Why the Dollar's Stablecoin Update is Inevitable | Jeremy Allaire, Circle
Source: Empire YouTube account
Compiled by: TechFlow
Guest: Jeremy Allaire, CEO of Circle
Moderator: Jason Yanowitz, Founder of Blockworks; Santiago R Santos, Investor
Background Information
In this podcast, Circle CEO Jeremy Allaire discusses the future of money. He explains how stablecoins can transform global finance by increasing the speed of money transfers and reducing transaction friction. Jeremy shares insights on the regulatory environment for cryptocurrencies, Circle's journey to becoming a public company, and his vision for a more efficient and accessible financial system.
US dollar architecture
Jeremy Allaire discussed the technical architecture of the U.S. dollar and its impact on the financial system. He pointed out that various types of U.S. dollar balances represent different risks, including credit risk, market risk, and liquidity risk.
Jeremy explained that the infrastructure of the US dollar is mainly composed of a set of Oracle databases running on older technologies such as FTP servers and text files. These databases record the cash portion of the US dollar (M0), while most of the funds are actually credit money created by banks.
Market size of legal electronic money
Jeremy mentioned that the market size of legal electronic currency is as high as 100 trillion US dollars, which includes the value of multiple currencies. He further analyzed the different uses of this market, including retail payments, B2B electronic payments and capital market transactions, which constitute huge market opportunities. He believes that with the development of technology, the circulation speed of currency will be greatly improved, thereby promoting the creation of economic value.
The Internet and the Future of Money
Jeremy believes that future currencies can exist natively on the Internet like other information. He envisions a currency protocol similar to HTTP that can be traded on an open network. He believes that when these networks reach scale, the storage and transfer costs of currency will approach zero, greatly increasing the speed of currency circulation. This shift will greatly promote the growth of economic activities, just like the impact of the Internet on information release.
Jeremy emphasized that removing friction in value exchange will help enhance global economic prosperity. His vision is to promote sustainable economic development and growth through frictionless value exchange, ultimately achieving higher transaction volume and economic value.
Efforts to regulate stablecoins
Jeremy discussed the current status of stablecoin regulation and the attitude of regulators. He pointed out that although regulators agree with the potential of stablecoins to some extent, their concerns about losing control make them cautious in accepting this new technology.
Jeremy believes that there are still many uncertainties and operational risks in stablecoin technology, and the cautious attitude of regulators is reasonable to some extent.
The evolution of technology and trust
Jeremy compared the early development of the Internet, pointing out that large companies once doubted the security of the public Internet, and eventually, as the technology matured and economies of scale emerged, companies gradually accepted this infrastructure. He emphasized that the advancement of stablecoins and encryption technology requires time to build trust, and the technology must continue to be enhanced in order to meet market demand.
Cryptocurrency as an innovation laboratory
Jeremy believes that the cryptocurrency field is a huge global innovation laboratory that brings together a large number of technical talents and entrepreneurs. He firmly believes that the open innovation model will have advantages in technical capabilities and results over the government-led model. He mentioned that central banks and regulators are actively establishing a regulatory framework for stablecoins, and by the end of 2025, stablecoins like USDC will be considered legal electronic currencies and regulated by major financial market centers.
Future Outlook
Jeremy emphasized that this evolution marks a major advancement in the financial market, and that traditional markets will be able to utilize stablecoins, which was unimaginable a few years ago. He believes that stablecoins will play an important role in the future as regulatory frameworks are established and technology develops.
The transformation of currencies into stablecoins
In this segment, Jeremy elaborates on how stablecoins (such as USDC) can operate within the existing financial framework and how to work with governments and financial institutions to achieve this transformation.
Current operating framework
Jeremy introduced how Circle built its business on the US electronic money and payment framework and became the first company to obtain a nationwide license. He mentioned that they followed federal and state electronic money transmission laws and obtained some specific licenses, such as the New York BitLicense. In addition, they also followed specific rules for stablecoin reserves, such as using only safe assets such as Treasury bonds, overnight repo and cash.
Global Expansion and Regulatory Cooperation
As its business expanded globally, Circle began to work with other major regulators. For example, in Singapore, the Monetary Authority of Singapore oversees Circle to ensure that the distribution and use of USDC in Asia complies with local regulations.
