Taking stablecoins seriously, with Haseeb Qureshi
This week, I'm joined by Haseeb, a managing parter at Dragonfly, a crypto focused VC fund. Stablecoins have seen more real adoption than any other product in crypto, including for use cases which are not crypto native, and I thought I'd invite an industry advocate I find routinely credible to explain what they're seeing and why stablecoins seem to be drawing investment and support from non-crypto-native financial industry participants.
This follows a prior episode with Zeke Faux on stablecoins and shenanigans, which I felt (no slight to Zeke) on listening was too heavy on the shenanigans without giving the arguments and evidence in favor of the industry a fair hearing. Tether is still as bent as a barrel full of fish hooks, but there might be the glimmer of something real here.
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Timestamps
(00:00) Intro
(00:55) Crypto industry insights and tether discussion
(02:52) Stablecoins and their economic models
(05:04) Decentralized stablecoins and their mechanisms
(07:41) VC perspective on stablecoin investments
(13:18) Regulatory challenges and lobbying in crypto
(20:36) Emerging use cases for stablecoins
(24:16) Sponsor: Safebase
(32:35) The initial response to stablecoins
(33:38) Stablecoins and national security concerns
(34:00) The shift in congressional attitude
(34:49) Stablecoins and dollar internationalization
(37:40) Retail payments in high-inflation countries
(38:41) The role of black markets
(46:13) International B2B payments
(01:02:57) The future of stablecoins
(01:05:44) Wrap
Transcript
Patrick McKenzie: Hideho everybody, my name is Patrick McKenzie, better known as Patio11 on the Internet, and I'm here with my buddy Haseeb, who is a managing partner at Dragonfly, a crypto-focused VC fund.
Haseeb: Thanks for having me, Patrick.
Patrick McKenzie: Thanks very much for coming on. So a few months ago, we had an episode with Zeke Faux of Bloomberg about “stablecoins and shenanigans.” I feel we leaned a little bit too heavily into the shenanigans and not much into stablecoins' positive story. [Patrick notes: FWIW, entirely on me: I got so interested in discussing Tether’s long history of shenanigans in particular that I didn’t do a good job of time management in the interview.]
In the spirit of providing balance and being an intellectually rigorous, but mostly cryptoskeptical person, I wanted to have someone well informed on to talk about what is interesting happening in the space.
Haseeb: I love your show. I've been listening for a long time since you started putting it out and I've been a long time follower. I've been in the crypto industry for now coming on eight years full time. Listening to that show was painful for me because I'm naturally a very argumentative person. I felt like there was a voice missing in that conversation about what is interesting going on in crypto.
It beggars credulity to think that, okay, this stuff, all the stuff about Tether has been more or less known since 2017. I think that was when the New York Times first published this big piece about Tether and saying, "oh, look at all the shady stuff going on." [Patrick notes: I would give the nod to Bitfinex’ed, and not the New York Times. 2017 is the right approximate timeframe; that is the year Bitfinex sued Wells Fargo after Wells informed their Taiwanese banks it would not longer be a correspondent on their wires, over compliance concerns. That act required them to divulge facts they had been lying cagey about, such that Bitfinex and Tether were alter egos.]
Now Tether is well over $100 billion in total circulating stable coins. [Patrick notes: Approximately $145 billion as of press time.] And there's almost no way that the primary thing going on is just unadulterated shadiness.
So not being able to explain, okay, why is this phenomenon still here? Why is it so big? Why are so many important and reputable players now throwing their weight behind it and increasingly betting on it tells you to my mind that there's a lot more going on here that maybe is less legible than "Tether's a shady company or has shady origins and therefore this whole edifice should be burned down." And that's what I took away from that conversation and what I came here to push back against.
Patrick McKenzie: So I don't necessarily know that I want to burn down the edifice, but certainly we're going to hear some intellectual pushback. Just to contextualize for people who might not have as much crypto background as you do. I think the current, for historical reasons, the crypto community calls it "market cap." But the total value of stablecoins is on the order of $250 billion, of which about 60% or so is Tether, about 25% is USDC.
Haseeb: I believe it's close to 80% Tether. [Patrick notes: Still looks closer to 60% to me, on rechecking stats prior to publication.]
Patrick McKenzie: I could be wrong too. The joys of having all transparent data on the blockchains mediated by random websites that you just Google for is like maybe the random website you check has it right or not. But be that as it may. [Patrick notes: I would generally consider Coinmarketcap a reliable source by the standards of crypto information providers, and I consider Circle’s data presumptively reliable.]
Stablecoins and their economic models
And then the rest is sort of a long tail of also-rans that each have less than five billion dollars of assets but total up to 10-15ish percent of the market. I think most of our audience understands the basic economic model of them by now, but in brief I would characterize it as: a stablecoin is a digital token which tracks a sort of tradable interest in underlying money market fund, aspirationally.
Tether now says that it is mostly a money market fund, mostly managed out of Cantor Fitzgerald and US Treasuries. USDC very explicitly just proxies essentially a BlackRock fund, which anyone could invest in, I think, if you have the $2 billion minimum investment size. [Patrick notes: Low confidence here, and no one other than Circle should want to be in this fund due to how Blackrock prices the services they are providing.]But they are essentially tradable claims against that fund.
USDC is, to a very high probability. money good. Reasonable people could disagree about Tether under various circumstances. [Patrick notes: I commend you the discussion of one Sam Bankman-Fried with Bloomberg’s Odd Lots and Matt Levine, who argued it is reasonably 100 cents +/- 5 or so. Tether has not received a recent updated testimonial from their star character witness.]
But there have been other models over the years of "maybe we can create something algorithmic and make a crypto native stablecoin" and they've largely fallen by the wayside in the market. Does that match your understanding?
Haseeb: Yeah, so I actually just checked. So actually the number is around 70% of the total stablecoin supply is Tether. USDC is roughly 21%. And then the rest is a smattering of other smaller stablecoins, which are much less significant relative to the market.
So the idea of stablecoins in crypto is a very, very old idea. And it used to be called the holy grail of crypto: how can you create a digital asset that can be traded globally instantaneously 24/7 from anywhere in the world, just with the ability to custody a private key. And you mentioned in the previous show, some of the precursors of things like Liberty Reserve, which were completely just basically centralized and more or less like "what if we did PayPal, but no KYC and no AML and no anything and just had emails and signups." [Patrick notes: Liberty Reserve was worse than that; people in the ecosystem were not merely maximally libertarian, but they understood they were facilitating fraud and crime. I understood that, as a college student, in less than 5 second of perusal of their website. It was a hive of scum and villainy.]
So these were shut down, clearly illegal and not really viable in the financial universe that we live in today. And this was more or less remixed/reinvented into what was originally called Real USD, which became Tether.
[Patrick notes: Hasseb here lays out a taxonomy of stablecoins. I’ve previously written about this at Bits about Money.
Hasseb continues: And so Tether and USDC are what we call “fiat collateralized stablecoins, which is the obvious thing that you would think of when you think about how to build a stablecoin, which is take a bunch of dollars in a bank account, issue liabilities against those dollars, and boom, now you have a quote-unquote stablecoin.
Decentralized stablecoins and their mechanisms
There are other more exotic schemes, and these exotic schemes came from the same kind of ethos that originally built Bitcoin and Ethereum themselves, which is, "we want to reduce reliance on centralized parties." Bitcoin was created because there was a distrust of banks and central bankers in the wake of the great financial crisis. And there was a thought of, we should untether from these people, no pun intended, and create our own system that operates outside of that entire ecosystem.
And so how do you do that with something that's supposed to be stable? Well, of course, the first question is stable relative to what? And people implicitly mean stable relative to the dollar, which already kind of ties you to the financial world of the US government. But this idea of "can you use exogenous collateral? So not backing it with dollars, but still get dollar stability?"
The answer generally is there's two ways to do it. One way is to over-collateralize with other assets that are not stable relative to the dollar, but you can kind of control the amount of collateral and de-leverage. This is what MakerDAO, which is the oldest decentralized stablecoin in existence today, which is still working fully pegged. It's a legit project that works.
There are other mechanisms that are a little more complicated, such as by creating derivatives. You know, going long an asset and shorting an asset, which creates a delta neutral thing where you're hedged and don't have any delta exposure to the underlying asset. That's the biggest one called Athena that currently exists today. It's the largest decentralized stablecoin in existence. There are some others.
