Stablecoins and National Security | Former CFTC Chair Timothy Massad

This episode delves into the impact of stablecoins on national security and the implications of integrating digital assets into the financial system.

1. The integration of stablecoins into the financial system offers significant advantages in terms of innovation and accessibility.
2. Decentralized blockchains present challenges in governance and identity verification, necessitating a balanced regulatory approach.
3. The U.S. needs a regulatory framework to manage the risks and benefits of stablecoins effectively.
4. Stablecoins could enhance payment systems and support the dollar's role in global finance.
5. Preventing illicit activities involving stablecoins requires ongoing collaboration between regulators and the crypto industry.

1: Introduction and Background

Overview of the episode's primary focus on stablecoins and national security.

• Ryan Sean Adams: "Welcome to Bankless, where today we're exploring the frontier of stablecoins and national security."
• David Hoffman: "Tim represents the type of person that crypto needs to win the hearts and minds of."

2: The Evolution of Stablecoins

Discussion on the emergence and potential of stablecoins in the financial ecosystem.

• Timothy Massad: "Stablecoins do pose certain risks that need to be addressed, but they also could enhance payments."

3: Comparing Eurodollars and Stablecoins

Exploring historical parallels between eurodollars and stablecoins.

• Timothy Massad: "Eurodollars are any deposit of dollars outside of the U.S."

4: National Security Concerns

Analyzing the national security implications of widespread stablecoin adoption.

• Ryan Sean Adams: "How do stablecoins impact national defense? Can crypto and the nation state work together?"

5: Regulatory Frameworks and Innovation

The need for a balanced regulatory approach to manage the benefits and risks of stablecoins.

• Timothy Massad: "We need to create a regulatory framework where this technology can develop in useful, constructive ways."

6: The Future of Stablecoins and U.S. Dollar Dominance

Potential scenarios for stablecoin adoption and their impact on the U.S. dollar.

• David Hoffman: "There's different strategies, so how do you feel about just the different trade-off space?"

1. Stay informed about the evolving regulatory landscape for stablecoins.
2. Engage in discussions with policymakers to advocate for balanced regulations.
3. Explore the potential of stablecoins for enhancing payment systems in your business.
4. Implement robust KYC and AML measures if involved in stablecoin issuance.
5. Monitor developments in international payment systems to understand their impact on global finance.
6. Consider the implications of stablecoins on your investment strategy.
7. Stay updated on technological advancements in blockchain and digital assets.
8. Participate in industry forums and conferences to stay connected with peers and regulators.
9. Educate stakeholders about the benefits and risks of stablecoins.
10. Support initiatives that promote innovation while ensuring financial stability and security.

Are stablecoins a threat to national security? How should the US government step in?

We brought Timothy Massad, the perfect guest to help us answer these hard questions. He was the Obama appointed chair for the CFTC, the guy who helped designate Bitcoin as a commodity over 10 years ago.

People

Ryan Sean Adams, David Hoffman, Timothy Massad

Companies

Circle, Facebook (Meta), JPMorgan, Bank of America, Kraken, Coinbase

Books

None

Guest Name(s):

Timothy Massad

Content Warnings:

None

Timothy Massad
Are we going to get comfortable with digital assets with tokenized assets traveling on decentralized blockchains or not? They pose enormous advantages in terms of innovation, composability, open access. But on the other hand, decentralized blockchains may not offer the kind of governance that we'd like, the kind of ability to check identity. And our financial system does turn on the ability to know who is transacted. So how do we balance that?

That, to me, is the central issue.

Ryan
Welcome to bankless, where today we're exploring the frontier of stablecoins and national security. This is Ryan. Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. The question today, how should the us government think about stablecoins and crypto from a unique vantage point, something we haven't talked about before, which is national security.

I think it's safe to say that many in DC have different concerns than probably the listeners of bankless with respect to crypto. And one in particular is this. If something like stablecoins gain adoption, does that nerf the us ability to sanction? How does the US come up with policy around this? Timothy Massett is the perfect guest for the conversation today.

He was the Obama appointed chair for the CFTC. This is the guy that actually helped designate bitcoin as a commodity way back when, ten years ago. And I would call him a maybe cautious state advocate, though there is definitely some nuance here, a few things we talk about today. Number one, why the US can't ignore stable coins. Number two, how stable coins are similar to euro dollars.

Number three, is crypto even compatible with us financial sanctions and dollar supremacy? Number four, what would sensible policy on stable coins even look like in the US? And finally, his thoughts on what happens next on bankless. Ryan and I like to host conversations with people who don't necessarily share our perspective and our values, but definitely do have a coherent opinion as to how this industry ought to and needs to integrate with the pre existing financial system. Tim, while he does not share our perspectives, I think we can find ourselves shoulder to shoulder with him about a lot of things and a lot of opinions.

David Hoffman
And I think Tim represents the type of person that crypto needs to win the hearts and minds of in order to get what we want out of appropriate crypto regulation. So with all that in mind, let's go ahead and get right into the episode with Timothy Massado. But first, I'm going to talk about some of these fantastic sponsors that make this show possible, especially Kraken. Our preferred crypto exchange in 2024. If you do not have an account with Kraken, consider clicking the links in the show notes to getting started with Kraken today.

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Ryan
Thankless nation. Very excited to introduce you to Timothy Massett. He's a senior fellow at Brookings. He's also a research fellow at Harvard. And he was an Obama appointed chair for the CFTC, where he served from 2014 to 2017.

And more recently, and of interest to us is he has taken a keen interest in stablecoins. He published this article in April that David and I caught wind of. It's called stablecoins and national security, learning the lessons of the euro dollar. That's the title. And it really caught our attention after reading it because it dove headlong into what I consider kind of the elephant in the room that everyone's avoiding.

How do stablecoins impact national defense? Can crypto and the nation state work together? So there's lots to explore in today's episode. Tim, welcome to bankless. Thank you, Ryan and David.

Timothy Massad
It's great to be here. Well, we're excited to dive into this. I was wondering, for our audience, if you could just tell us a little bit about your background and more specifically the background that is most relevant to your interest in stablecoins because you have become more recently interested in stable coins. How did that happen? Well, I've been interested in stable coins and crypto for quite a while, actually writing about the space for quite a while.

And actually, I first testified about crypto ten years ago, if you could believe it, before Congress 2014, before me and. Ryan got into crypto. Tim beats me on that. I just started in crypto in 2014. So you might be an OG here, Tim.

Right. And it was around that time that the CFTC, under my leadership, declared bitcoin a commodity. And we can get into why we did that because a lot of people actually don't understand why we did that. Thanks, by the way. Appreciate that.

And then when I left the CFTC in 2017, I was thinking about what I wanted to do next, and I became a senior fellow at the Kennedy school at Harvard, and I decided to start, you know, doing some writing about crypto. So I actually published my first paper on the need to strengthen crypto regulation in 2019. And I talked about this problem of, you know, is it a security? Is it a commodity? How do we deal with that?

We don't have a regulator for the cash market and commodities. And actually, in that paper, it was funny because I was going back to it the other day, I also talked about the fact that, well, we shouldn't let regulation push everything towards centralized intermediaries because one of the benefits of this technology is the potential decentralization aspects of it. So an important issue perhaps that's going to be debated as we're recording in Congress, as we're talking. Right. But anyway, then I started writing about stablecoins in early 2021, I think because I was sort of watching what was happening and wrote a piece, I guess initially for Bloomberg or Brookings.

