Hello and welcome to another episode of the all thoughts podcast. I'm Tracy allowatt and I'm Joe Wi. Isn't they so, Joe? UH, didn't we say recently that we were going to be talking about stable coin regulations more? There's never enough, you know. I actually I have. I think there are lots of
reasons to continue to focus on stable coin regulation. Why? Well, I think the biggest one in my mind, is this sort of thing I internalized from the great financial crisis, which is that things blow up when they're promised to be stable. Yeah, I think that's exactly and to me it's like, I know, I do not expect to experience in my lifetime like a bitcoin crisis, because people know that bitcoin crisis or a dogecoin. People know that these
coins are extremely volatile. They don't bucket them into, uh, you know, parts of their portfolio that are expected to be safe, and so they can fall like a stock can, whereas we know that, you know when something is like triple a or dollar peg or whatever, that's where trouble can theoretically start. Yeah, so two things there. I totally agree.
The other thing is, if you think about crypto broadly, stable coins are really the way in which the traditional financial system interacts the most or one of the most important ways with crypto. So stable coins are interesting because they build up these reserves of financial assets, things like commercial paper, and there's a concern there that maybe if you had a stable coin experience a big amount of trouble, that it could affect the CP market more broadly and
affect the financial system more broadly. And also there's a good argument that stable coins are the one killer APP of Crypto, that where do people actually use crypto? It's like tether, U, s DC. These are huge things, right, and so he's like, well, what do people use crypto for? Well, stable coins are like popular and why spread and therefore, you know, it's an area to be putting a lot
of attention. Well, also, I think that they promise something, which is the fact that they promise something, which is stability, kind of makes them easier to regulate. Like, you know what, what are other crypto tokens actually promising? Like they're not necessarily promising that safety net as you are discussing, but stable coins are, and so it naturally draws in regulatory interests, and this is a real, key, key point that you you bring up, which is that, yeah, like there is
this there is this promise, there is this expectation. You can also sort of judge whether the promise is being kept. Like, does this coin have a dollar in the bank? Is like a pretty simple binary question. What would be the equivalent for doge client? Well, more difficult to answer than you might expect. Sometimes Fair enough, but we are going to be discussing all of this with someone who I
think comes at it from a very interesting perspective. So we recently spoke to Senator Pat to me about this. He was talking about the stable coin bill going through Congress, but what if there was another way to regulate stable coin? Let's all right, without further ado, then, we are going to be speaking to Timothy Massad. He is, of course, a research fellow at the Harvard Kennedy School and also the former chairman of the CFTC under president, literally the
perfect guest. Yeah, definitely, Tim thank you so much for joining us. Thank you for having me. I'm a big fan of the show. Thanks. Thank you for saying that. Yeah, text and the mail. Uh. So, why don't we go ahead? And this is a question I asked senator to me as well, but why the interest in stable coins? Like, what is it that is drawing this regulatory scrutiny at
this moment in time? Sure, well, they're not that big relative to the financial senator, but they are growing very quickly and that's one of the concerns and obviously recently when we had that fall in crypto prices and we saw the crash of terra, which is an Algorithmic stert staple coin, that heightened the concern. There's a view that, you know, these things could grow very quickly and, frankly, that there's an opportunity here. They could help modernized payments
and increased competition. So I think it is right for regulators to be focused on them and of course facebook's proposal of libra was really what uh captivated or really regulators to focus in on this. I actually hadn't realized that. talked to us a little bit more about that because you know, remember the Libre Splash was during the team boom and it just seems so unwieldy and I'm not really surprised it never got off the ground, but I don't think I had appreciated the degree to which that
was a catalyzing moment for regulators. Can you talk about what happened there? But yeah, it was. It was really a huge moment, not just for the regulation of stample coins but also for the development of Central Bank digital currencies. You know, before were facebook announced that chair Powell testified and he kind of brushed off a question about cryptocurrencies by saying, you know, we don't, we don't regulate that.