Patrick McKenzie: I feel like to be fair to Ethena, they've attempted to not brand themselves as a stablecoin, although they've definitely been branded externally as a stablecoin. [Patrick notes: I would describe Ethena as a redeemable interest in a hedge fund which is managed to have NAV of approximately $1 per share. The founder describes the model at substantial length on a podcast with Castle Island, if you’re interested. It’s commendably intellectually rigorous, which is not something I frequently say about marketing comms from the crypto community..]
Haseeb: Yeah, I think in popular parlance, people just call them a stablecoin, but they describe themselves as a synthetic dollar. Which is to kind of point to the fact that it's a more complicated financial instrument than just what "stablecoin" generally tends to imply.
Now, the other family of approaches to stablecoins is the family that has not aged well, which is the family in which Luna belonged, in which a basis (which is a base coin, which is a very, very old project that was a predecessor to Luna) that were built on these models where basically you more or less take on more leverage over time the larger you grow and you back the thing with equity in the project as opposed to backing it with some other type of exogenous collateral. [Patrick notes: Preston Byrne called this the worst idea in crypto back in 2017 and keeps getting more right. We have increasingly abundant evidence for his claims.]
And of course backing your bank with its own equity only really works if you have some bigger entity that can backstop your bank equity, which is usually a central bank. Crypto doesn't have a central bank.
And so if your bank equity turns out to not be worth what we thought it was, then depositors are wiped out and the whole thing collapses. So this is what happened to Luna and this is what the whole family of stablecoins that were built on this kind of premise did. [Patrick notes: I think this discussion didn’t quite do justice to the ponzi dynamics of Luna and the fallout on the rest of the crypto industry, as it was a domino that effectively knocked over FTX/Alameda, but you can read about that elsewhere.]
VC perspective on stablecoin investment
We're VCs. We invest into early stage crypto projects. And so I've been looking at stablecoin investments for almost a decade now. And I think we have some understanding of the space because we passed on every round of Luna, which is the most famous decentralized stablecoin which failed. And we passed because we thought it was broken, that this mechanism wasn't gonna work.
There was another one called FAY, which we also passed on believing that the mechanism wasn't gonna work. And then we did invest into a few decentralized stablecoins such as MakerDAO, Frax and Athena, all of which have turned out to have survived and survived not just, okay, they've been around long enough, but they've survived 80% plus drawdowns in the underlying collateral, which basically says like, look, if you can survive an 80% drawdown, probably your mechanism works. That's like as robust of a stress test as you're ever going to get in a real world scenario.
Patrick McKenzie: Well, I think Iron Finance had a post-mortem of surviving an 80% drawdown where they made that exact claim and that was not the last time they were stress tested and they did not survive the last one. Shrug, I don't know. I just read the post-mortem and thought, well, bold and not so correct in hindsight. [Patrick notes: The postmortem I am referring to here, which I do not think I characterized accurately, is this one, not the later one after Iron Finance went bust.]
Haseeb: Iron Finance—that was a fork of... Okay.
Yeah, so obviously the 80% drawdown survival is not the reason why you should be confident that it's robust. [Patrick notes: Also not compelling evidence: Tether’s claim that they have sufficient liquidity at all times to meet their peak 24 hour withdrawals. Matt Levine provided sufficient understatement.] It's by looking at the underlying mechanisms and understanding how they work. Now, there's nothing in crypto that's going to survive an instantaneous drawdown of enough ferocity and enough of a liquidity impairment. But there's also no central bank that can also survive that, right?
So there's, famously many, many countries have pegged their currencies to the US dollar and have had to eventually give up on that peg, given enough pressure on their reserves. So if you look at the history of pegs, because ultimately that's what a stablecoin is, is a peg. The history of pegs shows that the majority of pegs in history have been broken at some point.
Pegs can survive for some time, and usually they survive using some currency board, having some reserves, defending the peg in the market. There's more or less an understanding that nothing is forever in finance. And it's probably also true of decentralized stablecoins is that probably most stablecoins at some point somewhere will have a depegging event because markets will just do some three sigma, four sigma, five sigma thing over enough period of time.
But the question is not, "okay, is this thing going to work forever?" The question is, "is this thing robust enough for your level of risk tolerance?" Which if you're in crypto land, the answer is that, well, for a decentralized stablecoin, especially if you look at something like Athena, for example, Athena pays a yield that's higher than what you'd be getting with treasuries.
And so as a user of Ethena or as a depositor in Ethena, you're being compensated to some degree for the risk that you're taking on.
Patrick McKenzie: So I think Ethena right now is paying a 4% interest rate, which is not, I don't think higher than… [Patrick notes: They have a ticker on their site. A one month T-bill has yielded more than 4% for most of the last few years.]
Haseeb: Yeah, that's because markets right now are incredibly jittery because of the macro instability. So the rate on Ethena is floating based on the funding rate on purpose markets.
[Patrick notes: This would be a surprising statement if you thought Ethena was a simple savings product, but an unsurprising statement if you thought it was a complicated tradeable LP interest in a hedge fund. I think crypto has a long history of misselling, and that the community routinely practices some strategic ambiguity, in a fashion which would be extremely not allowed elsewhere in financial services.
Partly this is because “crypto” is not a single actor. The people who sell you Ethena are mostly not actually Ethena or anyone Ethena has a direct relationship with, not in the way that a hedge fund has a direct relationship with feeder funds or a mutual fund/ETF issuer has a salesforce working to convince advisors to put their clients in the product. When a product performs as what it is, and not what it was sold as, crypto advocates shrug, and say “do your own research”, and ignore that it wasn’t just randos on Twitter but marketing departments, people with titles talking to mainstream media publications, and investment professionals who said things that were untrue and thereby caused direct harm to investors.
That’s fraud. It is a consequence-free genre of fraud, due to some combination of regulatory fecklessness and recent capture. But it vexes me, even if our political system has decided it is an everyday, acceptable form of fraud..]
Haseeb continues: We're kind of getting in the weeds here that maybe is a little bit opaque to some listeners.
But long story short, if you look at the menagerie of different stablecoin designs, it's very clear that there was an early Cambrian explosion where people were trying a bunch of different things. And a lot of these evolutionary branches ended up dying out and having no successors, which is the point of startups. That's the point of innovation. It's to try a bunch of things, see what works.
Some of it maybe was foreseeable that like, "yeah, this is not going to work." A lot of it was genuinely, we just didn't know. And it's kind of worth trying. And the beauty of crypto, and this is one of the things that many people rail against crypto for, but I think is genuinely one of its virtues, is that it creates this space for pure creative destruction where people try a bunch of stuff and some of the stuff works and ends up becoming really valuable. Most of the stuff fails and people end up losing their money.
But the people who end up losing their money, there's no bailouts, there's no FDIC insurance, there's no central banks. [Patrick notes: I didn’t want to interrupt Hasseb here, but in fact, the onshore, regulated crypto community did benefit from an extraordinary expansion of FDIC insurance back in 2023 when Silicon Valley Bank went bust. I think that policy was supportable on the merits and justified by concerns far wider than crypto, but the insurance fund did bail out USDC to the tune of about a billion dollars, so, worth mentioning.]
Haseeb continues: It's a complete caveat emptor such that for the people who are putting their money into these things, I mean, do all of them understand the risk they're taking? Of course not, absolutely not. There's no way because these things are really complicated.
In many of these cases, the people who are building these things didn't also themselves genuinely understand how they worked. But that is the process through which all markets ultimately arrive at more efficiency, more innovation, getting new ideas. The beauty of the Internet is that it allowed that kind of creative destruction to happen in so many domains that have now been totally transformed, to be unrecognizable post the Internet, right? Is that anybody with just an idea, a laptop can just host a startup or a website and just try to compete out in the world.
And mostly startups fail. People were saying, "I'm gonna start buying all my groceries from WebVan." Okay, obviously it's a minor disruption to your life if WebVan goes under. But the idea is that, we don't protect anyone. We don't make sure that this startup is going to survive and it will not be a disruption to your life. If you start using these products and this company fails, too bad, go find the next one. Suck it up, you'll be okay.
That is the space that crypto is inhabiting for money and for finance. Now that's really weird because we have an extremely strong prior in Western society that money and finance is absolutely beyond the realm of being able to just pick up rocks and bang them together and try things. And crypto says, "okay, fine. We will stay outside of your domain. We will stay outside of the regulated spaces. We will not tap FDIC insurance on anything. We will not give people the impression that this is insured by the government or insured by your bank or insured by anybody, we're going to create this totally separate space where we're going to play out with ourselves and incur all the brain damage of internalizing all this stuff amongst ourselves." That's crypto's answer.
