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The people who lead the national banking regulatory agencies typically come from long careers in banking and law with a traditional view of the banking world. But there has been one exception to this rule.
My next guest on the Fintech One-on-One Podcast is Brian Brooks, the former acting head of the OCC and a current partner at O’Melveny & Myers. Now, don’t get me wrong Brian has had a long career in banking and law but he has also spent time outside of traditional finance, thinking deeply about financial innovation.
He came to the OCC from Coinbase and he has been an advisor or board member to several other companies in crypto and fintech. So, his perspective on the banking industry, as you will hear in this interview, is very different from your typical banking regulator.
In this podcast you will learn:
How the financial crisis shaped his career.
The three dimensions of finance he is trying to knit together.
How he came to join the OCC from Coinbase.
How Brian was able to gain the trust of the big bank CEOs.
The most important idea that he had while leading the OCC.
How he looks back at his 10 months as OCC head.
How we could have easily avoided the FTX blowup.
Why the regulators were reluctant to make these simple changes.
The core ideological debate that Republicans and Democrats have over crypto.
Why the failures of Silvergate and Signature were more about concentration risk than specifically crypto.
What he says to people who want to ban crypto.
How decentralized finance can get scale and not run afoul of US regulators.
How US-dollar stablecoins could help mitigate the risk of de-dollarization.
What regulatory changes need to happen to take advantage of new financial technology.
Read a transcript of our conversation below.
Episode 452: Brian Brooks, former acting head of the OCC
Peter Renton 00:01
Welcome to the Fintech One-on-One podcast. This is Peter Renton, Chairman and co-founder of Fintech Nexus. I’ve been doing this show since 2013, which makes this the longest running one-on-one interview show in all of fintech. Thank you for joining me on this journey. If you liked this podcast, you should check out our sister shows The Fintech Blueprint with Lex Sokolin and Fintech Coffee Break with Isabelle Castro, or listen to everything we produce by subscribing to the Fintech Nexus podcast channel.
Peter Renton 00:39
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Peter Renton 01:21
We have a very special guest on today’s show, I am delighted to welcome Brian Brooks. He is the former acting head of the OCC, also known as the Comptroller of the Currency. He is currently a partner at O’Melveny & Myers, but in this episode, we talk quite a bit about his time at the OCC, what he did there, his thoughts on some of the challenges that he came up against. We also talk a lot about crypto, which is his one of his areas of expertise. We talk about the debacle at FTX. We also talk about Silvergate and Signature Bank and their failures and how that could have been avoided. We talk about crypto in general and why it should not be banned. We talk about decentralized finance and how that can actually operate in a regulatory framework. We also talk about de-dollarization and stablecoins and much more. It was a fascinating discussion. Hope you enjoy the show.
Peter Renton 02:23
Welcome to the podcast, Brian.
Brian Brooks 02:24
Thank you, Peter, good to see you.
Peter Renton 02:26
Good to see you. So let’s get started by giving listeners some background, you’ve had quite a varied career and some high-profile positions as well. Why don’t you just give the listeners some of the highlights, we’re going to dig obviously, into your OCC role for a little bit, but give us some of the highlights of your career to date.
Brian Brooks 02:45
It’s been a long journey with a lot of things that have led to my present moment. You know, I spent the first 20 years of my career in banking and traditional finance. And the way I like to tell the story is I was a lawyer at a large law firm representing financial services companies for years and years. And then the financial crisis came and I got the chance to get an inside high level view of two of the biggest financial disasters in American history. One of those was IndyMac Bank, which at the time it failed was the third largest bank failure in US history. It was the biggest mortgage related failure in US history and was like an epicenter of the foreclosure subprime crisis of that era. And I was part of the group that bought that bank out of an FDIC receivership and then got to run the part of the business that had led to all of the problems. And so I saw what happens when a centralized platform filled with people who are highly incented to make any loan they could, I saw what the failure mode that was and that was a little bit scary to me. And then I went from that company to the General Counsel of Fannie Mae, which was the largest financial failure, by a lot, in all of US history. Fannie Mae is a three plus trillion dollar investor in home finance, and it is the largest provider of housing finance in the world. Fannie Mae’s failure, as much as anything, may have been the thing that actually caused the financial crisis to be the financial crisis. And again, I was able to look at all of the things that went wrong.
