WBD216 Audio Transcription

The Role of Stablecoins with Jeremy Allaire

Interview date: Friday 10th April 2020

Note: the following is a transcription of my interview with Jeremy Allaire from Circle. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I talk to Jeremy Allaire, the CEO & Founder of Circle, the company behind the USDC stablecoin. We discuss the use case for stablecoins, the benefit of being fully backed rather and the impact on the economy from coronavirus.

“The global economy is a perpetual motion machine… and what is happening right now has never happened in the history of the world, which is; you have effectively stopped the machine.”

— Jeremy Allaire

Interview Transcription

Peter McCormack: Good morning Jeremy, how are you?

Jeremy Allaire: Good morning Peter, thanks for having me!

Peter McCormack: No problem! Nice to finally connect, it's been a long time. I'm surprised we haven't actually spoken yet. It's kind of strange really, but I'm glad we're finally connecting now. Nice of your team to reach out. So how are you? Strange times at the moment! I don't even know where you're based, so I don't really know where your lockdown is, but strange times.

Jeremy Allaire: Yeah, it is definitely strange times. I'm doing well, my family is doing well and yeah, I'm based in Boston, Massachusetts, that's where I'm camped out right now.

Peter McCormack: Big fan of Boston! I've been a few times in the last year, I really, really like it. I think it's because it has that British feel to it.

Jeremy Allaire: Right! It's New England after all.

Peter McCormack: Yeah and also the owners of the Red Sox own my football team, Liverpool.

Jeremy Allaire: Oh, is that right?

Peter McCormack: Yeah, John Henry. All right, well listen, great to connect, you mentioned in an email to me, you said, "I've got big things on my mind." So I think a good starting question is, what are these big things on your mind?

Jeremy Allaire: Yeah, I think for anyone right now, obviously, I think people and myself very much included, are trying to get one's head wrapped around the global crisis that we're in and what the implications of that are. I think concretely, within our own communities or our own workplaces, but then obviously very much also at a global macro level. So I'm thinking a lot about that and one of the things that I know animated me getting into crypto and this whole innovation and I think for a lot of other people, was the belief that we needed a new kind of global economic system, a new, if you will, infrastructure for society that could be more resilient and that's animated the work that we've done.

I think you see a lot of this commentary that's out there sort of "Bitcoin was made for this moment" kind of stuff, but I think more generally this environment, globally, is going to decrease trust. It is going to make increased risk and it's going to do that in a wide array of economic interactions and it's also going to, obviously, very deeply challenge the monetary system that we have. It already is! The monetary system we had already was challenged and it's going to be severely challenged in many, many parts of the world.

So from a global macro perspective, this is a really profound moment to conceptualize a better world and to build towards that and you see these kinds of themes already emerging, not just with the focus on things like crypto, but more generally what's going to change in the world. Is this global pandemic going to accelerate our move towards digitization more broadly? Is it going to accelerate the way that learning happens? Is it going to accelerate...

Lots of different things like that and I think certainly within my little tunnel vision focus in the financial system, it should have profound implications. So that's at a very high level of some of the things that I'm thinking about right now.

Peter McCormack: Okay, there's a lot to unpack there, so before we dive into that, I think it would be helpful if you explain to people a bit about who Circle are, but also where Circle is now as a business, because it's changed a lot over the last few years. So can you just give us an update on that?

Jeremy Allaire: Yeah, absolutely! So a quick update, we started Circle about seven years ago and the concept that animated the founding of the company was a belief that digital currency on the public internet, so kind of a public network, digital currency models would make the movement of value, things like payments, ubiquitous free service on the internet, the same way that data exchange and content are there today.

Our focus was not necessarily on, "Everyone in the world's going to move to a new reserve currency called Bitcoin" it was much more on what we thought of as a hybrid model, where you had these non-sovereign commodity monies and infrastructure that they provided and you could, in a sense what we now call tokenized, but you could essentially take dollars, or euros, or pounds or any other sort of trade or reserve currency and you could tunnel it over these public blockchain networks. So that was what we were excited about. We were excited about, back then, ideas like programmable money and the idea that you could write contracts and code that were enforced by machines instead of courts.

So the things that got us into this, that's why we started the company and the very first set of things that we built were a free payment system built on the Bitcoin network that could transfer pounds and dollars and euros instantly in and out of Bitcoin, using Bitcoin as kind of the network or the rails. That ran into a lot of the limitations that Bitcoin has or had at least back in say 2016, so it really wasn't well-suited to being a scalable, cost-effective, public settlement infrastructure.

So we made a decision to rebuild the protocols. We think of them as protocols for that kind of digital currency payment model on top of Ethereum, we can come back to USDC in a little bit, because that was sort of what grew out of that. But at a high level, from a business perspective, we started with this free service and from that, we stumbled into a very significant trading business because we had become one of the largest liquidity providers for Bitcoin in the world and that was a significant business for a couple of years.

As the market both got more efficient and the exchange environment got more liquidity to it, that kind of large block trading was not as good of a business, so we actually sold that business recently to Kraken and during the big waves of growth in the digital asset or crypto trading world, we grew very rapidly. We acquired an exchange, we ultimately then sold that exchange to Poloniex last year, but I think the sort of thread that's run through all of this is, in late 2018 we formed a new consortium called the CENTRE Consortium, which defines a standard for sort of stablecoins and protocols for stablecoins in a whole ... It's a whole framework for it.

We launched that with Coinbase and the first stablecoin on that consortium, standard USDC, grew quite fast. Then mid last year we basically said, "Okay, we can see now within the next year or two, using this as a key infrastructure for actual mainstream payments and commerce." So that's finally arriving and that's been what has inspired us for a very long time. So we started working on building out a broad suite of services, we call them Circle Platform Services, that basically provide the equivalent of a business bank account for businesses anywhere in the world that is digital currency native and then platform services, so a broad suite of APIs to build on that kind of digital currency banking infrastructure.