Regulatory challenges and lobbying in crypto
Patrick McKenzie: I hear that argument. However, a respect for the truth requires me to interject that crypto deploys that argument strategically in some circumstances. And crypto here, acknowledging that the community is a very diverse one, large, and just like you can't say all startups or all people in tech necessarily believe X, blah, blah, blah. But there is a lobbying strategy. And the lobbying strategy occasionally is that, "OK, we are sort of like maximal risk takers, firewalled from the parts of society which society is determined needs to be extremely stable, etc. etc. It's a PVP zone. Everyone who enters here knows that it's a PVP zone. We have that disclaimed on our websites."
And also crypto argues that institutional adoption is coming and we are increasingly tied into the mainstream financial ecosystem and there's decks, which go out to LPs of funds and yada yada, which say that like that is the reason why you should be an LP in this fund is that it is eventually going to outcompete and subsume a lot of the functions of finance. And there are people who've been arguing that for like 15 years. And so eventually I figure the game of strategic ambiguity on whether one is joining the adults table has to end at some point.
Haseeb: So I push back on that. If you look at what is the nature of the lobbying that's taking place? Because I agree with you, obviously there's been a huge amount of spending. I think the number one industry by corporate spending and lobbying in 2024 was the crypto industry, at least by some measures. I don't know if that totally accounts for all the money that's being spent on lobbying that is difficult to account for. But what was crypto lobbying for?
It was not lobbying for "okay, give us tax breaks" or "bake us into government procurement pipelines" or "give us FDIC insurance" or "make sure that retail customers are allowed to do this or that." It was basically "don't harass us, don't debank us, don't come after us and say everything we're doing is per se illegal, but you won't tell us what the rules are."
And if you look at the things that crypto has done now that it has the ear of the administration and clearly now it's on very different footing than what it was even six months ago, none of those things have taken place. There's been no effort by the crypto industry to say, "US government put, make sure the government buys the dips that people don't lose their money in digital assets." Nothing of that sort is being proposed or would be proposed.
Patrick McKenzie: The strategic Bitcoin reserve, et cetera, et cetera. Some of the talk around that has sounded a little bit like a government put.
Haseeb: To be clear, this is a Trump thing, this is not something that industry lobbied for in any way. [Patrick notes: … Out of an abundance of charity, I will interpret this statement as “The industry is a broad and diverse one and, while some actors within it did lobby for the Strategic Bitcoin Reserve, others were neutral or opposed it.”]
Haseeb continues: Like you look at any of the actors who are asking for Strategic Bitcoin Reserve, these are not lobbyists. This is crazy Trump town stuff that I think also is very inflated relative to its importance.
If you look at what Strategic Bitcoin Reserve actually is, it's about $15 billion of basically criminal seizures of Bitcoin that are basically frozen, right? They're not going to be auctioned until the next administration presumably goes and undoes or unleashes the Strategic Bitcoin Reserve. From the relative to the balance sheet of the US government, it's kind of a marketing stunt in the sense of, they're not buying Bitcoin. And this Bitcoin that's held in the balance sheet is basically just frozen, presumably for four years or until there's an administration that's less favorable to this.
It hasn't been put into legislation. The absolute, if you look at what happened when the Strategic Bitcoin Reserve passed, actually markets went down. Now, why did that happen? It happened because people realize Strategic Bitcoin Reserve is kind of a nothing burger. It's just more of a headline that Trump thought was going to curry him favor with the industry.
But overwhelmingly, what is Coinbase lobbying for? What are these different actors that are trying to get regulatory clarity lobbying for? It's just "stop banging us over the head."
Patrick McKenzie: I have an interesting position on this one.
So I wrote a piece called "Debanking and Debunking" which responded to some of the claims of industry advocates which were concentrated in the November to January time frame about a particular strain of the pressure that the industry had come under. And I think advocates have some points on that. Without—because we're hopefully chatting about stablecoins today, I won't repeat the entire thesis here but I'll point people at the prior work.
So without being super political about things, I would also point to, I think that some of the regulatory engagement that the industry faced the last couple of years is probably not the way the regulatory engagement should work. Some of the explicit things that it's asking for, there is a stablecoin bill, multiple competing of a stablecoin bill under discussion at the moment. There's also a market infrastructure bill...
Haseeb: Market infrastructure bill.
Patrick McKenzie: The crypto industry means a very specific thing by “regulatory clarity”, and I think they invoke it euphemistically. They don't want parity with the regulatory regime for, say, startup investing with the accredited investor exemptions, et cetera, et cetera. They want something which looks unlike that.
Haseeb: You don't think the crypto industry wants that for investing into tokens generally. Yes.
Patrick McKenzie: Investing into tokens generally, including tokens which are substantially equity investments and everyone knows it, but we describe them as other than equity investments. [Patrick notes: So-called governance tokens are the most recent scaled fig leaf.]
Haseeb: I mean, I dispute that characterization. I think everybody who is, like any version of the market infrastructure bill that's been proposed has a concept of securities, like on-chain securities that are treated basically, pair-pursuit with any other type of security.
But there's clearly also the concept of non-securities, which is, you look at Bitcoin, look at ether, the SEC has already basically conceded that, "okay, this is a category that exists." Clearly it exists. The question is, what does it take for something to start as a security and become that? And right now there's no answer. It's just kind of vibes: "you'll know because we will either come after you or we won't come after you." And this clearly is not good.
It's not a good way to govern. It's not a good way to give startups and the general process of capital formation insight into what they're supposed to be doing. The other thing is that it's just out of step with the rest of the world. The US is not uniquely confused by digital assets, every country in the world that has a major financial regulator has grappled with, "okay, how do you solve this problem?" Clearly there's some things that are securities, there's some things that are not.
Crypto is weird, it's different. Yeah, there are elements of it that are like securities. There are elements of it that clearly are not like securities. And having standardized securities disclosures for a decentralized file storage network, it's not useful. And so it doesn't solve the problem of giving investors clarity. [Patrick notes: In Debanking and Debunking, I mentioned that crypto structurally needs to sell investment opportunities in the trillion dollar size range. Those investment opportunities are, morally speaking, securities, and everyone knows it. Crypto will say many things about “clarity”, but they will not accept a regime which implies parity with privately issued securities.]
Haseeb continues: And it also massively increases the cost for startups to build stuff. And so the fact that the US has been so out of lockstep with the rest of the world, to me, vindicates the fact that nobody says you can do whatever the hell you want and it's just Wild West. No country has arrived at that being the answer. But no country has also arrived at, "well, we should just kind of give the police or the SEC just arbitrary levels of ambiguity about what is or isn't okay and they can just decide who to go after based on how they're feeling that day."
Patrick McKenzie: Yeah, so coming from the more startup-y, less crypto-y end of the ecosystem, I think one would say there is a relatively large amount of regulatory clarity with regards to what you are and aren't allowed to do with giving software company shares to someone, selling them to investors, et cetera, et cetera. My claim is that if the industry ended up in a place where it was as constricted as the standard Silicon Valley startup that doesn't have a token involved in it, the industry would be very unhappy.
Haseeb: Agreed.
Patrick McKenzie: Cool. I feel like we've wandered a little past the garden path of fun things happening in stablecoin lands. Would you like to return to that stuff?
Haseeb: Sure.
Emerging use cases for stablecoins
Yes, okay, so let me maybe give the bull case for stablecoins as well as why stablecoins are such an important innovation to take seriously. So if you rewind the clock back to 2016, 2017, the perception of stablecoins at that time, which was very much kind of encapsulated in that New York Times article in 2017 about Tether, was largely correct, which is that stablecoins are basically used for two things. One thing is buying drugs online or criminal activity, and then two, crypto trading.
And why did this evolve with respect to crypto trading? Maybe buying drugs online, maybe a little obvious why you use that, because it's hard to do that with PayPal. But with crypto trading, the answer, of course, was that most of these crypto exchanges were very unable to get dollar banking, but they wanted to have assets trade against what the natural pair would be for most traders, which is the US dollar.
And so having a proxy to US dollar or something that is pegged to the US dollar is a natural way to build liquidity for trading all sorts of assets in many different markets around the world. So that's where this thing initially arose. So I think today what you've seen is that the role of stablecoins has actually expanded significantly beyond these first two use cases.
