Laura:
Welcome to Candid Conversations for Financial Markets podcast series. I’m your host, Laura Paglia, President and CEO. Our podcasts are designed to provide insights, transparency, and provocative yet achievable proposals for matters that move financial markets in Canada.

We are joined today by Andreas Veneris, Connaught Scholar and Professor, Department of Electrical and Computer Engineering, cross-appointed faculty with the Department of Computer Science and the Munk School of Global Affairs and Public Policy at the University of Toronto.

Andreas’ research focuses on central bank digital currencies, design of distributed systems, formal methods for smart contract verification, and blockchain policy regulatory issues. In February 2021, his work with the Bank of Canada became public, proposing a central bank digital currency for Canada. The first work of its kind presenting a comprehensive technological, regulatory, legal, and economic model for a central bank digital currency. In March 2022, he was acknowledged for his contributions on a classified report by the Hoover Institution prefaced by former US Secretary of State Condoleezza Rice, titled “Digital Currencies, the United States, China, and the World at a Crossroads.”

US President Joe Biden signed an executive order following the report’s recommendations.

Today, Andreas engages with many G20 central banks and policymakers on the topic of digital assets and central bank digital currencies. His work has been featured in publications by the Bank for International Settlements, BIS, and the International Monetary Fund, IMF, among others. Welcome, Andreas.

Andreas:
Hello Laura, thank you for having me here.

Laura:
And thank you for joining us. Let’s set the stage for what we’re going to discuss. Key points Andreas, what is a stablecoin and how does it work?

Andreas:
It’s quite a trend these days, isn’t it? Right? So what is a stablecoin? So a stablecoin is a digital token that represents an asset and this asset is the currency of the respective country. So essentially,

Tether, which is one of the biggest stablecoins, actually the biggest stablecoin, one Tether represents that you possess one American dollar, but it’s a token. It’s not an American dollar itself.

How does it work? That’s a very good question. In what sense that, you know, immediately we cannot go to the supermarket and suppose we have like a stablecoin that represents the Canadian dollar, right? So can I really go to the supermarket these days and say that, hey, I have five Canadian tokens, give me my milk and give me back the change to dollars in tokens, Canadian tokens, right? So this doesn’t happen. But in theory, the way it works and in practice, in large practice for the last pretty much decade that they were introduced, the way that they work is that they’d be using for payments on blockchain systems. So you can send these stablecoins abroad or domestically to somebody else that has a wallet, a wallet that accepts cryptocurrency, so you can pay somebody, you can do that kind of like payment transactions. But there hasn’t been any killer app right now for people to use it for daily practice, right? Whether you go to the restaurant or to go to the supermarket and so forth.

And now the person that accepts these tokens, they need to have some sort of a cryptocurrency exchange, access an account to a cryptocurrency exchange, so that they can exchange those tokens for actual dollars. So that’s essentially how it works.

Laura:
Thank you for the overview.

The key difference between a stablecoin and the other so-called cryptocurrencies is…

Andreas:
Okay, that’s another good question. There’s a lot of other digital assets and if we focus on cryptocurrencies like Bitcoin, Ethereum, Solana, Tailing and so forth,

these are also tokens that run on a blockchain.

The difference is that those tokens are getting traded like the market determines the value. So we know Bitcoin just like a stock goes up and down depending on how many people want to buy it or how many people want to sell it. So the market determines essentially their value. In theory, stablecoins are stable. That’s why they’re called stablecoins. So one USD token for instance represents one US dollar.

So there’s no fluctuation. There’s like a tiny 0.01% fluctuation for the bid and ask. So the people that provide the equity can make some money out of it. But in theory, it’s pretty much pegged to the currency, the other line currency that it represents in a tokenized fashion.

They get it traded in crypto exchange. They get it traded in decentralized exchanges,

but they are pegged to the other line currency. They cannot move away from the currency. Theoretically, this is the premise.

But I see that you may have questions later on.

In practice, we had stablecoins that de-pagged and also created quite a bit of losses for the people that were holding them.

Laura:
So is it an oversimplification to say that the value of the stablecoin comes from the currency that it’s pegged to?

Andreas:
It’s not an oversimplification. I mean, that’s what actually it is. Like, let’s focus on USDT or USDC. These are the top two stablecoins. They’re pegged to the American dollar. So if the American dollar goes stronger against the Canadian dollar or the euro or any other currency of the British pound, then the fellow that is holding those stablecoins, his value will go up against those other currencies, the euro, the pound, or the Canadian dollar. So they’re pegged onto the American dollar. So it’s not an oversimplification. Actually, that’s the theory and practice of it. Okay.

Laura:
And to regulate these stablecoins, we see legislation and regulation starting to develop globally. If we can review that and their material features, starting with the United States, the Genius Act—what does that tell us?

