Adi Ben-Ari (00:00:00):
Welcome to the Applied Blockchain Podcast, where blockchain technology and innovation are in the spotlight. My name is Adi Ben-Ari and I'm the founder and CEO of Applied Blockchain. And I'll be your host as we dive into relaxed conversations with industry experts and thought leaders to get their views on what they're building, the Web3 ecosystem and its transformative impact on the modern world.
Adi Ben-Ari (00:00:21):
Tony McLaughlin. Welcome to the Applied Blockchain podcast.
Tony McLaughlin (00:00:24):
Thanks for having me.
Adi Ben-Ari (00:00:25):
So, Tony, it's been quite a while since we've spoken. And I'm really looking forward to getting a proper update from you. Maybe just to begin the give us a little bit of your background, because I know it kind of feeds into all of this. Sure. There's no where you've come from, what you've been doing, and how you got to what you're doing now.
Tony McLaughlin (00:00:42):
Yeah, I've been working in payments for 30 years with, financial institutions and, yeah, for most of that time, nobody really cared so much about payments. It was boring. And then along came fintech and along came crypto. And then people want to talk about payments at dinner parties. So go figure.
Adi Ben-Ari (00:01:04):
Right. So what was the, like let's put that down a little bit. So what were you what were you looking at before. What did the entry point look like? So I guess blockchain came along and presumably people labeled it so things and ignore that. What does that journey look.
Tony McLaughlin (00:01:20):
Like or the journey? The journey looks like? I think you read the Bitcoin white paper around about 2013. That was, a big kind of shock to the system for me, because I had always assumed because I'd been working in the system, I'd always assume that money and payments were an artifact of the nation state, that always emanated from the nation state.
Tony McLaughlin (00:01:46):
That was the world I lived in. And I had to really think to myself back in 2013, does money really belong to the nation state? Because here's this new form of money, which essentially says you can't trust governments, right? That's the basic idea. That's the thesis. So I went I found it to be a fascinating, thesis.
Tony McLaughlin (00:02:11):
I was actually, on the verge of sending not a huge amount of money, but a few thousands of pounds to Mount Gox. I think in 2013. So I was interested enough to to invest. Unfortunately, most Gox, blew up.
Adi Ben-Ari (00:02:31):
Saw this, and oh, yes.
Tony McLaughlin (00:02:32):
I was I was literally trying to send a wire on the weekend that it blew up. And then I think the price at that time, I can't remember exactly, but it was the low hundreds for sure. So I always wonder what would have what situation I would be in if I had actually successfully bought Bitcoin at that price.
Tony McLaughlin (00:02:54):
But to be honest with you, I, I wouldn't have held if the price had doubled, I would have saved for sure.
Adi Ben-Ari (00:03:00):
I wonder well, I have I have similar, similar stories because I've never really invested. Yeah. Or not invested in any kind of series or in crypto. But I've had these opportunities in the past when I thought, okay, go on, put something in.
Tony McLaughlin (00:03:13):
Yeah.
Adi Ben-Ari (00:03:14):
Quite early in some projects. Imagine being around ten years, some of these points a few times. And usually there's been as you described, there's been some it's not even a technical glitch, but some reason, I don't know. I tried this once and it didn't work. And then it.
Tony McLaughlin (00:03:28):
Yeah, yeah that's unfortunate.
Adi Ben-Ari (00:03:31):
Too many of those.
Tony McLaughlin (00:03:32):
Well next time, next time do it. You won't regret it. Oh.
Adi Ben-Ari (00:03:37):
Okay. Next time, tell me if you if you work it out.
Tony McLaughlin (00:03:39):
Oh, yeah. For sure.
Adi Ben-Ari (00:03:41):
Okay. So that's that's Bitcoin itself. Yeah. And then what came after that.
Tony McLaughlin (00:03:46):
Well look the interesting you know Bitcoin was designed as a peer to peer payment system. And then never really became that because of the volatility. And then fast forward to 2019 we had the Libra proposal. Yeah. And then you know before Libra central banks didn't really take cryptocurrency that seriously. And with Libra you had the prospect of big tech companies essentially having their own central bank.
Tony McLaughlin (00:04:19):
And that created an enormous reaction. And so, again, working up from a bank perspective, again, you have to understand that the heart that I had was to protect the protect the bank. And so I'm thinking, well, if you're protecting the bank, you don't like corrupt tool, you don't like stablecoins in the face of Libra. And then Libra created this other Frankenstein's monster called Cbdc because the governments got so spooks that they they went to Cbdc.
Adi Ben-Ari (00:04:53):
Yeah, yeah. So there's a nuance in Libra which, which which meant Facebook method did which. I don't know if people really if enough people sort of understand, appreciate, they didn't just try to create a stablecoin. They created their own coin from a basket of fiat currencies. Yeah, right. And that's right. And that in itself is means it's no longer tied to a single correct, a single country.
Adi Ben-Ari (00:05:21):
Right.
Adi Ben-Ari (00:05:22):
And therefore it's now detached from, you know, one single central bank.
Tony McLaughlin (00:05:28):
Well, it's a synthetic. It's a synthetic currency, you know. Yeah. And it's a it would be issued by, a non-state actor, by a non sovereign actor. Yeah. And one thing that which is a lot of people don't know, and you can, you can go back and find there's very original Libra white paper because it was revised. It was revised a few times.
Tony McLaughlin (00:05:54):
But in the original Libra white paper, there was a very interesting paragraph about how when you start a new currency, you have to have this reserve. But once the currency is accepted, the reserve can be separated from the currency. That's in the original Libra white paper. So for people who really want to dig in to the original thinking to that project, take a look at that if you can find it.
Adi Ben-Ari (00:06:27):
Okay, okay. And just to, I mean, they could they could have done something slightly different, right? They could have, you know, just done what circle did right. Made it like a, a real stablecoin for the US, for example, for the US dollar. And then they and they would have avoided from the a lot of the resistance.
