The Past, Present, And Massive Future of Stablecoins (...Trillions Coming) - Stably CEO

Transcript

All right, you guys. Welcome back to Stabled Up episode number 26. We're going to have Corey Huang talk stablecoin taxonomy today, guys. Let's get Corey up on the show, bring him in to Stabled Up episode number 26, powered by our friends at Frax. Corey, welcome to the show, man. Hey guys. Thank you so much for having me on the show. It's a pleasure. Absolutely man. This is our our cornerstone Stabled Up show all about the stablecoin economy. Um and you've got a stablecoin taxonomy that we are very, very curious to hear about, talk about, and understand what went into this, how you're thinking about stablecoins. Uh before we do, Corey, could you just tell us a little bit about yourself, how you ended up as

co-founder of Stably? Yeah, absolutely. So, everyone, my name is Corey Huang. I'm the CEO and co-founder of Stably. Uh we've been building stablecoins at Stably for actually more than 8 years now. Um as for how how I went down this rabbit hole well uh I guess I've always been fascinated by the concept of narrow banking where banks act more like custodians with full reserve backings of customer deposits. However, the history of banking, as you guys know, is largely been a history of fractional reserve banking, right? We never truly experienced something that's as close to narrow banking as stablecoins until they finally came out, right? So, payment stablecoins are

indeed the modern manifestation of a full reserve system, and that's where, you know, my original interest got really attached onto this technology. And um back in 2018, we actually issued the fifth uh US dollar stablecoin in the world. It used to be called USDs. Uh we listed on Binance, on Bittrex in early 2019. Um but within a few months of getting on Binance, we actually realized that we were, you know, now that we're on the big boys' playground, we had our first taste of uh a very fierce liquidity competition in what became known as the stablecoin war of 2019.

Um long story short, other stablecoin issuers, they were selling their tokens at a discount to market makers. And this allowing these market makers to redeem them for several months, and then, you know, the bigger the discount they took, the longer that they had to wait to redeem. And so, to realize these profits, uh market makers, you know, swapped the tokens that they bought at a discount from these larger stablecoin issuers. And they swapped them into other stablecoins on Binance, like USDs from Stably, right? And then they proceeded to redeem the newly acquired stablecoin without any restriction from us, uh capturing arbitrage for themselves, and, you know, they were able to effectively reduce our reserve and circulating supply significantly. And,

you know, uh this was basically our foray into the stablecoin war, right? This was the first one starting in 2019. And we very quickly realized that we were not sufficiently capitalized to pick a fight head-on with, you know, much larger stablecoin issuers, right? There was Circle, Paxos, TrustToken, um you know, Gemini. They all raised way much more funding than we did. We only raised like, you know, about million dollar in funding uh during our first year. So, um you know, therefore, we decided to pivot Stably in the beginning of 2020 and delist USDs from Binance. And we decided to pivot it to uh stablecoin infrastructure development and strategic advisory services.

And basically taking what we have built and what we have learned to help other organizations launch their own stablecoin, their own branded stablecoins, basically. We were one of the earliest industry pioneers of stablecoin as a service, or white labeling, as, you know, as uh come to know. And we've been helping folks uh doing that ever since 2020. We've worked with many names like, you know, Vechain, uh Tezos, Stellar, Ripple. We even advised Ripple initially during the the development of R L USD. So, you know, we have a little bit of our DNA everywhere.

Um But yeah, to date, you know, Stably, we have supported over 20 stablecoin launches, uh including one of the first gold-backed tokens in 2021. Um and we also launched a the first stablecoin with interest rebates for borrowers back in 2024. Um our clientele range from blockchain foundations to stablecoin protocols to institutions, some gaming companies as well. And yeah, that's pretty much been my story since 2018 in the stablecoin space. >> Yeah. Awesome, man. Um man, that must have been a wild time with the fighting against, you know, the large issuers now back in the kind of like the earlier days before folks really, you know, understood what stablecoins could

be. I mean, I remember uh Rob like trading on on exchanges back in the day. There was no stablecoin pairs. You know, and then like the stablecoin pairs came about. And it was like a whole new like way to trade on on on on the markets. Folks were like used to pricing things in Bitcoin terms. Now it was dollar terms. Uh to be thinking about where these companies have came since then is is is pretty insane. Yeah, absolutely. I was one of those people back in 2017, right? I was trading crypto. Tether, USDT, was the only one uh you know, that we the only stablecoin around at that time. And, you know, everyone that had, uh you know, a little bit of knowledge of history of banking and finance kind of, you know, were able to foresee that, you know, this was going