Andreas:
Okay, so that’s a very interesting topic that you raise right now, because stablecoins have been around like nearly a decade, and they have puzzled quite a bit, the regulators around the globe. And all of a sudden, the Genius Act was introduced as a draft last late January or February, I don’t remember. And it came into effect a few months ago in the United States. And we see that frenzy happening. And it’s all those things that some of the things that we’re not able to regulate for like 10 years, all of a sudden, the Genius Act comes to regulate it overnight. So the Genius Act is the first comprehensive US federal law that focuses on payments stablecoins. It defines a payments stablecoin as a diesel asset designed for payment or settlement that can be redeemed to a fixed level. And it’s not a single asset can be redeemed to a fixed monetary value. It makes sure to classify it not as a security, or a deposit or a bank liability that opens obviously a kind of worms.

Only permitted issuers can issue such stablecoins. And they need to back every stablecoin on a one to one basis with high quality liquid assets, mostly certain securities or actual US dollars.

As I said, they’re not treating stablecoins as securities. And at least that’s a nice step, because the last 10 years, stablecoins were viewed as securities by some intermediate regulatory statements.

It kind of brings the stablecoins some sort of like addy money laundering ability, because it shelters them under the Bank Secrecy Act in the United States, which is, you know, for some people is a good step for some people, they feel that the BSA, the Bank Secrecy Act is not sufficient to address these new digital types of payments. It also asks for the US Treasury to establish some kind of like reciprocity, so to agreements with foreign jurisdictions, so we can have cross border payments using stablecoins.

But, you know, no matter how somebody views that, the Genius Act is not as genius. It leaves quite a bit of gaps. I don’t know if you want me to address them over here.

But it leaves quite a bit of gaps. Now there’s other regulations across the globe.

More notably is the MiCA from the European Union, that it creates an asset reference token regime for e-money tokens. This came into effect a year and a half ago.

Actually no, actually a year ago, December of 2024. The United Kingdom is trying to update their regulation with stablecoins.

Singapore, the Monetary Authority of Singapore, finalized the framework for single currency stablecoins that are pegged to the Singaporean dollar and other G10 currencies, and this happened two years ago.

Hong Kong has taken quite a proactive stance in the last year for fiat reference stablecoins, and they introduced very strict controls of who can issue a stablecoin and also the audit behind the stablecoin. And they’re way more stricter than what the Genius Act is in the United States.

Canada, unfortunately, has been a bit behind because it classifies most of those alternative coins as securities, and up to 2024, stablecoins were viewed as that, but they’re trying to update since then their regulation.

Switzerland has a very good regime for the last two years of stablecoins, and United Arab Emirates, that is trying to become a hub of digital assets in the Middle East, has introduced recently a fiat reference token regulatory regime that I’m not that familiar [with], so I don’t want to speak too much, but I know that they did, essentially earlier this year.

So this is what’s going on today, but in my view, there’s still a lot of gaps in this regulation, especially when it comes to cross-border transactions using these kinds of tokens.

Laura:
You mentioned gaps with respect to the Genius Act as well. Is it fair to say that cross-border is the key gap with that legislation?

Andreas:
No, there’s a lot of gaps with the Genius Act, and if you ask my personal opinion, and my personal view, it’s a disaster waiting to happen, both when it comes to domestic issues in the United States and, you know, this is going to spill to cross-border, obviously.

I can go in more detail if you ask me, but…

Laura:
To someone who may be less familiar with the technicalities, your concern with the Genius Act lays in what main parts?

Andreas:
Okay, so first of all, I want to call it that it’s my concern, a lot of very prominent people, more notably Timothée Massad, the hugely chair of the FTFC, just like a few years ago, and he’s very active and very knowledgeable, and he’s a lawyer. He introduced immediately after the Genius Act was introduced. He provided a set of comments about it. The travel legislation, first of all, it grants state charter non-buk issues way too much flexibility, and it’s a mix of, like, earlier… It’s a patchwork of earlier state laws that have different standards that they don’t align to each other, so it doesn’t really provide a consistent federal baseline of how stablecoins should be regulated. There’s barely any user protection.

What happens if the guy behind the stablecoin issue takes the money and leaves, right? And if you have your bank account, you have insurance, there’s no such thing about the stablecoins.

There’s very little attention to illicit finance and other money laundering. The Bank Security Act is good for traditional banking, but not for digital decentralized finance.

The market cap threshold of 10 billion is too high, and when compared to how strong is the federal oversight and the state-based oversight, the liquidity and governance of the reserves is not very well specified, just to say that you have one-to-one reserves. And also the audit process is not very well specified.

