Could Stablecoins and CBDCs Be the Future of Money? | Heath Tarbert

Itay Goldstein: Welcome, everyone. I am Itay Goldstein, professor of finance at the Wharton School at the University of Pennsylvania. I’m also the chair of the finance department. This is the “Future of Finance” series. In this episode, we’re going to talk about stablecoins and the relation of stablecoins to central bank digital currencies, or CBDCs.

For those of you who are not familiar with the term, stablecoins are a type of cryptocurrency. But unlike other cryptocurrencies that are fluctuating up and down in value, looking sometimes like a rollercoaster, the point of a stablecoin is to maintain stability, as the name suggests. The idea is really to have something that can replace money. In order to do that, stablecoins are going to tie their value to a stable asset, stable currency, like a fiat currency.

For our conversation today, we have the ideal guest. We have Heath Tarbert, who is president of Circle. Circle has its flagship product, which is the USDC, the U.S. dollar coin, which is one of the leading stablecoins pegged to the U.S. dollar. Heath has a long history in financial regulation, in the financial industry. He was the former chair of the Commodity Futures Trading Commission. He is also a lecturer here at the University of Pennsylvania Carey Law School.

Heath, it’s great to have you. We have a lot to discuss, so let’s dive right in. We are recording this just a few weeks after the successful IPO of Circle earlier this summer. I think it’s appropriate to start from that and ask you, how do you feel about this IPO?

Heath Tarbert: Thank you. The IPO was something that Circle had long been planning. And the reason is, one of the things that Circle stands behind is our focus on trust and transparency — and we’ll talk a little bit about that with our stablecoin that you mentioned, USDC. But we have always strongly believed that the marquee level of that transparency is to be a publicly listed company that has the disclosures, has the controls, has the governance. It was a long process to get through to become a public company, and we are delighted that it occurred a little more than a month ago. We’ve gotten a little bit of rest, but we have pivoted almost entirely now on execution. Making sure that we are focused on building the world’s largest and most widely used stablecoin network.

Goldstein: Yes. I think it was a big success and certainly drew a lot of attention to Circle and to the key product. How did you end up with Circle and with stablecoin? You had an inspiring career at the intersection of law and finance and regulation, public policy, including the appointment as the chair of the CFTC. How did you end up working with digital assets and stablecoins?

Tarbert: I certainly didn’t plan my career — when I graduated from the University of Pennsylvania 24 years ago — to get into this field. Because, of course, it wasn’t invented. The internet was around, but the third generation of the internet that has blockchain technology hadn’t been invented yet. I’m not even sure people were even discussing its possibility.

But I would say about a decade ago, I started hearing about bitcoin. About eight years ago or so, I went into the United States government, first as assistant secretary of the Treasury and later as CFTC chair. And we had to confront, well, what is this technology? What does it do, and how does it intersect with traditional finance and its regulation? It was there that I discovered how important and how potentially transformational this entire field is.

This is the next generation of the internet. A generation of the internet that can actually not just simply move packets of information and data, but can actually move value. Just like the internet has had confluence with other industries that we’re very familiar with, the finance industry, in some ways, was the last industry that the internet could merge and connect with. But it’s blockchain technology, and the underlying cryptography, that actually makes that possible.

When I sort of figured out that big a-ha moment, it became something that I became very interested in at a somewhat technical level, but also at a policy level. And then a few years later, I was out in the private sector. I had an opportunity to make a career change.

This was actually in the midst of the crypto winter.  So, crypto is not doing well, and I had to make a decision. Do I go into this field, given the fact that in some ways it was at its nadir, at least at the time? My view was, ultimately, this stuff is not going away. The technology is not going away. We may have bad actors, just like we had bad actors with the railroads, with the initial version of the internet. And we had bubbles and all sorts of things. But anytime there’s a technological transformation of this magnitude, it’s going to have an impact if the right people are at the table and the right business plan is put in place.

I got to know Circle because I asked myself the question, “Who’s actually going to make this possible?” And more important, “Who’s going to do it the right way? Who is going to do it in an ethical, law-abiding manner?” Apart from the fact that sometimes the laws are not entirely clear. Circle answered those questions for me, so that’s how I ended up there.