Brian Brooks 04:10
So the backstory is I was a banking guy, who saw that system really teeter on the brink in a way that not that many other people have been able to observe. And from there, I discovered technology and ways that technology can change the way that our system operates. And first I found that in the form of fintech, which is to say, you know, various kinds of credit algorithms, various kinds of data exchanges, you know, companies like Plaid and Blend and other things, which, you know, we’re doing a great job of reducing the risk in the financial system and making banks a little bit safer. And I was very excited about that. For a long time, I sat on the boards of a number of important fintechs. And then Coinbase came calling, and I had the opportunity to experience what decentralization was all about. And that’s when I realized there were kind of two kinds of technology innovation, there were the kinds of innovation that were trying to shore up the existing system and make it faster and safer. And then there were platforms, like decentralized blockchain platforms that were trying to fundamentally change the basis of the system. So the basis of value exchange moving from a bank centered system, to a decentralized system. And that got me very excited. So I spent a lot of the next five or six years focusing on those things. And that’s what led me to Coinbase. It’s what led me to do some of the things that we did at the OCC around crypto, and around stablecoins and around blockchain networks, generally. And I’ve worked in that space, you know, in one form or another ever since. And so I think, you know, Peter, on a career front, the things that I’m trying to do with my life are to knit together three dimensions of the financial universe. Those are banks, which currently govern the system, they are fintechs, which are trying to make that system better, and they’re blockchain, which may still be years away, but will eventually replace that system. And making the world safe for interaction among those three pillars, that’s really a big part of what I do.
Peter Renton 06:02
Right, right. Okay. So before we get into the what you did in government, what are you actually doing now? Like, how are you spending your time these days?
Brian Brooks 06:13
Well, I appreciate you asking that. So, you know, my primary platform is that I’m a partner at the law firm of O’Melveny & Myers, which is one of the world’s largest global law firms. And it’s the place that I grew up as a young lawyer, you know, 20 years ago. And the reason I recently rejoined O’Melveny is it struck me that this is the best way for me to touch as many companies as possible and help as many people as possible, do the things I just talked about a minute ago, you know, I’ve been an advisor to about two dozen fintech and crypto companies. I’ve been on the board of Fannie Mae and, you know, a bank and a number of other kinds of platforms. And the thing about doing that work is you can only focus on one or two things at a time. Whereas a professional services platform, lets me talk to a lot of people over time, and try and add value to the broader ecosystem. So that’s, that’s where I sit today. I do remain on a couple of boards and, you know, have some advisory roles with a handful of companies I’ve been close to for a long time. But what I’m trying to do is make myself more available with more resources to the industry.
Peter Renton 07:13
Right, right. So tell us how the role at the OCC came up, you sort of I think you moved in as like a C-suite officer at the OCC, you didn’t go straight into the head job. But you came from Coinbase. Right, which is not a typical career path, shall we say, for anyone at the OCC, so particularly in the senior role? How did it come about?
Brian Brooks 07:37
Well, it’s a great story, and maybe enough years have passed that I can now tell the full story. So you know, if you were to Google me, you would find that I was offered a number of jobs in the administration, you know, none of which seemed quite right. But, you know, they included things like Deputy Secretary of the Treasury, and, you know, head of the Consumer Financial Protection Bureau, and other things. And the job that I had kind of fantasized about for a lot of my career was controller. And the reason that that was a big job for me, in my mind was, even though it may be the least well known of those jobs to the broader public, it really is probably the most important single job in financial services. And I say that because the controller is responsible for chartering and regulating the entire US national banking system. And that’s the majority of all financial activity that happens in the United States. The other thing about the controller is unlike the other banking roles, like Fed chairman or FDIC chair, there’s no commission, there’s no board of directors, you know, this one role has in its hands, all the authority to do all the things I just described, to charter banks, to regulate banks, to impose rules on the financial system without any other oversight. So, you know, a friend of mine who had the job once joked, this is only a joke, but it’s the most powerful, least accountable job in the federal government. So if you’re gonna take, you know, some time to do government service, that was an amazing job.
Brian Brooks 09:02
The way I came to it, obviously, is that, you know, in the financial crisis, as I say, there were a group of us that bought IndyMac Bank, a giant bank failure. And that group of people included Steven T. Mnuchin, who wound up being Treasury Secretary, Joseph Otting, who wound up being controller before me and a couple of other people who had very senior level roles later on down the pike. And, you know, Mnuchin and I had a very close trust relationship. Since I had been his lawyer and later his colleague at the bank, I had advised him after we sold the bank on a number of other important issues. And so we knew each other well had a trust level, etcetera. And when Joseph Otting, my predecessor and former bank colleague decided to step down, you know, I was asked if I would step into the role, not because I had been at Coinbase, but because I had been Mnuchin’s lawyer for a long time and had worked with him on a whole lot of projects. And it goes to show careers have many many twists and turns and it’s not about the job you have today. It’s about the set of relationships you form over a long period of time and the trust that you built up.