Jeremy emphasized that this regulatory collaboration enables them to establish direct banking infrastructure in Singapore and Hong Kong, making it convenient for market participants to easily create and redeem USDC in the local banking system.
Regulatory milestones in Europe
A major milestone was Circle becoming the first global stablecoin issuer to be regulated and licensed within the European Union. Jeremy noted that their Euro stablecoin (URC) is also growing. This development changed the supervision and reserve architecture of stablecoins. They worked closely with legislators such as the European Commission, the European Banking Authority, and the Bank of France to establish a dual issuance model to ensure that USDC is interchangeable no matter where it is issued.
Capital requirements for stablecoins
When talking about reserve requirements in Europe, Jeremy mentioned that the Markets in Financial Instruments Directive (MiFID) has very specific capital requirements for stablecoins. He pointed out that current regulations require a 3% capital requirement to be maintained on reserves of European users. In addition, he mentioned that the Payment Stablecoin Act, which is being considered by Congress, will give the Federal Reserve the ability to determine the appropriate capital requirements for stablecoin issuers.
Risk Management and Capital Framework
Jeremy emphasized that Circle has worked with its chief economist to publish a detailed capital asset processing framework specifically for stablecoin risk management. This framework takes into account various risks associated with stablecoin issuance and reserve models, including liquidity risk, market risk, and operational risk. He pointed out that stablecoin operators must consider specific risks in terms of multi-chain deployment, network failure, and key material storage to ensure the security and reliability of stablecoins.
The ultimate goal of central bank digital currency (CBDC)
Current status and prospects of CBDC
Jeremy said that the United States seems to have no political will and no public demand for a regular CBDC. He believes that although CBDC is a long-term goal, if the US monetary architecture still relies on outdated technologies (such as old databases and file transfer protocols), then modernization is needed. He hopes to see the United States upgrade at the central bank infrastructure level, using encryption technology and distributed ledgers to improve efficiency.
Private sector innovation
Jeremy emphasized that the intermediation and innovation of economic activities should be led by the private sector. He believes that the private sector is much faster than the public sector in technological innovation, and this innovation will drive the transformation of the economic system. He mentioned that the transformation of the Internet has made information dissemination fast and free. Similarly, blockchain technology will make value transfer efficient and low-cost.
Future value exchange
Jeremy predicts that as technology advances, there will be machine-driven value exchanges in the future, where business, labor, and financial relationships can be encoded and executed on public blockchains through smart contracts. He believes that this breakthrough in economic coordination will be a fundamental advancement in blockchain technology.
The role of decentralized finance (DeFi)
He mentioned that decentralized finance (DeFi) is bringing the basic elements of the traditional financial market to the chain, and there will be more abundant forms of value exchange in the future. He hopes to realize more traditional financial principles on the chain, such as time value, and then promote the emergence of unsecured credit.
The outlook for unsecured credit
Jeremy believes that the emergence of unsecured credit will be a huge opportunity. He pointed out that the private credit market has grown significantly in recent years, and this market can be realized on the chain. He mentioned some protocols that have made progress in this field, such as Maple and Goldfinch. He envisions a model that allows legally compliant individuals and institutions to intermediate capital supply and lending on the chain, forming an efficient market.
Insurance Models and Risk Management
When talking about risk management, Jeremy mentioned that an on-chain insurance model can be used to protect participants, especially ordinary users. He believes that insurance can be priced and managed on the chain to form a composable financial product. This model will allow users to use part of their assets for lending while maintaining liquidity, thereby achieving efficient capital utilization.
Evolution of the legal framework
Jeremy believes that the advent of the Internet has broken many legal paradigms. For example, in the past, broadcasting required a local license, but now it is no longer necessary. He hopes that the financial industry can demonstrate the advantages of encryption technology in efficiency, transparency and risk management, thereby promoting the evolution of the policy environment and making it more international.
Market Access and Compliance
Santi asked about factors that might limit or accelerate this process.
Jeremy pointed out that there needs to be market and compliance regulators to recognize the ability of financial intermediaries to build products and services on public chains. He mentioned that Europe's MiCA regulations provide a framework for building financial products on public chains, but it remains a challenge to widely accept this framework globally.