It doesn’t provide a division between… It doesn’t even say who can issue a stablecoin. So just to give you an example, it was 2019 that Facebook wanted to issue a stablecoin in the end, and there was panic around the world. There was a Senate hearing just a few days after the announcement because they were afraid that if somebody like Facebook issues a stablecoin, they will be able to buy as monetary policy in the United States, right? What changed since then? Today, other than genius, Facebook can as well go issue a stablecoin. So whatever they were complaining after these Senate hearings for like days, all of a sudden the Genius Act eclipses them.

This is not the case.

Financial stability risks, they’re not emphasized at all. What is the impact to the consumer, to the monetary policy, to the fiscal policy, the regulatory perimeter and the added money laundering and know your customer when it comes to those stablecoins could be exchanging decentralized protocols. This doesn’t even exist in there, right? Who can use them and how you can track them in case of illicit activities.

The cross-border nature that you brought up is barely just saying that, “Hey, we need to do deals to use President Trump’s lingo when you do deals with other countries so they can use our stablecoins.” And actually, you do already see people in Asia and also Latin America, they’re introducing legislation against American stablecoins because they can destabilize their own systems.

So the US policy does not reflect and this act is very silent on this global coordination.

What about the regulatory arbitrage when you go issue those stablecoins in very loose jurisdictions like the Caribbean?

There’s a lot of issues with the Genius Act that I think justifies the concerns of a lot of people out there that they brought them up.

Laura:
Thank you, Andreas. The concerns, the public concerns that we hear a lot about is this concept of losing financial autonomy through privacy, security, anonymity.

Are those principles that pose any real issue when it comes to stablecoins?

Andreas:
That’s a very good question, actually, Laura, because today we live in a digital feudalism society, right? That people love your data and people that give free services like just look at Google, at Facebook, or there’s equivalent websites in China. They give free services to the public because guess what? They get paid by the data. And now payments come with a lot of data and somebody may be able to determine where you buy, what you buy, and they can essentially switch advertisement and tailor advertisement to the particular so that this person essentially they buy as social consciousness and buy the marketing that they do.

There’s absolutely no talk in the Genius Act and other acts about how the consumer is getting protected by using those mediums, how his or her data is getting safeguarded, and how the consumer can essentially monetize this data. None of these exist in all these guidelines or policies or regulations that have been introduced. And it’s a very, very large paradox, essentially, what’s going on.

So I would agree with you that financial autonomy is at risk. And for financial players like banks, it’s not only something that it’s an add-on, but for banks, for private banks, it’s an obligation to their customers to provide this kind of privacy. So now they are in crossroad with all those stable points of how to address those issues because the regulation doesn’t provide avenues and they’re left on the dark. So it is still a little bit the wild, wild west out there. Yes.

Laura:

So thank you again, Andreas. In this wild, wild west, how deep is the concern about the prospect of a run on various stablecoins?

Andreas:
Well, you don’t need to ask me, you just have to see history about it. In their brief history in the last not even decade, there’s stablecoins, major stablecoins that collapsed and they never gained their value. And all the holders that ended up holding the bug and with deep, deep losses in terms of the billions, like the Terra stablecoin, it was an algorithmic, it was not one-to-one pegged, depegged in 2022 and never recovered. The Neutrino stablecoin, depegged and never recovered. The iron stablecoin, there was a bank run, the peg failed permanently and never recovered. But even if you go to the very large stablecoins, like let’s go to USDC and USDT, I don’t remember their valuations, but in the hundreds of the billions, the USDC fell to 87 cents to the dollar. It represents the American dollar. So one USDC is equivalent to one American dollar, went to 87 cents and it recovered immediately after, immediately if you call two days. I mean, if you go to your bank account, you see it by 15% down for 13% down for no reason. Two days looks like a century to you, obviously. It recovered back to one dollar, but imagine all the stock losses that were wiped out. Even the tether, that’s a huge stablecoin. And at the same time, we have no idea what’s going on. They don’t provide audits. They provide some attestations that you need to pray to Jesus, Mohammed or Buddha, whoever you’re believing, that they’re holding what they tell you they’re holding. The tether slipped to 92 cents in 2022. It repacked later, but fully repacked later. But that was like a scare for everybody holding those assets.

The JIYUS Act doesn’t really explain what happens, what is the user protection in those cases. So you understand the issues that we’re dealing with.

Laura:
Thank you, Andreas. You have done a lot of work on central bank digital currencies, which some countries have adopted. What do central bank digital currencies mean for stablecoins?

Andreas:
Okay, so stablecoins versus CBDCs, as we abbreviate the central bank digital currencies, is like converting apples with oranges.

CBDC is a liability to the central bank.

