Austin Campbell on the Rise and Regulation of Dollar Backed Stablecoins

Austin Campbell runs Zero Knowledge Group, a consulting and advising firm in the digital assets space and is an adjunct professor at New York University’s Stern School of Business. In Austin’s first appearance on the show, he discusses what comes next after the GENIUS Act, the debate with interest-on-reserves when it comes to stablecoins, the future of Tether, Governor Waller’s proposal of skinny master accounts, the larger macro implications of stablecoins in Europe and the global South, and much more. 

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This episode was recorded on November 14th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us. 

Our guest today is Austin Campbell. Austin is a Wall Street veteran who worked extensively on risk management and digital assets. He now runs Zero Knowledge Group, a consulting and advising firm in the digital assets space, and also is an adjunct professor at New York University’s Stern School of Business. Austin joins us today to discuss the latest developments in stablecoins and digital assets and their potential long-run implications for the financial system. Austin, thank you so much for coming on the program.

Austin Campbell: Yes, I’m happy to be here. Thank you for having me.

Beckworth: It’s a real treat for me because, as I have delved into the space of stablecoins, digital assets. I’ve had to learn a lot, and one of the people I’ve learned from is you. You’ve been on a lot of podcasts. You have a newsletter called “Zero In,” so subscribe to that, listeners, if you want to follow up on an expert in this space. Thank you, Austin, for the education.

Campbell: No, I think if people learn nothing else from this podcast, the discussion in crypto is fragmented and chaotic at best, and I would say we’re still in the early stages where all topics are misunderstood. If you’re listening and learning and being confused, congratulations, you’re on the frontline of the cutting edge.

Austin’s Career

Beckworth: Fantastic. All right. Now, tell us a little bit about you. You went from being a Wall Street participant to getting into the digital assets space. Tell us about that journey, and particularly how you ended up in the stablecoin topic.

Campbell: Yes, as I’ve said elsewhere, I’ll jokingly say it’s more that it was inflicted upon me than that I came to it. Back to traditional finance, when I was at JP Morgan, I ran a number of different products within the misleadingly named insurance-linked products group. One of the big ones was something called stable value wraps. It’s something that most Americans in traditional fashion here don’t think about, don’t know about, and probably don’t even realize exists, but almost all of you have probably interacted with them if you have a 401K.

If you ever go look in your retirement fund and there’s a stable value fund, that’s what’s making it work. Let me say some words that are going to sound familiar to anybody who has thought about stablecoins. I’ve got a product where there’s an underlying fund that has a diversified set of instruments, but I need the participants to be able to transact in and out, at will, at a fixed, stable value. Am I talking about a stablecoin here? No, I’m talking about the retirement product, and there’s about $1 trillion of that in the world, and they’ve been around for many decades.

One of the few things, actually, that largely worked properly through 2008. What it meant was I had this background in cash products, and so as I started doing things in crypto, and I was at a company called Stone Ridge, which is the parent of one of the early Bitcoin custodians, and was thinking about how do we do safe lending against Bitcoin, and then I was at Citi as the co-head of digital assets and global rates. Now, looking at stablecoins directly and being like, how do we service these things? How do we build better versions of these things? How do we not break stuff? 

Then I was at Paxos, where, actually, I was running, at the time, the third largest stablecoin in the world’s reserves and risk, which was BUSD. My claim to fame in this space, as I jokingly say, is I’m one of two people who built the economic model and risk of a stablecoin that went above $20 billion and then back to $0, and I’m the only one that didn’t lose anybody’s money or go to jail.

Beckworth: That’s awesome. Well, that’s great, Austin. Now, stablecoins are so fascinating, and my gateway into them is thinking about dollar dominance, the implications for debt management in the US, and what it means for interest rates, and a number of other, more macro-leaning topics. 

What Comes After GENIUS?

Let’s talk about the legal and technical issues behind it. I think that’s where really we need to know more. I want to begin with the big bill that was passed, the GENIUS Act, which brings stablecoins into the regulatory framework that we have here in the US. It adds a lot of certainty for people in the industry. What are the next stages? What are we waiting for over the next year as regulatory bodies begin to make rules? I know there’s debates over interest rates or yield, safe asset, collateral. What do you see as the big next steps we have to go through?

Campbell: As we learned with Dodd-Frank, one of the unfortunate truths of the US system is Congress can pass a law, but now what actually is, maybe the bigger question sometimes, in terms of implementing. GENIUS is going to be mildly complicated. The way the bill works is a stablecoin issuer could potentially have one of three different regulators. Option number one would be if you’re an insured depository institution, otherwise, like a state-chartered bank, it’s probably the Federal Reserve. 

Option number two is there’s a whole pathway for the large national people or certain types of trusts, et cetera, to be OCC-regulated. Then option number three is for stablecoins under $10 billion total notional, it’s possible that you could only be state-regulated because, quite frankly, we don’t want the federal regulators spending time on like 5,000 issuers of $10 million each. They’re just not systemically relevant. All three of those pathways are open and need to be fleshed out.

There’s going to be a committee giving states equivalencies so that you can’t have Alaska—not picking on you, Alaska. You’re one of the first states being like, you can run a stablecoin and use leveraged Tesla stock as your backing asset. No, they’ve got to be substantially similar to the requirements of the GENIUS Act. Then the OCC, who, if you’re not a banking expert, that’s the group that primarily regulates things like JP Morgan, are going to have to write a relatively robust set of rules for how do you do one of these things.

The Federal Reserve is going to have to do the same. When we talk about rules, it’s things like what are your operations? What are your controls? What are the exact details of reserve management? How about information security? How about anti-financial crime? This is not a trivial thing. We’re running something that is like halfway between a bank, a payments product, and a government money market fund. As a result, that’s going to take some work. I think it’ll take about a year for most of those frameworks to be booted up.