So actually increasingly a smaller and smaller portion of Tether and USDC are being used for very legible criminal activity. Now why is that? The answer is because these companies are now quite regulated. They work very closely with law enforcement. And if you are a hacker, a bad actor, a dark net market, and you're listing things in USDC or USDT, your assets get frozen actually pretty quickly.
And it's actually kind of the worst way to use dollars to transact in criminal activity, because it's dollars that can be instantly frozen from anywhere at any time with a panopticon kind of hanging over it and arbitrary depth of traceability for these assets. So now that doesn't mean that there's no criminal usage of these things, but it does mean that it's actually not the preferred way for criminal activity to take place anymore. You're much more likely to actually use something like Bitcoin, which cannot be interdicted instantaneously by anybody looking at the trace of activity on chain. So criminal activity using stablecoins has really plummeted over the last three, four years.
Now, the second category of people using it to trade in crypto, that's always remained significant. But one of the most notable things about this is that if you look at when the crescendo of crypto trading activity happened, it was actually around 2021. That was the crazy bull market where you saw NFTs and all the ZERP craziness that was happening in all financial markets and speculative assets. That was when crypto trading volumes were at all time highs on every venue.
And so what you should predict, looking back, is that as crypto trading volume was increasing, stablecoin supply was increasing because of the fact that it was the lucre of trading and crypto exchanges. But what you see after that is that actually, although crypto stablecoin volumes decreased after the end of the 2021 bull run, they started coming back and turning around.
And this is true even as treasuries started paying out more and more interest rates, which actually should have been really pulling money out of the stablecoin complex because people would say, "well, wait, if I hold a stablecoin, I don't get any yield. The issuer gets all the yield. I get nothing. It's like a bank account that pays zero. That's kind of bullshit."
You're getting 5% on treasuries, that should really be a giant liquidity suck. And so you saw a pullback in the total stablecoin supply. Then stablecoins started to increase again. And they increased actually to a high watermark much higher than where they were in 2021. And if you look actually in the last year in particular, what you see is that stablecoin supply has been basically continuously increasing, despite the fact that trading volumes in crypto have been largely sidelined and like kind of going down a little.
So what that tells you is that now there's more and more use cases for stablecoins that are, again, orthogonal to what's happening on the crypto trading side.
Patrick McKenzie: Can I push pause before we get into those three things and just double click on trading for a moment?
So I think the way that stablecoins being used to assist crypto trading as traditionally described was there were so obviously one, the exchanges have difficulty getting and maintaining banking relationships for reasons that should surprise no one at this point. Two, the exchanges are essentially isolated from each other. The way that the price of a Bitcoin in Japan and the United States should track each other if you're on BitFlyer versus Coinbase is that someone needs to be making markets at both of those things.
Because crypto has largely, with some exceptions, been a cash and carry business, that requires a trading firm or market maker similar to do large transfers in size between their accounts at various exchanges, and stablecoins were a major sort of structural solution to that problem because wire transfers are just terrible for doing over the weekend, etc., etc. [Patrick notes: crypto prime brokers were a hot topic for a while but the industry had broadly clownshoes risk controls and some of the largest ones went bust due to Three Arrows Capital and Alameda losing their money]
Wire transfers are – one of the things I think the crypto community is rightest about is that no one really loves wire transfers, particularly internationally, but they're the best game going on or at least happened for a while. [Patrick notes: There is a fascinating discussion on why the card networks outcompete wires for transactions you’d naturally assume would probably be wire transactions at Net Interest. Broadly it is because the ergonomics of B2C wires internationally are so bad that businesses selling even high-ticket services to customers, priced in the five or low six figures (think e.g. tuition payments internationally), would rather pay 3%~5% than gamble whether their customer can successfully convince a bank to execute a wire.]
Haseeb: That's right.
Patrick McKenzie: Anyhow, the thing that I think people underappreciate about stablecoins in trading is that much crypto is not traded on the spot market. It's traded in derivatives markets such as perpetual futures and the source of a non-correlated collateral item was extremely instrumentally useful for the growth of crypto trading over the course of last, I'm not an expert at this, eight-ish, nine-ish years I think.
Haseeb: Yeah, it was really the transition away from BitMEX. But when BitMEX was the dominant player, actually, they were collateralized in Bitcoin. And that made the futures instruments, which are collateralized in Bitcoin - Bitcoin is going down. So your contract value is going down, but then also your collateral is going down at the same time. It's actually very difficult to reason about and creates all these weirdnesses.
And so you really want collateral that's not correlated. And that started really when Binance started becoming the dominant player, which I think was around 2018, 2019. I think is when Binance started becoming dominant in the futures market. And that's when everyone moved toward USDC or USDT collateralized futures.
Patrick McKenzie: Yep, and so tens of percents of all the stablecoins in the world at the time were essentially sitting in Binance's wallet, collateralizing largely perpetual futures on Bitcoin and similar. I would predict a smaller number now, but not grossly smaller.
Cool. So sorry, I interrupted you. You were going to get to three emerging use cases, return and control.
Haseeb: That's right.
Yes. So the first use case, is maybe the most obvious one is, this has been probably the oldest very significant use case for crypto, is basically a way of facilitating capital flight. [Patrick notes: Not what I would have expected an advocate to lead with, and props for candor.]
So this is, you're a Chinese wealthy person, you're Russian, you're in Indonesia, you're in India, whatever, and you want to get out of your local currency. And these are all countries that have pretty restrictive capital controls.
This is something that if you live in the US, this might be a foreign concept to you, or it might be just kind of opaque of like, what are you talking about? If you're an American and you want to buy foreign assets, more or less, nobody cares. People will, if you want to put all your money into Indonesian bonds, you go the fuck ahead. Nobody really minds, right? The US government isn't even going to ask. This is an anomaly.
Patrick McKenzie: They will ask. I think you spend substantial time outside the country, too.
As someone who lived abroad for 20 years, I'm quite familiar with the various ways that the government tracks you externally. [Patrick notes: Quoth the IRS: “U. S. persons maintain overseas financial accounts for a variety of legitimate reasons, including convenience and access. They must file Reports of Foreign Bank and Financial Accounts (FBAR) because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions.”]
Patrick continues: But be that as it may, yes, there is no rule in principle that says an American can't buy financial assets in other countries. In other countries, including peers to the United States, there is a rule in principle that no, you just should not be doing investing overseas without government blessing. You should be buying domestic assets only.
Haseeb: That's right, that's right. So this is the case in, I'd say for the majority of people in the world, they live under some kind of pretty restrictive capital control regimes. And so if you look at India and China, of course, the two most populous countries in the world, they are some of the most restrictive capital controlled countries in the world.
So, and of course, there are also these growing Asian tigers, extremely wealthy and a lot of newly minted wealth in these countries. And so on some level, it's unsurprising that to the extent that you as a relatively well-off person in the first world think "I should have a diversified portfolio," people in other countries think that too.
And if you live in any country in Asia, the length of time for which your currency has had the same name or the length of time for which your government has been continuously operating is less than a hundred years.
And in some cases, like less than 70 years. So for almost everybody in these countries, they're very acutely aware that things might totally change. And I really want some more stability, especially if I have very large sums of wealth relative to, "I can only own the domestic stock market and or my local currency."
Or if you're in many of these countries, they've seen massive bouts of inflation or currency weakness. And so they naturally know, and this is part of the reason why the dollar has strengthened so dramatically over the last five, six years is because other people want the dollar. People outside the US want the dollar.
So, and that's also why we have such a massive trade deficit is because we have also so many financial assets from around the world flowing into the US, which is a little weird ex ante, but that's just how it works is we have such an incredible set of assets that people around the world want. And the way you get access to that is through the dollar.
Basically long story short, what you've seen for many, many years is that people use Tether or use USDC, but mostly Tether as a way to get out of the local currency and get into dollars. And most of the time, this is illegal. They're doing this against the interests of the Chinese government. And it's kind of fascinating the way it happens, because if you think about it, if you zoom out a little bit, right? On the one hand, we know that the Chinese government is trying to reduce their reliance on US treasuries. So the Chinese government was the largest seller of treasuries last year. I think they sold something on the order of like $40, $50 billion of treasuries.
At the same time, Tether was the seventh largest buyer of treasuries internationally, like relative to countries. And I think Tether bought something like $30 billion of treasuries while the Chinese government sold roughly 50 billion. And if you think about it, if you imagine that a lot of this demand is coming from Chinese individuals, what's happening is that Chinese government is dumping treasuries. Chinese individuals are buying Tether, and when they buy Tether, Tether goes out and buys a treasury.