We regulate banks when stable when facebook made its proposal, and you will recall, the initial proposal was for essentially a stable coin. They didn't call it that, but it was a stable coin based on a basket of currencies, not just one currency but the dollar, the euro, the pound and a few others. And so central bankers around the world immediately were alarmed because they thought, boy, this could actually displace sovereign currencies. FACEBOOK has, you know, two
billion plus users. What if they all use it? It also prompted some countries to really accelerate their CBDC development, in particular China. I was over in China shortly after the facebook announcement was was made and, uh, you know, all every want in Congress sort of looked at facebook and said, Oh, you're gonna undermine the US dollar. Well, every government official I spoke to in China had had
the opposite reaction. They saw libra as essentially a way to backdoor dollarize other economies, because the dollar would be the main component. So they got very worried about it and they accelerated their CBDC research because of interesting. So you know it was. It was big from the standpoint of causing people to recognize stable coins as an issue and also from cbdcs right. So fast forward to today and we have the president's working group report that came
out last year. I think we have this bill that may or may not be working its way through Congress. We have a lot of people talking in general about stable coin regulation. Would you characterize stable coin regulation as different to Crypto regulation more broadly, like, is there a different set of requirements that you're trying to satisfy here? Well, it is different because stable coins are seen primarily as payment mechanisms. Um, and the first thing to to realize
is that the regulation today is really inadequate. It's a very light touch. Um, these are regulated under State Law under what we call money service business laws or money transmitter laws. Those laws originated with the Telegraph okay, and what they required was, you know, if you walked into a Western Union office in Kentucky and you wanted to send money to your cousin in Illinois, Western Union had to make sure it had money on hand. So money
service business laws require very minimum capital. UH, they require security, again, very we're talking about amounts in the range from zero to, you know, maybe a million dollars, maybe two million dollars at the high end for some of these states, and some of them do have permissible investment rules. That does mean if you're registered as a money service business, you have to register with Finsen, right, which is a department of the Treasury which enforces anti money laundering and rules.
So that's a good thing. We are imposing those kinds of restrictions on stable coins based in the US. But this is not a sufficient framework. To suggest it's it's sufficient. It's sort of like saying, well, you know, there's no difference between an excel spreadsheet and a blockchain. What can that do? You know? Um, we people, yeah, I know, some people do right, right, right, Um, we need a
comprehensive framework. What would that involve? Prudential Regulation First, to make sure that these stable coins are fully reserved, meaning they have cash or Treasury securities backing them. But, more importantly, there's no stable in the stable coin today because there's no resolution framework. You know, if a bank fails, right, we have a well developed framework. The FDI C steps in very quickly, usually on weekend. Depositors are insured and,
you know, life goes on. Everybody's fine. If a stable coin were to default, were to collapse, um would be handled as a normal bankruptcy, which means the automatic stay applies. Right, so holders are not going to get their money for months, years potentially, and what we call the Perry Passu rule applies. So even though I'm a holder of a stable coin, I'm in the same category as all other unsecured credits.
So if the stable coin issue or has leveraged itself, well, you know I'm going to be competing with all of them. So that's a big problem. We need a framework that ensures good resolution and oversight as well as we've got to deal with the operational risks here, because the stable coins are trading on a number of decentralized block change and we got to look at how resilient, how reliable,
are those? This is really interesting sort of this second have your point, because I guess intuitively, probably everyone sort of gets like, yeah, we should have some required disclosure, something to make sure the money is actually there. That seems like, I guess that's the obvious thing, that's that's
the easy one, right. The second point, though, is not something I had really I've heard many people talk about, which is like all right, well, what is the mechanism that keeps it stable, particularly in the event of like something bad happening? And I see, I have seen some people, like on twitter for example, like talk about, say, like circles or tether. It's like capital cushion or the equity component,
and it's often pretty thing. So what do you talk to us a little bit more about what you see as lacking, or what you see is the risks on that sort of like second component? Sure, Um, well, certainly capital helps prevent a bankruptcy, right, because it gives you
a way to absorb lawsuit. But the point is that even with that you still need a resolution framework, you still need a way so that you know, this is a financial institution, we don't want it to and it's a payment company, we don't want it to go through the normal bankruptcy where where people are held up. So that's why I think we really need a more comprehensive approach. We've suggested this could be done administratively. I've talked a senator to me about his legislation. I think it does
some of the things I'd like to see. It doesn't do all of them, but you know, that would involve not just prudential requirements on investments, but it would involve creating a framework for resolution. It would involve overside, it would involve audits, it would involve standards on operational resilience and on concentration of power. I mean one of the big issues here is should we allow stable coin issuers to be affiliated with commercial companies? What if Amazon wants
to launch a stable coin? Feel about that? Well, talk to us about your proposal done, because I think when comes to crypto regulation there's often the sense, maybe it's unspoken sometimes, but the sense that the existing regulation isn't enough to tackle this new technology, this fast changing and
