Scott Shay on Why Stablecoins Are Just Receipts For Dollars

Transcript

All right, guys. Welcome back to StableUp episode number 34 powered by our friends at Frax. We've got Scott Shay talking neo banks, de-banking, stablecoins. Scott, welcome to the tokenization tower. Great to have you here. It's a nice view. It's a nice day. It is a great place and a great day. Yes, sir. It is. Well, man, we got a lot to talk about. There is this rise of crypto-native neo banking happening. You've got quite the background uh from some of the larger banks. You've been through some of this deep banking, some of this operation choke point uh happening. Scott, maybe just give us a quick uh tidbit into your background, what you've been working on for the last 20 or so years, and then we'll get into the conversation. So, I've I'm a founder

of four banks now. Bank United of Texas, uh Merrick Bank, which some of your folks may know cuz it was it was an it was an original payment bank, credit card bank. Then, I was the founder I was the founder of Signature Bank. And most notably, my claim to fame is I created Signet. Um and then, right now I'm starting the bank I'm really most proud of, which is actually not a neo bank. It's not a fractional bank. It's something that is new under the sun. It is a 100% full reserve bank, which I think is finally a bank that has a real bank that has the ethos of crypto. And I'm really excited about it. You know,

we're we've created we put our core operating system on a blockchain. We're really the only neo We're only not neo We're the only native crypto bank out there. I mean, I go to a lot of conferences. I see you at like 110% of the conferences I attend, and Robbie, of course, too. And um uh we're the only ones, literally, that transfer a real dollar. Yeah. And And people wonder like we just had uh Simon Taylor on from Yeah. uh Fintech Brainfood and tokenized Tempo. We were talking about the difference between tokenized deposits and stablecoins and kind of what that, you know, what how

actual banks refer to these things and think about them and treat them. Maybe you could just elucidate a bit about the core differences here and how traditional banks are thinking about tokenized deposits versus stablecoins within the lens of customer experience, profitability um moats. There's a lot of kind of conversations about stablecoins with clarity now. What is the difference between tokenized deposit stablecoin and what is the bank's approach to these things? So, I'm going to I'm a obviously as you can now tell I'm a bank nerd. So, I'm going to hang out I'm going to unpack a little bit of what you said. So, first of all, a they're they're really when we talk about tokenized deposits

versus stablecoins, a stablecoin is essentially a receipt for a dollar. It's saying I put the dollar in that box over there. Here's my receipt for a dollar. You've got it. You transfer it. You transfer it. You're on a crypto rail. So, you have to go on to a crypto rail. You have to go get that dollar, somehow get that dollar off a crypto rail. And having created Signet, I can tell you one thing whenever you go on and off rails and we see that obviously with bridges which are really, you know, have inherent risks.

>> Yeah. My view is like what most banks have done with tokenized deposits, actually including Signature cuz I we knew we would what we were doing when we were doing it is like it's stapling Signet was like stapling crypto on it was like stapling paper onto cardboard. Yeah. It The two systems are not fundamentally compatible. I mean, if you look at the banking systems that work right now, they're actually I don't care which one you're using, you need to be embarrassed. I mean, they take this building we're sitting in. I mean, famously took 1 year and 45 days to complete. And they're like, it's a real building and it's like, you know, you

have a great view and like, there are gazillions of people in here. For a big bank and for the operating systems of the FIS's, the Fiservs, the Jack Henrys, it takes more than a year for them to make a significant change. Whereas, by what we did, which is building in a blockchain, A, we're compatible, we're native. So, when when developers look at when crypto developers look at how to integrate with us, it's like, hey, wow. It's like, not all of the contortions and you know, uh I mean, if you have a development background, it's not all the stuff you have to do to to staple cardboard and paper together and hope that they work and know that

there's risk. So, we've um I think and this was our goal with with my co-founders, um Jeff Wallace, Arel Bonnell and Kyle O'Donnell, was to actually create the first native bank. There's one more part and I don't want to get to a monologue here, but there's one more critical part. When you use a tokenized deposit from a regular bank, >> Yeah. you actually are not transferring a dollar. And that's where people don't like want to. It's like, cognitive dissonance.