Peter Renton 10:04
Yeah, indeed. So I imagine, you get this role and you, as you say, it’s like, there’s no board of directors, you kind of have this authority, although you were never actually confirmed obviously, you were the acting OCC head, but I imagine that still had most of the authority of someone who’s actually confirmed. But the big banks, how did they view you because, like, looking back at the time, I remember when it first happened, that there wasn’t a whole lot of positivity coming from the traditional banking CEOs, oh here’s this guy who’s come in from Coinbase. And they look like there’s a, you’re a wild west cowboy. That was sort of some of the things that I read about at the time. How did you kind of combat that? And how did you kind of get things done and basically change that perception? Or did you?
Brian Brooks 10:52
Peter, it’s a great observation. And I felt some of that, although I think I felt a lot less of that than the newspapers would have reported, you know, media loves to tell stories of internecine battles, and family feuds and those kinds of things. And, you know, I think I was a useful foil for some of those stories. The truth of the matter is, you know, I had been representing big banks my entire career, and I was pretty well acquainted with most of the mega banks, and many of the large insurance companies and others going back years. So it wasn’t as though I was an unknown quantity to these people. And the way I interacted with them was, I think, the way that any controller would interact. So our personal connections weren’t, weren’t different from prior heads of the agency. You know, I had in person visits from the CEOs of most of the major banks on a monthly basis. They would come down from New York to sit in my office, and we would talk about various things, which is a big deal, by the way, because remember, this was the first year of Covid. So most people weren’t traveling or doing in person things. But the heads of Citigroup and JP Morgan and others, you know, would come in for their traditional one-on-one with the controller, and I spent a lot of time talking to them, and, and going through a lot of issues. And even though what people remember about me is the innovation stuff, which had a little bit of a disrupter quality to it, the majority of what we did, during my time at the OCC was worked on pandemic era, liquidity solutions, you know, we were worried that we were on the cusp of financial crisis 2.0. You had this giant spike in unemployment, suddenly everyone stopped going to work, you know, economic activity had the potential to go through the floor.
Brian Brooks 12:26
And so I worked with my colleagues at the Fed and the FDIC to put in place all kinds of facilities that would help banks stay afloat, manage credit, risk, and get through that era. And I think the bank CEOs that I worked for, appreciated that as much as they would have from anybody sitting in that seat. I think where the controversy came from was, was this simple idea, which I continue to believe is probably the most important idea that I had in that era. And that is, the notion of what banking is, is going to look different in the future, you know. And so the idea that all banks have to be insured depository institutions is an idea that comes from an era when value transmission requires that money be aggregated on a central platform, and then farmed out to potential borrowers. Kind of like the way the post office aggregates all the letters in one building, and then farms them out by zip code, because there’s no other technology available to do it. And what we know now is that the technology assumptions behind that model don’t exist anymore. So I just asked the question of what would it look like if a payment company that didn’t take deposits were allowed to have a bank charter, and therefore access the Federal Reserve’s payment rails? Or what would it look like if a decentralized lending platform that was engaged in the lending a core banking activity, were able to function as a bank? Those ideas did blow the mind of a lot of incumbents for a bunch of reasons, you know, their view was, listen, I’ve invested a lot in this platform. And you’re going to now come and let somebody who’s brand new and has not invested in a branch network and doesn’t have FDIC insurance premiums and everything else, and you’re gonna let them have the same charter? Forget that! And that was kind of the reaction. It’s very like the reaction of a lot of the oil companies to some of these electric vehicle mandates. You know what they’re thinking is, I’ve invested in a global network of gas stations, and the real estate footprint alone is enormously expensive. And now you’re going to tell me that there’s some new industry that’s going to end run that? That’s not fair. So that’s just an incumbency bias, where people who have large incumbent businesses are very threatened by the idea that the business model might change. They’re fine with some new competitor showing up, but not a new competitor with a different business model. And that’s where the friction came from.
