Conversation with Circle CEO: From Regulation to Innovation, the Digitization of the US Dollar is the Trend

Jeremy Allaire shared his insights on the cryptocurrency regulatory environment and Circle's journey to becoming a public company.

Compiled & Translated by: DeepTechFlow

Guest: Jeremy Allaire, Circle CEO

Hosts: Jason Yanowitz, Founder of Blockworks; Santiago R Santos, Investor

Podcast Source: Empire

Original Title: Why the Dollar's Stablecoin Update is Inevitable | Jeremy Allaire, Circle

Broadcast Date: August 30, 2024

Background

In this podcast, Circle's CEO Jeremy Allaire discussed the future of currency. He explained how stablecoins are changing the global financial system by increasing the speed of fund transfers and reducing transaction friction. Jeremy shared his insights on the cryptocurrency regulatory environment, Circle's journey to becoming a public company, and his vision for a more efficient and accessible financial system.

Architecture of the Dollar System

Jeremy Allaire discussed the technical architecture of the dollar and its impact on the financial system. He pointed out that various balances of the dollar represent different risks, including credit risk, market risk, and liquidity risk.
Jeremy explained that the fundamental infrastructure of the dollar is primarily composed of a set of Oracle databases running on older technologies such as FTP servers and text files. These databases record the cash portion of the dollar (M0), while most of the funds are actually created by banks as credit money.

Market Size of Legal Electronic Currency

Jeremy mentioned that the market size of legal electronic currency is as high as $100 trillion, including the value of various currencies. He further analyzed the different uses of this market, including retail payments, B2B electronic payments, and transactions in capital markets, all of which constitute a huge market opportunity. He believed that with technological advancements, the circulation speed of currency will significantly increase, thereby driving the creation of economic value.

The Future of the Internet and Currency

Jeremy believed that in the future, currency can exist natively on the internet, similar to other information. He envisioned a currency protocol similar to HTTP that could facilitate transactions on an open network. He believed that as these networks scale, the storage and transfer costs of currency will approach zero, leading to a significant increase in the circulation speed of currency. This transformation will greatly boost economic activity, similar to the impact of the internet on information dissemination.
Jeremy emphasized that removing friction in value exchange would help enhance global economic prosperity. His vision is to drive sustainable economic development and growth through frictionless value exchange, ultimately achieving higher transaction volumes and economic value.

Efforts in Regulating Stablecoins

Jeremy discussed the current state of stablecoin regulation and the attitudes of regulatory agencies. He pointed out that while regulatory agencies to some extent acknowledge the potential of stablecoins, their concerns about losing control have made them cautious in embracing this new technology.
Jeremy believed that there are still many uncertainties and operational risks in stablecoin technology, and the cautious attitude of regulatory agencies is somewhat reasonable.

Evolution of Technology and Trust

Jeremy compared the early development of the internet, noting that large enterprises were initially skeptical about the security of the public internet. Eventually, with the maturity of technology and the emergence of economies of scale, enterprises gradually accepted this infrastructure. He emphasized that the progress of stablecoins and cryptographic technology requires time to build trust, and the technology must continuously improve to meet market demands.

Cryptocurrency as an Innovation Lab

Jeremy believed that the cryptocurrency field is a vast global innovation lab, bringing together a large number of technical talents and entrepreneurs. He firmly believed that an open innovation model would have more advantages in technological capabilities and results than a government-led model. He mentioned that central banks and regulatory agencies are actively establishing regulatory frameworks for stablecoins, and by the end of 2025, stablecoins like USDC will be considered legal electronic currencies and will be regulated by major financial centers.

Future Outlook

Jeremy emphasized that this evolution marks a significant advancement in the financial markets, where traditional markets will be able to utilize stablecoins, which was difficult to imagine just a few years ago. He believed that with the establishment of regulatory frameworks and technological development, stablecoins will play an important role in the future.

Transition from Currency to Stablecoin

In this segment, Jeremy detailed how stablecoins (such as USDC) operate within the existing financial framework and how they collaborate with governments and financial institutions to achieve this transition.

Current Operational Framework

Jeremy explained how Circle established its business within the U.S. electronic currency and payment framework, becoming the first company to obtain nationwide licenses. He mentioned that they complied with federal and state electronic money transmission laws and obtained specific licenses, such as the BitLicense in New York. Additionally, they adhered to specific rules for stablecoin reserves, such as using secure assets like treasuries, overnight repos, and cash.