Adi Ben-Ari (00:06:46):
And then that lawsuit. See very see
Tony McLaughlin (00:06:48):
Well they, they then tried to pivot it and then it was quite similar with a dollar. But by that time the game, the game was.
Adi Ben-Ari (00:06:55):
Up. Yeah. Yeah. They'd already got everybody's guards up and.
Tony McLaughlin (00:06:58):
Yes, what, what they could have done if they wanted, Facebook to be a commerce platform is they could just have got the MSB licenses like everyone else. That would have raised no eyebrows whatsoever.
Adi Ben-Ari (00:07:16):
And that's what would that have given them thus?
Tony McLaughlin (00:07:18):
Well, essentially they would have had a Facebook version of PayPal right? The ability to have e-money accounts. And then if I see I like your I like your t shirt on your Instagram page or on Facebook, I can click on it and I can I can buy it and I could pay on my Facebook, a Facebook e-money account that that would have.
Tony McLaughlin (00:07:40):
That's what I would have done.
Adi Ben-Ari (00:07:42):
Yeah.
Tony McLaughlin (00:07:42):
But then again, no one that no one asked me.
Adi Ben-Ari (00:07:45):
Okay. Okay. But I guess that's a, that's a no, that's not tokenized assets.
Tony McLaughlin (00:07:50):
Or it's not tokenized assets. It's just that, e-money account.
Adi Ben-Ari (00:07:53):
Yeah, but it would have arguably achieved a lot of what they were trying to achieve.
Tony McLaughlin (00:07:57):
It would have turned Facebook more into a commerce platform. Yeah.
Adi Ben-Ari (00:08:02):
Yeah. So there's a few there's a few different things they could have done at the time, which might, might have gone through more smoothly and not. Yeah, not raised as much resistance as they did. Absolutely. But that changed history. Yeah.
Tony McLaughlin (00:08:14):
Move fast and break. Thanks.
Tony McLaughlin (00:08:22):
Yeah that's almost in an instant the reaction to Libra was Cbdc. Yeah. And you know, I again I was sitting there watching all of these things thinking, well, crypto was a medium of exchange. Hasn't worked. Non sovereign central banks are a strange idea. Because money is very tied to the social contract. It's very tied to the things that we give to the state as monopoly.
Tony McLaughlin (00:08:58):
So you've got the law, you've got force and you've got money, you know. So separating money from that social obviously.
Adi Ben-Ari (00:09:06):
Absolutely. Which pays for those things.
Tony McLaughlin (00:09:08):
And it's all it is all intrinsic. So yeah. So I was watching all these things happening and then I thought to myself, well, look, if there's some secret sauce about blockchain, what is that secret sauce? How can it be applied to the regulated financial system? So that that became my focus for a few years.
Adi Ben-Ari (00:09:32):
But can I just just just to take one step back again? The reason why the central banks stepped in at that point was because if Facebook would have been successful, then that's imagine each of us, you know, we've got Facebook accounts, WhatsApp accounts or whatever. We're moving some of our salary, you know, a few pounds here and, into our Facebook wallet.
Adi Ben-Ari (00:09:58):
And that's now not British pounds.
Adi Ben-Ari (00:10:03):
Which means that the, the government, its macroeconomic policy, the Bank of England raising interest rates and so on won't really impact whatever's in that wallet, which is essentially the central bank and the government losing control of of the macroeconomic policy.
Tony McLaughlin (00:10:17):
That's the concern.
Adi Ben-Ari (00:10:18):
That's the concern.
Tony McLaughlin (00:10:19):
The concern was that that currency, you know, on social networks. And remember, Libra wasn't only Facebook. There was a whole consortium of very powerful big tech and other clients and Big tech and other players. And so there was that the alarming but real possibility that billions of people could use this absolutely novel, non sovereign currency unit. And quite rightly, the government said, don't think so.
Adi Ben-Ari (00:10:54):
Okay. So back to you to back to your thinking behind the scenes to the. Yeah. Yeah.
Tony McLaughlin (00:10:59):
So I'm watching these things, play out. And my thought process was what's the secret sauce of blockchain? And in particular, I had this question which was really bugging me. There were so many pilots. I mean, you saw you saw yourself so many pilots with private permissioned blockchains and banks over ten years, over and over again, trying to explore whether a use case would work on a blockchain, which I found ridiculous because a blockchain is a Turing complete, blockchain is just a computer.
Tony McLaughlin (00:11:42):
So you have this.
Adi Ben-Ari (00:11:44):
Any use case is going to work on a block.
Tony McLaughlin (00:11:46):
Because if it works on a for use case, works on one Turing machine, it works on another Turing machine. So what these, experiments over and over again proved is that Turing machines are or are equivalent. Simply put, you need an experiment. We knew that already. Yes. So this use case thinking was just wasn't. What is junk?
Tony McLaughlin (00:12:15):
It's just not the right question. The right question, I thought, was what is the special source of blockchain in regulated financial services? And that's not obvious because the blockchain was not invented to augment regulated financial services. It was it was invented to displace them. Yeah. So you can't I mean, lots of people in the space, they live in the world of high level buzzwords like efficiency and no reconciliation and blah, blah, blah, these buzzwords, but I was I was quite interested to get to the, to the root, the first principle reason why blockchains may be additive to financial services.
Tony McLaughlin (00:13:07):
And I think I got there.
Adi Ben-Ari (00:13:09):
First and adds, this is when we pause for the end.
Tony McLaughlin (00:13:14):
And then you've got the hook or, you know, it's at Netflix. At Netflix, you just have that. You have to have like a dramatic, this is the.
Adi Ben-Ari (00:13:22):
End of episode one.
Tony McLaughlin (00:13:23):
It's the end of episode one. Yeah, that's what we would do.
Adi Ben-Ari (00:13:27):
So gone. So what was your conclusion? We're back now.