to become digital dollars of the future, right? Fast forward 8 years, you know, blah blah blah, right? So, don't need to go too much into that anymore, but uh back then it was very difficult to convince a lot of, you know, people who never heard of a stablecoin before. Um and even for, you know, USDT, it was, you know, it was the only one, right? There had to be more, right? There had to be more stablecoins to come out with more diversification and flavors. And so, we decided to be one of those uh you know, projects back in the day. >> We just didn't realize, you know, uh the scale of the stablecoin war and the liquidity war that was going to unfold, right? And so, you have to be very prepared, uh you know, not not just from you know, capital perspective, but also,

you know, industry connections and a lot of other things in order to, you know, make sure that that that it works out. So. Yeah. Certainly. And and through your experience, 8 years in the stablecoin business, you've you've seen a thing or two. You you've noticed that not all stablecoins are are the same, and there's several different kinds. Uh and so, as you guys are advising some of these clients, you know, there's many different types and varied varieties of stablecoins that you could pick from. Could you just start to sort of approach the stablecoin taxonomy?

Maybe, you know, talk us through how you initially put this together, and what are some of the high-level key categories in this uh this stablecoin framework? Absolutely. So, I actually released a stablecoin taxonomy paper recently. You can check it out on my Twitter. Uh but, you know, at the highest level, the the framework that, you know, I not, you know, came up with. I I like to think of I updated it, right? Um the framework that I'm using now classifies stablecoins based on how they are backed.

How they are backed, not just what backs them, right? So, the core split is between what's called exogenously exogenously backed, uh endogenously endogenously backed, and hybrid designs, right? Most of the market uh today it falls under the exogenous models. So, exogenous mean, you know, the stablecoin is backed by external assets or collateral, right? External reserve asset or collateral. And endogenous mean the stablecoin has value that is created within itself, within its protocol. It doesn't require on external collateral or reserve to maintain, you know, intrinsic value or, you know, peg stability, right? So, but let me

let's go back to exogenous stablecoin category because that's the largest one. So, within the exogenous uh stablecoin category, there are three further subclasses, right? The first one everybody knows is the reserve-backed stablecoin. Also known as fiat-backed stablecoin or payment stablecoins, right? But just because it's backed by a reserve doesn't necessarily mean, you know, it's a fiat reserve, right? Perhaps it's a, you know, on-chain reserve of other stablecoins or, you know, yield-bearing assets as well, right? But generally speaking, uh fiat-backed stablecoin, payment stablecoins under Genius' definition, they fall under the reserve-backed stablecoin category, or RBS, right? They are considered RBS.

And so, these are issued one-to-one against reserve like cash, T-bills, or yield-bearing stable assets, and they're designed primarily for payment and settlement purposes. Um the second class of exogenous stablecoins are collateralized debt position stablecoin, or CDP-backed stablecoin, right? They're also known as crypto-backed stablecoin where, you know, users lock up crypto collateral uh into a CDP, into a collateralized debt position, in order to mint new stablecoins, right? And when they're minting it, they're actually borrowing it, right? So, these uh CDP stablecoins, they're closer to synthetic dollars.

Uh and a really good example of this, largest decentralized stablecoin in the world, is MakerDAO, or Dai from MakerDAO. Or actually recently, uh they rebranded to USDs. Yep. They took your name. Yes, we actually we actually sold them that trademark back in the day, but different story, right? Uh so, we, you know, uh the the Sky USDs stablecoin, it's not exactly a purely CDP-backed stablecoin. It's actually a CDP and RBS hybrid, right? Because you can lock up collateral in Sky to mint USDs or to borrow USDs, but you can also deposit reserve, right?

In order to mint USDs one-to-one. If you deposit collateral into a CDP to mint to borrow US DS, then you have to over collateralize it, right? So, for every $1 of US DS that you borrow or mint, you have to put in more than $1 of collateral. But, if you put in reserve, right? Under the RBS model, then it's just one-to-one, right? You put in $1 worth of reserve and you get $1 of US DS back. So, that's a hybrid model. Um and the the third class of exogenous stable coin is what I call strategy-backed stable coins or SBS, right? SBS, they're you know, they're very similar to RBS.

They're backed by a reserve, right? But, you know, RBS are backed by a reserve of fairly liquid static assets. Like T-bills, cash deposit, bank deposits, right? Whereas SBS, the reserve is actually very actively managed in, you know, some sort of delta neutral strat- strategy, you know, basis trading, um and market neutral strategy, and it's typically hedged, right? In order to make sure that, you know, it achieves a price neutrality without taking, you know, volatility risk, right? So, a very, you know, famous example of this is Athena, right? US DE from Athena.

