Stablecoins, CBDCs, and the Future of The Dollar - Head of Tokenization At Galaxy

Transcript

And then of course the question is given that how do you regulate it to be able to ensure that that capital can move in a very efficient manner but also is used in an inherent and safe and and contained way. From all of your experience what separates the current era of stable coins and and why they're there they're such a positive impact versus the the you know potentially treacherous CBDC's that we had seen in the era of 2019 to 2022. >> Again we're still so early. It's funny how to us 280 290 billion in stable coins is so big but in in the trillions that currencies live on it's tiny. So we we have a long a long way to go.

>> Welcome back to the rule. >> This is your home to learn from the biggest guests, the brightest minds at the tip of innovation. >> Our goal is to help spread the collective knowledge of everyone in our community. >> We are breaking crypto out of its echo chamber and taking it to the real world. Thomas Cowan, welcome to the rollup. I'm super excited to have this chat. I don't think we've ever had someone who has been at the Federal Reserve and also Ripple and is now the head of tokenization at Galaxy. That is a very unique position that you're holding in the industry. So, it is a pleasure to have you here on the rollup.

>> Of course, Robbie, thanks. Thanks for having me and excited for the conversation. >> Absolutely, man. I mean, we were just talking before this, you know, bull market. It's good vibes. Uh we're we're enjoying the times. I think we we all grind through and survive in some of the tougher market conditions to make it out uh and enjoy some of the things that are happening today. Uh Bitcoin is breaking new all-time highs. Things are things are generally trending up and to the right uh in a very positive direction. Um and it's not just market prices that are up and to the right. It's the actual use of this technology. Hester Pierce is talking about cryptography and privacy.

never I I mean I remember Gendler and that was kind of all I knew as an SEC chair and now you know we are we are very much in a different set of circumstances. Before we get into kind of the current moment here today, it's your first time on the show. Maybe you could give us a little bit of a background and kind of a walk through your very storied history and experience leading up until this point. Thomas, how did you find yourself leading tokenization at Galaxy? >> Yeah, absolutely. Happy to give a quick a quick background. Um, so I mean I love how most people in the space have a story of, you know, they had their old career and then they kind of went deep down some rabbit hole and and then, you know, the rest is history in terms of of going deep into crypto. And for me, it

was um when I when I worked at the at the Federal Reserve on their on their crypto team. Um, and then and then I worked at Ripple and then was at Paxos uh helping helping build out their stable coin strategy. Um, and then and then finally ended up at at Galaxy uh helping build out the the tokenization team here. Um, and so, you know, been in the space for about five or six years at this point. Um, and to your point, it, you know, this industry has its highs and lows. And so, it's wonderful to be to be at a at a relative high at the moment. And, um, I one thing that's exciting is I do feel like this time, you know, we have a lot of wind at our back and that we have increasing regulatory clarity. We we have, you know, the technology has really reached

a level of maturity that is has, you know, much much more much stronger than than previous cycles. And then we have institutional adoption and interest that we just haven't seen before. So you put those three three things together and it really creates, you know, an environment that allows us to really to really run with it and build out build out the technology and the and the uh and the adoption that we've all been looking for for so long. >> Yeah, there's been just a there's been a flurry of news from the very core financial infrastructure that has underpinned our fi just not trady, not DeFi, just finance in general. the the SEC is considering allowing stocks to trade onchain.

Incorporate some sort of stable coin collateral potentially. I've heard things from the NASDAQ. We're also on the brink of 247 trading for a lot of these equities. So, it just feels like we're we're starting to realize the effects of this technology. We've seen this being understanding of blockchain for a long time. We've seen where this is headed. It finally feels like the rest of the world is catching up. I I want to get a sense of where you were when you were when you were at the Fed and you were working on crypto. I take it was probably a rather small team and a pretty tightknit community at the Fed that was working on the crypto initiatives at the time. When were you there and and generally what was the vibe? Was it still trying to parse out stable coins versus CBDC's and and

central bank digital currencies? Maybe you could kind of untangle this web of how things were back then. >> Yeah. So, it was actually on the the Project Hamilton team um that looked at CBDC specifically and and it wasn't, you know, pro CBDC or anti-CBDC. It was more, hey, let's look at this technology, see see where it applies and see how it it can impact the role of currency and the dollar more broadly. Um, not only here in the US, but also on on a broader scale across the world. And so, the mindset really was what is what is the technology? What what could it unlock? And so, that's kind of the mindset that that we had there. And it gave me a lens through which to look at the existing financial system, you know, how how it has evolved over over the decades, how technology has played that