I think there will be some arguments about how to do them. My personal worry is that if we don’t have good coordination, you don’t want the Fed coming up with a very different set of rules than the OCC. That will just lead to regulatory arbitrage and break things. As a result, GENIUS passed, but it’s just the start of a snowball rolling down the hill. It’s going to take some time to get critical mass. It’s going to take some time to really get moving. Ten years forward, this will be one of those gigantic snowballs that takes out the ski lodge when it gets to the bottom of the hill.

Beckworth: Nice.

Campbell: It is both going to take longer than people think, but the impact will be bigger than people think.

Interest and Stablecoins

Beckworth: I was reading that the Treasury Department has received over 250,000 public comments on some of the rules that it’s writing up now. Of course, two main groups. You’ve got the pro-crypto, which are arguing, in our favor, please do not impose any onerous regulations. Then the banks have come out swinging as well. One of the issues they have been very strong on is the ability for stablecoins to earn interest. Now, in the GENIUS Act, they can’t outright do that, but they can on the exchanges.

I’m surprised these banks didn’t bring this up before. Maybe they did. I don’t know the history of the law, but where is this debate now? Because this seems to be a pretty contentious issue. Can they or can’t they earn yields some other way on an exchange, some other means other than directly?

Campbell: I think the answer is pretty transparently, yes. We live in a post-Loper Bright world, and the law says what the law says. I think federal regulators attempting to impose regulations greatly in excess of what Congress has authorized them to do is just not a thing that will fly. Starting from the legal argument, what the text actually says is that, one, it applies to the issuers of stablecoin. There is no language in there that implies you could extend that to nonissuers.

If the issuer has a partner, purporting to bind the partner could be incredibly difficult. That is like saying, because Amazon banks with Chase, we can apply banking regulations to Amazon. The answer is no, that’s not how that works. Number two is that if you read the actual text, there is a very important qualifier in there, which is solely as to whether you can pay yield or not. I think if you read it clearly, Congress was trying to do is prevent the creation of either narrow banks or an arbitrage around government money market funds because it says you can’t pay interest solely for the act of essentially holding or using the stablecoin.

That’s what it says. It does not say there are not other reasons you can’t pay people. I think the point was, guys, if you want to run a government money market fund, we’ve got a whole framework for that, go do that. We don’t want narrow banks where you offer a stablecoin that all it does is takes the money, throws it at the Fed, does nothing else. Because we disfavor that in the traditional system. Why would we allow the regulatory arbitrage here? If you’re building, for instance, an entire payments ecosystem and suite of products and distributing this globally, these are the things we wanted you to do as Congress. You should be allowed to be compensated for that. 

Part 1, I would say, I think the rules say what the rules say. Part 2, I will gently advise the banking lobby, “I think you’re sailing into some incredibly dangerous waters here with some of the arguments that you’re making.” Because it is not lost on a lot of people who are pro-crypto or who lived through 2008 or who have an understanding of banking that if we were to really rewind the clock, not to 2025 when GENIUS passed, but let’s travel almost 100 years into the past and look at the 1933 Act that reformed banking in the United States, I will remind everybody that, in addition to the creation of the FDIC and the separation of commercial and investment banking that were in there, more commonly known as Glass-Steagall, there was an important little detail called Reg Q. Reg Q banned the paying of interest by depository institutions. 

Now, over time, it was understood that Reg Q started to cause some problems, especially in the ’70s and then into the ’80s when Paul Volcker was sending interest rates way up. The banks were like, “This is uncompetitive, we’re losing deposits. If we can’t pay interest on these things, they are not competitive products,” and successfully lobbied for Reg Q to be taken away. Now, to be coming here and arguing, we don’t want competition, they shouldn’t be allowed to pay interest. If you look at the bank’s own arguments on that exact topic, they are saying that these products are uncompetitive if you can’t pay yield on them. I find that to be a dangerous thing to be saying because that means either you are arguing purely for naked subsidies.

By the way, this is after Gramm-Leach-Bliley, where if you look at bank balance sheets, they are not majority doing residential mortgage lending in small business loans. Guys, be very careful arguing that you should have a government preference to lend money to hedge fund billionaires in your prime brokerage or to project loans. Or two, actually, we mean it, maybe you should bring Reg Q back. It’s very much banks lobbying for naked special interest. We did deserve special treatment just because we want special treatment. I think there’s a very good chance this backfires in their face. It actually moves the Overton window on the banking discussion toward, maybe we should reimpose a lot of these requirements from the 1933 Act if you guys really mean this.

Tokenized Deposits

Beckworth: I want to put a pin in our discussions on the legal and regulatory issues and come back to it because you raised this question about banks. Why are they trying so hard? Because if I look out, I do see banks actually coming into this space as well. I want to jump ahead to a topic we were going to discuss later, but tokenized deposits or JPM Coin. It seems to me, at some level, they could have a competitive advantage, at least domestically, maybe not cross borders. I’m wondering where you would see this going because there is still some advantage to being in the real world versus having to go on-chain, off-chain, and maybe in the future, this will become a trivial matter. Where do you see banks falling out in the long run, given they also are beginning to push into this space?

Campbell: Tokenized deposits are interesting to me, but they’re a half measure. What I mean by that is that bank deposits are not generally fungible. To anybody who thinks they are, here’s my challenge to you. In 2023, if I had offered you an unlimited amount of Silicon Valley Bank deposits for an unlimited amount of JP Morgan deposits at a one-to-one ratio, would you have taken that deal?

Beckworth: Fair point, yes.

Campbell: Banks have credit risk. The balance sheets are not all the same. This is something we’ve known since 2008. We put a Band-Aid on it with the FDIC. We’ve put a lot of things in place with Dodd-Frank, leverage capital ratios, et cetera, but banks have credit risk. Deposit tokens are not scalable and fungible in the same way that a stablecoin backed only by T-bills is. As a result, I think you’re just recreating the current banking system, but using a slightly better ledger if you are doing tokenized deposits.