Tony McLaughlin (00:13:29):
Okay. So again back to the first principles. If you observe the financial system on this planet from space, then what you see are let's say 15,000 financial institutions. What are we what are these strange institutions? Well, they are balance sheets. They're assets and liabilities. They're risk taking balance sheets. You know, they gather and deposits, which are short term, and they lend out money, which is long term.
Tony McLaughlin (00:14:02):
So they do maturity, transformation. That's interesting. And then there are lots of transactions that take place between those balance sheets. And the truth is that every kind of financial transaction is really about the orchestration of moving assets and liabilities from one balance sheet to another balance sheet. So then you ask yourself, how is that orchestration made? Well, sorry, let me before that, let me just demonstrate that if I am making a payment to you in the banking system at the beginning of the payment, my bank owes me $100.
Tony McLaughlin (00:14:47):
At the end of the payment, your bank owes you $100. So my banks balance sheet has been updated, your bank's balance sheet has been updated, and the central banks balance sheet has been updated because that liability can only shift if your bank gets a matching asset. And that matching asset is central bank money. So just to make a simple payment between me and you, there are three balance sheets that have to be updated.
Tony McLaughlin (00:15:14):
Now how do we update those balance sheets. We update those balance sheets through messaging. Messaging is it could be, you know, yogurt pot, yogurt pots and strength. It could be telex, it could be fax, it could be carrier pigeon. It doesn't matter how we do it, but we're sending basically sending messages between the parties. So seen from above, our financial system is really a machine for orchestrating the updates of balance sheets through messaging.
Tony McLaughlin (00:15:50):
Now, what does blockchain do differently? Well, blockchain is state machine. Blockchain is a who owns what machine?
Adi Ben-Ari (00:16:02):
It's a registry of ownership.
Tony McLaughlin (00:16:04):
Absolutely. But it maintains a it maintains a common state. So in today's world, in the messaging paradigm, there's no utility that maintains common state. And that's what that's what leads to the problem of these balance sheets getting out of sync with each other.
Adi Ben-Ari (00:16:24):
Reconciliation, the complexity of the messaging and so on.
Tony McLaughlin (00:16:26):
Absolutely. And sometimes in a in a cross-border payment, for example, there can be seven balance sheets to update, not just the three balance sheets. So I satisfied myself that the the blockchain, state machine capability could be a more effective way of updating the balance sheets and financial tracking of and financial transactions. And that was my first principles.
Tony McLaughlin (00:16:55):
I feel like affirmation that blockchain is additive to regulated financial services, even though it was invented to defeat them.
Adi Ben-Ari (00:17:04):
Yeah, yeah. Okay. Interesting. I guess there's another nuance in there, which is you mentioned the private blockchains, then those private blockchains, you don't really have a shared balance sheet either.
Tony McLaughlin (00:17:14):
Well, all right, you you can.
Adi Ben-Ari (00:17:16):
Bharti has its own ledger. Its own. No, they they do.
Tony McLaughlin (00:17:20):
What they do. But you can you can definitely create a shared state between those participants in a private blockchain. And I'm not talking about really there being a shared balance sheet. I'm talking about just a shared state that people can agree on for a specific transaction. That's additive over for messaging in the same way that, you know, this is the example I've given before, but if you're organizing a dinner party for ten people and you do that, you have option one is to do it by email, and option two is to do it by what's up?
Tony McLaughlin (00:17:55):
Most people would agree that they do it by WhatsApp, because the WhatsApp conversation embodies a shared state. You know, if you read all the messages, you understand who's bringing what to the dinner party. Yeah. Whereas in the email, if the emails are bilateral, there's no shared state visible to everyone. Yeah.
Adi Ben-Ari (00:18:16):
Agreed. It's true. I mean, I'm going to I'm going to do a little bit of rabbit hole because this is kind of what we deal in. But I guess in the in the private blockchains, what happened was the parties also demanded privacy. Yes. So the way privacy was provided was well alone. My transactions with. Yeah. My counterparty to that transaction.
Adi Ben-Ari (00:18:34):
Yeah. Which means that it's not really a WhatsApp group anymore.
Tony McLaughlin (00:18:38):
Well look it can be a, you can have a WhatsApp group between if we have if we're organizing a dinner party, you only invite the people who are going to the dinner.
Adi Ben-Ari (00:18:46):
Then you've got lots of lots of, lots and lots of WhatsApp groups.
Tony McLaughlin (00:18:49):
Yeah, exactly. And that's fine. And and the, the private permissioned blockchains, they're just Turing machines. They're just, they're they're functionally equivalent to any other blockchain. The differences between the private chains and the public chains is adoption. Yeah. Are you very difficult to get people to adopt the same price?
Adi Ben-Ari (00:19:12):
But maybe we don't. We're not, you know, we don't see things can complete the, the same way on that. My, my view is that if you've made the if in order to provide the privacy, you've effectively detached the ledgers.
Tony McLaughlin (00:19:25):
Yeah.
Adi Ben-Ari (00:19:26):
Then that shared state. Yes, you can, you know, you can have your dinner, separate dinner parties, but you don't have you know, we're not all in the same group anymore. Yeah. We're not all in one group anymore. And, and I think down the line that does have an impact on how, you know, I'm going to go to buzzwords again.
Adi Ben-Ari (00:19:47):
But might how powerful or efficient or game changing that ledger can be.
Tony McLaughlin (00:19:50):
Absolutely. Look, I mean.
Adi Ben-Ari (00:19:52):
What else you could do with that like that.
Tony McLaughlin (00:19:54):
That's perfectly reasonable. And you know, there are, you know, transaction types that you can have on a completely shared ledger and they're transaction types that you that you can, you know, but the place that the place that I got to just to kind of complete my journey was I've been working on this idea, which I called regulated liability Network, which, we experimented with in the US with the fed and ten, ten or so banks.