Peter Renton 14:39
Right. Right. Interesting. So then, you know, obviously, there’s a new administration that came in and you left the job, I think right before that happened, but do you feel like the the time was productive there because some of the things you just talked about, obviously didn’t come to pass, there were no banking charters that were given to payments companies or decentralized platforms. So how do you view your time there now? It’s been obviously, more than a couple of years since you left.
Brian Brooks 15:07
Well, so Peter, I guess I feel a couple of ways. I mean, first of all, I do think that that was the most active 10 month period in the 160 year history of that agency. I feel pretty proud about that. I mean, I think just on a throughput, shipping product kind of a basis, it was it was an amazing period of time. And I do think that the team there that I worked with fundamentally changed the discussion about banking regulation, even to this day. I mean, I think the agenda is very different today, because we were there and did those things than it would have been had we had we not, so I think that was a good thing. I think there’s some very concrete things that we did accomplish, actually and that have endured. For example, you’re right that we didn’t get a chance to charter a payment bank. That didn’t happen. But we did charter the very first fintech bank, Varo Bank, which is operating today, is serving, you know, poor and minority borrowers on a scale that large incumbents don’t do. And I think that’s, you know, that’s proved to be a good thought experiment to show that that kind of bank can exist. And we chartered the first crypto bank Anchorage, which continues to operate under their OCC charter. And even though they may have some growing pains there, it’s a beacon to the world that these kinds of companies can exist inside, you know, within the national banking system. Those were things that never would have happened, had we not been there. And I feel very good about that.
Brian Brooks 16:25
On other things, you know, I think we had a mixed track record of success. We, for example, put out our three crypto guidance documents about stablecoin custody, about stablecoin validation and reserve deposits and some other things. And even the Biden administration OCC did put out a legal statement saying that they agreed with our legal analysis, and agree that the banks do have the legal authority to do those things. Now they’ve been much more parsimonious about letting banks exercise those legal authorities. And I agree with the administration, frankly, that risk management dictates that you’d be very careful about how they’re conducted. But the fact that they endorsed our legal conclusions, that those are in fact, powers that banks have, is a pretty big deal. And I think it’ll be 10 years before we realize the full significance of the bipartisan agreement that banks do, in fact, have those authorities. And then, you know, I would point to some of the work that we did on pure fintech work. Things like the valid when made rule, you know, which talked about the ability of banks and fintechs, to partner on originating loans, and the idea that those loans can be sold in the secondary market without affecting the validity of their interest rate. That’s a really big deal. And that’s still the law today. So, you know, look, if we’d had five years to do what my full agenda would have been, we would have accomplished more. And we could have had a longer and healthier dialogue with Congress about the definition of banking, and the way that fintechs can play in the banking space. But given that we only had 10 months, I would challenge anybody to have to have tried to do more.
Peter Renton 17:53
Right, right. Fair enough. Okay. I want to talk about crypto and particularly the events of 2022, which were several major negative stories. Obviously, we had the Celsius first we had the we had Terra LUNA blow up, Celsius blow up, BlockFi, and of course the FTX debacle that is still playing out today. How could we have avoided these kinds of blow ups?
Brian Brooks 18:20
Well, you know, if in the public mind, the most important of those blow ups is FTX, I think there actually was a solution. For things like Terra LUNA, let alone for things like Three Arrows Capital, which is probably the most important one that you didn’t mention, it’s not clear what could have been done to prevent those things. I mean, those were speculative trading platforms that lost everything on a bad bet. So let’s talk about those separately. But on FTX, I think there is a simple solution, and that is market structure, okay. So what financial services lawyers understand to be market structure regulation is there are rules that require that certain kinds of activities be conducted by unaffiliated entities, and the most important of those is the idea that the brokerage and the custodian have to be separate. So here’s my, here’s my metaphor for that. Think about your Charles Schwab account where you have your IRA, let’s say, and inside of your IRA, you’ve got shares of Google stock and shares of General Motors stock and whatever else you have in your in your IRA. You never wake up in the morning worried that Charles Schwab is secretly pledging those assets, and trading those assets, or shorting those assets, and they might not be there when you retire. You never ever worry about that. And why? Because securities laws require that the custodian of your actual stock, not be Charles Schwab. And so you pay Charles Schwab to go and provide you a user interface and acquire the shares that you want to buy. But the actual shares, the digital book entries of the securities, are held to a different company called Depository Trust and Clearing Corporation. Okay, so that Schwab can’t get their hands on it.