Global Expansion and Regulatory Collaboration

As their business expanded globally, Circle began collaborating with other major regulatory agencies. For example, in Singapore, the Monetary Authority of Singapore regulates Circle to ensure that USDC distribution and usage in Asia comply with local regulations.
Jeremy emphasized that this regulatory collaboration enabled them to establish direct banking infrastructure in Singapore and Hong Kong, making it easier for market participants to create and redeem USDC within the local banking systems.

Regulatory Milestones in Europe

An important milestone was Circle becoming the first global stablecoin issuer to obtain regulation and licensing within the European Union. Jeremy pointed out that their Euro stablecoin (URC) is also growing. This progress changed the supervision and reserve architecture of stablecoins. They worked closely with legislators such as the European Commission, the European Banking Authority, and the Bank of France to establish a dual issuance model, ensuring that USDC can be interchangeable wherever it is issued.

Capital Requirements for Stablecoins

When discussing reserve requirements in Europe, Jeremy mentioned that the Markets in Financial Instruments Directive (MiFID) has very specific capital requirements for stablecoins. He noted that the current regulations require a 3% capital requirement for reserves held for European users. Additionally, he mentioned the "Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act" being considered in Congress, which would empower the Federal Reserve to impose appropriate capital requirements on stablecoin issuers.

Risk Management and Capital Framework

Jeremy emphasized that Circle has collaborated with its Chief Economist to release a detailed capital asset treatment framework specifically for risk management of stablecoins. This framework considers various risks related to stablecoin issuance and reserve models, including liquidity risk, market risk, and operational risk. He pointed out that stablecoin operators must consider specific risks related to multi-chain deployment, network failures, and key material storage to ensure the security and reliability of stablecoins.

The ultimate goal of Central Bank Digital Currency (CBDC)

Current Status and Future of CBDC

Jeremy stated that the United States seems to lack political will and public demand for a regular CBDC. He believed that while CBDC is a long-term goal, modernization improvements are needed if the U.S. currency architecture still relies on outdated technologies (such as old databases and file transfer protocols). He hoped to see the U.S. upgrade its central bank infrastructure using encryption technology and distributed ledgers to improve efficiency.

Innovation in the Private Sector

Jeremy emphasized that intermediation and innovation in economic activities should be led by the private sector. He believed that the private sector's pace of technological innovation far exceeds that of the public sector, and this innovation will drive the transformation of the economic system. He mentioned that the internet revolution made information dissemination fast and free, and similarly, blockchain technology will make value transfer efficient and low-cost.

Future of Value Exchange

Jeremy predicted that with technological advancements, there will be machine-driven value exchange in the future, where commercial, labor, and financial relationships can be encoded and executed through smart contracts on public blockchains. He believed that this breakthrough in economic coordination would be a fundamental advancement of blockchain technology.

Role of Decentralized Finance (DeFi)

He mentioned that decentralized finance (DeFi) is bringing fundamental elements of traditional financial markets onto the blockchain, and there will be more diverse forms of value exchange in the future. He hoped to implement more traditional financial principles on the blockchain, such as time value, to drive the emergence of unsecured credit.

Prospects of Unsecured Credit

Jeremy believed that the emergence of unsecured credit would be a huge opportunity. He pointed out that the private credit market has grown significantly in recent years and can be implemented on the blockchain. He cited protocols such as Maple and Goldfinch that have made progress in this area. He envisioned a model that would allow legally compliant individuals and institutions to intermediate capital supply and lending on the blockchain, creating an efficient market.

Insurance Models and Risk Management

When discussing risk management, Jeremy mentioned using on-chain insurance models to protect participants, especially ordinary users. He believed that insurance could be priced and managed on-chain, creating composable financial products. This model would allow users to use part of their assets for lending while maintaining liquidity, thus achieving efficient capital utilization.

Evolution of Legal Frameworks

Jeremy believed that the emergence of the internet broke many legal paradigms, such as the need for local licenses for broadcasting in the past, which is no longer necessary. He hoped the financial industry could demonstrate the advantages of cryptographic technology in efficiency, transparency, and risk management, thereby driving the evolution of the policy environment to be more internationalized.