Tony McLaughlin (00:20:31):
And in the UK we experimented with it through UK finance. And then the core idea was picked up by banks and called Unified Ledger. And then it was Project Agora with seven central banks and 40 central banks all run the same core idea. And that was, an investigation of that thesis about having that state machine and whether you could upgrade, for example, correspondent banking by having that state machine.
Tony McLaughlin (00:21:00):
But then came the US election.
Adi Ben-Ari (00:21:05):
Okay.
Tony McLaughlin (00:21:05):
That's the end. This is the end of episode two of the Netflix. Right. So you have an aggregate again just a cliffhanger. Yes. Of a cliffhanger every 15 minutes.
Adi Ben-Ari (00:21:16):
Okay. Okay. So, so yeah. So that was an extensive set of those kind of experiments. And you know, it's a range of players in there and yeah. Yeah. Okay. So we can do election.
Tony McLaughlin (00:21:27):
So then came the election and the reason why the election changed my thesis was because before the election, there was no line of sight for big banks in the US to use public channels. And after the election, I thought it was inevitable that banks would be able to use public chains.
Adi Ben-Ari (00:21:48):
What did you see there? Because if I look at what I understood about the election, I mean, I obviously understood the, you know, the incoming government was going to be crypto friendly to the crypto world. And obviously the president himself was dipping his toes in it. Yeah. But did you did you have already at that time, did you have a clear idea of where this was going in terms of the legislation that might come in?
Adi Ben-Ari (00:22:14):
So in fact, in my house.
Tony McLaughlin (00:22:15):
Literally the the morning after the election, I, I had this realization that banks would be able to use public chains because of stablecoins, because it was clear to me the day after the election that there would be a stablecoin bill. And stablecoins live on public chains, and there was no way the banks would sit by and watch stablecoins be dominated by non-banks.
Tony McLaughlin (00:22:45):
And so it was clear to me that the banks would lobby to be able to compete with the Non-banks on a level playing field, and that means having access to the public chains, and that would be granted. So that's obvious to me.
Adi Ben-Ari (00:22:59):
So so let me let me try and understand that, because that's not all obvious. So okay, US election now you understand the stablecoins on public chains could be something that banks can use. Yeah. To deal with.
Tony McLaughlin (00:23:16):
Issue I.
Adi Ben-Ari (00:23:17):
Issue.
Tony McLaughlin (00:23:18):
Yeah.
Adi Ben-Ari (00:23:19):
But why would they want to. Because and let me say this. So up until now crypto is kind of its own little bubble. Yeah, right. The banking system is not really dealing with it in any serious way. And stablecoins themselves, another assets that's living in this crypto world that's primarily used for by traders like to go in and out of their positions.
Adi Ben-Ari (00:23:44):
It why would that be interesting for retail banks and their customers?
Tony McLaughlin (00:23:50):
Well, I can give you my assessment of why it's interesting. My assessment is because the form factor of a token on a public chain and a token in a wallet is far more general purpose than a bank account. Well, that's the reason. So think think about this. Think about Europe. So if I ask most people on the planet, maybe not most people on the planet, but if I ask, if I ask you, I'm going to I'm going to make an image appear in your head and voluntarily.
Tony McLaughlin (00:24:31):
Okay. How much money have you got? Right. So I'm not I don't want the answer. You can just have that image in your head. But I bet you one of the things you thought about was how. What's my bank balance?
Adi Ben-Ari (00:24:46):
Yes.
Tony McLaughlin (00:25:20):
Now let's compare that to a wallet and a wallet. You could have the tokenized deposits from many banks. You could have stablecoins from many issuers. You could have tokenized money market funds from many asset managers. You could have tokenized treasuries and any other digital asset Bitcoin, Ethereum and meme coins all in the same wallet. So which is more general purpose?
Tony McLaughlin (00:25:49):
The bank account or the wallet?
Adi Ben-Ari (00:25:53):
Yeah. Okay. I mean, what if I what do I think about some of the fintechs, rising.
Tony McLaughlin (00:26:01):
The fintechs are built on accounts.
Adi Ben-Ari (00:26:03):
Yes, they are, let's say like Revolut. So I don't know, these kind of apps, you know, these kind of fintechs that maybe offer many different assets. But I guess in practice, they're still holding those somehow. All right.
Tony McLaughlin (00:26:13):
Well, we are currently and the account paradigm, everything is built upon accounts. You know, a large corporate, for example, might have 1500 bank accounts with different banks around the world in order to conduct this operations. And believe me, running bank accounts is painful. Opening them, maintaining them, reconciling them, managing the permissions to the bank account is painful. So if you are a large corporation and you currently have 1500 bank accounts and you made the on, the prospect is no no appear, you might be able to consolidate that down into, let's say, 100 wallets.
Tony McLaughlin (00:26:59):
That's interesting. All right. So what so what I'm saying is that the reason why this form factor is interesting, the form factor of a token on a public chain and a wallet, it that form factor is I like to compare it to, you know, these days, you know, I see your phone, I see your phone. Think of all of the special purpose technologies that have that your phone has replaced.
Tony McLaughlin (00:27:30):
Yeah. You don't have an alarm clock beside your bed.
Adi Ben-Ari (00:27:32):
Or not a camera.
Tony McLaughlin (00:27:34):
You know, have a camera. You do have a calculator, you know, you know, if a Walkman, the general purpose technology subsumes the special purpose technology. And that's exactly what is going to happen with tokens on public chains and wallets. The general purpose technology will subsume the features of all the special purpose rails.
Adi Ben-Ari (00:27:59):
Okay, okay. Interesting. I'm trying to you know, I'm going to keep digging, please, because, you know, having been in this space for a while, you know, and as a technologist, we can often sort of look at the positive aspects of a technology and maybe assign it lots of, you know, superpowers, if you like. But I want to get to the I want to really get under the bonnet.
Adi Ben-Ari (00:28:26):
Sure. If I think about, the, the, you know, you mentioned, like, a corporate with lots and lots of bank accounts. Know a lot of that will be maybe they have subsidiaries and they have different currencies that they deal in, probably multiple banks that they're working with.