Brian Brooks 19:56
In crypto land, because we have refused to actually impose market structure regulation for whatever reason, FTX was both the broker and the custodian. And so what happened was, at a certain point people showed up and said, you know, I’d like my bitcoin back. And FTX said, um, we don’t have your Bitcoin right now, because we re-hypothecated over here, or we pledged as collateral for an Alameda trading position, or whatever. And that’s when there was the bank run. People suddenly realized, Oh, my God, my assets aren’t there. So it would be super simple to solve that. But to solve it, the regulators would have to be comfortable saying, crypto is a legitimate enough activity that we’re going to pass a law providing the kind of framework that we provide for banks and broker dealers. And I think the view of the present aministration is we don’t want to validate this activity by giving it a regulatory framework. And the result is a world that is less safe than it would be if you did that. This, Peter, was one of the reasons why we talked a lot about crypto bank charters, in my tenure at the OCC, it wasn’t because we were crypto cowboys. And we were super like crypto day traders. It was because we recognize that the framework we use for banks, we use because it makes them safer. You know, banking is inherently a risky activity, banks are lending on somebody’s promise of repayment. And unless you have capital rules, liquidity rules, and market structure, there’s a big risk the banks will fail, as they have in the past. That’s why we have regulation. And our view was taking the risky activity of crypto, and bringing it inside of a regulatory perimeter, would make crypto safer. That’s the core ideological debate that Democrats and Republicans seem to have right now is the Democrats think crypto is risky. So they want to keep it outside the system. Republicans think it’s risky so they want to bring it inside the system. That literally is the ideological debate. I’ll just quickly say on the on the Celsius of the world, you know, the Three Arrows, I mean these guys are basically hedge funds. What they did is not that different from like the failure of Long-Term Capital 20 years ago, or the failure of MF Global 10 years ago, traders make bad trading decisions every day of the week. And sometimes they’re big enough that they blow up the whole sector. That’s not unique to crypto. That looks like lots of other hedge fund scandals of days gone by. The difference being usually, you know, when an American hedge fund manager blows up the world, he accepts his lawsuits and accepts his indictment and goes to jail versus here. Those guys seem to go on the lam and they go and hide out in foreign countries, so maybe they’re different in that way. But the loss of all that money, that’s not that’s not particularly new.
Peter Renton 22:29
Right. I want to talk about the bank failures this year, particularly, I’m interested more in Silvergate and Signature, which were very focused on the crypto space. You had authority over banks. I think they’re both federally chartered from memory, you would know better than I would, but how could they have been saved from their fate?
Brian Brooks 22:49
Yeah, well, so first of all, I would just say Silvergate was not federally chartered. Silvergate was a state bank, and they were regulated by the California regulators and by the FDIC. What I would tell you about those situations is two important things. So the first of them is there is a problem in financial services of concentration risk. And you see this in any monoline bank. So again, if you think about what really brought about the financial crisis, it wasn’t insured depository institutions, you know, we didn’t have a lot of bank failures in the financial crisis. But we had a lot of mortgage companies blow up Countrywide, IndyMac, you know, Washington Mutual. I mean, these were really just one product institutions. And when that one product failed, you know, because of a set of correlated risks all coming due, that they have no other businesses to diversify their revenue stream or their capital base, and so they went under, that’s the monoline problem. And Silvergate, and to a lesser extent, Signature, they really were crypto banks. So when you know, the price of Bitcoin fell through the floor in 2022, that was their only business, and it was going to be very hard for them to do well. So the first problem is concentration risk, and being focused on only one business. I mean, think about it. JP Morgan doesn’t have the monoline problem, you know, you can have a disaster in foreign exchange or a disaster in commodity prices or disaster in both mortgages. And JP Morgan would still be okay, because they’re big and diversified, and they operate in a lot of markets and a lot of product segments. Silvergate and Signature did not, okay, so that’s the first issue.