I can't remember where the first one was, where I talked about the fact that, look, these things exist. We need to bring them within the regulatory perimeter, if you will. They have certain risks, but they also have certain benefits and opportunities. And that's continued to be my view, that stablecoins do pose certain risks that need to be addressed, but they also could enhance payments and they could be an important competitive instrument in payments, and they do effectively support the dollar in a way. This most recent paper, as you note, focuses on the national security aspects and talk about what those are and what I said in that paper.

Ryan
Okay, quick side quest. Before we get into the main event, we talk about the euro dollars and stable coins and kind of the paper which is so under your leadership, the CFTC declared that bitcoin was a commodity. And this is of course very relevant to current debates. Even also as we speak, there's the question of whether the SEC is going to allow Ethereum to have an ETF. And I think this will be resolved by the time listeners listen this.

So, listeners, in the future, you have the advantage of knowing what's actually going to happen. Right now I'm wondering if you have any weigh in on this debate, specifically with Ethereum. Like, it seems like the CFTC has already also said it's a commodity, but maybe there's some territory war, turf war. I don't know what you can get into here, but you are no longer on the CFTC. So maybe tell us how this all works.

Like, what's your take on this? Well, the funny thing is this is one of the facts that people don't understand. Something can actually be a commodity and a security. But look, let me maybe say a couple of things first. When we declared bitcoin a commodity, I didn't do that in order to start a turf fight with the SEC.

Timothy Massad
We did that because the definition of a commodity under our federal law is a long list of things that everybody would say, oh yeah, that's a commodity, you know, cotton, oil, other agricultural products and so forth. But then the definition and the law also says, and anything else, and I'm paraphrasing, but anything else that is the subject of a contract for future delivery, meaning a futures contract or a swap. There were people who wanted to do bitcoin swaps in 2014, and they came into our office and asked us, well, you know, we want to launch these. What do you think? And we said, well, if you do that, it's a commodity and it's subject to our approval.

And that's what led to the determination which was upheld by the court. And then, you know, we were the first agency to start bringing enforcement actions. But we also did approve bitcoin swaps. So as to ether, look, I think I get the reluctance of chair gensler to say whether ether is security or not. I think that probably goes to issues of, well, isn't there some group of people that seems to be involved here?

And you can look at things that have happened, right? Look at what happened after the Dow attack and the reversal of the Dow attack back in, whenever that was 2016. Look at the merge and you sort of say, well, wait, is there a group of people that's kind of in charge here? On the other hand, obviously it is very widely distributed and it's probably water under the bridge at this point to assert that this is a security. But as to the ETF, I don't know.

I really don't know. I'm not sure that they will approve it. Interesting. Timothy, can you just place us in your head when you were learning about crypto, you're reading about crypto, learning about it for the first time. The bulk of this podcast, I think, is mostly going to be focused on stable coins.

Yeah. Do you just remember what your first impressions were when you read about stablecoins? And was there some sort of maybe a eureka moment or an aha moment of like, oh, this is what this is. This is how this is going to go. Just maybe if you could remember your first impression about stable coins and crypto.

Well, I think particularly with stable coins, I thought, oh, this is a really interesting application of the technology because I think up to that point I was intrigued. But when I was sort of looking at unbacked crypto assets and looking at what was happening in the market, it seemed that while there was a lot of investor interest, it was largely driven by speculative forces, by supply and demand forces. There wasn't a clear use case to a lot of the tokens that were being issued. I would say that's not to say that bitcoin isn't a very, very interesting thing, as is Ethereum and as are other blockchains and layer ones. But I think when I first started learning about stablecoins, I thought, oh, wow, this is essentially on chain money.

And it was around that same time, I think, that people were talking about cbdcs and so forth. I first really got into it with the Facebook announcement of Libra. Actually, that was the first paper I really wrote about stablecoins. They didn't call it a stablecoin, of course, but that's what it was. And I found that fascinating.

I found their proposal fascinating because everybody, I think there was a lot of opposition to it, of course, and it never got off the ground. A lot of that opposition was due to who Facebook was, right? Meta now, of course. But it was because people were upset about the power that Facebook had, about its failure to protect privacy, about things that people felt it did in the 2016 election. And that was kind of overhanging the whole issue.

Plus, Libra in its first iteration was a basket of currencies. I was just about to bring that up. I recall this 2019, it wasn't even the dollar. It was a basket of fiat currency. So I read about this, and I actually went out and talked to them.

I met with David Marcus and others, and I said, why are you doing it this way? And they basically said, well, us some time. He wouldn't tell me what was going on. But it was like a couple of months later, they came out with the revision where it was individual tokens for individual currencies, which I thought, well, that makes a lot more sense. I wrote a paper for Brookings about all this, where I basically said, look, I understand the objections to Facebook.

I understand the need to protect privacy and to think about the data that comes from all this. But I basically was still in favor of creating a regulatory regime to allow this because of potential competition in payments and because of potential benefits to financial inclusion. Okay? And at that same time, I looked at what was happening with China with Wechat pay and Alipay, and also how the chinese government had responded to those in terms of creating a regulatory framework. And I said, look, we can basically learn from what they've done because they put in some prudential measures, and that's what we would need for this sort of thing.

So that's where I was. And, of course, that announcement transformed things in a lot of ways. Right? It caused central bankers around the world to realize, gee, we got to pay attention to crypto and to digital assets. It caused a lot of central banks to start to do research and development on cbdcs.

And of course, it started to focus people's attention on stablecoins. And then it was a little bit after that that I started sort of looking at tether and getting worried about tether because there was so little transparency there and it wasn't clear what they were investing the assets in. And all this is very funny when you look back, because again, I'm not saying Facebook didn't have its issues, and obviously I was concerned about the data and privacy issues. But on the other hand, what they were proposing was, in the second iteration, a lot safer than a lot of things that have since been launched. So it was kind of ironic just.

Ryan
To tie a bow on that for people who don't. And even my memory is kind of hazy. I actually just don't know what happened. But why did the Libra diem project from Facebook actually die? Why did they abandon it?

I think my impression largely was basically, and this is probably gross oversimplification, but I think this is in a lot of listeners minds, the us government didn't want them to have it. Congress didn't want them to have it, and they realized that this wasn't the hill to die on, so they just moved on to AI and the metaverse and stuff like that and they just abandoned the project. Is that accurate or what would you revise? Yeah, Ryan, that's basically accurate. What happened was that they first sort of set up shop in Switzerland, they set up the corporation there.

Timothy Massad
But the swiss authorities sort of said again, by now we're in Libra 2.0, or what was then called Diem, which was the individual tokens representing individual currencies. And the swiss authorities said, look, we're not going to approve this unless the us government approves it. There were a lot of conversations with treasury, with the Federal Reserve, and ultimately those authorities were not willing to grant permission. What's very interesting about all this, of course, is that unlike perhaps its pattern in other ways, this is one occasion where Facebook asked for permission. And so they didn't get it.

And I remember watching the hearings shortly after they made the announcement. And Zuckerberg testified, David Marcus testified, and they were asked by Congressperson after Congressperson, well, are you going to do this if you don't have all the regulatory approvals? And they said, oh, no, no, no, we're going to get all the regulatory approvals. And I was sitting there thinking, well, what are those? There's no framework for this.

