Dialogue between Circle founder and SBF: How is crypto infrastructure reshaping global market structure?

Compilation: Deep Tide TechFlow

Author: Circle

Transcript

Jeremy: Welcome, Sam. Today I have a lot of different things I want to talk to you about, starting with the broader question of the impact of cryptocurrency on the world, and the bigger question, as I like to say, why do this? I remember a professor I had in college who always asked, "Why do these things? Why do you do what you are doing? What is truly important, and so on."

Regarding cryptocurrency, I think people have a simplistic surface-level understanding. In the past, you talked a lot about effective altruism and the long-term impact of this game on the world from a value creation perspective. Now the question is, why are you doing what you are doing now?

Sam: There are many angles to approach this question, and maybe I'll start with the market structure part, which I think is underrated. Everyone should have equal access. In the stock market structure, you need 10 different intermediaries and have to pay tens of millions of dollars each year, or you can't even see their trading orders.

The direct fair access environment in the crypto industry helps provide information and guidance for other financial products. I'm glad to be part of the change in market structure and hope to help bring what I think is a more suitable market structure for consumers.

Of course, doing this is somewhat accidental, like cryptocurrency itself, it's a new earth that makes people rethink issues. For example, when custodial stocks and clearing happen, the process can become very chaotic. I don't even know who is who? Who has the arbitration rights for the stocks? A lot of infrastructure needs to be created to answer that question.

But you can really answer the question of who owns this Bitcoin, who owns this USDC, which means you don't need to fully own that particular clearing and custodial company. This eliminates some of the chaos, and the blockchain helps with that to some extent. Moreover, you don't need a lot of intermediaries to facilitate the transfer of assets from one place to another; you can do it directly yourself.

Jeremy: Yes. So, digging a bit deeper, why is this important? Why is direct access to capital markets important? Why is there such enthusiasm for solving market structure issues, and what benefits does this bring to improving society and the world?

Sam: I would like to answer this from the perspective of prediction markets. What are prediction markets? If you want to know whether something will happen in the world, you can create a market for it. If you want to figure out what the temperature will be in five years, you create a market for it where people can trade, which is cool.

Based on market forces, you can derive the market price for the temperature in five years. If you are studying global warming and trying to understand its impact on your model, and you work in a temperature-dependent business, like energy or agriculture, then you come to an answer.

If you want to buy oil, first, you need to have a lot of liquidity available, or if you are buying corn but don’t want to pay five times the average price, who knows what the average price is? The market. Additionally, any entity or business doing financial planning should consider how to price, and how that will affect our finances.

Looking at companies, why is the stock market important to them? Investors need to know how much to pay a company, how much to invest in a business to make sense, so that it can help the business grow. If a company's business lacks creativity but receives a lot of funding from investors, that is quite a waste for the world.

Jeremy: So we want to avoid that situation. Some of what you just mentioned relates to markets and information; they are like two sides of the same coin. At the end of the day, if the market generates information, investors will seek to obtain the best information because it has value.

From what you said, my understanding is that cryptocurrency and blockchain have the potential to bring more valuable information in a sense and can incentivize the pursuit of better advice, enabling us to obtain the best information possible. Participants in the real world and the physical economy will be able to achieve greater assurance and favorable outcomes when using this information. This infrastructure can enhance the speed of information and the economy on Earth.

Sam: Absolutely correct. We can discuss the other side of this coin: why is money useful? Because bartering is terrible.

Jeremy: Information systems. Currency is a record-keeping system; it is just an information organization system that has a social convention, which is very useful for participants and the world we live in—because it minimizes trust, is global, and has extremely low costs of interaction.

Sam: When you start to think of currency as a record-keeping system, it starts to make sense why distributed ledger technology… why blockchain is so useful for currency? Blockchain is a global decentralized distributed ledger, which is exactly what you need when trying to keep records.

Jeremy: An interesting story I've shared a few times is that I met the CIO of the Federal Reserve some time ago, and I pressed him, "What is the real dollar?" He said, "What do you mean?" I was thinking, "Is it a database? What kind of database?" It turned out that the dollar is a cluster of oracle databases running on clusters like Sun Microsystems, which is quite interesting.

There is a viewpoint that "the cryptocurrency industry is speculative assets or something similar to speculation." Another viewpoint is based on what we just discussed: "This is the next generation of global economic infrastructure, providing a new foundation for organizing economic activity." This brings us a new perspective: "We are not just talking about whether we should regulate whether people can trade Bitcoin, stablecoins, or other altcoins, but we should realize that a strategic infrastructure is being developed, and the whole world is working towards it. For example, what is it? What impact will it have?" I would love to hear you talk about the entire industry and how crypto infrastructure will change market structure.

Sam: Let's talk about remittances or social media information. For example, you are trying to send money from someone in the U.S. to someone in Brazil. This goes back to the question you posed to the Federal Reserve: what is the dollar? You are trying to send $1 from one account to another; what exactly are you sending? What does $1 mean, or is it Brazilian currency? The situation gets worse because they are not one system.