Brian Brooks 24:23
The second issue though, gets back to what I said a moment ago, about keeping crypto outside of the regulatory perimeter. So what a normal bank will do when some of its assets are impaired, is it will sell those assets. It might take a loss, but it’ll book the loss and it’ll move on. The problem if you’re Silvergate or Signature and a lot of what you’re banking are crypto businesses is, most other banks won’t touch that stuff because they believe that their regulators would look askance if they did. So it’s not like if I have a distressed loan pool, I can just, I’m Citigroup and I can sell it to Bank of America at a discount. If I’m Silvergate and I have a distressed pool of receivables from Three Arrows Capital, there’s nobody going to buy that from me, right? So I’m going to have to hold that all the way to zero. And so those two things together, which is the monoline problem and the unmarketability of the underlying assets due to regulatory skepticism, it creates risk. You know we’re not making anybody safer by keeping that activity anathema. To make it safer, we have to create broad liquid markets. That’s always been what makes every financial asset safer. And I think that, to me, is the big lesson of Silvergate and Signature. Remember, by the way, neither of those banks, you know, resulted in like insurance losses or anything like that. And Silvergate voluntarily wound down, nobody shut them down. And in the case of Signature, they might have failed two weeks later, but they didn’t actually fail at the time that they were shut down by the FDIC, that was a fairly unique thing. And if they could have marketed some of those assets and pivoted their business model, they might still be here today. Who knows?
Peter Renton 25:56
Okay, I want to switch gears a little bit and talk about crypto specifically. We were both at the Philadelphia Fed earlier this month, and there were some pretty fiery discussions there. I’m particularly interested in the one that was around just the legitimacy of crypto as a thing, as an activity. And there were some people that were very vocal about it just should be banned. It’s got no utility whatsoever, it should be banned. And there were obviously others having the opposite side. But you weren’t actually in that debate, it would have been fun if you were, but I’d love for you to be able to kind of talk about how you respond to those people who think that this is basically a Ponzi scheme. It’s just a bunch of gamblers doing gambling things. How do you respond to that?
Brian Brooks 26:42
Yeah, well, so I always start with first principles on those kinds of things. So the first question I ask is, is it the American point of view that something that doesn’t have utility should be banned? I can think of a lot of things that we do every day that don’t really have utility, okay?
Peter Renton 27:00
Brian Brooks 27:01
Yeah, well, I mean, look, I had a friend come over, you know, a few weeks ago to my backyard to smoke a cigar. I’m pretty sure that cigars and tobacco products generally don’t have utility other than a handful people like them. And there have been movements over the years to ban cigarettes and tobacco products. But we haven’t done that in this country. Because we realize that actually in a free society, there is utility on people just being able to choose their own adventure if you’re not hurting someone else. That’s why we haven’t banned cigarettes. There are all kinds of other things out there that don’t have a ton of utility that we allow to occur in a free society. So when I hear that, I don’t hear crypto should be banned. I hear what else are they going to come from? Or come for once we’re done banning crypto? That’s frightening just at a surface level, even if you think all it is is speculation. That’s my first answer. My second answer is: there’s lots of areas of financial markets that are nothing but speculation, okay. The best example would be the commodities markets, the futures markets, okay. The people who are buying and selling soybean futures have no intention of taking delivery of soybeans, all they are engaged in is volatility speculation. That’s all they’re doing, okay. Nobody is taking control of the orange juice futures that they’re buying. They’re just financial speculation. That’s all it is. So why do we allow that to exist, given that no orange juice is trading hands, or changing hands? No soybeans are changing hands. Why do we do that? Well, we do that because it turns out that price signals in a market are always efficient. The more people you have participating in any market, doesn’t matter if it’s for trading cards, baseball cards, bubbles, it makes no difference. People are sending signals to the market about risk appetite, about their belief about future interest rates, about all kinds of other things. That’s why we have a futures market and we have a CFTC to regulate it.
Peter Renton 27:14
Right, right. So let’s talk about decentralized finance for a minute. And you mentioned smart contracts, which I think is just such a fascinating development. But it doesn’t really fit easily into our current system because we like to have people who are ultimately responsible individuals, corporations that you can actually sue and hold responsible. And sometimes decentralized finance is not organized in a way that makes that easy. Particularly if you start to get to scale with some of these platforms that have these smart contracts. How can you create scale and still not run afoul of US regulators today?