There's no regulatory framework. You don't even know what approvals you really need. But because they said they would not do it, unless it was blessed by regulators, they were kind of in a box. The other thing that's really ironic about it all to me is when you go back and watch those hearings, Congressperson, after Congressperson said, this is going to undermine the us dollar. And that was in the first iteration when it was a basket of currencies.

It was the dollar, it was the yen, it was the pound. I went to China like two months after that to a fintech conference in Shanghai, and I talked to a lot of chinese officials and they were all very worried about library because they said this is going to promote the dollar. And they said the dollar is going to be the biggest component of the basket. So this is going to promote the dollar. So they were very worried, and that was one of the things that caused them to accelerate their CBDC research.

So it's a fascinating thing. It's ironic, it's interesting how all this works. And I do think, by the way, I'll just say this out loud, part of the takeaway from crypto was ask for forgiveness rather than permission, because if you go to Congress, they're not going to have the vision. They don't have a startup mindset what this thing could become. It's really not in their DNA or their function.

Ryan
I want to ask you this question. As a former regulator, let me make clear. I'm not encouraging people to just go. Out and break things. Forgiveness later.

All right. I'm not endorsing that. I'm just commenting on what their strategy. Was, not endorsing the bankless lifestyle. Fair enough.

That's our job over here. Let's get this piece out of the way before we get into your paper and background and euro dollars. I think there's still a lot of people in the us government who don't care about stable coins. Right? Basically.

Okay. So in the crypto space, we're all very excited right now about stable coins. We're at all time highs in terms of, like, number of transactions, in terms of number of holders. We're almost at all time highs in supply, closing in on $200 billion, which would be a new landmark for the amount of stable coins out there. But many in government just see $200 billion and they're just like, we handle trillions.

Like, wake me up when this actually matters, right? And they go back and they look at Diem and Libra and it was much ado about nothing. Nothing actually happened. Here we are five years later and they say, Tim stablecoins are just too small to care about. It's a niche.

Why are you spending time on it? Why should any of us spend time on it? What do you say to that? So, yeah, it's a good point. And what I say to that is I think it's important as a competitive factor in payments and because we don't really know what the potential is.

Timothy Massad
Let's step back for a moment. The US, despite having the world's largest economy, most innovative economy, strongest economy, has a lousy payment system. It's slow, it's costly, and we have problems with access. Now, most of us don't realize that, right? We think everything's fine.

I've got my credit cards, I've got mobile banking, I've got maybe Venmo or Apple pay, Google pay, whatever. And boy, I'm making payments and they're going quickly. And what's the issue? Well, the issue is it's actually costing all of us more than we realize because merchants are paying the cost of those credit cards. That's number one.

It is slower than what we could have. And that is particularly a problem for people who don't have much money. If you don't have very much money in your bank account and you go to cash a check, that check isn't going to clear for three days. And so that is why a lot of people in the lower quadrant of income in this country use non banking services like check cashing services and payday lenders, right, because they get paid on a Friday, but they need to pay their bills and they can't wait three days or they can't risk getting an overdraft charge. So they go to a check casher, they get cash right away.

That check cashier may even send checks to pay their bills. A lot of them do that, but it costs them a lot. It costs poor people roughly 10% of their income just to use their income. So that's a big problem. So just to really reiterate, there are costs of our high friction, slower banking system.

David Hoffman
It's just obfuscated away for most people that have any sufficient amount of money. Exactly. And the long tail is severely penalized by comparison. Right. Stable coins.

Timothy Massad
When you really get down to it, stablecoins are like another form of narrow banking, if you will. In other words, banking, traditionally we have bundled the functions of deposit taking, credit creation and payments all in a bank. You had to be a bank, you had to get a charter as a bank, and you were regulated as a bank. Your deposits were insured, you got the backing of the Fed. And that's good system.

It's a great system. We have a very healthy, strong banking system, but with these technological developments, it's possible to sort of unbundle some of those things. And payments is one thing that I think can be unbundled, if you will. And I think having sort of non bank payment providers that are properly regulated can be a good thing for competition, can be a good thing for innovation. And obviously, the other aspect of this with stablecoins is because it's on chain, you have all these potential innovative facets of being on chain.

Atomic settlement, programmability, all those things. So all that's good. So that is why I have argued now for several years that we should bring these things within the regulatory framework. We need a strong regulatory framework, prudential measures to ensure that they invest the reserves appropriately, but also measures to prevent illicit activity. But they can be a force for competition, for innovation.

And that's all to the good. I think as a us citizen, this was most impressed upon me as I was learning about the chinese digital RMB type system, digital wand system, and how inexpensive it was to use something like Alipay or WeChat as a percent. So when we are doing payments in the US, there's like a transaction cost that credit card companies charge that merchants pay. It's about 3%. In China, when you're dealing with kind of a digital currency, they don't have this network set up, it's fractions of a percent.

Right? So imagine this behind the scenes. There's a 3% tax on all of these payments that the system is bearing, in addition to some of the other things that you mentioned, right? And the thing is, we could have fixed this without stable coins, okay, we could have done what most other developed countries have done in the world, as well as emerging markets, and implemented a fast payment system. We didn't need blockchain, we didn't need stablecoins to do that, but we haven't done it.

And so stablecoins are out there. And so I look at them as like, okay, this is something that can be a force for innovation. I'm not sure at the end of the day stablecoins will scale and will be that influential. But what I've seen from both the Libra announcement and what circle is doing and other things is it got the attention of banks, it got the attention of central bankers. And so now there's a lot more talk about, okay, what do we need to do here?

There are big banks now who are doing very interesting things on their own in terms of looking at tokenized deposits and other innovations. Finally, I would say, yeah, absolutely. And we would say finally as well. Okay, so let's get into some of the framing of your paper. In order to kind of talk about stable coins and maybe some of the national security concerns, I think we have to do some background, context, and a great lens on this, a lens that we enjoy.

Ryan
And I think you highlighted in your paper is the euro dollar. Right. A lot of people don't know the history of the euro dollar, in fact. But I think there are some great analogs to stablecoins in the euro dollar. In fact, one of our colleagues, Nick Carter, doesn't like the term stable coins at all.

He prefers crypto dollars to describe this because of the close analogs that hasn't picked up. So we're not calling this the crypto dollar episode, but we'll call it stablecoins. Can you give us the history of the euro dollar? So how did that come about? It seems like there was some us resistance to it at first and then gradual acceptance.

How did that happen? Why did people demand it? Just give us the full history here, Tim. Sure. Okay, so first of all, let's define what we mean by euro dollars.

Timothy Massad
Euro dollars are any deposit of dollars outside of the US. And today we use the term eurodollars. Those deposits could be in a japanese bank. They could be in any bank outside of the US, outside of the US regulated banking system. But they started in Europe.

And the way they started was some of the communist bloc countries were trying to figure out where should we keep our dollars? They had small amounts of dollars, Russia in particular, and they didn't want to keep them in the US for fear that us authorities would seize them someday. They found a bank in Paris that would accept the deposits and they put them there. And that bank's telex address, I think, is what led to the name eurodollars because it was the Eurobank or something like that. I can't remember.

Now, initially, the market was very, very small, and us regulators kind of ignored it because it was small. But it grew because banks overseas in Europe found a way to use those dollars. They could use them for foreign currency transactions. And then eventually they started using them for loans. And so the market started to grow, and so it started to get the attention of people at the Federal Reserve and at the US treasury.