role. And then as importantly, look at look at crypto and say, okay, how can blockchain specifically help improve that that um the the system that that we have today. And it's less of hey let's completely upend the system and more let's improve it and you know cut costs boost boost revenues where we can and increase availability to to you know different investor classes and and different people all over the world. And so that's kind of the mindset that that we took. And now that initial kind of 2020 2021 um kind of mindset that we had um we're finally beginning to see that begin to bear fruit as we get regulatory clarity as we get major financial institutions uh that have helped define uh the US economy more broadly and and finance

more broadly begin to think about this and recognize wow this is no longer you know just a technology or science project on the side but increasingly technology that we're going to adapt into vast parts of of their business lines more broadly and we're still super super early even though for those of us in the space it feels like it's been a long road. Um I think it's just exciting really what we're going to see and how quickly it's going to happen once once we really get people to to buy in and see the potential this technology has. >> Could you tell a bit more about the story of Project Hamilton? Where did the directive come from? Where did the order come from, you know, on the on the the food chain at the Fed? Did it come from the very top? then and then maybe you

could explain what the outcome of project Hamilton was. What what were some of the findings and the conclusions that you drew and we'll we'll maybe you know parse that into and catch up as to where stable coins are today. >> Yeah, totally. So it was very much uh looked at as a as a research project team within the Boston Fed in partnership with uh the MIT digital currency initiative. And so the approach was from a tech perspective, what can this technology do to help move um you know move uh currency more efficiently uh across the world and and domestically as well. Um and there were a few main takeaways that that we had when we published the paper in February of 21 or 22 now. I you know it's it's been a long long time. Um but but the the couple of

takeaways were uh for starters with a a product or currency as liquid as the US dollar it means that the um the kind of speed and the volume that you need frankly doesn't work well on a blockchain. Um you know for the the TPS that you would need for for for CBD a retail CBDC specifically uh you need at least north of you know multiple millions of transactions per second. For context, you know, Visa, last time I checked, could could handle up to 60,000, but they average closer to 6 to 10,000. So, just it's a few orders of magnitude greater than than what blockchains could handle. And so, you know, one of the biggest conclusions was maybe blockchain actually isn't the best use case specifically for retail CBDC.

Um, another big takeaway was um, you know, it's it's rare, um, that we would see an institution like the Fed face retail directly. You know, it never has. and is unlikely to in the future. And so one of the other takeaways was um you know that those roles would likely stay the same and so it would remain intermediated by the commercial banking system. Um and and so the other thing too is the timeline as well highlighting that if this were to take place you would need buyin from DC and buyin from um from legislators and and the executive branch as well. And so the timeline is long enough that at least I came to the conclusion that hey I think uh that the uh US private sector is likely going to solve a lot of these

problems that that a CBDC might um if if it were moving a little bit faster. And so at least for me that's when the light bulb went off of oh you know I do see a dollar moving on chain. The question is how and in what use case. And that's really when I I kind of went down the stable coin rabbit hole and I'm still very much very much uh involved in stable coins and and think that they are going to be one of the key ways we move and store value going forward. That being said, I think that we're going to continue to, you know, move value on the old rails for a long time, similar to how, you know, people still cash checks, people still use wires when in reality, you know, Venmo and and other other payment platforms do move move faster.

So, I think it's another avenue through which to move value, but it won't be one that replaces all the others. >> Habachi provable. Trade per with speed and security. Earn rewards. Visit hibbachi.xyz. Trading on fire. The wait is over. The Talis testnet is live. Be part of the revolution. Join now at testnet.talis.network. The future runs on intelligence, creativity engineering health money productivity. AI promised utopia but delivered only hype, blackbox models, and zero accountability.

With tons of tools claiming to be the best, how do you know what's real? Introducing Recall Find. Top models ranked by transparent reputation from researchers, users, and developers. Test AI skills, curate favorites, and compete to see what works. Don't guess what's good, recall it. >> Got it? That makes a ton of sense. They they're and and now we also have people directly in Washington. We have Secretary of the Treasury Bessant speaking about the the scale at which they're going to issue stable coins to to the tune of three trillion by 2028.