evolving industry. Um, you know with pat too, me the Howe test came up, a number of times, this idea that, well, how are you going to use something from the nineteen thirties in order to regulate block chains and cryptocurrencies and tokens and things like that. But you're suggesting that it can be done. So walk us through the proposal. So let's talk about stable coins first and then the broader crypto market second, because we have a similar proposal but
it's a different paper. Unstable coins, what I'm saying, with my co authors, how Jackson and Dan Owry, to law professors is that while legislation would be great, Um, we're not sure it will happen, number one, and we're a little concerned that it won't be comprehensive. So what we're saying is financial regulators today have the authorities they need to create a framework to try to bring this activity
within the banking perimeter. Wouldn't be regulated exactly as a bank, but what you would do technically as you set up what's called a National Trust Bank, which then has a trust below it that is the payment vehicle, and then what this gets you is it gets you supervision by a banking regulator. But it can be done in a way where there's not deposit insurance, right, because we don't want that. We want the stable point issuer just to hold cash and treasuries and so forth. It doesn't need
department insurance. It could be coupled with access to a Federal Reserve Master Account, which is very useful for settlement efficiency. And you know, the office of the controller, which would do this, can set a variety of other standards on all the other issues we need to worry about, such as operational resiliency, such as basic consumer disclosure, consumer protection and so forth. But the point is that admit this
strative Lee. This could be done. It would require all the bank regulators to get together and cooperate, something that doesn't always happen in our system very well, but it could be done today under existing law, and again, we're not against legislation. That would be fine, but let's not wait around. We could today. WHO WOULD BE? Who is
the regulator of a bank such as do? So? It would be primarily the office of the controller of the currency, because that it would issue a National Trust Bank Charter. But you would also need the cooperation of the Fed and the FDI C to really make this work. Ideally, you know, you need the SEC and the CFTC to go along to just to not do things that are inconsistent with what you're trying to do under the bank loans Um. But you know, we created the Financial Stability
Oversight Council to bring the regulators together. We've suggested well, it could, it could help coordinate this as well. Is there anything about this proposal that would impinge on the current business model of major stable coin issuers? Because I think if you all talk to them, if we had Jeremy a layer of circle back on, you say yeah, more clarity, more regulation, totally fine, etcetera. Is there anything? Is there a Trojan horse that I'm missing that he
would say no, this is not gonna work. There are things that they might not like. Um, the way we've proposed it, because we've said this could be done administratively and because we wanted to be very conservative and suggest something that the bank regulators could say, Oh yes, this uses building blocks we've that are tried and tested in our regulatory framework. We can do this. Is We have said, this trust bank would need to be a subsidiary of
an insured depository stitution. It still wouldn't have insurance, but it would be chartered that way, which brings in banking regulation overall. So what stable coin issuers will say is twofold one. They'll say our business model is narrowed, we don't need to be subject to lots and lots of bank regulations, and I'm sympathetic to that. Um, I would be willing to go down a path of saying, yeah, let's customize the rules a little bit for these guys.
They don't need all of these things. Our proposal already does that in terms of capital requirements and so forth, because the trust itself would be off balance sheet. The second thing they will say is, you know, if you're going to make this a subsidiary of a bank, that limits potential competition. The whole point of stable coins is we want to be competing with banks. I'm sympathetic to that too, because I do regard stable coins is potentially
helping US bring more competition to payments. I think both those things this can be dealt with in the process. It really depends on how much flexibility regulators want to build in the system. But those, I think, would be the terrain objections they would have, and this was going to be my question actually, which is what's in it for a bank to allow a stable coin issuer to be a subsidiary? Yeah, well, you know, I think a lot of banks are looking at stable coins and sort
of thinking about, do we enter this space? Do we not enter this space? Um, I think with with interest rates moving up, Um, it becomes interesting also, how does that affect the stable coin issuers business model? Right, because some of them now are going to be making a lot of money. On the of course, their deposits are still, you know, very, very, very small fraction of the total deposits in the banking system. Hundred fifty billion and stable
coins versus nineteen trillion and bank deposits. But, you know, I think banks are really thinking about how do we maintain our competitive edge in UH in payments? I mean all of this also goes to a broader issue, right, of how do we think about banking? Banking has traditionally bundled credit creation, creation of money. Really Right, because most of the money we use is really represents private eye, I. O. U. S. it's only paper money that represents a liability of the
government and payments. Right, banks have bundled all those functions. They've been entitled to certain regulatory advantages in order to do that, such as deposit insurance, such as access to fed master accounts and really stable coins and other innovations and payments are really raising the question of should we unbundle this a bit and let non banking entities come
in and do payments? And this, by the way, there's a report that's going to be put out by the Treasury Department called the future of money and payments, which is a report required by the executive order, which presumably will talk about this and you know, we'll see if it takes a firm stance. I mean the scope of that report is very, very broad if you look at the executive orders. Supposed to talk about future payments and cbdcs and how can they affect competition and financial inclusion
and so forth. And truthfully, you know, I'm I'm very interested in what the report will say, but you know, it may well be a committee product that doesn't take a firm view on some things but just covers a lot of territory. We'll see. Interesting just on the banks versus stable coins point this, this is something that came up in our episode with the Circle CEO, with Jeremy Ahlaire.
