Circle’s Dante Disparte talks stablecoin policy

[MUSIC] Hello and welcome to the ONFive podcast. My name is Lewis McLellan. I'm head of content for the Digital Monetary Institute. Today I'm delighted to be joined by Dante Dispartate, circles chief strategy officer. Dante, great to have you. How are you doing? >> Great, Lewis. Great to be on the program with you. >> Today, we're going to be discussing some of the key areas of stablecoin policy. We're in a really exciting time, very dynamic time with a lot of key bits of regulation changing at the moment. I just want to kick off and if you can give us a quick discussion of the state of play in the US, and then we'll come onto Europe in a moment. We've got the Clarity Act, still the subject of a very hot debate, particularly around remuneration. Can you give us a quick update on your take on the bill and when you expect to pass the timeline and so on? >> Yeah, well, it seems developing crypto rules might be a transatlantic echo between, obviously the rules that the Europeans have in place and will be subject to review, not in the not too distant future. The United States is fast at work. As you know, last year the Genius Act was passed into law. That triggered a very rapid but comprehensive rulemaking process that is being led by the Treasury Department, the OCC, our banking regulator and many other stakeholders. And so the genius rulemaking process is in full swing. And then not to be outdone, the United States now of course has been long debating what to do with crypto market structure and how to reconcile the broader set of activities that digital assets and crypto support and engage in. And so the Clarity Act just passed what I would call narrowly bipartisan markup process in the Senate Banking Committee, chaired by Senator Tim Scott, who did a really extraordinary job of hearing the equities weighing the equities in advancing the bill. I say narrowly bipartisan because I would claim 2.5 Democrats supported the bill in the markup, but that is partly I would argue a negotiating process to continue advancing interest that they care a lot about. But once the U.S. has the Clarity Act between genius and clarity, we will be able to level up the U.S. regulatory framework for this market to a level that would compare in many respects to the European framework in Mika, but at the same time keep that unique quality of American financial markets in place. Yeah, absolutely a very exciting time. And as you say in Echo because over in Europe the commission is now consulting on Mika 2.0 perhaps we should be calling it. And on both sides we're kind of reopening the question of stablecoin remuneration. I don't know how viable that is on either side of the Atlantic, but interested in your thoughts on that it seemed like after Mika and genius that stablecoin remuneration was almost a closed topic, but it seems like it's live again. What are your thoughts? Yeah, well indeed it's, if we start in Europe the markets and crypto assets framework is clear and it makes regulated stablecoins in Europe electronic money tokens. And so the product effectively becomes a near peer to electronic money. And the issuer is barred from paying yield directly to token holders or coin holders. And that carries through also to the crypto exchanges. And so the entirety of the European market has one set of clear rules that echo what might be in place for e-money issuers across Europe. Obviously the genius act echoed that same regulatory requirement and the genius act bar stablecoin issuers from paying interest or yield directly to coin holders, which is frankly from circles perspective one of these operating requirements that we had followed for a very, very long time. That even in the early days of stablecoins entering the stream of commerce in the United States, the concept of a stablecoin paying yield or interest might stray into commodities or securities territory as opposed to keep the innovation addressing the original sort of issues that it was supposed to address, which is a payment innovation first and foremost and secondarily import the features of money. Having said that, it's very true that how yield and secondary markets gets addressed has been a hot button issue in the clarity act negotiations. The fact that clarity passed this markup very recently shows that the banks on the one end and the crypto exchanges and other market participants on the other have tried to reconcile under what conditions or one way to think of it, Lewis is what verbs can a stablecoin generate yield and secondary markets. That has been greatly narrowed to activities not just similar to what you might see from payments companies. Rewards on your credit card, for example, could be a good proxy for where that is headed here in the US. I think in the end it'll be reconciled. In the end, I also expect the rise of regulated stablecoins will grow to the balance sheet of banks, grow the underlying currency and economy and be a net positive for capital markets and financial markets more generally. Just to distinguish, you're saying a little bit like rewards on your credit cards as opposed to rewards for passively holding a stablecoin balance. Exactly. That's been the big concern in my personal view and frankly in circle's experience, a lot of the nightmare scenarios of stablecoins have not really panned out. The nightmares that I've heard since the Libra project in my early days all the way through to circle and obviously the broader policy and regulatory