The Three Phases of Global Digital Currency Adoption

Earlier this month, Circle CEO Jeremy Allaire delivered a keynote at Hangzhou International Blockchain Week 2020 where he outlined three phases in the evolution of global digital currency adoption. 

Entering a Mainstream Tipping Point

In the speech, Jeremy explains how the rise of public blockchain infrastructure and the explosion in global stablecoin growth in the first two phases have set the stage for a mainstream tipping point in digital currency adoption that will be ushered in by advances in user experience, blockchain scalability, and regulatory standards. 

Event co-cost, 8btc, covered the speech and provided the full transcript available below. 

Hello, I’m Jeremy Allaire, the co-founder and CEO of Circle. And I’m excited to be able to join you all for this important event.

What I wanted to talk about today was about the evolution of how real-world money has intersected with blockchains to deliver on the promise of global digital currency. And I wanna talk about that through the lens of Circle, but also the lens of emerging standards, both technology standards and policy standards that are bringing us closer to the vision that I think many of us share for a new type of more open, global and inclusive financial system that’s built entirely on public blockchain networks

So I wanna start by just going back a little bit in time to early 2013 when we were just founding and starting circle. And we had been witnessing the global financial crisis. We had seen ideas for new global currencies like the SDR, the idea that the different leading economies of the world could come together around common currencies and also just saw the fundamental challenges both with risk-taking and the fundamental structure of fractional reserve banking and thought that digital currency really showed promise as a way forward.

So in 2013, the ideas that excited us were that we had a public network. And at the time, bitcoin was really the principle public network. It was a public network where you could transmit and settle transactions in a decentralized way and the thing that we were excited about was how could you take a public infrastructure like that, a public kind of transaction settlement layer and actually connect it to traditional central bank money. And how could you do that in a way which was safe and compliant, but gave you the benefits of digital currency which was the ability to move money at the speed of the internet very inexpensively

And critically to do that in a way which was interoperable so that anyone who is creating a digital wallet in any part of the world could connect an exchange value with other people or businesses really easily to pursue that idea of taking reserve currencies like dollars or euros or pounds and being able to convert them into a digital currency form and then use the open public blockchains to settle them. There were a lot of things that we needed to accomplish.

So one of the first was we needed to convince regulators in the United States and in Europe that this was okay. Back then crypto was looked at as mostly an illegal thing, mostly for bad actors. And so circle spent a lot of time working with the government working with key regulators to educate them that there were fundamental benefits from public blockchain infrastructure and that we could safely connect the existing electronic money system to this new world of digital currency. And so we became the most licensed and regulated company in crypto in the US and also with European licenses

We built a system where we could instantly convert between those reserve currencies on the bitcoin network. We created a seamless instant liquidity engine between the existing electronic fiat money system and digital currency. And that involved creating the regulatory capability, the risk management capability and the transaction kind of cut a new kind of transaction banking infrastructure to make that work.

And we wanted to even bring that into China. We set up something in China called circle China. Wang Jiang actually was one of the board members and investors in that project. And the idea was to do the same thing with RMB but connected outside of China allow you to use RMB globally using public blockchains as the kind of transaction medium.

But back then and by now we’re talking about around 2016, there were a lot of limitations being placed on payment firms on cross border payment licenses. And the idea of doing that with blockchains was very much frowned upon. And so we had to stop development of that project, Unfortunately.

But in the background, we were continuing to think about how can we get to a world where there are standards for how fiat digital currency could work, but built on the public internet, built on these public blockchains.

And by early 2017, we became very excited about second-generation blockchains like Ethereum. And the ability to actually create an issue currency tokens and the ability to create protocols and standards for those protocols that would allow for open interoperable usage of those fiat tokens

So we really began work in 2017 on sort of a second attempt at solving this problem that was through the creation of CENTRE. And then eventually the introduction of USD Coin or US dollar coin, and in that sort of second effort, instead of just focusing on our own consumer product experience, what we wanted to do is really focus on building a model that could scale for many many companies and for an entire industry in an ecosystem.

And so there are a number of things involved with that. So the first was we created the technology to do what are now called stablecoins. But we at that time called them fiat tokens. but what we really envisioned was a fiat token standard, a protocol like an HTTP for money and that we could create a protocol that multiple fiat currencies could implement. And in addition to creating a standard that could be adopted but also create a governance scheme around it so that you could have governance around the reserves and reserve model that back those fiat tokens. You could have audit standards around the transparency for those reserves. You could have a set of compliance requirements that had to do with the issuers of these fiat tokens and fiat digital currencies being authorized by regulators to conduct that specific business. So making sure that this was something that was acceptable to regulators in the United States in particular, and really the idea of creating a consortium that could have multiple issuers of those digital currencies that could ultimately support multiple currencies, not just a US dollar currency, but other key reserve currencies and also a governance model that could evolve to support multiple blockchains.

