Transcription:
Penny Crosman (00:03):
Welcome to the American Banker Podcast. I'm Penny Crosman. More and more banks are thinking about issuing stable coins themselves or offering stablecoin custody. US Bank, for instance, said last week, it's thinking of issuing its own stable coin. In the meantime, it's providing custody for the reserves of stable coins to be issued by Anchorage Digital Bank. Large banks, and even some community banks are thinking about doing this too. Today's guest, Amanda Fischer, is policy director and chief operating officer at Better Markets and former chief of staff at the Securities and Exchange Commission. She's also a stablecoin skeptic. Amanda's going to share with us some of her concerns about this form of cryptocurrency. Welcome, Amanda.
Amanda Fischer (00:45):
Penny. Thank you so much for having me.
Penny Crosman (00:47):
Thank you for coming. So Paxos recently accidentally issued $300 trillion worth of PayPal stable coins due to a fat finger error, and then 22 minutes later they took that stable coin out of existence, out of circulation. What did you think of this and could this happen again?
Amanda Fischer (01:12):
Well, I mean my first impression was just the absurdity of minting, $300 trillion worth of money substitutes. Given that I think that there's only like 2.5 trillion in circulation in the United States today. Exactly. But I think that the company in some crypto supporters were suggesting no harm, no foul. They were immediately able to burn, which is the term for delete the 300 trillion in stable coins that they minted. But I do think it evidences some real maturity issues in the crypto and the stable stablecoin industry, for example. To me, it demonstrated that there are infirm controls, at least at some of these stablecoin providers around only minting tokens when they confirm that there are sufficient reserve assets to back it. Because recall stable coins are supposed to have treasury securities and other investments behind every dollar of stablecoin that is issued. So that's the first risk. And then the second risk, I think is something that we're seeing increasingly in crypto, which is that the reason that Paxos was able to correct this error within 22 minutes is because they executed significant centralized control.
(02:38):
So the promise of crypto, the original promise of crypto is that code is law, is that once things are done, they cannot be undone unless there is a consensus of independent validators on a blockchain system. That is very unlike the banking system. However, we see that PSOs itself was able to rectify the error without engaging the full blockchain system. So as crypto scales and tries to replicate some of the functions of the banking system, I think we're increasingly going to see them moving away from the original decentralized promise of crypto and replicating many of the very logical systems that exist in the traditional payment and banking systems.
Penny Crosman (03:29):
Yeah, it's interesting. I hadn't even thought of the reserve question, but yeah, odds are Paxos doesn't have $300 trillion in reserve. So that should have been an immediate control point, I would think. What are some of your other concerns about stable coins and what's the worst that could happen?
Amanda Fischer (03:52):
There are significant number of risks, and I kind of like to tell the joke when folks ask me, who is this product for? I say, do you love the risk of a money market fund share? But do you hate earning dividends and do you love the zero interest paid on your FDIC bank account but hate FDIC insurance up to $250,000? Well, if that's you, boy do I have the product for you? Because it features the risks of a money market fund share with the returns of an FDIC insured bank account, but with none of the paid for deposit insurance. That makes us confident that our money will be there in any bank in the United States up to $250,000. So from a consumer protection standpoint, and this is just one prong of my concerns, I'm very concerned about the average consumer mistaking a stable coin dollar for an FDIC insured dollar, either at non-banks that they don't understand, don't have FDIC insurance or frankly it's in banking institutions where some of their accounts are FDIC insured and others aren't furthering.
(05:11):
My concern around consumer protection is the fact that banks in the United States and credit unions as well have to comply with the electronic Funds Transfer Act, which ensures that there are dispute resolution procedures. You can, if somebody steals your credit card and you want to ask for a chargeback, all of those payment system protections that have been established over time that banks and credit unions pay for the Genius Act explicitly excludes the consumer financial protection bureau's oversight and the application of efta. So if these really do scale as payments, I think we're going to see at a minimum a lot of consumer confusion about not being able to get the same legal recourse and services to which they've become accustomed in the traditional payment sector.
Penny Crosman (06:08):
I so agree with that. I remember thinking that in the first wave of stablecoin several years ago, obviously with credit cards especially, we have a well-established dispute resolution process and with cryptocurrency we really don't. I mean, Coinbase is, I mean a few providers are talking about starting to offer reversibility of transactions, but I feel like it's very early days on that and it kind of remains to be seen how that's all going to work. Now, some of the bankers that I talked to focus on cross-border payments as a strong, possibly the strongest use case for stable coins, people who need to send money back home or send money to a relative, some of the options today can be quite expensive, especially if you're sending money to less developed countries and they can take time as well. Your bank has to have correspondent banking relationships with other banks in other countries, and then there can be hops that take time to happen. Whereas with cross-border payments, theoretically your bank can simply buy, put your money into stable coin, send that stable coin to the bank in another country, they convert it to their local currency, and this theoretically can happen within minutes. Do you agree with that possible use case?