conversation about stablecoins, the nightmares that policymakers and the media often evoke are as far flunged and complex as encroaching on monetary sovereignty to eroding the balance sheet of banks to flight of deposits to digital dollarization. All of this before we finish this conversation this morning. There's a lot that a stablecoin is being asked to answer two and four, but the fact is if you look back at the operating experience of a company like circle, granite we're operating within the US frameworks of money transmission laws and obviously we'll be the first in line to operate under the Genius Act eventually as we have grown the balance sheet of our banking partners have grown. As we have grown payment systems optionality for the entire value chain of payments has increased and that includes incumbent global payment networks like Visa and MasterCard. It obviously includes entire new categories of payments that wouldn't be possible but for the fact that you now have this trusted regulated digital medium of exchange in the form of a regulated stablecoin. And so I don't hold the view that stablecoins automatically equate to more risk. I think they equate to more rules based competition and the proof I think is in the pudding. Let's just go into that in a little bit more detail because I think you touched on some of the interesting points there particularly the threat of deposit flight from banks. As you said, it's not something that we're seeing at the moment, it's not something that feels like we're on the way to at the moment. Is that because circle and other stablecoin peers are not paying yield? If they were paying yield would that mean they were a more threatening competitor to banks and would that be a negative or do you feel like they would just be that will be within the bounds of rules based competition? Yeah, well it's a good question. So there is a product out there in the category of tokenization and tokenized money that addresses the desire for yield from institutional counter parties and it's called the tokenized money market mutual fund. As it happens, circle is the leading player in that category as well and we specifically designed it for the institutional counter party that wants yield from passive money. Today, that category is something that asset managers can offer. It's a competitive marketplace, the same as stablecoins or a competitive marketplace. And again, this flight of deposit argument in some ways is too narrow of framing. It's too much based on fear as opposed to opportunity. Banks obviously care a lot about rules based competition and what we in policy circles call same risks, same rules, but the presumption that the missing link has often been technology neutrality. So for a bank to issue a stablecoin or an equivalent product like a deposit token, the European rules on the one hand are pro bank and in that spirit very protectionist. So circle, for example, in Europe where the largest mecha compliance stablecoin issue in Europe, both for dollars and euros. And that corresponds with putting billions of dollars into the European banking system. It's prescriptive, 30 or 60 percent depending on how large your stablecoin is has to be held in the balance sheet of European banks. So we're so so where the rest of the world is talking about a flight of deposits, the operating and regulatory reality in Europe is a flight of deposits into the banking system as opposed to from the banking system. And equally the experience in the US is the exact opposite of stablecoins grow at the expense of banks. In fact, arguably I think one of the most important features of a well regulated stablecoin like USDC is liquidity. And that liquidity that trusts that potential safety and soundness is a partnership with the banking system, not competition with the banking system. And so USDC in a given calendar year supports trillions of dollars of activity all over the world, hundreds of billions of dollars in over time in redemptions. That is guaranteed in a short through deep partnerships and deep integration within the banking system. Yeah, yeah, absolutely. Going back to the tokenized money market funds point, I think it's a very interesting instrument that as you alluded probably doesn't get the attention it deserves, given the appetite that it's serving. But is it fair to say, I mean, as a share essentially, as a share of a money market fund, it's a security. You hold it in a brokerage account, does it have the same sort of broad usability profile that a stable coin would have? Or that's still, you know, you sacrifice that in order to get yield? Well, it's a good question. So it is two buckets not to oversimplify things, but I do think this digital money conversation really, really, you know, in some ways boils down to two categories, money in motion and money at rest. And for the money in motion category, stablecoins, you know, the more they get regulated, the more they are pulled into the stream of commerce, the more they clearly support all of these internet-borne novel use cases from digital asset trading all the way through to the agentic economy that is rising. All of these types of breakthroughs in money movement would not be possible without the stablecoin. And remember, part of what a stablecoin is fundamentally introducing competition against is this insidious walled garden problem we have in payments. I've spent probably nearly a decade now, you know, complaining about the walled garden. And now we have an innovation that