Tony McLaughlin (00:28:43):
Absolutely.
Adi Ben-Ari (00:28:43):
Maybe for legacy reasons for all sorts of reasons. Now consolidating that into wallets, what does that mean in practice? I'm just going to play that out. Yeah. In my head, first of all, these a wallet would be my account, not on the counter to the sitting at the bank. All right. So as a as an organization or even as an individual, I don't need 20 because I'm working with 20 different organizations I need one.
Tony McLaughlin (00:29:09):
So maybe so maybe I mean, again, this is, I think, quite radical. When you move from the account paradigm to the wallet paradigm, it's not about who's got your account, it's about who's got your wallet.
Adi Ben-Ari (00:29:25):
Right? Okay.
Tony McLaughlin (00:29:26):
Now maybe maybe the so so again, that wallet you've got, you've currently got 20 accounts. And now you've got one wallet with tokenized deposits from 20 banks in one receptacle. So that receptacle holds more than a bank and an individual bank account. So this is fairly this is radical. But your question was before why are our banks interested in stablecoins.
Tony McLaughlin (00:29:58):
Because there was the, the prospect of of these instruments jumping from the crypto sphere into normal payments. And you just cannot, cannot allow non if you're a bank you kind of loan non-banks to run away with that. So back to the main thrust of the story. It was clear to me the day after the election that banks would be able to participate on public permissioned list blockchains, and that the barriers from the regulators in the US would be progressively reduced.
Tony McLaughlin (00:30:33):
And that's exactly what has happened. You know, so that was, the revelation or the insight that the after the election. And then I had another epiphany on the 30th of November going, I'd break. So this is when you have another ad break, right?
Adi Ben-Ari (00:30:55):
We could have a lot of ads.
Tony McLaughlin (00:30:56):
Now, it's tough to keep you in suspense over a budget, so you have to have a pause between.
Adi Ben-Ari (00:31:01):
Just before we go to that revelation. You mentioned the banks couldn't allow stablecoins in a companies offering and dealing with stablecoins to, you know, to for it to come out of the crypto space. Yeah, go mainstream. This is the you know, we talked about consolidation of wallets. Is it what why would companies use the stablecoins. Are they you know, some people will say, well, the instantaneous and they're cheap.
Adi Ben-Ari (00:31:31):
Yes. Is that is that true. Well you as well.
Tony McLaughlin (00:31:36):
Look the you look at the there's frictions in the fiat system and there's frictions in the stablecoin system. Yeah. But what one thing is certainly true is that you can send the US dollar payment on the 4th of July with a stablecoin, and you can't do that through the existing fiat system. You know, you can send a stable, you know, a dollar payment on the weekend.
Tony McLaughlin (00:31:59):
And you can't do that through the fiat system. So the, the prospect was of this form factor really eating into like the Mackenzie say, that the whole payments market is worth 2.5 trillion, trillion dollars a year. The stablecoin revenues, maybe a couple of tens of billions of dollars a year. So the the the breakout potential is enormous, is enormous.
Tony McLaughlin (00:32:31):
And if so, the other thing is in a in a format war, like, let's think about the format war between iPhone and BlackBerry. You don't have. It's not it's an all or nothing.
Adi Ben-Ari (00:32:46):
It's an all or nothing.
Tony McLaughlin (00:32:47):
It's an all or nothing.
Adi Ben-Ari (00:32:50):
So yeah, it's the classic blockbuster Netflix. All right. For those who remember it. So we're going to still have videos to.
Tony McLaughlin (00:32:56):
This is format wars are not about just winning a little bit of market share once that once the talking to public channels are allowed to compete with the existing reels, it's just like allowing the it's like allowing the laptop to compete with a calculator. Soon you don't have calculators anymore. It's like allowing your phone to compete with the alarm clock manufacturers so you don't have alarm clocks anymore.
Adi Ben-Ari (00:33:31):
I'll give you a couple of anecdotal observations that I've seen. One is that some point we as a company were receiving half of our revenue in stablecoins, you know. Right. This was I'm going back probably even a couple of years now. And so we had us clients paying us and we, you know, before I've got the email saying it's sent, I can already see the bumps.
Tony McLaughlin (00:33:52):
Yeah. Great.
Adi Ben-Ari (00:33:53):
It doesn't mean as you said, it doesn't matter when it was. And the second thing is I spoke fairly recently with some exchanges and in particular was one in the Central or South America. And I asked them, well, what does most of your trade look like? And I was expecting it to be crypto speculators. Yeah, right. Also, it's people buying all these mean coins and all this stuff to be there.
Adi Ben-Ari (00:34:17):
But if you look at the crypto press like who's investing in this stuff or who's buying and trading and so on, that's what I expect their bread and butter to be. And they said, no, it's stablecoin transpose.
Tony McLaughlin (00:34:27):
You know, on ramps and off of system.
Adi Ben-Ari (00:34:29):
So not from the stablecoins. People are moving money around. Yeah. That was that took me back as well. Sorry. That was just a couple of, so I don't.
Tony McLaughlin (00:34:39):
Know, it's just a sign of things to come. Yeah. But look, that's the first part of it. Then the 30th of November, there was the real epiphany. On 30th of November last year, I realized that stablecoins could be very, very, very closely analogized to travel checks.
Adi Ben-Ari (00:35:04):
Okay, so I didn't need to explain.
Tony McLaughlin (00:35:09):
So, my first job in banking 30 years ago was in traveler's checks. And, have you ever seen a traveler's check?
Adi Ben-Ari (00:35:19):
I mean, I'm
Adi Ben-Ari (00:35:19):
for the same way to think, I was traveling as a student and I was looking for, do I need to take money overseas? And instead of taking a wad of cash with me, which was very risky.
Tony McLaughlin (00:35:29):
Yeah.
