History in the Making: Why Stablecoins are Poised to Redefine Banking as We Know It

Amid wavering public trust in banks and accelerating interest in the digital asset ecosystem, it has become clear that fully reserved, blockchain-based stablecoins offer a safer, more transparent, and more equitable alternative to the current fractional reserve model that banks employ. As regulatory clarity improves and adoption accelerates, Mike Belshe will discuss why stablecoins are poised to become the foundational layer of a new financial system and redefine banking as we know it.


Transcription:

Mike Belshe (00:10):

Hello everyone. My name is Mike, like she said, I'm a Co-Founder and CEO of a company called BitGo. If you're in the digital asset space, I hope you've heard of our company. I got started back in 2013 building at the time what was a technology company to try to secure digital assets. Something that I think we're all still working on, but hopefully it's getting a little bit better. At this point, we're no longer just a technology company. In addition to the technology, we're primarily a financial services company, mostly known for custody, but building financial services all on top of it. So anything digital. Open to questions later. A little bit about me on the background side. I'm a technologist for the last 25 years, Silicon Valley, spent time at Netscape as my first part of my career was on the Chrome team at Google. One of the first 10 guys there wrote a protocol called Speedy, which later became HTTB 2.0.

(01:07):

So if you use your browser today, that's some of the work that I did. But for the last 12 years, I've been focused on digital assets and Bitcoin and how we can make better money. So stable coins. Stable coins are an exciting development. The second use case coming out of digital assets, the first one being store value for Bitcoin originally actually was described as a peer-to-peer payment system. Although it's emerged more as a store value than payments, I think stable coins are going to turn out to be the thing which breaks open payments. I think stable coins are actually the banks that people wish they had but never had before. And I hope that doesn't sound offensive to anybody here, but I often do talks on the digital side and I ask people, raise your hand if you love your bank. Not that many people raise their hand.

(01:55):

I'll ask you guys, raise your hand if you love your bank. Okay, we got a few people. Alright, we got some bankers here. That's good. At least the bankers love the banks, that's great, okay. But I think from a retail perspective, what people envision banks as is pretty simple. I know banks do much more. There's institutional banking, et cetera, but from a retail perspective, they're like, I want to keep my money safe. I don't want to have to hold onto it myself. Like what we do in crypto where it gets really dangerous. Number two, I want to have really easy payments. I want it to be cheap, cheap and fast. And three, I want to get a little bit of interest on my money. That's how they think of it from a bank perspective. I know there's lending and lots of other stuff that banks do, but that's where a lot of people have their heads at in the retail space.

(02:39):

And when you think of what stable coins can do, they can do all three of these things pretty well. From a payment side, I think I'll criticize the banks a little bit. I think if banks had been all over payment technology, we wouldn't have PayPal, we wouldn't have Cash app, we wouldn't have Venmo, and the list goes on and on. So there's always been room for innovation in payments. Stable coins are particularly good at it. They're 24 hours a day, seven days a week at almost no fees. From a security perspective, actually stable coins are more backed than anything we've ever seen before. Maybe money market funds backed by T-Bills. We'll talk about that in a moment. Most retail guys just think keep it safe. They don't necessarily think about how it's backed. But banks do fail from time to time as we know. We've put in a lot of safeguards and risk management to try to avoid that, but it still happens. And then interest, how many of you have been following the stablecoin bill That's up right now. Alright, so you may or may not know Congress right now is working on a potential stable coin bill.

(03:45):

There's two large stable coins in the digital asset space. One is called Tether. You guys heard of Tether. Tether runs outside the United States. Regulatory wise, it's kind of pioneered not being in the United States. That's how it's gotten so big. The other one is Circle USDC combined. It's 200 billion of size. So these are not small, they're not huge, but they're not small either. And when I talk about stable coins, I'm talking about fully backed stable coins. There's two types of stable coins. One is algorithmically backed where it's not a hundred percent backed. I don't want to talk about those. That's a very different class. I'm talking about everything thing being one-to-one backed back to the stablecoin bill. There is a stablecoin bill up right now and Congress is likely to pass it this year and you may or may not know, but one of the things I put in there is that stablecoin shall not give interest out to retail, which I think is kind of a funny thing.