Goldstein: Let’s take a step back and try to understand exactly what stablecoin is, how it is generating value to consumers, to investors. What is different between stablecoin and other cryptocurrencies? Everyone heard about bitcoin and ethereum. How is stablecoin and your particular stablecoin, USDC, different from other cryptocurrencies? Where is the value coming from?

Tarbert: I think you explained it really well in the beginning. A stablecoin, in many ways, is just a tokenized, real-world asset. The vast majority of them are fiat currencies, and the vast majority of those are the U.S. dollar. It’s essentially taking the dollar — in our case, with USDC — and putting it into an internet-native form so it can be sent as easily as an email or a text message. So, it’s essentially digitizing or tokenizing, if you will, the dollar, so you can send that dollar across blockchains.

In some ways, it’s just taking something we already know — in this case, the U.S. dollar — and figuring out, how do we get that dollar value onto blockchain? That differs from other digital assets, or so-called cryptocurrencies, which in some ways are native to this new economy. For example, there’s ethereum, which is the blockchain. Ether is the native token that’s on that chain, so you need ether to pay gas fees and to do other things, to be able to conduct transactions on the particular blockchain. The value of that particular token is tied to just general supply and demand, but also the view on ethereum and its growth, etc.

But it has sufficiently decentralized the exchange, that there’s fundamental changes in supply and demand each and every day. But it is a new concept, a new source of value that is native to the internet. Whereas what USDC does is it just takes the U.S. dollar and puts it in this new internet financial system, so there’s not the volatility that there is when you’re dealing with these other assets. The way I look at it is, stablecoins are, in most cases, fiat currencies that are put on the blockchain. Whereas these other digital assets are new asset classes entirely.

Goldstein: When we think about the stability that stablecoins are supposed to bring to the system, we think about traditional vehicles like banks and money market funds. Investors were always drawn to them because of the stability. Investors like to know that when they put money in, they can take the same amount of money out, with some return. And the question is, what is the difference? Where is stablecoin going to depart from the traditional vehicles like banks and money market funds?

Tarbert: It’s really important to draw a distinction that a stablecoin is meant to represent the underlying money. It is a new form of, in our case with USDC, the dollar itself. It is not meant, like a money market fund or a bank account, to be any kind of investment. Or as the SEC says, or the Supreme Court said in the Howey test, which defines what’s a security for purposes of the SEC, it’s not meant to have an expectation of a return. So, it is not an investment product.

That said, you can create tokenized versions of money market funds and perhaps even at some point tokenized versions of bank accounts. But the stablecoin is meant inherently to be more conservative in that it doesn’t pay any kind of yield. That is a major difference. That alone is a major distinction. It’s not paying off any kind of yield. It’s for you to use as, effectively, digital cash.

Goldstein: I spent a large part of my academic career and research thinking about financial fragility. What we all know from banks or money market funds maybe more recently is that they give you this promise of stability. In the way that they are trying to maintain stability, there is a lot of trust. You need to trust that it’s going to be stable, and you need to trust that everyone else thinks it’s going to be stable. But the problem is that this trust can be broken, depending on how the process works and what is the underlying asset. What is the triggering shock, potentially. But we do find ourselves in episodes where all of a sudden there is no stability anymore, and everyone is running to take their money out as quickly as possible.

We have seen some episodes like that in the short history of stablecoin already. But we have seen a lot with banks and money market funds. How worried are you about the prospect of a run, and how worried do you think investors should be about that?

Tarbert: Given the fact that there are no uniform laws and standards out there governing stablecoins, and there’s not even rules as to what can back a stablecoin, I think there is a chance of runs on various stablecoins. And we’ve seen that.

For example, we’ve seen terra LUNA, which was an algorithmic stablecoin — it was an experiment about algorithms. That experiment clearly failed. You’re 100% right, and you’ve done tremendous research in this field, which everyone should read. Ultimately, the quality and liquidity of the assets backing it is a key part. The transparency of the assets backing a particular, in our case stablecoins, is important. And also, some degree of regulatory certainty.

We don’t really have that uniformly in the United States and throughout the world. Circle is regulated by the New York Department of Financial Services, so all of those things are addressed in a pretty fundamental way. USDC is backed one for one with very, very high-quality liquid assets. Essentially, short-term treasuries like T-bills within three months, cash and cash-like equivalents. But not all stablecoins are backed by those assets. And when you have that maturity mismatch — you even have this with money market funds, where they can invest in a lot less conservative things — I think your chances of run risk are much higher.