I think there is a chance that domestically, that could be something that is an upgrade. I don’t know that it’s a 10 times upgrade, but it’s an upgrade. I think you’re going to have a much harder time with that internationally. Going back to stablecoins writ large, one of the big hopes here is extending the reach of the dollar globally. If you tell everybody who’s extending the reach of the dollar globally, by the way, good luck, we hope Wells Fargo’s management doesn’t screw up and you lose all your money because you’re uninsured depositors, that’s not nearly as compelling as it’s a pile of T-bills, you’re good unless the US Treasury defaults. I just think it’s a functional misunderstanding. I understand why the banks want deposit tokens. What I have a hard time seeing is why their customers would be nearly as excited about this.

Beckworth: I would imagine, too, that the cost of tokenized deposits has to be higher than a stablecoin because you have capital costs, you have regulations, more overhead, bottom line, than you would have with a lean, nimble stablecoin. Now, let me flip that around. The critique of stablecoin business is right now, at least the current model, is highly dependent upon a high-interest-rate environment. Banks will say this. I want you to reply to that argument that once interest rates go down, or if they go down again, should we return to a zero lower bound world? What are stablecoins going to do to stay afloat? How can they stay in business without the high-interest-rate environment?

Campbell: For one, you guys don’t want them to pay yield, so why do you think they care about interest rates, particularly from a consumer adoption standpoint? I have so many questions. Right back to you’re making some very two-faced arguments. Two, it’s not that expensive to run a stablecoin. Even now, you’re seeing the economics of that space largely shift to paying users and paying distributors, which are the ones with the economic power. 

The stablecoin itself is a government money market fund. The answer is, what did those guys do in a zero-rate environment? It’s like, okay, you’ve got lower management fees, you go into the reverse repo market, you make something higher than zero, but not necessarily like spectacularly large amounts of money like Tether has been making. I will remind everybody, Tether was started basically in 2014 and existed just fine in a zero-interest-rate world for quite a while—

Beckworth: That’s true.

Campbell: —before we got to higher rates. They can also charge mint and redeem fees, and they can also facilitate payments. There are other business possibilities in there other than interest on reserves. Honestly, the interest on reserves dominating everything was not the original paradigm of stablecoins, and the market is still really digesting what that means and adjusting to it.

Beckworth: Bottom line is, if we believe in markets and capitalism, they can find a way to operate and provide a niche. I’m just playing devil’s advocate here, obviously, but I wanted to hear your take on that. 

Future of Tether

Let’s go back to the legal and regulatory issues. I want to talk about Tether since we brought it up. The GENIUS Act is for domestic stablecoins. Tether is currently outside. It’s also the largest. Do you think the GENIUS Act incentivizes Tether to incorporate in the US, to move stateside, or will they stay outside the country?

Campbell: It depends what Tether wants to do. You’d have to sit Paolo down and be like, “Is your goal to grow an order of magnitude larger and be the backbone of a lot of institutional trading?” In which case, not only are you going to come to the United States, but you’re going to need to radically transform your business model or, “Is your goal to operate more like a call it Global South, emerging markets version of a PayPal or a Western Union?” In which case, you probably don’t want to go register in the United States. Just stay out of here and keep doing what you’re doing. 

The question you’re fundamentally asking, to me, boils down to how important is the United States itself to Tether? Then equally, how important is keeping all the yields on, call it, their internal reserve? Because one of the problems with stablecoins that you run into is if you’re in the United States—for people who don’t know about this, maybe I’m about to sell you a noncrypto product—you can get a cash management account from Fidelity, which is a relatively boring, regular way asset manager, where all they do is take your money and put it in their government money market fund. They will pay you the interest on that fund, and you get a debit card with that you can go tap to pay with everywhere in the world. 

Now, fundamentally, despite all of the complaining about yield on stablecoins, domestically, you have a yielding stablecoin solution to pay for everything you want. It already exists. Go to Fidelity’s website. I’m not lying to anybody here. You can get that right now. Robinhood does a similar thing with their cash sweep vehicle and their debit card.

This is a thing that exists, and people use it. I don’t think Tether is going to be competitive in the United States if their unit economics are, you can have dollars, but we keep all the interest. I think that works internationally because, to be totally blunt, if you’re in Venezuela, and your option is the bolivar or having dollars, the interest rate bit of the dollars is like a rounding error on what is important to you, and that is an FX trade.

Beckworth: Great points. They probably will stay where they are and continue to grow outside the US, as well as cross-border payments, maybe into the country. Any other points about GENIUS Act? We need to talk about the safe assets backing them, reserves, coins, T-bills. Any issues there?

Campbell: Yes, I would say two points on GENIUS that I think are misunderstood. One, if we want to give US regulators some credit, one of the best things that they did post-crisis was money market reform. It was led by the Boston Federal Reserve, but there were many other participants in that, including both private industry and other regulators. Basically, they went and looked at all the things that had happened pre-crisis, like asset-backed commercial paper and prime money market funds, and government money market funds, and said which of these work and which of these don’t. What are rules to fix many of them? 

The conclusion was the gold standard of cash assets is the government money market fund. In 2018, when the New York Department of Financial Services had to write rules for stablecoins, they essentially stole the homework of the Boston Federal Reserve and said, “hey, this is a solved problem. Government money market funds are the answer.” I will remind everybody who’s listening, who thinks that stablecoins don’t work or break the peg constantly, that zero NYDFS-regulated stablecoins have ever had peg stability problems.

The ones that have had problems are the offshore unregulated ones that don’t use this framework, which is bankruptcy remote, your assets look like a government money market fund. The writers of GENIUS look at this track record and go, “Why would we reinvent the wheel?” They stole that homework.