The current system is that if you want two different people to communicate and transfer information or assets, it needs to go through some private companies that store ledgers.

Jeremy: Yes. Like PayPal and so on.

Sam: Exactly, that makes perfect sense, but we also see the problems that such practices create in the world. When we observe people's reactions to Facebook's attempts to make decisions about whether to censor election content, we can see the shortcomings. Its services may not be what we see; the answers we trust are just selected results. The real question is, who controls these two systems? How do the two systems communicate with each other? These small instances are significant, and we can use them to provide efficient services and innovate quickly.

Jeremy: Who has read/write access to regulated databases?

Sam: You could say the government, but soon you would think of some questions like, "Well, which government?" Similarly, this is a transfer between Brazilians and Americans; which government controls this transfer? This is a question where the correct answer is not obvious.

When you talk about systems that provide feedback to the government, sometimes it can be negative. Today we see some countries operate this way. I think it has some characteristics that many people dislike. Blockchain technology is basically a reasonable third option; it is neither a company nor a government, but it transmits and records information.

Jeremy: In some ways, this is essentially the next growth point of the internet. It is like the next layer of logical infrastructure, the next layer of logical protocols for the internet, playing a larger role in society. Just like in the early days of the internet, if you wanted to make a voice call to someone, most voice calls were actually routed through government-controlled infrastructure, essentially operated by these government monopolies, which had backdoors to listen in on anything. But you could freely connect with anyone through open-source software and protocols on the internet.

Sam: Basically, that's right.

Jeremy: Back to the policy aspect, if you are the government, assuming you represent the interests of the people of the nation, like Congress, you need to try to figure out, "If this is the new economic infrastructure, what does it mean for the future development of our economy? What opportunities will it create for families and companies?"

Sam: Many questions have not yet been answered by the world, and we need to find answers from development.

When you talk about open infrastructure, there are crises and risks; it is not secure, and it gives people access and choice. People can choose which protocols they want to access. This means that choice is important. The choices we make now may have long-term impacts on the decisions people make in practice.

Stablecoins may be the most obvious example right now; stablecoins mean dollar stablecoins, and currently, there are basically no other stablecoins. This is not the way the world needs to be. If I were the Federal Reserve, I would think, "I want the answer to be the dollar, not other currencies." When you consider what kind of stablecoin policy should be adopted, there will be options available for people to use. I think considering what options they want is in the interest of many people. And I think you should ask yourself a tricky question: does this really mean you should try to get rid of stablecoins, or does it mean you should consider which stablecoins become mainstream?

Jeremy: Clearly, this overlaps with national competitiveness, the competitiveness of the dollar, and this new global economic infrastructure will achieve internet scale in the coming years. These will have significant and huge impacts. If you are the U.S. government, what do you want the currency of the internet to be?

The point you raised earlier about ensuring people can choose which protocols to interact with is crucial, and openness is paramount; it is like the air we breathe. Historically, that has not been the case because it is these regulated database operators who control it. But we say, "No, this is the open internet."

Sam: Yes.

Jeremy: Another part is the potential of technology. In fact, one potential desire is to be able to conduct on-demand instant transportation seamlessly through handheld devices anywhere, coordinating work and delivery and everything. When the iPhone came out in 2007, no one said, "I want an on-demand driver that runs seamlessly." The idea of potential technological capability is that when you have these integrated technologies and the ability to build them, no one can really predict what people will do with them. The same goes for cryptocurrency, public chains, and smart contracts.

Programmable money has only existed for three years, and there is almost no programmable dollar or other programmable currencies on the internet; this is a brand new thing, just like the infrastructure being built, and we still don't know what people will do with it. We need selectivity to use these protocols because all potential exists there. I would love to hear your thoughts on what people will invent with programmable money; what problems can people solve?

Sam: This is very interesting. Although I don't know some of the answers, I think interoperability is something I keep thinking about. We have so many systems today that cannot communicate with each other, and people seem to forget this situation. But it is a very important situation.

For example, I am on Facebook, and you are on Twitter; we cannot talk to each other, which disrupts communication. I think this is a real issue that exists but is overlooked in importance. Secondly, I think people are not yet aware of how difficult remittances are.

Jeremy: In fact, this is just a large number of databases with secure FTP servers and CSV files.

Sam: Yes, but that is not how systems are built today, so the cryptocurrency industry will have a real impact on people. Especially for those without bank accounts or underbanked individuals, listening to their frustrations, I think it is really interesting to do this.

Jeremy: We see many startups in Africa and elsewhere using USDC to build applications and just trying to make things faster and cheaper. I want to return to the theme of what people can do with the economic infrastructure we haven't thought of.

Clearly, DeFi itself is a great example of programmable money, where everyone is building protocols that allow people to interact with capital in different ways. Another fascinating aspect is DAOs, which are essentially a form of company that exists on-chain. This is also a case of programmable money and programmable governance. When we use this framework, it is like using a new layer of internet economic infrastructure, where people can build things that were previously impossible, essentially new multinational corporations. There are many experiments in this space, and many tools are being built, but when will these become producers of goods and services? When will they become entities that truly represent a new economic forum competing with traditional economic forums?