Yeah. Again, that it that is also a hybrid, right? It's not purely a strategy-backed stable coin anymore. It's a hybrid between a strategy-backed stable coin and I would say reserve, right? Because sometimes they do hold reserves of other stable coins or T-bills static, you know, fairly liquid assets as backing, right? So, it kind of, you know, depends on market environments and where, you know, the uh strategy overall strategy is, right? The composition of US DE reserve backing, it could, you know, shift, right? And so, Corey, is that on Athena, is that only as a result of the recent announcement that they made in the in the last day or so that they will be updating some of their some of their

reserve strategy? Uh that that definitely, you know, further strengthened the hybrid nature of it, but even before that, I think US DE was backed by not just delta neutral strategies strategies strictly, right? There were also tokenized T-bills or also cash backing of it. I'll have to double-check again, but I do believe that, you know, there's more than just delta neutral strategy that's backed. >> Yeah, I mean, they said institutional yield products and RWAs beyond T-bills, equity and commodity exposure through the basis trade, not just basis trade on digital assets, but through equities and

commodities Is that what what is that a is that new? Did that just come out? >> Yes, this just dropped today, this morning, that there is a that they're now kind of bringing in this institutional grade reserve portfolio. Um and that is kind of like what they're trying to do. So, there's going to be institutional triparty collateralized lending via Coinbase, Kraken, Anchorage, and others, prime lending across centralized exchanges and hyperliquid, and then liquid high-quality non-T-bill RWA exposures as well as basis on non-crypto assets. I see. Uh because I think basically what what Guy, the founder, put out was that um the market cycle that they've been through, obviously, with this kind of

crypto winter has really reduced the basis trade's profitability, and so they're looking to expand and kind of diversify their collateral sources in an effort to basically be able to generate you know, more sustainable consistent yield even in in a crypto crypto kind of winter. Yeah, more diversified yield sources. Yep, 100%. Um yeah, so, you know, as you can see, that further, you know, um exemplified that the hybrid nature of of, you know, these stable coins now they, right? They you know, a lot of them are purely, you know, uh sticking to one category, and a lot of it are, you know, fiat-backed stable coin the regulated payment stable coins, right? But, the ones that are, you know, quote-unquote decentralized are a little

bit more innovative. A lot of them are, you know, implementing hybrid models. They're not just sticking with one purely one pure model anymore. Yeah. Uh I have a question for you on the kind of fund-backed or like basis trading-backed stable coins, right? You call them like strategy-backed. Um there's a kind of a sentiment going on in DeFi right now that is like, why would I go and try to get a little bit of extra yield, you know, with the understanding that there is a risk of losing all my principal or taking a significant drawdown on on my principal when compared to something like a T-bill compared to something like a just a you know, Robinhood Gold earn account or something. So, the question there on the strategy-backed stable coin is

like when you when you look at like classifying the the risks of different strategy-backed stable coins, a lot of these things are just kind of like hedge funds backing a stable coin, and you are holding that token, you are assuming the risk of that of that hedge fund, right? Um how do you think about the the sustainability, like the long-term viability of these strategy-backed stable coins, and what are some of like the risk parameters that you try to understand when thinking about this this specific category? Yeah, absolutely. I guess I can start with, you know, people can, you know, investors can lose money and risky risk assets from stable coins to, you know, yield-bearing assets or what I

like to call yield coins. I don't like to call them yield-bearing stable coins. So, or even, you know, in traditional finance private credit, right? A lot going on in private credit sector right now, right? So, you know, not to say, you know, not to trivialize the the nature of the risk in in DeFi and stable coin and yield yield coin projects, right? Um there there is a lot of risk, significant amount of risk, and not just from the underlying strategy itself, also, you know, from security risk as we have seen over the past, you know, week with the Trip protocol incidents and also with Resolve, right? The a strategy-backed stable coin, actually.