There is a sense that, okay, maybe sending money via stable coins is more efficient than sending it through a bank which, you know, it takes days and maybe they charge you fees or they charge you a bad exchange rate or something like that. But the question always is how much of stable coins advantage is genuinely genuine technology innovation versus regulatory arbitrage, and I'd be curious to get your thoughts on that. Well, I think that's a great question.
I mean, look, for most of us the payment system works perfectly fine, right. I mean we have our credit cards, we have mobile banking and you know, I can deposit a check at three in the morning, uh, and I get an instant you know, I get an email right back and said, Oh, yes, we've got your check. Now.
In reality, of course, if I'm a low income person, I may not even have that access and if I deposit that check, it might be five days before it clears, right, and that's why our payment system is actually relatively slow and inefficient compared to what it could be and what at least some countries have advanced in terms of having more of a real time system. That doesn't hurt most of us, again, because we have all these options. We have credit cards that give us, you know, free revolving it,
but it really does hurt low income people. They're actually subsidizing our credit cards right because they pay all the same price as we pay, but they don't have those credit cards. So when you look at it from a societal standpoint, we do need to modernize the payment system. And while, yes, the advantages today to most of us of a stable coin payment versus, you know, a bank may not matter that much unless maybe we're doing a
cross border payment where the fees can be high. Um, you know, I think long term this could be significant. I think obviously digital forms of payment have the potential. Also blockchain forms of payment have the potential to be programmable. But I guess at the end of the day I would say, as a former regulator, I don't really know the answer to the question ultimately, and I don't think government is smart enough to figure it out. I think the market has to figure out do these things really
have long term utility? I'm skeptical of a lot of things that go on in it though, as to their long term utility. But I don't think that's the government's job to decide. I think that's the market will figure it out. The government's job is to create a framework where, you know, innovation can can take place, but that we ensure, you know, financial stability and consumer protection and transparency and integrity.
And we're not doing that today. We're not doing it with stable points, we're not doing it with Crypto more broadly, and we can. You know, you asked about better. Happy to turn to that. So you mentioned that what really got crypto and stable coins in particular on the map of regulators, obviously, was the failed libra attempt, and you also through in their earlier in the conversation. It's like, well, what if like Amazon wanted to do a stable coin?
And I don't know much about this, but there is something like that prevents or makes it hard for like a retailer or a non bank company to become a bank. And Walmart, ever once in a while, I think, makes noises about wanting to become a bank and like set up something in Utah and never really seems to go anywhere. From what I understand. Would your proposal essentially foreclose the possibility of an Amazon stable coin at something? Yes, it would. Today.
That's an excellent question. We do have a separation between banking and commerce. That's primarily through the bank holding company APP and our proposal would uh have that apply. Now you could revisit that as well and you know some of the proposals in Congress have suggested. Well, maybe the bank holding company Actiondn't apply, but we should still have some limitation on commercial affiliations. I think that is important.
It's a difficult question as to exactly where you draw the line, but I do think that we need to be concerned about the concentration of power that could result from, you know, a major commercial firm like an Amazon, which has lots and lots of information from its customers Um also then engaging in, you know, financial services and payments types type of services. Well, let me ask you the kind of a follow up question which is in your mind.