Beckworth: Interesting.

Campbell: If you look inside of a GENIUS stablecoin, it’s a government money market fund with some important details, which is bank deposits and T-bills are pretty well understood. The other thing that’s in there that’s really important is something called reverse repurchase agreements. In traditional financial fashion, the more jargon there is, the simpler the product actually is, that is, overnight collateralized loans. Here’s how that works. I give you cash, you give me Treasuries in excess of the amount of the cash I gave you, and then the next day I choose if I want to continue lending you the cash. That’s how that trade works. It’s one of the simplest financial instruments in the world.

It’s a very good way for people who have cash of essentially providing liquidity to the market. By the way, repo’s a giant market. There’s trillions of this rolling daily. It’s something actually the banks use to fund their balance sheet, especially the big banks. GENIUS stablecoins being able to do reverse repo against Treasury collateral means that this may be a funding vehicle for the banking sector with Treasury collateral, which is good for Treasuries and good for banks. It makes this whole, oh my God, they’re going to steal all the deposits thing a bit silly because, guys, it’s moving from your left pocket to your right pocket. Stop it. 

Two, and this is very misunderstood, if you read the GENIUS Act, there are anti-financial crime and compliance issues that have sprung up all over in blockchain that are largely solved with regard to US stablecoins. Stablecoins issued under the GENIUS Act need to have what is called freeze-and-seize capabilities. That means if you have a wallet, you control that wallet. It’s self-custodial. Only you have the private keys, but you have a GENIUS stablecoin in that wallet. The issuer can freeze the tokens in your wallet or take them out of your wallet and take them back. They can reach out anywhere in the world and take those back in a way we cannot do with our current banking system. 

Two, in addition to the KYC AML requirements of like, if you’re going to give somebody cash, you’ve got to know who they are. They also require people to look out into the ecosystem and at least instead of closing their eyes and living only in their building, look out on the street and see what everybody’s doing. If you see bad acts happening with your stablecoins, you need to be monitoring that, notifying people, and possibly freezing those, depending again on the exact way the guidance is written. What it means is that in addition to extending the reach of the US dollar on blockchains, we’re extending US legal norms on blockchains.

The North Koreans have been hackers in this space and stealing all kinds of value, but if the North Koreans were to hack something and get their hands on a GENIUS-compliant stablecoin, the issuer would be able to immediately freeze those and take them back, no matter where in the world the people controlling the private keys were.

Beckworth: Fantastic. That should give us reassurance this is not a financial stability issue after all. I would mention, and this goes a little bit far afield from domestic regulatory and legal issues, but I want to mention a previous guest I had on the show, Rashad Ahmed, and he used to work at the OCC and he’s doing some other work now. He’s at the Andersen Institute, and he made this really interesting argument I’d never heard before, and I want to see what your response is.

I was talking to him, and I said, “Look, I like this because it’s going to extend dollar dominance. It’s going to help pay for our deficits because we have a hard time reining those things here in the US.” Then I said, “Will this not also make the Fed more powerful, the dollars are used elsewhere in the world?” He brought up this counterpoint, which actually makes the case that stablecoins could lead to more financial stability. This was his point. One of the reasons the Federal Reserve, when it moves, can be destabilizing around the world is because the world has all these dollar liabilities on their balance sheet, so households, businesses. On the asset side, it’s local currencies. They have a currency mismatch on their balance sheet. 

If we get dollar-based stablecoins widely used throughout the world, balance sheets will have better currency matches. We’ll have dollars on the asset side, dollars on the liability side. When the Fed does do something, it’s less consequential around the world. This global financial cycle is less volatile. It may actually serve to stabilize globally what’s happening. What are your thoughts on that argument?

Campbell: I think that argument is correct. I think that argument is actually incomplete. Let me take that argument one step further.

Beckworth: Sure.

Campbell: If you are in Venezuela, if you are in Nigeria, if you are in countries that have persistently had high inflation, poor rule of law, and where the government has been confiscating value from you either explicitly by just stealing your bank account or nonexplicitly by causing large amounts of inflation, what incentive do you still have to use your local currency at all? There may be some degree of payments that are legally mandated to the government, like you’ve got to pay your taxes but almost everything else you might not want to use the local currency for.

I think one of the impacts of dollar stablecoins is that we are now living in a world where virtually anybody globally who has access to the internet can choose to opt into the US system and out of their local system. I think this is going to be incredibly disruptive for a lot of poorly run currencies and poorly run financial systems, where we’re essentially bringing a degree of freedom to people that they did not previously have. If you live in Nigeria in 1985, your options are use the local system. I’m done talking. 

Now your options are actually how about the dollar system? I would take it a step further and say many of these currencies that are currently causing that mismatch will cease to exist systematically over the next 10, 20, 30, 40, 50 years, as people just have the option to use something significantly better. As a result, if you want to hold onto your own local currency and you’re living in a post-GENIUS world, my answer is you have to behave better. If you do not give people a compelling reason to have your local currency, they don’t have to. Like Switzerland, you guys are fine. Like many other people, I would be very concerned about.

Beckworth: Wow, that is an interesting add-on argument that it imposes discipline abroad. It creates the incentive that unless you want your country to be dollarized, you better get your house in order. I think back to an example I have here, sitting behind me in my bookshelf. I’ll put this in front of the camera. Listeners won’t be able to see this, but this is the $100 trillion note from Zimbabwe 2008. This thing actually is worth, I think, a few hundred dollars now as a collector’s item, but it was worthless.

As soon as it came out, it was worthless. What they were trying to do in Zimbabwe, the regular people were to use dollars instead of the South African rand, but the government was like, no, and they tried to suppress it. Finally, they gave up. Okay, you can use whatever currency you want, and dollars magically appeared. Now imagine if they’d had stablecoins back during this period. Much better world.