So, you know, yes, you it's a very valid question, why are people risking so much in order to chase, you know, returns that are barely, you know, competitive versus T-bills, right? And you know, I mean, if if this was the case all the time, then it wouldn't make sense, right? Absolutely wouldn't make sense. But, this is not the case all the time, right? We do know historically that during bull markets or during, you know, better periods, yield in DeFi for stable coins and even for, you know, crypto assets has, you know, were very competitive versus traditional finance, extremely competitive, right? And in this particular market environment in market environment right now, if you are looking at, you know, the market and you're seeing the yield

is low, well, you know what? On the other side of the equation, that means borrowing cost is also low, right? And if borrowing cost is also low, now, again, this might involve taking on more leverage and more risk in order to uh you know, compound the yield exposure, right? Through yield looping strategy or carry trading and things like that, but you know, if people really do want to get higher yield, then, you know, there are ways for them to achieve it, but they do have to undertake the risk. That's just, you know, that's just a natural thing that you have to deal with financial markets, especially with a market like DeFi and stable coins and yield coins that's extremely nascent, very immature right now, right? So, you can't just look at this market right now and expect it to have like, you know, regulatory

standards or like, you know, traditional finance standards. That's that's not a fair apple and, you know, apple-to-apple comparison, right? It's it's more like apple to like I don't know, like a grape or like an orange or like something like that, right? It's way different right now. Maybe one day, you know, with more regulation and more progress and with better security development, things like that, it will, you know, the risk premium will start to converge more and more toward the the same with traditional finance investments, and, you know, that also mean returns and yield will also start to converge with TradFi, right? So, we we do want to work toward that day because that means we're improving market efficiency, right? When we get there, but until we get there,

there's going to be there's going to be, you know, a lot of um there's going to be a lot of you know, back and forth, you know, a lot of heartbreaks and, you know, stressful, you know, sleepless night, and that's that's just part of the process. Imagine when people first built airplanes, right? Imagine how many airplanes actually like didn't, you know, finally make it back into the ground with people alive, right? But, what do humans do? We kept going. We didn't stop, right? >> Yeah. We kept going, and then within 60 years, we were on the moon or like 20 years, you know, I double-check my math here, but yeah, we were on the moon.

Yeah. I I think we were on the moon, so, you know, we're we're about to go back there again soon, right? >> [laughter] >> Man, another thing that just dropped today, I'm curious to get your opinion on it is Polymarket is changing their collateral token on Polymarket itself to P or Polymarket USD. It's going to be currently backed 100% by USDC. Why do you think Polymarket wants to take control of the stable coin platform of the stable coin on their platform? What what could this suggest for prediction markets like Polymarket?

Yeah. Yeah, absolutely. So, this is the kind of like the whole reason why, you know, we started stablecoin as a service or stablecoin consulting way back in the day, right? We foresaw the, you know, the the rise of privately issued money or stable coins. Privately, you know, white label stable coin or branded stable coins, right? Um and right now, there is still not that many of them. You you feel like you're hearing a lot, but it's not a lot. Have you seen, you know, white label debit or credit card with like traditional, you know, uh supermarkets or like, you know, Walmarts and Amazon? Tons, right? If you compare that to how many branded stable coins there are in the market, it's absolutely like, you know, minuscule, right? And for the very similar reason, why would

any of these companies want to issue their own debit card or credit card, right? Why don't it just, you know, Bank of America does it. JP Morgan already does it. Why do they need to have their own, right? Well, number one, uh if they issue their own stable coins, they get to reduce Well, in the case of Hyperliquid, it's not so much payment cost, but like, you know, in the case of like a supermarket or like a e-commerce platform, right? They get to significantly enhance payment costs, right? Stablecoin costs nothing or barely nothing to send and they settle almost instantly, right? You don't need Visa. You don't need Mastercard. You don't need anything in between, right?

In order to, you know, have that stablecoin payment be settled to the merchant uh literally within seconds, right? Secondly, um the stablecoin, as long as it is in circulation, right? Meaning somebody has to acquire the stablecoin, hold it before they spend it, right? >> Yeah. And you're not going to go to You're not going to go to like, I don't know, Costco in like 10 years in the future, get in line with all your stuff, and then like, oh crap, let me go get the Costco stablecoin real quick before cuz I need to get this 2% discount on Costco stablecoin. You're not going to do that, right? You're going to get it from home or like way ahead, and by the time you get in line, you just go ahead and you pay. Boom, right? And if you're if you have to get that stablecoin from

Costco ahead of time, now Costco's sitting on a lot of float, right? A lot of reserve that's backing that stablecoin. And now they're earning yield, right? Float income. They're earning float float income from all that stablecoin that's sitting in circulation but has not been spent yet, right? That float income could be extra revenue or it could be redirected, forwarded back into their ecosystem in order to enhance, you know, user benefits and and um values, right? For example, Costco issue their own stablecoin, well, use Costco stablecoin within Costco, save 2 3% or something like that, right? Where does the 2 or 3% savings come from? Oh, hello, Visa Mastercard is not in the picture

anymore. And they get they get float income from the reserve. They could literally redirect that back to their customers to make it even cheaper, right? To buy stuff with Costco stablecoin. So, now you have natural demand. You have natural demand for people to want to get into Costco USD to spend it within Costco, right? Because they they get a tangible, you know, financial benefit. They get a discount, right? And now that allows Costco uh USD to have its own like, you know, its its own economy. It has its own money velocity, and eventually, you know, stablecoins, they're not closed loop system. They're open loop.

