Cam Harvey: Through the Noise
Fuqua economist Campbell Harvey gives his insights on pressing topics within the worlds of economics and finance.
Cam Harvey: Through the Noise
Banks Are Terrified of Stablecoins
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While bitcoin and dogecoin grab headlines, a far less flashy corner of crypto has quietly overtaken Visa and Mastercard in annual transaction volume. In this episode of Through the Noise, Cam Harvey walks Robert Olinger through stablecoins - dollar-pegged tokens that settle in seconds for pennies instead of days for dollars. Cam unpacks how Circle's USDC actually works, why the model is structurally safer than fractional-reserve banking, and how the GENIUS Act now puts token holders first in line if an issuer fails. He revisits the brief 2023 USDC depeg tied to Silicon Valley Bank, explains why Tether earns a staggering $33 million in profit per employee, and lays out the brewing fight over the Clarity Act - where stablecoin issuers want to pay interest, and the bank lobby is fighting hard to stop them.
Thank you for joining us for another episode of Cam Harvey's Through the Noise. Today, Cam, over the last several uh episodes, we've been circling these ideas uh around crypto technologies. And one technology that you keep talking about is stable coins. It's something that I sincerely have uh have very little knowledge of. And I'm wondering if maybe you for us in the audience can kind of walk us through what is a stable coin and how do they work.
SPEAKER_00Sure. So stable coins are very important. So we focus a lot of the media attention in the crypto space on highly speculative crypto assets like Bitcoin or Dogecoin. And there's something else happening in the background. And this is a type of cryptocurrency that is not volatile. It is stable. That's why we call them stable coins. So these are tokens that are fully backed by another asset. And the most popular backing is the US dollar. So these tokens solve problems. So for example, the simplest uh problem that it solves, and perhaps the most important, is just the transfer of funds. So to transfer funds using the traditional banking rails could take three to five days. And the cost is enormous. It might not go through. It's not transparent. If it gets hung up, who knows where the money actually is. Stable coins take out the middle layer. They can transfer in one to 12 seconds at a cost of maybe 10 cents. So importantly, this provides uh like an alternative. Think of it as risk management, think of it as what happens if the Swift system goes down. Well, you need the backup. This is a backup. So this is not just for speculative trading, indeed, it doesn't make much sense, given the stablecoin is linked to a dollar, it should be worth a dollar, and that's it. Uh this is something that actually makes our financial system work more efficiently. And even though this is very early on in this technology, this is still very significant economically. The stablecoin volume uh last year was greater than the sum of the volume uh for MasterCard and Visa. So that that's a big deal. There are two main stablecoin issuers. One is Tether, which is an offshore issuer, and the other is Circle, which is a US uh company. Uh Circle is the number six overall in terms of capitalization of all cryptos, and the second most important uh crypto um stable coin. Let me tell you how it actually works. So Circle is a company, and I've got $100. I give Circle the $100, and then they issue 100 tokens. Their token is called USDC. And then I can spend those tokens, send them anywhere in the world, and at any point I can redeem those 100 tokens for $100. So Circle takes my money and then invests it in ultra-safe short-term assets. Think of treasury bills, short-term treasury bills. And they also keep some float so that they can uh they can fulfill their obligation when I give my tokens back, that they redeem the actual uh dollars. So this is how it works. The mechanics are very simple. It's extremely safe given that Circle is investing in uh treasury bills and other extremely safe assets.
SPEAKER_01What I hear is is a couple of things that I just sort of associate with. You say it's backed by a dollar to a dollar. That sounds kind of like gold standard to me when we come back to currency in a long time ago. And then you're talking about trading, being able to with withdraw and it investing in safe assets, and that sounds a lot like a bank. But we know that these things all caused problems in the past. So what what are the risks we should be thinking about? Like what are the things that can go wrong?