Transparency is absolutely critical as well. Circle has published and audited financial attestations that show you exactly what’s in our reserves. You want to make sure that there’s a degree of regulation, so you know that they’re supervised. In our case, we’re supervised by New York DFS. But the Genius Act is potentially becoming law. My hope is, by the time this airs, it will be law. And that requires a federal regulatory regime for those that are over $10 billion or more in issuance.

I think all those factors need to be there to reduce the possibility of runs, which is very important. My view is, it’s absolutely critically important that this be done. Because otherwise, the new internet financial system, this third generation of the internet where the financial system and the internet become intertwined and merged, is not going to take off, if we have this massive loss of confidence. Not to mention the fact that consumers and all sorts of other folks are going to be hurt.

Goldstein: Yes. One episode that we had just over two years ago with the collapse of Silicon Valley Bank— you had some exposure to that because you held deposits in Silicon Valley Bank. There was a moment there where it looked like trust is going to be broken in your currency. Are there lessons learned from that? Was that just an episode in the past, and going forward we are not going to be exposed to this?

Tarbert: It’s a terrific question. As you said, we had some of our reserves at the time in Silicon Valley Bank. People have often said, “Well, we’re worried about crypto hurting the banks.” This was the exact opposite. This was a situation where the traditional banking system threatened the digital asset market space, because we had a pocket of our reserves in that bank. Very important lessons were, I think, ensuring that there are uniform regulations and that banks can accept cash from stablecoin issuers.

Now, the vast majority of our cash is held at globally, systemically important banks, as disclosed in our financial statements. But back in that time, a few years ago, banks were told not to take stablecoin issuer money, not to take any crypto money. So, you had this situation where stablecoin issuers like ourselves had to responsibly put our cash somewhere. And the only banks where you could potentially place it were these banks that catered to the industry. I think having digital assets become mainstream, allowing the larger banks to do it, and having federal regulation, will make this a lot more important.

The other thing to realize is that during that period, there was dislocation in the secondary markets. In other words, people out there were saying, “Hmm. I’m a little worried about USDC, because some of the reserves were in Silicon Valley Bank.” At no point did Circle say they were worth anything less than a dollar. I wasn’t at the company at the time, but the company made very clear, they remained redeemable one-for-one. What ended up happening was, a lot of these trading firms went out there. They scooped up USDC, and they brought it to Circle, because they had Circle accounts to redeem it one-for- one. They made out quite well. But in the future, we want to make sure that situation doesn’t occur, and we don’t have secondary market dislocations, even if a company like Circle continues to stand by its peg.

Goldstein: When you’re thinking about the future of the stablecoin industry, do you see uniformity in that all the stablecoins are going to adopt the same practices? Or do you see some taking more risk and having, potentially, more exposure to runs, and others are taking less risk and having less exposure to runs?

Tarbert: We have advocated for uniform federal standards, just like they’ve done in the European Union under MiCa, where stablecoins are held to very conservative standards that are implemented uniformly. Because again, stablecoins should not be risky. Stablecoins should be the equivalent of a digital cash. You want to send money as easily as you send an email, so you have to depend that that dollar continues to be a dollar. Our position has always been to have a pretty conservative standard that the U.S. Congress now appears to be adopting, that is applied to everyone.

If you do want to have assets that maybe take a little bit more risk, that maybe pay the holder of that asset a yield, they are different kinds of instruments. Some of those may be securities, and they should be regulated accordingly. For example, Circle has a tokenized money market fund, which at the time we took it over was the world’s largest. And that does pay a yield. That does have assets that may be somewhat different in kind, or at least they’re not held to the same standards as our stablecoin reserves. But that offers investors an opportunity to get some yield. But I would make a distinction between that kind of product and a stablecoin, a tokenized dollar, if you will, that should be held to those pretty stringent conservative standards.

Goldstein: You talked a lot about regulation. Maybe we should confront it a little more head on. Going forward, how optimistic are you that we will have proper regulation to support the growth of stablecoins? And maybe more broadly, the support of DeFi and cryptocurrencies?

