering with FinCEN Financial Corp.

Jeremy

That's different because today, if you are a custodial wallet to custody Bitcoin or the custody Etherium or any other crypto asset, including USDC, in pretty much every country in the world, you need to register with the government, get a license and be regulated as a money service business. So that's the threshold. And so, registering as a money service business being required to meet anti-money laundering laws and so on.
That's like a reasonable bar. But to be a money service business is important. And that's kind of where the regulation I think should stay at that level. I do not believe that, you know, digital wallets should go to maybe a step too far. I think it's a step too far.

Jeff

Okay. Let's quickly cover the last one.
And that's about affiliations of Stablecoin issuers and commercial enterprises, clearly looking for some separation I mean, this seems to be in response to perhaps big social media companies that have recent entrees into digital currency world. They're looking for a separation of commercial versus the banking Stablecoin issue is how do you feel about that Jeremy?

Jeremy

You know, I'm not an expert in this issue.
I think this is an issue that has been raised historically to separate commerce from banking. And that's been upheld in the United States for a very long time. It's one of the reasons why Walmart was unsuccessful getting a banking license. And so that sort of separation of commerce and banking is something that's applied.
And I don't have a super strong opinion about it. What I would say is if, in fact, a, you know, a large scale dollar Stablecoin issuer were to be under Federal Reserve oversight and would therefore have the entirety of its business classified as a bank holding company, then there are very clear regulations for bank holding companies and what kinds of activities they can undertake.
And so, I do think implicit there's something implicit in, you know, if we're going to have federal charters and Federal Reserve supervision, then in fact, that does de facto limit the other businesses that that might be, you know, involved in that broader business entity.

Jeff

That's really helpful. Jeremy, thank you. And want to make sure that we come back to and talk a little bit about Circle, about the company that you that you formed in.
And there are some really exciting new initiatives at Circle. We've been reading with lots of interest, for example, about Circle Impact which is a new social responsibility initiative, taking USDC reserves, moving them into women minority owned businesses. Tell us more about Circle Impact and why that's exciting for you.

Jeremy

Absolutely. So, Circle’s broad mission is to increase global economic prosperity, you know, through the frictionless exchange of financial value.
And we have a core value as a company to be multi-stakeholder and multi-stakeholder to us means you know, our stakeholders are our customers, probably the most important, our employees, their families, their local communities, the world at large, of course, our shareholders but to be a multi-stakeholder company and to meet the core mission of the company, it's really critical that we have very clear programs and efforts to really demonstrate that.
And Circle Impact is something that we just recently announced, which really has four pillars to it. The first is, is one that I'm very excited about, which is we have made a commitment to take a meaningful portion, which we think will ultimately be billions of dollars of the cash that is held to back USDC and we will place that with minority depository institutions and community banks throughout the United States.
And that will strengthen the capital of those banks and ultimately lead to economic opportunity creation in those communities. And so that's a really significant thing that we're very excited about and we hope to provide more details on how that's going to start rolling out. And that's because we're a full reserve model, we don't want to hoard that capital for our own lending.
We want to make that cash distributed out into communities.

Jeff

And there are real barriers there that exist, especially for women, minority owned businesses. I just saw a recent statistic that that on average, a business that's owned, whether by women or minority owned, that the percentage of capital that comes from their own wallet is significantly higher than it would be from others.
And that's raising concerns in the U.S. and within commerce. And it's raising concerns in other countries. This, it seems, would be a way to perhaps close some of that gap. Is that fair?

Jeremy

I mean, ultimately, it's about ensuring that banks in these communities can be strong enough to lend into those communities and to, obviously lending in those communities will strengthen those communities and the businesses within them.
You know, a second piece of the initiative is focused on what we called digital financial literacy, which is there's this incredible set of opportunities that come with crypto and come with digital currency. And we want to make sure that communities have equal access and understanding. And so initially that's partnering with, you know, historically black universities and colleges to build educational programs around this technology specifically to ensure that these communities have really strong awareness and literacy around it.
You know, a third piece is also very exciting, which is we operate one of the largest crowdfunding platforms in the United States called Seed Invest. And we will be launching specific programs for women and minority entrepreneurs to be able to more effectively do direct to Internet fundraising and form capital and raise capital through the Internet, both from within their communities, but more broadly and so we're going to be introducing programs focused on entrepreneurs in those categories and helping them raise capital.
And then the last is basically, there's really incredible power from digital currency reaching people around the world efficiently. And so we're building out programs for humanitarian aid, disaster relief and other aid distribution using USDC and making that a tool that's available to NGOs. Also, supporting even government objectives. We've done some work in the past with distributing, you know, aid to health care workers in Venezuela.
There's no lack of need for distributing aid in inefficient and corruption resistant and traceable and auditable ways and digital currency gives aid distributors a real power. They're certainly partnering with a number of organizations to do that as well.