(04:35):

I mean as banks we're fiduciaries, right? Aren't we supposed to give people interest on the money that they have? Alright, next. So summarizing all of this, if you compare banks and stable coins, if you look at the risk level, I personally think stable coins are incredibly safe. I'm talking about one-to-one backed with short-term duration, T-bills and cash and that's it. Banks are fractional reserve payment system. It runs 24 hours a day at almost no fees around the globe in terms of being global. I asked some guys, I mentioned to JP Morgan once that it is difficult to move money around the globe. We have a lot of international clients. They say, what do you mean we can do it? No problem. Alright, well the rest of us. And then in terms of yield, although stable coins don't have a yield yet, look, the risk-free rate is very achievable with stable coins.

(05:25):

If you look at interest rates over the last, I guess almost a hundred years here, I went and pulled this up, I think the historical data might be a little bit jagged, but here you can see where our interest rates are as far as retail is concerned. Are we keeping up with inflation in terms of what we return? It doesn't look like it. And here's what you see if you do inflation adjusted risk return. So in terms of what banks are delivering in terms of yield back to clients, it hasn't been super, especially over the last 20 years, of course banks are taking higher risk than the risk-free rate. So all right, let's compare it there. If we look at the risk-free rate, it's also outperformed kind of what US bank interest rates have been and in particular over the last zero interest rate environment, obviously that's been easier to achieve, but T-bills have also been relatively low until the last year or so where you can see that the interest rates, the TBI interest rates have gone quite a bit up.

(06:23):

So here's banks versus the risk-free rate. Again, underperforming basically since 1970. So one thing that's interesting to compare this to is TBI backed money markets. Remember when these were invented, anybody around 1970, there used to be this thing called Regulation Q, which capped the interest rates that banks were allowed to charge. You guys are probably more familiar with this than I am, but as a result of that is TBI rates started to go up and we went into an inflationary period in the seventies. These money market funds emerged and we had all the same concerns back in 1972 that we have right now about stable coins and that, oh, this is going to cause disin remediation of the banks and that'll create risk and they're not insured, they're not FDIC insured and that could lead to systemic risk. I hear these questions a lot about stable coins, but I'll answer them first off, when it's fully backed by T-bills, I am not sure that the FDIC part is nearly as relevant as it is when you're dealing with a fractional reserve system on the disintermediation part, peer-to-peer digital assets.

(07:30):

It's almost like the whole point of it is actually to take out middlemen to make it so that everybody is on an equal playing field. There wasn't a run on the bank back in the 1970s as some had feared. Like if you had a money market fund which could return the risk-free rate, which was far exceeding the banks, then why wouldn't people move to it? Some did. We'll go to that second, but I don't think it'll cause a run in the bank. Most people won't move, but stable coins will be very soon able to provide interest back to clients in addition to the fast payments that you have today. Alright, so if you look at, I'm going to skip that side. Going to go to this one. If you look at the money market fund here, I'm just talking about the TBI backed ones. This data is approximate as you go way back into the early days.

(08:14):

I did my best to try to find here, but you can see that in terms of market share, if you just take total bank deposits somewhere around 18 trillion and you compare what's in the TBI backed money markets, it kind of peaked out around seven and a half percent there. Then it went down a little bit over the last few years as we had a lot of money printing. And then in the most immediate you can see that actually people have been moving to this pretty fast. We had obviously a rapid rise in interest rates on the T-bills, which has caused a change there. But overall you can see that money markets actually have carved into bank deposits quite a bit. Stable coins I think are going to be a lot easier to do as well. Good news for everybody here I hope. Position to lead.

(08:59):

I think stable coins ought to come from banks. I think they can come from banks. How many here has read a book called The Innovator's Dilemma? Got a couple hands. Alright, I talked to Wall Street, I talked to Silicon Valley. Silicon Valley side like Innovator's. Dilemma is a book, it's kind of a Bible. It's about how is it that small innovative companies are able to overtake big giant companies. Whether you're talking about Microsoft beating out IBM or whether you're talking about disk drives or whatever, it seems that somehow the incumbents that all have all the money, they have all the great talent, they have all the resources, they still get outrun by some of these innovative companies. And I think to some degree stable coins could present this to banks. On the Wall Street side, people haven't heard of the innovator's dilemma as much. I think the main reason is because of regulation.