even the largest of the world's closed payment systems and closed networks are incorporating as a settlement asset on their networks. And so in that sense, that part of the stablecoin job is done, right? The money at rest side of the equation is obviously a category of value that stablecoins can natively support, which is why we actually think it's important to defend yield in secondary markets. In the same way that you and I might have a physical dollar, but to the extent someone wanted to use it for credit, creation, lending, and other terms, those are terms and conditions that the borrower and the receiver of funds can agree to in secondary markets. It should be rule space, it should be regulated. But I think that is a domain in which stable coins can prove compelling. But the money at rest argument is where I think products like tokenized money market funds are consistently growing. Household name, asset managers, and other institutions are competing in that market. And that market in some respects over time could be as big as, if not bigger, than the 300 plus billion in circulation of stablecoins. Stablecoin circulation at some point also starts to shift towards transmission of money, settlement activity, velocity of money. And so the metric isn't just total circulation growth. Yeah. A counter metric that needs to be understood and really analyze very carefully is velocity of money and speed on a network. Yeah, absolutely. I want to switch gears a little bit and talk a little bit about the European picture in some more detail. Because I think we're in a pretty interesting situation with the Mika2 consultation coming out. And I would say, you know, people have their criticisms of the approach of Mika and indeed of the consultation itself. But I think most people would agree that they are keen to see Euro-denominated stablecoins grow and become part of their strategy, particularly internationally. They're also, you know, you were talking about e-money tokens. I think they want to make it a little bit easier to do asset reference tokens of stablecoins. Some very interesting developments. But then on the other side, you have Christine Lagarde and the ECB making you speak a week or two ago in which she is quite critical of the concept of stablecoins as a sort of useful vector of the Euro's monetary rule outside of Europe. I wondered where, you know, we have a slightly, I guess that indicates we've got quite a fragmented approach in the sort of European power structure at the moment. I wonder where you, you know, looking at Europe, what you feel like our approach is lacking at the moment. Yeah, no, it's a very good question and incredibly timely as well. I mean, so first, we're taking taking this all very seriously because we're in the industry where everybody else ran for the borders of Europe. At the onset of the markets and crypto assets regulation, circle ran to the heart of Europe. And that heart of Europe was Paris and now two years ago, we obtained the first major Mika license out of Paris, which makes us an e-money issuer. And we not only imported our fledgling, then fledgling Euro-denominated stablecoin to Europe by the way it is today the largest Euro-denominated stablecoin. We also ensured that our dollar stablecoin USDC complied with Mika. And with that compliance with Mika, it means that billions of dollars are in a network of European banks. And so where the rest of the world is complaining about a flight of deposits, circle is contributing to the growth of European balance sheets, banking balance, that depth of market. Let me just jump in there. Just on that point, I think this is worth unpacking this a little bit because the concept of a USDC-denominated Mika compliance stablecoin, obviously you also have genius regulations to comply with and they are somewhat similar but not identical. So does this mean you have to have two dollar denominated stablecoins, two versions of USDC and Mika version and a genius version, or can these be treated fungibly? Yeah, well today they can be treated fungibly. They ought to be treated fungibly. In the same way that a visa card issued to a European customer is fungible and acceptable on the visa network on a worldwide basis, even if the card in Europe might come with unique rules vis-a-vis privacy or other unique standards in the European market segment. Without that fungibility of a credit card network, the utility value of the credit card network might break down. And in a stablecoin construct like ours where circle is a wholesale financial infrastructure provider, the stablecoin reaches the retail and end consumer through an intermediation. That includes banks, neo banks, crypto exchanges, digital assets, service providers and others. That fungibility is partly what the network is designed to support. Now I would also point out that it is legally permissible in Mika to have this construct of a dual-issue and structure. In a world where the genius act comes into full force, which obviously as you know, it's in its rulemaking phase now, we have advocated very heavily for an America first, but not an America alone model, which means that we're trying to promote the concept of regulatory reciprocity and comparable regimes ought to enjoy literal transatlantic harmonization here. And so that is where we expect the direction of travel ahead. Now just to highlight there for listeners, the multi-assurance or dual-issue and concept has been enormously contentious in Europe. It was confirmed in the Mika