How do you actually distinguish the difference between, say, a stable coin versus, say, a Venmo or a paypal, which are not you know, you could sort of abstract them away. They're pretty similar. You have a dollar and a paypal account. It's supposed to be backed by a dollar, it's and it's a liability of paypal, etcetera like. What do you see as like the bright line difference for them? And it seems important if we're going to be deciding who
gets to even issue these. Absolutely, because from a regulatory standpoint, you're basically right that the same framework I talked about that applies to stable coins is essentially what applies to those other types of payment providers, um. From a business model standpoint, they're different, of course, because paypal Venmo are then connected to the banking system. They are running through the banking system, whereas a stable coin is not, Um,
you know, in terms of what we've seen today. So, uh, you're right that we do need to think about those issues together when we think about how to regulates. I have a devil's advocate question, which is you've mentioned a number of times Um that under your proposal there wouldn't be deposit insurance first. Stable winds. Right. Why not? Because I mean the trade off between banks and getting deposit
insurance from the FT I C is. Well, you know, we agreed to restrictions on what we can and can't do. We agree to hold a certain amount of capital, to be regulated, to be under scrutiny, and in return we get this government back stop. So, if you're going to make requests of stable coin providers and say that they are going to be portfolio constraints or more disclosures, then why not give like a carrot to reward reward them
for doing that? Yeah, good questions. So keep in mind deposit insurance enables banks to basically create money, create credit, right, because they can take in my deposit and then lend it out and that's creating money. And that happens over and over and over again, subject to minimal reserve requirements or whatever. But as the depositor, I don't worry because you know, I know, if the bank fails, my money
is going to be insured. So it's not going to be like, you know, Jimmy Stewart, and it's a wonderful life. You know, where's my money? Where's my money? Oh, it's invested in selling those mortgage so that was a happy ending in that. Sorry, when I take my classes and I use a slide show, I actually have a little slide of Jimmy Stewart in the bank facing all those people with a little balloon coming out, you know, cartoon things saying with him thinking they'd go away if I had,
if I told them we had blockchain. But Um, the point is that first of all we don't want we're saying stable coin issuers should not be creating credit. Okay, so again we're separating the payment function from the other things banks do. Stable coin issuers would not be creating credit. They're not intermediating in the sense of bringing borrowers and
sabers together. They're a payment vehicle. So That, plus the fact that we can um ensure that you know your your money is safe, if you will, by the investment restrictions, means we don't need deposit insurance. And the final reason is, of course, that I don't want to subject the Deposit Insurance Fund to the risk of these things. Um because
it is a new area. We don't know exactly how we'll develop and I recognize that some of the concern of the bank regulators and you know, and they've kind of acted in a way of like Gee, you know, we're not so sure about all this stuff. We don't really want to legitimize it or authorize it. Um. So that those are the reasons. Why? What kind of investment
or portfolio restrictions would you be envisioning? Because I know we were kind of joking earlier about to some extent this is the easy part, but still there are big questions over what a stable coin like tether is actually holding right, there are. So it would be some version of cash and high quality liquid assets. Okay, whether it's exactly like to a seven for money market funds or whether it's more restrictive, you know, you can debate that.
But basically cash and treasuries, you know, is what is what I would say. It wouldn't include commercial paper, it wouldn't include other things. And you're right. Tether, you know, has had to other investments. It had investments in cryptocurrencies. It's only recently that that circle limited its investments to basically cash and short term treasuries. And, by the way, for a stable coin issue, to say, Oh, we've put our money in FDI c ensured bank. So, you know,
that's why we don't need to be regulated. I mean, yeah, that's safer than, you know, putting it in a mattress, but it doesn't help people again, in the bankruptcy situation. The F that that money is in an FDI and C insured bank isn't going to help me as a holder get it isn't gonna put me better off relative to unsecure creditors of that stable coin issue. Yeah, I think that's one of the things we're seeing like the
voyager bankruptcy, not a stable coin per saver. It's like, Oh yeah, the fact that they held their money in an FD. I see. In Short, bank is not really helping many people. You know, you joked about could a blockchain have saved George Bailey? But you you, but you briefly brought up but I actually do want to talk about this aspect, which is the operational risk of public block change, which is another way that clearly stable points differ from, say, Venmo or Paypal, which are, you know,
we know those rails. Um. What in your how? How should you know? They're always launching new change. There's ethereum in Salana, but there's like, I think there's like thousands, and the big stable point issuers are all on multiple chains at this point. From a regulatory standpoint, how should regulators be thinking about what chains, uh, they're issued on and the risks that posted? Yeah, yeah, great question, and let me, by the way, before I answer that, just note,