That allows any kind of business to integrate from the existing, what I call, electronic money system into the digital currency native electronic money system and build apps and program it and integrate it with public chain infrastructure. That's rolling out right now and we're very, very excited about it! So for now that's where the business is and USDC is sort of the tip of the sphere or kind of foundation of that. Just in the last month, that's grown 60% in USDC in circulation and we're seeing surging growth and adoption in that and there's a lot of macro related things on that too.

Peter McCormack: Okay, it's a really interesting area, the stablecoins for me, because it does challenge some of my own thoughts with regards to blockchains. I'm Bitcoin focused, entirely focused on Bitcoin with my show and I only own Bitcoin. I just don't take any interest in any form of token. I get some Brave donations every month, which is quite funny, because I instantly convert them to Bitcoin. I don't even know where they come from. I just got an email telling me they come in, but I'm not really interested in tokens. But I am interested in stablecoins for a number of reasons.

I think they facilitate the buying and selling of Bitcoin easier and also, I think the movement of dollars and native sovereign currencies in a digital form, the moving of that around the world is a very useful thing. So this is where it challenges me because it's trying to understand where these could exist on a blockchain. I know Tether ran into some difficulties on Omni. Has that now moved to Ethereum?

Jeremy Allaire: Yeah, I think most of the transactions are now on Ethereum.

Peter McCormack: Yeah, so I'm not a fan of Ethereum. I'm not a fan of all the projects that spun up and all the ICOs, but I can understand why stablecoin would build on Ethereum. I have questions long-term about the viability of Ethereum, but I assume you have some of those yourself.

So I think the stablecoin area is a really interesting area to unpack. I'm guessing when you were considering USDC, you had to look at a number of blockchains. Did you have to consider your own one? What was the journey you went through that meant you came to Ethereum?

Jeremy Allaire: Well the way that I look at this is, there's sort of some first principles. So one first principle is, just for the goal of the application in this case, a digital dollar, it technically has to be feasible, it actually has to work. So in the case of USDC, you need a public chain that's secure, that has the underlying code execution capability, that has the underlying object model primitives that allow you to express your protocol or your app. So in late 2016 when we started to look at this and then started developing in 2017, really the only public chain that could kind of meet those criteria was Ethereum.

So that's just sort of first principle, does it work? Can you actually build it? I think the second first principle is really around interoperability. As a technologist, I've worked in internet software platforms since the early 90s and sort of have at the kind of browser operating system, server operating systems, mobile operating systems, web standards, all of these sort of fundamental platforms that society at large has built on you. You really want there to be widely adopted standards and you want there to be interoperability and each of these sort of public network projects are almost like operating systems.

So I look at something like Ethereum as a new operating system layer on the internet and I think we're in the early stages of competition in the development of this new class of operating system. The internet itself is this decentralized network, this collection of peer-to-peer protocols that allow for a lot of different things. We need to do things like safely transact with each other, or enter into contracts with each other, or reliably record votes for things that happen in the world. All of those things require a new kind of compute, and transaction, and data layer on the internet.

So it's a very important kind of next layer operating system problem and I think one of the things that was attractive about Ethereum is not only did it work, but I think it was trying to solve that kind of problem. Obviously, as a technologist, I understood the severe limitations of the first generation of that technology. However, you want something that, when we thought about introducing USDC, you want to be able to bootstrap it.

You want to be able to bootstrap it in a way where it functions, the interoperability benefits are there and with that, having many, many other developers who are also building on those standards creates interoperability and composability among a lot of different things and so that's been really powerful. If you look at the growth and adoption of USDC in particular, and some other projects too, the composability of smart contracts has really enabled some amazing things.

You're seeing decentralized finance applications, there's internet-based credit markets that exist now that are there and there's just really significant breakthroughs that are happening there. So that's sort of why one would build on that and I think to your comment earlier, I'm not a maximalist on much of anything. I call myself an internet maximalist, so I believe in broadly adopted open technologies, open protocols, open standards, and their wide applicability in a lot of domains and I believe in that in this area of trustless transactions, trustless money, trustless compute, these kinds of problems that are being solved.

So I believe in all of that, but we're still in the early days, so the conceptualization of USDC and CENTRE Consortium, which governs it, is very clear that it will be a multi-chain model because it's sort of like, if I'm Spotify I don't just want Spotify to run on iOS, I want it to run on Android and on a web browser and on Windows. I'm going to be cross-platform because there's going to be a lot of different runtime environments and if you have a digital dollar or a digital euro, you want it to be cross-platform, you don't want to be tied to one platform.

So there's going to be competition in these operating systems, there's going to be multiple platforms and we want to make sure that businesses, and people, and households that use this can use it widely.

Peter McCormack: Okay, so I'll tell you another reason why these digital dollars are interesting for me at the moment and then there's a few questions we can unpack. So I did an interview a few days ago with Raoul Pal, the Real Vision guy and one of the things I said to him is, "How do you financially plan? What are the things you would do in a time like this?" And he had kind of a four point plan, which was, " Hold cash and also physical cash, not just in your bank" which sparked interest. He said, "Hold scarce assets like Bitcoin and gold" and the other things were "Cut your spend and hustle" and I was thinking about my own personal planning through this crazy period.

Obviously, I'm a Bitcoiner, so I hold Bitcoin, I don't have any gold and I think it might be prudent just to have a little bit. I do have exposure to the pound, but I don't have any exposure to the dollar and the dollar will be one of the strongest currencies through this crisis. If we see currencies fail and I had to bet on a failure rate, I would put the dollar last. I was part thinking, perhaps it might be sensible and prudent to hold some dollars. Now I'm not going to go down to the bank and exchange some, that's just not going to happen, as I can't hold dollars in my UK bank account.

One of the easiest things for me to do, is just to go out and buy a digital dollar. Let's say it was $10,000, $15,000, that might be a prudent thing to do. I'm assuming I could keep it on a hardware wallet and it's quite an easy thing to do. So I am definitely interested in that, but that does lead me to some questions, for someone like you, in terms of that is wanting to understand really the trade-offs I'm making. So one of the good trade-offs I think I'm making, and I think it goes back to Roaul's point about holding cash and physical cash, we all know that our money within our banks is fractionally held.