Adi Ben-Ari (00:35:30):
I think I went to the post office or a bank or somebody and then got these checks. And then when I arrived again, I can't remember if I used them to pay for the hotel or went to a local bank or something, but you could basically cash them in local currency. Yeah, I think that was right.
Tony McLaughlin (00:35:46):
So. So you were really at the tail end of, an instrument which has been around for hundreds of years. The first American Express traveler's check was issued in 1891. And in the UK there were Thomas Cook traveler's checks back in to the top checks in the UK back into the 18th century. So let me describe an American Express traveler's check of 1891, and you tell me what's different from from that on a stable coin.
Tony McLaughlin (00:36:20):
So you've got a US dollar instrument, issued by a non bank, pre funded, fully collateralized, doesn't pay interest, a beta instrument and a negotiable instrument.
Adi Ben-Ari (00:36:41):
So what does what does that mean. Borrower negotiable.
Tony McLaughlin (00:36:43):
Okay. So a bearer instrument essentially means I take it with me a hand over and it's accepted for payment.
Adi Ben-Ari (00:36:50):
It is natural.
Tony McLaughlin (00:36:51):
So that's the better the better asset. Yeah. And the negotiable instrument is a slightly more subtle thing. So the negotiable instrument is imagine I give you $10 and then you write on a piece of paper I owe the bearer of this piece of paper $10, payable on demand. And you give me that piece of paper. So that piece of paper is a it's an IOU.
Tony McLaughlin (00:37:19):
It's a promise to pay. Don't. But it's also a negotiable instrument because I can do two things with it. I can bring it back to you to get my $10, but I can also sell it to someone else.
Adi Ben-Ari (00:37:32):
And he might say it's not exactly $10, because I don't know if that's going to be exactly. So that's going to be paid.
Tony McLaughlin (00:37:38):
Yeah for sure. Yeah. So so it's sold at a discount right. Sold at a discount based upon the counterparty risk of the issuer. Yeah. So here's the question. That piece of paper that you wrote, could you have as easily inscribed the IOU into a cleat. What would it would mean. The same if it was on a clay tablet with the meaning of the instrument would be the same?
Adi Ben-Ari (00:38:09):
I guess so.
Tony McLaughlin (00:38:10):
Right? Would it be the same if you had? If you chiseled it into marble, would it mean the same? Yes. If you put it on a relational database, would it mean the same? Yeah. If you put it as a token on a blockchain, would it mean the same thing? So you've just derived the stablecoin from traveler's check okay.
Adi Ben-Ari (00:38:35):
Amazing. I haven't heard that before. Oh okay.
Tony McLaughlin (00:38:39):
So what that really means is if you understand the history of checks, you understand the future of travel. You understand the future of stablecoins. Because the way the way in which these market structures resolve themselves, are nothing to do with the form factor. They're nothing to do with the form factor.
Adi Ben-Ari (00:39:04):
Can I ask you the turn? Yeah. Checks is something that's kind of been phased out. Yes. In many parts of the world.
Tony McLaughlin (00:39:11):
Because they're made of atoms.
Adi Ben-Ari (00:39:14):
But haven't we replaced them because we have more instant payment methods?
Tony McLaughlin (00:39:20):
The reason why we're phasing out checks is because they're made of atoms.
Adi Ben-Ari (00:39:24):
So what if we replaced them with could, which is in the form of.
Tony McLaughlin (00:39:30):
A token on a public blockchain?
Adi Ben-Ari (00:39:33):
Was there anything in between.
Tony McLaughlin (00:39:35):
Relational database.
Adi Ben-Ari (00:39:37):
Okay. Fair enough.
Tony McLaughlin (00:39:40):
Messaging.
Adi Ben-Ari (00:39:41):
Yeah. And I'm just thinking in terms of increase. If I'm not using a stablecoin, what am I doing with my bank today instead of instead of traveler's checks?
Tony McLaughlin (00:39:50):
Well, what replaced travel checks was the debit card and the credit card.
Adi Ben-Ari (00:39:53):
Like I said, credit cards. Yeah.
Tony McLaughlin (00:39:56):
Messaging. Yeah okay. But my my point is that that, that that promise to pay that negotiable instrument, we agreed that the essence of that negotiable instrument is nothing to do with the form factor. Yeah. And so if someone in the future creates, I know holographic promises to pay that can be teleported from point to point instantaneously. Still, a traveler's check.
Adi Ben-Ari (00:40:27):
Yeah, it doesn't matter. But this is the one thing the form factor can do is it can accelerate, magnify, and so on. Right. So traveler's checks maybe weren't quite limited use. Yeah, that had implications. And maybe stablecoins replace a big part of them.
Tony McLaughlin (00:40:44):
I'm not arguing that the form factor isn't germane to the usefulness or the functionality of the negotiable instrument. All I'm arguing is that it doesn't change the nature of the instrument. At its core. And so one thing which bedevils the current discussion about stablecoins is that, well, there are people in the crypto community who think they've invented fire.
Tony McLaughlin (00:41:10):
And then there are people at the regulators who believe that. Whereas if we take a step back, we can say, look, this is just a negotiable instrument like we've seen for hundreds of years. So let's just monitor in the same way that we've managed those other negotiable instruments. So there's nothing new under the sun. And the way in which the stablecoin market structure will play out, I would argue, is predictable.
Adi Ben-Ari (00:41:43):
On the basis that the instrument itself is something that we know how to deal with.
Tony McLaughlin (00:41:47):
On the basis that if you have a market structure with many issuers of negotiable instruments and many places where they can be used, the market structure is very, very predictable.
Adi Ben-Ari (00:42:04):
Okay. So what do you predict on basis?
Tony McLaughlin (00:42:08):
So in the age of checks everyone can issue, everyone can receive. In the age of ACH, everyone can send, everyone can receive. In the age of faster payments, everyone can send, everyone can receive. In the age of plastic, everyone can issue. Everyone can receive. In the age of stablecoins, everyone can issue. Everyone can receive. So we'll have a pluralistic market structure.