Tarbert: I am optimistic. This administration currently in office has made it a priority, and the president has said he wants all the legislation on his desk by the end of this summer. I think we’re certainly going to see stablecoin legislation happen sooner. Again, my goal is, by the time this podcast is released, that we will have a stablecoin bill signed into law. So, I’m very optimistic.

I’m also optimistic on market structure, but it’s a bit more complicated. Because the issues are a bit more novel. The House has been steadily working on this. There is a bill that’s about to be passed in the House of Representatives, and I think a companion piece will be introduced in the Senate relatively soon that will address things like digital assets that are not stablecoins, that may be securities, that may be commodities. They’re trading on centralized exchanges. The custody of digital assets, as well as blockchains and blockchain tokens, how they are treated and all of these other issues, I do see coming. And even, potentially, DeFi as well.

The other thing we haven’t talked about, which is really important alongside prudential standards and making sure that there’s customer protections, is the anti-money-laundering, counter-terrorism finance element to all this as well. We have long advocated for standards in that. We are registered under FinCEN, under the Patriot Act, and we do AML, CTF, KYC, all those sorts of things on our customers. That’s also something that I think we want to get right in this industry so we’re able to take a step forward, use this innovative technology — because we haven’t talked about all the benefits. But the benefits are many. But we also don’t want to introduce new risk, whether they’re financial risk or national security-type risk.

Goldstein: Five, 10 years from now, do you see a financial system, a monetary system, that is fundamentally different than what we have today? Who are the main people who are going to benefit from that? And how are they going to notice it? If you’re thinking about households, they don’t have much interaction with the financial system, they don’t make speculative investments. They just need to save and pay. How are they going to see the tangible difference in their day-to-day life?

Tarbert: I think any family that has waited two days for money to clear, that has friends, for example — you probably have lots of friends overseas, and you want to send them money. And you’ve paid exorbitant fees. All of these things are going to potentially change if we have the new internet financial system. As well as folks who maybe don’t have access for traditional bank accounts. In the United States, most Americans do. But many people in the Wharton community are outside the United States. Even in a country to our south, like Mexico, only 50% of Mexican adults have access to a bank account. But if they have their phone, then they can download a wallet and they can store value there.

There are other folks as well, in countries where the local currency is highly volatile. I remember when I was at Penn, we had some fellow students at Wharton and at the law school who were from Asia. The Southeast Asian financial crisis occurred, and their tuition rate quadrupled overnight because they weren’t able to store value in dollars. Very difficult.

The other way to think about it is, when you and I were going through university, to make a call from Philadelphia to New York, we needed a phone card. It was long distance, right? To some extent, the current system of moving money is back in the 1980s and ‘90s, when we were using telephonic communication. All of this will get a major uplift. There will be a ton of benefits that I would call skeuomorphic —in other words, all of the stuff we’re doing today, we can probably do a lot better with stablecoins and with blockchains.

Then there’s a whole host of stuff that we haven’t even imagined that are native to this new system. For example, AI agents buying and selling things. AI goes and sweeps the Wharton website for all of the great research that you and your colleagues are doing. Right now, you’re not charging anything for it. But maybe interesting the future, you could get a slice of every time that is used in an AI agent, and the most likely way that value transfer would occur would be by automatic payments in stablecoins or other value over blockchain. So, there’s a whole bunch of use cases that entrepreneurs, many of whom may be watching this very podcast — Wharton students and graduates — may come up with on their own.

Goldstein: We talked a lot about the government as a regulator. The other part that the government takes in this overall story is through its own product, its own currency. Here, there is a lot of talk about a central bank digital currency, or CBDC. How do you look at that in terms of the future landscape of the monetary system? Is that going to happen? If yes, then what will be the relationship with stablecoin? Is that going to be a competition, or happy coexistence?

Tarbert: Some countries are experimenting and have central bank digital currencies. China is one of them. The United States does not appear to be interested in adopting a CBDC, a fed dollar, if you will, any time soon. And the reasons for that are pretty clear. Based on, I would say, Western democratic values, as well as what we’ve seen with some of the other nations that have imposed CBDC experiments. First and foremost is civil liberties and privacy. There’s an innate sense, at least in Western-style democracies, but I think most places in the world, that we don’t necessarily want the central bank to be tracking every single dollar, every single unit of currency that we spend. There’s a sense there that’s very, very different from the current system by which the Fed issues federal reserve notes, but ultimately works through the banking system and doesn’t have that insight into what’s in Americans’ every single wallet.