Jeremy Allaire: Exactly.

Peter McCormack: But with a stable coin, it is essentially fully backed. Essentially USDC is fully backed. I know there's been some questions around Tether, whether that is now fully backed, but you're essentially saying it's fully backed. We have to trust that, but can you talk to me about that USDC is fully backed, but how do I know I can trust that?

Jeremy Allaire: These are great questions and there's a lot we can unpack there, which I'd love to talk about. I come at this from a couple of different angles. The first is just that digital dollars like USDC, just from a user perspective, it is a form of digital cash. So you're right, it is not like commercial bank money, it's like digital cash, meaning it carries the same bare instrument properties that a Bitcoin would carry, that digital cash token, you can self-custody and you can put it on a hardware wallet.

You have all those attributes and like I say, the fundamental utility value of a digital dollar is imbued with all these characteristics of the internet. You can transact to any counterparty without counterparty risk, to anyone with an internet connected device in the world, you can settle the transaction with finality in three minutes or less for 2 cents, so that's super good, super powerful, both the self-sovereign aspects, as well as the economic efficiency aspects and so it's just inherently really powerful from that perspective.

Now the issues and questions that you raise around how to think about this, both A, compared to existing forms of electronic money dollars, and then B, in the specifics, let's just call it the trust architecture of something like USDC and essentially, what is the covenant that you have from the issuer and why should you trust that...

Peter McCormack: The point is Jeremy, is that I've travelled to the States a lot, usually at least every other month, but before the travel bans. I've got dollars here and I think I've got about... Actually, because the last trip was in Vegas and I won $500 at the airport, I've actually got about $600, $700 here.

Now I trust those dollars, I know every time I go to the States, I can use them, but the utility right now is terrible for me. To actually get any use, I have to go to the bank and I feel as though I'm never going to do it. But if I was to hold digital dollars for some rainy day fund, I know I can go and exchange it like that for pounds or Bitcoin.

Jeremy Allaire: Totally! So just to break it down, I think to the interview that you recently did, likewise, I hold cash, I hold digital dollars, USDC, I hold Bitcoin and I do also hold some Ethereum tokens, but mostly Bitcoin and cash in digital dollars. That's sort of my total portfolio. From a macro perspective, I think we look at this and what we see is very likely on a global basis, other forms of sovereign money are going to be even more deeply challenged than say the US sovereign money form.

The amount of government debt effectively that is going to be issued, as well as the cascading, essentially bankruptcies and failures at both the household level and at the level of the firm in many markets, are also very likely going to put a lot of pressure on commercial bank money, which is fractionally reserved. So if you're in Turkey or Brazil or wherever, and you have a dollar balance in your bank of Turkey or whatever it is, that's commercial bank money, that's fractionally reserved and that's just a higher risk for my money.

Then secondly, you also may have concerns about the sovereign currency, because fundamentally that's a proxy to the credit worthiness of the sovereign bond issuer and those are going to get worse and worse and worse. So there is naturally going to be this, "flight to dollars". But then the question is, what are good dollars and what are bad dollars and how do you evaluate a dollar because each dollar product is a little bit different. So electronic dollars in a commercial bank are subject to that fractional reserve risk and they don't have the self-sovereign cash attributes that you have with something like a digital currency.

Now I'm getting to the essence of your question, which is, when you look at USDC, what is I think very unique and very exciting about it, and also speaks to a lot of its growth is, first of all, it's governed by this consortium framework, the CENTRE Consortium, which has multiple issuers and the tokens are fungible and redeemable across issuers. Today that's Circle and Coinbase, in the near future there are going to be some other very major companies that are going to be issuers. So that fungibility will be there. The second thing is the way it works is, USDC issuers are required to be regulated financial institutions and specifically regulated financial institutions in the United States under either money transmission law or trust bank law.

We are that, we're regulated in all relevant US states and under those laws, there are a few things to note. We are examined regularly by banking supervisors and they're examining a lot of different stuff, but in particular, from a legal perspective, there's what are called permissible investment clauses and the permissible investment clause is basically say, as a money transmitter, if you're holding dollars that are in support of these payment instruments that you're creating, like these USDC tokens, there's a very narrow scope of what those can be held in and that defines in turn what we call the investment policy for CENTRE reserves.

So the USDC reserves that are governed by the CENTRE Consortium, have an investment policy, which is bound to either fully liquid, full reserve cash, or the majority is in short term US government treasuries. So first of all, it is full reserve, second of all, the underlying reserve itself is the most liquid and essentially it's a proxy to the sovereign credit of the US government. Getting to your earlier point, you're saying, "Okay, who are the creditors in the world that I'm willing to hold a proxy for?"

And USDC is essentially that. It is this full reserve against that and that makes it in my mind, it gets all of the efficiency and utility advantages of being a digital currency and it's just safer than a commercial bank dollar and it's safer than the other forms of electronic money dollars. I'm even concerned about that in the United States... I mean, we're talking about unemployment levels that could be 25% or 30%, we're talking about 30% to 40% of businesses potentially being bankrupt, the household defaults, the corporate defaults, no matter how you slice it, the balance sheets of commercial banks are not designed to support that.

So commercial bank dollars may not be, this is why people say, have held cash or hard assets, but also I think digital dollars like USDC avoid that challenge, because of the nature of what they are and so that makes it attractive. I think we've seen that and in the last month, we've seen a surge in USDC in circulation and it continues every week and I think that underscores it. So for the crypto in us, this is not a trustless system, basically you're trusting the regulatory regime of supervision of firms like ours.

By the way, there's public attestations from a top five global accounting firm that are published on center.io every single month, that examine the full reserve basis and share that, so that's a piece of the puzzle. But I think you're also basically trusting that short term liquid US government treasuries will remain liquid, that they will remain instruments of some value, but compared to many other sovereign instruments, like you said, that's the top of the pyramid.

Peter McCormack: Well it's about having a mix I guess, to hedge your various risks. Even if I was US-based, I would be considering the dollars in my bank account versus the dollars under my mattress versus digital dollars. I don't think I would put all my money into USDC itself, because that itself has a set of risks. There's all different risks! One of the other risks... Before I come to that. So these issuers, how many are there?