since you've mentioned paypalates. YEA, do some advisory work to pay OK. Thank you. We appreciate that. Um. So I think that's a huge issue and you know, and I've talked with senator to me about this because I said, you know, your bill is very good, it has a lot of things, but you haven't said anything about the operational risk of these block chains. And he said, yeah, I know, I'm not quite sure you know what to do. and Um, I think regulators aren't quite sure what to
do about that. We need so we do need standards. We need standards that would impose some obligation on the stable coin issuer as to what blockchains it supports. Right, because if you read circle's disclosure, you know it will say, well, we support the trading of USDC on eight blockchain. So there would have to be some sort of due diligent
standards and so forth. And then I think what you would want is, you know, some requirements that a stable coin issuer might have to freeze its tokens if certain things happen. So freeze the tokens on that blockchain and of course, could even be used if what happens is, even if a blockchain isn't supported by a stable coin issuer, someone wraps the stable coin and trades it on that blockchain, which case the stable coin issuer could say, Hey, I
didn't authorize this but it's still happening. So, you know, I think you'd have to have some stand or just say look, if this happens h then you might have to freeze, freeze the stable coins. Now, of course, the risk is still, you know, lack of resilience, lack of reliability, a hack or so forth, and that's why, you know, this area is so new. I do think we have to move cautiously, UM, because it's not clear that some of these blockchains are resilient enough and people don't, you know,
always appreciate that. So one thing on stable coins is it does seem like there is this sort of regulatory dagger hanging over the industry at the moment, and you started off by noting that this is a very fast growing market segment. How do you think stable coin issuers feel about regulation on the whole? Because, again, one thing we hear is that the industry wants clarity, they want rules to come out so they know how to go forward. How much pent up demand do you see in the
wings from stable coin issuers? You know, if a rule came out tomorrow, would we suddenly see fifty or injured new stable point issuers out there? Yeah, I'm not sure that we would. Um, Um. You know, I think people are still trying to sort of figure out you know, other financial institutions are still trying to figure out the space and of course it would depend on what the rule is, but certainly some players are eyeing this very
closely and thinking about it. So you know, it would really depend on the on the content of the rule and you know how burdensome it is and so forth. One thing we have to keep in mind though, Um, you know, maybe make two points. On the one hand, you know, I think bank regulators sometimes kind of lull themselves into maybe feeling like they don't have to act that quickly because they say, well, it's still not very big, right.
I mean circle claims it did three point six billion in payments since the beginning of well, you know, the Fed wire system does like a hundred times that amount every day or something. So they're small, but nevertheless they are growing. And also there's nothing that prevents really a stable coin issuer from incorporating abroad and then still issuing a dollar based stable coins. So, you know, jurisdictions are
moving faster. I mean you can sort of think about this, Um uh, in parallel to you know, the growth of the Eurodollar market. I was talking with my friend Josh Younger, who I know has been on your show numerous times, about this idea of how this has kind of got similar parallels in some ways. Um. So, you know, I think we do need to act. Um. It is, you know, it's it's maybe not a financial stability risk, but it's
growing quickly and we need to move forward. So one of the thoughts that I took away from our recent conversation with centator to me, and Tracy and I were just talking about this, is it feels like stable coin regulation. It's kind of low hanging fruit. It doesn't it your it doesn't seem that hard to do. Maybe it's a lot harder, but whether it's your proposal or something legislative, it's like, okay, come up with a banking framework and a way to make sure that they have the money there.
It seems like as soon as you go past that with crypto regulation it strikes me in my mind as orders of magnitude more complex, because how do you prevent someone you know, or how do you think even begin
to think about regulating someone launches a joke? What's the responsibility of that India or Estonia somewhere outside, and it gets traded on a defi exchange and it gets marketed towards us, uh, you know, American investors or consumers like just conceptually, and we just have a couple of minutes left, but how should we begin thinking about like that, which just seems just so much harder it is. It is harder. And you know, for one thing, we do have a
gap in the law. Right there's no federal regulator of the trading and distribution of crypto tokens, which aren't securities right now. The CFTC doesn't have that power. I you know, when I was chairman we did quite bitcoined a commodity, but that simply gave us essentially jurisdiction over swaps and futures based on that's problem number one. Problem number two, of course, is this. Is it a security? Is it
a commodity? And we're kind of stuck in the mud on that because, you know, I'm very sympathetic to chairman gainstler's view, Um, that a lot of these things probably are securities, but I'm also sympathetic to the view that, you know, the rules maybe aren't perfect. I mean there are some issues where you'd like to customize them. But my proposal that I'm working up with how Jackson at Harvard Law School is we say, look, we're stuck in the mud on that issue. Let's take a different approach.