Um what you're transferring is a promise to pay because the the deposit is insured up to $250,000. Maybe the the the the the the FDIC and the Fed will, you know, make good, maybe they won't, but you're not actually transferring a dollar worth of Satoshis. Fundamentally, this is what got me. I started on my crypto journey in 2013. What got me was when you trade a block of Bitcoin, you are trading the actual crypto. You're trading the actual, I'm sorry, currency. When you're trading a block of Ethereum, you're trading an actual amount of Ethereum. Right. You're

not doing that when you transfer a dollar. So, what we did is by putting all of the money in the bank, but not investing a penny, so there's nobody like, you know, Signature Bank had an had a is public knowledge. We were a lender on the Empire State Building. Yeah. So, if everybody wanted to all of their money, we'd actually go have to go to, you know, the owner of the REIT that owns this building Yeah. and say, "Tony, please give us the the money back." It doesn't actually exist. What we've done is we put all the money in a T+0 environment, so on any business day we can get all of it. We don't take interest rate risk. We don't take credit risk.

And so, when someone moves a block of dollars on our block, they're actually moving physical unit of USD cuz we are a bank. We're not a receipt for a bank or a receipt for a custodian. Yep. And that's it's subtle. It is really something new under sun. It's it's subtle, but fundamentally puts us in a whole different category and takes us out of TradFi. Yeah. I mean, you've been going to all these conferences and everybody wants to sing Kumbaya, you know, about TradFi and crypto, right? I mean, we're all, you know, it's like No. No. It doesn't work. Yeah.

Scott, you know, I'm curious um what what were some of the learnings from the, you know, I I want to get more into ND D and to and 3 XT. But what what were some of the learnings from Signet, from the entire Signature Bank kind of process? Like when when the on and off-ramp, you know, choke points were happening and people were were being de-banked, what was happening? Like where what was happening in your mind? What what like lessons did you learn? What did this trigger as far as you kind of coming to build a fully reserved bank? Like man, what the hell happened? Wow. Well, this is I assume this is a family show, so

I'm not going to take off my shirt and show you some scars. Yeah. >> [laughter] >> I believe you. Look, Signature was de-banked. Um I It was wrong and unnecessary, and I testified before the House and the Senate should open the next day. But as some of your listeners may vaguely recall, there was a time that the administration in power at the time didn't like crypto. They didn't like crypto-friendly banks.

Um and this is wrapped up in a bigger Actually, if we had like hours, we could talk about this, but the regulators have because we live in a fractional banking world, the regulators have enormous power over the banks. Because they control the insurance. The minute a regulate the the the regulator says you're not insured, you're done. Or the minute that you want to exercise having your collateral and the regulator the bank and, you know, the lender of last resort doesn't say that they're going to lend against you, you're kaput. And by definition, you're always as a fractional bank cuz you

know, five people put in $10, and they all think they have $10, but in reality $40 was lent to the Empire State Building REIT, right? Or other people like them. You know, generalizing obviously, but it's been lent out. So, by definition fractional banks are creatures of the government. Yeah. So, the first thing one thing that was really fundamental that I wanted to be part of was saying no. We want a bank that's more robust where we never need a lender of last resort. If everybody wants to take all their money out on any day we can do something that not even JP

Morgan can do. We can just give them the money. Yeah. I mean, don't get me wrong. JP Morgan will be bailed out. They're too important. They have 35% of the market share of the, you know, the United States and they're, you know, we just where it's JP Morgan's world, we just live in it. Um but we have that special superpower of all the money's always there. You transfer a dollar when you transfer a you know, a a Bitcoin or if you just want to transfer if I just want to pay you. Forget about cryptocurrencies.

Personally, my vision is much bigger. I mean, that's why I'm doing this. Yeah. And I want to I really believe that we need to retire and say thank you to the 20th century, almost 19th century business rails of banking. We're a quarter of the way into the century, actually more. >> Yeah. What are we still using 1980s programming for Yeah. in banking? Yeah. Well, then so the core reasoning for the frank fractional reserve is its ability to lend, its ability to then generate yield off the customer deposits and make money.