Campbell: None of this would  have happened.

Beckworth: Yes, exactly. We wouldn’t have gotten to $100 trillion note in Zimbabwe, probably. That’s a great point, that it’s not only going to improve financial stability, but create the incentives to have more disciplined public finance abroad.

Campbell: If you think about this from a free market’s perspective, there has not really globally been a free market in choice of currencies for people. Maybe at the institutional level, to some degree. If you’re Standard Chartered, for instance, you can get your hands on a lot of currencies. That’s fine. The average person globally has not had a free market and access to currency, and that’s what stablecoins are now bringing to people. 

Again, I’ll remind everybody listening, here’s what you need to get your hands on a dollar stablecoin. You need the internet and something of value to exchange for it. When I was at Paxos, the only country in the world where we were quite confident that none of the regular citizens had our stablecoin was North Korea, because you have to take the internet away from people.

Skinny Master Account

Beckworth: That’s amazing. Let’s move on to another key development in the stablecoin space. We’ve talked about the GENIUS Act, which is huge, but one that’s recently come out is the “skinny” master account. Fed Governor Chris Waller talked about it. Now, this is just an idea at this stage. I heard him in an interview say that he hopes to see it out in a year or so, not three years or five years, but within a year or so. Walk us through that and what its implications would be for the stablecoin industry.

Campbell: I was recently actually at the Philadelphia Federal Reserve fintech event and had a chance to speak briefly with President Waller about this, so if you’re listening, thank you for the time. I would say I think the punchline here is if you think about what a Fed master account does right now, it’s actually taken several different concerns and welded them into a single object. There may have been good reason for that historically, with the way the Federal Reserve was constructed, but now in a world of electronic payments everywhere at all times, no matter what, we’ve stapled the ability to use things like ACH or FedNow or FedWire onto the ability to borrow at the discount window. Those are two very different things.

I think we can all agree that there are people we might be okay sending ACH payments that we would not be okay with borrowing at the discount window. I think if you think about what Waller was saying there, the important point is we need a way to start unbundling some of this functionality. Historically, maybe there was good reasons to bundle it all together because we were really only serving one type of institution. As the payments landscape in the United States has changed radically, does Visa need the ability to borrow at the discount window? No. Should they maybe be able to have direct access to some of these functions? Yes.

If you think about the “skinny” master account, I think you can really think of it more as a “skinny” payments account. What they mean by that is we want you to have access to the payment systems, and we want you to be able to leave reserves at the Federal Reserve to facilitate that, but these would not be interest-like bearing reserves. You’re not going to get IOR on them. You’re just going to be able to leave money there to facilitate you pushing it all throughout the system, and that that’s a very different function than the lending and borrowing and the discount window. It’s meant to create, call it a layer cake of potential options from the Fed instead of all or nothing.

I think some of that is a result of both some of the lawsuits that they’ve faced, but also, more importantly, an acknowledgement of the changing payments landscape. Stablecoins are a part of that, and there are certain stablecoin issuers who you’d be probably comfortable giving a “skinny” account to that you wouldn’t want to have a full master account, but I don’t think it’s just them. I think it’s other fintech payment solutions as well.

Beckworth: This is really interesting to see evolve and to happen. Governor Waller, in some subsequent interviews, even mentioned this would be a path forward for institutions who’ve applied in the past and have not gotten those master accounts. Institutions like Kraken Financial or Custodia Bank, this may be a path forward for them and others like them who want to be custodians for stablecoins or fintech industry in general. Interesting development for sure. Now, what are the conditions to get this? We don’t know for sure all the details, but it’s not just like anyone can run up and get a “skinny” master account. There has to be an eligible depository institution. Manage our expectations here. Who is likely to get this and who is not?

Campbell: I would say if you think that you, the regular two-legged American are about to apply for one of these and get one, you need to tap the brakes. The Fed has had a somewhat inconsistent approach to granting master accounts. In theory, they are insured depository institutions only, but if you look at the list of current holders, there may be a few people who might not be eligible under that strict criteria. Part of what I think is being thought about here, too, is the legal framework, especially with some of the challenges that exist around access to these right now in the legal system.

You wouldn’t want a framework where a judge comes in and says, “It means literally what it says on paper, so insured depository institutions only,” and a lot of people have to be kicked out of the system. That’s going to be very disruptive and might actually be damaging to the American banking and payment system. On the other hand, you wouldn’t want a judge coming in and saying you have to give discount window access to everybody. That’s not going to work either.

I think this is a way for them to start allowing the following subsets of institutions access, which is that insured depository institutions are pretty obvious for regular master accounts, but there are a subset of things like certain kinds of uninsured trusts that are still nonlevered and holding assets, certain types of custodians, maybe certain types of money transmitter licensed payments entities, like say a PayPal, that might be something that you want to give a payments account to that wouldn’t be eligible in the current framework that they could create an eligibility pathway here for. I think this is, in many ways, undoing a couple of generations or at least decades of hacks to make things work the way they want by wedging it into the current system and instead saying, “Things are moving fast enough. We need to slow down and formalize this and fix the rules.”

Beckworth: This will be exciting to follow and see what happens within the next year as we learn more about these “skinny” Fed master accounts. I think between them, the “skinny” master accounts, and the GENIUS Act, it’s like a steroid shot for stablecoins. This is great news for at least certainty and being able to move forward. 

Stablecoin Regulation

Let’s move on to another interesting discussion about stablecoins, the regulatory space. This came up, actually, at the conference you just mentioned, the Philadelphia Fed’s fintech innovation. Paul Atkins, the SEC leader, he outlined a taxonomy, or at least the prospects of a taxonomy. Do we know much about this taxonomy for regulating these digital assets?