Our belief was that sort of blockchains are like the new operating system layer of the internet. And there’s intense competition in blockchain infrastructure, both public and private. If you have a digital dollar and you have a format and a protocol for a digital fiat. it’s very important that standard is cross platform that it can work across the operating systems that are being built. And so we wanted to evolve to support those things

And that also involved a lot of regulatory development. So in the early stages, it was getting people comfortable that we could have the fiat system interact with the bitcoin network. In this next phase, it was getting regulators comfortable with the idea of a stablecoin, the idea of a fiat digital currency, ensuring that regulators classified it and treated it like other kinds of stored value electronic money products.

We were successful in doing that. We were able to get regulators comfortable that this was equivalent to other electronic payment innovations. And using blockchain and crypto as a technology for that. So that obviously has led to the rapid growth of USDC. It’s the fastest growing, compliant, fully reserved US dollar digital currency in the world and has really brought ecosystem support.

And now the standards and governance are really starting to evolve as more members during CENTRE consortium as we add support for multiple blockchains. we’ll see that expand a lot, which really leads into what I think is gonna be the next major phase in this mainstream development of global digital currencies. And we’re seeing this around this idea of global stablecoins.

And the phrase global stablecoins emerged from the G7 following the proposal for Libra last year. the sort of world economy leaders. The financial regulatory leaders from the G7 issued a report on the risks and challenges and opportunities of global stablecoins.so we’re seeing global stablecoins emerged Today. We’re seeing the rise of things like USDC. We’re seeing proposals for other global stablecoins that are from private sector industry. And we’re obviously seeing the potential for global stablecoins in the form of central bank-backed digital currencies as well.

So this next phase, which I think will enter in full force in 2021 is really built around the idea that this can be useable by hundreds of millions and then shortly after billions of people and there are really three key things that need to happen. I can see each of them happening over the next 12 months in particular.

The first is right now to use these fiat digital currencies or to use a stablecoin like a USDC today. it’s too complicated. It really requires an early adopter who’s very committed to tinkering and experimenting. But the user experience is too challenging. Setting up a non-custodial digital wallet is complicated and scary for many people. Most of the digital world experiences are optimized around trading and speculating on tokens, not on just everyday payments and the actual underlying infrastructure itself. The idea of paying gas fees or having to hold a crypto commodity like Ether or something equivalent in order to transact is it goes over people’s heads. It’s too complicated. So first we just need to see the user experience improvements that will make it so that using something like USDC is as simple as sharing a JPEG photo or a text message. So we need to eliminate that complexity. And we’re working on things to do that. And I think new blockchain architectures are making that possible as well. Getting us closer to this idea of frictionless movement of value in an open public way.

The second is also technology-related, which is having blockchains that can support the scale that’s needed for initially hundreds of millions of people to use these. And 3^rd-generation blockchain architectures are really paving the way for that blockchains like Proof of Stake blockchains that are able to support very very high throughput are new novel consensus mechanisms that support greater scale. And we’re seeing many examples of this that are being introduced in Asia and in the US as well. Taking standards like USDC and another CENTRE stablecoins and being able to run those on these 3^rd-generation blockchains is also really critical to making this possible for the massive people to use these.

And then the 3rd, and maybe one of the most important is with the regulatory environment. There’s critical work that’s happening right now in the aftermath of Libra. the Group of Twenty, the leading nations of the world formed a working group through what’s called the financial stability board to define a set of policy recommendations for regulations of global stablecoins. We’ve remained involved in that process and commenting on it. And we’re approaching that point where those recommendations will become standards that G20 members will be expected to adopt. And then we think throughout the world, throughout the leading countries of the world in 2021, there will be standard policies for how global stablecoins are regulated. And from what we have seen, the suggestions we think are appropriate. And they very much map to the kind of self-governance that we’ve already put in place around the CENTRE consortium.

As these come into place, the combination of user experience improvements, scalable public blockchain infrastructure and clarity on the policy side of this will unlock this for massive mainstream adoption. So I think we’re really very much approaching a time when digital currency will become very mainstream for everyone everywhere in the world.

I think there are phases beyond this. Other phases beyond this are when central banks, more central banks come up with standards for how these private sector- stablecoin arrangements interact with and hold funds with the central bank itself, what we referred to as hybrid central bank digital currency, where private sector lead innovation and private sector led arrangements and standards connect with new kinds of bank charters or new kinds of licensing that require the issuers of those digital currencies to hold the reserves.

So it’s really this we would call it division of labor between central bank says core governors of money supply and core governors of monetary policy, The fundamental price of money liquidity providers for the broader economy they act in. But the private sector, including the open source blockchain community as really building the infrastructure that’s gonna connect the world economy.

So in that phase, we’re also excited about ways in which these different global stablecoins, whether they are sovereign backed or private sector led, will interact with each other and enable seamless, frictionless instant convertibility and deeper integration of economies, including the Chinese economy and the global economy. And we’re very excited about the prospects of that.

So it’s a very exciting time. And we’re looking forward to seeing what emerges in the coming years. Thank you very much.