SPEAKER_00Uh sure. Uh obviously things can go wrong, and I think we need to look at this in a relative context. So think of a bank, you put money into a bank. The bank lends out 90% of that money. So it's using leverage, like 10 to 1 leverage. Whereas the stablecoin issuer is taking 100% of the money that they got from you and parking it in ultra-safe assets, either cash or short-term treasury bills. So they're not lending anything out. So the risk here is if the collateral drops in value uh sufficiently that there isn't $100 uh to redeem. So you send your hundred tokens and there's only 99. Uh so this could happen. It's unlikely that it would happen in a US-based stable coin. So uh we have regulations for this, and the stable coin needs to be fully collateralized at minimum. Uh Tether, which is an offshore uh stablecoin, is not subject to the same regulatory oversight. And as a result, it's not kind of recognized within the U.S. And their collateral is not just in treasury bills. Even though it's heavily weighted in treasury bills, their collateral also involves things like gold and Bitcoin. So if there was a crash in the price of Bitcoin, that might affect the value of the collateral negatively, and it wouldn't be enough to go around. So there's something else that is a risk that was patched with the Genius Act, and that's the regulatory uh framework. Um, and that is the following. Suppose Circle has 100% of the funding and safe assets like Treasury bills. And then suppose Circle the Company makes another corporate investment that turns out to be poor. So just the company makes an investment uh and and the company goes under. Well, before the genius act, those token holders were just creditors. They'd just be in line like everybody else. But after the Genius Act, the token holders are first in line. So even if the company got into trouble, the token holders have first right to the collateral. It's fully collateralized, so therefore they get uh one token equals one dollar.
SPEAKER_01If I I'm thinking back when like this SBF thing happened, crypto kind of blew up. I I do remember looking at some charts around stable coins, and and there was a big deal about stable coins going below the value of a dollar. So they weren't they weren't so stable. So there was a time when some of these firms seemed to be getting in trouble, we didn't trust them. I don't I didn't follow it all that much, but maybe you can help.
SPEAKER_00Yeah, no, I followed it extremely closely. So this is around the time uh that Silicon uh bank uh went bust.
SPEAKER_01The Silicon Valley Bank?
SPEAKER_00Yeah, yeah. So uh this is and and it was kind of unexpected, but let me sketch uh what happened. So Circle uh puts most of its collateral in a money market fund that's called the Circle Reserve Fund. And we can see that collateral. We can see the treasury bills that they're invested in, and also things like reverse repos, again, fully collateralized with treasury bills. So it's very, very clear. But they need even more liquid collateral to uh to deal with the day-to-day withdrawals. So they need some some cash. Think of it as a checking uh deposit so they can they can handle the daily liquidity uh needs. And that was about like $3 billion uh that they need for liquidity. And what people didn't know is that that liquidity was parked at Silicon Valley Bank. And when Silicon Valley Bank went under, uh people thought, oh, well, that means that the collateral is not worth a dollar to a dollar. And the peg briefly uh dropped uh from a dollar to well below a dollar. And at the time I thought it was irrational because the the issue at Silicon Valley Bank was not that severe. So maybe a 10% haircut uh in what people would get back on their deposits uh if the government didn't do anything. Uh but the drop in the value of the stable coin essentially was assuming zero back from Silicon Valley Bank. So this points to another problem that we've talked about before. The FDIC provides insurance up to $250,000. So what if you've got a liquidity need, whether it's a payroll at the end of the month for $50 million, or daily liquidity that you need to run a stablecoin issuer of $3 billion, what do you do? Uh so you want to park that money somewhere safe, but the limit is $250,000. So what we really need are banks that specialize in just pure liquidity like this, where those banks do not lend out. Uh they take the reserves, and it's usually 10% goes to the Fed. Send 100% uh to the Fed. So this points to a bigger uh problem, but you're correct that there was a blip in the uh in the value um and the peg was briefly uh broken. In the end, uh Silicon Valley Bank was bailed out. Okay.