David Hoffman
Would you say that the supply of eurodollars grew because eurodollars found a way to become financialized abroad? Well, they had use. I mean, banks found a way to use them. They realized, hey, we can do things with these dollar deposits, which is what banks do. So they started to grow.

Timothy Massad
But even then, the US policy was still not quite sure what to do. The Kennedy administration actually did some things that actually encouraged the growth of the eurodollar market, not because they wanted per se to encourage that growth, but they were trying to address a balance of payments problem that we had in terms of foreign investment. But basically we didn't really do much about it. Then people started to get worried because it did start to get quite big. And even some european leaders were worried because they thought, wait a minute, we have these banks that have a lot of dollars, but how is our central bank going to support those?

One of the functions of a central bank is to act as lender of last resort to banks if they get in trouble or if the financial system gets in trouble. So leaders of some of the european countries were suddenly realizing, well, we can't do that because we can't print dollars, so what do we do? And so people started to get worried. But then the 1973 Middle east war broke out, the Yom Kippur war. And as you may know, right after that war, OPEC dramatically raised the price of oil.

Oil is priced in dollars. So suddenly you had this problem of, how are people around the world going to pay for oil? Finance the trade in oil. Eurodollars became the way to deal with that. And that's where the term petrodollars came from, because you sort of recycled these eurodollars around the world, essentially just using dollars abroad outside of the us banking system to pay for oil.

And so the market grew again. And by the time of the financial crisis, the global financial crisis, that is, in 2008, there were more dollar deposits outside of the us banking system than there were in the us banking system. So it's quite a big market, and now we do effectively stand behind it through swap lines. You probably heard about swap lines during the financial crisis. Well, that's one of the reasons for swap lines, is that there are all these dollars outside of the US.

So why the analogy then? Well, stablecoins like eurodollars can be thought of as dollar liabilities of an issuer, of a bank or a financial institution that are created outside of the us regulatory system. That's the similarity. And so you also have this similarity in how the market is kind of evolving. It's small.

It's very small today, as you pointed out, Ryan, relative to the total financial market, a lot of people are saying, well, why do we need to pay attention to that, it's very small. But one of the points in my article was, yeah, it's small today, but it could grow, and it could grow from unexpected events. That's why we need to pay attention to it. Then, of course, I get into how it's different than eurodollars, which we can talk about. When you were learning about stable coins, back when you were learning about crypto and you saw the evolution of stable coins, did you just see the history of the eurodollar markets just flash before your eyes?

Well, I'll tell you what happened was I had been thinking about this parallel, but I didn't know a whole lot about that history. And a good friend of mine who's now at the New York Fed, Josh Younger, was also interested in this, and he had started to do some research on the eurodollar market. And so I benefited greatly from learning from him, and I credit him in the paper. So he taught me a lot about that history. But, yeah, I mean, as I started thinking about it, it just seemed like, wow, this is really kind of similar.

I bet there's something to be learned by looking at that history. I want people to hear about kind of the pivot that happened in the early 1970s that you were talking about, Tim. And you cite this in your article about eurodollars really being a villain. They were villainized by the US. And there's like this New York Times article, I believe, from 1971, the villain of the crisis, euro dollars, almost feels like somebody might say the villain of stablecoins at some point in the future.

Ryan
Right? And then you also have a french minister calling it a hydra headed monster. And then all of a sudden. Yeah, all of the sudden, this changed 1973 with the oil shocks, and the US kind of wakes up and realizes this could be good for us dollar supremacy in the form of the petrodollar. And so I guess I want to ask you the question about euro dollars.

Was it a net good for the US, a net bad? What were kind of the trade offs? What were some of the bad outcomes for the US, and what are the good outcomes for the US? I would say it is definitely a net good because it has helped cement the role of the dollar internationally as the world's primary currency of international finance, of commercial transactions, as well as the primary reserve currency that people want to invest in dollar assets. Obviously, that's due to other factors as well.

Timothy Massad
The strength of our economy, the strength of our government, our rule of law, the certainty that comes from that. All those things are important. But eurodollars played an important role in cementing that role of the dollar internationally, and particularly the role of us banks in commercial transactions. And that's one of the things I really focus on in the paper, is that a lot of cross border financial transactions, particularly, say, just foreign exchange transactions, converting one currency to another, involve us dollars, even if those aren't the two currencies that are really being converted. In other words, if you're trying to convert uk pounds to Singapore dollars or something, just to create an example, you might well be going through dollars.

In other words, converting one of those currencies first to dollars and then from the dollars into the other one more liquidity. And that's just again a factor of the evolution of all this, the prominence of the dollar, the way it's built up, the liquidity that comes from the dollar as against other currencies. So it's very important. And it also means that most financial transactions have touch points with us banks, because at some point they have to route through us banks under our financial system. That is something that a lot of countries don't like.

But that is the reality today. Right? So EuruSD is good for the us dollar, and today it's actually like, it's absolutely the dominant medium of exchange. And like for payment settlements is something north of like 70, 80% of all worldwide transactions are dollar denominated. There's massive demand for dollars.

Right? And you point this out, which I think isn't immediately noticeable by people who come to this point in the story, is the US also gained as a byproduct of this, almost accidentally, a new economic weapon, let's call it sort of a national security weapon, the modern ability to sanction dollar denominated transactions. You say this in the paper. Luckily for us officials, even if not by conscious design, the growth and maturation of the euro dollar market has enhanced the ability of the US to project power by non kinetic means. Of course, in a world where we're talking about the 1970s, 1980s, like even into modern times, the catastrophic potential of a nuclear exchange, having a weapon that is non kinetic and that allows you to project geopolitical power is quite an advantage.

Ryan
So I want to ask you about that, Tim, that byproduct. So it's almost like the ability to sanction anyone who is using the euro dollar. How did that work out? And how does that work out now? Right, okay, so again, keeping in mind that so many commercial transactions are denominated in dollars, and that means that they have touch points with us banks.

Timothy Massad
In other words, there's at some point in that chain of a transaction, a us bank is involved that enabled the us government to say, ah, well, we can impose sanctions through those banks. In other words, we can restrict the ability of people to deal with the us financial system. Right. We can sanction them. And, you know, we started doing this early on with Iran and it's kind of grown basically over time where we've relied more and more on this power and to the point where we've obviously sanctioned individuals and businesses, but in some cases it's been trying to cut off countries.

So we did this with North Korea and Iran in the early two thousands. And of course, we've done it recently with Russia, first in 2014 and then in 2022 over the Ukraine war. And what's interesting is it was kind of early on maybe an adjunct to the exercise of military power, or maybe we're using something to supplement military power, as in, say, the first Iraq war. But now it's kind of the tool that we're using in place because we don't want to use military power. So, you know, we're using sanctions instead.

They've been very, very effective. But of course, they've also provoked some consternation among other countries and frankly, it's led some other countries to look at how that. Can they create payment systems that aren't dependent on the dollar? Yeah, just like the behind the scenes piping of all of this is a lot of the dollar denominated settlement, the euro dollars, you know, like the US dollar. This all happens in international standard, basically a network called Swift.

Ryan
And the US basically has the ability to just block, censor, like reroute sanction swift transactions, which gives them a tremendous amount of power to economically sanction actors or countries or just basically anyone attached to Swift. Yeah. So Swift is a messaging system, right. It doesn't actually transfer the value. I mean, this is one of the interesting things about payments today.