Campbell: One of the problems that we’ve had under the previous administration, in the Gensler SEC, was that their taxonomy was anything you put on this type of ledger is a security, which I think when you zoom out and think deeply about that, it has a lot of really broken implications and was overwhelmingly likely to have been done in bad faith, because it’s hard to think you could be that naive and be in charge of the SEC.

The idea that if we take an asset that we’ve recorded in a Microsoft Access database and move it to Microsoft Excel and it magically becomes a security is anything other than patently ridiculous. You need a taxonomy to instead look at the assets and decide, “Some of these are probably securities.” If we were to tokenize Apple stock, security, but if we were to tokenize my daughter’s socks, not a security. It’s going down the list and figuring out a taxonomy of which of these tokens are definitely securities. Which of these tokens, if we’re being honest, probably exist currently in a somewhat broken gray area where maybe the token itself is not a security, but they appear to have been sold with some investment contract-type construct? 

This is a weird space to be in, and we need to think deeply. Then there are many of these that are 100% not securities. Let me give an obvious example of one of those. My old firm, Paxos, tokenized gold. By gold, we mean literal physical bars of gold, like allocated gold at the London Metals Exchange. I think it is a stretch to say that physical gold bars are a security. I think the CFTC would have some things to say about that as well.

It’s developing a taxonomy of what are those things, but maybe the more important part of the speech was what should be the regulatory emphasis and approach on doing this. A general principle that before we give you a speeding ticket, we should probably post the speed limit. We can certainly have an argument about what the speed limit is, but within some bounds, like 30 miles, 45 miles, 60 miles, these are all reasonable numbers. We know 0 is insane, and we know infinity is insane.

Now we’re having a discussion about what that is, but also you need to know what it is. We can’t be like, “We’re going to put up a sign that says ‘speed limit.’ We’re not going to put a number on it. We’re going to give you tickets, and then you find out what it was in court.” To some extent, that’s what Gensler’s SEC was doing. Atkins was telling us, essentially, the things that the SEC should be laser-focused on in terms of enforcement actions are fraud, abuse of consumers, investors, breaches of trust, the kinds of things we would think were severe issues in any market.

If I say, give me $10,000 and I’m going to run an investment fund, and I take the $10,000 and I go buy a car with it, that’s just fraud. The blockchain part is completely irrelevant. I’m just committing fraud. I think they’re going to aggressively enforce against people in this space doing that, maybe even ramp up some of the fraud-based enforcements, which I would be in favor of.

They’ve said, in the cases where the rules are somewhat ambiguous, if people are proceeding from a first principles basis and treating people fairly and disclosing things, it probably doesn’t make sense to be spending tens of millions of dollars to try to tag them on very tortured interpretations of registration requirements. We should consider, oh, I don’t know, the magical power of writing things down. I think, really, this is a speech about good governance and regulation and a way to restore trust in institutions and give everybody faith that they’ll be treated equally under the law.

Beckworth: He mentioned in the speech, my former colleague, Hester Peirce, who’s done a lot of work on this issue. This taxonomy, though, it’s still forthcoming, right? They’re still fleshing it out. At least he’s telling us not everything under the sun will be called a security. There’ll be clear boundaries. Again, more certainty and clarity for people who are in the digital asset space. This is good. The GENIUS Act, “skinny” master accounts, this taxonomy. These are the things you want to create the guardrails and let the market do the rest. Go do your magic.

Campbell: Yes. I think this should be, knock on wood, a bipartisan consensus-type issue if people understand it correctly. What I mean by that is I’m totally happy to have arguments about what the rules are, but the core principles of we need to know what the rules are, we need to write them down, they need to be fairly enforced so we’re not giving selective or favorable treatment to people, and quite frankly, that there should be consequences for government officials who deliberately violate those principles is one that’s very important.

After the complete and utter failure of the Gensler SEC to stop any of the crypto criminals, but then attempting to enforce against people like Coinbase, where they did not allege any wrongdoing toward customers, and Operation Choke Point 2.0 under the Biden administration, if we don’t fix these issues—let us ignore crypto for a moment. If the average US person develops the belief that the financial regulators primarily exist as gangsters to enforce the political preferences of whatever party is in power and just grab money from the other side whenever they’re there, everybody will lose faith in American capital markets, which are the crown jewel of the world. I think it’s important for America writ large that we have fairness in this space.

Beckworth: Absolutely. One last question in this part of the regulatory legal issue area, and that is, let’s compare ourselves to other countries. It seems like we’re making a lot of progress. We’re definitely pro-market. Let innovations bloom. Let 1,000 stablecoins bloom and let’s see what happens. Now, if we go over to Europe, though, they’re a little bit more timid about this. Tell us what’s happening there.

Campbell: There’s a piece of legislation there, MiCA, that, among many other things, it’s an omnibus-type thing trying to deal with all of the blockchain issues. It has a taxonomy for stablecoins. There, I think the Europeans probably made the mistake of listening to the special pleading of the banking industry and, to be honest, crippled themselves, because if you look at a MiCA stablecoin, you’re required to have 65% of your reserves in bank deposits. Number one, congratulations, your stablecoin is essentially a tokenized deposit. Does everybody remember what I just said about Silicon Valley Bank versus Chase? I have so many questions. How do you feel about Greek banks?

Two, I think when you create standards that are essentially trapping capital onshore in specific types of institutions, you are greatly reducing the interests of people internationally in using them. If you had MiCA stablecoins backed by the safest forms of eurozone debt, could you get international adoption of those things? Very likely, but if you’re trying to tell a bank in Japan or a bank in Australia or a bank in Thailand, “Hey, you’ve got to take a ton of unsecured, uninsured credit risk to BNP Paribas and you don’t get paid anything for it,” they’re going to barf all over that, not just for economic reasons, but because their regulators, who are not stupid, are going to look through the stablecoin and be like, “Ah, those are uninsured bank deposits,” and give them an appropriate risk weight, which makes them totally uneconomic to take in.