(09:50):

Frankly, in order to get started with any type of banking financial service, you have to go get licensed in half dozen ways and there's not a lot of investment into projects that first require $10 million of regulatory fees before you're able to start making any profits. But blockchains have been changing this. All of a sudden we have technology which is able to do peer-to-peer financial services and it's pushing innovation into the financial sector like never before. So stable coins are here, they're going to come fast, they're going to be global. We now have a leader at the present level that is thinking about how can we use stable coins to export dollars globally? And it's a really important point. If you look at the dollar relative to all other fiat currencies in the world, it is absolutely the strongest. And there's a lot of people that just need access to something that's relatively stable for all we complain about with inflation here in the United States, there's so many weaker fiat currencies.

(10:46):

So there's going to be a tremendous rush to get something that's more stable. By the way, this already happened as soon as interest rates started rising in 2022, what happened? The US dollar got much stronger relative to other fiat currencies. And if you were living in Turkey or Venezuela or Argentina, you all of a sudden saw your already inflationary currency spike and then you were desperate to get something. And what did these guys turn to? Did they turn to Bitcoin? No, they didn't turn to Bitcoin. They turned to Tether. And half of you have never even heard of Tether. And Tether is this stable coin which they don't understand and is run by a company they don't know, but they hear from their friends, it's stable. And when you're desperate to get to a decent fiat currency to save your money, you absolutely run for anything that you can possibly get.

(11:32):

Not to mention the fact that the governments in these various regions always tend to do the same playbook. When their fiat currency starts to inflate, they first start to lock the exits. They make it so that people can't get access to dollars. That creates a black market. Once there's a black market, two prices emerge is the price that the government says things cost and the price the people know things cost anyway. Point is that stable coins will be able to go global banks, all of you guys here have got all the licenses to do it. So you're in the position to lead. Alright, revenue opportunity. Look, there's going to be new savings deposits coming in that obviously leads to a lot of potential for each of your companies. The processing costs, by the way, it is almost free. Stable coins run on a variety of blockchains.

(12:16):

There's pros and cons of different ones, et cetera. Sharing interest rates back to clients is very possible. That can bring in new clients cross border capabilities super easy. Like there's no need for correspondent banks actually. Alright, so the future stack, I think traditional banking plus adding blockchain infrastructure can help quite a lot. I'm not sure if you're familiar, A-I-C-P-A has a standard now for how to audit stablecoin treasury reserves. So any of the big four can already audit today. It's easy to do compliance on these products. You can get yield. Alright, and I guess this is kind of another way of just saying look, I don't think stable coins are going to kill banks in spite of my early slides. I think it's an opportunity for banks to embrace a new technology that's actually going to bring a lot more US dollar around the globe.

(13:07):

Alright, so finally, if you're interested in any of this, my company can help. We have a stable coins as a service type of product. We are operating the stable coins behind World Liberty Financial, which you might've heard of. They have a product called SD one. They grew from zero to 2 billion in assets under management in about two months and they're expecting to grow quite a bit more. We've been doing another product, it's a different type of stable coin called wrap Bitcoin, which is basically a stable coin of bitcoins instead of a stable coin of dollars for quite some time. So we have a modular service, we can handle treasury reserves, you need that. We can handle toga management if you need that. We can handle minling burning. And of course we do this all with a regulated product. So we are a regulated trust company out of New York, under New York DFS also out of South Dakota. We also have five other trust custodians around the planet in Switzerland, Germany, Dubai, Singapore coming soon in South Korea. Alright, and I think that's all I have. So I think we have time for questions and I'm happy to take on any questions that people might have.

(14:19):

No questions. Alright, have question. They have a mic runner somewhere. I can't see you guys very well. That's the problem. I can speak loud. Alright, let's hear it. I'll repeat your question.

Audience Member 1 (14:32):

Do you see a contender for a stable coin that people would want to buy lunch with pay their bills?

