NCI: China Detente & Stablecoins as SoftPower

NCI China Detente & Stablecoins as SoftPower

Speaker1: [00:00:00] And welcome to our next show of Lumina non-consensus investing. I'm really pleased and thrilled to be joined by my friend Austin Campbell. Austin is a renaissance man. He's a professor at Columbia, but you're also an entrepreneur. You are at JP Morgan, and you were there at very seminal moments of financial markets history.

You testified in front of Congress around stablecoin. And I know you're doing the work you can behind the scenes to help educate policy makers on what matters. You also see the promise and potential around digital assets. So we're gonna cover a lot of ground. In the next hour or so, we'll talk about stable coins what that might mean for the FX markets and the treasury markets.

We'll talk about digital assets and also China. And China Deante. Without further ado, we'll get started. And by the way, keep the questions coming as we chat. We'll do our best to address 'em. Good to see you, Austin. 

Speaker2: Good to see you. I only have one [00:01:00] complaint with your intro, which is I have technically defected from Columbia back to my alma mater.

So I teach at NYU Stern now. 

Speaker1: Oh, that's right. Recent 

Speaker2: development. 

Speaker1: We won't hold that against you. You're still in New York then? Still in New York. I still, 

Speaker2: I still am in New York, and technically I think you called me old by saying renaissance man, so I'll let that slide, 

Speaker1: right. It's a term of a endearment.

So let's get started with the stable coin market, right? There's a bill that I'm, you can give us an update where we are with that. Very disappointing to see that it wasn't passed. And more broadly, we would love to understand what impact might this have for American financial markets, and should someone like Secretary Bessant be excited about the opportunity?

Speaker2: Yeah, so let's start with stable coins as they're defined in the Genius Act, which is the one that's in the Senate and the Stable Act, which is the one that's in the house. 'cause these are relatively similar from a financial construction standpoint. [00:02:00] So the theory behind stable coins there, because if you look at the crypto market, they've called all kinds of things, stable coins.

All of them have been coins. But on the stable part, varying degrees of success. So this act attempts to codify a framework. And what it says is after 2008, there were a bunch of things that we called cash that blew up and went completely nuclear in the crisis. That's things like asset backed commercial paper, prime money market funds, lot of kinds of bank deposits.

I would summarize the thinking of the Genius Act as Stop It, right? That they've looked at post 2008 financial markets reform and said the thing we've canonized as being like a non fractional, reserved, safe form of holding money is the government money market fund. There's 6 trillion ish of them currently in financial markets.

They have posed no stability risks, and all they do is basically hold T-bills or do a thing called repurchase agreements. So it's called [00:03:00] repo in financial markets, which in really simple terms is I lend you cash, I take securities as collateral, and in a government money market fund, those securities are unsurprisingly treasuries.

Okay? This is super simple. It's super boring. They say, if you wanna do a stable coin, congratulations, you are doing that. And importantly, you are doing that in a way where the reserve. Is for the benefit of the token holders, it's bankruptcy remote, it lives in a box. So also no taking all that money reating it, doing like fractional reserve lending, et cetera, et cetera.

So I would tell you, when you look under the hood, despite all of the rhetoric around the Genius Act, it's essentially codifying the most boring financial instruments humanly possible. Which from a consumer protection and stability standpoint, probably a good thing. Understood. I was gonna say, I think that's an explanation.

Do you want me to go into where I think we currently are on the legislation 

Speaker1: Yeah. Look like kinda a brief update there. And then [00:04:00] let's dig into the promise and the opportunity of stable coins and what that means for the markets. 

Speaker2: Yeah. So on the legislation, there's been, what's the best way to say this?

A pretty confused debate that's emerged about stable coins and what they can do and what they are a lot of people on the Democratic side of things have gotten themselves tied up in thinking that stable coins are somehow inherently risky in pointing at things like UST without having done the work to understand that.

Yes, that is specifically the point of this bill is acknowledging that those things are risky and telling people to stop doing that because the contra is in a traditionally democratic stronghold, which is New York State. They've been regulating stable coins since 2018. Zero N-Y-D-F-S stable coins have ever had any PEG stability problems.

And the Genius Act basically steals the NYDF S'S homework and just makes it federal. So I think a lot of the opposition is confused. There's been a big education effort after the [00:05:00] failed vote to close debate last time. It sounds like late this week or early next week, there will probably be another vote to move forward and it seems more likely to pass after a lot of discussion now.