Brian Brooks 28:53
Why is crypto different from that? The fact that there’s no underlying physical asset does not make it different from soybean futures, where there also will be no delivery of an asset. And then the third thing, Peter, which you and I understand, but maybe the people on that panel don’t understand is, crypto is not just for trading. It’s not just for speculation. There’s plenty of stuff in crypto that is fraudulent and plenty of scams go on, as happen in any new market. I mean, I always like to joke that in the early days of the internet, the only thing that was used for was bank scams and pornography. That literally was the majority of internet traffic in 1996. But we didn’t ban the internet because people said it has no use, so therefore it should just be banned. You know, this is not a Soviet society where you have to prove to the government why your business activity should be allowed. That’s not how we operate. But a lot of what’s being built in crypto today are really important for various purposes. I would argue that the invention of the smart contract and the various major smart contract platforms, starting with Ethereum and including a series of other things, will ultimately be shown to be deeply important in the same way that The Clearing House was important in a different era, or that the ATM machine was important in a different era. And a lot of people thought those were sketchy and debatable at the time. But those kinds of platforms, they will change the way that credit is delivered in the world, okay. Bitcoin, whatever you think about Bitcoin, is our hedge against inflationary monetary policy long-term. And, you know, before 2021, people might have thought that was just pure speculation. But now that the United States has lived through 9%, inflation, I think suddenly the idea that there’s some protection against a renegade Fed becomes a real thing, you know, becomes a real thing. There’s a reason why BlackRock of all people is talking about a Bitcoin ETF, it’s because they see that in the future, this is a real thing. So I don’t buy that there’s no utility. But even if there weren’t utility, that’s not how we’re supposed to make regulatory decisions in this country. It’s not for the regulators to decide what’s good for us, as long as we’re not hurting anybody else, you know, the market gets to decide, not the government.
Brian Brooks 31:42
Well, so I would say a couple of things, I mean first of all, you’re right. People always feel better, and governments always feel better if they have a throat to choke. That’s the line people use. So you know, you know who the CEO of Citi Group is, and you can go get her and sue her and put her on TV if something bad happens at that bank. That’s all true. On the other hand, I would just remind everyone, you know, when you get on an airplane, the safest part of the flight is when you’re on autopilot. And the most dangerous part of the flight is when the pilot is flying the plane on takeoff and touchdown. Virtually all plane crashes occur when a pilot’s in charge and virtually no plane crashes occur when the autopilot is in charge. So some of this is just a heuristic bias, like you think you’re safer because you know who to hold accountable. But you’re actually not, that is a heuristic bias that is provably untrue. So I’d start with that, and let’s just let that message land with our listeners for a moment. Then I get to the idea of, hey, let’s think about how the system works when humans are in charge versus in some other models. So humans brought you the London Whale trade, you know, the $6 billion loss that happened one day at JP Morgan, because one guy was asleep at the switch. Or I was telling you about IndyMac and Washington Mutual a few minutes ago. Why did those banks fail? They failed because you had a whole bunch of mortgage brokers who were strongly incented to make loans that they knew would never make it to the third payment. But that didn’t matter because as long as the first payment came in, they got paid. And that’s all that mattered. So that’s what humans do. What smart contracts will do, like any computer program is, they’ll do what they’re programmed to do and they will do it 100% of the time, and they’ll never do anything different. So if you program a computer to say we’re only going to lend to people with these credit criteria, then only those people will get loans and no one else will. And so you won’t have any forging of income, you won’t have any, you know, liar loans, because the system won’t allow that, they only allow certain inputs and that’s that’s all that happens. That might seem cold hearted, or it might seem like it can deal with some of the obvious mistakes of the past that brought us crises in the past. So I come back to Peter, I think the assumption of the question, I think it is most people’s assumption, and I think it’s a false assumption.
Peter Renton 33:51
Okay, interesting. Interesting. So then, let’s talk about the, you mentioned this during your speech at the Philadelphia Fed and the stablecoins, de-dollarization. The risk that the US dollar is going to lose its role as the reserve currency of the world. And you know, the fact that you, you talked about US dollar backed stablecoins as a way to kind of mitigate that risk. Tell us a little bit about what you’re getting at there.
Brian Brooks 34:17
Yeah. Well, so first of all, we were just talking about decentralized finance. And another way of thinking about decentralized finance is any kind of banking activity that’s conducted away from banks. There’s a sense in which stablecoins themselves are decentralized finance, because they allow people to access assets through an intermediary that isn’t the bank. So let me just set the table that way. But what I was talking about in Philadelphia was the increasingly clear trend in the world away from the dollar as the central trading asset of the global financial system. You know, historically for the lives of pretty much everyone who’s currently living, historically all commodities and virtually all international trade was priced and settled in dollars. And that was great for the United States for a bunch of reasons. One was, it means that since we don’t have to engage in foreign exchange to buy things, because we can go to the Middle East and buy oil in our own currency, everything we buy has sort of an imputed 5-10% discount, because we don’t have to engage in foreign exchange, which is a friction before we’re able to buy the asset. You know, the Japanese have to convert yen to dollars to buy oil. But but we do not have to convert anything, we can use our native currency for that. That’s been a great thing. But over the last 20 years, you know, because of geopolitics, the war on terror, you know, the increasing rise of China, there have been some dissident countries that have decided they don’t like the US hegemony in financial markets. So you see this, first of all, in the decline of federal, of central bank reserves that are held in dollars. The percentage of central bank reserves that were held in dollars in the year 2000 was about 72%. Today it’s 59%. And what I like to say all the time is, I don’t know where the tipping point is, that causes the end of the world. You know, I don’t know if it’s 57% or 52%. But somewhere between 59% and 50%, we’re gonna fall off a cliff. And that’s not that far away.