Mike Belshe (14:42):

Yes. So look here in the US probably Circle is the leader right now. I think it's about 60 or 70 billion in size. They're working on integrations with point of sale systems, et cetera. So I think it's absolutely coming. You can already do it through digital apps, so just tap your phone, et cetera. That's going to take off as well. So yes, I think that's the most likely to win. In terms of the number of stable coins, there's about 25 of them are actually of decent size. PayPal also has one interesting thing about PayPal and their stablecoin might be relevant here. PayPal actually should be bigger than Tether to this day, but PayPal is, I think it's one to 2 billion in size. I might have that wrong. PayPal, of course, they started their stablecoin back around 20 19, 20 20. So they were early and they thought, Hey, we're PayPal, we have a stablecoin user.

(15:36):

Well bigger companies sometimes have a hard time kind of crossing the streams between their different product lines. I don't blame them, it's very natural. All part of the innovator's dilemma again. But basically yes, they have a massive 300 million person distribution stream that they could distribute to, but they didn't cross these two things together. So instead they've kind of put stable coins over here and they put their PayPal product over here and even though probably 90% of you have PayPal accounts, you didn't have access to the PayPal USD stablecoin anyway. A big part of the reason they were delayed is their own internal working through processes, figuring out what's best for their business, but also the regulatory component 2020 through 2024 was quite concerning. So they didn't do it. They are now working on that. So who wins? Whether it's going to be Circle, who I think is ready to go very aggressively or PayPal who's already got a massive distribution channel. I don't know the answer to that, but yes, I think people will be using stable coins in their mobile apps and paying for things for lunches and coffees and whatnot. Yes.

Audience Member 2 (16:44):

Since you are pioneer for crypto for the digital assets industry, very much like your opinion on the value of Bitcoin, is this undervalued, overvalued where it's going?

Mike Belshe (17:01):

Okay, well look, I mean I'm a believer in Bitcoin and scarcity. So I think Bitcoin is on a forever uptrend against the US dollar. Not so much due to any strength of Bitcoin, but due to the weakness of the US dollar. So I mean the US dollar from, I dunno, 1999 till now has diluted somewhere in the 40 50% range. And so that means if Bitcoin had been static at that time, it didn't exist at that time, but that alone would've caused the price to grow. I think as you look at global adoption, as you look at other fiat currencies and the reasons why people adopt it today, the uptake of Bitcoin globally is really quite small. Number of US persons that have it somewhere in the 40 million mark and globally still relatively small. So with the combination of growth plus scarcity and the dollar going down in value, it's going very high. I don't like to predict prices. Other people like to use dramatic numbers. People who sit everywhere from $250,000 per coin to millions of dollars per coin. I do think it's going to the higher end of that spectrum. Question. Yes sir.

Event Member (18:14):

One second.

Mike Belshe (18:19):

It's a big room you got to run,

Audience Member 3 (18:22):

So thank you so much. I'm curious with the bills and congress right now for stable coins like the Genius Act and so on, it seems like it's going to create a new stable coin sort of licensing regime. Would that be something where Bitco would need a new charter from regulators? And I guess the more important question is what kind of regulations does there need to be for stable coins? Do you think it's working well now or is there room for improvement?

Mike Belshe (18:50):

Right. Look, I think everyone's looking forward to seeing the stable coin legislation come through because it just provides clarity where all of us can participate and not worry that our regulators are going to come after us. Today you've got Tether, which operates primarily outside the US and in fact during the last 10 years where there's been a lot of negativity towards digital assets broadly their feature was the fact that they ran outside of the United States and they've done very well with that. So I dunno, 140 billion in size or something like that, circle runs inside the us. They run all on top of money transmission licenses. You guys are familiar with this, but money transmission licenses are really kind of almost a dirty license, right? It's intended for western unions and other things that don't fit quite within the realm of finance. And yet when you really look at it, it turns out to be a pretty versatile license.

