Dialogue with Circle CEO: From Regulation to Innovation, the Digitalization of the Dollar is an Inevitable Trend

Original Title: “Why the Dollar's Stablecoin Update is Inevitable | Jeremy Allaire, Circle”

Source: Empire YouTube Account

Translation: Shenchao TechFlow

Guest: Jeremy Allaire, CEO of Circle

Host: Jason Yanowitz, Founder of Blockworks; Santiago R Santos, Investor

Background Information

In this episode of the podcast, Circle's CEO Jeremy Allaire discusses the future of currency. He explains how stablecoins can transform global finance by increasing the speed of fund transfers and reducing transaction friction. Jeremy shares insights on the cryptocurrency regulatory environment, Circle's journey to becoming a public company, and his vision for a more efficient and accessible financial system.

Dollar System Architecture

Jeremy Allaire discusses the technical architecture of the dollar and its impact on the financial system. He points out that various dollar balances represent different risks, including credit risk, market risk, and liquidity risk.

Jeremy explains that the dollar's infrastructure is primarily composed of a set of Oracle databases running on older technologies, such as FTP servers and text files. These databases record the cash portion of the dollar (M0), while most of the funds are actually created as credit money by banks.

Market Size of Legal Electronic Currency

Jeremy mentions that the market size of legal electronic currency reaches up to $100 trillion, which includes the value of various currencies. He further analyzes the different uses of this market, including retail payments, B2B electronic payments, and capital market transactions, all of which constitute significant market opportunities. He believes that as technology advances, the velocity of money will significantly increase, thereby driving the creation of economic value.

The Future of the Internet and Currency

Jeremy believes that future currencies can exist natively on the internet, just like other forms of information. He envisions a currency protocol similar to HTTP that can facilitate transactions on open networks. He believes that as these networks scale, the costs of storing and transferring currency will approach zero, significantly increasing the velocity of money. This transformation will drive economic activity growth, much like the internet's impact on information dissemination.

Jeremy emphasizes that removing friction in value exchange will help enhance global economic prosperity. His vision is to promote sustainable economic development and growth through frictionless value exchange, ultimately achieving higher transaction volumes and economic value.

Efforts in Stablecoin Regulation

Jeremy discusses the current state of stablecoin regulation and the attitudes of regulatory agencies. He points out that while regulators somewhat agree on the potential of stablecoins, their concerns about losing control make them cautious in accepting this new technology.

Jeremy believes that there are still many uncertainties and operational risks associated with stablecoin technology, and the cautious attitude of regulators is somewhat justified.

Evolution of Technology and Trust

Jeremy compares the early development of the internet, noting that large companies were once skeptical about the security of the public internet, but gradually accepted this infrastructure as technology matured and economies of scale emerged. He emphasizes that the advancements in stablecoins and crypto technology require time to build trust, and the technology must continuously improve to meet market demands.

Cryptocurrency as an Innovation Laboratory

Jeremy views the cryptocurrency space as a vast global innovation laboratory, gathering a large number of tech talents and entrepreneurs. He firmly believes that an open innovation model will outperform government-led models in terms of technological capability and outcomes. He mentions that central banks and regulatory agencies are actively establishing regulatory frameworks for stablecoins, and by the end of 2025, stablecoins like USDC will be regarded as legal electronic currency and regulated by major financial market centers.

Future Outlook

Jeremy emphasizes that this evolution marks a significant advancement in financial markets, allowing traditional markets to leverage stablecoins, which was unimaginable a few years ago. He believes that as regulatory frameworks are established and technology develops, stablecoins will play an important role in the future.

Transition from Currency to Stablecoins

In this section, Jeremy elaborates on how stablecoins (like USDC) operate within the existing financial framework and how they collaborate with governments and financial institutions to achieve this transition.

Current Operational Framework

Jeremy introduces how Circle has built its business on the electronic money and payment framework in the U.S., becoming the first company to obtain nationwide licensing. He mentions that they comply with federal and state electronic money transmission laws and have obtained specific licenses, such as the BitLicense in New York. Additionally, they adhere to specific rules for stablecoin reserves, such as only using safe assets like government bonds, overnight repos, and cash.

