Comment by krrishd
5 months ago
I think this is somewhat reasonable, but with plenty of asterisks / not the "arbitrage" this would imply.
There is still a "real", regulated money-holder in the loop - it's just Bridge (the manager of the cash reserves backing the coin - and licensed money transmitter etc etc). Or in the case of USDC - Circle, the "money-holder" / manager of reserves (also has tons of licensed / is very regulated). And the ETH network (where the coin itself sits) for much of the tech / logistics of making that held-money usable.
In fact - because neither Bridge nor Circle are banks, they can't do the fractional reserve that banks do, and are only allowed to do the 1:1 backed thing, with super regulated entities like BlackRock. "you can lend out the money you earn from selling someNiceCoin to services with higher yields" is strictly not true - they _cannot_ lend the money out, they have to store the money in ways that the end-consumers could do themselves, directly.
In that frame - the "efficiency" for you as a fintech is that instead of having to work with a bank on a "stored value" program, you can just work with Bridge and Circle, whose technological primitives are leaps / bounds ahead of the bank, but more importantly - who are much more flexible to work with than the median "partner bank", because they are not banks.
The whole "partner bank" ecosystem only really even scales because there are API providers like Increase.com / Unit.co etc to wrap them.
Everything you're describing makes sense in terms of legal requirements, but none of it seems to require any form of cryptocurrency or stablecoins.
This was also where I initially landed after finding out that the custom stablecoin could not leave my Bridge instance.
I think the role that crypto plays in enabling this is as a neutral, credible storage layer on which this token can be held, that is not my Postgres database as (eg.) Bridge - these tokens still are actual ERC-20s/etc that are present on-chain, as are the wallets that hold them -- but yeah, I'm:
- not sure how instrumental that actually is here
- not sure if that's just incidentally the easiest structure for Bridge, whose primary business revolves around facilitating payments via stablecoin (now, as a part of Stripe)
Blockchain guarantees there is no double spend while not having one controlling entity. Legal requirements are there to do exactly the same thing - not let managers mess with other people money.
But there are 2 separate controlling entities in this scenario. The hypothetical company that wants to issue the stablecoin and Bridge. They have complete and full control over the money anyway, blockchain or not.
What you describe sounds like the opposite of my perspective.
You make it sound like stablecoins offer a benefit to all sides because of better technology.
My expectation is that they offer a benefit to the borrower because the borrower is less regulated and can lend out the money with higher risk and by doing so generate a higher yield.
You mention "1:1 backed thing, with super regulated entities" as if that means the money is safe. But as we have seen with Silicon Valley Bank, even lending out the money to the government via bonds is not safe enough in all circumstances. And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
The difference is in the assumption of "higher risk". Most of this borrowing is eventually the US Govt because the stablecoins are backed by T bills. So its not as much of an arbitrage as you say.
But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
> But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
This strikes me as among the biggest macro risks, and (IIRC) is one of the reasons banks are fighting to prohibit stablecoins from granting yield (to keep the banking system working).
A different primitive that is related to stablecoin but not the same thing, popular among banks, is the "deposit token" - basically a stablecoin, but backed by bank deposits rather than 1:1 cash reserve, and operated by banks. eg. JPM's "JPMD": https://www.jpmorgan.com/payments/newsroom/kinexys-usd-digit...
Not sure how popular / active they are yet, but I imagine they will become a bigger deal as stablecoins are further regulated / banks push harder on their own interests.
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> you can lend out the money you earn from selling someNiceCoin to services with higher yields.
> And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
To be clear - stablecoin issuers are not allowed to "lend" the money out like a bank or a regulated lender _at all_ - much less doing "riskier" lending. Bridge and Circle still have to, by law, maintain 1:1 cash/cash-equivalent [0] reserves, which means the best they can do is things like US treasuries / money-market funds - which are also primitives accessible to consumers and businesses directly (ie. not inherently competitive).
Certainly there is still great benefit to Bridge, Circle, and the customers issuing stablecoins through them - because it gets them MMF/treasury yield without having to do a "stored value" program at a bank etc - but the issuers who are converting user deposits into stablecoins are also only getting user deposits in exchange for doing useful things.
People don't deposit funds into Mercury just because Mercury gives them 4% (there are plenty of places you can get 4%). You put money into Mercury for the software - this is primarily an implementation detail of how Mercury manages that money, affords to give you a competitive (4%) rate, and affords to give you great software.
[0]: https://en.wikipedia.org/wiki/Cash_and_cash_equivalents
Whether US Treasuries are "cash equivalent" is debatable / depends on the specifics. A dollar is worth a dollar tomorrow. A 10-year US treasury might not.
Are you saying the holder of a stable coin is not taking a higher long-tail risk than the holder of a dollar in a checking account of a bank?
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