#223—The fight for the future of money

Also, why we need stablecoins in the first place

Sep 12, 2022

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out last week’s report here.

Back at Bitcoin 2013 in San Jose, the headline keynote was the Winklevoss twins, and during their presentation, they offered up a quote overused and often misattributed to Gandhi:

“First they ignore you, then they laugh at you, then they fight you, then you win.”

Back then, we were certainly still in the ignorance or joke phase of the crypto revolution. Fast forward nearly 10 years, what is now a trillion-dollar asset class is seeing plenty of fighting from all sides. Increasingly, the fight is around stablecoins.

That makes sense. Stablecoins are the perfect bridge between the web2 and web3 worlds, between TradFi and DeFi. You get the digitally native benefits of the blockchain without the speculative fervor of tokens. They’ve also been the source of the biggest blowups, stemming from the algorithmic variety. But even the safest variety poses long term systemic risks to how money works today. The joke about crypto is that we’re re-learning all the historical lessons of finance, just faster. We’re sort of seeing that play out now in the stablecoin space. After all, there’s plenty of lessons to learn from the traditional banking model.

And so we’re seeing our representatives in government fighting one another to find consensus around new rules and regulatory frameworks. Regulators are fighting startups to keep them in line. And stablecoin issuers are fighting for market share.

This week:

Michael Barr pushes Congress for stablecoin clarity (but don’t expect it anytime soon)
Gene Ludwig: Stablecoins belong in traditional banking
For Gary Gensler, stablecoins is another potential land grab
Binance wants all the stablecoins
Why we need stablecoins in the first place
Meanwhile, the US Treasury fights smart contracts
Ecosystem updates
This week in identity
Stuff happens

1. Michael Barr pushes Congress for stablecoin clarity (but don’t expect it anytime soon)

Photo: Gerald R. Ford School of Public Policy

Michael is the Vice Chair of the Federal Reserve for Supervision. He spoke on stablecoins at a speech last week, his first since his successful appointment by President Joe Biden. Here’s The Block:

"I believe Congress should work expeditiously to pass much-needed legislation to bring stablecoins, particularly those designed to serve as a means of payment, inside the prudential regulatory perimeter," said Michael Barr, the Fed's vice chair for supervision a speech at The Brookings Institute, a think tank. "I look forward to continued partnership with other regulatory agencies and Congress to address the risks of stablecoins."

Further:

Stablecoins have become a focal point of crypto-focused legislation in Congress in the past year. The House Financial Services Committee's leadership made a late-July push to get a bill on stablecoins out before August recess. On the Senate side, Pat Toomey, the leading Republican on the Banking Committee, has been circulating prospective legislation. He is, however, leaving the Senate for good at the end of the year.

But don’t expect consensus on this contentious issue anytime soon.

Meanwhile, the EU considers banning stablecoins outright—at least the USD variety (via /gregkidd).

Relevant:

2. Gene Ludwig: Digital assets belong in traditional banking

Speaking at the same Bank Policy conference as Barr, former bank regulator Gene Ludwig shared his two cents. Here’s The Block:

“The federal government doesn’t want basically unregulated third parties basically creating their own currency,” Gene Ludwig, a former top U.S. banking regulator who now runs a regulatory consultancy firm, said at the Bank Policy Institute annual conference in New York on Tuesday.
Instead of experimenting with a central bank digital currency, regulators should “allow banks to play more aggressively in the crypto market,” Ludwig said. “If we’re going to allow crypto at all, the banking industry is the right place to do it, because it is regulated."

Relevant:

3. For Gary Gensler, stablecoins is another potential land grab

The SEC Chief made a big deal about conceding Bitcoin to the CFTC but spoke broadly about stablecoins in a speech last week:

Before I turn to intermediaries, let me briefly discuss so-called stablecoins. Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues.
As discussed in the President’s Working Group Report on Stablecoins,[14] it is important to ensure that we have appropriate safety and soundness protections, investor protections, and safeguards against illicit activity.
Some stablecoins purportedly are backed by reserves of U.S. dollars. Other stablecoins, so-called algorithmic stablecoins, are not backed fully by fiat moneys and bear heightened risks related to whatever mechanisms are used purportedly to maintain a stable value.
Currently, stablecoins primarily are used as means to participate in, or as so-called settlement tokens inside of, crypto platforms.
Depending on their attributes, such as whether these instruments pay interest, directly or indirectly, through affiliates or otherwise; what mechanisms are used to maintain value; or how the tokens are offered, sold, and used within the crypto ecosystem,[15] they may be shares of a money market fund[16] or another kind of security. If so, they would need to register and provide important investor protections.[17]
This is by no means an exhaustive list. The point is, it is important to look at the facts and circumstances of a product, not its label, to determine whether it is a crypto security token, a crypto non-security token, or another instrument.