SPEAKER_01In this all makes this all puts things together, but I'm I'm I'm thinking of me as the consumer of a stable coin and and uh and some of the things you talked about in the past. So what's the benefit to me? Do I get interest? Do I what what rights do I get as a token holder?
SPEAKER_00Aaron Ross Powell Well, the first benefit is the functionality, where you can use this anywhere for a very, very small uh fee. So when you swipe a debit card, that costs you on average 0.7%. Okay, and you might not see it directly. A credit card is more like 2.1%. You might not see it directly, but you're paying for it. The merchants are just increasing prices uh to reflect this. So what we're talking about is a way to pay that has far lower uh transaction cost. Far lower. So that is the main benefit. And and again, it's so naive that people think, oh, I'll use my credit card because I get cash back. That that's really uh illusory, that the price of the good is increased to take that into account. So you're not getting anything back uh in the end. So uh in terms of what you get, if you use physical cash, you get nothing. Right? It doesn't pay any interest. But if you think about what these companies are doing, they're taking your money, investing in treasury bills, they're earning 3.7% and keeping all of the money. So Tether is an interesting case. So uh Tether, uh, people have calculated the profit that it makes per employee. And that profit per employee in 2024 was $85 million per employee.
SPEAKER_01That seems like a lot more than most firms.
SPEAKER_00So they hired, they went on a uh like a hiring spree in 2025, and I calculated roughly that the profit per employee is about $33 million. So the next closest might be NVIDIA at $1 million, roughly. So it it is it is so far out there. And the business model is just ideal. People give you money, and then you invest in treasury bills, low risk, and you get the return.
SPEAKER_01So uh an insurance company without the insurance obligations.
SPEAKER_00There you go. So there is a debate uh in Washington right now, uh, and there's a new piece of legislation that's making its way through called the Clarity Act. And it turns out that stablecoin issuers like Circle, they actually want to pay interest. And for a good reason, I think. Uh, and that is that once you go outside the U.S., you don't have this restriction that you can't pay interest. So for Circle to be a world leader, they need to be competitive, and they can afford to share some of the interest. So this would be like cash paying interest in terms of the functionality. And just to be clear, even if there's no interest paid on these stable coins, you can always deposit them somewhere and earn interest. Or you could lend them out and earn interest. Or you could put them to work to support a protocol and earn what's called a staking yield. So it's possible to earn, but what you're talking about is from the issuer circle, and that's what circle wants to do. Trevor Burrus, Jr.
SPEAKER_01I want to be clear. So if I have the token, I can still lend that out for some sort of loan and I can do other things with it, but the issuer isn't able to give me interest. But that seems like a very consumer-friendly thing to do. So what's the question? So why aren't they allowed to do that?
SPEAKER_00So it goes back to the Securities Act of 1933. So if a non-FDIC regulated entity is paying interest on something, then it's technically a security according to the law. And ideally, what the Clarity Act will do is to modify the application so that companies like Circle can pay consumers interest. It is, as you say, very consumer-friendly. And you might ask, well, who would oppose this given it's so consumer-friendly? Well, the people opposing it are the bank lobby. So the bank lobby doesn't want this because the banks see this as a competitor to their savings and checking deposits. And we talked uh the other week about the average savings deposit rate at one of the two big-to-fail banks is between 0.01 and 0.02% on an annual basis. So if the stable coins are paying 2% or 2.5%, then people would likely withdraw from the banks and go to the stablecoin uh issuers. It kind of makes sense. The banks oppose this because that uh savings deposit is ultra cheap funding for them, that they can raise capital where they have to pay only 0.01% and then loan it out and make the spread. So so for them, they want uh the lowest possible uh competition, and that's why they oppose having interest being paid on stable coins.
SPEAKER_01Well, this has been very informative to me. I'm learning not a lot about stable coins, but I'm also looking learning a lot about the competitive landscape in banks and how we think about risk and securities. So thank you for this introduction. I hope that we'll be able to continue such conversations in future episodes.
SPEAKER_00Thank you.