Timothy Massad
And the difference with a blockchain, of course, is that there's transfer of the information or the message about the payment and then transfer of the value as well. The transfer of the value is really just adjusting balance sheets of banks, right. Because it's not really that money actually goes somewhere. It's that JPMorgan and Deutsche bank or whatever settle up in terms of their depositors. Two banks agree to adjust their own internal line items at an equal amount according to the message that was passed.

That's right. And so what Swift does, Swift just communicates the messages about those payments, although Swift is actually now looking at getting into actual settlement, which is interesting, but Swift is a huge network, 11,000 banks. What happened after 911 was the us government was able to get information from swift about transactions and it then used that information to basically incorporate into its sanctions effort. That was a big deal that Swift agreed to, that it was actually kept secret for a few years and then it came out later that Swift had agreed to that. So at this point in the conversation, I think listeners should take away that the US has this superpower basically to economically sanction things by route of euro dollars through mechanisms like Swift.

Ryan
I think beyond the scope of maybe the conversation to sort of weigh in on how effective these types of financial economic sanctions are. And yet I'm also tempted to just like ask you what your personal take is, or at least if you don't have a personal take on this, maybe what's the debate? Because, I mean, I could see some contours of the debate being sort of a layman to this, being it's very easy to sanction a small actor, small players, so terrorist groups that kind of like exist, you know, within a nation state apparatus or rogue nations like something like North Korea that are completely, very much isolated. But when you start talking about large blocs like maybe Russia or maybe a China Russia type bloc alliance, then rather than sanctions actually working, what they will do is incent these geopolitical actors to just like route around swift, come up with their own swift network. So what's the current debate on the effectiveness of sanctions?

Timothy Massad
Well, it is a very big debate and I take no position on this. I make it very clear in the paper that I'm not taking a view one way or another as to when it's appropriate to use sanctions. Under what circumstances and what should those sanctions look like? That is a complicated debate. I don't consider myself a national security expert sufficient to weigh in on that.

But it is now an increasing debate. And one of my former bosses, Jack Lu, who was secretary of the treasury after Tim Geithner and I served under him for a little while, gave a very good speech several years back, probably 2016, probably shortly before he stepped down on this issue. And other people have weighed in as well. But as you note, Ryan, it is something that has caused some countries to say, hey, we have to somehow move away from the dollar. And whether that's through central bank digital currencies or multi country payment platforms involving cbdcs or even fast payment systems.

I mean, there's a lot going on in this area around the world that people in this country particularly our Congress should be aware of. There's a project, for example, called Enbridge that involves China, Hong Kong, Thailand and the UAE that is looking at creating a platform where they can make commercial payments by having this shared platform that relies on CBDCs, central bank digital currencies. And they're getting more countries involved in that. Now. That's not real yet.

And I think the governance issues on platforms like that are very difficult, probably more difficult than the technological issues. But things like that are happening around the world. As my friend Josh Lipsky at the Atlantic Council says, people are building the pipes. They may not be flowing water through the pipes yet, but they're building the pipes. And we in the US need to be aware of that and think about the consequences of that.

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Ryan
I think a realist would look at some of these things and ask themselves, how long can that power actually be preserved in the face of alternatives? And I even think the most strident folks around that are true believers in economic sanctioning would probably admit that it's an exhaustible resource, right? Just the game theory of it is such that other countries would try to route around if they could. I guess this sort of brings us to stable coins. So one difference between the euro dollar and stablecoins is in the euro dollar apparatus.

Because the origination, the setup was basically us banks. The US still was able, through the export of its dollar, to preserve the might of its sanctioning facility. In fact almost enhanced that ability. With stablecoins it might not be so clear cut. And I want to dig into the crux of this issue.

So is there evidence today that foreign actors are using stable coins for any sort of sanctions evasion? We've seen news headlines of this. There was talk of, you know, Hamas maybe using this. Some of this was, like, based on spurious evidence. And it came out that, like, well, Hamas was actually not using stable coins in crypto at scale.

It doesn't mean that some foreign adversary couldn't in the future, though. So take us to the state of stablecoins in this conversation around economic sanctionability. Well, I think people are using them to escape sanctions. What's hard is to quantify by how much. In the case of Hamas, I've talked to people at chain analysis and TRM and other places, and, yeah, initially there was a report that said this was pretty significant.

Timothy Massad
Then people realized there was some problems with the analysis. They were sort of counting the total held in certain accounts at intermediaries rather than just the part that was going to Hamas or something. So those estimates were scaled back. But I think the conclusion is generally that Hamas is using crypto and stablecoins to some extent. Similarly, there were reports that there were Russians that were using tether to buy arms and evade sanctions.

So I think it is happening. It's, again, hard to quantify it. But the reason is that stablecoins, as we know, settle on decentralized blockchains and therefore, transactions don't have to pass through a bank. Now, if you want to convert that stable coin back into fiat currency, back into dollars, you either have to do that on a trading platform platform like Coinbase or kraken, or you've got to figure out a bank that will do it for you or whatever. So that off ramp conversion is a point at which you could say, well, we should be able to catch the perpetrator then, right?

And yeah, we should. But the point is that as stable coins grow and as the crypto universe grows, you have the risk that people can transact without doing that conversion, without going through an off ramp, as apparently the russian smugglers were able to do, or they're going through off ramps that aren't abiding by those sanctions. You can have offshore entities that aren't abiding. There are international rules. Something called the Financial Action Task Force, FATF, has issued guidance on how virtual asset service providers and exchanges and so forth have to apply certain laws to prevent illicit activity, to prevent money laundering.

But not all jurisdictions are enforcing those. So the risk is that you can have activity that doesn't go through an off ramp, particularly as the crypto universe grows or goes through an off ramp that isn't following those rules, and therefore can circumvent sanctions and that's kind of the thing I talk about in the paper and the need, therefore, to look at this and I view it. But again, it's not a reason to say, oh, stablecoins are bad, let's hope that they don't grow, because I don't think that's a good policy, but rather it's a reason to say we need to create a regulatory framework around this and to look at how we do prevent illicit activity with these. Okay. And so do you think that this issue is kind of alive and well and maybe one of the primary issues that any us legislation would have to face and surmount and like the us government would have to get comfortable with in order to start promoting stablecoins.

Ryan
You think this is the big one, the ability to kind of like sanction, preserve that? Well, I think it's pretty big. And I think we've seen a lot of people in Congress pay attention to this, whether it's, you know, I mean, I talk about this in the paper. I mean, Senators Elizabeth Warren, who I also had the privilege of working for briefly, and Roger Sherman introduced, you know, a bill that would impose anti money laundering responsibilities and bank Secrecy act responsibilities on crypto generally. And I think they're very concerned about stable coins from this aspect.

Timothy Massad
I think a lot of people are concerned about this. So I think the issue is, what I've said when I've talked to people who work for Congresspeople is, look, I don't expect Congress to figure out exactly how we will do this because the technology is going to evolve, the technology is going to change. But what we need to do is create a regulatory framework where there is an authority, whether that's the Federal Reserve or somebody else with authority, to figure out what those requirements should be, what those rules should be, and Congress can give some general direction. And I talk about some of the ways we might do this. I mean, obviously, the holy grail of in some ways might be some sort of digital identity system, right, where a stablecoin smart contract won't process a transaction unless your identity has been vetted by some authorized vetter and you've pinged enough information about that so that the transaction goes through.