The MiCA thing is the classic example of losing the forest through the trees and really playing to protect the incumbents as opposed to the new innovation. It would be equivalent to saying in the United States, “Ah, we’re having this big internet boom, but book selling is very disruptive, so we’re going to tell banks that you can give bank accounts to Borders, but not Amazon.” Then you’re going to have some very deep regrets about this about 20 years down the road when foreign banks are the only people banking the largest company in the United States of America. Europe, in classic fashion, the same way they’ve done with AI, is they regulated something before they had any of it and killed it because the regulatory framework they made is completely unusable.

Beckworth: That is so interesting that they are requiring stablecoins to back things up with banks, which is consistent with what a previous guest talked about, Luis Garicano. He was at the University of Chicago. He’s now, I think, at London School of Economics. He made this case. He made a presentation, and then I talked to him afterwards, got him on the podcast. He makes this point that the Europeans are shooting themselves in the foot, just like you said, because on one hand, they’re making it prohibitively costly to have a euro-based stablecoin because they don’t want to harm the banks.

On the other hand, the public option, a CBDC, they’re also weakening that. They don’t want it to be too good, lest it harm banks. They’re preserving banks, and they’re undermining both versions of a digital asset. A CBDC that’s weakened and a stablecoin that’s unlikely to compete, which to me is really interesting. I’ll say this. I had an ECB official reach out to me after that podcast, after a Substack that I did, and wanted to chat about it. I didn’t get a chance to follow up on that conversation, but I’m wondering why are they doing this? Is it just that the banks are so powerful? They clearly can see these arguments as well as you and I can, right?

Campbell: I’ll say, I think there’s some misconceptions about banking as it exists in the world because people have ideas in their head that are very attractive and appealing and easy to understand. It’s like the old H. L. Mencken quote of, “For all complex problems, there is an answer that is simple, easy to understand, and wrong.” What I mean by that is, let’s think about the US banking system, and then we can zoom over to Europe and understand this problem.

If you’re in the United States, we have roughly 4,450-ish banks that I say “ish” because by the time this podcast comes out, inevitably, a bank somewhere will fail, or maybe one will be created, but we’re in that ballpark. As a trivia question, I’ll actually ask you, of US banks, if I take the top 20 banks only, again, there are like 4,450, top 20 only, roughly what percentage of deposits in the total system exists in the top 20 banks?

Beckworth: I’m going to pick a big number, 70%.

Campbell: That’s about right, 70%. When you think about this, people tend to have in their mind the bank that does a lot of mortgage lending and local lending, but those are all the tiny ones. It’s actually the really big guys who are driving things, and they do very different things with their balance sheet. It’d be a little bit like somebody comes to you, and it’s like, “Hey, I need you to take care of some things for me. I’m going on a vacation, and I’ve got this ant farm, and I need you to watch 4,400 ants. Can you do that?’ You’re like, “Yes, sure.” They’re like, “Oh, and 20 polar bears.” One of the scales of these items is very different than the other one, and yet we conflate them as though they are the same thing. 

Now, Europe, same problem. If you go look at Société Générale or BNP Paribas or Deutsche Bank, these are giant FX trading houses. They trade a huge amount of equities. They issue securities. They have massive portfolios of those things. It’s largely a trading operation with a deposit-taking institution that coincidentally exists within there if you look at what’s really driving their business results, but they act like the deposit institution is the thing that’s driving everything when they talk to regulators. That’s how people think of a bank, like, “Oh, they take my money, they lend it to the local business, like in It’s a Wonderful Life, and then they maybe pay me some interest.” It’s like, “No, they are taking your money and going and trading a bunch of exotic equity options with people and lending it to hedge funds so that they can lever their portfolios.”

I think until people get that mental model out of their head, there will continue to be favoritism of the banks, but I think the good news is for everybody who lived through the financial crisis, like a big divide—I’m a professor, so I see this as my younger students are all like, “The banks are full of it.” It is people who are, call it 50 and over, that seem to continue to believe this. To some extent, time is the answer, but that may not work out well for Europe because you’re going to lose the entire global market of stablecoins at the time it takes you to unbreak this.

Beckworth: To be fair to Europe, my understanding is that the financial system is a lot more tilted toward banks, it’s bank-heavy, whereas in the US, banks are still an important, but smaller share. 

Macro Implications

Let’s move on to the macro implications or the macro tie-ins. I want to begin by reading an excerpt from Fed Governor Stephen Miran. He had a speech recently, November 7, and pretty provocative title, “A Global Stablecoin Glut: Implications for Monetary Policy.” Basically, he’s invoking Ben Bernanke’s speech in the early 2000s, “A Global Saving Glut,” and the idea being all this excess savings, looking for a place to go. It came to the US, and part of the early 2000s, they went to what we thought were AAA-backed, mortgage-backed securities. They really weren’t. We found out later. 

Now, the argument that Stephen’s making is it’s going to be coming into stablecoins. It’s going to increase the demand for Treasuries, for safe assets, largely Treasuries or the Fed’s balance sheet, some safe asset in the US, and it’s going to drive down rates. He invoked a study that said the safe rate would fall 40 basis points, which is fairly large.

I want to step back from these point estimates and what’s going to happen. Just a more general question: Do you see a big, untapped source of demand globally for stablecoins, so that the story at least could be partly true? Do you think there are a big reservoir of people in the emerging markets we talked about earlier? We talked about Europe. There could be a lot of wealthy people in Europe who substitute into dollar stablecoins. How do you see this unfolding over the next decade?

