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Well, as we go deeper into the
world of digital currency, it's becoming more important to make
sure that there is a secure
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connection to the traditional
financial system. A new stablecoin toolkit has been developed
at the Wharton School as a way
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to potentially bridge the gap
between the two worlds. Pleasure to be joined by Kevin Werbach,
who is a Professor of Legal
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Studies and Business Ethics here
at the Wharton School. Kevin, great to have you with us again.
Thanks for your time.
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Thank you, Dan. You know, we have talked so
much about this area over the years. I mean, the stablecoin,
it's not a new concept, but
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it becomes more important to
bring forth a toolkit like this now because why? Stablecoins have been around
for roughly 10 years. A stablecoin
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is basically a digital
asset, so it's a cryptocurrency like Bitcoin or ether, but it's
designed to remain stable, to
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typically keep at the value of
the US dollar. And stablecoins have been used primarily in the
digital asset world as a form of
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liquidity on exchanges, but
they've been kind of in a regulatory gray area. And what's
happened in recent years is
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there's been a lot of activity
around stablecoins. There's been interest in stablecoins
for other uses, like payments.
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And regulators are now starting
to create regimes to deal with stablecoins. There was one
adopted in the European Union,
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and just last year, the US
passed something called the Genius Act, which created a
legal framework for stablecoins.
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And so the importance of this
toolkit is to help provide a better understanding of kind of
the stablecoin landscape at
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the moment? Stablecoins are bigger than
most people realize. There are several 100 billion dollars of
value in assets. But if you look
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at the transaction volume of
stablecoins, Visa has found that the transaction volume of
stablecoins last year was
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$35 trillion, which is double what
Visa's traditional payment volume is. Now that's a little
bit overstated. A lot of that
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actually turns out to be high-
frequency trading and spoofing and so forth. But the adjusted
number they come up with is
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still $7 trillion. Again, most of
that is used in digital asset trading. But it's quite
significant. 80% of all digital
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asset trades use stablecoins
for at least one leg. And a survey last year by Fireblocks,
a digital asset custody company,
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found that 90% of financial
services firms— and this includes traditional firms and
fintechs as well— were looking
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at using stablecoins or already
were doing so. So it's a significant phenomenon. But it's
a deeply misunderstood
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phenomenon, which is why we put
this toolkit together. Okay. And so one of the sections of
the toolkit is defining and
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categorizing the different types
of stablecoin. It turns out that when you ask
the question, what is a stablecoin,
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it's a much harder
question than people realize. The specific laws like the
Genius Act have a definition of
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what they call a payment stablecoin.
But then you look at all the stablecoins that are
actually out there in the market
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today, many of them don't
conform to that definition. And there are all kinds of other
things, like central bank
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digital currencies, tokenized
deposits, tokenized money market funds, money market funds, that
are similar to stablecoins. And
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so what we do in this, is this
is really, I think, the first academically-rooted document
that says, systematically, what
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is a stablecoin? We come up
with a definition— precise definition about what is a
stablecoin. And then we talk
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about how stablecoins are
different from other forms of money, how they're used, how
they're made stable and so forth.
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Right. And so you laid out a variety of
uses for stablecoins. But from where we are now, how much
farther
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do these uses go,
potentially? Potentially, very far. We are
trying to, in this report, put
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out a balanced perspective. This
report involved an expert group of industry participants,
academic participants, legal
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experts and others from around
the world with different views. And there definitely are people
who are convinced stablecoins
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are going to be massive. There
are various reports talking about the value going from
roughly $250 billion to two or
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$5 trillion in a few years.
We're not taking a position on that. We're trying to map out
what the use cases look like, and
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help policymakers as well as
industry participants understand what to do. So clearly, the
biggest use of stablecoins
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today is in digital asset
trading. But there is interesting take-up of uses in
payments, especially in
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developing countries, places
with high inflation. But a lot of interesting experiments and
activity going on in places like
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the US, with major financial
services firms, because there's tremendous efficiency,
especially for any kind of cross-
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border transaction, in using a
stablecoin, as opposed to the traditional payment system. And
then the other potential uses
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are tremendous as well, but they
haven't really taken off yet. But do they go to the point of
this kind of moving towards kind
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of a commonality use of us
using traditional currency at some point? The point that we make in the
paper is that stablecoins are
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potentially the bridge between
the digital asset world and the traditional financial system.
The traditional financial system
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has all kinds of limitations.
It's massive, but especially when you talk about payments,
which is this plumbing that most
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people don't see, it's trillions
and trillions of dollars going back and forth around the world,
but it's incredibly inefficient.
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There's all kinds of limitations
and silos and inefficiencies and gatekeepers and so forth. And in
order to overcome that, you need
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a common, global, secure,
decentralized platform. That's what blockchain is. And so there
is this potential to bring these
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worlds together in a very
powerful way. So you talk about the global
component of this. How much of a
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global framework is already
there in the use of stablecoin, and what needs to potentially
develop even farther as we move
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further down the line? There are a whole set of
regulatory issues. Law is national, even though money is
global, and blockchains are
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global. And so different
countries come up with legal regimes. As I said, the European
Union has one, although theirs
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is not very widely adopted, for
various reasons. The US now has one. Hong Kong has one,
Singapore has one. Many
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countries are looking at
creating legal regimes, and there's some commonality between
them, but they're not all going
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to be the same. And that's—
that's okay. Every country doesn't have to be the same. It
isn't right now for traditional
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finance. But there's also a huge
amount of activity in stablecoins that's still in this
regulatory gray area, uses that
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are not mapped into these
existing regimes, but they're being very widely adopted.
Ultimately, there needs to be an
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environment where there's clear
regulation, because it's essential to have things like
any money laundering and
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countering terrorist financing
checks to have certainty for global transactions, to have
mechanisms for oversight while
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still allowing for fluidity of
currency flows and innovation. So that doesn't mean every
country has the same regime, but
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there needs to be a lot of
coordination. It's starting to happen, but it's still very
early.
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Right. So that at least everybody is
reasonably on the same page in terms of how this process is
going to work and develop as we
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move forward. That's a big goal of this
toolkit, to try to give everyone a common language and a common
understanding of what the
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possibilities are and what the
issues are, and then they can decide where they go from there.
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So what, then, do you hope this
toolkit will bring to the table? Well, it stimulates discussion.
It gives everyone a solid
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understanding. The core insight
that we started with is that we can't talk about stablecoins
without having a solid
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understanding of what a stablecoin
is. And it's, fine, again, for the US to say there's all
kinds of stablecoins that we
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are not going to allow within
the US financial system. But at least you can't ignore that the
other stablecoins are out
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there, and they may be
legitimate in other countries, and maybe those need to be
brought into the US regime,
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because they actually are other
appropriate mechanism. Those are the kinds of conversations that
need to happen. And frankly,
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industry participants need to be
aware of what the possibilities are, and not just be going on
hype or not just be fixating on
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the way this market used to be
historically. Those are the kinds of conversations. And
since the toolkit came out,
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we've already received a number
of inquiries from regulators and other organizations that are
interested in starting
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conversations and potential
collaborations with us. Kevin, it sounds very exciting,
and congratulations on the work
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that you've been doing. Absolutely. Thanks a lot. You got it. Kevin Werbach, Professor of
Legal Studies and Business
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Ethics here at the Wharton
School.