Brian Brooks 36:14
Then you see things like the recent BRICS summit that happened just three weeks ago, but you know, among Brazil, Russia, India, China and South Africa. One of the stated goals of the BRICS summit was to de-dollarize, and to encourage a set of agreements inside of those countries. And those are big countries by the way. I mean, Brazil, largest economy in Latin America, China, second largest economy in the world, South Africa’s biggest economy in Africa. So when India, the largest country by population in the world, when those countries say, we’re going to stop pricing, trade deals in dollars and start either using our local currency or start using Chinese renminbi, that is a big deal. So my point about stablecoins was this: Governments want to de-dollarize. But people don’t want to de-dollarize. And so one of the interesting things I’ve seen in the last couple years as I’ve been looking at venture deals, is the number of startups who are offering dollar stablecoin savings accounts in the developing world. You know, in Argentina, the government might want to drop the dollar. But the people of Argentina are dying to hold their wages in dollars, because they have 130 or 140% inflation rate in that country. And if they could just take their dollars, or their wages on the day they’re earned and put them in a USDC asset, versus put them in a local bank, that would be way better for them. And the same is true throughout the developing world. So there is this up from the bottom, re-dollarization aspect where stablecoins make it possible for people who live in countries where the banks don’t offer dollars to hold dollars, that’s good for the role of our currency globally. And it’s also really, really good for the people who live in these countries. They’re acting for political reasons, but not out of the interests of their own people.
Peter Renton 37:56
Right, right. Interesting. Okay, so last question, and it’s a pretty broad question, I’d love to kind of get, let you sort of take a crack at it. You know, when we’re looking at all the financial innovation that is happening today on the crypto side, also in the traditional fintech, shall we say, what are the major things that need to happen when we’re talking about regulatory infrastructure to really take advantage of all this new technology?
Brian Brooks 38:22
So first thing I would say is, I think you’re actually starting to see that happening in many parts of the world. So the MiCA legislation in Europe for example, or some of the recent guidance put out in the United Kingdom, or what’s going on in the Emirates. I mean there are large parts of the world, Brazil would be another place I would highlight as a place of emerging clarity on this. So it isn’t like the world necessarily needs a regulatory framework, I think a lot of the world is working on that. The United States is fairly unique in our refusal to to embrace anything. I mean we can’t pass a stablecoin bill in this country, let alone comprehensive crypto, you know, token taxonomy or anything else that’s important. So what makes the United States unique? I’m going to argue that one of the biggest problems we have as a country is the age of our leadership in both parties. So what was interesting is when when Patrick McHenry’s stablecoin bill was coming out of the House Financial Services Committee just a couple of months ago, there was Democratic support, but it wasn’t from the leadership of the committee, it was from the junior backbenchers on the committee, right. The Democrats under 50 tended to support the bill, whereas, you know, Maxine Waters, who’s in her 80s and a number of other people who don’t understand crypto, and will never understand crypto, are opposed. It will be kind of like if you ask my grandmother to vote on a video cassette recorder bill, she’d be against it because she could never figure out how to program it, so she just as soon ban it. But everybody younger than her was super excited about their VCR in the 80s, right? It’s the very same thing here. There’s a generational shift that has to happen and I think that it’s less of a partisan issue, more of a generational issue. They have to understand this technology is real, it’s adopted, it’s not going anywhere. And so the only way to make it safe is to do something to provide a framework.
Peter Renton 40:08
I haven’t heard that argument before, that’s really interesting. Anyway, Brian, we’re out of time, really appreciate you coming on the show today. Thanks so much.
Brian Brooks 40:14
Peter Renton 40:15
Well, I hope you enjoyed the show. Thank you so much for listening. Please go ahead and give the show a review on the podcast platform of your choice and go tell your friends and colleagues about it. Anyway, on that note, I will sign off I very much appreciate you listening, and I’ll catch you next time. Bye.
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.