There there was recently a tweet by Naval that said stable coins are just CBDC's with extra steps. as someone who worked at the Fed on Project Hamilton, did intense research into CBDC's and then went on to work at Paxos, significant issuer of stable coins and now again head of tokenization at Galaxy. Is there truth to that? What getting back to the basics here? What separates a bad CBDC from a good stable coin? >> Um, well there's a a lot in that question and a lot to unpack. One thing I would focus on is at the end of the day when you build a new technology it can be used in in you know a lot of beneficial ways and there are also risks with that new technology and and the

question is as it evolves and as it is created you need to make sure the industry uses it in ways in the most you know in the best way possible innovating and pushing the ball forward while at the same time having regulators come in and create the rules and the regulations that put up walls to ensure that it's used in the best way to benefit you know the the consumer base as much as they can without with limiting the drawbacks. And we've seen this over and over and over with new technologies going back from, you know, Visa starting in Fresno, California to to the rise of the internet to Uber. Over and over and over, we see that, you know, technology racing ahead of of um regulation and then regulation catching up and it's just kind of a a constant, you know, give and take. and and this this is no

different where uh people are recognizing especially those of us who've been in the industry for a long time recognize the benefits of this technology and the question is how we make sure that we create a regulatory environment uh to to you know maximize the the best part and minimize the risks and I think increasingly in the past couple of years and this year specifically we're beginning to see that really bear out whether that be in the US or or Europe or Asia more broadly where people are beginning to recognize the technology and help put in rules to embrace it and and um and incentivize innovation as much as possible.

>> Yeah, absolutely. I I think the regulatory environment is something that there's there's no doubt there's no objections. It is certainly fostering innovation and one of the things that I think was extremely positive that frankly the market reacted negatively to which makes a ton of sense. But I think just on a just on a pure first principles basis, the SEC saying that they're going to start to investigate 200 plus digital asset treasury companies for insider trading because of some of the movements that took place ahead of them announcing their crypto strategies. It's like, yeah, that is common sense regulation.

That's not regulation by enforcement. They're not saying just, you know, letters out the wazoo to these companies. They're saying, we're going to go investigate it. We're going to find out what's going on here. that's not going to slow down the rest of the positive innovation that's happening on on the rest of the industry. I I do want to just double kind of double click on this question though like what's just kind of catching up the last couple years. What separates and and fostering innovation certainly you know as people in this this industry is super helpful and super healthy for this industry to kind of foster, sustain and grow. But from all of your experience, what separates the current era of stable coins and and why they're there such a positive impact versus the the you know

potentially treacherous CBDC's that we had seen in the era of 2019 to 2022. >> Yeah. I mean, I think zooming out, thinking about what what currency is and what what a dollar really is, when most people think of a dollar, they think that all dollars are the same. In reality, a dollar in your PayPal account, a dollar at JP Morgan, a dollar in your wallet, and um you know, a money market fund all are equal to a dollar. But in reality, the risk profile is very different. They're inter intermediated by a different system. And so it means that while from an accounting perspective, that's all a dollar. From a risk perspective, it's very different.

And so when you think of a CBDC versus a stable coin, the risk perspective is also different. Right? By definition, a CBDC is a liability, a direct liability of of a central bank. uh whereas a stablecoin is a liability of a private issuer, a circle or a tether that's that's backed by uh you know cash repo and and treasuries, right? So um it it really just depends on on how you how you um you know define what a dollar is and and how it's treated. Um and then of course the question is given that how do you regulate it to be able to ensure that the capital can move in a very efficient manner but also is used in an inherent and safe and and contained way.

And so that balance I think is is one of the biggest challenges that we're going to have as we see uh the movement of of currency you know moved on chain. I think the extremes usually people agree with that there should be some way like cash is completely anonymous. I would love for that to remain the case. Um but at the same time when you move vast amounts of of of money most people would say yeah if you're moving a ton of money it would make sense to make sure that there are KYC and IML checks for that. Right? So like those extremes usually most people can get on board with. It's the middle that really things get interested in what those what those use cases are. So um you know just like any other technology we've we've shown what the benefits are and and what the

possibilities are and now the question is how we come together to to leverage it to you know upgrade the system with while minimizing the risks. >> Right. Yeah. that I I can see the current the current dynamic of private issuers of stable coins creating somewhat of a fragmented system that we we've had this conversation about private issuers going all the way down Walmart stable coin, Amazon stable coin, the Meta Libra project being revitalized and and seeing all of these things, how do we maintain fungeability across them could lead to some issues. But then again, you know, the CBDC certainly has its in issues with surveillance state potential outcomes.