So if you trust, let’s take the Bank of Canada, that they give face value to your Canadian dollar that is in your pocket,

then if this Canadian dollar becomes digital, it’s again the Bank of Canada in extension of your own government, your own taxes that provide the stability behind the Canadian dollar, right, and the digital Canadian dollar. So there are two different things. On one side, you have stablecoins that now anybody can pretty much with the certain limitations, let’s take of the Genius Act, everybody can provide that can issue a digital representative.

And you have no protection at all. It’s like if there’s a run, where do I go to get my money? If there’s a run the bank, I have insurance for my actual money.

And also I have insurance for CBDC, my government, right, but for the stablecoins, I don’t.

But I think the impact is not that much of CBDC and stablecoins, but rather the other way around, especially in North America, there is a trend promoted by the private sector, whether it is the banking sector or the technology sector that wants to go into payments,

and they have already entered payments to essentially diminish the importance of CBDCs.

And that’s also the tragedy over here. They say that I don’t want the government to spy on me when the same companies issue stablecoins and they’re spying on you. Actually, they’re already spying on you through your smartphone and the free economy, digital economy that they provide to you. So in North America, there’s a strong opposition to CBDCs. It was expressed by President Trump that he banned CBDCs with an executive order the first day that he came into office. And on the other hand, we see countries like China that already have a CBDC.

Other BRICS members like Brazil is about to release the CBDC. India is a late pilot of their CBDC.

Europe is pretty much a certainty that they’re going to have a CBDC by the end of this decade.

They will be in terrible and North America is left behind, not even left behind, like CBDCs, they’re banned. So there’s an effect from the private sector to CBDCs, not vice versa in North America, including Canada.

The Bank of Canada a year and two months ago, September of 24 on the public announcement said that they’re going to put CBDCs on the shelf and that will focus on other ways, innovations on payments actually. So the trend that will show south the border spilled north of the border as well.

Laura:
In light of what you described, is there going to be on a global scale competition between CBDCs for the nations that have them and stablecoins for the private sector parties that issue them?

Andreas:
There’s already competition, as I explained. The competition comes from private lobbying that promotes stablecoins and they try to obliterate CBDCs in North America.

I don’t see that a well-regulated stablecoin, I don’t see it as a negative thing and I don’t see it even competing with the CBDC, promotes innovation if it’s well-regulated and protects the citizen.

But as of right now, North America has created that type of competition, as I said, yes.

In an ideal world, if we move forward 10 years from now when everything is said and done, I do believe there will be a happy coexistence. But until we reach that point, we’re going to have to go through a lot of waves of disequilibrium that I described 10 years from now. So I don’t think it’s got to be a very happy trip over there.

Laura:
So on our way to a happy coexistence, what are the implications that you would see for our Canada’s economy, currency, and payment systems?

Andreas:
The truth of the matter is that the recent events of the border present a very real threat to Canada. And the biggest threat over here would be currency substitution, that you go around and you buy your milk, going to my example before, or you do your grocery or you pay at the restaurant or you pay your movies by using American dollars. So this exposes the Canadian economy to, this exports the Canadian economy to essentially all the risks that the American economy may entail.

So this called currency substitution.

Now there’s two ways to address it and say, hey, we’re going to release our Canadian stablecoins.

Well, the truth is that we did release a Canadian stablecoin in 2018. I thought it was called the QCAD.

The volume was non-existing.

In fact, there is a Euro stablecoin that the volume was non-existing. So forget about Canada, let’s go to Europe, which is like a top three, top four economy in the world, right? Top three economy in the world. So the Euro stablecoin barely has any circulation. Everybody’s using the USDT and the USDC that they’re pegged to the American dollar.

So there’s no good reason to believe that a Canadian stablecoin is going to solve our problems here in Canada.

Now, the other option is to say, hey, I’m going to ban the American stablecoins. Good luck with that, right? There’s no such thing as banning a stablecoin that anybody can use. So if there is a killer app application and people can use stablecoins on a daily basis, this is going to have a terrifying effect to our monetary stability and financial stability here in Canada. Now, the first approach is to issue the Canadian stablecoin that it doesn’t, history doesn’t say it’s good. The second is try to ban them. This is like science fiction. It’s not going to happen. You cannot ban something that runs on the internet. The third one is to release our CBDC and do a public campaign to explain just like they do in Europe. That’s how they do in Brazil.

And introduce a payment system,

in my view, a CBDC, Canadian CBDC, Canadian digital dollar, that it will be able to counteract on that. And it will also provide communication with the CBDCs that we see popping out around the world. And I think that will be the prudent approach, along with some regulation to whatever extent this regulation can to help restrain the American stablecoins in circulation in Canada.

Laura:
And yes, excellent. Thank you very much for joining us.