Silvergate CEO Alan Lane On the Business of Stablecoin

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:17)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, we recently had the collapse of the stablecoin UST, and the total disaster of that didn't turn out to be a particularly stablecoin in the end.

Tracy Alloway (0:32)

You're not gonna say it? You're not gonna say unstablecoin? You're so close, so close to saying the cliche.

Okay, yes. So Terra slash Luna collapsed, and that kicked off, I would say, soul-searching, maybe not soul-searching, a vast amount.

Joe Weisenthal (0:49)

I think soul-searching is a fine word.

Tracy Alloway (0:51)

Well, a vast amount of criticism of the stablecoin space. And we saw some other stablecoins, notably Tether, start to wobble a bit, although it looks like it's gotten back closer to its peg since all of this happened. But lots of people asking tough questions about the space. Are stablecoins sustainable? Are they inherently susceptible to some sort of bank run-like phenomenon? And then secondly, is this whole Terra Luna collapse going to expose the sector to more regulation? Is there going to be even more attention trained on this?

Joe Weisenthal (1:26)

Yeah, right. Because there are different models of stablecoins. So this is really important. So there are stablecoins where a issuer has a dollar's equivalent of assets in a regulated bank.

There are stablecoins in which the issuer has, in theory, a dollar or more than a dollar's worth of crypto assets held up in some smart contract. And then there are these so-called algorithmic stablecoins in which, I don't know, through magic, they don't really seem to work, but they keep trying. Whether it's like somehow the price is supposed to just stay there even without the money.

But the point is, if you sell something that is nominally supposed to be worth a dollar, and it doesn't stay at a dollar, then regulators are going to get interested. And of course, we saw in the financial crisis that one of the sort of loci, a source of instability, loci, was money market mutual funds, which were supposed to stay at a dollar and didn't, the reserve fund. And so any time you have something that's supposed to hold a dollar, or supposed to be stable and is not, this is a major source of regulatory interest, regardless of what the model is.

Tracy Alloway (2:35)

That's right. And regulators are well aware that when you have something that's supposed to be worth a dollar, if it dips below a dollar, like reserve primary did back in 2008, it can actually have massive consequences for the rest of the financial system. You get a contagion effect. And I think this is partially why they're worried about the space. But the other thing I would say is, this is why when people say, oh, Terra Luna, you should have known better. This was a terrible, volatile asset. It's like, well, the marketing actually matters here. If you say this thing is always gonna be worth a dollar, yes, obviously people can do due diligence and decide for themselves whether or not that's true. But you're putting it forth as a stable $1 pegged asset. And that comes with some sort of responsibility that regulators might well want to enforce.

Joe Weisenthal (3:25)

Absolutely. Like that to me is the key thing. Like, okay, yes, at some level, right. People can learn about the smart contract risk and they can learn about what theoretically is and isn't back in the coin.

But if you call something a stable coin and it falls, that seems like a problem. So we need to learn more about this space. And the other question I have, like, why is it growing? I thought the whole point of crypto was to make a lot of money and have the number go up. So why the attraction to a coin that doesn't go up is another big one.

Tracy Alloway (3:53)

Well, also to get away from fiat dollars, right? And instead of getting away from it, it seems like we've just created the shadow banking system, almost like the Eurodollar market, just to create more dollars that are pegged to dollars. Anyway, I have so many questions. Let's get into it.

Joe Weisenthal (4:10)

I do too. So I'm really excited about our guest because he has a great position within this world to understand the sort of intersection of crypto and traditional banking, which is kind of what a stable coin is. It is this attempt to sort of like bridge, okay, you have the US dollar and you have crypto and you sort of make a crypto version of the US dollar.