(19:44):

You can run a lot of financial services products through it. That's what they run under today. They don't have any requirement from any regulator to have an audit. They don't have any requirement to have. I mean we're all subject to BSA of course, but they don't have any particular requirements around how they manage the stablecoin. So the stablecoin legislation will do it. Good news. What BCO already does with stable coins is more or less what's in the bill. So we've had a bill passed by the Senate, there's a separate bill Genius Act out of the house. This goes through reconciliation and we'll probably see something get codified this summer. That's my prediction. Some people more pessimistic, but overall this is going to give clarity as to what you need to do and then we just go get the license. It's super easy. There'll be a grandfathering process. The fact that we're doing it from a regulated trust company is pretty good footing already.

Audience Member 4 (20:34):

You mentioned you're regulated by the New York State DFS, they're pretty intense. What are the concerns that they have? What do they give you a hard time on in terms of the regulatory scrutiny?

Mike Belshe (20:48):

All of you're regulated entities. I think you probably know how hard it is to talk about your regulators publicly. Look, DFS came up with this thing called a bit license, I want to say 20 16, 20 17. I think it has hurt New York to be honest. It is kept them unused for digital assets, whereas other states that have moved forward, it's not clear to me at all that the BIT license has actually helped protect New Yorkers. Although I'm sure that if you had New York DFS here, they might tell you something else. They might say, Hey, we protected our clients from FTX or whatnot. But the reality is, so we're a New York regulated trust company, so we don't need a bit license per se. But when you talk to New York companies and we're primarily an institutional business working with institutional firms, almost all of them have figured out how to run outside of New York, not related to crypto. Pretty much every hedge fund that operates in New York has something in New Jersey or Caymans or Bahamas or whatnot and has already been working around DFS. That has nothing to do with crypto. So crypto kind of gets, I guess, a bad rep for having to work around things like DFS. I don't think DFS has added a lot of value, but yeah, look, they're critical of digital assets generally, yes, they're going to bring the mic for you.

Audience Member 5 (22:14):

Stable coins allow for a different business model, the banks. So I would like you to expand a little bit about why, I mean I understand why banks can do that business and maybe that will be very good for them, but I suppose stable coins don't want to be banks.

Mike Belshe (22:42):

That's correct. We certainly don't want to be a bank. So my opinion, and here I'll go out on a limb because you are better experts at banking than I am. But I think the needs from Americans for banks today is radically different than what we started with a hundred years ago as banking regulation and structure was being figured out. As a simple example, let's take mortgages. There was a time you needed a bank that was local so that everybody could go and apply for the loan. They see you and they meet you and they're using their, they're actually lending you the money today by the time you walk out of the bank having done the loan paperwork, it's been sold, packaged up, securitized, and put on Wall Street. The need for mortgages from banks is very different today than it was previously. Small business loans I think also is a similar thing, obviously is a much smaller market, but the need for a local bank has really changed.

(23:37):

You guys probably hear about this from your regulators about local branches. The need for local branches is different. We have this internet that connects us all and so do we need it. Alright, so I think the needs for banking is just changing and that's why I mentioned at the beginning of the talk was like what does retail think of a bank? They think of it a place to store their money, a place they're going to do their payments from and hopefully get some interest, right? That's it. They're not very sophisticated. So your question then of do stable coins want to be banks? No, I don't think stable coins want to be banks. I don't want to be a bank regulations. They need the mic. Sorry, I can't quite hear you.

Audience Member 6 (24:14):

So what do you expect out of the regulation from Congress?

Mike Belshe (24:20):

Oh, all that's going to come from it is basically they're going to require it to be a one-to-one reserve stable coin, meaning that you have to have the backing. Number two, you're going to have to go through an audit process. And number three, they'll reinforce compliance, A-M-L-K-Y-C, all those types of things which you're already subject to just due to money transmission and BSA loss. So we got one more question. She's got to get more. Keep the mic

Audience Member 7 (24:50):

As a stable coin business you don't need, but do you want a master account,

Mike Belshe (24:59):

At a Fed Master account? Yeah, we'd love a Fed Master account then we get to skip the banks probably don't want to hear that, but yes, that's correct. Yeah.

Audience Member 3 (25:23):

So you mentioned you didn't want to be a bank at the beginning of the conference, and correct me if I'm wrong, somebody, but they'd introduced all the crypto companies looking to get a banking charter and your company along with Circle and Coinbase were mentioned as seeking a banking charter, but that's not something you're looking to do. Or I guess a better question would be what would be the benefit of becoming a bank in a stable coin world? It's like offer you an inherent advantage maybe with the bills or, yeah.