From the hand of the Chinese government. And so you're sort of having this rotation from the central bank dumping treasuries to on the balance sheet of Chinese citizens. And so I think this is part of the reason why increasingly the US is realizing, on the one hand, okay, stablecoins are kind of this difficult to police, it's kind of outside the realm of traditional sanctions and knowing exactly who controls what. And when you have an account that holds stablecoins, you don't know who it is. It could be a sanctioned entity, could be somebody in Iran, could be somebody in North Korea.
The initial response to stablecoins
You have no idea. And so the natural response to that is, this is bad. We should stamp it out. This is clearly subverting the interests of the US economic financial complex. And then you saw this reversal.
Patrick McKenzie: Can I interject here? The thing which issuers will say is that we are fully KYC'd, et cetera, et cetera. We comply with all anti-sanctions laws. Issuers who are less buttoned up, and here I mean Tether, mean that with regards to people we do business with directly and allow to on-ramp and off-ramp dollars, where there are a few dozen of these folks worldwide total.
And we've KYC the heck out of them. We're pretty sure that they are who they say they are and we are also pretty sure that they are not directly proxies for the Bad Guy list. And everybody else who holds a Tether in the world bought it from someone who isn't us and we don't care about them.
That is somebody else's problem. It's not ours.
Haseeb: Yeah. So to be clear, that is how every stablecoin works. That's also true for USDC. It's true for PayPal USD. It's true for every stablecoin that has this model. And now this model is fundamentally the model that was impugned initially when stablecoins were circulating as a concept of, this new thing exists. Should we stamp it out?
Stablecoins and national security concerns
Naturally, anytime something new happens in DC, the national security apparatus just says immediately, this is against US national security interests.
Let's destroy this thing. And that was the initial response that you saw from Congress and on the Hill is that stablecoins are obviously bad. They're obviously going to be used for criminal activity and evading sanctions, and therefore we should destroy them. And what you've seen is that even before Trump came into office, there was an about face on this whole thing in Congress. Now, why did that happen? Did Congress suddenly forget about their desire to stop North Koreans from using dollars? The answer is very simple, is that they've realized that the demand for treasuries around the world is decreasing. And the exorbitant privilege the US has of being the reserve currency of the world is predicated on this demand for dollars around the world continuing to exist.
The reason why these governments are pulling away from US dollars, they want to decouple from the US, and maybe now we have a better example of why they were so worried about over-reliance on the US. But at same time, individuals don't, it's a collective action problem, right? Individuals don't feel that. Individuals are just like, that might be great for you as a country, but for me personally, in my bank account, I would rather just have a stable currency. And US dollars are obviously incredibly stable and liquid.
Stablecoins and dollar internationalization
And so the recognition was that, stablecoins increase the internationalization of the dollar. And this is now increasingly becoming not just a strategic, it's usually valuable, but potentially existentially valuable if we don't want to have a quick decline in the total demand for dollars around the world.
So on the one hand, even if your government is trying to reduce your reliance on the dollar, stablecoins are a backdoor way that your citizens can vote with their wallets and say, no, no, no, no, I actually still want dollars. And even if you don't want me to have this, I insist. This fundamentally what it represents is a transfer of power from governments and central banks to individuals. Now, technology sometimes does this kind of thing where it ends up weakening the state.
Haseeb: This is one of the things that you saw traditionally in the Internet is that the newspapers and TV stations were very tightly controlled by governments, even in the US. You had to get a license from the FTC and there were certain things you can say at certain hours and so on. And now it's just implausible that anybody could possibly say, you have to get a license to get on YouTube and start live streaming. It's just obviously the dynamics of control about information dissemination.
Patrick McKenzie: There were many, many misinformation bureaucrats who would have loved there to be a license required to make that happen, but be that as it may...
Haseeb: Absolutely, absolutely. And even though you see, well, China seems to be pulling it off. The answer, of course, yes, but not that well, right? The reality is that the nature of the information landscape in every country, no matter how authoritarian, has changed irrevocably post-internet compared to pre-internet. Like the fact that you can just get on a VPN and message somebody and send them, and just talk to them directly, to anybody in the world, just means that these memes are spreading in a way that is no longer centrally controlled. And that's a transfer of power about information, about media, about all of these things that ultimately we've seen how governments have been forced to adapt to these changes. Stablecoins...
Patrick McKenzie: So I agree generally that the pitch has been made that stablecoins increase dollar supremacy, people – and true fact, the users of stablecoins only vote for dollars versus other currencies that they could hypothetically peg against by greater than 100 to 1 margin. But I think it is over advanced that one could necessarily cushion a decline in central bank reserves of dollars by using stablecoin uptake because it's bit of an apples to oranges comparison. I think the total number of dollars in the millions, sorry, treasuries in the millions is many trillions. Most of them are already owned by private individuals. If you compare the 250 billion stablecoins to the total amount of wealth held by private individuals or in treasuries, that's actually not that large. But I think I'm not sure if we got to all of your emerging use cases yet. Do you want to...
Haseeb: Correct, yeah, right now it's quite small.
No, no, we didn't. So that is the second big use thing is just basically people wanting to hold dollars, who are not allowed to hold dollars, right?
Retail payment in high-inflation countries
The third use case is you see this increasingly happening in just basically really rough places that are facing extremely high inflation is you see actual retail payments adoption of stablecoins. So this is one of the stories that people love to talk about in crypto. It's in absolute terms, very small.
Just because the fact that these are countries that don't have very high GDP. They're already battered by the fact that there's some kind of currency crisis going on in these countries. So you see this in Argentina, Venezuela, Turkey, Iran. You even see this in some places like Indonesia, is that increasingly, you get off a plane and your taxi driver will say, please pay me in Tether on Tron. Or you go into a corner store in Argentina or in Venezuela and they take Tether payments. It just says there's a little logo on the store that just says, yeah, we take payments in Tether.
And now this is also illegal, right? Like these are all places where they're trying to hold on to a collapsing currency. But of course there's huge black markets in all of these countries because that's what happens when you have a currency crisis is there's a black market for other currencies.
The role of black markets
The advantage of using Tether or using stablecoins in general is that it's actually surprisingly hard to import green little pieces of paper to facilitate your black market demand for dollars.
So dollarization is a common thing that happened. Dollarization is when a country basically, sometimes intentionally, but sometimes kind of as a final concession to a citizenry that has lost faith in the currency, moves away from their own currency and basically gets on the dollar. And this is what happens when currencies, when you have currency crises or just failed states is very often they just decide, okay, we're just gonna use someone else's currency and we're no longer going to have sovereign monetary policy.
And what stablecoins do is they basically make it much more efficient for users or citizens of any country to just opt into dollarization themselves, as opposed to having to rely on this complex supply chain that very often results in US dollars being priced much higher than they should be because there's often currency shortages. You just can't get enough dollars to facilitate all the black market demand in a place like Venezuela or some of these countries that are facing very, very high inflation.
Patrick McKenzie: An interesting fact about the world is that, well, you mentioned that the physical specie greenbacks are often used for these black market currencies. Other than intended for use of United States-based financial institutions and similar is also used for the black market. And so there's any number of people in the world that end up having a US bank account and consult to each other because they spent some time in the US. We give out bank accounts to pretty much anybody here.
And then banks are, I might say, not diligent about closing them if you leave the country. But that implies that you have an affirmative duty as a bank to close them if you leave the country. And that's just not true. So given that you have a bank account, you can continue using it no matter where you are and where in the world the subject of your bank is continued. OK on that. And many banks just don't have a person at the bank whose job it is to close down accounts for that reason.
And so the amount of like Zelle traffic in non-United States countries, particularly ones that have a liquid black or gray market for US dollars is very substantial. Not calling Zelle out specifically there. They were one that came to mind because they've been publicly reported. But one would assume that happens on almost all US-based payment systems. Anyhow, fun little fact about the world. But yeah, broadly agree with you.
You mentioned that this use case is small relative to all payments which matches my understanding as well. Go figure like rich countries do much more payments than countries that are experiencing difficulties that are relatively less developed. Where would the trustworthy metrics be on like how much retail usage of stablecoin for payments happens?
Haseeb: So candidly, I don't think anybody has a good estimate of it because these are incredibly inscrutable systems. Like the best way you can get a sense of it, so probably the only person who really knows is probably Binance. So Binance Pay is the predominant way in which these payments are done around the world given Binance's massive global market share. But Binance doesn't share any these numbers with anybody.