I mean, that's one solution. There are others that people are talking about. I do think we need to talk about this. Look, I mean, to step back from this, I would say the following generally about crypto, we're bogged down in this debate about whether something is a security or a commodity. And I argued why we shouldn't be bogged down in that, and there's a way to get around that.

To me, that's not the big issue. The big issue is the rails. The big issue is when we talk about tokenization and we talk about digital assets. Are we going to get comfortable with digital assets with tokenized assets traveling on decentralized blockchains or not? They pose enormous advantages in terms of innovation, composability, open access.

We've seen that. That is clearly one of the incredible things about this space. One of the things that keeps me interested is just the amount of innovation and creativity that is taking place. I spent a lot of time on a college campus, and I meet a lot of students who are quite interested in this space because of that, and I admire that. But on the other hand, decentralized blockchains may not offer the kind of governance that we'd like, the kind of ability to check identity, and our financial system does turn on the ability to know who is transacting.

So how do we balance that? That, to me, is the central issue in digital assets. I'd really like to dig into this a little bit more just because there's just a fundamental trade off space between traditional bank transfers of dollars versus stablecoin transfers on the rails. Of course, there are some properties about payment rails on Ethereum, on crypto that are just brand new, and people still just need to wrap their heads around. If some illicit actor gets their hands on stable coins.

David Hoffman
There's no one to really talk to, to prevent, to reverse a transaction. There's no reversible transactions. It's actually not easy, it's not trivial to just immediately identify an actor. Yet nonetheless, at the same time, it's also, there's so much data out there because of the fact that it's a public, permissionless ecosystem. And so while there's no central authority, which makes people uncomfortable, the amount of data that's out there is highly available.

So there is a trade off space that's not completely nerfing, neutering the power of regulators to really elicit the control that they want to control. It's just now it comes in a different flavor. There's different strategies. So how do you feel about just the different trade off space, about the tools that regulators have because of the affordances of crypto versus, like, what they're familiar with? Yeah, no, I think that's right.

Timothy Massad
Well, you know, to maybe zero in specifically on this question of illicit activity. Obviously, the data, if this is what you're getting at, the transparency of the blockchain, in terms of being able to see every transaction. Every transaction is always, there is an enormous benefit when you're trying to track illicit use. Of course, it's pseudonymous, so you have to be able to somehow figure out the identity of a person. But that is a big asset in law enforcement.

And law enforcement people will say that, on the other hand, of course, you can transfer things very, very quickly. I mean, one of the things I talk about in the paper is should we be requiring stablecoin issuers? Stablecoin issuers presumably can apply anti money laundering and KYC and combating financial terrorism, what we call CFT requirements, when they issue or redeem a stablecoin. And if you talk to Jeremy Allaire or people at Circle or wherever, they will say they're doing that, and I believe that they are, but obviously, once the stablecoin is issued, it can be transferred to anyone. And so the question is, what responsibility do they have then?

One of the things I talk about in the paper is whether stablecoin issuers should be responsible for not simply monitoring transactions, but kind of aggressively monitoring and maybe doing risk analysis of wallets and maybe even taking action to seize and freeze. Now, I think Circle would say, well, if law enforcement comes to us and says, gives us a subpoena, or obviously they do it, then, or maybe if they give us enough evidence, we'll do it. But gee, we can't just freeze anyone's coins on the basis of our own due diligence. So we're going to have to think about that. We're going to have to think about how do we balance reasonable expectations of privacy, and we don't want improper seizures going on.

But on the other hand, we're going to need stablecoin issuers, I think, to actively monitor what's going on on the chain and circles on what, twelve or 16 blockchains? Now, this balancing Tim is such an interesting conversation. I think this is the meat of the conversation. I just want to, at this point in the conversation, just thank you for engaging us in this way. I mean, you're coming on a crypto podcast.

Ryan
You can imagine we're not super favorable towards the Senator Warren bill to kind of extend the Bank Secrecy act and effectively KyC validators and like mining equipment and all of these things. We think that there's a better way. But I appreciate that you're coming here and like, we're all collectively addressing what I called in the intro, the elephant in the room, because I think it's an elephant in the room. And I actually want to press into that more, because it's not just stable coins, but stable coins. There's the ability to freeze, as we mentioned, there's lots of different abilities that a circle might have to kind of like control these things once it's on chain less.

So, but there's still some capabilities here with crypto native assets and decentralized networks like bitcoin that we were talking about earlier. That is a commodity, right? And ethereum. Ether, the asset transitioning, moving that from place to place, that's not issued by a circle. It is not the us government kind of like behind this.

And so let's just full on address the elephant in the room here, okay? In propagating decentralized networks, the fact that we have an open Internet and open blockchain networks means that there is the ability for illicit activity to happen on a chain like ethereum, with a crypto native asset, maybe not with a stable coin, but certainly with a crypto native asset. And I think the question that the crypto industry is sort of asking those in the us government is like, what do we do about this? Are you effectively going to aml KYC everything? Is there like some notion of an open Internet that we can preserve?

An open chain that we can preserve? And I'll just run this one kind of like, like game theoretical outcome that could be the case. Right. So let's imagine we start living in more of a multipolar world where the US has less ability to economically sanction, less of the world runs on Swift. Well, it then seems to be the case that you could have a world that runs in kind of like the us block financial system, swift based.

And then you might get some alternatives. You might get China or something like this. What's interesting about blockchain is it doesn't have an alliance with either. It's credibly neutral. And so one question, you know, I don't know that this is being considered, but I would ask like wonder if it's considered is if the US has to pick between the world kind of moving to a chinese central bank, digital currency type of system, you know, a China led swift or something that is credibly neutral, like, like blockchain, like Ethereum, which would it pick?

And I know it seems like very preemptive for us to start having this conversation, considering the size of crypto to date, but it's still like a possible outcome. Yeah. What do you say to that hodgepodge of thought? I guess what I say to that is we clearly don't want a chinese CBDC model or a chinese dominated swift. But look, I guess I'd approach it all maybe slightly differently.

Timothy Massad
The fact that blockchain distributed ledger technology is sort of like the Internet in the sense that it's supranational is, you know, a big thing, a big potential benefit, but also a potential risk, if you will. But the truth is we still live in a world of nation states and laws are made by nation states. And I believe in that. And, you know, I'd love to see harmonization of certain areas of the law. I did that.

I worked on that a lot when I was at the CFTC with derivatives, believe me. But, you know, the fact is we still live in a world of nation states. We have countries that obviously don't share our values, our values of democracy and openness. And I don't want to become like them. And I want us to make sure that we continue to uphold our values.

And I don't believe that blockchain technology is of such great advantage that I would sacrifice anything in terms of those values of this country and what it stands for and the rule of law and the strength of our financial system, which is in part built on transparency, just because of the potential advantages that blockchain technology might offer. I think you have to recognize, I think the crypto industry needs to recognize that that is how financial regulators think, in part. And meaning that, yeah, the crypto sector is small. And while crypto advocates may see huge amounts of potential given the open access, given the innovative potential, given the composability, the us government is not going to give away or it's not going to diminish the values that I think are at the heart of this country and have contributed to its strengths simply to promote that innovation? We've got to find a way to promote innovation with this technology that is consistent with our values.