Jeremy Allaire: So today there's two. So just the history of this is, we established CENTRE Consortium in late fall 2018 and then last summer, it actually went live as a network with the governance scheme, the shared reserve bank model, the multi issuer model, that went live officially last summer. It's bilaterally been managed by Circle and Coinbase. There is an independent director as well and a lot of that's changing very fast. We're very reluctant to just add more issuers and I think it speaks to the evolution of where we've been and where it's going.

What I call again, the bootstrap use case for this was within the crypto trading markets, as you identified earlier, right? It was what I call crypto capital markets, it's market infrastructure and it makes it easier, makes it more reliable, it's liquid, you can get in and out of the fiat system with it and it has all these benefits, but where we see this going is, and this gets to the very first question you asked, but what am I thinking about is we think that these programmable digital dollars on public chains are going to rapidly emerge as a very reliable payment and settlement medium for a much broader range of payments and commerce applications.

We're betting our entire company on that and CENTRE Consortium, the next major members of that consortium are going to be companies who operate at scale in the existing world of payments and commerce, not crypto exchanges and others. So we're going to be going through this transition from the bootstrap use case, which was the digital asset markets and into a more mainstream phase, which I think is really exciting.

Peter McCormack: Let's just do another couple of the questions on the trust model, just because this is important for me. So there's a couple of other things I would also be thinking about and one of them, we've talked about platforms and there's obviously a platform risk. If there was a catastrophic failure of Ethereum or Ethereum was to ever die, what happens to my USDC dollars, in a situation such as that?

Jeremy Allaire: We certainly thought about those things. The first is, the full reserve base, this is a really, really important thing, which is if all of the tokens were destroyed, let's just say like, poof, they're all destroyed, which would be obviously catastrophic! The reserves are still there, those exist.

Peter McCormack: I expected that, so how do you attach to the claim to the dollar?

Jeremy Allaire: This gets to the nature of the instrument, the instrument is digital cash like, it's not an account at a bank. It is more, "I'm holding this digital cash" and so in order to redeem, you need to be able to present the credentials that you possess that token, which is obviously you're able to, from a wallet, from a message broadcast into the chain and prove the ownership of the tokens that are in that address and then they moved to our address and then we say, "Okay, now we have them, give us your information, your identity and your bank account, we'll give you dollars." So that's sort of the flow.

Now in a catastrophic thing with Ethereum, you have to assume that you still have the blockchain, the history, up to that point where they're set catastrophic event and that's just public key cryptography. So you still have the addresses, the proofs etc and there are things in the CENTRE network and there are capabilities in the CENTRE network infrastructure of USDC itself, essentially to deal with emergencies. So if for example, there was an event occurring, which raised alert levels to a 51% attack, let's just use that we can through decisions made by the CENTRE of governance body and pause USDC.

We can just pause it and say, "We're going to wait until dust is settled on this 51% attack", or things like that. Now of course we've never needed to do that, but the network has been designed with fundamental security breaches of the underlying network in mind, specific potential security breaches that would happen in attack, say on the USDC token itself, and then also, protocols around attacks on issuers. So there's a whole series of things like that, that are in place and those will just need to continue to be hardened.

Actually, this is a space that will receive more regulation going forward, as central banks and treasury departments in countries start to better understand how digital currency versions of their central bank money function and they will very likely introduce rules, I think within the next two years that say, "If you're a financial intermediary that's issuing these digital currency tokens for our money, there's a whole set of security and operational considerations that have to be audited and proven."

Peter McCormack: I fully expect all those things and it's not like, I wouldn't even be comparing this to Bitcoin, because I think the goals of Bitcoin are entirely different. I think essentially what you're doing is you're trying to just make a better dollar, you're trying to make a more efficient dollar that's better for the digital age. A few other things in there just to think about. So one of the other trade-offs I would be thinking about is, what is the reality of the ability to track the use of this digital dollar?

I don't know if you are currently being tracked by someone like Chainalysis? I just had Johnny Levin on and I gave him a very hard time actually. I don't know your considerations for that, but how much of this can be tracked? Is there a reality that these are digital dollars that offer you some benefits, but one of the trade-offs is that you can be tracked and your certain dollars can be blacklisted? Is that a reality of the situation, because of the laws or do I still have a lot of freedom with it?

Jeremy Allaire: It's a great question and there's a few key pieces here. So the first coming back to first principles is, the way that we look at these digital dollars and digital currencies like this is that they're designed to be digital cash. So that's important and we think it's important to their utility. We think that's important to their value globally and the architecture of public chains, digital wallets, security, privacy, all those things that inheritance all those things, which are really, really critical.

We think, again, first principles, let's just call the legal and compliance layer that interacts with this, is actually very similar to the legal and compliance layer that interacts with intermediaries involved in Bitcoin. It's in fact identical. If you're in the United States or if you're in the UK or wherever, and you're an exchanger of fiat to Bitcoin, you've got a whole set of KYC/AML requirements you need to do and you have a set of reporting requirements. If you as a financial intermediary interact with a customer who's on your platform, if that customer is generating suspicious behaviour, you are obligated to report that to law enforcement.

That is what that is the set of rules that exist pretty much everywhere with some exceptions. That's the base piece there. I think USDC is an ERC-20 token. There may be other chain implementations as well, where the chains have other attributes to them around privacy and security, but right now USDC is a ERC-20 token and blockchain analytics, products, support the tracing of address movement, and things like that for that. So that exists to that financial institutions or law enforcement are using those tools.

Peter McCormack: I guess there's a slight difference and it is this isn't any form of "got you!" It's actually me weighing up the different coins that I want for different purposes in life. The difference I guess with Bitcoin, is that I can use it a bit more anonymously if I'm well-prepared or I can use CoinJoins or I can buy Bitcoin in person from somebody and hold it on a wallet and then use it for certain transactions.