Global Expansion and Regulatory Cooperation

As the business expands globally, Circle has begun collaborating with other major regulatory agencies. For instance, in Singapore, the Monetary Authority of Singapore regulates Circle to ensure that USDC distribution and usage in Asia comply with local regulations.

Jeremy emphasizes that this regulatory cooperation enables them to establish direct banking infrastructure in Singapore and Hong Kong, facilitating market participants to easily create and redeem USDC within the local banking system.

Regulatory Milestone in Europe

An important milestone is Circle becoming the first global stablecoin issuer to obtain regulation and licensing within the European Union. Jeremy points out that their euro stablecoin (URC) is also growing. This development changes the oversight and reserve structure of stablecoins. They work closely with legislators such as the European Commission, the European Banking Authority, and the French central bank to establish a dual issuance model, ensuring that USDC can be interchangeable regardless of where it is issued.

Capital Requirements for Stablecoins

When discussing reserve requirements in Europe, Jeremy mentions that the Markets in Financial Instruments Directive (MiFID) has very specific capital requirements for stablecoins. He notes that current regulations require a 3% capital reserve for European users. Additionally, he mentions that the Payment Stablecoin Act, currently under congressional review, will empower the Federal Reserve to determine appropriate capital requirements for stablecoin issuers.

Risk Management and Capital Framework

Jeremy emphasizes that Circle has collaborated with its chief economist to release a detailed capital asset handling framework specifically for stablecoin risk management. This framework considers various risks associated with stablecoin issuance and reserve models, including liquidity risk, market risk, and operational risk. He points out that stablecoin operators must consider specific risks in areas such as multi-chain deployment, network failures, and key material storage to ensure the security and reliability of stablecoins.

The Ultimate Goal of Central Bank Digital Currency (CBDC)

Current Status and Prospects of CBDC

Jeremy states that there seems to be no political will or public demand for a general CBDC in the U.S. He believes that while CBDC is a long-term goal, modernization is needed if the U.S. monetary framework continues to rely on outdated technologies (like old databases and file transfer protocols). He hopes to see upgrades at the central bank infrastructure level in the U.S., utilizing crypto technology and distributed ledgers to improve efficiency.

Innovation in the Private Sector

Jeremy emphasizes that the mediation and innovation of economic activities should be led by the private sector. He believes that the speed of technological innovation in the private sector far exceeds that of the public sector, and this innovation will drive the transformation of the economic system. He mentions that the internet's transformation has made information dissemination fast and free, similarly, blockchain technology will make value transfer efficient and low-cost.

Future of Value Exchange

Jeremy predicts that as technology advances, machine-driven value exchanges will emerge, where business relationships, labor relations, and financial relationships can be encoded and executed through smart contracts on public blockchains. He believes that this breakthrough in economic coordination will be a fundamental advancement of blockchain technology.

Role of Decentralized Finance (DeFi)

He mentions that decentralized finance (DeFi) is bringing fundamental elements of traditional financial markets on-chain, and more diverse forms of value exchange will emerge in the future. He hopes to realize more traditional financial principles on-chain, such as time value, thereby promoting the emergence of unsecured credit.

Prospects for Unsecured Credit

Jeremy believes that the emergence of unsecured credit will be a huge opportunity. He points out that the private credit market has seen significant growth in recent years, and this market can be realized on-chain. He cites some protocols that have made progress in this area, such as Maple and Goldfinch. He envisions a model that allows legally compliant individuals and institutions to mediate capital supply and lending on-chain, forming an efficient market.

Insurance Models and Risk Management

When discussing risk management, Jeremy mentions that on-chain insurance models can be used to protect participants, especially ordinary users. He believes that insurance can be priced and managed on-chain, forming composable financial products. This model will allow users to utilize part of their assets for lending while maintaining liquidity, thus achieving efficient capital utilization.

Evolution of Legal Frameworks

Jeremy believes that the emergence of the internet has broken many legal paradigms; for example, broadcasting used to require local licenses, which is no longer necessary. He hopes the financial industry can demonstrate the advantages of crypto technology in efficiency, transparency, and risk management, thereby promoting the evolution of the policy environment to be more internationalized.

Market Access and Compliance

Santi inquires about the factors that might limit or accelerate this process.