So, they can actually go outside of Costco, right? They can circulate into other ecosystem. They can, you know, just like how the US dollar circulates outside of the US economy, right? That further increase the power of the United States and the US dollar. The same thing would happen to like any company that issue their own privately branded stablecoin that, you know, gains velocity and adoption, right? Be it Hyperliquid, be it Costco, be it Amazon, you know, anyone that wants to, you know, financialize their ecosystem in the, you know, in the form of a digital uh uh uh a stablecoin, now they can capture all that value, all that network effect, right? Keep it within their own ecosystem, benefit further benefiting their own users as opposed to letting it go elsewhere.

>> Yeah. Yeah. So, you know, one of the things that's really significant here for Polymarket in this particular example is that Polymarket hasn't charged any fees up to this point. They have zero revenue. And this activates their entire monetary base. I'm seeing estimates There We don't know exactly how much float exists on Polymarket at any given time, but the estimate is that there's about 500 million in USDC that's just deposited onto Polymarket for people that are just, you know, holding balances on the platform in order to place these prediction market predictions.

Based on the spread >> that's more than 15 million dollar a year in float income right there based on current T-bill rates. Ex- exactly. >> Circle but Circle and Circle and Coinbase keep most of that, not Hyperliquid. Yeah. >> sorry. Yep. >> Yep. Right. Right. And so, um I'm I'm curious, you know, on on one hand, we've got this float income and stablecoin businesses are are really well positioned to capitalize on this. On the other hand, you know, AI payment and these sorts of things is making just-in-time payments a lot easier. So, how do you How do How should we rationalize these, you know, when in in just-in-time payments means like, hey, I want to predict place this prediction, I deposit, it places the prediction all in one click. I don't

have to hold balances on this platform in order to facilitate making a prediction. That takes away all of the float income from companies like Polymarket or Uber or Costco. How you know, do you do you see that as a core risk to the to the stablecoin business? >> No. Not at all. What people fail to realize about stablecoins is, you know, they're like digital checks, bank checks, right? They're like digital bank checks. You know, they're backed by, you know, actual cash deposited somewhere, and you can redeem them for cash. It's very similar to a bank check. But they live on a blockchain, right? Because it lives on a blockchain, it's more open, it has more money velocity, it has more utility, blah blah blah, right? At the end of the day though,

it's still similar to a bank check. Banks don't monetize checks. Banks give checks away for free. Actually, uh if I pay a little extra fee, I might get a nice little poodle on my, you know, bank check or whatever, customize, right? But that's about it. They don't really monetize that. For their VIP client, they're definitely like giving out customized checks away for free, too, right? So, that has literally what a stablecoin is. If it's like, you know, a bank If it's similar to a bank check, then how you really, you know, expect to monetize it over time, right? The the the true answer is in the long run, you don't. You don't monetize stablecoin off of float income. Yeah.

>> to share that away. You have to, you know, give that away to the ecosystem, to the users in ways that are compliant, right? Now, you know, genius say you can't share yield with the users. Okay, well, that's pat you know, potentially that's passive, you know, yield sharing for the holders, right? What if the, you know, what the user actually use a stablecoin for things, like for payments, for borrowing, for lending, for trading, providing liquidity, blah blah blah, right? Now you're actually doing something with it. Can I get rewarded with it? I don't see why not, right? Like you go you go to, for example, you go to um what you call it, uh your your Hyundai dealership, right? You need to get a new Hyundai Sonata, for example, and I actually saw one earlier

in Seattle. They they were um giving away one of these uh financing deals for 1% APR >> [laughter] >> Yeah. And I'm like, how the heck is that even possible? And so, you know, when I went to talk to them, guess what? Hyundai is subsidizing that interest rate, right? >> Really? They're giving interest subsidy or interest rebates or whatever you want to call it to the user. That's not an expectation of profit. That right? So, legally, there's been many historical precedents saying that interest rebate, interest subsidies is not considered, you know, security expectation of profit, right? And so, you don't have to just share the yield with passive holder. There's so many other ways that you can share yields to the like, you know, um ecosystem market participants