Tony McLaughlin (00:42:39):
Many, many issuers, universal acceptance, many currencies.
Adi Ben-Ari (00:42:45):
So in currencies.
Tony McLaughlin (00:42:46):
Many, many currencies.
Adi Ben-Ari (00:42:47):
Okay. That means many stablecoins representing sovereign currencies. Yes.
Tony McLaughlin (00:42:53):
No problem. Yeah. I mean, you don't think just just because the current market structure doesn't look like that. Doesn't mean anything. You know back in do you remember America Online. Yes. Right. So we did the America Online stage in the stablecoin game which is everyone is staring at America online and trying to extrapolate the internet. We can't see you.
Tony McLaughlin (00:43:21):
You cannot understand what the internet will become.
Adi Ben-Ari (00:43:25):
Yeah. That was one company working as a single company, really trying to monopolize as much as they can. Right? That that stage of the technology.
Tony McLaughlin (00:43:32):
Absolutely. But if we were, if we were the, the commentariat at that time, we'd be saying, well, here's America Online. How many American lanes will there? Will there be? What are the prospects of America Online? People are staring at America Online and commentating about it, not understanding that it's a passing phase. So we're going to move through this phase in the development of stablecoins and tokenized deposits, and we'll get to a very different market structure where this becomes the the form factor of tokens on public chains.
Tony McLaughlin (00:44:19):
Becomes the dominant form of payment on the planet.
Adi Ben-Ari (00:44:24):
Is there. I'm just thinking of the differences here. So as you said, it's a, it's a bear instrument. There's risk associated with this issue and the collateral and the reserve and so on. Right.
Tony McLaughlin (00:44:38):
The issuer has to be regulated. Of course, the actual.
Adi Ben-Ari (00:44:41):
Code to regulate the regulation is the, is the thing. Of course.
Tony McLaughlin (00:44:44):
The actual has to be regulated. But think about and the I look I'll give you a, a simple parallel which is in cards. There are 16,000 card issuers on the planet now, the customers of any one of those issuers can walk into Bloomingdales and Bloomingdale's. Don't care about the issuer.
Adi Ben-Ari (00:45:40):
Okay.
Tony McLaughlin (00:45:40):
So that's where we're going to get to.
Adi Ben-Ari (00:45:42):
And so, so, so to summarize, you're basically saying that regulation and standardization, these two things will make stablecoins ubiquitous. It won't matter.
Tony McLaughlin (00:45:52):
Regulation standardization economic incentives. So here's a here's a really good question that comes from the traveler's check. So back in the day back in my day traveler's checks were ubiquitously accepted all over the world. Every bureau de change, every bank, every large hotel. Why?
Adi Ben-Ari (00:46:20):
Whoever they're going to to cash in is is giving you know, they they've got some risk, some assurance that they will be able to cash these in.
Tony McLaughlin (00:46:29):
But you're so what's the reason why you offer that service. If you're, if you're a bureau de change or, or a bank, why do you offer the service to in cash traveler's checks.
Adi Ben-Ari (00:46:41):
Oh you take a fee.
Tony McLaughlin (00:46:42):
You make money. So every traveler's check that goes into the world in dollars is a gift to the foreign country. Because the little old lady from New York goes to Japan with a traveler's check, takes it to the bank. The bank, converts it to Japanese yen. The bank makes fees and forks. The reason why everywhere in the world accepted traveler's checks is because the receiver makes fees and forks on the story with respect to stablecoins, is that times 10,000?
Tony McLaughlin (00:47:25):
And it's for that reason that everywhere in the world will accept foreign stablecoins foreign stable. So this is something really, really strange that I absolutely don't get. In Europe, they're concerned about American stablecoins. In the U.K., they're concerned about American stablecoins all around the world. People are concerned about American stablecoins. American stablecoins are a gift when you catch them and your financial system and convert them to local currency.
Tony McLaughlin (00:48:03):
The more America pumps stablecoins, the happier the rest of the world should be.
Adi Ben-Ari (00:48:09):
Yeah I'm trying to process that. There's a there's probably some some again complexity and nuance than differences. Right. If all you're doing is is cashing in in order to spend the money locally. Yeah. And then that's correct. And that's what you were doing a traveler's checks here. There's a world where you're using applications that live on chain in this environment.
Adi Ben-Ari (00:48:31):
Sure.
Tony McLaughlin (00:48:32):
Right.
Adi Ben-Ari (00:48:33):
And so you might be.
Tony McLaughlin (00:48:35):
Keeping the keeping the stablecoins.
Adi Ben-Ari (00:48:36):
Keeping the stablecoins, but you might not need to transfer them into local currency at the same level or the same.
Tony McLaughlin (00:48:43):
No problem, no problem. In fact, that's also good because but let's just imagine a world of let's just imagine a world of America and Europe. Here's what would be really good for both Europe accepting American stablecoins and converting them into local currency where the user wants, and America accepting European stablecoins and, and the user converts that where they want to right now when they're converted.
Tony McLaughlin (00:49:20):
The receiving financial system makes fees and effects. When they're not converted. The sending country has diversified demand for its government debt. Yeah.
Adi Ben-Ari (00:49:33):
So yeah, this is the genius and the genius of.
Tony McLaughlin (00:49:36):
American stablecoins in Europe that stay in Europe as American stablecoins are diversifying the debt of the US, European stablecoins that are sent to the US and remain as euro stablecoins. And they're diversifying the debt of Europe. Yeah. So there's actually an absolutely beautiful trade deal to get done between nations. And that trade deal is I will accept your stablecoins into my financial system if you will do the same for me.
Tony McLaughlin (00:50:08):
Yeah, this is a very stablecoins, I agree.
Adi Ben-Ari (00:50:13):
I also think there's.
Tony McLaughlin (00:50:13):
Nothing to fear.