Market Access and Compliance

Santi inquired about factors that could limit or accelerate this process.
Jeremy pointed out the need for market and regulatory oversight to recognize the ability of financial intermediaries to build products and services on public chains. He mentioned that the MiCA regulations in Europe provide a framework for building financial products on public chains, but widespread acceptance of this framework globally remains a challenge.

Potential of Cryptographic Technology

Jeremy emphasized the need for the industry to explore solutions that are better than the existing financial system, leveraging the advantages of cryptographic technology such as zero-knowledge proofs and encrypted credentials. He stated that the industry should innovate in user experience and privacy protection, rather than simply following existing laws.

Legal Status of Stablecoins

He also mentioned that stablecoins are considered legal electronic currencies, which will allow financial institutions to use them as effective collateral on their balance sheets, thus being used as operating capital in transactions. This is crucial for driving traditional financial institutions to participate in the crypto market.

Impact of Transparency on the Financial System

Transparency and Risk Management

Santi mentioned that as more transactions occur on-chain, there will be better visibility into the risk status of borrowers. For example, wages can be paid through USDC, reducing risk.
Jeremy agreed and emphasized the importance of cryptographic credentials (such as KYC verification) in ensuring compliance and security. He mentioned that geographical restrictions can be used to ensure users comply with specific legal frameworks.

Lack of Transparency and Its Consequences

Santi mentioned that the lack of transparency in the financial system is often seen as a feature rather than a flaw. This lack of transparency allows certain participants to benefit, such as by establishing higher interest rates or profit centers. However, this situation also leads to a range of problems, such as the occurrence of global financial crises, as risks are difficult to accurately assess in the absence of transparency.

Potential of Transparent Systems

Jeremy agreed with Santi's point and pointed out that participants who rely on opacity to profit will face challenges. He believed that open internet infrastructure can achieve significant economies of scale, thereby changing the economic structure and improving products and services. He believed that this transformation would have far-reaching effects in multiple areas such as retail payments, capital market infrastructure, lending, and asset management.

Industry Reshaping and Innovation

Jeremy further pointed out that many industries have an excess of participants, and the application of blockchain and cryptographic technology will enable the provision of more efficient, lower-risk, and more valuable products. He mentioned that the historical changes in the media industry can serve as an analogy, where the internet in the early 2000s had not completely disrupted media companies, but with technological advancements, many traditional media companies have faced significant challenges, even collapse.

Integration and Globalization Trends

He predicted that the financial industry would also undergo a similar process of integration, leading to fewer but more powerful internet-native platforms in the future, which will be more globalized. In lucrative areas, increased transparency will drive more innovation and competition, thereby providing better services to users.

Value of Decentralized Systems

Santi mentioned that while technology can be a centralizing force, he hoped that decentralized infrastructure could be built.
Jeremy expressed his strong belief in distributed and decentralized systems. He believed that one of the most exciting aspects of cryptocurrencies and blockchain is that global economic participants can safely conduct peer-to-peer commercial and financial transactions.

Potential of Open Source Code Protocols

Jeremy hoped to see open-source code protocols governed by the community, maintained by stakeholders, and continuously improved. He believed that such infrastructure would support thousands of different business models. For example, he mentioned Uniswap as a community-governed protocol infrastructure, where many people build and combine their own markets on it.

Real-World Examples and Innovation

Jeremy also mentioned that Zora's recent launch of a secondary market with Uniswap is a good example, demonstrating how to build a fundamental decentralized platform that many people can develop on. He believed that this decentralized infrastructure could enhance system resilience and promote more innovation.

Vision of Token Incentives

He further elaborated on the importance of token incentives in creating a broader range of products and services, combining real-world incentives with on-chain economic coordination. This model would help rebuild historically centralized platforms to become more decentralized.

Debate on Applications and Infrastructure

In the current crypto world, the debate about applications and infrastructure still exists. Jeremy hopes to see decentralized applications using digital tokens and broader forms of coordination that can create meaningful value at the end-user and enterprise levels. He stated that he highly agrees with Chris Dixon's viewpoint and looks forward to seeing more such innovations.

Impact of Interest Rates

Comparison of High and Low Interest Rates

Yano raised a question, pointing out that in the current interest rate environment, many people believe that high interest rates are beneficial for Circle's business, but he wanted to understand the impact of low interest rates. He mentioned that low interest rates might increase the velocity of money.
Jeremy explained his view on interest rates, believing that rates should be lowered to promote better economic policies and stating that this would be beneficial for the real economy, digital economy, and crypto economy.