You can get a general gestalt of what's going on by just going to some of these countries and seeing how widespread this activity is, especially in places that are suffering really meaningful currency crises, but I don't think anybody has a good estimate. All we know is that it's not a big, it doesn't explain very much of the variation in total stablecoin supply or total stablecoin flows.
But from a humanitarian perspective, it's very clearly the most significant story for stablecoins beyond just, okay, it's increasing financial efficiency or allowing these people to do this thing they wouldn't otherwise be able to do. This is one of these things that it's like, hey, you go see some of these people who are seeing their wealth being inflated, you know, like 10% a month. And for them, it's like, okay, yeah, this is awesome. Like this is clearly way, way better than what we had before. Or just even the fact that we're paying enormous slippage to try to get physical specie on the black market.
And this is one of these places where I will also come out and defend black markets and gray markets, especially in these kinds of circumstances, where I think there are cases when the state is... This is again, one of the things I think if you spend all your time in America or in places with very well-functioning institutions, you come away with this expectation that like, people should usually follow the law and your bias should be that like the state is probably doing the right thing.
And I think in many, maybe even the majority of countries by number around the world, that is not a good assumption. That should not be your baseline. Your baseline should be that people for the most part want to do the right thing and just wanna live their lives and countries that are controlled and captured by an oligarchy or small group of people who are trying to enrich themselves at the expense of the citizens is the norm.
And as a result, there's a reason why there are so many failed currencies, if you go look at the history of currencies is because yeah, I think it is probably correct that there should be way fewer currencies in the world. I think the fact that there are so many currencies in the world is really a function of the fact that most states have way too much power over their citizens. And really, for states that have such low state capacity and such low fiscal and monetary responsibility, they're kind of just pillaging their populations.
And if they could just say, fuck you, you're responsible for defense and tax collection and that's basically it, and leave us to the rest of it to just try to be productive citizens and fend for our families, a lot of people around the world would be much better off. And you see in Latin America, and especially in many African countries, you just see this, just the degree to which governments have stultified their own populations and gotten in the way of people otherwise trying to engage in making themselves better off.
Patrick McKenzie: This occasionally comes up in non-stablecoin contexts as well. You know, theoretically speaking, if there's an exam and while there isn't a formal exam, there really is an exam for working in the regulated financial industry, should you facilitate anyone's evasion of a law in their country of residence? Like there is a right answer to that question. It is no. And, but...
Haseeb: Right.
Patrick McKenzie: A lot of the facilitation of evasion of laws is like the thing that is illegal is capitalism. Most bankers and other people in the grown-up financial industry don't have the level of aesthetic distaste for capitalism that say like the Chinese government did for many decades. The Chinese government will still say something that rounds to like, no, capitalism without Chinese characteristics is definitely illegal here.
Haseeb: Right.
Patrick McKenzie: Also like claim dominion over the lives of Chinese people wherever they are in the world. That's just a claim that China makes pretty openly. Then the rest of the world sort of gets a choice with regards to, well, on the one hand, can't openly say it because there is a test that will be held later and there's a right answer on the test. On the other hand, we don't agree with that moral claim of the Chinese government to regulate people throughout the entire world, et cetera.
And so acknowledging some tensions here. Stablecoins are a stock and flows business. Stock meaning if you think that someone is primarily using it for savings, then they will tend to have more stablecoins and then the stablecoin economy would have an awful lot of assets over time. If you think it's primarily used for payments...
Haseeb: Mm-hmm.
Patrick McKenzie: Then the actual circulating supply needed to support a certain payments volume is much smaller than that payments volume is. And so in a world where it was primarily used for the use case of paying for coffee in Istanbul, then you would expect there to not be trillions of dollars of stablecoins floating around in the future. And the same way there aren't trillions of dollars of money at the large payments companies that are...
Haseeb: That's right.
Patrick McKenzie: Backing all the payments back and forth.
I broadly agree with you that I attempted to look at it a few times over the years and haven't seen great numbers with regards to the payments adoption, the...
International B2B payments
Haseeb: Well, so the last piece on the payment side, so there's like retail payments mostly in these countries that are facing currency crises. The last piece is international payments. And this is more on the B2B side. And this is actually the part that is easiest to understand and get a real sense of, okay, what kind of flows are going through here? And this is also what galvanized the recent string of M&A. So most famously, obviously Stripe, which I understand you work with.
Acquired Bridge for 1.1 billion was the headline figure last year. There's a lot more companies that are acquiring stablecoin payments services as well as getting into the space. We saw also PayPal launch their own stablecoin largely on seeing the same overall story. And this is really around B2B payments. Now, most of these B2B payments are countries that are...
Initially, you again rewind the clock back to like 2019, 2020, where were stablecoins being used first in these kind of international B2B payments? The first place was actually in the Russia-China corridor. And this was because Russia got hit with sanctions, of course, after the invasion of Ukraine. So Russia was no longer, anybody in Russia was no longer able to get US dollar banking. And if you're Chinese, you really don't want to bank in rubles. You don't want to buy, you don't want to get a bunch of rubles. Like, what am I going do with this?
And if you're Russian, you're like, well, I don't really want RMB. So normally, usually international trade settles in dollars because it's the neutral currency. Post sanctions, that became impossible. And so that's when you started seeing a lot of this volume going through this corridor start to take place in Tether. And this was the first real place where we started to see meaningful financial flows. But this was something that no fintech was servicing this. This was kind of like, if you go talk to the OTC desk, they'd say, yeah, we're seeing some of these commodities companies suddenly starting to use Tether. That's really weird.
Patrick McKenzie: Can I jump in here on historical analog for this? So many people say that stablecoins are sort of the internet native Eurodollar system, where the Eurodollar system and crypto folks have published a number of interesting pieces on this. I'll link to some in the show notes, but—and non-crypto folks as well. It's been known to be a thing in finance for a while. The basic version is when you have a—
It usually isn't physical specie. It's a liability of someone in the world, most typically in the United States, a bank, which is regulated by the US federal government, et cetera, et cetera. A euro dollar is simply a dollar, which is a liability of a bank that isn't a US bank. A large amount of trade in the world happens. When it's happening between two countries, neither of which is the United States, it gets settled in dollars.
Most of the time that is settled offshore from the United States in the Eurodollar system, which ultimately has recourse to the onshore US dollar via complicated mechanisms that we don't quite have time enough to go in here. When Russia got hit with sanctions in the wake of the invasion of Ukraine, what that cut them off from was not just the onshore settlement of US dollars, it was cutting them off from a lot of the Eurodollar centers such as London, etc., etc. That made it difficult for Russian companies to buy from Chinese counterparties using their banks in Western Europe. It's the better regulated parts of Western Europe. You described this as fleeing from that euro-dollar system to Tether functioning as sort of a synthetic E, internet E kind of euro-dollar.
Haseeb: That's right. For a lot of these import-export businesses or commodities businesses, a lot of the advantages of stablecoins are beyond just, okay, well, I can't get dollar banking. So that was the initial use case was this Russia-China corridor. But increasingly, you're starting to see all sorts of businesses around the world that actually can get euro-dollar banking or even US dollar banking start to be using stablecoins for payments and settlements.
And this is a large part of what drove Bridge and their whole business model is that increasingly for these commodities businesses, they really care about fast settlement. They really care about increasing the utilization of their assets and just waiting an extra three, four, five days to settle a transaction. Just actually meaningful, because these are very, very low margin businesses. So it actually really meaningfully hits into their bottom lines to not have to use some complicated path to settlement or doing all the stuff that happens in trade finance, you can circumvent a lot of it just by the fact that stablecoins are instantaneous, very low fees. There's basically a rounding error of middlemen and delays compared to what you get with traditional forms of international settlements.
Patrick McKenzie: They're also much more aspirationally fingers to the wind. Even if you have correspondent banking relationships and a relatively well locked down internal treasury department that does good work every Monday, Tuesday, Wednesday, et cetera, your P50 time.
So I'm getting technical for a moment here. I apologize in advance.
If you graph the time it takes for your payments to go from A to B over the year, your 50th percentile time, P50, might be something acceptable. Maybe it's the next business day or two business days later. Those are both hypothetical numbers. But your P95 and P99 times, the worst affected 5% and 1% of payments, that goes crazy.