I know with USDC that I'm going to hold it more like the dollar as an asset right now, rather than as something I'll be spending. But I can't CoinJoin USDC. My assumption is, all the money is attached to me.

Jeremy Allaire: There's a tremendous amount of work in privacy models for Ethereum applications data with privacy models for Ethereum applications, data, and transactions, and tokens. There's an enormous amount! Ethereum supports zero-knowledge proofs and there are a wide range of implementations around that on Ethereum. So there are I think in fact more robust privacy solutions on Ethereum than there are on Bitcoin today and there lots of folks building that.

What's interesting is that if you look at and think about digital dollars being used in everyday business, businesses don't want to have their transaction flows be auditable by the public. Someone figures out I'm whatever, Tesco, how much money I'm getting paid, or how much money I'm sending out, that's none of anyone's business.

Peter McCormack: Yeah, of course.

Jeremy Allaire: For example, there's a project that's from Ernst & Young, I think it's called Nightfall, it's a very robust zero-knowledge proof based privacy layer for Ethereum transactions that is designed for businesses. If you're going to be using this stuff, I don't want my competitors, I don't want my suppliers, I don't want anyone to know what money is moving around for me. So as we know, privacy is fundamental to money at both the household level and at the level of the firm and so the technologies are really improving on that.

I think you still will face everywhere in the world this role of these regulated intermediaries that have these record keeping obligations and have a whole set of obligations. That's not changing and that's being adapted to digital currency. So the Financial Action Task Force, which is the 170 countries that set standards for anti-money laundering and anti-terrorist financing, have standards now that are in place for digital asset companies, virtual asset service providers as they're called, they're VASPs and those rules are going into effect this October.

What that will mean is that when you're using an exchange, or a custodial wallet, or you're using a service that is moving digital dollars, or whatever it is, that you're going to be presented with things like, who are you sending the money to? What's it for? You're going to have that kind of stuff and that is just going to get rolled out. The countries that do not enforce that on firms in their jurisdictions will be at risk of being designated as higher risk jurisdictions under FATF, which means that they are people in their firms will have less access to the financial system. So that's how the game is played on that and that is happening.

Peter McCormack: I guess the last trade-off I would be thinking about is immutability, because with my bank bounds, I think in the UK I'm insured up to at least £80,000, but there is that kind of level of protection. The bank is often checking my payments to see if I make a significant purchase, I'll get a text message asking to confirm it, because they want to check and see that it is actually me. Also if my card is stolen and somebody uses it, all the money comes back to me.

Jeremy Allaire: Reversibility and fraud and all that stuff, yeah.

Peter McCormack: But within this world, this is a trade-off I have to accept is, that there is immutability here and if I make a mistake sending the dollars or they're stolen, they're lost.

Jeremy Allaire: That's right.

Peter McCormack: There's no reversibility?

Jeremy Allaire: That's right, they're digital cash and so there is no reversibility and transactions are final in minutes. So before, with respect to conducting transactions where you have worries about counterparty risk or settlement finality or speed to settlement or those things, it's a huge advantage. Now there's these other places where it's not as much.

Now what I think you're going to see happen is you will very likely see things like USDC supported within payments platforms where the payments platform itself provides those things as a service. In the same way that banks provide charge back protection, which is a form of insurance that's built into the fee structure of the transactions on cards, and so there are ways to price insurance for digital dollar transactions.

Peter McCormack: Interesting.

Jeremy Allaire: There will be intermediaries that say, "Okay, if you're transacting through our wallets, or through our commerce environment, or whatever it is, you can have insurance on those transactions, but there's a cost to the insurance." Someone's got to bear the cost of that insurance. That is what all this stuff is within banks, there's costs and so who's paying the insurance and how much profit margin is there on it, but essentially it is certainly not impossible to have insurance on the digital cash.

Peter McCormack: Yeah, I'm almost certainly going to buy some and actually one of the interesting things is one of my lead sponsors is BlockFi, who you probably know. You have BlockFi currently?

Jeremy Allaire: Yeah. I think you can get USDC on Kraken with pounds. Yeah, so that's definitely an exchange with pounds and euros and USDC as well. You can go straight to Circle, usdc.circle.com/start and you can connect a UK bank account and transfer funds and just get USDC straight from Circle that way.

Peter McCormack: Well the interesting thing there is because I'm almost certainly going to hold some USDC. Well let's say I'm going to hold a dollar stablecoin and I've been thinking about which one to hold. But one of the interesting things is say for example with my bank account, I have an amount of money in there, which is a float that I never go below. Let's just say for the sake of this conversation, it was $30,000, okay?

One of the things I'd been thinking about is that I could hold that $30,000 in USDC on BlockFi and rather than earning the pithy close to zero interest I do in my bank account, I think theirs is like 8.6% on digital dollars. So the money can actually work for me better and I had that conversation with Zac the other day in terms of their business, but my assumption is that in the future, certainly I can't put a full time scale on it, but the lending and moving of digital dollars in the environment which BlockFi is going to do will probably end up being a bigger part of their business than Bitcoin.

Jeremy Allaire: Yeah for sure. I deal with every one of these companies, so both the centralized, essentially credit and lending services, and the decentralized ones. They all use USDC as a full reserve fiat-collateralized stablecoin and it's got like 99% market share on these platforms. So it's very, very popular and we're seeing that grow a lot. I think the really exciting part of this in my view is these permissionless, smart contract based credit markets, so Compound, dYdX, but let's just say Compound in particular, it's a credit market, there's no company and it exists just in code.

It's transparent and auditable, you can supply credit to it and borrowers can borrow at rates that the market sets. If you're collateralizing your own borrowing, it has native collateral call models, so it is a functioning credit market and there's yields and Compound's protocol has done a really innovative thing, which is they've created something called CUSDC. Basically if you think about a bank, one of the popular bank products is a certificate of deposit where you say, "Okay, I'll give you my pounds for 90 days and you'll give me this interest rate" or "I'll give you my pounds for 180 days and you'll give me this interest rate." CUSDC is very similar.

So basically you can Timelock your USDC and the decentralized market, there's not a bank sitting there with a bunch of risk guys going, "How are we going to price this?"