and users in a way that could be compliant, that would be compliant with the the genius that, right? And that that right there is further reasons why, you know, there's going to be a lot of competition among a lot of stablecoin issuers. They're all going to want to forward this yield out, right? It's not yield-bearing stablecoins, right? It's yield-forwarding stablecoin. That's the terminology, right? So, they're going to forward this yield away to as many like, you know, the merchants. Hey merchants, accept our stablecoin as a form of payment, you know, so that, you know, we can gain more uh payments volume. Okay, and then we'll we'll share some of the uh you know, pay uh rewards to you if people make payments volume in in our stablecoin,

right? Okay, so that's the merchants. Lending and borrowing platform. Hey, if you lend our stablecoin, we'll give you rewards. Or if you borrow your our stablecoin, we'll give you interest rebates right? >> Mm. So many ways to like, you know, chop it up. So, like it's Yeah. it's really like this is where we come in with Stably and years and years of experience, right? We look at this and we said, you know, I've been thinking about this, you know, yield-forwarding issue since 20 since the end of 2022, right? There's so many ways to do this. Everyone just caught up over, oh yeah, yield-bearing stablecoin, we can't pay the yield. There's so many other ways to forward the yield, right? I mean, PayPal's already doing it. Ripple's already doing it. Look at Morpho. Look at Aave. Look at

Curve Finance, right? They're already forwarding rewards all over the place, and you know, to to these protocols, to their users on these protocols. And it all it all comes from float income. It all comes from reserve income, right? And these are, you know, rewards for activities, right? You have to do something on Curve. You have to do something on Morpho. You have to do something to get this reward. Yeah. So, you know, it's not passive holding yield. That At least that's what the way I see it. Yeah. >> Again, I'm not a lawyer. I'm not No disclaimer. Not not a licensed legal professional. So, definitely double-check with your legal counsel Yeah. you know, on on this topic. Yeah.

Um it seems like regular like from the regulatory perspective with regards to clarity and market structure, regulators are favoring these fully reserved, you know, genius-compatible fiat-backed stablecoins. Um I'm curious if you think that this is going to be firmly locked as like the payment category globally accepted standard, like basically USDT, USDC, um while pushing the rest kind of to the fringe for more like investment-based assets. Um how do you think about like how the regulatory landscape is affecting which globally accepted standard type of stable coin is going to be like the payments oriented stable coin?

Okay. The way I like to think about it is like yin and yang, right? It's not one overtakes the other. They coexist. There's a need There's a place for both of them, right? The ones that are stable and used for payment and settlement that doesn't have any yield, and the one that is more geared towards savings investment use cases that does have yield or appreciation, you know, ability, right? Now, one core distinction that you need to keep in mind is any healthy monetary system, they need to separate payments money from savings money.

You cannot combine the properties of these two into one single currency. That's what That's when you have like an unhealthy monetary system, right? I'll give you an example, right? Let's say you have a stable coin coin right? You're probably not going to want to spend it. It's paying you yield. Why would you spend it, right? It's an opportunity cost, right? When something carries yield, it introduces opportunity cost. So, now you're less likely to spend it. That reduces money velocity, right?

So, that's in the use case that's a medium of exchange use case. In the medium of credit use case, nobody borrows yield-bearing stable coins or like, you know, yield you know, yield-bearing assets, right? Because you don't get to keep that yield as the borrower. You You have to pay that yield back to the lenders. You owe that to the lenders. And on top of that, you still owe them interest. Matter of fact, in in traditional finance for dividend dividend stocks, right? You borrow dividend stocks to short them, right? To short sell them.

You owe substitute payments on those dividends to to those who lend you those stocks, right? You don't get to keep that dividend, right? So, anything that's yield-bearing it it it acts The yield acts as a tax not just on spending, but also on borrowing, right? So, that reduces both money velocity and credit velocity, right? So, you cannot position a yield-bearing instrument as something that is designed for payments and settlement use cases because anything that's designed for payment settlement medium of exchange or medium of credit, right?

They don't have yield. Just look around you, right? Your Your bank account, right? Your checking account, which is the thing that you use to spend, you know, every every day, right? Do you ever spend money from your money market accounts or your savings account? No, right? Maybe Maybe some people do, psychos, right? Most people, they're they don't do that. So, this is a distinction that most people miss, right? They don't They don't understand the difference between payments money and savings money. And so, maybe they, you know, I mean, some of these people are actually very great, very innovative, you know, stable coin founders and builders, you know, and they want to create, you know, yield-bearing stable coin or yield coin products, right? The The next evolution of where this industry is going. But then, they don't

realize that, you know, a yield-bearing asset is not good for payments or borrowing credit use cases, right? And so, you know, sometimes they would position that, you know, their their project in a not as optimal uh, you know, uh uh go-to-market approach, right? Whereas, you know, perhaps you should think about having two, right? One that is non-yielding specifically for payment and borrowing and lending or whatever, and one that maybe does have the yield, right? And that yielding one that's you don't position as, you know, for payment or whatever. It's just savings instrument, investments instrument, whatever. Could be a security, whatever, right? But that's, you know, that's in a different category. That's completely, you know, separate from the the other one.