And that means people in government need to understand the technology better. Some of them do, some of them don't. And it means people in crypto need to understand the purposes of financial regulation and the value of financial regulation better. People in crypto can't just say no. They can't just say, well, it's decentralized or it's supranational.

So us laws shouldn't matter. They shouldn't say that. That's not going to get us anywhere. We've got to have responsible, reasonable people from all sides kind of get together and think about how do we create a framework where this technology can develop and can develop in useful, constructive ways that are consistent with our values. That's what I'm interested in, at least.

Ryan
So let's talk more about the pro case for staple coins. So we're talking about kind of like illicit actions and economic sanctions and that sort of thing. I think that there's an analog that I'd like to continue, which is, at first the us government wasn't so sure about euro dollars, and it turned out to be very good for us interests in the long run. And it wasn't quite clear how, but it became clear later on. And there are some that make the case.

So one is fed reserve Governor Chris Waller. Yeah. Just makes the case that basically, if you look at the crypto economy, so you got the us economy, the different economies, and then there's a crypto economy. If you look at what its trajectory is, the us dollar is actually a major winner inside of the crypto economy. It's something like, you know, 90% or so of DeFi transactions happen and they're us dollar denominated.

So Federal Reserve Governor Chris Waller makes the case that basically crypto and the propagation of crypto is a net winner for the US dollar. There's also Brian Brooks, who was a former comptroller of the US. He penned an op ed piece. It's basically the title of which is stable coins can keep the dollar, the world reserve currency, and basically through demand. So his point is that stablecoins are an export of the us dollar.

They're primarily held by people that aren't based in the US of foreigners. So it's good for US dollar reserve currency status and supremacy as well. What do you think of those arguments? Do you think they hold water? Do you think they will be a positive story?

Timothy Massad
Yeah, no, I do. I have a lot of respect for both Brian and Governor Waller. I've talked with both of them. I know both of them, and I do have a lot of respect for those arguments. Again, will stablecoins really turn out to be important at scale relative to other payment mechanisms?

I'm not sure, but I'd like to see us find out by creating that regulatory framework. You know, again, I mean, I wrote a paper with a couple of other law professors on how the bank regulators could set up this framework today. They don't even have to wait for Congress. And we kind of walked through, it's a very technical piece on how the office of the Comptroller of the currency could do this, but I think they could do it today. And I'd like to see that happen because I think they can be a net benefit.

Again, assuming we address the risks, what I call the prudential risks, we know how to do that. That's the risk that you take in dollars. You issue tokens. What do you do with those dollars? You got to invest them very conservatively and you got to still have some capital on top of that because you could have operational losses, you got to have liquidity measures.

I've chatted with Jeremy Allaire and I know he believes in all those things. You know, we know how to address those prudential issues. The big fight in Congress has been over whether states can charter stablecoin issuers even without some overlay of federal standards. And, you know, I am on the side of, well, you know, we need some federal standards. I'm fine with state chartering as long as there are some federal minimal standards because we don't want to risk a situation where states keep lowering the bar or something.

But as I say, I think the harder challenges come with how you prevent illicit activity and how you ensure the resilience of the blockchain. I mean, the truth today is stablecoins have grown in usage, but to my knowledge, no one's going to make $100 million transfer using USDC because you're just not going to do that. Because if something goes wrong, who do you sue? What happens when you look at, at the volume of stablecoins? Yeah, they've grown.

It's significant. But look at the size of what moves through fed wire today. It's like 100 trillion a month or something. It's huge. I'm covering a few different things here, but the point is that I think stablecoins can be of net benefit to the dollar, but we need to create the proper regulatory framework.

Ryan
What about the other side of this? What if the US goes full narrow bank and actually launches a fedcoin, a central bank, digital currency? There's some other countries that are doing this, even western liberal democracies that are considering this. What do you think of that idea? It's interesting because there been a lot of talk about that, obviously.

Timothy Massad
I guess what I would say right now, my view is I don't see a reason for us to launch a CBDC, certainly not a retail one. What I would like to see, though, is the Fed continue to do research and think about, well, if we were to do something, what might we do? How would we do it? And I would like to see the Fed really focus on what we call the wholesale settlement system, meaning how banks settle with one another. Let me explain all that in terms of the retail CBDC.

Look, a lot of reasons were thrown out. Some of them had the Fed doing retail services. I think that's a bad idea. I don't want to see the Fed having an actual interface with consumers. That's not the Fed's job.

So then people said, well, it could be distributed through banks. Yeah, maybe, but I'm not sure we need it even then. I think if we create a framework for sufficient private innovation, we can get those benefits. And that could be stablecoins, it could be tokenized deposits. I mean, the thing about stablecoin legislation is what we really need is not simply legislation on stablecoins.

We need federal payment regulation. We don't even have an emoney statute in this country, which a lot of countries have. I did some work with Paypal because that was the one consulting thing I was willing to take on. I turned down basically every other crypto company that came to me asking me to help them, because I wanted to be free to just give my views on policy. But I agreed to work with PayPal when they started looking at this, because I thought, well, they're a traditional payments company and they're thinking about this in a responsible way.

And so I was supportive of them launching a stablecoin, but they're subject to state regulation. There's not really a federal framework for them. And I told them, look, I'm still going to argue for a federal payments framework. And they said, fine, that's fine. So we need that kind of framework in this country.

We don't have it. But getting back to sort of what the Fed should do, one of the things I'd like to see the Fed really focus on is, all right, if we create a framework where there can be private innovation and we can have stable coins and we can maybe have tokenized deposits, does the interbank settlement system need to be upgraded? It's electronic. And some people say, well, we have a CBDC today, banks have electronic accounts at the Fed, but it's not a tokenized settlement system. I think the question, and I've had this discussion with people at banks who said for tokenized deposits to really work well, it would be good if the Fed had the equivalent, a tokenized deposit settlement.

So JP Morgan and Bank of America, if they both issued tokenized deposits, can settle up instantly through the Fed in a similar kind of tokenized structure. I dont know enough about the technology to know for sure whether the existing interbank settlement system is sufficient to incorporate bank tokenized deposits and stablecoins, but I think those are the issues we got to be thinking about if we want stable coins to be truly safe, we could consider what the UK is thinking about, which is any systemic stablecoin should keep its reserves at the central bank, because that's the safest form of money there is now. Again, that would come with strict oversight and supervision and so forth, but that's one of the things they're thinking about. So I think, you know, I believe we can address our payment issues and we can, you know, take advantage of these new technologies through private innovation. We don't need the government to try to, you know, lead the way on innovation.

And I don't think the government is a good judge of what innovations are going to work best. Imagine if the government had had to decide whether we should have ATM machines. They said, well, why do you need those? You just go to the bank, get the money while it's open. ATM machines are probably the greatest technological advance in banking in the last 50 years.

But what we do need the government to do is create the regulatory framework where this innovation can flourish, and particularly with the Fed. Look at the interbank settlement system and look at cross border payments, and how do we make sure our technology is up to date on those? I guess, maybe speaking of ATM's. ATM's, of course, quite famously, they spit out cash, which is an interesting instrument, I think, from a civil liberties perspective. And so far, we really haven't talked about that.