Mike Belshe (25:49):

Oh, I see. Well look, there's depository banks and there's custodial banks, right? So yes, under the OCC charter you don't have to be a depository bank, right? And then you can avoid bank holding, company act restrictions and things like that. So we are very much interested in having a level of regulatory oversight, which makes our clients comfortable and confident. What we're doing today, we operate at the state level in two different states across also those countries that I mentioned. But then yes, we are looking to upgrade to the OCC path, but we don't need to be a depository bank. Mike? Yes,

Audience Member 8 (26:30):

It's been said that stable coins or cryptos killer app.

Mike Belshe (26:34):

Yeah.

Audience Member 8 (26:38):

What's the killer app for stable coins?

Mike Belshe (26:42):

He asked the question, it said that stable coins are crypto's killer app. Actually, well, I slightly disagree. I think actually Bitcoin is the first killer app for digital assets being a store value. So we talked about that a little bit. And then I think the second one is stable coins. Are you asking what's the next one?

Audience Member 8 (27:03):

What for stable coins, what's the best application? What's the most profitable use of stable coins for bankers?

Mike Belshe (27:07):

Here it is just global cheap payments. That's all it is. So imagine as a retail user of this, you put your money into the stable coin. It's one-to-one backed. There's an audit that comes out twice a month that shows this one-to-one backed at the end of each month. Some coins get airdropped into your digital account, which is your interest on that. And if you ever need to send it to anybody, you can send everybody at the farmer's market. You can tap two phones together and pay the producer of the food at the coffee shop. You can use the point of sale mechanism. It just works. Super simple. Peer to peer-to-peer plus peer to intermediary. I mean the great thing about peer-to-peer is that it covers everybody. You can go retail to business, retail to retail, business to business, it all works. So what encompasses every application?

(27:53):

Compasses all apps, I think it's going to replace all payments. It really do for the banks. What's on the other side of it is you've got the treasury management of it all. So inside of the stablecoin bill you may know that they said there shall not be interest going back to retail. I think that changes over time just like it did with money markets. That fear that you can't do it will go away. The other thing is that the banking lobby is out advocating that we'd be able to use deposits just at banks, which are fractional reserve as the backing. That'll be interesting to see how the market accepts that. Will they care about whether it's backed one-to-one or not? We don't know, but we'll see If retail discerns that, I think they'll probably mostly go for the right brand. So if they trust the brand of the bank, they might be happy to have that bank branded stablecoin. Alright, any other questions? Oh, one more. What would be the exchange?

Event Member (28:52):

One second please.

(28:56):

One moment.

Mike Belshe (28:56):

Go ahead.

Audience Member 9 (28:59):

What would be the exchange rates for the stable coins if we are transferring cross countries?

Mike Belshe (29:05):

Great question. I guess I've only been talking about US dollar backed stable coins and you still have FX that's required to be done. What I suspect is going to happen is you'll have regionally banks that handle that part of it. I think actually stable coins are fantastic for the US dollar. I think we suddenly take over a bunch of the weaker fiat currencies that will probably collapse and then those governments will go through processes of maybe resurrecting a new version of their currency or maybe they'll switch onto the dollar like many already have. But I think FX will largely happen at the end point. So if you go back in time in digital assets about 10 years years, there's this company, ripple, you might've heard of them. They had originally decided they were going to try to tackle cross-border payments by use of their XRP token.

(29:48):

And so the idea was that they would become the rails between banks and then you would have a local on-ramp where you take dollars converted to XRP, zip it across the world and then convert those XRP back to Mexican pesos or whatever. It turns out that's two conversions and USD stable coins are just better. So in fact, ripple just launched a stable coin, a US dollar backed stable coin. There's some talk in different countries about getting a Euro back stable coin and in fact there is one U Circle has one. None of these have really taken off a lot yet, and I think it's because they're still just trying to get traction. But I do think we're going to see dollars become more of the rails across the world. I know there's a few countries that don't like dollars, but they'll probably get beaten into submission for it. So, alright, thank you very much.