Stablecoins Explained: Lessons from Casino Chips and Regulatory Challenges

Well, the Genius Act passed with bipartisan support, the Act defining payments stablecoins, setting standards for issuers, and also requiring strong reserve backing to protect consumers as well as strengthen the US currency's role in global finance.

Now, as regulators implement the law, there are tasks to tackle, including right capital as well as risk rules for issuers and setting conditions for nonfinancial firms that issue stablecoins.

And updating AML regulations.

Well, joining me live from Las Vegas is Kyle Hoffman, who's chairman of the NCUA.

Kyle, great to have you here.

Thank you so much for joining me.

So glad to be here.

Well, this event has been a whirlwind.

We're on day 3, and you spoke about the great wealth transfer.

So how can credit unions actually engage the younger generation and what really needs to happen here?

Yeah, a lot of genius act stuff we've talked about, but that Great wealth transfer.

You get a lot of people take credits.

Remember, I'm not a credit employee.

I'm the regulator and insurer, right?

So I just want them to be uh financially successful, so we don't have to write big checks as a deposits there, right, um.

Odd building credit union is kind of your grandpa's financial solution.

Well, if it is, and your grandpa gives you money, first time I ever had money on credit union because my mother passed away.

And OK, you have some money.

Now they've got a head start.

The money is already there, so are these institutions, same with small banks, right?

You're gonna inherit money from mom or dad.

It's already is that institution gonna not only convince you to keep it there.

Maybe even move your other stuff there and they're gonna have to have the service they need, you know, the way your payments.

Do I get my paycheck a day ahead of time or what have you?

Yeah, is there any friction?

Um, and so that's gonna be an opportunity because the easiest thing for any money is just leave it where it is.

Uh, so you guys do work to get rid of it.

So they're gonna have an opportunity, you know, hey, young person, you've never heard of us.

We don't really know you, but we got money here and it's yours, you know, are you gonna convince them to keep it?

Are you gonna offer all the stuff they need?

Yeah, and Kyle, we're here at Money 2020, right, and there's a 5, there's D5, credit unions being represented here.

So what do you think needs to happen on the regulatory front when it comes to the future of digital assets?

So top of mind for me, Congress has told myself and 4 other agencies to do the rulemaking for the Genius Act, right?

Uh, 262 days I believe from today is when Congress gave us a deadline.

It's about how do you apply to issue a stablecoin, what kind of reserve requirements, etc.

And I've been talking to people about it and uh they get nervous, or is everything going to change?

What is the stablecoins, token, and here it's actually pretty easy, Remy, because this town.

Has a decades long settlement token they have used.

This whole beautiful convention center, our hosts here at the Venetian, all of it exists because the widespread use of this settlement token, it's a casino chip.

Not only is it a token that we use for settlement because sitting there with cash each time on the casino floor would be a pain, right?

We could do it, but it would be a pain.

This token.

It's also a stablecoin, right?

This is $5 on it.

When I say I won $5 or double down at $110 and people get paid in this town, right?

You tip the waitress, right?

And she says, I got a $5 tip.

Why did she say $5 Remy?

Why does she think she got $5 US dollars?

I mean, I don't know.

Well, it's because this is a stable coin, because the backing and it works.

This is a $5 chip and the moment.

That this $5 chip is not worth 5.00 $5 US dollars exactly, then the whole thing breaks down.

The same is true for this new settlement took.

We're going to have a stablecoin.

And it only works.

We agree to settle in it, your paycheck, selling your home.

We're going to use stablecoins.

Why?

Because we think it's the same as $1 and there cannot be a moment's hesitation, right?

It can't be, you know what, Kyle, the Venetian is going to pay me $5 but why don't we ACHTO you'll get it next Monday.

No, that's not good enough.

That's not a stable coin.

That's something.

It's not a stablecoin because now it's not worth $5 right?

Uh, so that's what we have to do is make it just like this, as reliable as this.

You treat it when it goes off chain to fiat or on chain there, they are simultaneously exactly the same thing, and that's what we as regulators have to make sure these new stable coins that are going to be springing up, they have to be just like this absolute uh uh substitutes for one another at all times.

Yeah, and Kyle, I'm so glad that you actually brought that chip and you have fiat currency.

Right, the US dollar, a $5 bill, because I think in the US, when we think about stablecoins, it's not as familiar as it might be in other developing countries around the world.

So I do want to ask you, what do you think needs to happen in terms of guardrails as well as, say, anti-money laundering?

What needs to happen when it comes to the space?

The KYC stuff now once you're on Shane and you stay within it, it's a little easier once you've Then you KYC, right, once you know it's Kyle and Remy and we've entered via our portals, um.

That aspect is always there KYC AML, the tough ones, OK, that I'm grappling with, and if you've got good ideas, you have 262 days left to get these right.

We gotta do proposed rule and then final rule.

I tell you what, number one, it's if you're gonna have the Remmy coin, OK, for every 100 Remy coins you gotta have, let's say, and I'm gonna make this number up, $105 in assets, right?

Step one, right, so people can use it.

You gotta have $105 of say cash.

Treasuries and Treasury repo, right, Treasury just collateralized loan repo.

Overnight, uh, that's what a repo is.

Trades same clock as treasury.

Alright, so step one, I think we can do that.

We can verify hopefully on chain that for every $100 you got at least say $105 in assets.

That's step one.

Here's our other problem though.

And it's a little bit like the problem that could happen here, right?

There could be a moment's hesitation that the casino pays you out, not a moment's hesitation, right?

The whole thing breaks down.

No one should ever be able to sell this or want to sell it for $4.95 499 cents.

Why?

Because I this settlement for $5 right?

Any delay.

Then now it's not worth that anymore.

OK, so here's the deal.

As long as we have the old rails, we have the old treasury markets Monday through Friday, pretty much, right?

All right, Remy, what about early on you got a small token out there and somebody wants to cash out Auburn 10 p.m.

Friday night.

You got some cash, all right.

And you got the other 70%, let's say in treasury.

Well, that market doesn't open till Monday.

They settle T+1 Tuesday.

Remember, this isn't gonna work unless the Remmy coin or the Kyle coin or the Money 2020 coin or Fintech coin is just like this on the spot, on demand, no hesitation settlement.

So you're gonna have to have some kind of liquidity solution, right?

How are you going to pay them out Friday at 1 p.m.?

You can't say, Well, market opens Monday, Treasury's out of money.

I'll get, I'll give you your money Tuesday.

No, no, that's not a stable.

They better have withdrawable cash by 10:01 p.m., right?

So that's what we're working on.

Maybe you got to have a credit line or something.

Somebody lends you money for 4 days, which I kind of like because if you have a big bank credit line, that's another set of eyes on your assets, making sure you got it.

Well, Kyle, thank you so much for joining us this morning, and thank you so much for simplifying it with those examples of the chip and fiat currency.

All right, happy to be here anytime.

Thank you.