Jeff

Exciting to see that effort Jeremy. Alliance to Financial Inclusion and Accessibility. It'd be great next week as you as you provide commentary and testify the House Committee that there's a lot of good in the world, especially around financial inclusion in closing some of these gaps that I think as we're heading into greater discussions around potential regulatory burden they understands that there's a whole range of benefits that this can provide on financial inclusion. I want to, as our time together is coming close to an end and had such a great discussion Jeremy, one topic that we're particularly interested in and we mentioned earlier is around programable money and it aligns to our work at EY applying innovative technology to solve big problems across public finance tax, which is a particular focus of mine.
We have an advanced technology lab focus on big tax issues, including trade as well. There's opportunity to develop programable money with the help of smart contracts, sectors like insurance. I mentioned public finance. We'll look a lot different in the future. Explain what we mean by programable money. This exciting opportunity to actually program currencies themselves with smart contracts. Why are we also interested and excited about this?

Jeremy

Well, I would look at it through a couple of lenses. So, I think the first is, the ability to take some arrangement that exists between counterparties, right? That could be an arrangement between let's just say it's an arrangement between businesses. There's a trade agreement, there's a commercial agreement and there's events that occur in the delivery of services or delivery of products or other things which are typically written down in a traditional contract and then require humans to say, okay, this thing happened, okay, go tell this part of this department to go make this bank transfer or whatever it is.

Jeff

Goods got shipped, they cross the border, something happen. The consensus is certainly in that.

Jeremy

And but you can imagine that like a labor contract is a great example of that. There's all kinds of, you know, work delivery, etc. Now, what if the, the, the, the contract itself is written in code and instead of, you know, having an interpreted by humans and then manual processes, what if everything could be automated and where the events as they occur trigger the code to effectuate a transfer.
There's simple examples like, you know, there's an enormous amount of labor that now is working in the on demand economy, the so-called gig economy, and that's growing and that's going to continue to grow because flexible work, etc. Now with programable money as you know a delivery happens just to use the most simple example, you know, that could stream a payment to a person's digital wallet instantly.
So, the notion of when you get paid and how you get paid and because this infrastructure works on the public Internet and it's, it's this trustless infrastructure that would work with people who work with you anywhere in the world and super efficiently. And so, just the ability to have, you know, just greater capabilities for the, you know, events and what takes place in a commercial arrangement and being able to have all of that be automated.
That's one thing. I think the other lens that I would look at this through, though, is that we don't know yet what people are going to build. And this is the example I like to use is, you know, when you know, people invented smartphones, there were smartphones for a really long time. You know, Palm Pilot, Symbian, Nokia, Windows Phone, all this.
Right and people are like, oh, this is going to be amazing. They had all these ideas. But, you know, eventually you had a smartphone that had a good touch screen and it was high fidelity and it was like had a good way to create good software, and that was good. Okay. So people started building software for it.
But then you had another technology which was like 3G. You know, the bandwidth got faster. Then you could actually start delivering more data. And that was cool. So, people could build even more interesting apps. And then you added a GPS to the phone and people thought, oh, a GPS, that's cool. It's going to replace my Garmin or whatever device made turn by turn directions.
And that's going to be helpful for me. But no one thought, well, if you match those up, you could reinvent transportation and logistics. Travis from Uber thought of that, and he built that, and he built it with those the programable infrastructure of those things coming together and created an extraordinary business that then has been replicated all around the world.
Programable money is similar. The capabilities of blockchains, Stablecoins, smart contracts, and what that's going to allow we can't imagine yet. And it's going to be thousand X improvements that we just don't know yet. I did a podcast with a project called ___[AB1] a week ago. It's a really, really cool platform for musical artists that basically is a blockchain protocol that puts the artists in control over their relationship to their community of listeners and to the monetization that can take place and ___, they took the USDC and the USDC Protocol. They built it into their infrastructure and they've now got this automated flexible micropayment system that goes to artists. They just came up with that. They didn't, you know, that was an example of like now I have programable money, what can I do?
Mashing that up with what can be done with community ownership of art and media because of blockchains. And so this is another example where people are just coming up with it. And then, you know, ultimately kind of coming back to the Ernst and Young world a little bit. Our own view is that on chain treasuries, on chain payments are going to become far superior operationally for corporation and eventually corporations are going to want their treasury, their contracts, their financial activities to be on chain.
And that is going to be a breakthrough for the assurance industry because you will be able to audit transactions, funds activities, etc., with far greater visibility and assurance than you can today. And so that will take some time, obviously, for that to happen. But I think it ultimately has a big impact on fiduciary industries.