In a fully reserved bank you know, it there's got to be a creative way to generate revenue. How does that work? So, excellent question. Um you know, investors and others always ask, "Well, okay, that's great. How you going to make money?" Sure. Um and um and we have a great We have just like some fantastic investors who saw the vision Farxiga Farxiga's paradigm, um hack, um names you know, you know, names you know, and um and they got it. Um the um the the way we make money is threefold. So, first, we do make some money from float. Even

though we only invest in T+0, um direct US government obligations, no repo, no nothing else, um months duration, we still make some money from that. Number two, we're going to in starting in 2028, um we're going to start charging on the account fees. We're only business to business. So, we're going to charge a monthly businesses are used to pay monthly account fees, and no one's actually, you know, we're going to charge relatively low compared to the big banks, much lower. The third, and this is where we're doing shipping and logistics, is if I ship you something, you know, if I ship you uh you know, uh you know, $10,000 worth of those water bottles, um one of us is taking

risk. Either I send it to you and hope, hey, you're usually pretty good for it. Um I'll send you a bill, or I say you got to ship me for a ship pay me first because these are such, you know, these are in such a or more likely, if it's a bigger amount of money, you get a letter of credit. Mhm. So, letters of credit are very expensive. And what really we found at Signet was, and this really blew my mind, and it's why we're so excited about continuing the 24/7 payment delivery, is by the end of Signet by 2022 before it was shut down and the money was sent back by the government.

Um 50% of the transactions were not crypto but were shipping and logistics related and they were for much lower amounts. So another So people who would wanted to do So a typical transaction in that arena would be 17,000, 100,000. The crypto transactions would be a million, you know, to be aggregated, a million, two million, 10 million. You would even have 100 million. But here if I ship something to you, I can essentially create a self-serve We've created and the team, the engineering team is just remarkable, is a self-service letter of credit, if you will. It's a programmable payment which people in the crypto world are used to.

It says I've shipped you those bottles, check. You say I got the bottles, check. Robbie is not here says I went in, this is what we ordered and um the bottles look like they're fine. Check. Once though we've agreed on that those are the three things that need to happen, the money in the the money and the the um the the letters the letter of bill of lading, the certificate of authenticity, the you know, if it's if it's pharmaceutical, if it's whatever, there's a whole bunch of certificates. It's what's I'm summarizing obviously, but all the documentation required and the money change hands. It doesn't

matter whether it's 3 a.m. in Detroit Dublin Dakar Dubai. You don't have to wait for the bank to be open. You don't have to have a lawyers. Now, look, 20% of the transactions are going to require They're complicated. They're you know, they're big. You're going to want a lawyer involved, but for but for 80% of the transactions or some number like that, we're going to charge you 10% and we still make money. That's how big and fat the margins are in banking.

Yeah, I mean you guys have launched this NDD product as of April. Yeah, we're Um with a couple other other products. Um what is this what is the NDD product what what is that and how does it relate to the bigger vision? So, NDD is part and parcel of a bigger vision. Yeah. Uh which is what NDD does, next digital dollar, is actually if you want, you don't have to, you can have a regular bank account like what I what I just described. It's all under, you know, secret, nobody knows from you, it's under the bank secrecy act, you know. But, there are many people there are many players, companies, that are thinking

actually, we want to show that we've paid somebody and have it be public. So between clients of the bank, customers of the bank, we've put NDD on the Ethereum blockchain, which is obviously the most used blockchain. Um maybe in there it'll be it'll be on others in the future. You just talked to you as you said to Tempo and others. But, in the meantime, we started with Ethereum, made most sense. And now you can see that I paid you.

That's really important in a certain in the universe of of suppliers in that First Brands, which is the famous uh you know, the famous bankruptcy where people thought others were getting paid. If I said, "You know what? I'm the I'm the I'm the the factor, I'm the finance agent, I'm the private line. I want to actually see your payments public. I'm not going to be able to touch them, right? They can't touch them, but I can observe that you're actually making payments." >> Mhm. That is enormous for protecting credit. I mean, that's you know, thankfully, that's where I, you know, personally, I do and other people in the in the in the group really

have the understanding of banking. Cuz we've actually that solves a central problem of private credit lenders. Interesting. But But that's actually opposite of what we've been hearing, which is that privacy is crucial for this next era of payments, of institutions using crypto, of the average person wanting to use stablecoins for payments. How do you balance this desire for privacy with this, you know, B2B public need to show, like, "Hey, I'm good for it." How do those two go hand in hand when I think a lot of these, you know, businesses and enterprises want to keep their finances private. Why make it public? Is it just solely for this