Jeremy points out that there needs to be market and compliance regulatory agencies to recognize the ability of financial intermediaries to build products and services on public chains. He mentions that Europe’s MiCA regulation provides a framework for building financial products on public chains, but achieving widespread acceptance of this framework globally remains a challenge.

Potential of Crypto Technology

Jeremy emphasizes that the industry needs to explore better solutions than the existing financial system, leveraging the advantages of crypto technology, such as zero-knowledge proofs and cryptographic credentials. He states that the industry should innovate in user experience and privacy protection rather than simply following existing laws.

Legal Status of Stablecoins

He also mentions that stablecoins are regarded as legal electronic currency, which will enable financial institutions to use them as effective collateral on their balance sheets, thus serving as working capital in transactions. This is crucial for encouraging traditional financial institutions to participate in the crypto market.

Impact of Transparency on the Financial System

Transparency and Risk Management

Santi mentions that as more transactions occur on-chain, there will be better visibility into the risk status of borrowers. For example, salaries can be paid in USDC, which can reduce risk.

Jeremy agrees with this viewpoint and emphasizes the importance of cryptographic credentials (such as KYC certification) in ensuring compliance and security. He mentions that geographic restrictions can be used to ensure users comply with specific legal frameworks.

Lack of Transparency and Its Consequences

Santi points out that the lack of transparency in the financial system is often seen as a feature rather than a flaw. This lack of transparency allows certain participants to benefit, such as through higher interest rates or the establishment of profit centers. However, this situation has also led to a series of problems, such as the occurrence of global financial crises, because risks are difficult to assess accurately in the absence of transparency.

Potential of Transparent Systems

Jeremy agrees with Santi's viewpoint and points out that participants relying on opacity to gain profits will face challenges. He believes that open internet infrastructure can achieve tremendous economies of scale, thereby changing the economic structure of the industry and improving products and services. He believes this transformation will have a profound impact across various fields, including retail payments, capital market infrastructure, lending, and asset management.

Restructuring and Innovation in the Industry

Jeremy further points out that many industries have too many participants, and the application of blockchain and crypto technology will make it possible to provide more efficient, lower-risk, and more valuable products. He mentions that the changes in the media industry historically can serve as an analogy; the internet had not fully disrupted media companies in the early 2000s, but as technology advanced, many traditional media companies faced significant challenges and even collapse.

Integration and Globalization Trends

He predicts that the financial industry will also undergo a similar consolidation process, with fewer but stronger internet-native platforms emerging that will be more globalized. In lucrative areas, increased transparency will drive more innovation and competition, thereby providing better services to users.

Value of Decentralized Systems

Santi mentions that while technology can be a centralized force, he hopes that decentralized infrastructure can be built.

Jeremy expresses his firm belief in distributed and decentralized systems. He believes that one of the most exciting aspects of cryptocurrencies and blockchain is that global economic participants can securely conduct peer-to-peer business and financial transactions.

Potential of Open Source Protocols

Jeremy hopes to see open-source protocols governed by the community, which should be jointly maintained by stakeholders and continuously improved. He believes that such infrastructure will support thousands of different business models. For example, he mentions Uniswap as a community-governed protocol infrastructure where many people build and combine their markets.

Real-World Cases and Innovation

Jeremy also mentions that Zora's recent launch of a secondary market with Uniswap is a great example of how to build a foundational decentralized platform that many can develop on. He believes that this decentralized infrastructure can enhance the resilience of the system and promote more innovation.

Vision for Token Incentives

He further elaborates on the importance of token incentives in creating broader products and services, which can combine real-world incentives with on-chain economic coordination. This model will help rebuild historically centralized platforms to become more decentralized.

Debate on Applications vs. Infrastructure

In the current crypto world, the debate about applications versus infrastructure still exists. Jeremy hopes to see decentralized applications that use digital tokens and broader forms of coordination, which can create meaningful value at both the end-user and enterprise levels. He states that he strongly agrees with Chris Dixon's views and looks forward to seeing more such innovations.

Impact of Interest Rates

Comparison of High and Low Interest Rates

Yano raises a question, pointing out that many believe high interest rates benefit Circle's business in the current interest rate environment, but he wants to understand the impact of low interest rates. He mentions that low interest rates might increase the velocity of money.