Amanda Fischer (07:49):
I mean, I remain open to it and certainly the remittance sector is an area where I do think that there could be improvements. I've worked 10 years on Capitol Hill, there was a lot of concerns from bankers and credit union executives about the compliance costs of doing all of the A ML checks and a lot of concerns from folks in the United States that had family abroad to which they were trying to remit money and it was just so prohibitively expensive or difficult to do so. So I am sympathetic to that case, but I'm not sure that the technology behind stable coins solves the underlying issues, which is a ML is hard, it's costly, and not everywhere in the world has access to internet or banking services. So I mean, if you look at circles marketing materials, when they unveiled the new remittance product, you'll notice that they in one diagram had circle stable coins as the sending method of payment and the receiving method of payment.
(09:01):
But in between were correspondent banks. Now they were correspondent banks in circles network that they had onboarded that agreed to accept the stable coin. But if I send you A-U-S-D-C and you're in Venezuela, good luck. What are you going to do with the USDC in Venezuela? I mean, you can buy Bitcoin with it maybe, but if you're trying to buy groceries, you're still going to have to figure out a way to convert that to the local currency. So yes, maybe crypto companies have different incentives and they will have more success developing networks in some corridors of the world that are being underserved right now. But I am afraid that the way that they serve those customers is by not through technological solutions, but through legal maneuvers of not applying the same scrutiny as the traditional financial sector is held to. And also at the end of the day, to get spendable money, you're going to have to engage with a traditional financial institution to convert you back. And then there's going to going to be foreign exchange fees, both the fee to convert from USDC to dollars and then fees associated with converting back from the stable coin to the local currency.
Penny Crosman (10:26):
So there's possible benefits, but they may not be as great as they seem at first glance. And you're right, it's circle that's working on reversibility, not Coinbase. I misspoke earlier, I apologize. So American Banker recently did an on chain finance survey that found that 2% of banks and credit unions are piloting a stable coin. 4% are planning to pilot or launch a stable coin and 4% are planning to partner with other banks in a bid to issue a stable coin. And 70% are either in early stages of discussing stablecoin issuance or haven't yet discussed launching a stable coin and 15% have said they're not planning to launch one. If you were advising one of these banks that's kind of thinking about testing the waters, what might be some warnings you would give them?
Amanda Fischer (11:20):
Well, I understand the impulse because crypto is encroaching into activities that have traditionally been in the traditional financial system, and they're doing so under legislation that frankly is more permissive than the current law that bankers and credit union folks abide by. So I get it that they don't want other financial sector participants to get an edge over them. But a couple things I would flag first is this consumer protection issue, and if you have customers that are used to being able to call up your bank and get certain recourse and understand the $250,000 FDIC or credit union protection, really making sure that there's a lot of consumer education that stable coins which are being marketed as dollar substitutes are not in fact dollars. So that's the first thing.
(12:23):
The second thing I would flag is that transaction fees on stable stablecoin transfers are highly volatile. And I know that there's a lot to be said about problems with the current interchange framework, and there have been many debates around that. But cryptocurrency enthusiast, Kevin O'Leary from Shark Tank yesterday was talking about how transaction fees on the Ethereum network are so volatile that at peak trading congestion, it was costing a thousand dollars to remit payments, and that's called gas fees, which is the fee you pay for the compute to transfer money over the decentralized network. So that's an extreme example that Kevin O'Leary, who again is a crypto enthusiast was talking about, but if you go on Reddit, you can see a lot of users complaining about paying $23 in gas fees to swap $45 of Ethereum for an alt coin they want to buy. So again, if you're doing arbitrage in the crypto market and you're trading in and out of positions and trying to make money, a reasonable person can account for those gas fees and decide if it's worth it to them. But for day-to-day household use, I am not particularly sure that the average consumer wants to pay more to send money because somebody launched a hot new meme coin and it's congesting the network. So I remain a little bit skeptical that this is scalable and really useful for everyday payments. It's just, it really makes sense in crypto when the objective is trading. But everyday household purchases, I'm not so sure.