>> So there's there's certainly a lot of nuance here. But just to be reductive for a moment, Naval's tweet fact or fiction. >> I mean, honestly, I would I have to dig in dig in more. I I think um at a high level, I look at it very much as a as a tech perspective of okay, how can we leverage the tech to be as beneficial as possible? Um and and really think through what it can be. And one thing that's exciting here at Galaxy is while, you know, the industry's really found product market fit with stable coins, you know, as a more efficient way to move money as a as overseas dollar access and emerging economies and as a trading pair for Bitcoin, Ethereum, digital assets. We're really beginning to unleash what this technology can do beyond stable coins, money market funds, debt, tokenized equity, and beyond. And

so, um, we're we're really excited to to see what given given the past of showing that stable coins have that have that, uh, that future going forward and that growth, uh, now really what we can do more broadly across different different financial assets. >> Very, very diplomatic answer. Really really appreciate that. Um, and and I'm curious when you're you're looking at the US market, this is certainly a a a result of the the regulation and the the developing landscape that we're having here and and really fostering innovation. We're seeing private issuers coming out all over the place. And it is really, really cool from my perspective to see the private and public markets go head-to-head in stable coins. We're seeing Wyoming, this the state of

Wyoming issue a a there's a publicly issued by a government, a state government stable coin. At the same time, we have Circle, one of the largest IPOs this year, private company launching stable coins. So the Wyoming currency and the and effectively still the US dollar, but the Wyoming stable coin, the USDC, these are going to go head-to-head. And this is how things are playing out in the US. We have a very capitalistic attitude. It's really cool to see. Other places, for instance, Europe, there's kind of speculation. They're kind of toying with this idea of a CBDC.

They haven't fully embraced a full privatized stable coin market as of yet. How do you think the non US dollar denominate denominated stable coins? How do you think that landscape might play out? And then I I'd love to go on to some more broader broader strokes tokenization combo. >> Of course. Of course. So, um I I think one one thing to think through is in many ways we're kind of in the in the wildcat era of banking where we're having a privatized version of the dollar to an extent. And I think what we'll end up happening in the beauty of the genius act is the goal is to standardize all of that. So we can go back to thinking of a dollar as a dollar just like a dollar at JP Morgan and a dollar at Bank of America trade equally even though they're liabilities of

different institutions, right? So from that perspective, you know, you and I when we think of money in a bank account, we think of it as as standard when in reality it is at different institutions, right? So that that I think is where we'll end up. Um and in terms of on the on the Europe side, actually one of the uh big initiatives that that I've led here at Galaxy is is um helped form a joint venture with DWS, which is the asset management arm of of Deutsche Bank, Flow Traders, and Galaxy to uh form a joint venture and launch a uh Euro denominated stablecoin called All Unity. Um, and we chose to launch it in in Germany with a a Bofin uh license in the Mika regulation and it's it's euro denominated and really we saw that

uh you know if you look at Europe today uh it's still frankly dominated on chain by the tethers and by the USDCs of the world the the euro specific stable coins are still pretty limited. And so we saw a big market opportunity knowing that hey, as the market matures, there's likely going to be demand for euro denominations on chain. And so that's one thing that we really are excited by and continue to see to see grow after our launch uh this past July. Um and I think the fun part is I you know long term we're likely going to see uh you know the the amount of off-chain amount of onchain currency match off-chain currency. So we will see more and more currencies come on chain. Um and and then you know FX markets will emerge and

and and the like. But uh you know again we're still so early. It's funny how to us 280 290 billion in stable coins is so big but in in the trillions that currencies live on it's tiny. So we we have a long a long way to go. >> Wow. So the amount of onchain currency flipping the amount of or or coming to par with the amount of off-chain currency where do we where is it right now? Is it 8020? Is it 955? Do is there any >> it's it's fractions of a of a of a percent. It's not it's not not even close. Um and we we have a a long way to go and and we're excited by that, right?

Because um it just it just means there's a lot of opportunity there. And and as we know, stable coins are the part of the industry that has the most product market fit where people very clearly do see it as a more efficient way to move value across borders. They do see it as a more efficient way to get overseas dollar access in emerging economies with weaker currencies. And they do see it as as a more efficient way to uh you know buy Bitcoin, Ethereum, and other digital assets. So, it's found product market fit, and that's just the beginning. And we're really going to see it grow substantially as stable coins become a means of payment and a store of value across different parts of the financial e ecosystem more broadly.

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about it now. Scaling to three trillion, scaling it so that we're on par with the amount of off-chain currency will bring it I I'd imagine exceeding three trillion in quite some excess. And so starting from this premise, what are some of the knock-on effects of this? And I I can just sound off just for a moment and and and I'd love to get your take because you know there's also and I I was in uh I was in Asia. I was going to these conferences. I didn't get to go to the network state conference, which I I I'm sure was really really interesting because this is essentially an economy and a and a network state that's already built on stable coins. That is the lifeblood of the economy. It is it is kind of the national currency of each network state. Mhm.