Jeff

And what this is, is disintermediated. You imagine today the army of people that it takes in a complex commercial business arrangements, whether it's cross-border shipment of goods and the number of intermediaries and the people that are involved sending, you know, thousands of emails back and forth and still phone calls and texts to release released goods from ship and release payments. And as that becomes automated through smart contracts and you just intermediate and make that process more efficient, then I would agree you could see this world of opportunities opening. For us and our work in our lab, advanced technology tax lab. We're particularly interested in taxation. And we've talked to a number of governments about the efficiencies that would result when there's an opportunity to take tax determinations or collection mechanism arms or payment mechanisms and move it to the transaction itself. And today, what happens is that, you know, there are hundreds of separate technology systems that help companies figure out how much taxes you have to pay governments to collect it.
And it's and they're not interoperable. It's a spiderweb of technology. The opportunity to embed those tax features and just bring tax to the transaction instead of taking the transaction and moving it to separate financial systems. To what seems like there's a world of breakthrough and opportunities there. Would love to get your thought about the application of programable money and from a tax, whether it's from a public perspective, governments efficiencies, of course, tax is the lifeblood of economies or from the private sector perspective. Does that excite you as much as it excites me, Jeremy? I just love taxes.
Don't we all? Just having more, you know, real time visibility, availability, the ability to, you know, kind of effectuate transfers and payments and other things in these more real time and auditable ways certainly should make that kind of activity, you know, stronger and theoretically could you know help Treasury's, government Treasury departments to have, you know, more efficient and assured tax collection as well.
So, I mean, I think these are interesting things at an infrastructure level for society that can be built out over time for sure. And just like the Internet and Internet software and cloud data and all the Internet infrastructure has like woven its way into like everything I think, blockchain, blockchain finance, and this new economic infrastructure being built around, it will find its way deeply into all of these areas.
The transparency that would be apparent to governments and the ability to see more transactions. And if you're an honest taxpayer, as of course we are and our clients, that that you would embrace it, you would embrace transparency, opportunity for governments to close the tax gap. A lot of the tax dollars that are just not being collected today reduce tax fraud.
You know, the opportunity to transform government is one thing we talk a lot about is the annual loss tax revenue to fraud is in the measured in the trillions somewhere in the two to $3 trillion range that could close the sustainable development goals like that and the opportunity to streamline that. And for governments to do it responsibly, not as a question of control where they're controlling the transactions.
But that there's a bright light shining on the transactions and allow to taxation to become more efficient. Yeah. Well, Jeremy, I think that's a great point in discussion for us to anchor on as we bring our discussion today to a close. Thank you so much for coming in to our Better Innovation Studio. He's such a leader in this space and really enjoyed our discussion.
We have a regular feature on Better Innovation. We'd like to close it out as if we haven't had had enough fun, this is a lot of fun. Three rapid fire questions and answers. You up for it?

Jeremy

Give it a try. All right. Here we go.

Jeff

Number one, what book do you have on your nightstands?

Jeremy

I have Dalio's new book that just came out.

Jeff

Oh, I do that, too. I haven't read it yet. Have you read it? Just started reading it. Oh, great. So far so good.

Jeremy

Yeah, I would imagine it's pretty dense, but it's good.

Jeff

Yeah, it's good because we're recording this early December. We're going to try to get it out before the holidays. So I think you've just given a gift absolutely. Gift advice to others.
Okay. Second question, tell us about a historical figure that you admire.

Jeremy

Benjamin Franklin. Hmm. Why is that? Well, I think he was an entrepreneur a technology inventor, a diplomat. He was a revolutionary. And, you know, I think those are all good attributes.

Jeff

I see the connection. I can see the connection. Love it.
Okay. Last question. What do you see as our greatest opportunity as a society, as we try to build back stronger when we emerge from this pandemic?

Jeremy

Our greatest objective.

Jeff

Our greatest opportunity, what is our greatest opportunity as a society to as we're emerging from the pandemic, how do we build back stronger? Where should the focus be?
Give us one thing.

Jeremy

I guess, you know, from my perspective, I you know, my hope is that, you know, building back stronger is just developing more human commonality that people certainly in the United States can kind of better understand our shared reality and develop stronger ties across communities and build those, you know, build those more strongly I think we're a country that has got a lot of divides.
And I think that's a huge issue. It's a huge threat to our democratic system. And, so I hope that, you know, coming out that there's some real opportunity for reflection for people to try and reduce some of those divides as well.

Jeff

I love it. But what a great message to close this out on today. What also a great message for you to bring to Congress next week and wish you well with that?
And thank you for spending time with our better innovation audience. Really enjoyed the conversation Jeremy.

Jeremy

thank you so much.

Presenters

Jeffrey Saviano

EY Global Emerging Technology Strategy & Governance Leader

Podcast

Episode 3

Duration

1h 14m 31s

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.