The market prices it and you get a yield and it's really, really powerful. So from my perspective, the more that you have these digital dollars in circulation, then people in any market around the world, any country in the world, can say, "Oh, I have some extra, I'm willing to supply it and I'm going to lend to the market" or "I am someone who needs, I'm going to borrow from the market" and you have software that's enforcing those contracts. That's a breakthrough that's never been possible and that's really exciting stuff.

Back to your own personal use case of, "Hey, if you're going to hold this, why not put it to work?" The only comment I would make on that and I have my own views for my own money with respect to that, is the borrowers on these platforms today, which is where the yield is coming from, the reason the yield is so high is the borrowers are gamblers. they're all crypto traders.

So you're a counterparty if you're lending to them, which is to say you're putting your USDC with them, is the crypto trading market and it is gamblers and there is tail risk there. So there can be Black Swan events in the crypto trading markets, now it's over collateralized borrowing, but these are new products, these are new markets, they are new services and so I think you need to risk adjust how you think about your allocation in that light.

Peter McCormack: It's funny, I put those questions to Zac this week and I actually did an interview with him and Flori a couple of days ago, because that's one of the main criticisms that people have had against their business, how do they survive a severe market crash, a Black Swan event? We've had it, we've been through it and I don't think we could have been through a more disastrous, volatile market and market situation as we have recently, and they've rolled through it.

I think they also have very good policies in terms of who they lend to, but the way I see their business is that it starts in the crypto and then it uses crypto to expand outside of crypto.

Jeremy Allaire: Absolutely.

Peter McCormack: So the people borrowing Bitcoin and Ethereum most certainly are market makers or traders of some kind, but I'm assuming their USDC or their stablecoins are hopefully going to be taking them out into other markets, into non-crypto markets.

Jeremy Allaire: Yeah, that's certainly the hope and just like we're seeing USDC move...

Peter McCormack: I don't think they'll get 8.6% with that by the way.

Jeremy Allaire: No, the market will price that and actually if you look at the DeFi markets, which are decentralized, those yields on USDC have come down a lot. But the important thing is I think these effectively internet based lending markets, whether they're centralized or decentralized that utilize stablecoins, are growing. They're going to grow bigger and that's an opportunity for people everywhere.

Peter McCormack: So what are the criticisms that you do get that I haven't raised? Are there any tough criticisms or fair criticisms of these stablecoins? I know a lot of what the kind of hardcore Bitcoin maximalists will say is that this is the currency we're trying to get away from and we want to get to hyperbitcoinization. Fine, I'm fully convinced by Bitcoin, I'm not sure how that actually plays out and if it ever does, but while it does, we still have a need to use fiat currencies.

I have a day to day need to use them, I cannot survive entirely on Bitcoin, so I'm more than happy to use it, but I expect one of the other main criticisms is that there is still the ability for companies like Chainalysis to track this and they're not I guess so much criticisms of you, that's just the reality of the ballpark we're playing in, but is there anything that I've not raised that you think is worth evaluating?

Jeremy Allaire: Yeah, there's a couple of things. Maybe one just to comment on what you said and then one issue that is a question that we get and I can share. That's a tough question if you will and I'll share my response to it. So the first is just that I think that the general criticism of, "Hey, wait a minute, this is sovereign money. Look at what's happening in the world, look at the amount of quantitative easing, and this giant debt injections, and money machine go brrr, blah, blah, blah, blah"" We know that! So I am with you, like I am the bull case and the long conviction on Bitcoin is greater than ever and it's why it's such a big part of my portfolio as well.

I do expect to see more demand grow at an organic level and potentially more demand grow in an everyday use level over the coming years. But you're absolutely right and I believe very deeply that vast parts of the world are going to continue to denominate transactions and have the need for dollar based and potentially a small number of other reserve currencies as mediums of exchange, and as mediums of account, and even as a store value with varying degrees of credit worthiness behind those so to speak.

But that will be there and that correlates to the growing capability of public blockchain infrastructure to support really robust forms of commerce applications and to actually lower the cost of transacting in the world and make it safer to transact and more automated. So there's a lot of benefits to it and those are not arguments against Bitcoin. They're these two domains and I've always had the view that, and I've seen many other credible participants talk about the arc of non-sovereign money becoming a reserve currency that is then stable enough that it can be used safely by everyone.

In the past, I had thought that's maybe 10 or 20 year arc and maybe that's going to come in some because of what's happening in the world today. That'll be interesting to watch, but in the meantime, there's this other thing that's happening and then just to answer the question of is there a hard question, there is one and you touched on it earlier, but I didn't get a chance to answer, which is this potential for a wallet address to be blacklisted.

Peter McCormack: Yeah, I was going to come back to that.

Jeremy Allaire: Yeah, so there is a blacklist function on the USDC smart contract. It has never been used and we are actually eminently going to be publishing the latest board-approved blacklisting policy so everybody can see exactly what that is and the policy really focuses on two things. One is if there were some event that put the security of the network of USDC at risk, then that would be a cause for being able to use a blacklist function.

That's one scenario and I won't get into the details of what that could be for security reasons, but say there was some concern... That could be an example like I gave earlier as well. Then the second is if there is a binding final court order from a competent court in a US jurisdiction that is a final deemed court order to freeze an address, then the CENTRE board would have to make a decision and then choose to blacklist an address.

Peter McCormack: I'm assuming that's the same with a bank account as well?

Jeremy Allaire: It's very similar, but the bar is a lot higher and these are not accounts. I think it's just the bar is higher on this.

Peter McCormack: See the reality of all these questions, it's just weighing up the trade-offs that come with this and I have no need to use the funds for anything.

Jeremy Allaire: And when we publish this policy, we will publicly share when there's blacklist and we'll publicly share what that blacklist address is as well. So, this isn't going to be a behind the curtain where there's this stuff going on no one knows about it etc. We view this as something that it would have to be really severe with and not just any jurisdiction, but a competent US court jurisdiction that is enforcing this and we're not going to go hide. So we're trying to be clear about how we look at this, the severity and how the governance framework that we have is going to be handling that.