Yeah. Yeah, I think I mean, when Sam kind of came on for one of the first episodes of this weekly show, he laid it out as two separate kind of categories, just yield-generating assets and then kind of genius compatible, more like uh, yeah, like settlement payment assets. Sounds like you're introducing kind of a third here with this hybrid model. So, it's interesting to hear how you think about the the uh discrepancies as it pertains to like the regulatory changes because it the regulatory is changing so much. For example, like Binance USD BUSD went from, I mean, like zero to like 25 billion almost in a very short amount of time, and then that thing got completely shut down, you know, the SEC went after Binance. Uh that was something that was

kind of still in this hybrid model. Um it was a little bit less friendly regulatory setup there. Binance obviously operating from a different spot. Just it's interesting to understand how the the regulatory changes are going to affect how people are like labeling these things and kind of interacting with these things on a global scale. Absolutely. Well, first, we have genius already, right? And And also Mika and many other regulatory frameworks that popping up all over the world. And it very clearly says that, you know, payment stable coins cannot have yield, right? Cannot be yield-bearing, cannot, you know, pay yields passively to holders, right? So, that's already clear as day, right? And you know, for better I mean, you know,

for all intents and purposes, they shouldn't have yield. Yeah. >> Payments. They're for payments or for borrowing credit use cases, right? They should never have yield, right? But genius act also leaves, you know, a section that says, you know, the they're going to look into non-payment stable coins, right? What defines a non-payment stable coin, right? This is the part where we we as an industry have to work together with policy makers and, you know, regulators in order to help educate them, right? On and what is a, you know, payment what is a non-payment stable coin?

Because then you're going to so many other like, you know, lending, credit, liquidity provision, uh pay not payment, but um what is it? Uh potential uh arbitrage or insurance and bunch of other things, right? So, there's so many use cases for a stable coins that, you know, um what you end up calling them or categorizing them in order to regulate them, you know, that's an ongoing process, and I think, you know, the the the market and the regulation will continue to evolve hopefully in a collaborative manner.

Yeah. >> Um like we have been seeing over the past year, which is really great. Yeah. >> Um you know, that will foster innovation, and that will, you know, allow regulators to also, you know, be open-minded to these things. Help them, you know, they help themselves understand it. Because if if it if we still have, you know, uh what is what's his name? Uh Gensler at the SEC, and he's, you know, uh what is it? Uh regulation through enforcement, right? Well, that's not open-minded. That's never going to, you know, be collaborative and help the industry move forward in the, you know, in a way that is uh you know, uh positive for everybody, Yeah. right? So, the builders going to keep, you know, trying to avoid the regulators and, you know, keep doing things in DeFi anonymously, and there's no, you know,

there's there's there's no oversight of them. Uh whereas, if, you know, the government, the regulator were open-minded, and they said, "Hey, we'll let you guys experiment, right? Like, you know, let's We know there's things that could happen, you know, bad things could happen, but let's keep an eye on it, and let's let's experiment, right? Let's work together on this so that we don't miss out on potential innovation, right? What if other countries other than America start adopting these and we don't? You know, and then we'll be technologically technologically behind other countries. So, You know, Corey, one of the things that I found most interesting about part two of your stable coin taxonomy was the idea that this is actually a feature.

You know, we we we typically think, "Okay, well, if I'm, you know, if I have this asset, I'm holding it, uh maybe I'm using it for payments, yield would be great, right? It would be nice if we could also, in in addition to, get yield." But it turns out that the the the best uh characteristic of a payment form of money, whether it's a coin or otherwise, is that it's high velocity. And you make this point in part two that if you end up paying yield on your payment coins, it would be more likely that people would use them as collateral for lending, use them in vaults, and do these sorts of things. Um I'm just curious if maybe you could unpack, you know, part two, anything else that you think is is relevant to

this discussion as we sort of think about the knock-on effects, the second-order consequences of increasing the monetary base with these stable coins. Oh, you're talking about money supply. Okay. So, now we're not talking about taxonomy anymore. We're talking about stable coin money supply, which is part two of my paper. So, this one is a little bit um we need to kind of like take a step back and understand how money supply works in traditional finance and for fiat first before we talk about stable coin, right? Um and most, you know, I a lot of time I ask, you know, clients or partners or investors, "Do you know how money is created? How How's money created or how is money printed, right?" And most people, they would, you know,