>> And so I'm curious as greater amounts of stable coins are put into circulation on chain, this will inherently flow into the econ economies of network states and not necessarily the economies of nation states unless those nation states are onchain. And so to me, it's, you know, it's it's a slipperier slipperier slope for stable coins to go into something like a hyperlquid or or an Ethereum roll up or an Ethereum ecosystem rather than starting from first principles. We create these stable coins, we put them into circulation, and then they make their way into, you know, a money market fund or or a or a a stock indicy unless that thing is tokenized. And it's almost

like this onchain liquidity begets more onchain liquidity. Are you thinking about the same way? What what do you think are some of the knock-on effects of generating and and circulating so much stable coin supply so that you know we reach this inflection point going from offchain to onchain. >> Yeah. So I think when we think through any kind of technological adoption that that whether that be financial related or not kind of the first wave is you look at what the technologies potential is and how exciting it is. when the first iPhone came out, everyone said, "Wow, this we don't know what all the uses will be of it, but we know it's it's fascinating." And then, you know, then the app store comes out and then all the uses of the technology really unlocks. And we're in the same thing

here where people have shown that using a stable coin to move money across borders is just faster, better, cheaper than the correspondent banking system. So, we know that that's better. But then what are the actual uses and the implications of that? That is the part that we're going to get into over the next, you know, 18 months to to couple of years where people will say, "Wow, now I can just move move money in a faster, better, cheaper manner." What does that mean from an economic point of view? And and that part is when the technology begins to fall away and people won't know they're using stable coins. People won't know that they're that the back end of their financial life is on chain. They'll just know that they're able to pay their relatives more more efficiently, that they're able to send money home, that they're able to

pay for goods more efficiently. and it just means that the global economy can be even more integrated and have even less friction when you're moving value across borders. And so we're we're going to get to that inflection point. Um I think with stables we're getting we're getting there in terms of seeing the use from just the technology. Um but I think in terms of other financial products we still have a long road ahead. Uh but we're beginning to see kind of the um the benefits of them uh kind of you know come come to life. >> Yeah. you know, there there's been a lot of speculation that AI is going to lead to this, you know, GDP uh increase and productivity boom as a result of the efficiency of of the labor market and basically, you know, a lot of automation. But when we're thinking

about capital efficiency, it feels like stable coins are right there. Like they're they're a very clear use case for how we can make all of this capital flows more efficient. May maybe you could just close us out here. What what are some closing thoughts? Do maybe some do you think there's going to be categorical changes here, GDP increase, banking sector decrease as they get innovated generally? How do you what are some conclusions that you draw? How do you put these things together? Yeah, I think one parallel that I that I like to make and I can steal from from Jeremy Aair, he always talks about how um before the internet and after the internet, what it really did was the amount once you could move information much much faster, it meant the amount of information, you know, increased by a

large number, right, by like exponentially. And I think we'll see the same thing here where because the cost to move money and the cost of payments will decrease so much, it means that people are going to be much more likely to pay fractions of a cent to access content, for example. And and so that's for people. When you get to the AI end of things, there's no reason why you can't have AI AI agents paying fractions of a cent for access to certain information or to, you know, get through a payw wall or to make sure you're not a bot or whatever it is. And so I think we're going to see a merge of these two technologies that that will be quite beneficial and create a lot of efficiencies. And at the same time, I think over and over and over, you know, with every new technology, a lot of the

time people think, oh, this is going to wipe out so many jobs and and impact our GDP in XYZ ways. And at least up until now, we've seen a lot of people been able to create new jobs, create new industries, and you know, generally improve the livelihoods based on this new technology that we've seen. And and I think I think this is no different. and and you know at Galaxy while we you know I started with focusing on stable coins we're now much more you know much broader looking at at money market funds and onchain debt and and tokenizing our own stock and all that and so while stable coins is the first chapter we still have a long road ahead and we're we're excited to continue to lead the industry in that way >> awesome Thomas Cowan thank you so much for coming on absolute pleasure talking

about this induced demand as a result of uh making capital more efficient love to love to have you on again sometime soon and just generally as we're pushing beyond stable coins and into money market funds and indices and and bringing things on chain there there's we're moving at light speed and uh there's lots to talk about. So, thanks thanks again for coming on. >> Of course. Thanks for the time.