Peter McCormack: Okay and as I was saying, all these things are just about trade-offs, risks, and what I'm willing to hold. I know that if I want to hold any physical cash, there is a risk of losing it if my house burns down or my house gets burgled and if I hold it in the bank, I know I can't use it for illicit purposes and there is a risk of it being seized by the government in extreme circumstances. So there are trade-offs with all of this and I'm not trying to any way demonize this, it's just balancing the trade-offs.

I think if I was US-based, I think I would potentially consider having 10% to 20% maybe of my dollars in something like a digital dollar. I actually just checked, I actually have some USDC. I have 106 of them that came through as an interest on BlockFi. But these are the trade-offs and I'm trying to understand it. An interesting side point, during the interview it came to my mind, I'm not sure if you're aware, but I went out to Venezuela recently. I went out to make a film and see what's going on with Bitcoin there, and I came back with this conclusion that it's not the opportunity people think it is. Now there is a definite couple of use cases.

If you're middle class, upper class, there is a real use case to hold Bitcoin and every week, avoid your 10% inflation and just get your bolivars as you need it. That is a definite use case and there's also a definite use case for remittance for people who just can't get bank accounts. But in visiting the slums and meeting some of the poorest people, there is no use case. There is no culture of saving and you've got people living on $5 a month, it's completely no use. But people do want dollars!

But one of the main problems with the dollars is that if you're living on $5 a month, you're buying things that cost less than a dollar, but you can't get your change in coins, it's all dollar notes. But I'm imagining in somewhere like Venezuela, a digital dollar is a lot more useful because it's fast and easy to spend and also you actually have multiple decimal places to work with. So actually it's weird and I feel like I will get a slap from the Bitcoin gods for saying this, but there is a more of a purpose for day to day survival and an ease of use for a digital US Dollar for these poorest people in Venezuela, than there is for Bitcoin.

Now I would hope long term that Bitcoin could grow in Venezuela and it can do all the things, separate money and state and de-finance someone like Maduro from all his evil acts, but just practical, real, short-term solutions, I know if I went to the slum and tried to sell somebody the concept of Bitcoin with its price volatility and transaction costs and a digital dollar, the digital dollar will be an easier sell.

Jeremy Allaire: Yeah, well we see that. So at Circle, a big theme for us is dollarization and a lot of things at the macro level that we've talked about and we absolutely see demand from emerging markets. In fact some of the partnerships that we're working on right now are very much aimed at empowering Latin Americans with self custody, mobile, digital wallets that have seamless support for USDC and it's a killer app, it makes so much sense and I'm excited about it. I think there's going to be a lot that goes on with that.

Peter McCormack: I've always felt that and maybe it exists, but there would be a very good use case for a wallet, one that I would certainly use, which holds both Bitcoin, Lightning Bitcoin and a digital dollar, and that I could seamlessly move between the three. I've always felt that would be a very useful. I was in El Salvador and I was met with a group of kids who are incentivized to stay out of gangs by doing local work in the community and they're paid in Bitcoin and then they can use that Bitcoin in local stores.

But the volatility is a slight issue for them and also the transaction costs. Really he's trying to teach these people in terms of savings, but almost certainly in that scenario, if that wallet allowed them to say, I don't know, keep 25% in Bitcoin, put the other 75% in a digital dollar, because they are dollarized in El Salvador anyway, that that would be a very good use and that would be a very good wallet. But I am yet to see that one.

Jeremy Allaire: Yeah, there are quite a few projects that are trying to synthesize those kinds of experiences. Civic has a cool wallet project they're working on and there's a pretty exciting digital wallet from Argent, which is I think a UK based company as well. There are a lot of different takes on this and I think in the next year we'll see a lot of progress on those, with the right level of usability, but also maintaining the right level of privacy and security as well.

Peter McCormack: All right, well listen, we've done an hour and six minutes and that was my first section. My first section was just an update on how you're doing in the digital dollars, so let's close out just by talking a little bit now about the situation we're in. It would be good to just get your perspective on what's happening with the injection of money into the markets, the potential failure rate of businesses and I'll leave it for you to have a broad answer because there's a lot of people questioning why are loans being issued to companies that are failing and essentially zombie businesses!

I especially look at something like the airlines. Obviously it's tragic what they've been through, but even when we come out of lock downs, my assumption is there's going to be a lot of nervousness about traveling still. We know it's through the airports and the planes that this traveled around the world and I certainly, unless I confirmed I have the antibody, I would be very nervous getting on a plane these days. So these companies potentially won't come back to the level they were before.

So I'm myself questioning the loans that are being issued to these businesses and I'm also just questioning a lot of things personally about what life is going to be like when we come out of it. I almost feel there's a pre-coronavirus world and a post-coronavirus world, and the world will have shifted and won't return. I think Balaji has been saying it, there's going to be a new normal.

Jeremy Allaire: Yeah, I think there's a lot to talk about obviously and I think maybe the first concept to be grounded, is there's the pre-coronavirus world, there's the during the coronavirus world and then there's the after coronavirus world. The during the coronavirus world is really the next two to three years and so this is not a...

Peter McCormack: Can I just throw one in there? So I was trying to map out these different kind of coronavirus epochs and one of them I had was, there's going to be pre and post vaccine as well. So we've got post-lockdown pre-vaccine and post-vaccine!

Jeremy Allaire: Yeah, that's right! So when I say during coronavirus, I think everyone understands we're dealing with explosions of this everywhere in the world right now and even if for three or four months you can have mitigation in place, it's not like the virus goes away. So we are absolutely until there's a broadly distributed, safe immunization that can be worldwide, which is... Bill Gates had a great interview in the Financial Times yesterday, I'd encourage you to read it. He's one of the sharpest people in the world on this topic and this is a two plus year journey.

So you're going to have both waves of uncontrollable infection that are happening in places a lot, but during that period, the world is absolutely not going to be what it was before and if you want to maintain very, very low levels of infection, you're going to have structural changes in the way society functions. Then just endemically, behaviorly people will change themselves because they're going to be like, "Well I don't want to go expose myself to this risk" and the recent studies on what happened in China suggest that the R-naught in China was actually closer to 5 and that's really significant.