Let's have the SEC and the CFTC create a joint self regulatory organization trying to set the standards for the trading of all crypto assets. We don't care whether their securities can come out. We're gonna basically prod or browbeat or jaw bone, whatever word you want to use, industry participants to join this S R O. WE'RE gonna type. We're gonna have the agencies tightly oversee it, tightly watch it. It's not just going to go off on its own.
The agencies, the regulatory agencies, are going to appoint the members, they're going to prove the rules. You know, and S R O s have been very, very important in our regulation of the Securities and derivatives markets since that regulation began.
And William O Douglas, former Supreme Court justice, who was the chairman of the SEC, I guess he was like the second or third chairman, basically was the guy who who initiated the Self Regulatory Organization Movement and he basically said, look, it only works if government has what he called a Well Oiled Gun, you know, and standing by Um. In
other words, agencies really have to oversee this. But we think it could set some standards because, you know, when you look at the trading and distribution of Crypto, oh, it's it just it's awful. I mean the lack of standards. You know, you have exchanges that Um, have their own proprietary trading operations that Um don't prohibit Um uh wash trading, you know, where someone can basically inflate the price or the volume of the security. You have other conflicts of interest.
You have exchanges that have interests in the CRYPTO tokens their listing. You have, you know, no sort of order execution rules, you have no requirements on pre impost transparency, and crypto has created, you know, despite its claim, despite the claim of the original White Paper, they said we're going to eliminate intermediaries, we're not gonna have to rely on these large intermediaries anymore. It created a whole new class of Intermedias, right these changes and other and other actors,
and so we need standards. There and what we're proposing is look required basically push them to become members of this and then they'll also want these rules to apply to the defied platforms, and the needs to figure out a way to do that because they don't want to be, you know, at a competitive disadvantage. So you know, it's not a perfect solution, but compared to where we are, we could go much, much further, we think, faster if
we were to do this. That's really interesting. I was sort of wondering when someone would make that that suggestion. Rather than just have this bun fight between the CFTC and sec going back from the stain government. Right, right, let's just band together and create a new agency. Um Tim I'm so sorry. We could talk to you for another hour, but we are going to have to leave it there due to Um time constraints. But fascinating discussion. Thank you so much for coming on all thoughts than
thank you for having me. It's been a pleasure. I thought that was really, really interesting and he kind of answered a long running question that I've had about stable coins in general, which is this came up with with the circle CEO, which is, it feels, kind of redundant if you have this new technology but in order to make it work you have to team up with a bank and get, you know, a bank license and all
of that. But the way Tim described the sort of unbundling of credit creation versus payment services, that makes some sense to me. Can I just say, like, I'm just gonna full disclosure here. This is people are are you going to leave all lots to join the new CRYPTO Inter Agency Organization? Full disclosure here. It's not always the case that I get really excited by Finnreg conversations like macro and commodities and markets and stuff like. Yeah, that
gets me going. Tim Got me going Finn Regg and like, even if we weren't talking about stable coins, he's I really just enjoyed hearing him like talk about the essentially like theory of Finnregg or financial regulations, in a very engaging way. Yes, absolutely, also a little bit about facebook and Libra Galvin and political interest and very interesting that from the perspective of the Chinese that was seen as a way to further reach the dollar, which I think
it's really interesting think about. If you're in any other country, how do you hold dollar assets? Is Not a trivial question. Right. You hold a dollar denominated assets safely and there is this clear potential. People are talking about it of like stable coins actually really deepening and cementing the dollars global reach.
So it's really interesting that that was like sort of the aspect of libre that they totally but this is also why people were making jokes about like the east India Company and stuff when when facebook announced list but absolutely fascinating conversation. I think we're going to have more on stable coin and CRYPTIO regulation more broadly to come, but for now shall we leave it there? Let's leave it there. Okay, this has been another episode of the
all thoughts podcast. I'm Tracy alloway. You can follow me on twitter at Tracy Alloway, and I'm Joe Wisn't all. You can follow me on twitter at the stalwork. Follow our guest Timothy Massad. He's on twitter at Tim Massad. Follow our producer, Carmen Rodriguez, at Carmen Armand and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.