they know the answer. They they always start with the Fed. Yeah, the Fed prints money. Okay, that's base money, right? That's M0. What about the rest of the money supply? Do you know how the rest of it is created? And they're like, "Uh yeah, lending, you know, bank loans." Okay, you're getting there, bank loans. But like, you know, how do how do they make, you know, increase the money supply? "Oh, you know, banks taking customer deposits and then they re-lend them." Nope. Uh that's not how it works anymore, right? Maybe it was 50 years ago, 100 years ago, but nowadays, banks literally print money. Bank money out of thin air.

They give that to you as a loan. Deposit liabilities, right? That's considered a M1 money supply. And that sits on top of the M0 money supply, right? Banks actually create loans first, which then become deposit, and then they go and they acquire reserve after, right? So, in traditional finance, fiat now has evolved the money creation and credit creation process. It has evolved to a loan, deposit, and reserve model. Now, let's look at stable coin, right?

Completely opposite, right? For a stable coin, and for it to be created, it has to be fully backed by reserve, at least for payment stable coin reserve back stable coins, right? It has to be backed by reserve, one-to-one, right? You can't create new stable coin out of thin air through credit creation, through loans, right? You can't do that, right? So, credit creation is not involved in the money creation process of a stable coin. Credit intermediation is involved in the, you know, the in in facilitating lending and borrowing for the stable coin, right? But that happens in the secondary markets, right? When you issue a stable coin, it's just one-to-one.

Then you have to take that stable coin, put it into a lending deposit somewhere, right? So, that's the stable coin itself is a token liability. You take that token liability, you put it into a deposit liability for the token, right? Like Aave, Morpho, whatever. Now that deposit is earning yield, right? So, for a stable coin, you know, the the base money, the M0 of it, like fiat, is also the reserve, right? But the reserve of stable coin can, you know, has to be one-to-one with the circulating supply. Circulating supply is the M1 money supply of the stable coin, right? In traditional finance, M1 can be much, much, much, much bigger than M0. Not so with stable coin. M1 M0, the same,

one-to-one right? And in traditional finance, M2 money supply, right? All the, you know, loan and savings account money market funds and all that stuff, right? It can further increase the money uh supply, the M2 multiplier, that's what it's called, right? It's 4.21. For every $1 base money, you get another $3.21 of additional, you know, uh broad money that's created on top, right? Lending deposit and all these liabilities. For stable coins, the M2 multipli- I M2 multiplier for all the, you know, all the major stable coin Tether Circle Sky USDs Dai right?

Group them all together, the M2 multiplier 1.13. Which is it's 1.13 for stables and it's 4.21 for fiat, right? So, that right there shows you how stable coin itself, you know, because credit creation is not embedded into the issuing process like fiat money, you can't create credit out of thin air and, you know, have a lot of credit expansion in order to drive money, you know, supply expansion, right? The actually the opposite happened. When you borrow a stable coin, what do you do?

You sell it, right? >> Mhm. If you don't sell it, you're going to redeem it, right? You need to get that final settlement liquidity from from underneath it up, right? What does that do? That, you know, that reduce the circulating supply. That also reduce the reserve. So, unlike fiat money, credit expansion for fiat increases the money supply. For stable coin, credit expansion could reduce the token supply, right? It is an inverted structural dynamic to fiat. And this structural dynamic is inverted because again, fiat is fractional reserve.

Stable coin is full reserve, right? Again, we never had a full reserve narrow banking system at scale. So, we never, you know, we didn't grow up with this. We don't study, you know, we never studied this in textbook, right? Now that, you know, the stable coin industry is being pioneer and and being you know, proliferating as we speak, this is the modern equivalent of a narrow banking system, of a full reserve banking system that we never had. You know, we all we had we always had fractional reserve. Now we finally have something that's like as close to full reserve banking as it, you know, it can get.

Yep. Incredible. Corey, I mean, I I feel like we could talk for hours, but uh I I think you've got a flight to catch and and we've got a >> sure I do. [laughter] uh show here. So, uh really appreciate you coming on, man. You you took us all the way through the stable coin taxonomy as well as the monetary base and how stable coins play into it. Um I think uh we'll have you on again here here soon to to ask some more questions, but uh but for now, really appreciate you coming on. Yeah, thank you so much for having me on. It's been a pleasure. Thank you guys. Thanks, Corey. We'll see you next time. Yeah, see you.