In this edition of TechREG Talks we have the pleasure of presenting an interview between Karen Webster of and Circle CEO Jeremy Allaire and Kenneth Rogoff, professor of Economics and the Thomas D. Cabot professor of Public Policy at Harvard University.

1. Recently, venture capital firms have invested tens of billions of dollars into crypto-related ventures, with more than 540 deals in 2021 so far. Beyond those VC firms, payment heavyweights such as J.P. Morgan, Citi, Visa, Mastercard, PayPal and others, have been investing in and building out the crypto ecosystem. What is your understanding of this set of developments, and its likely outcomes?


Jeremy Allaire:

The investors want to spur, be part of and earn return on investment (“ROI”) from an infrastructure development that rivals the development of the web itself or the advent of smartphones.

At a high level, cryptocurrencies are a generalized technology — effectively a new operating system, with layers that are being built for the internet. The value of the public internet is really profound and allows for an incredibly diverse range of applications.

Investors are trying to grab the tiger by its tail, so to speak, and get in on a frothy market. The promise they are chasing might be likened to the “10x effect,” in which things can be transformed and made leagues better — with disruption thrown into the mix.

Cryptocurrencies hold that promise for economies as whole. The banks, at least for now, are trying to give high-net-worth clients a range of ways to purchase synthetic derivatives of bitcoin, while the innovation lies with the smaller, non-traditional players within financial services.

Scale can come quickly amid the innovation, with the blockchain networks in place, USDC stablecoins can transact at roughly 50,000 transactions per second, with 400-millisecond finality, and transactions cost a fraction of a cent.

The market is on a linear growth path. Storing value, moving value and integrating that into different forms of financial contracts can become a commodity, a free service on the internet, like data and content.

Drilling down a bit, crypto developers, the exchanges, the issuers and the blockchain firms are still grappling with growing pains that mark the initial stages of any new industry.

Circle stands out as a firm that has been focused on issuing stablecoins, specifically the USDC, but has expressed its intent to become a regulated bank. It is now targeting a new business model as a pre-emptive strike in anticipating where the regulatory framework is headed.

Financial stability board members around the world have said that global stablecoins, according to Allaire, “look, feel and smell more like large-scale banking and payment system activities, and ought to be dealt with that way.”

Circle’s USDC has grown from $4 billion in circulation a few years ago to $33 billion today — and it’s on its way to hundreds of billions of dollars in circulation.

As for the banking application, he said, “We do not intend to operate a fractional reserve lending business. We want to take these dollar deposits. We want to hold them in full reserve. We want to work with the federal government to determine the right reserve liquidity kind of covenants.

Kenneth Rogoff:

It’s kind of the Wild West, and they’re all under the umbrella of cryptocurrencies, but they’re completely different animals.

2. Who do you project will be the winners and losers from any regulation of cryptocurrencies? What are the stakes at issue?

Kenneth Rogoff:

The winners in the game will be firms that learn to be “regulation-friendly.”

No matter where you look, that regulation is coming, as policymakers eye the potential for crypto to scale to billions of users and for immense amounts of value to be transferred across lending and payments activities.

As detailed in my 2009 book, “This Time It’s Different,” centuries’ worth of financial crises shook nations to their economic cores. But in one important way, when it comes to cryptocurrencies, some things really are different.

One reason that cryptos are worth so much (even considering the volatility), is that interest rates are roughly zero, and investors and speculators are chasing returns.

It is difficult to see how crypto could cause a systemic crisis because it’s not regulated yet. It’s not like a banking system failing: if bitcoin fell to $1,000 tomorrow, it would really be like a stock falling. From a systemic point of view, this would really just be a shrug.

Policymakers are justifiably concerned about how to regulate the industry, which firms will become big enough to be termed “systemic” and what the inherent risks would be, he said. Allaire said that current and future concerns would center around money laundering and tax evasion.

It is the specter of cheating governments out of their due that might spark regulation in earnest, Rogoff said. There’s just no way policymakers can indefinitely sit on their hands as a vehicle develops if it’s being used for sharply reducing government revenues.

Driving out currencies that have been around for centuries is utterly naive, said Rogoff, who co-authored the “G30 paper” that examined digital currencies consisting of bitcoin and its brethren: There is a giant financial infrastructure out there, which is very efficient in some ways, but very inefficient in other ways: There’s always change. And this is a very big one.

Nations such as El Salvador may experiment with bitcoin, but the idea that individuals and enterprises can sidestep that giant financial structure is folly. If you’re playing a game with the government where it can keep changing the rules until it wins, you’re going to lose.

Jeremy Allaire:

That’s not to say there won’t be friction as cryptocurrencies evolve. After all, even where autocratic governments are in place, there’s been access to the internet (albeit with censorship). Governments could say that cryptos are illegal, said Allaire, “but people are clever” and will find their ways to VPNs.

You might actually have civil conflict that starts to emerge because people and entities want to participate in a different economic system … internet digital currency will topple some forms of monetary sovereignty.

Eventually, governments will capitulate and hold non-sovereign and digital currencies on their balance sheets.

Kenneth Rogoff:

If that were to happen — a very big if — it would happen with much smaller nations, where there is limited state capacity to control things. An example is Venezuela, where sanctions have been imposed by other nations and where there’s at least some appetite to circumvent those sanctions (and in some cases, support the development of underground economies).

3. How will cryptocurrencies need to evolve to coexist and become an inherent part of the financial services ecosystem?

Jeremy Allaire:

The evolution must include interoperability with Federal Reserve account infrastructure, the Fed’s payment rails and the international financial infrastructure.

We’re examined by governments all the time. We are audited by major accounting firms and their self-governance as well. Self-governance around technology standards, information, security, cybersecurity compliance and transparency is really critical.

The smart money, if you will, is really focused on seeing this as an internet infrastructure build that will generate very significant value and new types of companies and business models over the next five to 10 years.

Kenneth Rogoff:

Central banks around the globe are looking at central bank digital currencies (“CBDCs”) — and the question remains: “How far do we want to take it? How does the public feel about having the central bank be in total control of what’s private and not private — or would you like there to be an intermediary between you and the government?”

For now, the innovation is coming out of the private sector, policymakers must tackle what they think the world of digital currencies should look like.