It could take potentially months in the case of you drew the short straw with the compliance department or you were, like sometimes maybe your wire was in the middle of a shooting war that day because there's money moving around Europe and suddenly shooting war in Europe, like stuff got disrupted for a while. And very bad news for the people who were on the ground. Also bad news for you and you didn't necessarily know you had any exposure there until your money gets tied up for six plus weeks, which again low margin business is a problematic thing.
[Patrick notes: People who have a team in Operations actually tracking wires around the world a) have a much better understanding of p50/p95/p99 than most people who use wires (including in crypto circles) and b) get better p50/p95/p99 because they do the obvious things Operations would do, like call on the 3rd business day and ask what the holdup is. They also tend to have structural advantages, in picking more reliable counterparties (because not all banks are equally adept at handling all wires) and having ready answers to Compliance’s questions.]
Patrick McKenzie: Say what you will about Tether, and I've said many things about Tether over the years. [Patrick notes: Including “Tether is the internal accounting system for the largest fraud since Madoff.”]
The P99 time for settlement on Tether is not grossly different than the P50 settlement time. They're both indistinguishable from instantaneous (by the standards of wires).
Haseeb: Exactly. They're both seconds.
I think this for many of these businesses, a big part of the reason why, I like as a crypto VC, obviously, I'm a little bit of a booster. It's my job to kind of proselytize some of these ideas. And I've been telling the story that like, yeah, I think crypto is great for micro payments and macro payments.
And these macro payments, is very largely these kind of international trade type situations, it always made sense, but it really wasn't happening basically at all outside of this Russia-China thing until about like mid 2023. Mid 2023 is when we started seeing a really rapid growth rate in the amount of B2B international payments that started to happen in stablecoins. And I don't have a complete picture of why it started to pick up, but you basically can see like 20, 30% month over month growth.
For almost all the businesses that were servicing this sector, start around then and it's basically, it's still continuing. And my guess is that it's a little bit of like an O-ring model type situation where it's kind of like, okay, well, in principle you could do this, but if you're some old school commodities business and you're trading cobalt, it's like, okay, well, I'm not gonna open a Metamask wallet. Like how am I gonna fit this into my accounting system? How do I pay taxes on this? Like, no, I'm not gonna, maybe in principle I could, but you have not sufficiently explained to me how to do this. So yeah, I'm not gonna do it and my son doesn't know how to do it, so no.
Patrick McKenzie: There's also Schelling points in every industry and market and etc. where if you're asking for a method that is not like the usual one of three things that we do, you are buying a level of complexity in your relationship with partners that is probably not justified by the gains. And so in a world where hypothetically there were huge amounts of adoption, I think a narrative for that adoption might be certain places adopt the shelling point and then suddenly there is...
Haseeb: For sure.
Haseeb: That's right.
Patrick McKenzie: A pool in adjacencies there.
Haseeb: Well, so most of these startups, what they do is they also make it so that the counterparty doesn't actually have to take stablecoins. So they handle the FX on the other side. So like, okay, you're sending stablecoins, but that person gets Turkish Liras or whatever. And we'll have these partners in the right place and the off ramps and the on ramps to be able to handle all of that for you. So we're abstracting that complexity from you.
Now these vendors or these on ramps and off ramps existed in all these countries, but it was kind of on you if you were trying to do this in 2022 to figure out who are these off-ramps? How do I get competitive pricing? How do I onboard onto all these parties for all my counterparties in all these different countries? And so just papering over all this complexity and also waiting for a robust enough set of partners to emerge in all these different jurisdictions just took time for a product that good to actually be able to be built.
And now we're at the point where those kinds of products can be built. There's Bridge, which of course was acquired by Stripe. There's Conduit. There's new, we invested recently in one called Codex, which is doing something very similar, but focused largely on initially Southeast Asia. So you see increasingly many of these geographies, this coordination problem, if everybody's on the same network, then actually would have been easier for stablecoins to get up and running. But it really took these systems that basically say, look, your counterparty doesn't need to know anything about stablecoins. Your counterparty doesn't need to take the stablecoins at all. Actually will give your counterparty whatever currency they want as long as it's within our currency network.
Patrick McKenzie: So you mentioned Bridge a couple of times. I have to make the obligatory disclaimer. I used to work for Stripe, still an advisor there, not necessarily speaking for them, and not using any non-public information in any of my remarks here. [Patrick notes: Stripe has a succinct explanation of the corporation position on stablecoins in the 2024 annual letter [PDF link].]
But I think Southeast Asia is very interesting. And I think this is something we're seeing in a few different blocks in the world where there are increasing amounts of sort of like pseudo-economic blocks caused maybe less by government action as was the historical case for economic blocks and more by just organic behavior of people transacting across borders thanks to the Internet.
In places like Southeast Asia, you might do a substantial amount of your online shopping from businesses that ship into the place that you live but don't necessarily—they're not necessarily based in the place that you live. They might have material operations there, etc., etc. But payments might be at the mothership and...
You've probably seen from living in Singapore part-time, like getting money from Singapore to the Philippines is fairly complicated, despite there being a large amount of commerce that happens along that corridor. And this is one place where I think crypto makes a good point: Americans largely don't understand how blessed they are in living in a world where Indiana and Florida use the same currency. It's a wonderful thing that Indianians and Floridians can transact seemlessly.
Americans don't understand how important of a fact of the world that is. Even prior to stablecoins, Grab for example, one of the taxi services that is basically pan-southeast Asia at this point, had to do an incredible amount of work to make that work and eventually ended up expanding into Grab...
Haseeb: That's right.
Patrick McKenzie: Bootstrapped their own payments network simply because, one, there was a market need for a payments network and, two, they had an internal operational need for doing that to run essentially a taxi ride-sharing business.
So to the extent that I'm often skeptical about this stuff but watch with a waiting eye on things, I kind of classically in the tech industry expect disruption to happen in the places that are least well-served in the status quo [Patrick notes: this is the disruptive innovation thesis, often associated with Clayton Christensen]. Developing nations that are in increasingly tight Internet-based economic blocks with each other in places like Southeast Asia and similar, which might not have great domestic payment rails that are already heavily interconnected by global megacorps. That is the place where you would expect to see...
Haseeb: That's right.
Patrick McKenzie: I don't want to say Patient Zero, that sounds bad. [Patrick notes: “Infection vector” basically disappeared from my marketing lexicon, for similar reasons.]
That's where you expect to see an early burst of adoption. So indeed, some of that has been seen.
Haseeb: That's right. I mean, this is one of the things I notice from many Americans will tell me like, well, you I don't know anyone who uses stablecoins. Like it must be just criminal activity or crypto trading or what is this for? And I would surmise that probably the US will never be a meaningful adopter of stablecoins because we already have great... like you mentioned, using Zelle or PayPal or whatever, Venmo, these are all fantastic services. There's a lot that's done to paper over the complexity of moving money around within the US. And it works fairly well. It's not perfect. Wire transfer suck. ACH is kind of embarrassing, but overall it's good enough. That's one of the rules of technology disruption is that good enough is very hard to displace. So that is not true in other parts of the world.
And overwhelmingly, the story of stablecoin adoption is not in America. And the only path that I could honestly see for stablecoins being meaningfully adopted in America is as an assault driven by the big tech companies against Visa and MasterCard. If basically at some point, Apple and Google decide, you know what, now that crypto is totally kosher and we can do whatever we want, apparently under this administration, we're just going to completely go around when you do tap to pay, we're gonna give you back 30 bips on every transaction if you use stablecoins instead of using Visa or MasterCard. And then we'll just take some other side from the merchant and now the merchant will be better off. I could see something like that happening if the sort of duopoly is weakened enough by this DOJ antitrust thing that's going on right now. But beyond that, I think it's pretty unlikely that in the US we would end up having stablecoin adoption meaningfully.
Patrick McKenzie: I largely think you're right with that prognostication on the being bearish on US adoption. Acknowledging that US-based payments rails have any number of issues to them, and I spent a couple of years of my career banging my head against those. They are a moving target and getting better every year.
FedNow has been FedLater for a while, but it will eventually land someday.
Haseeb: Hahaha.
[Patrick notes: FedNow is a real-time payments rail. The large U.S. banks have a notionally competing standard, RTP (for “realtime payments”). Both actually exist right now, but the network is not yet sufficiently densely connected that Americans expect bank transfers to be instant. One would be very surprised if that remained the case for another 15 years.]