Campbell: I think on the untapped demand for stablecoins part, I completely agree. My last estimate before I left Paxos was that 95% of the holders of our stablecoins were non-US persons. I think almost the entirety of the Global South minus maybe literally like Singapore and significant parts of Asia, some parts of Europe, there’s going to be a lot of demand for dollars as opposed to your local currency. Again, this is not an endorsement of the dollar so much as a criticism of everybody else. It’s a little bit like the Winston Churchill thing on democracy. I love the dollar, but do you want the Turkish lira?

I think a lot of people will be reaching for dollars as a result of this. If they’re reaching for stablecoins, that means those dollars are going into the assets that back stablecoins. That conduit, I completely agree with. Again, I’d be pretty hypocritical to say I think this could wipe out a bunch of currencies, but also there’s no demand for them. It linearly follows through. That’s probably true. The part I would disagree on is I’m not so sure this all piles into T-bills.

If you’re running this sort of strategy, the overwhelmingly dominant financial instrument to do inside of these things is overnight reverse repo. If you read the act, you can do that against any form of Treasury. This is going to provide funding to anybody who has any form of Treasury collateral across the entire curve that can be redistributed through the system. If we think they start to catch on in the United States as well, that’s probably moving out of deposits, paying people 0% in banks, and into wholesale funding, which is more expensive.

There are cross-current effects between non-US dollar-denominated people demanding US dollar assets that will bring rates down. And depositor substitution in the United States, if that starts to happen, that will bring rates up. Honestly, I think it’s a wash. What it really is, is a reallocation of fairness in the system because, as I jokingly ask my students, I don’t understand why I have to lend money to a real estate billionaire to buy coffee.

What I mean by that is, in the US right now, with the way we’ve constructed our banking system, the banks are paying everybody 0, and then doing very risky things. Sometimes they make out great and pay themselves huge bonuses or just explode, and then stick the public with the bill. I really think what this is doing in the United States is unwinding some of the heads-I-win, tails-you-lose aspects of the banking system if this catches on.

Beckworth: How fortuitous that this is happening at the very time where we need more demand for our Treasury securities. This is really one of the puzzles that haunts me is, we continue to run large budget deficits, and as far as the eye can see, large primary deficits. The debt’s going to continue to grow according to all estimates. Yet, I look at the 10-year Treasury, it’s around 4%, which in my mind should be quite a bit higher. I’m worried about fiscal dominance, and yet here comes this hero riding onto the scene to save the day, called stablecoins, at least one of the heroes. How lucky are we to have this? I know this wasn’t orchestrated to happen this way, but, man, the timing could not be better.

Campbell: I might argue, I’m not sure if it’s going to turn out to be a blessing or a curse. What I mean by that is stablecoins cannot solve the deficit problem. Eventually, you have to spend less money. What stablecoins can do is extend the runway for us to spend less money. If Congress doesn’t have the will to engage with that and stablecoins hit the scene, all we’re doing is eventually creating a bigger problem at the end of the runway if you didn’t slow down at all.

Now, on the other hand, to invoke somebody who was literally voted out of Congress or left, to avoid that, because he was pointing out to everybody we can’t keep doing this forever, if you were to implement something like Paul Ryan’s plan to bring the deficit back down, stablecoins can help you land that plane. If anybody is a voter in the United States or anybody is in Congress in the United States, you need to understand these things can’t save you. They only buy time. If you don’t start taking this seriously, it’s not a fix.

Beckworth: This might be just kicking the can down the road and allowing Congress to avoid making tough choices. That’s the thing. When interest rates are relatively low and you can roll over the debt without higher interest rates, higher inflation, it’s really hard to make these tough choices. No one really wants to address the ultimate issue here, and that’s entitlement reform, but that’s another podcast, another conversation. 

Future of the Financial System

Let’s end on the time we have left with the future of the financial system. In particular, I want to go back to a point you made about we may see credit creation and payment technology separate going forward or being distinct more and more. Talk about that a little bit more as we wrap up the show.

Campbell: Let’s travel back in time about 50 years. The majority of payments you made day to day in the 1970s were not done through your bank. You were paying for things with cash, and then maybe cards had started to catch on some. The idea that banks were somehow central to the day-to-day activity of buying a sandwich was just not there. That’s not how that worked. We’ve accidentally, in this country, given banks a monopoly on electronic payments, and I think a lot of questions are starting to be asked about that and breaking that system back apart.

There’s some research out of the UChicago in the 1950s of wouldn’t you want your payment system to be separate from the banking system because this one blows itself up all the time doing risky things with leverage, and we’d like this to continue working to oversimplify the arguments. I think people are coming around to that. From a payments perspective, I think it’s very important.

Two, I would urge people in the US not to lose the thread also on securities market reform, which is to say, right now, we have relatively slow ledgers. We settle things business day or days after trades happen, and we have to do derivatives margining during New York banking hours, which is really a weird thing for a 24/7 global interest rate derivatives market. There are many structural improvements that tokenizing forms of payment like certain stablecoin designs, putting them on a blockchain, and then allowing us to trade other financial instruments against them will give to the financial system.

Let me put myself back in my JP Morgan shoes. Let’s say it is late afternoon on a Friday in 2008, and I get a phone call from somebody who says, “Hey, I want to sell you $100 million of Treasuries.” I would normally try to figure out what’s a fair price for that and just give somebody a quote, but at that point, I have to give a very, very different number. In fact, maybe just hang up on somebody if it’s Wells Fargo that calls me or Lehman Brothers that calls me. If I can settle that trade instantly, thanks to better technology, now I can just quote both. There are very real technological upgrades to really nitty-gritty stuff inside US financial markets that is still not fixed from 2008 that we are going to unlock here.

Beckworth: With that, our time is up. Our guest today has been Austin Campbell. He has a newsletter, “Zero In.” Be sure to subscribe to that. We’ll provide a link to it in the transcript. Austin, thank you so much for coming on the program.

Campbell: Thank you very much for having me.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.