Ideal Interest Rate Environment

Jeremy stated that a more neutral interest rate environment would be ideal for the USDC platform. He believed that lowering interest rates would increase the liquidity and activity of money, thereby increasing the demand for a more efficient and valuable currency. He emphasized that Circle is building an infrastructure to make it the most efficient and valuable currency in the world and encourages developers to build applications on it.

Currency Liquidity and Growth of USDC

Jeremy believed that increasing currency liquidity and lowering interest rates would have a significant driving effect on the adoption of their stablecoin network. He pointed out that while the circulation of USDC decreases in a high-interest rate environment, it starts to grow significantly as rates stabilize and are expected to decrease.

Economic Activity and Stablecoins Relationship

Santi mentioned that as the use of USDC in payments and commerce increases, this dynamic might undergo significant changes.
Jeremy explained that currency liquidity in the economy increases as interest rates decrease, especially in commercial transactions and settlement needs. He believed that the capability of the USDC platform is correlated with on-chain commercial and financial activities, and interest rate changes will impact this relationship.

Investment and Capital Markets

Jeremy also mentioned that capital market liquidity is an important factor driving growth. He pointed out that many people are willing to invest in assets they believe will bring higher returns than 3%, and this growth in risk appetite will drive the use of USDC. Additionally, as interest rates decrease, currency liquidity in commercial transactions will also increase.

Overall, Jeremy emphasized the far-reaching impact of interest rate changes on the economy and digital currencies. He believed that lowering interest rates would help increase currency liquidity, promote the adoption and growth of USDC, and drive overall economic prosperity. As market conditions change, Circle will continue to build and optimize its platform to adapt to these changes.

Innovative Development of Stablecoins

Challenges of Yield-Generating Stablecoins

Yano mentioned the recent launch of some yield-generating stablecoins, such as Mountain Protocol, and asked if Circle is considering passing on the net interest spread to users to dominate the market.
Jeremy directly responded that this is illegal. He explained that if what is offered to users is an investment product, it is considered a security, and Circle is already regulated as a payment system and electronic currency payment system, so it cannot offer such returns.

Impact of Regulatory Environment

Jeremy further pointed out that stablecoin laws globally (such as the Mica Act in Europe, the U.S. Payment Stablecoin Act, etc.) consider stablecoins as interest-free cash and electronic currency. He believed this is the right decision. He emphasized that while they hope users can seamlessly switch between digital cash and yield products, this must be done within a compliant framework.

Vision for USDC

Jeremy expressed Circle's vision, hoping that USDC becomes the best digital cash and the best digital dollar in the world. He mentioned that Circle aims to be the preferred settlement tool for users seeking returns, whether it's DeFi yields, unsecured on-chain lending yields, or other investment returns.

Role of Market Infrastructure

Jeremy stated that Circle sees itself as a neutral market infrastructure company, dedicated to building more infrastructure to enable developers to build applications on it. He mentioned that Circle is developing cross-chain transfer protocols and gas abstraction mechanisms to simplify the user experience, allowing users to trade without needing to understand blockchain and transaction fees.

Investment and Innovation

Jeremy also mentioned that Circle Ventures will make small minority equity investments in projects that are innovating. He emphasized that Circle's main goal is to enable other developers to build applications on its platform.

Outlook for IPO

When discussing going public, Jeremy stated that Circle is very focused on becoming a globally listed public company. He believed that this would increase the company's transparency and trustworthiness and help Circle maintain high standards of governance and ethical responsibility in its future development.

Advice for Entrepreneurs

Finally, Jeremy offered some advice to entrepreneurs, emphasizing the willingness to make sacrifices during the entrepreneurial process, being willing to let go of unsuccessful projects at the right time, and focusing on the core vision of the company. He mentioned that despite facing challenges, entrepreneurs should maintain a strong belief in their original intentions and make adjustments and developments based on that.

Overall, Jeremy's viewpoints emphasized the innovative development of stablecoins within a compliant framework, Circle's efforts in bridging digital cash and yield products, and advice for entrepreneurs facing challenges. He believed that there will be more surprises and innovations in the future, driving the development of the entire crypto space.

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