Jeremy explains his views on interest rates, believing they should be lowered to promote better economic policies, which he sees as beneficial for the real economy, digital economy, and crypto economy.

Ideal Interest Rate Environment

Jeremy states that a more neutral interest rate environment would be ideal for the USDC platform. He believes that lowering interest rates will increase the liquidity and activity of money, thereby raising the demand for high-utilization currency. He emphasizes that Circle is building an infrastructure to make it the most efficient value currency in the world and encourages developers to build applications on it.

Money Liquidity and Growth of USDC

Jeremy believes that when money liquidity increases and interest rates decrease, it will greatly drive the adoption of its stablecoin network. He points out that although USDC circulation decreased in a high-interest-rate environment, it began to grow significantly as interest rates stabilized and expectations declined.

Economic Activity and Stablecoins

Santi mentions that as the use of USDC in payments and commerce increases, this dynamic may change significantly.

Jeremy explains that the liquidity of money in the economy increases when interest rates decline, especially in terms of business transactions and settlement needs. He believes that the capabilities of the USDC platform will correlate with on-chain business and financial activities, and changes in interest rates will impact this relationship.

Investment and Capital Markets

Jeremy also mentions that capital liquidity in capital markets is an important factor driving growth. He points out that many people are willing to invest in assets they believe will yield higher returns than 3%, and this growth in risk appetite will drive the use of USDC. At the same time, as interest rates decline, liquidity in business transactions will also increase.

Overall, Jeremy emphasizes the profound impact of interest rate changes on the economy and digital currency. He believes that lowering interest rates will help increase the liquidity of money, promote the adoption and growth of USDC, and drive overall economic prosperity. As market conditions change, Circle will continue to build and optimize its platform to adapt to these changes.

Innovative Development of Stablecoins

Challenges of Yield-Generating Stablecoins

Yano mentions that some yield-generating stablecoins, like Mountain Protocol, have recently been launched and asks whether Circle is considering passing net interest margins to users to dominate the market.

Jeremy directly responds that this is illegal. He explains that if what is offered to users is an investment product, it is considered a security, and Circle is already regulated as a payment system and electronic money payment system, so it cannot offer such yields.

Impact of the Regulatory Environment

Jeremy further points out that stablecoin laws globally (such as Europe’s MiCA regulation and the U.S. Payment Stablecoin Act) regard stablecoins as non-interest-bearing cash and electronic money. He believes this is the right decision. He emphasizes that while he hopes users can seamlessly switch between digital cash and yield products, this must be done within a compliant framework.

Vision for USDC

Jeremy expresses Circle's vision of wanting USDC to become the best digital cash and the best digital dollar in the world. He mentions that Circle hopes to be the preferred settlement tool for users seeking yield, whether from DeFi yields, unsecured on-chain lending yields, or other investment returns.

Role of Market Infrastructure

Jeremy states that Circle sees itself as a market-neutral infrastructure company dedicated to building more infrastructure that enables developers to build applications on it. He mentions that Circle is developing cross-chain transfer protocols and gas abstraction mechanisms to simplify the user experience, allowing users to transact without needing to understand blockchain and transaction fees.

Investment and Innovation

Jeremy also mentions that Circle Ventures will make small minority equity investments in projects that are innovating. He emphasizes that Circle's primary goal is to enable other developers to build applications on its platform.

Outlook for IPO

When discussing going public, Jeremy states that Circle is very focused on becoming a globally listed public company. He believes this will increase the company's transparency and trust, helping Circle maintain high standards of governance and ethical responsibility in its future development.

Advice for Entrepreneurs

Finally, Jeremy offers some advice to entrepreneurs, emphasizing the need to be willing to make sacrifices, timely abandon unsuccessful projects, and focus on the core vision of the company. He mentions that despite challenges, entrepreneurs should maintain a strong belief in their original intentions and adjust and develop based on that foundation.

Overall, Jeremy's views emphasize the innovative development of stablecoins within a compliant framework, Circle's efforts to bridge digital cash and yield products, and his advice to entrepreneurs facing challenges. He believes that more surprises and innovations will emerge in the future, driving the development of the entire crypto space.