credit reason? How How do you balance the desire for privacy here? So, first of all, totally agree. Many people, I don't know We don't know yet. Most, you know, probably I guess most are going to want their transactions kept private. There are people that getting their companies. Most companies will want their transactions private. But let's say you're literally a borrower in the private credit markets and you've got five different credit five different creditors. They don't have visibility to the other credits that you've extended. So, it's always been a problem in banking and then if I'm borrowing from five

different people, I could you could be playing three-card monte with the collateral. This protects you against it. I'm not saying everybody's going to want it. Yeah. But boy, but those people who do want it, they're going to say a prayer of Thanksgiving that they used it. And the other people that may want it, and I think this is going to be a use case, um, are some exchanges that want to say, "Okay, here's the clearing. The dollars are flowing. We want that all on the network or so that everybody can see the finality and the It's It's almost like a ticker.

You know, and there could be ways in the future to semi-anonymize that. So, it's you know, it's just exchange to closing agent or to custodians. So, it's not like I'm saying, "I know you bought X shares of SpaceX or whatever today's, you know, hot story is." But, it could say somebody did on this exchange. It closed. You know that's yours. The other guy knows that was his. Right. You know, that's that's again a real serious use case that we're solving. So, we're not you know, we're not just trying to throw things at the wall. We're actually, I think solving

real necessary cases. So, I noticed that you guys were doing some work in Wyoming as well as as part of like the jurisdictional kind of like landscape. They've been very forward with this digital dollar, the Wyoming stable token. Yeah. I think that's what it's called. And they've been very kind of like like the first state to embrace a a stable token for a state and for like a local a local state level government. What is the relationship with Wyoming for NDD and for kind of the collateral and legal side? What are you guys doing in Wyoming? So, we're just we're just chartered there and they were supervised.

They did start their own stable coin and more power to them, but that really doesn't have anything to do with us. The idea is that if you're a citizen of Wyoming that instead of using cash, if you want to use a stable coin, that you know that the reserves are going toward parks and you know you know they're going to state government. Wyoming is famously a low tax state and no income tax state so they are very keen on finding ways to get revenues um and more power to them. I'm happy for them. You know, I'm happy for I'm happy for the state of Wyoming. We're a taxpayer. You know, so I'm happy that they've you know want to figure out

other ways to also raise money. Right. Right. Okay, so kind of you know, chartered there it's friendly. When it comes actually people using this this um FDD or sorry NDD this this kind of new form of a bank, what is the appeal to someone like myself, someone in the younger generation? Why would I what like why should I care to put my money into this? What is the what is the benefit to to Wells Fargo or to JP Morgan Chase or whatever it is? Well, first of all, you aren't our target market personally.

Your company could be. Okay. >> So when we talk, we're B2B only. Yeah. Um and you may want to use this because you can minimize your your working capital. If you you can get If you get paid on the weekend for those proverbial bottles, you can reuse that the next you can use that immediately. You don't have to wait for the wire transfers. You don't have to pay for a wire transfer. You don't have to pay for Swift. So if your those bottles are being shipped from Manila or they're being shipped from Manila to Portland to here, you don't have to worry about the time zones or the different bank have a bank there a bank here.

You can just make that payment atomically. So for your business, I mean, you're not in the water bottle business. You're not your local business here. Um but for many businesses, wow, we can offer you a lot of service that will lower your costs and fees and simplify your business and mean that and and make you have less working capital. Um I would say um, you know, in terms of the big banks, to be perfectly honest, I think we're competitive to big banks. Yeah. I mean, we set ourselves up so that we keep all the money in just short-term US Treasuries. So, we have the quality of a G-SIB in that we have no credit risk.