Sam: Very good question. My guess is that we will have to wait for regulation to provide answers. Suppose you have a DAO, a new economic unit, and no one really knows what laws govern the DAO. Is it contract law? So personally, I think it is hard for it to play a significant role in society before we start experiencing this process.

Take the Aetherium classic board as an example of a DAO. Its question is, "What happened there? What determined whether these transactions were reversed?" Would you go to court to ask them to reverse a blockchain transaction? If so, would you vote on one of the networks? What is the real network? If you don't know what the correct answer is, then I think there is still a lot of work to be done to solve these problems before people can put a trillion dollars into a DAO and know what it means to do so.

Jeremy: It feels like we will see more DAOs trying various experiments, which is also one of the spaces with potential economic and technological potential, and no one really knows what people will invent with it. Perhaps some innovative protocols will emerge in the future, which will become the new cornerstones of business or similar things on the internet. I want to ask you about the difference between tokens and equity from a different angle. Just like stocks, you are considering trading stocks on FTX US, and there are currently some tokenized equity products. How do you view the difference between native tokens and tokenized equity? How should users choose?

Sam: I don't know how all this will end, but I can tell you how I think about it now. I believe we are in the early stages of this situation, and at least for a while, tokenized equity is just stablecoin equity against the dollar. What is tokenized equity? It is the tokenized packaging of underlying financial assets, where one of the pros and cons is similar to the pros and cons of stablecoins against the dollar. I think tokenized stocks can interact more easily and gain many advantages, but at least for a while, it may not represent actual equity; it is just a representation of equity, and sometimes you need to switch back and forth to move between the tokenized version ecosystem and the underlying version ecosystem.

But I think over time, there will be more and more movement toward the tokenized version, or more systems will move there. Similarly, you can raise questions like who holds that asset and get answers in a clear, concise, and explicit manner. Anyone can challenge this, and I think there is a lot of power in that.

Jeremy: Another related question is the tokens that exist within projects. From a broader market perspective, how do you view the difference between native crypto tokens and stocks, etc.?

Sam: This is yet to be determined. There are many interesting things that will depend on the evolution of their protocol tokens. The questions will revolve around what style the protocol tokens have. Are they collectors on-chain, or are they part of the core governance mechanism? Traditionally, equity encompasses both.

In terms of distinction, on one hand, native tokens focus on governance. Governance is clearer and easier to execute on-chain than through current corporate governance mechanisms, especially for people outside the board of directors or others. When talking about random stakeholders, how do you coordinate among 10,000 stakeholders? The answer is that blockchain provides a way to do that, and if you want, you can delegate governance to on-chain stakeholders. On the other hand, you can have multiple governance tokens for different purposes; technically, you can have multiple classes of equity, but they cannot have the diversity that tokens can have.

Jeremy: It is very difficult to coordinate all parties in traditional industries. But here, I want to talk about identity. A long time ago, I felt that the internet was missing a few layers, and a naturally missing layer was funding, and another layer was identity. Many reasons indicate that interconnected assets and identities do not really exist on the internet in any protocolized way, but crypto primitives are actually starting to make it possible to solve these two problems. When you see the use of today's cryptocurrencies, crypto finance, DeFi, DAOs, and NFTs, how do you view identity, whether it is real identity expressed on-chain or identity tokenized in the form of NFTs? What does identity need to do to unlock all this infrastructure?

Sam: What we lack is on-chain identity. The reason is that when you think about identity, you are thinking about things that only exist in centralized pools. There is a centralized exchange identity on FTX that can collect KYC information, but there is no identity elsewhere. Users have blockchain addresses, and they can always create new blockchain addresses. I think when identity is on-chain, it will unlock a lot of things, and it is not that difficult. Just like we collect people's FTX accounts, we can create a button that you click, enter your blockchain address, and we output some comments to the blockchain saying, "We verify that this blockchain address is associated with KYC for accounting on FTX." Then any on-chain protocol can read it.

The second thing is the other side of identity, like social identity. You can see this from people's Twitter feeds, Facebook profiles, and their achievements in video games. They are currently all very fragmented, and there is no coherent sense of someone's identity. They have their LinkedIn, they have their Facebook. By combining on-chain identity with NFTs and other things, you can suddenly have a blockchain address that starts accumulating various forms of identity from many different sources, and everyone can read all of this. Suddenly, identity becomes like, "Who is Jim?" You send them an address, and Jim suddenly appears, and then you can learn a lot about Jim.

Jeremy: We will need many different crypto addresses to help us deal with these privacy preferences, etc. As you know, we are optimistic about this field, and there are still many things in this industry that have not been explored. Thank you for joining our conversation, and I look forward to seeing you again.

Sam: Sure. I'm happy and excited about the prospects for this industry.