The other reasons are, there’s a concern by the banking system itself. Many Wharton graduates are working in finance, and their customers have accounts with them. If the bank issued its own currency directly to citizens, there’s a concern that it would disintermediate the entire private banking system if you just had an account, for example, with the central bank and were transacting directly. So that larger policy issue, I think, needs to be solved.

There’s also the question of monetary policy. Right now, there are a number of mechanisms by which the Fed can regulate the money supply. But many of them are traditional, and they take time. It’s much harder than just issuing a trillion dollars of stablecoins, for example. So, there’s a big concern, what will that mean for monetary policy? And what about if there’s a slip-up? I think closely related to that is, if the Fed can create money digitally in a way that is much broader than the way it does so today, that creates a major cybersecurity risk for the United States of America. Hacking, and the ability to sort of create money literally out of thin air, compared to stablecoins, which must be backed one-for-one by traditional assets that are very conservative.

I think the United States, to your question, is going to go the route that says, “Look, the Fed will still play a major role in the money supply.” But as digital dollars go, we actually want competition. We want a decentralized model where we have a number of stablecoin issuers who are highly regulated, held to high standards, supervised by federal authorities, need to back everything one-for-one, be transparent, but also are on the cutting edge from a technology standpoint, who can experiment and make sure that the U.S. digital dollars that are out there are the very best and continue to iterate.

I see the Federal Reserve and the banking sector regulators working with stablecoin issuers to ensure that the dollar is exported, that it remains the reserve currency not only in the traditional financial world, but also on the new internet financial system. But working together, as opposed to the Fed just taking it over and doing it itself.

Goldstein: There are, indeed, a lot of debates in the academy community along these lines, and I think you hit on some very important points here. Just one final question to our own local audience here: Wharton students, MBAs, and undergraduates. You’ve interacted with them in a few lectures, and your lectures here are always very popular. What advice do you have for some of these students who are now picking their future career path? Should they go and work for a firm like Circle? Should they target the fintech industry? How do you look at that?

Tarbert: Great question. Obviously, we’re always happy to look at resumes from Wharton. It’s a phenomenal school. You can do no better. It is a wonderful place. My advice to students and graduates — and this is over the years, my own reflected learnings — I would say are a few key lessons. First, the days of traditional careers where you go to a place and you spend 10 years or 25 years — those days are largely over. Unless you’re in academy, and you’re able to get tenure at a great university like you have, by and large, there’s a lot more movement out there. What I would also say is, if you look at the original Fortune 500, I think only 49 of them are still in the Fortune 500. The champions when you graduate from Wharton may not be the champions 10 years later and 20 years later. That’s the great thing about our system, our free enterprise, is there’s always new things developing.

I personally believe fintech and blockchain is a great area that will continue to grow, so I would recommend looking at this as an area. But I would also say, everybody at Wharton probably one day wants to be a CEO. My advice to all of you guys is, you are a CEO. The moment you graduate and you’re looking for your job, think about yourself as a CEO. The CEO of you. Your own professional services organization that you are going to sell to all these companies in your career who may technically employ you. But ultimately, you’re in control of your own set of services.

That leads to, I think, the penultimate point. You’re always learning. Don’t stop learning. Every day, I am learning new things. That’s what excites me about this career. I’m reminded of the statue of Ben Franklin, where he’s sitting there on the bench right around the corner from the Wharton School. And one of the things that he said long ago, which still strikes me, is, “The doorstep to the temple of wisdom is knowledge of our own ignorance.” I know some things. I’ve been around for a long time. But there’s a lot I don’t know. And learning is something you’ve got to constantly do.

The final point would be, don’t be afraid to take risk. But be thoughtful about it. Right? There’ll be some times when you can take financial risk and other times that you can’t, depending on your family situation. But one thing I would say is do not risk — and this goes back to the story of why I chose Circle — don’t risk your integrity. Go to places that you’re going to be proud that you work for, and that ultimately want to do the right thing. Because that’s one of the few things you can take with you to the grave, is your integrity.