Penny Crosman (14:14):
Yeah, that definitely makes sense. Those fees sound pretty astronomical. And you made the point before about people might think that their money is FDIC insured when it's really not, and you even see that today sometimes with FinTech relationships where people think money is FDIC insured, and it is if the bank fails, but not it that FinTech that they're actually working with fails, people don't understand these nuances. Do you think there's any amount of disclosure that would solve that problem?
Amanda Fischer (14:53):
Look, the Genius Act does include provisions around signifying when or when not a product is FDIC insured. So it does exist, and I know that banks and credit unions take very seriously the use of the, for example FDIC logo because it goes back to it's a wonderful life. It's like Americans have confidence in our financial system because banks pay into the FDIC insurance fund. I am not sure that disclosure alone will do it. And I think the synapse failure is a really good example of that. I think we see a lot of past instances when I was at the SEC of crypto firms pushing the boundaries of implying that funds are FDIC insured and look on these yield generating products, which are proliferating in recent months. They look a lot like a CD in the way that they're being marketed. And in fact, the CEO of Coinbase, Brian Armstrong was touting that one of their stable coin deposit lending programs had interest rates that were beating the rates, the A PR offered by banks. So there's a lot of marketing trying to signal your money's not working for you at a bank, come here. And it will require a lot of diligence on behalf of consumers to understand where that extra yield is actually coming from
Penny Crosman (16:28):
For sure. Another concern I think is security breaches. I mean, we've seen exchanges get breached. We've seen thefts from digital wallets. We've seen distributed ledgers themselves get hacked. To what extent do you worry about that?
Amanda Fischer (16:49):
I think it should be a huge concern, and crypto is always going to be a target for scammers because of the techniques that exist to move and launder the money once it is stolen. It is very hard to move money through the traditional banking system without it being traced by law enforcement. And frankly, it's pretty hard to move large amounts of money in duffel bags too. People do it and they move cash across borders, but getting a billion and a half dollars in physical US currency to North Korea, you're going to need a few tankers to do it. So crypto is always going to be a honeypot. And the decentralized nature of these networks also creates more points of fragility. So we only need to look in the recent past to see all of these hacks. I mentioned $1.5 billion because that was a hack earlier this year in which $1.5 billion was stolen from the buy bit crypto exchange by North Korean hackers.
(18:07):
And I think around a quarter or more of the funds currently remain untraceable and unfrozen. And that was just for a few minutes of work. Also, the existence of what's known as Mixers and Tumblrs, which are open source software that exists on the internet for the explicit purpose of scrambling up wallet addresses to make it difficult for law enforcement to unscramble the egg, so to speak. And a concern I have is that in the name of free speech, some of the subsequent crypto legislation that is pending explicitly restricts regulators and law enforcement's ability to shut down these systems. And the answer from the crypto industry is that law enforcement just needs to buy better tools to learn how to unscramble an egg, and they're happy to sell those tools to law enforcement, but it's just they see it as a very black and white free speech issue that the government can't censor code on the internet. And there's a lot of folks that just say that these online money laundering services are kind of the price of freedom, but so long as you have that software available to criminals, why wouldn't someone want to launder money in that mechanism? So it really paints a target on the back of crypto.
Penny Crosman (19:39):
I mean, you do see these services like elliptic and chain analysis, which attempt to track and monitor transactions on a lot of the major distributed ledgers like the Bitcoin blockchain. And they do do a lot of forensic work to figure out where transactions are coming from and where they're going. But it seems to me that a lot of it's after the fact, like the money's gone, and then you figure out what happened after the fact. It's not like a proactive thing where banks have a lot of monitoring where they can watch transactions and try to actually block a transaction that looks deeply suspicious. It seems like, as far as I know, we don't really have that yet in this world of crypto. So did I miss
Amanda Fischer (20:39):
That's absolutely right.
(20:41):
That's absolutely right. And look, some of this is also relying on the individual crypto companies quickly understanding where the money went and freezing the assets. And that certainly doesn't always happen. So there is a reason that Chain lysis is also called Stable Coins, the kingpin of illicit activity, and it's because it is just much easier to get away with it once you've got the money if you're dealing in crypto. And I'm not saying that the technology will never catch up, and we might not be able to ever do better, but right now it is a very hard situation and that there's a reason why other state sponsors of hacks are going after crypto.
Penny Crosman (21:29):
Sure. Well, Amanda Fisher, thanks so much for joining us today and to all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Wen Weis, Jean-Marie. Special thanks this week to Amanda Fisher at Better Markets. Read us, review us, and subscribe to our content at www.americanbanker.com/subscribe for American Banker and Penny Crossman and thanks for listening.