If you have something with an R-naught of 5, the intensity of what you need to do to get the infection rate below 1 is pretty severe and what that suggests is that if you mildly relax where we are today, you're still going to have very high infection rates and then you're going to have waves of going back into lockdown. So that's tricky and most Western countries, we're not living under authoritarian regimes with total observation of society with the ability to put military police outside of every apartment building, to have an app that tracks all your status and has code levels that scanned at every checkpoint in the society.

We don't have that. They have that in China and that will make it possible for that society and economy to function better. I do not believe that will roll out here and so you're going to be dealing with those kinds of structural changes. I think to the macro economic question and the bailouts and what this is, I think the big issue is the global economy is a perpetual motion machine and it is this supply and demand perpetual motion machine and what's happening right now has just never happened in the history of the world, which is you've effectively stopped the machine entirely.

When you stop it, it's sort of like a nuclear bomb going off and just waves of decimation that are going to happen and it's easy to focus on say what's happening in England or what's happening in United States, but this is every country in the world. There's like a nuclear bomb that went off and it's just this explosion of destruction of spending and of demand and you can't just restart that. I think what's happening now is like you've got a dead patient and you're trying to inject drugs into them to wake the patient up.

The economic interventions are so swift, so significant and really they're just trying to keep the patient alive during this cardiac arrest, during this time and we will probably come out of it, but the damage is going to be very, very severe. I believe that you will have very large scale bankruptcy at the household level and at the level of the firm and there isn't enough money to address that.

The only thing that can ultimately address that is productivity, is actual economic output that actually generates productivity and so you're going to have this wave of, I think depression-like circumstances in many, many parts of the world. I think in the United States, I think very, very likely in England and in other places, I think you're going to have these waves of that and there'll be this massive scale, public health infrastructure investment to be able to try and cope and manage this.

I think the response will turn to forms of nationalization of public health systems, you already have that in England, but there'll be forms of nationalization of other industries and very likely attempts to stimulate productivity and demand through large scale infrastructure investments that take place. So the media silver lining here is the United States might get high speed rail, or we might actually see massive investments in green energy production or very large scale multi-trillion dollar investments that is aimed at creating ultimately productivity and efficiency, which is the only way you get out of an economic challenge like that.

Peter McCormack: Yeah I've been trying to look at the positives as well. Obviously this is a terrible situation, the number of people dying, including health workers and in the UK, public transport workers as well, it has been terrible. But I think we're all recognizing positives in our own lives. I'm not driving my car anymore, I'm cooking every single meal, I think last night, just because I had to work, I ordered my son a pizza, but that was the first time we've had any takeout in nearly three weeks. I'm cooking every meal fresh.

I'm talking to people more than I normally talk to, I'm exercising, there are all these positives, but obviously we have this impending economic problem, which I think we're very early on in understanding how severe it's going to be, very early on. The trickle effect of this is going to take some time. One thing I hope for, and I'm really hopeful for, is that if we do come out of this in a new world, that we come out a world, which is more local, less global. So perhaps that leads to more localization or localism with politics, localism in terms of trade, in terms of the industries that pop up, in terms of the new things people do.

That's one of the things I'm hopeful for, that that is something we get out of it, rather than striving to get back to where we are, where everything is global and we have to get on planes here. I'm hoping that it all comes back to that, but I've got a feeling it's going to be really tough times, but that's my green shoots of hope.

Jeremy Allaire: Yeah I certainly have a lot of green shoots of hope. I think there will be real opportunities to re-conceptualize how society is organized, how fundamental microeconomic organizations what we think of as corporations, are organized, how labour interacts with that, how trade and commerce happens and I'm looking at this very much from the financial and economic sphere, but even at the political sphere as well.

I am a technologist and so I think about how these kinds of transformations can strive radical technological advancements as well and I am very, very bullish on the potential for these third generation, blockchain infrastructures to be an important set of infrastructure that allows greater levels of self-organization, greater levels of collaboration and coordination without large institutions and I think that that would be, back to your comment about local, I think lots of us have different political economies in our backgrounds.

But one of the models that I studied and was very excited about was this idea of anarcho-syndicalism and anarcho-syndicalism was expressed as a outgrowth of socialism, but it was designed around the idea of highly decentralized, democratic, self-organized units of economic organization that have these syndicalist systems that could work internationally as well, but with a very high level of freedom.

I think when I look at projects in the crypto space, like Aragon is a really cool project that is trying to construct a model for how an organization can form and have its governance and have its treasury and have its voting and have its contracts and have all these things implemented on a blockchain and enforced by code and have a human overlay on that as well, of course. But I think that we can see interesting building blocks that emerge, that are new forms of organization for how our societies and economy function and I'd like to see that pursued in the coming years.

Peter McCormack: I've just written that down. That's going to be my next reading topic now after this interview. Well listen Jeremy, I've really, really enjoyed this, this was a great chat. You're welcome to come back on the show whenever you want in the future, I think we could probably go on for a few hours with this one. But I do want to just give you the opportunity to tell people how to follow what you're doing and what Circle are doing. Just if somebody is interested after this, where should they head?

Jeremy Allaire: Yeah sure, absolutely. I'm on Twitter, @jerallaire and circle.com is where you find our company. We've a lot of awesome stuff that's rolling out there for how businesses can use USDC and if you're technically minded or a developer, we have developer sandboxes where you can get in and start using API services that we're launching. But we're on Twitter and Medium and at circle.com.

Peter McCormack: Fantastic! Well look, appreciate your time, good luck with everything and hopefully at some point we're going to get back to some normality, where perhaps I will be able to get on a plane and maybe I'll get out to Boston and see a Red Sox game, which I've never actually seen!

Jeremy Allaire: I will look forward to that and happy to host you Peter.

Peter McCormack: Fantastic! Listen, take care, stay healthy, stay safe!

Jeremy Allaire: You too, cheers!