consultation too that it is intended by the original wording of Mika, but the CB and the European Council have kind of pushed back on that because they perceive risks of redemption to resumance on that. I personally don't think are super well-founded, but the water has got a lot less money when the Mika consultation came out and specified that this was part of the original intention. Well, and this gets to your second question. This thing, I have your question, Lewis, was my reaction to Mademois Gauv's speech in Spain. One, if you're trying to sell public sector digital currency innovation, it would be well advised to sell it based on opportunity and not fear. And I think the role that central banks play in obviously all forms of payments and banking and the future of money is not only central, it is critical. And you see this playing out with the successful stablecoin contracts in the world is that there was once upon a time a period where people were trying to do multi-currency basket-backed stablecoins. And the closer they became a near-peer to single currencies, trusted currencies, and they follow the steady hands and the invisible hands, hopefully, of the central banking world, the better the innovation will be treated and the more trusted it will be. So obviously the European central bank has designs that keep accelerating vis-a-vis a digital euro, but that final product construct in our view would be beneficial to support banks and non-bank players that are regulated. And doing so would also ensure that a lot of the motives that Madem, like out states, publicly vis-a-vis monetary sovereignty, payment systems optionality, and all of these other goals can be met. At the same time, the part of the criticism in that speech that I don't accept is the notion that stablecoins, including Euro-denominated stablecoins, are all automatically a threat. The dollars that are regulated in Europe under Mika are adding to the European banking system. The euros under Mika are literally both currencies or literally e-money tokens. And so if you don't like European stablecoins, then you don't like European e-money. And then the last point of it is more of a philosophical one, which is that in my view, Mika would pass Mario Draghi's economic competitiveness test for Europe. And the proof is in the numbers. Not only did Circle become the first major international player to operate under Mika, you now have more than 20 e-money token issuers across the EU, banks, non-banks, and many others. A very large banking consortium was just announced, including something like 30 banks that are all offering digital euros. Digital euros, stablecoins, I should clarify. I think they're up to 30 and banks now. 37 banks exactly and the market is heavily competitive. One was a last. time a European regulation attracted investors, competition, and operators, as opposed to killing innovation and activity at the start. And so too much has been said domestically in Europe around criticizing what in my opinion would be a clear regulatory win. And Mika hasn't even had a full anniversary or a second anniversary before people started second guessing its merits. And I would say democratically elected policymakers and Brussels followed a set of norms. They put those norms on on the books, those norms became law, companies observed those laws. And if there's one difference between the US and Europe right now, is that our rulemaking tends to be more principled, whereas European rulemaking tends to be more prescriptive. But even there, I'm very optimistic that we can, you know, auger this concept of transatlantic harmonization. And frankly, the last point I would make very briefly here is the country to watch in this development of transatlantic digital asset norms is actually the United Kingdom. I recently gave parliamentary testimony in the UK at the House of Lords. And you could see the UK machinery is moving. And there is such a thing in my opinion as a second mover advantage that the British are close to claiming when it comes to stablecoins. You may be responsible for finally getting rid of the Bank of England's insistence on stablecoin holding limits. That seemed like a nonstarter right from the start. We've held a lot of events with people who want to do UK-based stablecoins, talking to the Bank of England and the SCA. And every time they would talk about the holding limits idea as a complete nonstarter. So it's good to see Sarah Bregan seems to be rolling back on that, which is very encouraging. Well, I'm not going to take entire credit for it, but it was a big point in my testimony. And I actually wrote a financial Times article highlighting exactly some of these issues. And deputy governor Bregan and many others at the Bank of England are amongst the most thoughtful in terms of not just the centrality of the central bank. But Sarah Bregan's general concept of this idea of a multi-money system is actually where we're probably headed. Whereas the Europeans probably only see a world in which money has to be a publicly issued innovation digital or physical. Whereas Sarah Bregan is acknowledging in her concept of a multi-money system, the likelihood of fungibility across all forms of trusted money in a jurisdiction, including alternative currencies. And that in my opinion plays to the strengths of the city of London. It is a clearinghouse for hundreds of billions, if not trillions of dollars every year from the inner its interconnectivity to the global banking system. And I think that