The potential of encryption technology
Jeremy stressed that the industry needs to explore better solutions than the existing financial system and take advantage of encryption technology, such as zero-knowledge proof and encrypted credentials. He said that the industry should innovate in user experience and privacy protection rather than simply follow existing laws.
The legal status of stablecoins
He also mentioned that stablecoins are considered legal electronic money, which will enable financial institutions to use them as valid collateral on their balance sheets and use them as working capital in transactions. This is crucial to promoting traditional financial institutions to participate in the crypto market.
The impact of transparency on the financial system
Transparency and risk management
Santi mentioned that as more transactions are conducted on-chain, there will be better visibility into the risk profile of borrowers. For example, wages can be paid in USDC in a liquid manner, which can reduce risks.
Jeremy agreed with this view and stressed the importance of cryptographic credentials such as KYC certification in ensuring compliance and security. He mentioned that geographical restrictions can be used to ensure that users comply with specific legal frameworks.
Lack of transparency and its consequences
Santi mentioned that the lack of transparency in the financial system is often seen as a feature rather than a bug. This lack of transparency allows certain players to benefit from it, such as through higher interest rates or the establishment of profit centers. However, this situation also leads to a series of problems, such as the occurrence of the global financial crisis, because in the absence of transparency, risks are difficult to accurately assess.
The potential of transparent systems
Jeremy agreed with Santi's point of view, and pointed out that participants who rely on opacity to make profits will face challenges. He believes that open Internet infrastructure can achieve huge economies of scale, thereby changing the economic structure of the industry and improving products and services. He believes that this transformation will have a profound impact in many fields such as retail payments, capital market infrastructure, lending and asset management.
Reshaping and innovation of the industry
Jeremy further pointed out that there are too many participants in many industries, and the application of blockchain and encryption technology will make it possible to provide more efficient, lower-risk and more valuable products. He mentioned that the changes in the media industry in history can be used as an analogy. The Internet had not completely subverted media companies in the early 2000s, but with the development of technology, many traditional media companies have faced huge challenges and even collapsed.
Integration and globalization trends
He predicts that the financial industry will also undergo a similar consolidation process, with fewer but more powerful Internet-native platforms emerging in the future, which will be more global. In lucrative areas, increased transparency will lead to more innovation and competition, thus providing better services to users.
The value of decentralized systems
Santi mentioned that while technology can be a centralizing force, he hopes decentralized infrastructure can be built.
Jeremy expressed his firm belief in distributed and decentralized systems. He believes that one of the most exciting aspects of cryptocurrency and blockchain is that economic participants around the world can conduct peer-to-peer commercial and financial transactions securely.
The potential of open source protocols
Jeremy hopes to see community-governed open-source protocols that are maintained by stakeholders and can be continuously improved. He believes that such infrastructure will support thousands of different business models. For example, he mentioned Uniswap as a community-governed protocol infrastructure on which many people build and combine their own markets.
Practical cases and innovations
Jeremy also mentioned that Zora’s recent secondary market launch with Uniswap is a good example of how to build a basic decentralized platform that many people can develop on top of. He believes that this decentralized infrastructure can enhance the resilience of the system and promote more innovation.
Vision of Token Incentives
He further elaborated on the importance of token incentives in creating a wider range of products and services that can combine real-world incentives with on-chain economic coordination. This model will help rebuild historically centralized platforms to become more decentralized.
The Applications vs. Infrastructure Debate
In the current crypto world, the debate about applications and infrastructure still exists. Jeremy hopes to see decentralized applications using digital tokens and broader forms of coordination that can create meaningful value at the end-user and enterprise level. He said that he is highly consistent with Chris Dixon's views and looks forward to seeing more such innovations.
The impact of interest rates
High interest rates vs. low interest rates
Yano raised a question, noting that in the current interest rate environment, many people believe that high interest rates are good for Circle’s business, but he wanted to understand the impact of low interest rates. He mentioned that low interest rates could increase the velocity of money.
Jeremy explained his views on interest rates, believing that they should be lowered to promote better economic policies, and believed that this would be beneficial to the real economy, the digital economy, and the crypto economy.