Ryan
And I don't know if you delve into any of this, but one of those, what many would argue is a civil liberty, is some form of. Of privacy inside of our digital cash apparatus, whatever we choose as a society. And so, like, Fourth Amendment protections against unreasonable search and seizure, that sort of thing. One thing that we want to maintain in crypto is some sort of privacy for peer to peer transactions. Have you seen anything like that in your travels that is kind of compatible with some of the worldviews that we've been talking about so far in this episode?

Like, is there a way to thread that needle? Or do we just have to sacrifice peer to peer privacy of money transactions in the society that we're moving towards, no matter what? Well, I certainly don't think that should be the assumption that we have to sacrifice that. I mean, clearly, small value transactions don't have to be. No one needs to be collecting information about those, right?

Timothy Massad
So exactly how you thread that needle with digital transactions, I'm not sure, because the blockchain, obviously, everything's on there. It's pseudonymous. But you have ways of identifying who addresses belong to. But I guess in terms of thinking about what the policy should be, I think the policy should be if we can get there technologically, that, sure, there's a certain level at which, which we shouldn't be collecting information about people's transactions, but there's a level that you cross when it's big enough and the risk is great enough that you do want to be able to identify who's acting. I don't know exactly how to get there, but I think that is one of the important questions.

David Hoffman
Tim, I'm wondering what your perspective is as to the role of the dollar or the utility, the purpose of the dollar. Different people might have different opinions on this, right? Like the United States government might perceive the dollar as a tool, a geopolitical weapon to kind of command the interests of the state. There's also a perspective out there that, you know, the dollar is actually meant for servicing the local economy of the United States and helping the citizens of the United States, you know, engage in commerce. There's different perspectives out there as to, like, what people's like position is.

Like, what is the dollar for? I'm wondering if you have a perspective as to that. It is our national currency. It's a form of sovereignty. The fact that it has become the world's primary currency for international finance, for commercial transactions, is of great benefit to us.

Timothy Massad
It's a huge benefit to us, and one that we should by all means try to preserve the fact that it's the world's preferred reserve currency. Currency for investment is also a huge benefit for us. I think there is a difference in my mind between the dollar as what's called the world's reserve currency and the dollar as the primary means of payment. I've had this conversation with Governor Waller, actually, again, whose views I respect, who's said, look, there's no threat to the dollar as the world's largest reserve currency. We shouldn't be worrying about this.

And in terms of where are people going to park their money, invest their money? Yeah, I mean, treasury securities, China is not going to replace us anytime soon in that regard. But we can see people move away from using the dollar for payments. And that's the thing that worries me. And that's the thing I think we want to make sure, again, that our cross border means of payment are up to date, that the fed systems are as up to date as they can be.

That may or may not involve distributed ledger technology. I'm not sure, but those are the things we need to be focused on. So far, we've been talking this conversation about what the US wants, maybe from the perspective of what the government wants, what Congress wants, what american citizens want, what people in the crypto community in the US want. I want to actually turn the question to other countries, like, what do they want? It was very interesting early in the conversation, Tim, that you were talking about your colleagues in China, who are basically looking at Facebook's digital currency effort and basically saying, we better speed up.

Ryan
This is concerning to us. What do you think the perspective of, say, a Europe or a China or a Russia has on this entire conversation? Where do they fall in this whole thing? Do they want the us to have a central bank digital currency? Do they care?

What about stable coins inside of their local economies? Is that sort of a threat to them? Yeah. How do you think about this? I'll focus on countries that we consider our allies, or at least having values similar to ours, like the UK, Europe, Singapore.

Timothy Massad
I think those countries want to see the US lead here. They're a little confused as to why we seem to be moving more slowly to set up regulatory frameworks for stable coins for crypto generally. All those countries, I think, are moving forward with frameworks on this. And I try to explain. We'll get there.

Sometimes it just takes us a while, but we will get there on a CBDC.

Look, that's become, unfortunately, kind of a hot political potato in this country for reasons I understand. I mean, no one wants the Fed collecting information about all of us. That's terrible. We don't want that. We don't want anything like what China has, and no one wants to undermine funding of the banking system.

But as I said earlier, I think. I think some level of research on how we make sure our payment system is as modern as it needs to be is important. And I think other countries would like to see us do that. They would like to see us be at the table, you know, when some of these issues on cross border payments and payment platforms are discussed. So I think they still want the US to lead, and, you know, I think we're still capable of that, and hopefully we will.

Ryan
This has been a fantastic conversation, Tim. I learned a lot, and, like, I appreciate the dialogue. You know, maybe there's some daylight between us and on some of these issues and the specifics of them, but I certainly appreciate your willingness to engage the crypto community, and I think that this speaks very highly for how we move forward together, I guess, as we close. One question I have for you is in the realm of predictions in the realm of what happens next, and of course, anyone's guess. So you could take this question as open as you like, but questions of will we get any stable coin legislation anytime soon?

Will this become an election issue? Does this need to be so partisan, or will that calm down? Will we get a stablecoin ban? Do you have any predictions for the next few months or years that might play out? Mike?

Timothy Massad
Well, I try not to make predictions. Look, I'll focus on stablecoins. Since we've concentrated on that, I think we will get a stablecoin regulatory framework. I'm not sure that we'll get it this year. I'm still hopeful that we might get it this year.

I think Patrick McHenry and Maxine Waters have been negotiated, I heard him interviewed by you all recently. They have been negotiating a while. I'm hopeful they can come to terms. I think if that happens and if we also make some other adjustments in our regulatory framework in terms of banks interaction with stablecoins, that would be a big boon. Now, interestingly, though, I don't think it means that people keep their money in stablecoins.

See, my ideal is you create this framework, you allow stablecoins as a payment instrument. You allow banks to interact with firms like circle, but you don't permit the stablecoin issuers to pay interest because you want them just as a payment mechanism, not as a security, not as an investment. And so what it means then is people keep their money in money market funds or banks or wherever they want to keep it, but they have the ability to quickly move it, it in and out of a stablecoin to make a transaction. That's the world I would like to see. And then it becomes a means of fast payment, of atomic settlement potentially.

I think that's very important. That could really save us a lot of cost in our financial system. So that's at least the world I want to see. I don't know how quickly we'll get there. I like that world too.

Ryan
And I can tell you, Tim, from my experience, that's how I use them today. I mean, not for regular transactions, but when I'm transmitting money or paying for something, I'm using stablecoins. And when I'm storing my value, I'm holding it in t bills, money markets, and then ether and bitcoin, you know what I mean? So that's how that works. And see, the funny thing about that is that would actually address a lot of the reasons the bank regulators have been very worried about stablecoins, because they're worried about all that money sitting in a stable coin, which I would worry about too.

Timothy Massad
But again, if we created this framework and we allowed that kind of interaction, you would not have a lot of money necessarily part in stablecoins. You would just move in and out of them as a payment mechanism. Well, I think this is one of the most interesting conversations going on right now, and we appreciate you continuing the conversation. I'm sure there will be much more in the days, weeks, and months to come. So thank you again so much.

Well, Ryan and David, thank you. I've really enjoyed it. Bankless nation, some action items for you in the show notes. You got to read Tim's article that we were talking about today. It's called stablecoins national security.

Ryan
We'll include a link to that in the show notes. Also, I I highly recommend an article put out by Nick Carter recently. It's called five perspectives on stable coins. He goes through the different perspectives that have surfaced and, as always, have to end with this. Of course, nothing we said about stable coins or anything about crypto or ever say is financial advice.

You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey.

Thanks a lot.