multi-money system should be a vision we adhere to and something we aspire to in the industry. Yeah, absolutely. Just while we're on the subject of the UK, it has been encouraging to see the our regulatory machine kind of getting into gear now. And there's some interesting consultations going on. And the crypto asset regime will be done October 20, 20, 27. It goes live. But something that came up recently and then was fairly swiftly rolled back was some concern around unhosted wallets. And I think it stemmed from a conflation of unhosted wallets or self-hosted wallets with a lack of KYC, which I think has been addressed. But it does. The possibility of sending stablecoins to a wallet that on which KYC has not been conducted remains something that regulators are kind of grappling with. And do you guys have a take on that? Yeah, no, we do. And so here's the thing. This is where obviously you can't have the economy of the future without the money of the future. And for stablecoins to really meet their features of money, they've had to become near peers to e-money or directly plug into central banking, which is one of the ways I think the bank of England's proposals are really a breakthrough. Yeah. They're not saying at the outset that a stable coin regime in pound sterling couldn't plug in directly to the central bank. They're saying that at the outset, even if there's some boundary questions on what share of those reserves would remunerate to the issue or not, I think we're reconciling those issues. But if it is truly going to be money, remember what we're actually solving for with stablecoins, right? Which is that number one, you're in my financial needs don't take bank holidays. And number two, physical money is the ultimate censorship-resistant form of economic value and store of value and medium of exchange. However, in the 21st century, it'll only go as far as your arm could reach. And so the concept of protecting peer-to-peer payments, open payments should not automatically and reflexively mean it is a vector for illicit activity. I think arguably the more you regulate the issuer, the exchanges, the neo banks, and fundamentally, finally, the wallet infrastructure, including providers of self-hosted wallets, which are effectively software providers in the end, the more you could also ensure that the rise of stablecoins and blockchain-based financial services doesn't come with a rise of illicit finance. And the very first and very most material of the consultations on the Genius Act has been from FinSan and OFAC on precisely what types of novel approaches should we have so that good technologies don't go get co-opted by bad actors. But preserving the peer-to-peer payments, preserving the open infrastructure, and preserving this what I call financial services shareware, I think adds to competition as much as it overcomes the walled garden problem we tend to have in payments all over the world. Yeah, absolutely. Although one thing I'll push back on as someone who recently received a $20 bill in the mail, the reach of cash goes lonely on the reach of your arms into the postal service. Was that a collector, a collector item for your numismatic proclities, you know, collecting bills? I wish no, just actual payment. We're almost out of time. There's so much to discuss. Some final thoughts from you, what's coming next? What should we be looking out for? Yeah, and I think you'd like to leave the list. Sure, no, no, well, first it's been a far-reaching conversation. So I'm grateful for the occasion. I think the thing to keep an eye out on is, you know, once upon a time people thought of stablecoins merely as poker chips in a crypto casino. And what the last five or six years have proven is that this was actually a breakthrough innovation that could be integrated in the core of the financial system as opposed to the edge. I think today it would be similarly wrong to think of stablecoins as not having a direct link, if not just an enablement link to the rise of agentech commerce and economic activity. We're seeing in the use of USDC by its very nature as software and by its very presence across now, 34 public blockchains, a real natural sort of link of USDC being the digital thrift of this always-on AI-powered economy. And I think that's an area to watch, perhaps, you know, the basis of a future conversation with you, Lewis. Well, and for our listeners who might want to hear more about that, they can listen to the podcast that I have also recorded with Chad Harper, the Coinbase Institute on agentech commerce with stablecoins. So yeah, a great deal to be discussed in that area. Super interesting topic. And I will have to leave it there. I know you'll be running out of time soon, very Dante, but it's been terrific to have you. Thanks so much for your insights. And yeah, hopefully we'll have another one of these soon and much to discuss. Thank you so much. Thank you to the On Fifth listeners. Check out our website on fifth.org for reports, details about upcoming events, more podcasts, and follow us on LinkedIn and X. Thank you very much. Goodbye. Thank you for joining us for this edition of the On Fifth podcast. If you found today's conversation engaging, make sure to stay tuned for additional thought provoking discussions on artificial intelligence, central bank digital currencies, and digitalization of finance, by subscribing to our channel. Stay connected of the latest developments by following us on our LinkedIn page. On Fifth Digital Monetary Institute.