Ideal interest rate environment
Jeremy said that a more neutral interest rate environment would be an ideal environment for the USDC platform. He believes that lower interest rates will increase the liquidity and activity of the currency, thereby increasing the demand for high-utility currencies. He emphasized that Circle is building an infrastructure to make it the world's most high-utility currency and encourage developers to build applications on it.
Currency Liquidity and USDC Growth
Jeremy believes that when currency liquidity increases and interest rates fall, this will have a huge boost to the adoption of its stablecoin network. He pointed out that although the circulation of USDC decreased in a high-interest environment, as interest rates stabilized and expectations fell, the circulation of USDC began to grow significantly.
The relationship between economic activity and stablecoins
Santi mentioned that this dynamic could change significantly as USDC’s use in payments and commerce increases.
Jeremy explained that monetary liquidity in the economy increases when interest rates fall, especially in terms of commercial transactions and settlement needs. He believes that there will be a correlation between the capabilities of the USDC platform and on-chain commercial and financial activities, and changes in interest rates will have an impact on this relationship.
Investment and Capital Markets
Jeremy also mentioned that capital liquidity in the capital market is an important factor driving growth. He pointed out that many people are willing to invest in assets that they believe will bring higher returns when looking for higher returns than 3%, and this growth in risk appetite will drive the use of USDC. At the same time, as interest rates fall, currency liquidity in commercial transactions will also increase.
Overall, Jeremy emphasized the profound impact of interest rate changes on the economy and digital currencies. He believes that lower interest rates will help improve the liquidity of currencies, promote the adoption and growth of USDC, and drive overall economic prosperity. As the market environment changes, Circle will continue to build and optimize its platform to adapt to these changes.
Innovative development of stablecoins
The Challenges of Yield-Based Stablecoins
Yano mentioned that some yield-generating stablecoins have been launched recently, such as Mountain Protocol, and asked if Circle would consider passing on the net interest margin to users to gain a dominant position in the market.
Jeremy responded directly that this was illegal. He explained that if an investment product was offered to users, it would be considered a security, and Circle was already regulated as a payment system and electronic money payment system, so it could not provide such returns.
Impact of the regulatory environment
Jeremy further pointed out that stablecoin laws around the world (such as the Mica Act in Europe, the Payment Stablecoin Act in the United States, etc.) regard stablecoins as interest-free cash and electronic money. He believes that this is the right decision. He emphasized that although he hopes that users can switch seamlessly between digital cash and income products, this must be done within a compliant framework.
USDC’s Vision
Jeremy expressed Circle's vision, which is to make USDC the best digital cash and the best digital dollar in the world. He mentioned that Circle hopes to become the preferred settlement tool for users when seeking returns, whether it is DeFi returns, unsecured on-chain lending returns, or other investment returns.
The role of market infrastructure
Jeremy said that Circle sees itself as a market-neutral infrastructure company, committed to building more infrastructure so that developers can build applications on it. He mentioned that Circle is developing a cross-chain transfer protocol and gas abstraction mechanism to simplify the user experience, allowing users to trade without having to understand blockchain and transaction fees.
Investment and innovation
Jeremy also mentioned that Circle Ventures will make small minority investments in innovative projects. He emphasized that Circle’s main goal is to enable other developers to build applications on its platform.
IPO Outlook
When talking about the public listing, Jeremy said that Circle is very focused on becoming a global listed public company. He believes that this will increase the transparency and trust of the company and help Circle maintain high standards of governance and ethical responsibility in its future development.
Advice for entrepreneurs
Finally, Jeremy gave some advice to entrepreneurs, emphasizing that in the process of entrepreneurship, one should be willing to make sacrifices, abandon unsuccessful projects when appropriate, and focus on the core vision of the company. He mentioned that despite the challenges, entrepreneurs should maintain a firm belief in their original intentions and adjust and develop on this basis.
Overall, Jeremy's views emphasized the innovative development of stablecoins within the compliance framework, Circle's efforts in promoting the connection between digital cash and yield products, and advice to entrepreneurs in the face of challenges. He believes that there will be more surprises and innovations in the future to promote the development of the entire crypto field.