Patrick McKenzie: But when you compare that against other places that are seeing… I know the Japanese word for this [Patrick notes: 活発的] but can’t recall the English. Bubbly? No, that’s not right.
No, that's not the right word. This sort of like rapid growth of stablecoin adoption. There is no incumbent in the market that is rapidly innovating on those use cases specifically. [Patrick notes: Not at the breadth of stablecoin adoption; solutions in single markets / industries / corridors are taking whacks at all the stated use cases and more besides. But there is no incumbent building a rail which both works for trade finance and works for coffee payments across 100+ countries, except for the stablecoin issuers.]
But in the US, incumbents are innovating.
I would take the other side of tech companies attempting to get into a fight with large financial companies due to, one, a combination of huge amounts of internal reticence and lacking will to do big splashy things. Also in tight solution with their general reticence to do things that will cause a bullseye to be painted on them in Washington, DC. And, finger to the wind, not using any non-public information, think that various large tech firms would see disintermediating either banks or Visa/Mastercard as a paintable bullseye in Washington, D.C. sort of thing, which...
Haseeb: That's very plausible. And I think after the Libra hearings in 2019, when Facebook famously tried to launch their own digital currency, I think that was the takeaway for many big tech companies, which is never touch the stuff, like don't even whisper the word crypto, or like you will be just headshot in front of Congress. I think it's very clear that there's been a vibe shift in DC about the attitude towards crypto. And this administration in particular is kind of mercurial and it's a little bit unpredictable with respect to what they like and what they don't like.
But I would be surprised ex ante. So I agree with you when you talk to the people involved. It's like they certainly seem very protective of their current position in the market and they've learned these lessons over time of don't anger the powers that be otherwise bad things can happen to your core business. At the same time, it would be surprising if these gigantic monopolies that basically control every element of your digital life did not also find some way into your wallet. Where today, I mean, for Apple Pay, my understanding is that Apple makes pretty good money from the Apple Pay integration. Google Pay, much, much less so, is my understanding. It would be surprising if...
Patrick McKenzie: I think it's been publicly reported that Apple Pay gets 15 basis points on transactions they facilitate, which is a good business to be in. [Patrick notes: Capital One publicly estimates that Apple Pay does $6 trillion in global volume and about $2 billion in revenue.]
Haseeb: Right, amazing business to be in, right? And especially as more and more payments are moving over in that direction. And if you just think about what it's gonna look like in 10, 15 years, it would be surprising if the person who owns the customer and has basically the entire technology network doesn't end up subsuming more and more of that margin over time.
Patrick McKenzie: I think there's been a Cambrian explosion of payment methods, even ex-crypto, actually primarily ex-crypto over the last couple of years. And exactly that insight is primarily the thing that is driving the explosion of payment methods, that if you own the relationship with the customer, a payment method is a natural adjacency to get.
It deepens your relationship with the customer, allows you to earn margin with people who are sort of on the outer edges of your ecosystem, and functions as a way to bring those people who are on the outer edges of the ecosystem closer and closer to the core ecosystem where you sell them things that makes the real money.
I agree with you that it would be a shocking world where the number of payment methods in 2050 were approximately similar to the number of payment methods that there were in 2005 or 2025 for that matter. Something really weird would have to happen in the next 25 years.
There are a variety of ways that, say, large tech companies or other people with large passionate user bases could go about doing things which accomplish the strategic goal of getting them more plugged into the lives of the customers without necessarily upsetting the apple cart [Patrick notes: unintentional dad joke] too much with regards to the maximally regulated parts of the financial industry.
Haseeb: Yeah.
The future of stablecoins
And the virtue of stablecoins, just to put a kind of ending different frame at which to think about stablecoins, is a lot of the incentive behind building stablecoins is very similar to the incentive behind crypto generally, which is that, look, we hate the traditional financial system. We hate the way you guys have built all this stuff, but we obviously don't have the agency to be able to change it directly. So we're just going to leave that alone. You guys can keep using that and we'll just build this little parallel thing over here.
And if you know anything about software, that's always how you, like you never fix the old system. Like it just never worked. Like somehow it's just impossible to fix systems, especially the older they get, the more impossible it is, no matter how possible you think it is. And so almost always the answer is you do a V2 and you slowly start shifting over traffic to the V2. And that may be the ultimate answer to how to understand what stablecoins even are, is that.
I don't think it's that implausible that over time what you see in stablecoins in like 10, 15, 20 years is you start to see reserve ratios on stablecoins. And all of a sudden you start to see more and more things that start to look like the exact same stuff that we had with banking regulation is that they're also making loans to businesses and they're also doing consumer loans and they're also doing all sorts of other things. And it really increasingly looks less like it's a banking hack and it's like this weird thing to facilitate crypto bros paying each other. And it just becomes the V2 that like, let's pretend that 2008 never happened and we can kind of start over and thinking about how to do banking regulation, knowing how the internet turned out. That may be, I'm agnostic, relatively low confidence that that will happen. But I think that's another way to think about what stablecoins kind of are, is that what if we just ran it back?
And we didn't have to actually repeal any of the old regulations, but we just created a second system that didn't have any of them. And it turns out like it's almost impossible to get regulations to repeal. It just doesn't happen. So it's a kind of technical debt that politically you just cannot get rid of old stuff. It's like, you like terrorist financing? Oh, you like criminals and bad people being able to use dollars? But...
Patrick McKenzie: As I've observed in other contexts, it's very difficult to get people to acknowledge that the optimal amount of fraud is greater than zero despite that being a fairly core element of the financial industry and so a tough public choice problem. But I'm sorry.
Haseeb: Exactly.
Right. No, I mean, that was the core of my point.
Patrick McKenzie: Well, Haseeb, thank you very much for your time today. Where can people find you on the internet?
Haseeb: Google my name, H-A-S-E-E-B, and you can find my Twitter as well as bunch of my writing.
Patrick McKenzie: And you're also a recurring guest on the podcast Chopping Block, which I think is under Unchained.
There are two podcasts I listen to in crypto all the time. Again, a bit skeptical, but frequently hear things that are worth my time. So if there are listeners who are wondering where to start there, I'd point as Chopping Block is one of the options. [Patrick notes: The other, FWIW, is Castle Island’s On the Brink.]
Haseeb: That's right.
Thank you. I really appreciate the spirit of debate. I will say this as a closing note is crypto industry have so many times fucked up really dramatically. And there's a lot that the crypto industry has done to appropriately deserve the skepticism of people in the wider world. I think that's that's going to continue. There's no way that we're done making gigantic snafus and face planting. But I do think what's happening here and you notice it with every cycle of crypto despite the fact that it keeps face planting it also always gets back up and it doesn't disappear, doesn't go away which is a sign that what's happening in the space is really important. Something really important in the world is being served by this crypto shaped thing that we've created and I think getting a really deep understanding of what that is behooves anybody who cares how the 21st century is going to end up playing out.
Patrick McKenzie: Well, I continue keeping watchful eye on things, although I will say, not casting aspersions on yourself, but you are certainly not the first person, and 2025 is not the first time that that argument has been made. Previous things that were definitely going to be the use case did not turn out to be the use case.
[Patrick notes: Bitcoin was going to be a payments rail, ICOs were going to be transformational for businesses raising capital, NFTs were the future of IP rights, and fintech front ends on top of crypto lenders were going to allow crypto to manufacture tens of billions of dollars of deposits without risking the assets of unsophisticated savers.
Nobody believes those are true any more, but they were passionately believed at the time, and crypto certainly doesn’t lack for talented communicators that can argue that This Time Is Different.]
But I will say, as a skeptical onlooker myself, stablecoins are certainly the thing that seems to have the most actual adoption by real people. They do seem to be increasingly used for Corp to Corp, business to business, international payments, international treasury movements, etc. [Patrick notes: I observe public examples of rapid adoption and impressive growth numbers quoted on very small bases. This is better evidence than crypto has had at any point in the last 15 years.]
And so there is plausible world in which that ends up being a fairly material part of the international payments mix going forward to me. I think it's also plausible that they might kind of recede into the background and sort of way that no one really thinks about correspondent banking on their average Tuesday unless they're directly involved in it.
Plausibly, like no one will remember that they're actually using stablecoin rails because they will get seamlessly integrated into the plumbing. But we shall see. That'll be interesting to watch.
Haseeb: Absolutely. Thanks for having me, Patrick.
Patrick McKenzie: Thanks very much for coming on and for the rest of you folks, see you next week on Complex Systems.