And here’s Gensler on the lack of need for further regulatory guidance from the same speech, but reported by Coindesk:

“Nothing about the crypto markets is incompatible with the securities laws,” Gensler said in his prepared remarks to the Practicing Law Institute. "Investor protection is just as relevant, regardless of underlying technologies.”
…
“Some in the crypto industry have called for greater ‘guidance’ with respect to crypto tokens. For the past five years, though, the commission has spoken with a pretty clear voice here,” Gensler said. “Chairman [Jay] Clayton often spoke to the applicability of the securities laws in the crypto space.”

Gensler, speaking to Coindesk, before his speech:

“[The public is] investing for a better future, based upon the efforts of others,” Gensler said. “There's websites you go to, there's Medium posts that you read, there's Crypto Twitter, there's Reddit forums and places you can look for information. And it's about that common enterprise and that entrepreneurial effort, which is the hallmark of investment contracts, which are securities.”

Relevant:

4. Binance wants all the stablecoins

While policymakers chatter and squabble, one of the largest exchanges and stablecoin issuers, Binance, just made its move. Apparently, it’s prime time for land grabs.

Here’s Axios:

Why it matters: The move is a land grab for Binance, which is using its weight to boost Binance USD, the third-largest stablecoin in circulation, to the detriment of its larger peers — Circle's USDC, No. 2, and Tether's USDT, No. 1.
Driving the news: Binance on Monday said it will automatically convert customers' dollar-pegged stablecoins like USDC, Paxos' paxdollar (USDP) and trueUSD (TUSD) into Binance USD (BUSD), effectively delisting competing coins on the exchange.
Big picture: In effect the fiat-backed stablecoin market is a three-horse race, with market share almost evenly split between Tether and now Binance/Circle, per data compiled by The Block.

Relevant:

5. Why we need stablecoins in the first place

Because moving money around is hard, complex, and expensive. In stablecoins, we have a real printing press moment.

6. Meanwhile, the US Treasury fights smart contracts

Here’s Hard Yaka co-founder Greg Kidd speaking with Protocol’s Ben Pimental:

Pushing back against “overbearing regulation” is a good idea, but “whining about OFAC compliance issues may not be a great battle to pick,” said Greg Kidd, founder of VC firm Hard Yaka. Any system that downplays the importance of identity is “going to end up mixing green money with dark money — which is the whole foundation of the money-laundering industry.”

But Coinbase is fighting back. Here’s Reuters/Yahoo (via /gregkidd):

Crypto exchange Coinbase on Thursday said it was funding a lawsuit against the U.S. Treasury Department to block sanctions barring Americans from Tornado Cash, a virtual currency mixer accused of helping hackers launder proceeds for cybercrimes.
In a lawsuit filed Thursday in a U.S. district court in Texas, six users of Tornado Cash accused the Treasury Department of violating constitutional rights to free speech and overstepping its authority in sanctioning the cryptocurrency mixer.

Relevant:

7. Ecosystem updates

Via /junhiraga—Mysten Labs Raises $300 Million to Onboard Next Billion Users to Web3
Via /junhiraga—The Block Research on Unstoppable Domains
Via /junhiraga—Alloy leans on fraud prevention to land new $1.55B valuation

8. This week in identity

A Liminal study revealed that a staggering 76% of consumers wanted the ability to manage their own data, and 60% of those consumers expressed more comfort with using a digital wallet.

USBC

Discussion about this post

USBC

#223—The fight for the future of money

Also, why we need stablecoins in the first place

1. Michael Barr pushes Congress for stablecoin clarity (but don’t expect it anytime soon)

2. Gene Ludwig: Digital assets belong in traditional banking

3. For Gary Gensler, stablecoins is another potential land grab

4. Binance wants all the stablecoins

5. Why we need stablecoins in the first place

6. Meanwhile, the US Treasury fights smart contracts

7. Ecosystem updates

8. This week in identity

9. Stuff happens

Discussion about this post