The impact on financial markets, if that happens, is going to be significant and dramatic. I I always caution people that financial markets transformation takes longer than people think, but also the impact is bigger than people think. And stable coins would mean for the first time really in, basically the post electronic money slash internet era.

People have the opportunity to transact with and leave their money in a cash-like instrument without taking counterparty credit risks to a bank. And yet still get all the functionality of the modern financial system. Because right now, today, like I'm a regular two-legged human being. I live in Brooklyn.

If I go and try to pay for all kinds of things in cash, I'm gonna have varying and not particularly great degrees of [00:06:00] success. Like I. Buying online, paying my Verizon bill, like paying my mortgage, the these are not things I could do in cash. You must have access to electronic payments, which for now mostly means you're dealing with banks unless you've done something very clever.

And so banks have this payments monopoly that is in many ways, accidental, if we're being honest, nobody writing this stuff in the 1970s was like, aha, everybody will be using Zelle in the future. They didn't even know it would exist. And so we handed banks an electronic payments monopoly and this bill is really a big step in starting to unwind 

Speaker1: that accident.

So that enables non-banks to get into the business of payments. Now, non-banks already are and have been active in payments. Stripe is one of the leading payments processors There are pay Faxs such as PayPal. So I, the banks do advantage though because they can access. Fed master accounts, and this has been one of the issues that Caitlyn Long from custodian [00:07:00] has been seeking to access.

Could you help us just distinguish the advantages of the moat that a bank has versus, say, a non-bank entity and how stable coins might change this set up? 

Speaker2: Yeah, and I'll point out a lot of the alternative payments providers in the United States themselves actually still rest on top of banks, right?

So if you look at like where Cash app is holding your balances good news guys, it's a bank under there. And so what I would say is the advantages that banks have are they have fed master accounts, they have access to the fed wire system, they have access to a CH, they have access to Zelle, and they have, I'm gonna call it a privileged regulatory position in the sense of having FDI see insurance on their balances, right?

So if I were to start independently a trust company. Where I wasn't gonna do fractional reserve banking and say, I wanted to do all these services. I can't get FDIC insurance and I can't get access to a lot of those systems. Again, that is a [00:08:00] regulatory decision that we made in the United States. There is nothing, call it natural economic or market forces around that.

That is purely the product of the government passing laws and so stable coins by providing native cash balances that don't need to be insured because they're backed by T-bills. We don't have FDIC insurance on government money market funds and that's fine, can now exist on native like payments rails and be transferred peer-to-peer between people without needing a bank as an intermediary and creating a parallel open access system that starts to erode that monopoly.

In the same vein, certain banks now are likely to start stable coins that comport with this act. So now you have access to all of that stuff and a form of deposit at the bank that's not co-mingled with all the 

Speaker1: fractional reserving. So who are the winners and losers? Like in terms of the ecosystem?

You've got the legacy money center banks such as a JP Morgan, the Citi Banks, and the Bank of America as the world who have really low cost funding and distribution. That's one bucket. [00:09:00] Then you've got leaders in the stable coin market. There's us that would be circle non-US, that would be tether.

Then you've got these kind of non-banks providing payment services, which we talked about the PayPals of the world. There's the odd ends of the world. Global payments. Who stands to gain? Who stands to lose? 

Speaker2: Alright, so let's start with the losers. 'cause I think these are in some ways easier to identify when you're disrupting a system.

So I'm gonna put them in the United States locally into two big categories. Category one. If you run a small to regional bank and your entire net interest margin comes from paying your depositors zero and then making loans where you don't have a significant edge, you are screwed. And the reason for that is the activity that you're undertaking essentially relies entirely on giving borrowers a significant invisible subsidy [00:10:00] by ripping off your depositors.

And now the depositors are gonna have better access to other products with a better value prop and less risk. And you have a problem, I'm gonna transparently say, as a market structure guy, I don't think that's a bad thing. Like these people are, quite frankly probably negative net return for the economy.

So washing them out is a good thing. Are 

Speaker1: there many regional banks actually doing that? The money center banks do that all day long. They charge, they offer very little interest. But the regional banks. Do offer a higher rate of interest. I don't know if there are any banks out there doing close to zero 

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