Um, but we have the immediate transfer, the flexibility of having a blockchain as a core system. Yeah. We're bank supervised. We have a supervisor. We were fully examined before we opened. >> And you're doing daily transparency checks as well. >> Yes. Yes, 100%. >> Yeah. Yeah. We're We're going to And we're going to start posting those actually on our transparency page. Yeah. So, kind of as we kind of slowly come to a close here, when it comes to integrating the importance of the crypto rails to this, could you just kind of reaffirm why this is only possible using Ethereum, using a blockchain? What What makes this so much different and more unique than a typical banking setup that

is enabled by using the on-chain tools at hand? So, most banks, and again, Signet, and we were working on on on, you know, other stuff, too. I would say they may have a cool 24/7 system that shows you got paid and the other person, you know, you you paid and the other person got paid, but in reality, to a great degree, they're debits and credits. They're actually not the movement of the money because even the biggest banks really run their batch twice a day, and they're still I wasn't totally kidding about 1980s technology. Yeah. Um, I mean, there are big banks which have,

you know, sort of holidays on changes for 2 months cuz they're just integrating what they've integrated over the last year. Um or what they've started over last year. It's it is fundamentally can make you can make it look like it works. Again, it's like stapling paper to cardboard. I'm you know, but it fundamentally doesn't work because fundamentally what what everybody's talking about is bringing tradfi and and and crypto together, but they just don't work together. It's like trying to put you know, VHSs and Betamax together. It just it does they're incompatible. You can run them on the same system and it's got a third system that has to have a third system

that records from one, transfers to the other. It is a workaround. And what I'm so excited about and how I hope people are talking about and writing about in 10 years. I I really really mean this is that we really revolutionize the banking system. We brought crypto to the banking system, not some ersatz, you know, put together. Scott, just coming to a close. I mean, what is the road map here for you? What are you most focused on throughout this year into next? You mentioned by 2028 there'll be more revenue generating features and products. How does the next 6 to 12 months look like for you guys

really capitalize here? Well, I we're clearly looking at how to make um NDD more powerful. Um and like everyone, but I think we were we're doing it I hope uh in a great way that will hopefully have some announcements coming out at some point. Um we're looking at AI. One thing that was nice about starting the bank when we did in 2023, 2024, 2025 when we were doing all the building was we knew AI is here. It was no longer like something, you know, where you could you could put it aside. We know AI is here. Um I do think adoption to finance is going to be slower than everybody thinks.

Part of that is due to to the tools involved. And part of it, frankly, is due to the risks involved in AI. And you know, you've I I think you even talked about AMMs. I'm watching those obviously closely but um you know, even the folks who are essentially have AMMs like Renaissance and others um that had AMMs before they were really called AMMs. There's human being watching them because you're never going to want to say, "Hey, dear shareholders, all the money's gone because our you know, AMM went wild and we didn't check it until Monday morning, you know." Or it had it had it transferred out faster than someone could push a button from all the

money from our accounts. I think it's there's no question it's going to happen. There's no question the very >> first thing I did out if you've got one more moment though, and I was saying started out I was my first job was at Solomon. My first real job was at Solomon Brothers. And um I did the the the um training um training class that uh Michael Lewis so famously uh depicted. So, one of the things that I did was they I rotated through the money making through not money making market making areas on the OTC desk when there were phones and people were calling. And the trader who had a good sense of humor at my first day said, "I'm going for lunch. You take the position for an hour."

And it in addition to being scared into death, you know, I was like, "Just got to be kidding me." And I'm like, "There's a decent There's a real position here for Solomon Brothers." Um the um you know, I got back I I think I lost like $2,000 in the hour. And he was, "Oh, that's great." You know, over [laughter] how He was like when he he he enjoyed it. It was like worth it to him. But >> [laughter] >> and um I didn't know what I was doing. I was happy it was only that. But, um, ultimately, there was somebody there who would have pushed the button and I made it. And I started really using his position, somebody would have stopped me. Yeah. And someone's got to do that when you're talking about them, you know, the repo market, I'm sorry, is it the re- the repo market is about a $13

trillion a day trading market? >> Yeah. Yeah, someone's going to watch that. Yeah. It's not going to happen so fast. Yeah. And so, you think that kind of framework applies to how the banking industry is going to evolve? Yes. >> Just this different removals of checks and balances, implementing programmable kind of immutable technology, but then watching it, and then same thing, and it's kind of evolving through that process. I think so, and I think we're part of that revolution. I've I'm really I'm I I can't be more excited. Scott, thanks for the time, man. Thanks for coming to the studio. That is Scott Shay, Stable up episode number 34, guys, live from Tokenization Tower. We'll be