Adi Ben-Ari (00:50:14):
There's a there is a competitive situation here as well because there is if I think about software development, for example, English became the language. Yeah. Well if you wanted to write code you needed access to the documentation. Yeah. So there is a you know, if I think about the applications that live on chain and so on, there is, there is a, a sort of a standardization that could happen here.
Adi Ben-Ari (00:50:36):
It's linked to one currency over another potentially.
Tony McLaughlin (00:50:39):
So you're talking about dollar, the fear of dollarization.
Adi Ben-Ari (00:50:41):
The language of the digital of the stablecoin world might be the US dollar.
Tony McLaughlin (00:50:47):
Well, when credit cards and debit cards were invented they were initially invented in the US, right. So cards did not lead to dollarization. And stablecoins will not lead to dollarization if we organize things in the right way. And in fact, you'll get a world of every currency can issue. There are stablecoins and tokenized deposits. Every other place can accept them.
Tony McLaughlin (00:51:21):
Everyone will be better off.
Adi Ben-Ari (00:51:23):
And let the world decide how they use them and what they do. Let the.
Tony McLaughlin (00:51:26):
World decide. You know, there's no there's no problem with someone from the UK sending a dollar stablecoin to pay for something in Malaysia. The Malaysian bank will enjoy it because the Malaysian bank will convert it from a GBP stablecoin into Malaysian ringgit. There's no problem with a Singapore stablecoin being accepted in the UK because the UK bank will enjoy it.
Tony McLaughlin (00:51:49):
They'll convert the Singapore dollars into GBP.
Adi Ben-Ari (00:51:52):
Yeah. Okay, so so turning we've got you got your thesis now you've got to do a thesis. What are you doing about it?
Tony McLaughlin (00:52:02):
Okay. So all of this works when there's the A you end up with a many to many market. You end up with a market where there are hundreds if not thousands of issuers and many, many thousands of accepting points. And then in that many, too many network, it cannot be resolved bilaterally just because of the maths of the number of connections.
Tony McLaughlin (00:52:30):
If you resolve that network bilaterally, then the number of connections is A times B, and if you resolve it through a clearing system, it's a plus B.
Adi Ben-Ari (00:52:40):
And this is different. Different stablecoins different issuers and so on.
Tony McLaughlin (00:52:43):
Stablecoins and tokenized deposits. Yeah. So simply this your bank will give you a wallet that's just an address. You will be able to receive tokenized deposits and stablecoins from many, many different issuers into that receptacle. Your bank will convert that for you into sterling. In order to do that affect transaction, your bank needs the original currency. So your bank empties out the wallet.
Tony McLaughlin (00:53:16):
And to my company, which is, Ubyx. We obtain the money from the issuer, give the money to your bank. Your bank does the. If you are happy, your bank is happy, and the issuer is happy.
Adi Ben-Ari (00:53:31):
Okay. So that's is anyone holding you're not holding this these reserves are you holding these reserves as an exchange would or your interfacing into the issuer?
Tony McLaughlin (00:53:41):
Well, we have let's see let's just think about my company as a black box. Without going into the internal workings of an unfair unveiling. All of my secrets.
Adi Ben-Ari (00:53:53):
No, you don't.
Tony McLaughlin (00:53:54):
But open the kimono. You. But the black boxes is this. You put in stablecoins, you get money out. That's one way it can work. The other way it can work as you put money and you get stablecoins out. The other way you can work is you put stablecoin and you get stablecoin B out. And this works for both stablecoins and tokenized deposits.
Tony McLaughlin (00:54:14):
And even CBDC
Tony McLaughlin (00:54:15):
They're all stablecoins just issued by different issued different kinds of issuers. They all need to be cleared and the only to have access to a neutralized acceptance network. So this is this all stems from the realization that stablecoins are travelers checks.
Adi Ben-Ari (00:54:40):
Very good, very good. Certainly. On that note, I think we'll end the conversation for now, though I'd like to pick it up again at some point. Yeah, for sure. The distant future, because things are moving very quickly.
Tony McLaughlin (00:54:51):
Absolutely. A pleasure to talk to you.
Adi Ben-Ari (00:54:54):
So thank you very much for your time. Just before we go, I'll ask you a question that I normally ask the guests, which. Okay, you know, you've clearly gathered a lot of information here over the years, you know, have you got a source of information that you that you'd like to recommend? It could be, it could be books.
Adi Ben-Ari (00:55:12):
Yeah. Another podcast. It could be something you subscribe to. Maybe some.
Tony McLaughlin (00:55:17):
The best source of information if you're. I don't know who your audience has, but if there are five players, the best source of information is empirical experience. Now, I see lots of senior bank executives talk about stablecoins, and it's clear to me, just from their body language, the way they talk about it, they've never seen a stablecoin, but the best source of knowledge is empirical experience.
Adi Ben-Ari (00:55:48):
So I couldn't.
Tony McLaughlin (00:55:50):
Get a wallet. Yeah, yeah. Some stablecoins transact in these instruments, transact in stablecoins, transact in tokenized money market funds. Understand you will soon see the benefits and the frictions and the frictions. And the truth is that this whole world of tokens on public chains will become a lot better when we have bank and fintech involvement. And it's actually essential because if the banks and the fintechs, we have to remember what these are.
Tony McLaughlin (00:56:26):
They are based upon the account paradigm. We are going to move into a wallet paradigm. So the banks and the fintechs that don't give their customers a wallet are the alarm clock.
Adi Ben-Ari (00:56:41):
I remember I remember thinking they even talked about this a few years ago, that the the shift is is offering custody. Yeah. And and and issuing this stablecoins.
Tony McLaughlin (00:56:52):
That's absolutely.
Adi Ben-Ari (00:56:54):
Yeah. Very interesting.
Tony McLaughlin (00:56:55):
Yeah.
Adi Ben-Ari (00:56:55):
Yeah. Very good. Thank you very much. Thank you very much. Oh, pleasure. Okay.
